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spk08: Hello and welcome to the FMB Corporation fourth quarter 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. Now I'd like to hand the conference over to Lisa Constantine, Investor Relations. Ms. Constantine, please go ahead.
spk06: Thank you. Good morning and welcome to our earnings call. This conference call of FMV 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's Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable 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 27th, and the webcast link will be posted to the About now turn the call over to Vince DeLee, Chairman, President, and CEO.
spk12: Thank you. Welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrero, our Chief Credit Officer. FMV'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 mobile e-store 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 of 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 three 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 a year, 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 e-store shopping tool into the FMV mobile app as part of a series of innovative enhancements that build on our customers' ability to bank digitally. FMV also successfully upgraded our mobile banking experience, adding new features and expanding our suite of online loan applications, including FMV credit cards, mortgage products, home equity lines of credit, home equity installment loans, and small business loans. This platform creates a fully digital bank where customers can conduct routine transactions, purchase products and services, and schedule time with our bankers virtually. Our comprehensive mobile offering was recently recognized by S&P Global Market Intelligence, which called F&B Direct one of the most competitive mobile banking apps in the industry. And their analysis indicates that our mobile app had more features than any of our peers and is commensurate with J.P. Morgan and Bank of America. In addition, We were also recognized for our best-in-class digital strategy, Clicks to Bricks, and received a prestigious national award for our mobile banking experience. In addition to integrating the eStore, our mobile app was upgraded to incorporate a new modern look, streamlined navigation, and direct access to 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, as evidenced by an industry-leading app store rating of 4.8 stars. We continue to integrate additional products and services into our digital platform to better serve our customers and increase our market share through customer acquisition in a scalable and efficient manner. A few weeks ago, we rolled out a fully digital and enhanced version of our Physicians First program on our eStore. This holistic suite of digitally accessible products and services dedicated to meeting the unique needs of physicians, dentists, veterinarians, and other healthcare professionals includes commercial loans, deposit products, consumer loans, and wealth management services. With over 250,000 physicians, dentists, and veterinarians in our footprint, and over 4 billion of new medical student debt created each year, our opportunity to improve financial outcomes for members of the healthcare industry is tremendous. We 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 healthcare industry. Lastly, I wanted to touch on the Howard Bank acquisition. We were in the final days before our close on January 22nd, and the system's integration on February 5th. We have worked closely with Howard's 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 FMV 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 acquisitions, we will introduce our expanded product suite, to our new clients to drive additional non-interest income growth in Baltimore and Washington, D.C. Both the one-time cost and the credit mark, including day two, are expected to come in better than originally planned. With that, I will now turn the call over to Gary to comment on our overall credit quality. Gary?
spk07: 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 boached 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 Triple P balances ended December at a very solid 62 basis points, an improvement of nine bps on a linked quarter basis. NPLs in OREO also improved during the period to end December at 39 basis points, representing a 10 basis point reduction from the prior quarter, with reduced non-accrual levels of $22 million driving the improvement. On a year-over-year basis, our non-accruals are down nearly 50% compared to December 2020, representing an $82 million reduction. This largely reflects the actions we took late in 2020 to better position our loan portfolio for the year ahead, at which time we proactively took risk off the table during a challenging macroeconomic environment. Net charge-offs for the quarter were very low at $1.4 million, or two basis points annualized. while full-year net charge-offs for 2021 totaled $14 million and stood at a solid six basis points, 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 and as well as a general improvement in economic factors that favorably impacted our forecast models. This resulted in a GAAP reserve position that was down three basis points to stand at 1.38%, with the XPPP reserve decreasing five 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%, 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 acquisitions. Our credit teams have been carefully tracking and monitoring the Howard portfolio since announcement, as is our standard practice. At this point, we remain pleased with the credit performance and the anticipated day one positioning of this book, which is tracking better than originally expected. Post-close, we do not expect our loan risk profile or credit quality performance to be impacted, as the Howard book remains well diversified and will have minimal impact to our concentrations of credit. As we close out another successful year marked by continued positive credit trends, we are very pleased with the position of our portfolio moving into 2022. With the global