F.N.B. Corporation (FNB) Q1 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the F.N.B. Corporation First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [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 measure should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our earnings materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate Web site. A replay of this call will be available until April 27 and the webcast link will be posted to the About Us, Investor Relations and Shareholder Services section of our corporate Web site. I will now turn the call over to Vince Delie, Chairman, President and CEO.

Thank you and welcome to our earnings call. Joining me this morning are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. I’d like to open the call by expressing my appreciation for the entire F.N.B team who produced highly impressive results despite continued challenges presented by the pandemic. First quarter net income totaled 91 million or $0.28 per share, resulting in upper quartile return on tangible common equity of 15%. I'm so proud to state that the first quarter results are on par with pre-COVID-19 levels, an extraordinary accomplishment given the significant changes in interest rates and a less favorable economic environment during the last 12 months. Our company remains well capitalized with increased risk-based capital ratios and an allowance for credit losses, excluding PPP loans, at 1.57%. F.N.B demonstrated strong fundamental performance as total revenue increased both on a year-over-year and linked quarter basis. We established a new record for noninterest income at 83 million, supported by strength in mortgage banking, record wealth management and insurance revenues and solid contributions from capital markets. During the quarter, we originated nearly 1 billion of PPP round two loans. On a linked quarter basis, tangible book value per share increased $0.13 to $8.01, as we continue our commitment to paying an attractive dividend by declaring our quarterly common dividend of $0.12 last week, while executing on 36 million of share buybacks during the quarter at an average price of $11.91. In addition, our CET1 ratio increased to 10% as we continue to prioritize our options for capital deployment in the manner that produces the highest risk adjusted return for our shareholders. Diligent expense management remains a top priority and we are on track to meet this year's $20 million cost savings target, completing our three-year $60 million expense reduction initiative. The efficiency ratio totaled 58.7%, improving 36 basis points compared to the first quarter of 2020, with both quarters reflecting seasonally elevated expenses. Today, I'll take a deeper dive into three areas discussed in our annual letter to shareholders where we've successfully gained scale, strengthened our risk profile and diversified our revenue streams. First, I will cover the successful expansion of our fee-based businesses and how we've continually expanded our suite of value-added products and services. Next, I want to highlight F.N.B’s new digital capabilities and provide updates about our de novo strategy within the clicks-to-bricks initiative. Lastly, after Gary reviews asset quality and Vince provides details on financials, I will wrap up with a summary of how we differentiate ourselves and delivered value to all of our stakeholders. One of the main areas we’ve emphasized in our 2020 annual report was our goal to diversifying our overall revenue mix. Over the last several years, we've been consistently growing value-added fee-based businesses, many of which generated double digit annual growth rates that have led to a more granular fee-based revenue stream. And what has been a challenging interest rate environment over the last 12 months, we have successfully leveraged these investments in our fee-based businesses to mitigate net interest margin headwinds, specifically through significant growth in capital markets, mortgage banking, wealth management, and insurance revenues. During the first quarter of 2021, we've continued to build on last year’s success as those businesses have increased 16 million, or 56%, compared to the first quarter of 2020. If you recall, we laid out our long-term strategy to invest in scale of our fee-based businesses to offer core products and services to our clients, namely mortgage banking and capital markets. As we transformed our footprint and expanded into attractive markets such as Baltimore, Maryland; Washington D.C. and the Carolinas, F.N.B continues to grow the scope and depth of client relationships. In 2021, we are adding capacity to mortgage banking operations and services, as production levels continue to set records each quarter. As of this week, mortgage pipelines are at record levels in relation to both production and held for investment origination. Our mortgage banking business had a record breaking year in 2020, with more than 3 billion in total production and 50 million in fee income. Even as rates have risen, we are confident that a broader geography and a more favorable economic environment for purchase money mortgage loans will support healthy production levels and become a greater portion of total volume. Turning to our capital markets platform, we've expanded our capabilities significantly through building our syndications, derivatives and international banking platforms organically, with those businesses now contributing revenues from just over 1 million to more than 30 million annually. Additionally, we have expanded the breadth and reach of our capital markets platform with enhanced debt capital markets capabilities geared towards our upper middle market and large corporate clients. Looking ahead, we are also focusing on specific opportunities in public finance and other specialty verticals that will provide broader revenue opportunities with the issuance of corporate and municipal debt. As we've advanced our fee-based businesses, our consumer bank is making important decisions relative to evolving overall consumer preferences, and how we deliver products to our clients. Consumers can now utilize F.N.B’s eStyle checking, designed to prevent overdrafts and NSF fees completely. F.N.B continues to expand its digital capabilities through launching new products. We recently rolled out a number of new features such as e-signature and offering credit scores, with plans for embedding the solution center e-store into our robust mobile application. This will provide clients with the opportunity to directly purchase loan products within the mobile application as well as deposit products. The next phase is to finalize our single omni-channel online application so the customer can apply for multiple products with a single application, while utilizing our shopping cart experience. Along with our digital investments, we continue to streamline elements of the physical delivery channel through implementing dynamic appointment setting capabilities, and a comprehensive data-driven sales management platform to better identify value-added products and services when clients conduct business in the branch. Additionally, we are focused on bringing the application process online for more of our loans and our other consumer products in the coming quarters so that consumers are able to seamlessly manage and add F.N.B products and services using online or mobile channels, as we continue to make progress within applications for end-to-end delivery of digital products and services. In addition to investing in technology, we continue to make targeted investments in our physical delivery channel to position our company for accelerated growth and efficiency. Charleston, South Carolina is an example of our successful de novo strategy to enter a higher growth market. This year, we will have five retail branch locations and a regional hub that permits us to offer a complete set of fee-based products complementing the consumer and commercial teams that are firmly established in the market. Our South Carolina bankers were recruited from some of the largest financial institutions in the country. The commercial team has originated more than 150 million in funded assets since inception, and the retail locations ranked among the upper quartile of branches relative to their key performance indicators during 2020. Looking ahead, near-term commercial pipelines are at an all-time high and South Carolina was the fastest growing commercial market companywide on a percentage basis for both full year 2020 and first quarter 2021. There are many exciting things happening with our investments in the de novo growth market and digital technology. Another area we are proud of is our risk management and credit performance. And with that, I will transition the call over to Gary to discuss our progress. Gary?

