FNB Corp (FNB) 2020 Q4 法說會逐字稿

Hello, and welcome to the F.N.B. Corporation Fourth Quarter 2020 Quarterly Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Matthew Lazzaro, Manager of Investor Relations. Mr. Lazzaro, please go ahead.

Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it 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 in our earnings release.

Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until January 27, and the webcast link will be posted to the About Us, Investor Relations and Shareholder Services section of our corporate website.

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

Good morning, and welcome to our earnings call. Joining me this morning are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. Gary will discuss asset quality, and Vince will review the financials.

Today, I'll touch on our 2020 financial highlights, review last year's accomplishments and wrap up with a discussion about our strategic objectives. We will then open the call for questions.

First, I'd like to highlight some key metrics from our 2020 financial results. Despite substantial challenges resulting from the pandemic, management took significant actions to protect our employees and preserve shareholder value, implementing measures to improve efficiency and increase profitability as we navigated the pandemic.

Looking at the fourth quarter, FNB reported operating earnings per share of $0.28, and operating return on tangible common equity increased to 15%, building on the upper quartile returns relative to peers through the first 9 months of 2020.

Turning to the income statement for fiscal year 2020. FNB reported record total revenue of $1.2 billion, operating net income of $314 million and operating earnings per share of $0.96, while building significant credit reserves to address economic risk associated with the pandemic. These profitability levels resulted in strong internal capital generation driving our tangible common equity and the CET1 ratio to the highest levels in decades, and increasing tangible book value per share by 5% to $7.88.

Because of our performance in the prudent risk management culture, FNB continued to pay an attractive dividend. Our portfolios continue to expand with full year average loan and deposit growth of 11% and 14%, respectively. This growth was due to the resiliency of our bankers and the success of the Paycheck Protection Program, with balanced contributions across our legacy footprint and added growth in our southeastern market.

Our leadership team prioritized a number of financial objectives during fiscal year 2020 designed to drive long-term results. Reflecting on the 2020 operational initiatives we laid out in last year's letter to our shareholders, we made significant progress towards those objectives in spite of a difficult operating environment. We set out to deliver peer-leading returns on tangible common equity and drive internal capital generation and growth in tangible book value per share. Our 2020 return on average tangible common equity of 13% and 5% growth in tangible book value continued to track above others in the industry. Sustaining this trajectory, the execution of this strategy should increase our relative valuation over time compared to peers.

In tandem with delivering this financial performance in a challenging environment, we set out to protect our attractive dividend while optimizing capital deployment. For the full year, we paid out $165 million in cash dividend and repurchased nearly $40 million of stock under our current stock repurchase program, returning over $200 million directly to shareholders.

From a capital planning perspective, we've now surpassed our previously stated target and completed the adoption of CECL, both leading to enhanced flexibility to optimize capital deployment in this environment.

During the second half of the year, we took significant steps to enhance future risk-adjusted returns through prudent balance sheet actions, notably the auto loan sale in November, reducing exposure to COVID-19 sensitive industries and the prepayment of higher cost liabilities. These actions reduce overall credit risk, reduce future interest expense and provides us with more liquidity moving forward.

In the fourth quarter, we resumed the inaugural FNB share repurchase program, after activity was halted in the first quarter due to uncertainty related to the pandemic. When considering the total capital consumed by the dividend and share buybacks combined, we are pleased to report an increase in year-end capital levels. Approximately 25% of the total shares repurchased were below tangible book value, resulting in accretion to that metric.

The overarching goal of our organization is to grow revenue by prudently increasing our loan and deposit portfolios, all while maintaining superior credit quality and FNB's risk management culture through the cycle. During a difficult operating environment, many of our teams exceeded loan and deposit origination targets, while improving our funding mix through a focus on bringing in low-cost deposits. As a proof point, loans continue to grow even when excluding the impact of PPP and the auto loan portfolio sale.

On the deposit side, in addition to an improved deposit mix, noninterest-bearing deposits surpassed $9 billion to end the year. As a percentage of noninterest-bearing deposit -- our percentage of noninterest-bearing deposits increased to 31%, up meaningfully from 24% 5 years ago. FNB is in a very strong liquidity position with a loan deposit ratio of 87% to fund future loan growth with strengthened capital and enhanced liquidity.

Diversification and growth in our fee-based businesses, namely capital markets, mortgage banking and wealth management, contributed significantly to our record total noninterest income level. Our fee-based businesses had an outstanding year with many groups setting all-time records for revenue.

In 2020, capital markets, mortgage banking and wealth management achieved revenue of $39 million, $50 million and $49 million, respectively. The strong performance was driven by increased contributions due to our geographic expansion strategy and providing value-added solutions to borrowers. We continue to look for ways to diversify our fee income streams by executing on strategic initiatives, such as growing the mezzanine finance group and enhancing FNB's debt capital markets capabilities. Total operating noninterest income exceeded $300 million in 2020.

Through our continuous investment in both our digital and physical delivery channels, we aspire to provide our customers with intuitive and efficient solution to meet their banking needs. On the digital front, adoption rates from mobile banking users have increased exponentially in 2020, attributable to 18% growth in new users added to the platform in the last 9 months.

Looking back, over the last 5 years, we have now consolidated 111 branches, opened 12 de novo branches in attractive market and expanded our ATM capabilities to exceed 800 locations. These actions enable FNB to optimize our overall footprint with limited disruption for our customers. We've diligently invested in technology and risk management infrastructure by upgrading platforms in the retail bank and improving the customer experience. We continue to evaluate our distribution network regarding consolidation effort as we announced 21 consolidations to take effect in 2021.