challenges and uncertain economic conditions faced during 2020, our proactive approach to risk management and ongoing review of our credit portfolio allowed us to strategically position ourselves entering 2021, a proof point of the attentive and disciplined approach we take in managing our credit book. We remain vigilant and attentive to any emerging risks in both the broader economy and within the markets in which we and our customers operate. As macro factors continue to change, including economic conditions, inflationary pressures, and the evolving nature of the virus, we will continue to manage our book through this highly competitive environment with our core credit philosophies front and center. This foundation of sound and consistent underwriting, attentive management of risk, and careful selection of high-quality lending opportunities continues to support our growth objectives as we look forward to more business opportunities ahead in 2022. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
spk10: 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 a bottom-line and pre-provisioned net revenue basis. We produced mid-single-digit loan growth, excluding PPP, with 5.7% year-over-year growth on a spot basis. We surpassed our full-year revenue expectations with a record $1.23 billion, driven by a continued strategic focus on diversified fee income contribution. Operating expenses were well controlled, and operating pre-provision net revenue, or PPNR, ended the year at $508 million. Because of our strong credit quality trends and improved economic conditions, our provision for loan losses was essentially zero, at $0.6 million for the full year. Through this successful execution of our strategies, we were able to increase our operating net income available to common stockholders by 27% to $400 million, or $1.24 per share. Let's walk through the fourth quarter financials, starting with the highlights on slide five. Fourth quarter operating EPS totaled 30 cents, an increase of two cents from the year-ago quarter. tangible book value per share increased 9% year-over-year to $8.59. When excluding Triple P, 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%, still below the pre-pandemic level of 40 to 45%. Consumer lending had their second highest production quarter. We also had record linked quarter growth for small business loans. Let's continue with the balance sheet on slide seven. Average earning assets are now over $35 billion, as 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 in average Triple P balances. Average deposits totaled $31.7 billion, an increase of 2.7% linked quarter, with year-over-year growth in all eight of our primary MSA markets. The growth continues to lead to a favorable funding mix, giving customers preferences for low-cost savings accounts and maintaining 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 Triple P given forgiveness activity, which was partially offset by an increase in average earning assets, a more favorable funding mix, and lower deposit costs. Reported net interest margin decreased 17 basis points to 255, the total yield on earning assets declined 19 basis points to 280, reflecting the reduced Triple P contributions and a 498 million or 15.6% increase in average cash balances. The total impact of Triple P 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 two basis points in the prior quarter. When excluding these factors, net interest margin remains stable, reflecting a three basis point reduction in the cost of funds, offsetting the lower yields on variable rate loans. Now let's look at non-interest income and expense. Non-interest 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, a solid contribution from swap activity, loan syndications, debt capital markets, and international banking. We are very impressed with the performance of our capital markets team, with international banking and loan syndications 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 help-for-sale pipeline and lower secondary market revenue. SBA volumes and average transaction sizes continue to be strong, with $2.1 million in premium income included in other non-interest income, the third consecutive quarter exceeding $2 million. Reported non-interest expense was well managed and declined $2.6 million, or a 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 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 of 2021. The efficiency ratio equaled 58.1% compared to 55.4%, reflecting lower Triple P income and the previously mentioned non-interest income decrease from record levels last quarter. Overall, this was a strong quarter to close out 2021, positioning us very well for 2022. Now let's turn to 2022 guidance on page 12. We expect the momentum in 2021 loan growth to continue. We expect loans to increase in 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 Triple P program and other government stimulus, which we expect will begin to run off in 2022. With that runoff included in our assumptions, deposits are projected to grow mid to high single digits on a spot basis, inclusive of Howard. Let's now look at the income statement, which includes Howard Bank in all assumptions. We expect net interest income to end the year between $965 million and $1.005 billion, with the first quarter between $226 to $230 million. Our base guidance currently assumes two rate hikes, with the first being in June and the other in September, although we have run sensitivity analysis given the recent volatility in the interest rate futures. Full-year non-interest income is expected to be between $320 and $340 million, with the first quarter in the high $70 to $80 million range. We expect non-interest expense on an operating basis to be between $760 to $780 million for the full year and $190 to $195 million for the first quarter, given normal seasonality and the addition of Howard. These do not include the one-time expenses associated with the Howard Bank acquisition. 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 in the low $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.