Thank you, Vince, and good morning, everyone. We continue to see positive performance across our credit portfolio during the first quarter of the year. Our key credit metrics improved across the board and remained at very solid levels, with better than expected results across a number of consumer portfolios as well as the favorable positioning of our commercial book, following the actions taken last quarter to proactively reduce exposure to the most challenged industries. I would now like to review some highlights for the quarter followed by a brief overview of our current deferral levels. The level of delinquency improved over the prior quarter to end March at 80 basis points, representing a 22 basis point improvement linked quarter, which was driven by positive macroeconomic trends and some seasonally lower past due levels in the consumer portfolio, as is typical in the first quarter. Excluding PPP loan volume, delinquency stands at 89 basis points. The level of NPLs and OREO ended March at 65 basis points, an improvement of 5 bips on a linked quarter basis, while the non-GAAP level, excluding PPP loans, stands at 72 basis points. The improvement was largely driven by a reduction in nonaccrual loans of $12 million during the quarter, with nearly half of our NPLs continuing to pay on a contractually current basis. Net charge-offs for the first quarter came in at a very solid level of $7 million or 11 basis points annualized and 13 bips on a non-GAAP basis, with provision expense totaling $6 million, resulting in an ending March reserve position at 1.42%. Excluding the PPP portfolio, the non-GAAP ACL stands at 1.57%, up 1 basis point over the prior quarter. Inclusive of the remaining acquired unamortized discount, our total reserve coverage stands at 1.78% with our NPL coverage position also remaining favorable at 230%, following the previously noted improvement in NPL levels during the quarter. I'd now like to provide you with a brief update on our loan deferral levels. At the end of March, our deferrals are down to 1.2% of our core loan portfolio and the number of new requests from commercial borrowers have essentially ceased at this point. We continue to monitor these smaller credits actively as we have done throughout the entire pandemic, with the expectation that the numbers will continue to reduce as the economy opens up. Additionally, we continue to track our portfolio mix and performance trends to stay ahead of any potentially sensitive asset classes that could show signs of stress towards the tail end of the pandemic. As is consistent with our approach to risk management, we will continue to proactively identify any potential areas of risk and take action if opportunities arise that are strategically and financially beneficial to the company. In closing, we are very pleased with the solid start to the year and the continued progress we've made in the book to work down our limited exposure to the more sensitive industries. As the broader economy continues to evolve, we are focused on managing our book through our core credit principles and disciplined underwriting across our footprint, attentive risk management and the proactive workout credits to keep our portfolio well positioned as we look forward to the anticipated activity from an accelerating economy in the second half of the year. 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 some of our current expectations. As noted on Slide 5, first quarter EPS was solid at $0.28, up significantly on a year-over-year basis as the first quarter of 2020 and significant reserve build at the onset of the pandemic. At a high level, results for the quarter included record levels of noninterest income translating into revenue growth, well managed expenses and significantly lower provision for loan losses including the recent asset quality trends, partially offset by the continued impact of this low interest rate environment. Let's review the balance sheet on Page 8. Average balances for total loans increased 8.3% on a year-over-year basis and decreased 0.8% in the fourth quarter. On a spot basis for the first quarter of 2021, total loans were up 0.3% as PPP balances increased 330 million on a net basis with 900 million of round two PPP loans funded during the quarter, partially offset by 500 million of PPP forgiveness. Commercial line utilization rates remain at record lows in the low 30s, which translates into about 0.5 billion in funded balances at a normalized utilization rate. This level creates upside for long growth as reflected in the strength of our long range commercial pipelines, which are near all-time highs. Turning to deposits, average deposits grew 19.3% on a year-over-year basis and increased 5.7% annualized on a linked quarter basis. On a spot basis for the first quarter of 2021, total deposits increased 1.2 billion, or 16.9% annualized, led by strong growth in noninterest-bearing and interest-bearing demand deposits, partially offset by a managed decrease in time deposits. Discontinued deposit growth bolsters our ample liquidity and strengthens our deposit mix with a loan to deposit ratio at 84%, with 33% of our deposits being noninterest-bearing at the end of the quarter. Turning to the income statement, net interest income declined 11.5 million or 4.9% compared to the fourth quarter. The reported net interest margin narrowed 12 basis points to 275 as higher average cash balances were a 6 basis point negative impact on the margin compared to last quarter. Additional drivers to the lower margin were a 7 basis point reduction in PPP contribution and a 2 basis point reduction in a benefit from purchase accounting on acquired loans. Excluding these impacts, the underlying margin increased 5 basis points from the fourth quarter with benefits from continuing to manage down interest-bearing deposit costs, which improved 12 basis points to 31 basis points for the quarter. With the cost of these deposits ending the quarter at 27 basis points on a spot basis, 4 basis points lower than the average, we expect further reductions in our cost of funds moving forward. Let's now look at noninterest income and expense on slides 10 and 11. Noninterest income totaled a record 83 million as mortgage banking income remained strong at 16 million, with expanded gain on sale margins and strong sold production volume that was up 69% on a year-over-year basis. Wealth management increased 14% in the fourth quarter to record levels due to the expanded footprint and positive market impacts on assets under management. Solid contributions from capital markets and insurance also supported the record fee income results for the quarter. Looking at Slide 11, noninterest expense totaled 184.9 million, relatively flat with the prior quarter and year ago quarter. On an operating basis compared to the fourth quarter of 2020, salaries and employee benefits increased 2.7 million or 2.5%, primarily related to 5.6 million of expense in the first quarter of 2021 due to the timing of normal seasonal long-term compensation recognition similar to last year's first quarter. Occupancy and equipment on an operating basis increased 2.5 million or 8.1%, due to investments in digital technology, expansion in key growth markets across the footprint and seasonal expenses related to adverse weather. Our CET1 ratio improved to an estimated 10%, up from 9.1% last March, even with 75 million of buyback over this period, reflecting F.N.B’s strategy to optimize capital deployment. Turning to our outlook, we expect reported net interest income to be generally flat from first quarter '21 levels, as we expect a pickup in loan activity to be weighted towards the second half of the year and the net interest income contribution from PPP to be similar to the first quarter. For the full year of 2021, our mid single digit loan and transaction deposit growth assumptions, ex PPP, remain unchanged from our prior guidance. We expect continued strong contributions in mortgage banking, given the pipelines Vince mentioned, with total noninterest income expected in the high $70 million range for the second quarter. For provision, our current outlook is down from our expectations in January, subject to loan origination activity in the second half of the year. We are on track to achieve our expense savings target of 20 million for 2021, and expect operating expenses for the second quarter to be down from seasonally higher expenses in the first quarter based on our current forecasted level of mortgage conditions. For the full year of 2021, we still expect revenues to be stable compared to 2020 and expenses to be down slightly year-over-year. Lastly, we expect the full year effective tax rate to be around 19%, assuming no change to the statutory corporate tax rate of 21%. I'll now turn the call back to Vince.