Building on FNB's strategy to grow its market presence, particularly in Metropolitan, Baltimore and Washington, D.C., we entered an agreement with Royal Farms, a regional convenience store operator that enables us to connect cash distribution services with a robust online and mobile banking offering, providing convenient access to essential banking products and services throughout a broader geographic region with the deployment of more than 220 ATM locations in the Mid-Atlantic region.

In addition to withdrawals, transfers and balance inquiries, several of the Royal Farms' ATM will also feature check and cash depositing capabilities to provide customers with even greater flexibility and increased access to broader product offerings.

As evidence of successful execution of our growth strategy, according to the most recent FDIC data, we experienced deposit growth in 50 of 53 MSAs across our footprint. FNB achieved top 5 share position in nearly half of those MSAs, further illustrating our ability to compete effectively in our markets against a broad spectrum of competitors.

Additionally, we strive to continue to manage costs and improve efficiency. This is evident by FNB achieving our stated 2020 cost savings goal of $20 million. In addition to achieving the 2020 target, FNB also achieved its roughly $20 million cost target in 2019. When including a plan to reduce an additional $21 million in expenses during full year 2021, in total, this amounts to more than $60 million of expense reduction over the 3-year period. Because of our proactive expense management initiatives, our efficiency ratio remained at a good level at 56% despite pressures on net interest income in a challenging rate environment and continued capital investment in technology.

Our strategy is proven through varying cycles as evidenced by the solid performance and continued focus on improvement in many key asset quality metrics. To expand on this topic, I'll ask Gary to comment on credit quality. Gary?

Thank you, Vince, and good morning, everyone. Our credit portfolio continued to perform in a satisfactory manner in the fourth quarter, and we are very pleased with the position of our portfolio as we move into 2021. Our key credit metrics showed improvement across a number of categories, after we took steps during the quarter to proactively reduce exposure to borrowers most impacted in this COVID-sensitive environment, which drove a reduction in the level of delinquency and NPLs.

Specifically, we were successful in further reducing our limited exposure to the hotel and lodging industry by nearly 20%, which improved our position in this hardest hit asset class that now stands at only 1.3% of the loan portfolio, exclusive of PPP loan balances.

Let's now review some of the highlights covering both the fourth quarter and full year results, followed by some commentary around COVID-sensitive portfolios and deferrals.

Turning first to credit quality. The level of delinquency came in at a very good level of 1.02%, representing a 5 basis point improvement over the prior quarter. And when excluding PPP loan volume, delinquency would have ended December at 1.11%. The level of NPLs and OREO totaled 70 basis points, an improvement of 6 bps linked quarter, while the non-GAAP level, excluding PPP loans, stood at 77 basis points.

We saw very positive OREO sales activity this quarter, which contributed to the $10 million linked quarter reduction for an ending OREO balance of $8 million, a historically low level.

Additionally, we were successful in moving several credits off the books during Q4 to proactively derisk the balance sheet, thereby further reducing NPL levels. Net charge-offs for the quarter were $26.4 million or 41 basis points annualized, which reflects the actions taken to strategically move these select COVID-sensitive credits off the books utilizing previously established reserves.

Our GAAP net charge-offs for the full year came in at a very solid 24 basis points. Provision expense totaled $17 million for the quarter, ending December with a reserve position at 1.43%. Excluding PPP loan volume, the non-GAAP ACL stands at 1.56% or a 5 basis point linked quarter decrease, again, due to the reductions in exposure across these COVID impacted sectors.

When including the remaining acquired unamortized discount, our total coverage stands at 1.8%. The NPL reserve coverage position also remains favorable at 213%, reflecting a slight improvement linked quarter.

I'd now like to provide you with an update on our loan deferral levels and COVID-sensitive industry exposure. As it relates to our borrowers requesting payment deferral, 1.7% of the loan portfolio, excluding PPP, was under a COVID-related deferral plan at December 31. As I mentioned earlier, we made significant progress during the quarter to further reduce the limited exposure we have to higher risk segments, including travel and leisure, food services and energy.

On a linked quarter basis, exposure to higher risk segments declined by nearly $90 million to stand at only 3.1% of the total loan portfolio. The primary driver of the decrease was led by a $65 million reduction in hotel exposure, which, as noted earlier in my remarks, stands at only 1.3% of our total loan portfolio. Loan deferrals in the 3 higher risk segments ended the year at only 7%, down from the prior deferral level of 29% at the end of the third quarter.

In closing, we are very pleased with the progress made during the final quarter of the year in this COVID-sensitive environment, with our credit metrics ending at very satisfactory levels as we enter 2021 very well positioned. We continue to closely monitor our book and remain focused on managing risk in our COVID-impacted sectors as we work to further reduce portfolio exposure to these higher risk industries that continue to face uncertainty in the current environment.

As we move into a new year, we look forward to an improving economy and the expanded lending opportunities ahead. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Thanks, Gary, and good morning. Today, I will discuss our financial results and discuss some of our current expectations. As noted on Slide 5, fourth quarter operating EPS totaled $0.28, an increase of 8% compared to the third quarter. Full year 2020 operating EPS totaled $0.96 after adjusting for $46 million of significant items. While this year brought unique economic challenges, we were well positioned to adapt to the environment and provide strong internal capital generation.

As Vince mentioned, we increased our tangible book value per share to $7.88, an increase of 5% from 2019. Despite a volatile year for equity markets, our combined dividend yield and share repurchases put us above peer median levels.

Looking at 2021, we are confident that returning to generating core positive operating leverage on a quarterly basis will lead to better overall performance compared to 2020.