spk12: Thanks, Vince. 2021 has been a great year for F&B with many accomplishments to celebrate. I'd like to summarize several significant achievements. F&B achieved record revenue leading to strong earnings with EPS at the highest level since the company's restructuring in 2004. We grew loans excluding PPP by $1.3 billion year-over-year to drive total assets to an all-time high of $40 billion. generated record fee income of over $330 million for 12% year-over-year growth, which now comprises 27% of total revenue. Our team achieved more than $20 million in run rate cost savings, accomplishing our three-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 operating plan. We enhanced our digital technologies to better serve our customers, putting us at the top of the industry, and supported our communities during the pandemic through the facilitation of $3.6 billion of PPP money. We also continued our effort to provide loans and investments 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 F&B employees who focused on serving their clients and driving shareholder value every day. This past year was a difficult environment to navigate, but our employees continuously delivered an 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.
spk08: Very good. Thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Michael Young with Truist Securities.
spk02: Hey, good morning.
spk08: Good morning, Michael.
spk13: Good morning, Michael. I actually wanted to start with more of a strategic question for Vince. You know, with the rollout of the digital banking, you know, both app and online marketplace, what – you know, 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, you know, more efficient operations in the retail bank? You know, how do you kind of think about that? You know, maybe both strategically and financially moving forward?
spk12: Well, I think it adds, you know, it really adds an element to both. I think we're able to operate more efficiently and 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, I think since we launched our e-stores, we basically reformatted it and relaunched it and then added loan products. We started last year and then we phased in various loan products. So consumer loans came online in August and September and credit cards rolled out in January, but mortgages were rolled out and the mortgage product itself was rolled out in May. We've done pretty well with applications. I mean, we During that period, we were able to originate almost 3,000 applications online for those loan products. And, you know, 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 omni-channel application, I've been talking about it for a long time, where customers can go in and fill out one application for five or six products simultaneously. 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 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, but people who started to engage with the solution 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 with the eStore. Not all of them led to applications, but they started the process or reviewed content on products and services. 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 have them 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 grown. 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. Anyway, 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 work streams within the company, eliminating a lot of manual processes. And then on the flip side, it'll help us scale. And we have not advertised or spent a lot of money on promoting it. We will this year. We have a plan to do that. And it's included in the expense guide that you got from Dennis.
spk10: Another element, too, is the non-banking businesses running their operations through the digital bank, too. Wealth, insurance, private banking. So there's opportunities there to leverage the investments that we've made for really across the business.
spk13: Okay, thank you and appreciate you tying it back into the financial guide. Maybe, you know, as a follow-up on the financial guidance for 2022 for Vince Calabrese, just as we think about kind of rate hikes, you've got two built into the estimate for the year, but You know, if we were to get a third, have you kind of looked at the sensitivity on, you know, either a dollars or a NIM basis to what, you know, an incremental rate hike would be in addition to what you have baked in?
spk10: Yes. Yeah, we did. You know, with things moving so quickly, we've done some sensitivity analysis around different options. So we did quantify that. Basically, the ranges that we have for 2022 would go up by about 3% if we get a rate hike in March. So adding one March to the June and September that we already have in the guidance is a 3% lift to the range. It's there, the 965 to 1005.
spk13: Okay, great. Really helpful. And one last one, if I could sneak it in. Just on Howard, you guys are so close to closing it. Are there any kind of pro forma balance sheet actions that you expect to take or things that have already been done, whether that would be shrinking it and increasing kind of the NIM benefit or... anything like that that we should be incorporating as we model that?
spk10: I think as we sit here today, Michael, you know, the main item would be that borrowings of about $200 million and about $100 million or so of wholesale deposits, you know, that we would, the borrowings we would pay off and then the wholesale deposits kind of wean down, you know, over the course of the year. And then, you know, overall, you know, that's the main first step in You know, there's nothing else from like an exit portfolio on the loan side that we've had in the past, some transactions. You know, we've been very happy with credit quality there. So really just those two items as we sit here today.
spk13: Okay, perfect. Thank you.
spk10: Thank you. And that's included in our – Michael, I should comment too. That's included in our guide, those actions that I just mentioned.
spk08: Okay, thanks. Thank you. And the next question comes from Frank Schirardi with Piper Sandler.
spk11: Good morning. I wanted to start actually there, I guess, with a follow-up on the rate hike question. I don't believe you guys provide, you know, quantified deposit data as you use, but just wondered if you could give any color on how you model it out in terms of, you know, 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 that approach?