Thanks, Vince. We've covered a lot of ground today and I want to wrap up with how successfully executing our long-term growth strategy differentiates F.N.B moving forward. First and foremost, F.N.B is in a unique position as a regional bank with a top market share in many attractive growth markets across a broad geography. Given this position, our local product specialists and decision makers dedicated to serving our market can provide a high touch relationship-based personal service level that consumers and middle market borrowers prefer. We have an exceptionally talented team of bankers, the necessary funding and optimal capital levels to pursue relationships across the footprint to accomplish our growth objectives, and provide our shareholders with peer-leading returns on tangible common equity. As an organization, we've consistently and prudently invested in technology, data analytics and risk management to better the customer experience, improve profitability and enable F.N.B to maintain superior asset quality throughout varying cycles, while maintaining a top quartile efficiency ratio relative to peers. We have been recognized for our mobile and digital offerings that have improved the customer experience by positioning the company for shifting preferences and providing F.N.B with a sustained competitive advantage. Our culture of risk management and disciplined approach to underwriting and local decision making allows us to maintain our lower risk profile. We are unique and that we can maintain a lower level of cumulative losses, while driving mid to high single digit loan growth because of our diversified granular approach to credit. As it relates to the quality of people and strength of our culture, F.N.B has received more than 65 Greenwich Excellence and Best Brand Awards, including specific recognition for excellence in client advisory services and for its commercial banking client experience during the past decade. The company further built on these honors in 2020, with three consecutive quarters of recognition as a Greenwich Associates standout commercial bank amid crisis for our COVID-19 response. And just last week, F.N.B was named to Forbes' 2021 ranking of the World's Best Banks based on consumer feedback. F.N.B. is one of only 75 banks in the United States to be recognized on this, which includes a total of 500 banks from around the globe. In closing, we are focused on continuing our commitment to advance our market position by gaining scale and operational efficiency and by cultivating meaningful lasting relationships with our clients and communities, while simultaneously creating value for our shareholders. Again, I want to say thank you to all of our employees for their continued dedication, and will now turn the call back to the operator for questions. Operator?