Let's review the fourth quarter, starting with the balance sheet, on Page 10. Average balances for total loans decreased 1.6% in the third quarter, largely due to the previously mentioned indirect auto sale of $500 million that was completed in November 2020. Linked quarter PPP balances decreased $377 million on a spot basis, as we received forgiveness forbearances from the SBA throughout December. Commercial loan line utilization rates are 32%, which is about 8% or $0.5 billion in funded balances, below what we would characterize as a normal level, creating upside for loan growth as the economy improves.

Turning to deposits. Average deposits grew 2%, with 4% growth in interest-bearing deposits and 3% growth in noninterest-bearing deposits, partially offset by an 8% decrease in time deposits. This continued total deposit growth provided ample liquidity and afforded us the opportunity to pay down an additional $300 million in FHLB borrowings with a rate of 2.35% during the fourth quarter. Including the FHLB debt extinguishment from the third quarter, a total of $715 million in borrowings were terminated during the year with expense savings that will continue through 2022.

As Vince noted, FNB is in a very strong position to fund future loan growth, strengthen capital and enhance liquidity.

Turning to the income statement, net interest income increased $7.3 million or 3.2% compared to the third quarter, and the net interest margin increased 8 basis points to 2.87%. PPP loans added 17 basis points to the net interest margin in the fourth quarter as the level of net interest income from PPP increased $8.8 million compared to the third quarter, offsetting 3 basis points of negative impact from higher average cash balances and 3 basis points of lower purchase accounting benefit on acquired loans. Interest-bearing deposit costs improved 12 basis points to 43 basis points and on a spot basis were down another 7 basis points to 36 basis points.

Let's now look at noninterest income and expense on slides 13 and 14. Operating noninterest income totaled $81 million, when excluding the $12.3 million loss on FHLB debt extinguishment. Mortgage banking income remained strong at $15 million with large contributions from the Mid-Atlantic and Pittsburgh regions, and the results benefited from above-average gain on sale margins compared to historical levels. For the full year of 2020, mortgage banking increased 57%, reaching a record $50 million.

Wealth management increased 5% from the third quarter due to the expanded footprint and positive market impacts on assets under management. Capital markets, wealth management, mortgage banking and insurance are businesses we've strategically invested in over the last 5 years, providing diversified revenue streams that have served us well in this low interest rate environment. In the aggregate, revenue from these businesses increased $32 million or 24% to $162 million for the full year of 2020.

Looking on Slide 14, noninterest expense totaled $199.3 million, an increase of $19.1 million or 10.6%, which included $10.5 million of branch consolidation expenses and $4.7 million of COVID-19 related expenses in the fourth quarter of 2020 compared to $2.7 million of COVID-19 expenses in the third quarter. Excluding these COVID-19 and branch consolidation expenses, noninterest expense increased $6.6 million or 3.7%, primarily driven by higher production-related commissions and incentives as well as $2 million in outside services.

Ratio of tangible common equity to tangible assets increased 5 basis points to 7.24% compared to September 30, 2020, with net PPP loan balances negatively impacting to December 31 and September 30, 2020, TCE ratios by 45 basis points and 56 basis points, respectively. Compared to the year ago quarter, the ratio decreased 35 -- 34 basis points, due primarily to the PPP loan impact and the 2020 Day 1 CECL adoption impact. On a linked quarter basis, our CET1 ratio improved to an estimated 9.9%, reflecting FNB's strategy to optimize capital deployment and increased over 40 basis points from year-end 2019.

Turning to our outlook, we will offer quarterly guidance for the first quarter of 2021 and some high-level expectations for the full year of 2021. I'll note that our assumptions do not take into account the impact of recently announced stimulus programs. For the first quarter, we expect period-end loans to decline low single digits relative to December 31, assuming approximately $700 million of additional forgiveness of PPP loans in the first quarter. Excluding PPP and purchase accounting, we expect first quarter net interest income to be at a similar level compared to the fourth quarter. We expect continued solid contributions from fee-based businesses with continued strength in capital markets and mortgage banking, resulting in total noninterest income in the mid to high $70 million range. We expect expenses to be down slightly compared to the fourth quarter operating level.

For the full year of 2021, on a full year basis, we expect total revenues to decline low single digits. This top line organic growth is offset by reduced contributions from purchase accounting compared to 2020. We would expect loans to grow in the mid-single digits from the end of 2020, excluding impact of PPP forgiveness in net of any new PPP originations. I'll note, this does not account for any additional government stimulus and assume some level of line of credit utilization increase throughout the year as the U.S. economic conditions are expected to improve from where we stand today.

We would expect transaction deposits, excluding PPP and stimulus, to increase mid-single digits from year-end 2020. We expect full year provision for credit losses to be in the $70 million to $80 million range based on our current macroeconomic assumptions. We expect full year expenses to be down slightly from the $720 million operating level in 2020 as we execute on our expense savings target of $20 million while continuing to invest in technology and infrastructure in 2021. Lastly, we expect the effective tax rate to be around 19%, assuming no change to the statutory corporate tax rate of 21%.

I will now turn the call back to Vince.

Thanks, Vince. Throughout the last year, we continue to focus our efforts on optimizing our online and physical delivery channels to improve the customer experience, improve operational efficiency as well as investing in our infrastructure and technology. Our commitment to reinvesting a portion of our cost savings initiative in our digital delivery channels was instrumental in our success serving our clients in growing loans, deposits and fee-based business. FNB will be adding a number of features to our mobile app in the first quarter providing an improved offering to clients. Once again, we received national recognition by S&P Global for having a top mobile application in terms of features and functionality for banks in the Northeast regional banking space.