spk10: It's more of a dynamic modeling process, I would say. I think our expectation as we sit here today would be to kind of get a couple of the Fed moves in and then start to see some impact on the deposit rates. I guess a 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 you know, over time move more towards a kind of historical 40 to 50 percent. But for 22, kind of more in that kind of 20 percent level.
spk11: Gotcha.
spk10: Okay.
spk11: 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, you know, 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, you know, the $20 million in cost saves you've done over the last three years. Just wondering if there was something similar for this year and if it shaped it.
spk10: Yeah, I would say a couple comments there. I mean, the expenses for Q4, you know, as you know, came in consistent with our expectations. At 180 was what we guided to. You know, every line item on the non-interest income slide you can see is basically unchanged from the third quarter. As we move forward into 2022, you know, we do have a kind of inflation component baked into our non-interest expense level 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 the second part, Frank, what was the second part again?
spk11: Cost saves. Yeah, the cost saves.
spk10: Yeah, the cost save number, you know, we had, as you commented, you know, $20 million a year for three years. You know, we've done a lot of consolidation with the branches over those three years. So, the bogey 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, you know, Triple P, 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, XPPP, in the fourth quarter. And as we move into 2022, you know, we have positive operating leverage each quarter and expect that to build. And, you know, as the rate moves come in, you know, 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.
spk11: Okay. Great. Thank you. All right.
spk10: Thanks, Frank.
spk08: Thank you. And the next question comes from Jared Shaw of Wells Fargo Securities.
spk02: Hi, good morning. This is Timor Braziller filling in for Jared. How are you?
spk05: Good.
spk02: How are you? Good. 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, 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?
spk12: Yeah, I think, you know, the guide we gave is fairly consistent. If you look back historically at our growth trajectory, it's fairly consistent to where we've grown historically. So, you know, in our assessment of what the potential is in the marketplace, obviously we don't know. You know, we rely on pipelines, economic data, 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, the economy is still feeling the effects of stimulus. There is potential for us to outperform, but we can't You know, we have to rely on what we know today. And, you know, our pipelines are good. We don't really comment on the details of the pipeline, but, you know, I would say it's pretty good across the board, particularly in the southeast and in the mid-Atlantic region. So we, you know, have been doing pretty well down there, and it's really paid off for us. That expansion has helped us. The investment in technology, you know, sure, if that starts to really take off If the adoption picks up, you could see some significant growth in certain categories, consumer loan categories, pick up some growth in small business potentially. So that could be additive. But our guide, I think, is 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 meant the first quarter of this year where we were softer and then we had three strong quarters in the second half of the year, or do you mean moving into next year, this quarter, 22?
spk02: Yeah, I meant the fourth quarter production, if any of that was pulled forward from the first quarter of 22. No.
spk12: We can't time. Having been a commercial banker, I tell Vince Calabrese this all the time. He's like, why can't these people forecast when they're going to close a deal? You know, we don't control when transactions close. There's so many, you know, there's so many factors. Obviously, the bankers want to get paid. And our incentive compensation plans are geared towards, you know, they get paid on what they close each quarter. So there's, you know, there's kind of a tug of war between the client 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 decide to defer CapEx spend into the next year, and there goes your incentive comp. It gets 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. The flow of production is real and normal. It's not impacted by our people or behaviors of our people.
spk02: Okay, that's good, Culler. Thank you for that. And then maybe a question for Gary. Looking at the provision outlook for 22 relative to your comments on asset quality expectations kind of when the Howard deal was announced to today, Okay, could that prove to be conservative as well as maybe some of that day two allowances is reversed out throughout the year? I guess just maybe talk through the puts and takes of further reserve releases, better Howard performance, and then providing for incremental growth and how that plays through the provision in 22.
spk07: Yeah, I guess the important pieces there, Tim Moore, 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 other important factor is the loan growth that we're able to put up. That loan growth is really going to 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 one credit mark and the day two provision on that book are going to be better than expected, as was mentioned earlier. So all told, everything's moving in a good direction there. It's going to be driven by those factors as we work our way through the year.
spk02: Okay, thank you. And then one more, if I could, just looking at the balance sheet, it looks like Some of the repositioning out of cash 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.