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And this morning's first question comes from Frank Schiraldi with Piper Sandler.

Good morning, everyone.

Good morning, Frank.

Just in terms of the excess liquidity on the books, I wondered if you could talk a little bit about how you managed that in the near term. Are you starting to see enough of these deposits sticking around more than transitory, where you can start with redirecting it to the securities book for some yield, or is there enough loan growth potential that you seek to keep that powder dry?

Yes. I would say during the quarter, it was built quite a bit as we put in the comments there, ending the quarter around $2.5 billion. I think as we look ahead and as we commented on, we do expect loan activity to pick up in the second half of the year. We do have $0.5 billion of Federal Home Loan Bank advances that are maturing this year. That will use some of the cash. We have started to reinvest the cash flows from the securities portfolio, actually grew it a little bit, exclusive of T-bills that we had in there, 600 million at the end of the year. So we're reinvesting the cash flow there now that the rates are, at least north of one, up about 50 basis points from where they were earlier in the quarter. So as far as the securities portfolio, kind of around that same dollar level as the end of the quarter is kind of the current expectation. So really a combination of the maturing advances and then the loan activity picking up and using up some of that cash. We don't want to go along and really blow up the investment portfolio. We don't think that that makes sense. The cash flow from that portfolio is pretty significant. Over the next 12 months, there's 1.4 billion that’s going to kind of cash flow over the next 12 months. So depending on where rates go -- we will be opportunistic, if rates – the 10-year rate has moved significantly during the quarter, if there’s opportunity and we see things we like, we would invest more than the cash flows. But there's a good opportunity to continue to remit that portfolio as we go forward from here.

Okay, great. And then just lastly, I'm just wondering if you could talk a little bit about your updated thoughts on M&A. We've seen a lot of it so far in the industry and into 2021. You guys have talked about the strong pipeline. It sounds like there's plenty of organic opportunity. But just wondering how M&A could fit into the strategy and what a deal could look like?

Yes. Well, I think as I mentioned in my prepared comments, we are very well positioned unlike some other banks and midsized groups, we’re spread across a fairly broad geography. We're in a number of high growth markets. We've had very good success with our de novo expansion strategy, particularly in Charleston. And now we're starting to see some good progress in Washington D.C. Obviously, as we move forward, M&A at some point is inevitable, one way or another. But I feel pretty strongly about where we are from a performance perspective. I think that we posted some very solid quarters. We've got some very good measured growth. We've got very solid pipelines. Going into the second half of the year, we've said repeatedly that we felt that we'll see a surge in demand towards the second half of the year. It's starting to play out in the pipelines that we have. In the event that an opportunity was to present itself from an acquisition perspective, obviously, we've been very disciplined in the past and we've done a very good job of executing. There's a large group of people here that have tremendous amount of experience with integration and performing due diligence. But our first focus is to try to drive organic growth through the platform that we've created, both digitally and in those high growth markets that we've expanded into. We think there's substantial upside for the shareholders as we execute our longer-term strategic plan. That's one. Two is, we're obviously looking at opportunities to deploy capital. And I think as we continue to grow, one good example is – I’m shifting gears here a little bit, but one good example is actually our incentive compensation plan. The LTIP award themselves align our interest with the shareholders where we grow tangible book value per share and continue to pay an attractive dividend. So internal capital growth is an important factor, and return on tangible common equity as we grow our capital base performing at a higher level by taking cost out and driving returns off is also part of our short and long-term incentive plan. So I know that's a really long answer, but obviously we're capable of doing acquisitions. It's still not a principal focus of ours. And if something comes along that's attractive, that works in market, there's a high probability that we would look at it, but it's not a focus of ours at this point.

All right. Okay. Thanks, guys.

Thanks, Frank.

Thanks, Frank.

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

Hi. Good morning, everybody.

Good morning, Jared.

Good morning, Jared.