As consumer preferences continue to evolve, our investment in our digital platform will enable us to reach new households in our expanded footprint. Moving forward, we are focused on increasing the number of interactions through our online and mobile channels. We are confident our digital offering, robust omnichannel presence and innovative customer interface will provide multiple ways for our clients to utilize our complete offering of FNB products and services.

Before turning the call over to the operator, I would like to thank our team for all their hard work, dedication and determination as we work through one of the most difficult and challenging operating environments of our lifetime. Their efforts resulted in a safer work environment and the preservation of shareholder value, and positions our company for better outcomes as we moved into 2021. We expect a resilient U.S. economy to perform at a higher level as the effect of expected stimulus and the rollout of the vaccine take hold, accelerating business activity and economic growth as we move through the year. We will continue to serve our constituencies by actively engaging with communities, investing in our dedicated employees and working continuously to deliver greater shareholder value. Operator?

(Operator Instructions) And the first question comes from Frank Schiraldi with Piper Sandler.

Just wanted to ask, first, just on buybacks. So you bought back some shares in the fourth quarter. I was just wondering how you would characterize the buyback opportunity here with shares having recovered to higher levels? And then also your thoughts on, I believe, you kind of thought you'd get to an 8% TCE ratio ex PPP over the next few quarters. I wonder if there's any change to that as well.

Sure, Frank. I can comment on that. Just from a capital perspective, as you saw on the slides, we ended the year with the CET1 ratio at 9.9% and our TCE ratio of 7.7%, excluding PPP, both good levels. And as you mentioned, we did comment and we expect to move past 10% and 8% in first half of 2021. As you know, we've taken actions to bolster our capital position to take it to these levels that are really highest for us, within our kind of forecast and guidance to look for capital ratios to kind of gradually build from here.

And then as far as the repurchase activity, I mean, we've done nearly 40 out of the 150 programs that was authorized in the fourth quarter. We're going to continue to be opportunistic. We think the valuation is still very attractive at these levels. What we did buy back was reflective of the confidence in the strength of the balance sheet, overall credit profile that we had. And during the fourth quarter, we were able to buy back 25% of those below tangible book value, which is nice from accretion to that measure.

So I mean we're going to be opportunistic. It's going to be a function of loan growth and see how loan growth goes. If loan growth slows, then there's more opportunities to do that. But it's definitely going to be a tool we have, and we'll look to deploy it as we go through the year.

Got you. Okay. And then just secondly, on the expense side of things, $20 million in expense savings targeted for 2021. You guys have done a nice job pairing expenses over the past few years. And so $20 million is sort of like par for the course actually for you guys. And I wondered if maybe there is more opportunity, given the tough -- well, given the tough rate environment, but also the acceleration in the digital channel to maybe see further cost saves in 2021 or would any further saves likely just be reinvested?

Frank, this is Vince. It becomes more difficult when you look at it in aggregate, it's $60 million over 3 years. And I think we've done a pretty good job despite the headwinds with margin cutting cost each year. So we have a process that we've actually set up inside the company to continuously look for cost save opportunities. So I wouldn't rule out that we could do additional. I would say we keep looking. The timing of that cycle puts us pretty much $20 million a year. And that's what we initially set out to do over a multiyear period, and we're well down the path of accomplishing that. That's why we've included it in our guide -- expense guide for the year. But there's always an opportunity to look at a number of areas within the company to drive additional efficiency.

I think as we look at this year, we've paired back our branch network fairly significantly. That was the comment in my prepared comments, I mentioned, 111 branches. We continue to look for opportunities to pair back where we feel we have the ability to retain customers. I think the move with the ATM distribution, enhancing our ATM delivery channel, particularly in the Mid-Atlantic and in the Ohio market in the last 12 months is -- will help us leverage our digital channels to attract new customers, which gives us the ability to weed out lower performing branches, right, and not lose the coverage of the marketplace. That's the overarching strategy. But I would say that we continue to focus on it. Obviously, we'd love to see our efficiency ratio below 55%. That's always been our target, was to be around 50%, hopefully, in the long run. And some of that comes with revenue growth, too.

And the final half of this, I was going to tell you, that we feel very confident about the markets that we've entered. We're seeing good success in those higher growth markets. So hopefully, our growth trajectory starts to improve as the economy improves, and we start to see outsized revenue growth contributions from those markets, which will obviously help the efficiency ratio. We're not just focused on expense. We're focused on driving top line revenue.

Got it. And then, sorry, just quickly, I just want to make sure I heard Vince Calabrese right on the PPP. Did you say that was added 17 basis points total to 4Q? And if so, just could you remind us what 3Q was contribution wise?

Yes. The fourth quarter it was -- yes, 17 basis points to the fourth and 6 basis points to the third quarter was the contribution of that.

And the next question comes from Casey Haire with Jefferies.

Wanted to touch on the loan growth, the guide, mid-single digits. Can you just give us some color on -- it sounds like it's -- I'm assuming it's going to come from your higher growth markets. But on a product basis, CRE was pretty strong. And we've seen other -- shows CRE momentum as well. Just given the concerns there, what's driving that strength? And then also, Vince Calabrese, you mentioned line credit utilization is backstopping some of this. And I'm just trying to square that with what's, obviously, very flush, liquidity situation in -- among borrowers. So just some a little more color on the loan growth?

Well, the southeastern markets, in particular, and the Mid-Atlantic region, they have fairly substantial pipelines. The overall pipeline is down slightly, I think 8% to 10%...

8% to 10%.