spk10: Sure. Yeah, 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 to half a billion. So we ended the year at $3 billion for that excess cash. And, you know, 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, you know, during the fourth quarter, we invested a little over $900 million into the portfolio. It's about double the portfolio cash flows. A good portion of that being pre-investing in anticipation of the Howard acquisition. So kind of on a net basis, the portfolio grew $479 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 were investing in the third quarter. We run that forward to, so far this year, in the first quarter, in January, we've invested $300 million We've put the work so far in January at 154, so another 21 basis points higher than where we were in the fourth quarter. And at a pretty low duration, too, 3.7. So as we look to the end of the quarter, there's a lot of moving parts with Howard coming in. You know, we'd look at the end of the quarter with securities at about 7, 7.1 billion at the end of March from 6.8 to 6.9 that we've kind of ended the year.
spk02: Okay, great. Thank you. I appreciate the caller. Thank you for the questions, and nice quarter.
spk08: Okay, thank you. Thank you. And the next question comes from Daniel Tamayo with Raymond James.
spk00: Good morning, everyone. So just hopefully to close the loop here on the NII guide, you know, 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?
spk10: Yeah, I would say – The floors that we have are really pretty low. We have $12.5 billion of loans that are indexed to short-term LIBOR order times. And less than $400 million, $350 million or so, have floors on them at a current benefit of 63 basis points. So basically, you'd have two Fed moves before that $356 would 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 one-month LIBOR, and then another $2.5 billion tied to PRIME. So between the two, it's 50% of the loan portfolio that's tied to those short-term indices. And the four levels, we didn't have the benefit of it on the way down, so part of why there's not that large of a balance there that we kind of have to work back through.
spk00: Okay, great. And then on the non-interest income side, you know, 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, you know, the base of non-interest income and what impact that could have on any of those line items from a rising rate environment.
spk10: I would say, you know, as we've talked about in the past, You know, the investments we've made over the last couple of strategic planning cycles to invest in these fee-based businesses has paid very well for us, particularly in an environment when rates came down. You know, if you look at the different components, I mean, service charges just driven by customer activity, the wealth management business, you know, up 16% year over year, trust and securities commission. So, you know, we look for that to continue to have nice growth. This year the insurance business has been growing nicely. Cap markets, you know, while it was down from a lights-out record of 12.5 in the third quarter, 9.5 million is a very solid number. You know, we will look for that to kind of grow as we go forward. And then, you know, what's additive, too, is with Howard coming on board, you know, 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. wealth. We're very much looking forward to having them on part of the company and working with those customers. It's kind of all baked in. The interest rate environment we described is baked into our guidance. It's kind of all in there.
spk12: From a practical perspective, we would expect mortgage banking fee income to be down because margins have come in versus the peak of that cycle. Offsetting that You know, on the flip side, in a rising rate environment, you know, SBA gain on sale becomes better. That business is starting to pick up for us. You know, our debt capital markets platform that Vince mentioned that we launched this past year, you know, it's already hit a million dollars in revenue. So that'll help moving into next year. And there are some transactions that we'll be a part of this year. I say next year, but I meant 2022. You know, there are transactions that we're already, you know, part of, so we'll get some benefit from a fee income perspective there. You know, syndications, the pipeline's still pretty strong in syndications, and, you know, that business has been moved, you know, pretty nicely across the footprint, and, you know, we're now starting to see larger opportunities in the southeast and mid-Atlantic region, as well as Pittsburgh and Cleveland and our traditional markets. And then, you know, as we look... You know, at other opportunities to grow fee income, particularly in treasury management, the deployment of products and services, and the Howard acquisition, you know, we feel, you know, there's enough other businesses in our diversified model to offset the declines that occur through economic cycles. That's kind of how we designed it, and we're hoping that that holds true for us and, you know, we'll achieve the guidance that we're getting here. There's a lot of moving parts. I'm sorry, Vince. I just wanted to add quite a bit to make sure that we have that diversification.
spk10: On the mortgage side, I would just add that as we look into what's in our guidance for 2022, I would expect the fourth quarter level around $6 million probably to be kind of a bottom. Part of why I'm saying that is if you look at the expectation in the market for mortgage applications, it's down 25% to 30%. But for us, you know, 75% of our business is purchased. And the purchase side is actually, you know, the expectations from Fannie Mae 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, you know, all things being equal, to kind of build from here as we go through 2022. And that's baked into our guidance, too.
spk00: That's great, Keller. I appreciate all of that. And that's all I had. Thanks.