Maybe shifting over to the expenses, you made good progress like you said on reaching your targeted expense cuts. Are there other additional expense opportunities that you could shift to, or is it really at this point more an efficiency story as revenue comes back that will be the primary driver of a lower efficiency ratio now?

Yes, just a couple of comments on the expenses. During the first quarter, there’s -- we mentioned the seasonality. Now in total, there's about $10 million of seasonality in the cost base that happens in the first quarter. The stock compensation that we talked about was 5.6 million. Payroll taxes were at 3.6 million when you restart the year. Utilities were up 1.2 million. So really there's kind of $10 million that isn't recurring. So kind of where we go from here, we have $20 million cost save which is baked into our guidance for the third year in a row. And as you noticed, we're still guiding expenses being down for the full year slightly from 2020 level of $720 million. And as you look ahead to the next quarter, the expenses will come down in the several million dollar area from first quarter to second quarter from those seasonally elevated levels. And then as far as how we kind of execute on the cost savings, I mean this is year three of it. So there's always been a focus in the company on discipline and management of costs. The things that we've had kind of in our tool belt continue to be in the tool belt. As far as continued optimization of the retail bank, closely monitoring customer preferences as they evolve. Renegotiating contracts is constant. We've dusted off our top 100 vendors going back through all of those, including the large ones. We're starting to have some success as far as optimizing our space throughout the footprint, not just branches but also some of our kind of operating facilities. And then kind of -- RPA is a topic. It’s robotic process automation. We have a bunch of initiatives that we're looking at and that will be a big focus for us in '21 and '22. That's kind of a newer item, so that's kind of additive to the things we've been focusing on as part of kind of cost savings initiatives over the last couple of years.

Okay, great. Thanks, Vince. It’s good color. Maybe shifting over to the allowance. With the improving economic backdrop, how quickly can we see that allowance ratio start to migrate back maybe towards the day one level, either through a combination of the provisioning or growth? Is that something we should expect to see maybe lower dependence on qualitative overlays as you go through the next few quarters?

Yes. Hi, Jared. When you look at day one CECL, it’s right around round figures, 300 million and reserve level in the high 120s versus today at 157 in terms of the position of it, and about $360 million. We do expect that there's opportunity there as we move through the cycle. And we see upgrades and reductions in criticized assets that were impacted by the pandemic. We did move the forecast in Q4 to a consensus forecast, but we did see a little bit of benefit there. We do expect to see a little bit of benefit going forward from model-related benefits as well as I mentioned upgrades from the criticized portfolio. We were down 51 million in criticized assets this quarter and we do expect that to continue as we move forward. The model-related benefits we expect of that delta are about 25% or so and from a credit standpoint about 75%. So we do see some benefits coming as we are seeing improved performance in a number of those credits. Final comment around it from a model framework standpoint, the qualitative piece of it varies from low 20s to about 30%. Right now, we sit near the high end of that. So I would not expect that qualitative to go up any from where it's at or vary slightly. So there was barely some benefit in that piece of it as well.

Okay. And then just finally for me, you commented on the C&I pipelines being so strong geographically. Is that really just focus more in the Carolinas or are you seeing any type of significant trends in your legacy markets? And when you're talking about that, is that primarily new customers and new customers to the bank or do you think that you get back to that normal utilization level maybe in third quarter?

I would say a couple of things. First of all, it does not necessarily contemplate getting back to normal utilization rates in the second half of the year. I think there's still a lot of liquidity out there. There's a lot of cash sitting on the sidelines for our corporate clients. It's going to take a while to deploy that capital. So that's one aspect of it. Having said that, in our legacy markets, as we sit today, we've got better production out of the Southeast, much better. The Midwest and the Northeast has been a little slower based upon the pipelines that we've had, what we've actually funded in production in the first quarter. In the second half of the year, there are a number of opportunities that are coming that are larger in the upper middle market to, call it, large corporate space that are kind of M&A. So we've got a number of opportunities within our legacy markets that should drive some growth for us both in capital markets piece and with the size of the commercial portfolio. So that's Pittsburgh, Cleveland, Baltimore markets. And then in the Carolinas, there's still quite a bit of activity across the board. So we're pretty optimistic about that. The pipelines have grown considerably. So if you recall, last quarter, we said things were a little light because we had a big quarter in closing in the fourth quarter, but that has rebuilt and actually exceeds where it was at the high last year. So, we're more optimistic about achieving the guidance that we put out there and growing in the second half of the year. I hope that helps you with that. And it's really a combination of both existing customers and new opportunities that we're seeing.

We have. We've seen a lot of activity across the board, but it's really increasing in the Carolinas with some of the bankers that we've brought on over the last four to six months, new leadership in one area there in Charlotte is really generating some nice new name opportunities, high quality credit and some good opportunities that we've already worked through in the pipeline. So we're excited about that.