On a year-over-year basis, but the quality of the pipeline, I think, is better, and we spent more time sorting out where real opportunities are. And I would also say that the pipelines in the southeastern markets are fairly robust. I mean Charleston is doing exceptionally well. We expanded in Asheville, North Carolina, we're seeing some good activity, in Asheville, both from a CRE and C&I perspective. The Mid-Atlantic region is still moving in the right direction, has some growth potential. And then our legacy markets, we're expecting to pick up in the second half of the year. They're more industrial based in -- than the Midwest. And we're expecting to see more C&I opportunities. Gary, I don't know if you want to add to that? You're seeing the book. You're seeing the opportunities come over there, but I don't know...

Yes. I think as you mentioned, Vince, the southeast has been more active than the other regions at this point, seeing some new opportunities. We brought on a few new bankers, and they've been active. So we're seeing some very nice new opportunities with some new names out of those new bankers that we brought onboard, very solid and experienced bankers in those markets. In terms of the line of credit utilization, Casey, we did see it bottom in the fourth quarter. It actually moved up about 0.5%, into the mid-32 range. So we are expecting, as the economy improves over the next year that in the latter half we will see some growth from a utilization standpoint with our industrial base. So that's kind of the expectation there.

Keep in mind, there's a lot of cash on corporate balance sheets sitting on the sidelines. So we're going to have to go through several sales cycles to deplete that cash. Some of it's stimulus driven. So there's -- I'd say the second half of the year is when you'll start to see expansion on the revolvers from a balance perspective.

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

Yes. Let me go through some of the pieces because there's a lot of moving parts in there. So for the fourth quarter, net interest income was $234 million, right? PPP contribution was $31 million, up from $22 million in the third quarter. So it reflects that forgiveness of -- it's about $400 million that we had and kind of updates our assumptions for remaining life. So the purchase credit-deteriorated accretion related to CECL was $9 million, down $2 million from the third quarter, okay? So $11 million. So kind of all in, if you look at net interest income, excluding PPP and purchase accounting, we're at $195 million, which is up slightly from $194 million. So just kind of underneath this activity. The NIM and the other item that we had also is just a cash position, right? So the cash position will reduce the margin by about 3 basis points.

So all of these kind of contribute to our good confidence that we're at an inflection point for the kind of underlying NIM. When you look ahead to the first quarter, we think the net interest income, excluding, again, PPP and purchase accounting, will be relatively stable even with a couple fewer days you have in the quarter. The PPP contribution we expect to be $20 million to $25 million, assuming $700 million of forgiveness. And then purchase accounting probably comes down another couple of million to $7 million to $8 million or so. So those are kind of the key moving parts as far as the purchase accounting and PPP.

And then just a couple other kind of key drivers just for everybody for me to touch on. So interest-bearing deposit costs, we mentioned in the slide, came down 12 basis points to 43 basis points. We ended the quarter on a spot basis at 36 basis points. So that kind of gives us a 7 basis point head start to the first quarter. And there's still some more opportunity there on the business deposit side.

The consumer CDs continue to roll down. We have maturities of $275 million to $300 million a month in the first quarter. Those are kind of coming off at around 1.5% to 1.6%. New CDs are coming on at 19 basis points. So that continues to create opportunity on the rate paid side. And then the new loans that we made during the quarter, from a pure kind of coupon standpoint, came on at 3.21%, which is a basis point higher than the portfolio yield. So that stabilization obviously helps on the loan side. And then lastly, the reinvestment rates in the securities portfolio were 91 basis points during the quarter, excluding some T-bills that we had for budgeting purposes. That stuff rolling off at 2.28%. So there's a little bit of a headwind there. But I think the loan yield stabilizing and new ones in relation to the portfolio helps as well as the continued opportunity on the deposit side. So sorry for the long answer, but I wanted to kind of go through all those key drivers.

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

I made it even complicated, Casey.

We originated in the first day, 1,900 PPP applications for roughly $400 million and just started -- we just launched our portal. So we're in day 2 now. But -- so we will be adding footings.

And that's not in our guidance. This is new info.

That's not in the guide. So that will be coming on the balance sheet.

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

Gary?

Casey, we've done a lot of work across the portfolio, reviewed a lot of credit, updated significant amount of credit in the latter half of the year with our normal reviews that come in plus what we've done on top of that with the 3 deep dives around the COVID-impacted portfolios. And one of the things that we did, as mentioned, we took some actions in the fourth quarter to reduce our exposure to what we call the higher risk assets in those COVID-impacted sectors, and we really feel good about the book coming into the new year. Our reserve levels at year-end were at solid levels.

Our charge-offs for the full year came in at 24 basis points, and we feel really good about the work we've done and the position of the book. So our expectations, as we look forward, subject to loan growth around the portfolio is that we're expecting charge-offs to be in, what we would call, normal ranges with some guide there. And we feel good about that provision guide in 2021, with expectations that the economy will continue to improve. So a lot of work has gone into it, and we feel good about the information that we have forward with you.

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

Maybe just sticking with the credit discussion. When you look at the guide for that $70 million to $80 million of allowances and what we saw this quarter, how much of a qualitative overlay did you have to utilize to sort of keep the provision where it was? And as to your comment about an improving expectation for the economy, do we -- should we assume that, that qualitative overlay declines over the year and that we really do see some significant reduction in that allowance ratio?

Yes. We -- with the end of the year review of the ACL, we did utilize some qualitative overlay based on the position of the book. That said, the majority of our ACL is quantitative, but there is qualitative overlay. As the economy improves, we'll continue to manage that appropriately. The metrics that we utilize there, Jared, with an improving economy coming into play in Q4, also improvement in unemployment, housing, GDP as well as the markets. So generally, we're looking at a gradual steady improvement. Unemployment will continue to decline, and it's just over 6% in our forecast horizon, and GDP grows about 4% next year and 3% the year after. So I mean that's -- those are some of the inputs into our ACL that I can give you, and we feel good about the position of it at this point.