spk08: All right. Thank you. Thank you. And the next question comes from Michael Perito with KBW.
spk09: Hey, good morning. Most of my questions have been asked and answered, but just two quick ones. One, just on the loan growth, obviously, over the last few quarters, it's you know, easy to see the benefit of having the, you know, the diversified platform. But, you know, 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, you know, that made the high single-digit core growth come from? Is the mix going to look similar to the back half of this year, or do you think there's room for maybe some other buckets to contribute some more based on the pipeline?
spk12: Well, I think there's been a lot of activity in CRE. You know, I've been involved in discussions with some of the borrowers. So there are still some projects that we're looking at that are fairly sizable and some projects that we closed that, you know, fund up over the course of the next year or so. So, you know, I would expect that business unit to contribute a little more next year. But I think overall when we look at our pipelines, you know, the Carolinas still – you know, have very strong pipelines. I think, you know, Charleston's been terrific for us. You know, we had good growth in Raleigh. You know, Charlotte, there's a building pipeline in Charlotte for this year. And then the mid-Atlantic region with the Howard acquisition, you know, positioning the bank, you know, will be number six in deposit share and have a pretty substantial lending theme. in that market and in Washington, D.C. So, you know, I'm pretty optimistic that we'll be able to achieve these growth objectives. And I said it before, you know, I think it's really attributable to our expansion strategy and the fact that we were able to secure substantial market share positions and fairly dynamic MSAs, you know, across the Southeastern and the Atlantic. It really helps us. So we're you know, in a good position as the economy, hopefully the economy continues to hold together and give us some upside in this year.
spk07: Hey, Michael, one of the things that impacted Q4 a bit there on the CRE side, we had six multifamily projects, as we've talked in the past, just being kind of lumpy, six projects for $150 million in move into the secondary market. So, you know, 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, you know, that's an important part of what we do, especially in the southeast, as Vince mentioned. So, you know, you'll continue to see some lumpiness there with those exits.
spk09: Got it. Helpful. And then Just lastly for me, you know, obviously it's good to see there was some, you know, 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, you know, from an appetite perspective and just, you know, 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.
spk12: Well, you know, we, As I've said before, we're really focused on the best deployment of capital possible. So, you know, Howard kind of met the criteria. It was in market. You could take costs out. You know, it's a good team. You know, it was a decent size. It wasn't too big. It was easily digested. It really gave us the ability to position the company from an expense perspective, moving into, you know, an environment where everyone's concerned about inflation and wage coming off of PPP, so we were to pick up those balances. The timing also was good with the launch of our e-store and the upgrades to our digital offerings, so we could offer those consumers those products. I think that's an example of an M&A opportunity that we thought was good, and we looked at it. We were approved by the Fed and the OCC, I think within 32 days of application. So 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 You know, I'm very proud of that. I think our relationship with the regulators is strong. And, you know, we listen and we respond. And I think that, you know, 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, you know, there's a great deal of comfort there. Having said that, I keep telling everybody, What I'm most excited about is the investment that we've made in our digital technology, what's going on inside the company that you can't see from an automation and AI perspective, our data analytics team, the data hub that we've created, the infrastructure we've built out internally has really been helping us, not just with securing customers and gathering information to help our customers, with products and services, but also to gain efficiency within the company, you know, to monitor more and more metrics to help us drive performance. So, you know, all of that's very, very exciting to me, and I think given the positioning of the company, you know, we did our big expansion and moved into, you know, two very dynamic areas of the country, which should provide us with significant opportunities for years to come. So, You know, our focus is going to be on driving market share gains in those markets. And if something comes along from an M&A perspective that makes sense and fits into that strategy, sure, we're going to look at it. But it has to be shareholder-friendly. It can't be something that harms us as shareholders. So anyway, that's it. So thank you. Appreciate your question. Thanks, Vince. Appreciate it.
spk08: Thank you. And the next question comes from Russell Gunther with DAA Davidson.
spk03: Hey, good morning, guys. Just a follow-up on the growth commentary. Curious if you could provide some additional color on what you think needs to happen to hit the high end of the range, so to take you from the mid to the high single digit. Is that CNI utilization continuing to improve, portfolioing single family at the current clip? Just curious as to what you think the drivers of that delta will be.