When I think about the quarter, Jared, really I think it was a solid quarter even though we didn't show the loan growth this quarter, I think there's prospects for loan growth fairly substantial down the road. There's a lot of activity going on. I feel better about our balance sheet than I ever have, because of our CET1 capital ratio of 10%. The amount of liquidity that we have, we've got many options to deploy that liquidity that will enhance earnings. We were now able to buy shares back which we couldn't do historically. So, as I looked at the quarter without substantial reserve release, we did pretty well this quarter and it's a good foundation to build on as we move throughout the year.

That's great. Thanks. I appreciate the color.

Thank you.

Thanks, Jared.

Thanks, Jared.

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

Hi. Good morning. Thanks for the questions.

Hi, Mike.

Good morning, Michael.

I wanted to start maybe just with the revenue guidance. Obviously, the second round of PPP you have a little more color on now. But I noticed the revenue guide wasn't adjusted upward? So are other things offsetting it or is that just putting too fine of a point on the guidance overall?

Actually we did revise the guidance, Michael, from where it was in January given round two PPP. So we had moved -- the revenue originally, I'm trying to remember about it, it was down. Down slightly was the guide in January. We moved it up to stable from full year 2020, given the round two contribution. And it has come in pretty strong. As I mentioned, we said 0.9. We're up to a $1 billion as we sit here today. So we did move the guidance up to reflect that.

Okay, thanks. And I guess a follow-up question just on the margin kind of outlook. I know there's a lot of moving pieces. But if we look at maybe NII dollars, should we kind of think of that as having bottomed here just on a core basis, ex PPP and purchase accounting accretion, would be a potential to continue to kind of steadily climb as liquidity is deployed in loan growth returns?

Yes, the guidance as you can see on this slide there is for net interest income to be flat from the first quarter. Coming into the first quarter, you did have the impact on the PPP contribution was reduced from where it was in the fourth quarter. So that kind of ran against – overall, it declined 7.7 million. So we expect that to be at a comparable level in second quarter to where it was in the first, so you won't have kind of a drag from the PPP. The cash side of it, it doesn't affect dollars, it doesn't affect the margin. So kind of given where we ended the quarter, there's an additional drag. And it's good to -- I don’t know if you noticed, Slide 14, there's a new slide we put in there kind of a deep composition in net interest income and volume. I think the PPP and PCD contribution, the accretion on the acquired loans we would expect to be kind of comparable levels in the second quarter. Like I mentioned, the cash contribution is getting a little bit worse from a margin perspective, but not really from a dollar perspective. So the dollar’s kind of being flat is based on those. And then you have other things. In the first quarter, we had one less day. That affects us. LIBOR came down 3 basis points. That was 3 million. One less day, 3 million. So first quarter had quite a few things affecting it that kind of helped as we moved forward from here. So, I would expect that the dollar’s flat to up as we move forward as you get into the second half of the year. I think one of the things that's really important is that the PPP contribution, I really look at that as a bridge to the loan activity kind of increasing. So the contribution has been coming in each quarter. It was 31 in the fourth quarter, 23 this quarter. We look for a similar number in the second quarter, down a little bit in third quarter. But it really serves as a nice bridge, because of this commercial loan activity to the traditional commercial loan activity picking up in the second half of the year. So kind of a long answer there, Michael, but yes, I think I would agree with your statement. But I just wanted to kind of talk through the moving parts in there.

Okay. And maybe just one last one just on the share buyback, the 75 million remaining. Now it's good to see activity again on it this quarter. Can you just talk about kind of appetite going forward, given where stock price is today and any other thoughts there?

Yes, we'll be opportunistic. We look at capital allocation every day and decide what should we do with our capital? And as Vince said, now that we have a CET1 at 10%, you have some opportunities to kind of optimize that capital base, depending on what happens in the balance sheet. So if the loan growth kind of ramps up in the second half of the year, we will be less active. If it doesn't come through quite as strong, we continue to be more active there as far as repurchasing 75 million that’s left. We just kind of have to see how the balance sheet movements kind of transpire from here. But we're definitely -- we still think stock valuation is very attractive. So we've been very active. We bought a good amount, 36 million in the first quarter, and we’ll continue to do the right thing as far as shareholder interest. And we're all aligned on those, so we'll continue to manage it appropriately.

Okay. Thank you.

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

Hi. Good morning, guys.

Good morning, Russell.

Just one quick follow up while we're on capital return. So, Vince, your comments on the inevitability of ultimately returning to M&A down the road? Could you just provide a little bit of color in terms of where you would like to go or fill in from an asset size perspective, geographic perspective, any additional thoughts would be great? Thank you.