Okay. And then on the PPP, with this second round, yes, I know it's excluded from your guidance. But looking at the $2.5 billion you were able to put on in the first round, and that went on pretty quickly, how -- where do you see the second round peaking? And when do you think we get there?

Yes. I think it's too early to tell. I don't feel that -- I mean I can tell you, we're running -- we're at about 9% of the total that was originated last time. And there was just a mad rush. So I don't see that happening. I think that we'll continue to originate. As I said, we're at $400 million roughly with 1,900 -- 1,871 applications is what we took when we cut it off last night. So that -- and that had -- the portal had just opened. So I would expect there to be sustained demand for the product. And I think it's hard to say what we won't hit -- we won't be at $2.6 billion, I can tell you that.

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

Yes. We've been in communication. When we originated in the first round, we captured everybody's e-mail addresses and pertinent contact information. They were assigned to a banker physically. Every single one of those, 19,000 or 20,000 loans was assigned to a banker at the company. And those bankers have maintained communication. And we've also set up a communication system via e-mail, where we update the clients periodically about what's happening with the SBA and the PPP program. So I would say we were pretty active with that 20,000 base that we originated the first time.

And what we're seeing are folks that are coming back. They feel that they qualify for this tranche, and they're coming back. And so I would say, yes, it's been managed. And it's been very fluid for us. Our -- we developed our portal in-house. Our people did a fantastic job planning it. We monitor the changes that we're providing, which were constant with the SBA. It's very complicated because there's a first draw, a second draw, and we still have forgiveness going on, but we've automated all of those processes. And when we went live, the website worked flawlessly for us. So -- and we're end-to-end digital. So I'm very impressed with what our people have done and very pleased with how easy this is to use for the customers.

Great. And then just finally for me on the expense side. That's great with the $20 million target. I guess when we look at the COVID accommodations, whether that's expenses or waived fees, should we expect that, that is over now in '21? Or what's the tail on those COVID-sensitive expenses and COVID-sensitive missing fees? And do you think that we get a 2021 efficiency ratio back to where we were in '19?

I would say that the -- just a couple of things. I mean, on the expense side, we'll still have some level of supplies of maybe $22 million, just looking ahead to the first quarter at least. So there will still be some level of that, just kind of given where we are. If you look at the fee income side, you could see that on the noninterest income side, the service charges are down about 10% year-over-year. At the bottom, it was down about 45%. So we've definitely seen customer activity kind of moved back up, not back to pre-pandemic levels yet, but I guess we'll see as you go into 2021. I think one of the key things that we're monitoring, as everybody else is, is how customer behavior changes and evolves over time.

We've done, I think, a great job of investing in all the digital initiatives that we can and the clicks to bricks that we have, so that customers can bank wherever they want to bank. But we're definitely going to closely monitor the customer behavior over time to see there are opportunities for maybe more consolidation as you go forward from here. But I guess there's one other thing on expenses, too, I wanted to mention is we're -- process improvement initiatives. We've been actively working on that over the last few years and definitely looking at using some of these robotics, RPA initiatives to streamline processes even more. So we have a good number of initiatives this year that will help the efficiency ratio. And some of that's baked into the guide. And if we can do even better on that, it would be the first time we're implementing some of these techniques. I think there's more opportunity there, too.

And we've invested pretty heavily in the digital realm. And that includes data analytics, data warehousing, the interface. We're adding features to our website where today you can purchase, checking account products and move through the whole process online digitally from end-to-end. We're adding loan products this year. Our mobile app is going to have picture bill pay, enhanced chat, credit score, e-statements, a new user interface and the ability to immediately enroll in mobile -- through the mobile application. We're also taking the mobile optimized website with the solution center, and that's going to be incorporated into our mobile app, so people can actually shop on the solution center within the mobile app without going into a disparate website.

So there's a lot going on. I don't think we should lose focus on investing in those areas because that's what's kept us competitive with larger competitors and fintechs. And I think we're hanging in there. You can see from the market share data that I shared with you that we've done well and just about every MSA we're in, in terms of growth. So I don't think that battle is over. I know we're dealing with headwinds on margin. So we've kind of curtailed some of it or delayed some of that investment, but that still needs to be a focus.

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

Wanted to maybe do a quick follow-up on the expense side. So you've got about $15 million of kind of core expense inflation, $21 million of planned savings. And I would assume there'd be maybe a little bit of tailwind from lower cost in the fee businesses on a year-over-year basis, in particular mortgage. So maybe could you kind of square that comment with maybe your expectations for the mortgage outlook or other fee businesses that maybe are going to do better in 2021?

Yes. I would say -- I mean the fee business has had a phenomenal year in 2020 with record levels, as Vince commented in his remarks. When you look at mortgage plus capital markets plus insurance plus wealth, the $32 million increase there in fee contribution. As we said in our guide, the contribution there, we would continue to have a very strong levels. I don't know that we're going to set a record every quarter, as we did with mortgage, when you look at mortgage last quarter. But this quarter was very strong again, 15.3% following an 18.8%. So we've invested a lot in those businesses. We've expanded geographically, particularly in the mortgage business. We think there's still more upside to come with some of the markets and folks that have joined the team over the last year. But I think as we come through this period, that will continue to bring more benefits to us.