spk12: Well, I think it'll be a combination. We're going to have to execute in all of those areas. And I think, you know, we grew 10% with very little help from expansion and working capital facilities. I know I've read other earnings reports and, you know, other companies have seen growth in line utilization. We haven't really. I mean, we're up 1%. It's a de minimis amount that was contributed. So while that is a factor, you know, I think the more activity you see around working capital utilization, that means there's opportunities to finance other things, too. So, you know, obviously those two go hand in hand. But, you know, we have great opportunities in the middle market across the footprint with the rollout of the e-store and now being able to digitally onboard small business customers. We have a great opportunity there to do it much more efficiently, cost effectively. There's upside in consumer. There's upside in mortgage with our Physicians First program that we rolled out that I mentioned. So, yeah, I think we've got a lot of channels to drive that growth. So, you know, I think our pipelines look pretty solid going into the year. So, you know, we're feeling pretty good.
spk03: That's great, Vince.
spk12: Thank you.
spk03: 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?
spk10: Just from all the normal.
spk12: We have an expense team, and we call the guy that runs it our real CEO because he's the expense driver. So he's the chief expense officer there. So we have somebody that reports to Vince, 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 Danny App to review automation and, you know, the utilization of intelligent software to help automate, you know, and eliminate redundant process and manual process. So all of that kind of ties in to the expense reduction. And then we also have a team that looks at occupancy expense just constantly. I mean, they're constantly reviewing that. We don't let any FTEs – I mean, we review every single add to staff, every replacement position – at the company, and we require people to do an analysis based upon transaction volume or some sort of hearing 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, you know, those are all the things we do to manage expenses. So there's a whole process around it. And I think we've done a very good job. And Vince and Adam and that team, Lou, they work for Lou, have done a terrific job keeping us in line. Best workplace accolades help, too. Yeah, I mean, we've won, you know, Best Workplace for a number of years. We just won for the 10th year and one publication in Pittsburgh. You know, just about every market the last decade, you know, we've won awards. And the award, you know, the employees feel like they're part of the process, and there's a tremendous amount of engagement. We had off-the-charts, you know, engagement scores 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, but the rest of the company is pretty, you know, they enjoy coming to work and working hard and winning. And I think that when you have a culture like that, you know, sure, you're not impenetrable, but, you know, it's a good place to be. Anyway. Okay. That's what leads to our performance and our results. All of those things come into play.
spk03: Thank you both for your thoughts there. I appreciate it. Great call.
spk08: Thanks, Preston. Thank you. And the next question comes from Samuel Vargo with Stevens Inc.
spk04: Good morning. Hey there.
spk11: Good morning.
spk04: I wanted to ask a couple of questions on the securities book quick. Could you give us the percentage of floating rate securities
spk10: I'll have to get that figured. I don't know that we have much, if any. I can get an answer while we're talking if you want to go to your next question. Zero.
spk05: Zero.
spk10: Just next to me. Zero. All right. Had much of any. We don't have any.
spk04: Okay. And then kind of a follow-up on that. Could you give the duration of the available for sale portion of the securities book?
spk10: Scott, if you want to, Scott or Bob, just text me. Find it.
spk04: I can ask another question, maybe until that number comes up. Did you? Three percent.
spk10: Three percent.
spk04: The duration?
spk10: Duration three, yes, on the available for sale.
spk04: Thank you. 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 that you could just tell us about?
spk12: Yeah, I mean, we've hired quite a few people over the last 12 months. We generally hire people from larger institutions in the commercial banks. So, you know, we just hired somebody from J.P. Morgan here in Pittsburgh who's leading the teams in Pittsburgh. You know, we've hired a number of bankers from, you know, other companies in the southeast. So, you know, a good bit of our bankers have come from You know, either at one point in their career, they were at either Wells or V of A in the southeast. The entire Charleston team, I think, at different times, we didn't do a lift out, but we hired a number of people from Wells and BB&T and other places. And I think that's part of our culture, too. That's why we're able to replace positions. I think, you know, people view our product set as deep. If you're a corporate banker, the incentive compensation plans are fair and provide upside, you know, 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 have won, you know, we've won Greenwich Awards in the Treasury Management Today's National Awards. So coming here as a commercial banker, you've 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's open to you. So if there's anybody out there listening on the call that wants to work here, you know, please call me. But I think, you know, of all the places I have worked, you know, 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 were fighting, you know, within various product areas here. You know, 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. So, you know, it's a smaller institution. So anyway.