I think that, obviously, in-market transactions would be the most appealing. As I've said, we've always been fairly disciplined. Our incentive compensation plans are designed for us to grow tangible book value. So we're not looking to do a large diluted transaction, I can tell you that. I think that we're open to it. We'll look at it. But again, I don't want to get specific because that's not the principal focus. We think we have a great business model that we're executing on. I mentioned in my quote in the release that we've done more than 30,000 applications digitally. So we just launched our whole digital platform in January. Unfortunately, it was right before – or fortunately, I should say, it was right before the pandemic. So we were able to accommodate customers, but really didn't have a great opportunity to promote it like we would have liked. We had to shift gears and focus more on PPP originations, which we did digitally and that's all coming online this year. So we'll have a great opportunity to grow organically through that platform as well. And that's only starting. So as we integrate our ability to take applications in the consumer segment, we're enhancing that, we're going to be able to take loan applications in mortgage and consumer loans, home equity, on that platform, and then later in the year small business loans. So that will significantly change our ability to efficiently go after market share. And the focus will shift a little bit strategically from a marketing perspective. But I know we've got all that going on. So, I don't roll out M&A because I think that it's an important part of our DNA. But again, I have quite a few things going on that are pretty positive and it certainly isn't something that we feel desperate to do.

I appreciate your thoughts there. And guys, the rest of my questions were asked and answered. Thank you very much.

Thank you so much.

Thanks, Russell.

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

Hi. Good morning, guys. This is Elan Zanger on for Casey. So just looking at the core loan yields, ex PPP, there was still some compression. Could you maybe talk a little bit about kind of the outlook there, where are you seeing spread compression, and what's the new money loan yield that's coming on the balance sheet?

Yes, in terms of spreads, they had moved up when you go back during the soft period. I can tell you they have moved down again. They are ranging depending upon the credit quality from 125 for extremely solid credit to 225, 250 depending upon the transaction, the tenor and the quality of that asset. The real estate opportunities that we're seeing are generally in the 200 to 250 range. Some very strong transactions with extreme amounts of equity, 50% type of equity, maybe slightly under that, but that gives you a pretty good range.

And I would just add. As far as the new loans made during the quarter, if you put the PPP on the side, we were at three and a quarter, 2.24% rate for the new loans kind of from a coupon standpoint. It was 3.21 in the fourth quarter. So kind of ex PPP, PCD was 1% coupon brings that number down to 2.40. So that's kind of running through the average balance sheet you see there. But the 3.24 versus the 3.21, it's kind of an apples-to-apples number. So some stability there, which is good.

Okay. And then back on the securities reinvestment rates, I understand it's more just cash flow coming off that's going back in. Where is that today relative to the 178 that you showed in the first quarter?

For the reinvestment rates, as we look at what happened during the quarter, it moved significantly. In January, 52 basis points is what was available. By March, we had 106 that we were reinvesting at. So that's kind of a good proxy to use for where we're putting money to work. But again, the stuff that's rolling off is rolling off kind of in the 1 to 85. So there's still a 79 basis points difference there. There's still some of that to continue to roll through and have that gap narrow, but that gives you the kind of the figures as far as where we’re reinvesting today. We're not going long, so we're not going to make bets here and lock stuff up for many years. We've kept the duration on the shorter side so that we will benefit when there’s move again someday. And we definitely during the quarter, we kind of backend loaded the reinvestment. We were definitely less active, much less active in January with 52 and more active in March. Like I said earlier, we'll be opportunistic. When we see securities and yield that we like, we’ll reinvest.

Okay, so the low ones right now. Okay, great. That's all for me. Thanks, guys.

Thank you.

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

Good morning. I’m on for Brody.

Good morning.

I just wanted to ask a couple more questions on the loan portfolio and kind of going off on the previous question. Looking at what percentage of loans are in flowing rates, where can we expect kind of a backstop to some of the loan compression?

That number has moved up. I want to say we're probably around 15% or so of the portfolio, it sounds for us. There's been -- as we've been going through this recent cycle, there's been an active process to put those in place, so it benefits us next time.

But recently, the originations haven't included floors [ph]. The competitive environment has essentially negated the ability to get floors. I don't know, Gary --

We're getting floors and fewer transactions today. Again, I go back six to nine months and when we were very successful in getting floors into the transactions, we made good progress during that timeframe. It is getting much more competitive, getting back to the interest rate spread commentary as well, and it's more difficult today than it has been. And it is reducing pretty significantly at this point.

That's going to vary based upon the risk profile of the borrower. So if it's a riskier situation, the borrower is going to agree to a floor. If it's a higher quality credit, the borrower is not going to agree to a floor and you're not going to be able to close a floor on them. So we tend to compete -- just like everybody says, we tend to go after higher quality credit opportunities. So really that's a function of the competitive environment, and we try our best.

That’s really where it's at today.

I understand. Thank you. And then another data point around that, what percent of the loan portfolio has a floating rate contract? So I understand 15 at the floor already, but I guess what percentage of the floating rate for the total?