You know on the expense side, I would say that the guide overall is kind of down slightly from 2020 levels. And the first quarter always has -- there's payroll taxes and things kind of jump up in the first quarter. But if you look at the expenses going out second, third and fourth quarters, you get right around that $178-ish million that we had been guiding to, which hence the kind of the flat guide that's in there. And that's through the cost savings, the $20 million cost saves as well as kind of other initiatives, to improve the efficiency. So that's kind of where you get to once you get through kind of the first quarter seasonal increase there.

And I guess my second question kind of as I go back to the 0 interest rate environment that we had coming out of the last cycle, I remember at that point in time, you guys felt like it was prudent to grow more quickly early in the cycle, while credit spreads were wider, as those would only get competed away throughout the cycle. So maybe just kind of an update on your view on being more aggressive on loan growth early this cycle again? And when you would feel comfortable kind of stepping out there and being more aggressive in that way?

Our strategy has always been to be consistent through cycles. So while we were able to grow faster and gain better margins because of credit spreads broadening through the depth of the cycle, we were out in the marketplace to play capital throughout the financial crisis. That hasn't changed. What's changed here is the trillions of stimulus that's been injected into the economy. So I think if we didn't have that, my belief is that FNB's credit metrics would be superior. We would be out in the marketplace originating, while others would be retrenching or returning capital because of concerns. That didn't happen in this cycle because I attribute it to the stimulus. It's essentially providing an opportunity for companies to work through the issues without relying on a bank to provide additional capital. Essentially, we're providing the capital, but it's federally guaranteed for PPP.

And even in the consumer segment with these stimulus checks, which are unprecedented, that has changed the game. So with that, we have to be very careful about what we originate because eventually, there will be a day of reckoning. So I would say we're optimistic about the areas that we focus on, and we're continuing to deploy capital in those areas just as we have in the most robust times. And I think we will get a benefit because I think given the 0 rate environment, borrowers have been more receptive to floors. When you think about their all-in rate, an additional 50 basis points doesn't change much. It's not even that if you got to net out the LIBOR -- 1-month LIBOR rate. So I think that -- well, our loan originations in the commercial segment, we're still calling aggressively that will turn at some point here when demand starts to pick up in what we believe the second, third and fourth quarter of this year. Sorry for the long answer, but that's the view.

No, that makes sense. And one -- just quick last one maybe for Vince C. Are there any other balance sheet actions that can be taken or opportunities ahead? You've taken some in the last 2 quarters. So just curious if there's anything else out there that we should expect?

Yes. I would say that we're always analyzing the full balance sheet to see if there's ways to improve the position. We took a lot of action in 2020. I would say, as we sit here today, if you look at the home loan advances, there's about $1.7 billion or so, $650 million matures in 2021. So kind of the short life there. So there's another $1 billion or so that we'll continue to evaluate to see does it make sense to potentially do that. But we don't have any plans to do it right now, Michael. I mean, it's just kind of part of our regular evaluation and assessment of the markets and the balance sheet. But as we sit here today, we don't have any plans for any other actions.

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

Gary, I just wanted to ask, was any of the reduction in the higher risk portfolios like the hotel due to loan sales? Or was that pay downs of maybe some weaker credits that you didn't want to retain?

Yes. We moved $65 million in hotels. $42 million of the $65 million, we moved them in the normal course of business, moving them off the balance sheet. We did sell a handful of hotels that we classified as higher risk in that book. So it was only $23 million. And we did move some other small business-related items of a similar dollar amount. But other than that, the majority of that was just moved off of the balance sheet.

Okay. Of that $23 million that you sold, was there any charge-offs that were tied to those sales?

Yes. The total amount that we moved, including some of the small business stuff, was right at $50 million, Brody. And in terms of charge-offs, the charge-offs on that book were $6 million. And of that, we had that totally reserved for going into the sales. So it was provision neutral. So it was very good.

Okay. And I'm sorry if I missed it, but could you give us a sense for how criticized and classified loans trended this quarter?

Yes. The classifieds were down $50 million. And the criticized were up just a touch over $100 million, criticized being special mention. So we had good movement in classifieds, slight increase in the special mention category.

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

We're getting -- I mean Vince can maybe give you more detail. But on originations, I can answer that. We're running in the probably $250 million range, right, spread.

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

And as I said earlier, I think the floors moved down a little bit, right? We were seeing 75 bps, now we're seeing 50 bps. So there's a little bit of competition. I mean there's a lot of competition out there, but -- in particular, in focusing on the core, we're still able to get them, not at the same spread that we would have gotten at the beginning of the crisis.

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

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

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

Well, it will be a combination. I mean, we're monitoring that every day to decide kind of which way to go. We had been letting the securities portfolio run down earlier in the year, and we did put some good portion of the cash flows that came out of that portfolio we reinvested in the fourth quarter. And kind of the plan right now would be to hold securities flat in 2021. But again, that subject to changes as kind of rates move around. The liquidity is there. We've used some of that to pay down some of the borrowings. Like I said, we'll continue to evaluate that.

And then additional stimulus is just going to bring more deposits into other banks, right? So I think that the plan there would be, as Vince commented earlier, as you get through the year and you get the vaccine behind, and hope that economic activity picks up and the customers work through cash and then they start to borrow again to utilize that liquidity. So we like having the powder. And I think our teams are very well positioned. They're actively calling on their clients as well as prospects so that when that time comes I think we'll be right at the table.

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

I mean they're around -- I want to say, around 100 basis points, really, pretty well.

Okay. And then just I wanted to ask the outlook for capital markets. Are you expecting some of your middle market customers to get more active throughout the year? Or is there not as much of a need just with so much liquidity on balance sheets right now?