spk04: Understood. Thank you. And then if I could just sneak in the last one. Do you have any sort of overdraft reduction plans moving forward?
spk12: Yeah, we actually were ahead of the curve there. You know, we rolled out a product last year. There was a press release that was put out. You can find it. We have an electronic checking product that we put out as part of our digital offering. And you cannot overdraft. in that account. You are 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, you know, eight or nine months. It may have dropped a third because our student checking campaign, you know, student checking pushes it up. But it's in the top three of our offering. And, you know, that's why, you know, in our guide on non-interest income, it includes, you know, a flattening fees in the consumer segment, even though we're seeing a rise in other areas. There will be an impact. It's already been baked into our guidance. That's one thing we've done. We've made a number of other changes and are planning on changing other elements of the fee structure within the consumer bank.
spk10: We're studying the competitive environment.
spk12: We can't be a market leader there. We have to step back and watch what's happening. But we were on that one product and, you know, it's received, you know, very positive reviews and it's bank on certified and, you know, it's been great.
spk10: Also, if I could clarify the duration. So, the AFS duration is 3.4 at 1231. The total is 3.6. So, the HTM is at 3.7. So, they're pretty similar. But just to correct what I had said earlier at 3. It's 3.4 in the AFS portfolio.
spk04: Thank you very much. And that'll be all for me. Thanks for taking my question.
spk08: Thank you. Thank you. And the next question comes from Brian Martin with Jenny Montgomery.
spk01: Hey, guys. Good morning. Sorry to last question here for you. Just on capital, just kind of any changes in your outlook on kind of deployment of capital? I know you already talked a little bit about the M&A kind of outlook, just kind of share repurchases, kind of how you're thinking about that given the flexibility?
spk10: Sure. You know, 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, you know, we have talked about kind of a 10% target there. So, you know, we're pleased with the level there. And even with the strong loan growth we had, 10% as Vince mentioned, you know, holding the CET1 flat tells you about the earnings generation that we're creating and retaining. You know, as we look forward, what's baked into our guide is for the capital ratio to kind of slowly build from here. You know, we're still swapping normal loans for triple P loans, right, that have a zero risk weighting. But I still expect, given our guidance, for the CET1 ratio to build, like I said, gradually as you get from here to the end of the year. And then we'll just be opportunistic on share repurchases. I mean, our our first goal is to deploy it for loan growth. So to the extent that loan growth is stronger on the higher end, you know, 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, you know, we'll continue to monitor it and just manage capital in the way that's fully aligned with shareholder interest. But loan growth will be kind of our first lever that we'll look to deploy for.
spk01: Gotcha. Okay. And then just baked into the guidance, Vince, I mean, what on the – maybe you said this and I missed it. I joined a little bit late. But just kind of the excess liquidity, I think if you kind of just talk about maybe kind of where the core margin is in one queue, I guess, given – and then just kind of the outlook, what you have baked in for that a drag of 26 basis points and excess liquidity kind of as you go throughout the year, given the loan growth outlook?
spk10: Yeah, 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. You know, 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 have 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 based into our guidance. So basically, the cash level will go from an average of 3.7 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.
spk01: Yeah, 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, and not NII, but just the fees and expenses and whatnot, that assumes the close here next week, or was that kind of baked in at kind of a year-end close? I just want to make sure I clarify what you've got here on the guide.
spk10: No, it's in there for 11 months. Yeah, I got you.
spk01: Okay, that's what I thought. I just want to clarify. Thanks, Vince. I appreciate you taking the questions.
spk08: All right. Thanks, Brian. Thank you. Thank you. This concludes the question and answer session. Now I'd like to return the call to Vince DeLee for any closing comments.
spk12: Okay. Thank you, everybody. Thank you for the questions. Great questions. Very detailed. I'm glad we were able to answer. Hopefully we answered everybody's question. I just want to commend our leadership team and the employees. I've spent a lot of time when I could meeting with people in the field and and interacting with different markets. And, you know, the morale throughout this entire last two 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 congratulations. Thank you for the questions, and thank you to our shareholders for your continued support.
spk08: Thank you. That's all I have. Thank you. Okay. Thank you. Thank you. And the conference is now concluded. Thank you for attending today's presentation.
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