The total variable and adjustable combined is 56% of the total loan portfolio. Just to give a data point that typically gives one-month LIBOR at 35%, which is 9 billion. And then there's another 9.6% is tied to prime at $2.4 billion, and that's embedded in that overall 56% figure.

Awesome. Thank you very much. And then just one more question tied to this. If we were to see a 25 bips rate hike sometime this year, what percent of those at the floor would start getting above the floor?

A very, very small percentage of them, if any. It would be very low. Most of the floors oriented 50 basis points. We've gotten many in at 100; very, very few at 25.

Okay, great. Thank you. And that would be it from me. Thank you very much.

Thank you.

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

Hi. Good morning, guys.

Good morning, Brian.

Just wondering if you can comment on the -- I appreciate the color on the mortgage and the pipeline. And I know, Vince, you talked last quarter about kind of the debt capital market fees and kind of getting into that in the second half. But just kind of as you look high level, I guess where the fee income is at today, this level? I guess feels pretty sustainable if you have that pickup in the second half and service charges rebound, I guess are we thinking about fee income in that way, looking at it the right way with that type of sustainability and growth from here as mortgage remains strong and other fees kick in and service charges pick up a bit?

Yes. I think the characterization of stable. It's a very good characterization. We have the value of it being as diversified as it is, right, helps, because not everything is at a record every quarter. But as we look forward from here, particularly through the second quarter, we would expect mortgage to be a similarly strong number. Capital markets has been very strong, even though it's down from its lights out [ph] record last year, 7 million to 8 million is a very, very strong quarter there. So as we look at what's baked into our guidance, Brian, we're around that 80 million-ish figure per quarter. So if stability comes is a good way to look at it, with some upside with some of the newer initiatives that really are just starting. So I think there's some upside that's not baked into the guidance yet because it's kind of the newness of it.

Right. Okay. Perfect. And then maybe just one or two others. Just on the forgiveness and the remaining fees that are going to be collected. Given that a lot of that round two is just in there, how much do you expect to, big picture, to see, realize the 59 in '21 versus maybe some bleeding over into '22? Is that more of it coming in '21? Is that your expectation with just a little I guess piece that might overhang into '22?

Yes. The 59 that's there, 40 million of it is related to round two. That portal hasn't been opened yet. So that needs to happen where you have the kind of the machine is cranking there. So there would -- I would say for the next couple of quarters, Brian, as I mentioned earlier, looking for a similar level in the second quarter. Third quarter kind of come down a few million from there. There's some tail that would go into '22, but there's not a ton left that goes through there. Trying to think -- what's our look ahead for '22 is probably pretty small, right.

Okay.

And most of it would be in '21, Brian. I just don’t have the full year in front of me. I have the quarterly.

Got you. Okay. Perfect. And then just your comments about the pipeline, I just want to make sure I understood that. The Southeast, obviously, is doing well. I guess your comments on -- just remind me just on the pipelines in the Northeast and the Midwest, just how they're looking today?

Yes. The second half of the year is much better for our legacy markets; Cleveland, Pittsburgh, even Baltimore. Baltimore had a great year last year, finished really strong and then it was a little slower in the first quarter. And that's really the Baltimore, D.C. area. They cover both. I think the pipelines for those areas, particularly in upper middle market and large corporate is very solid for the second half of the year. So we're starting to see some sizable opportunities coming in. It will generate both capital markets fees and funding for us. In the Southeast, their pipelines have been pretty strong and their production has been decent. It's on par with the first quarter of last year and continues to build. So Charlotte, in particular, is performing pretty well and there's quite a bit coming in. And then even in some of the other business units that we have, Builder Finance, which is based in Charlotte under this CRE group, small portfolio, but we're expecting them to do a little more this year. We're seeing a lot of activity.

It's very active.

There's quite a bit going on. If you look at – what I was trying to say, and I probably didn't do a great job, was funded production for us in the first quarter was more -- there were more solid contributions from the Southeast than our legacy market. When you look at the pipeline overall end-to-end for the rest of the year, the next three quarters, it's a sizable -- there's been a sizable increase in the pipeline. So that tells me that there's a lot more going on out there than we had initially thought. That's what I was trying to communicate.

Got you. That's helpful and I appreciate it. That's all I have then. Thanks, guys.

Thank you, Brian.

Thanks, Brian.

Thank you. And that does conclude the question-and-answer session. I would like to return the floor to management for any closing comments.

Yes. Again, I'd like to thank everybody, thank our employees in particular, because they've gone through a tremendous amount. And we've had to forge forward despite all the challenges we've had. And I think the company has performed very, very well given the challenges in the interest rate environment and the economic environment with the pandemic. So thank you to all of our employees for your contribution. And thank you to the analysts for covering us and providing such detailed and thoughtful analysis. I look forward to the next quarter and the rest of the year. And everybody, stay safe and thank you. Take care.

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