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

But from a CRE perspective, that's still an active area. I would expect us to continue to see decent level of capital markets opportunities. And our syndications areas, both CRE and C&I, are reloading their pipelines. So I think M&A will pick up in the second half of the year again. And -- yes, we're also forming a -- we're in the final stage of completing the formation of a broker-dealer to take advantage of debt capital markets fees for our large corporate borrowers, that's a move that we made. So that should help us as well this year. That will be finalized shortly, and we'll be able to accept these debt offerings for our clients, which we haven't done.

Okay. Just a couple of quick ones left. Just wanted to -- on your insurance, just wanted to ask, how much of that is related to individual policies? Or is there a commercial insurance component to that as well?

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

Okay. And then just on the expense outlook, I appreciate the guidance, but you're running just a little bit higher than where your guidance would imply right now. So I just wanted to get a sense for if you could walk us through, I guess, maybe some of the timing as to when the expense -- that core expense number would run down and get you closer to sub-$720 million level for the full year?

Yes. I would say just a couple of points. I mean the fourth quarter expenses are a little bit higher, as we commented on kind of production-related commissions and incentives are in there, you typically have some of that at the end of the year, kind of true everything up based on how you close out the year. So that's in there. There's a couple of million dollar increase in outside services, professional fees related to a variety of projects that we have going on, where we've brought in some outsiders to help with things like LIBOR and all these projects that we had folks kind of helping out with. So that's really not kind of run rate as you go forward. There's a couple of million dollars in there for that. Our FAS-91 deferred origination fees were about $1 million lower. So that increased expenses.

So there's a lot of moving parts to the kind of the fourth quarter, which is why my comment just a little earlier ago, which if you look at the expense run rate kind of second through fourth quarter, once you get through the seasonal whip, we're right around the $178 million that we had been talking about for a couple of quarters in there. So the $20 million initiative is a lot of -- I mean it's all identified and a lot of it's in place. Most of it starts within the first few months, I would say, so that you get that kind of run rate benefit. But the $20 million is inclusive of the various timing of those initiatives as we go through the year. But most of it's pretty early, as you would expect, so that we get most of the full year benefit of those expense savings.

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

Most of my stuff has been answered. Just a couple of things. Could you guys just comment -- I mean in the past, you guys have been pretty adamant about M&A was off the table. But with activity maybe picking up this year, just if you could give any thoughts on how you're thinking about it? If it's still, really, the focus continues to be organic growth? Or is there some consideration you could be opportunistic on M&A this year if activity does pick up?

Yes. I would definitely say that while we're experiencing good success with our de novo expansion and the rollout of our digital platform more globally, I think there's opportunities. I mean, we're going to do whatever makes sense for our shareholders. If there are opportunistic transactions, we'll look at them. I think that one thing for sure, though, is that we're going to look for something that doesn't impair tangible book value substantially. So the earn back would have to be relatively short. And as you know from our past M&A activity, our Board is adamant about EPS accretion, significant internal rates of return and capital invested and earn back. So those will be key elements.

And I do think as we move through, we've made significant investments in our platform, in our systems, in our infrastructure assets, which I think will be daunting for smaller banks. So I do think there will be opportunities to take cost out and to merge with or acquire smaller organizations that provide some decent accretion and, in some instances, may be accretive to tangible book value and capital. So that's where we are. Thank you for asking the question.

Yes. And just the -- in your thought, Vince, I mean would these be probably in market deals. I guess, it is -- what it sounds like rather than entrance into new markets, the way you're looking at it today?

Yes. I would say there's still work to do within the franchise. We're spread across a pretty broad geography. So there's plenty of opportunities to do in-market acquisitions, and that would be the priority because, obviously, we can take significant amount of costs out with overlap. We've been shrinking branch delivery channel with the rollout of more digital capabilities. So I think that, coupled with our ability to roll out additional ATM sites across our footprint, kind of bridging the gap. We're up to 800 with branded and owned ATMs. So we have a pretty substantial network. That goes hand-in-hand with our ability to originate customers, both digitally and through the physical delivery channel. So obviously, within that footprint, it's much easier to do.

Got you. Okay. And then just the last 2 for me. I guess the other, Vince. Vince, did you -- I appreciate the color on the PPP. Did you give what the remaining unearned fees to collect are at this point before the new program kicked in here? Just kind of what's left as we go through the balance of the year?

Yes, Brian, I have that. It's -- at the end of the year, we were $32 million of remaining unaccreted fees. You may recall, it was kind of $82 million to start with the program. And there's $32 million that's left to come in that we would expect virtually all of it to come in during 2021 kind of depending on the pace of forgiveness.

Got you. Okay. And then last one for Gary was just the color on the criticized and classified level. I mean, Gary, do you feel like -- I guess it sounds like from your outlook, I guess, would you anticipate that fourth quarter levels are maybe a peak in the criticized and classified levels based on kind of the review of the portfolio and the better macroeconomic outlook? Is that kind of how you're thinking about it today?

I would say that's an accurate view at this point, Brian. Naturally, the economy is going to play a role there. If we get a continuing improvement throughout the year from here, yes, I would expect that to play a help. Naturally, you're going to have a credit or to move from a rating standpoint, so that could temporarily move a number. But I think we are at an inflection point there.

Got you. Okay. And then that utilization, you talked about kind of trending back up maybe in the back half of the year, I guess. Can you get back to pre-COVID levels? Or do you think it's going to get maybe partway back if things kind of unfold as you guys look at them today?

Yes. I think it's going to be a slow grind forward with increased activity in the latter half. I would not expect it to get back to a normal level by year-end '21.

Thank you. As that was the last question, I would like to return the floor to management for any closing comments.

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

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