F.N.B. Corporation (FNB) Q4 2022 Earnings Call Transcript

F.N.B. Corporation (NYSE:FNB) Q4 2022 Earnings Conference Call January 24, 2022 8:30 AM ET

Company Participants

Lisa Constantine – Manager of Investor Relations

Vince Delie – Chairman, President & CEO

Gary Guerrieri – Chief Credit Officer

Vince Calabrese – CFO

Conference Call Participants

Frank Schiraldi – Piper Sandler

Jared Shaw – Wells Fargo Securities

Casey Haire – Jefferies

Daniel Tamayo – Raymond James

Michael Perito – KBW

Brian Martin – Janney Montgomery

Operator

Good morning, everyone, and welcome to the FNB Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today’s event is being recorded.

At this time, I would now like to turn the floor over to Lisa Heidi (ph), Manager of Investor Relations. Please go ahead.

Lisa Constantine

Thank you. Good morning and welcome to our earnings call. This conference call of F.N.B. Corporation and the reported files with the Securities and Exchange Commission contains forward-looking statements and non-GAAP financial measures.

Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release.

Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Tuesday, January 31 and the webcast link will be posted to the About Us Investor Relations section of our corporate website.

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

Vince Delie

Thank you, and welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. FNB closed strong in 2022, continuing our streak of outstanding performance and is positioned to capitalize on our momentum as we navigate a complex economic landscape in 2020 (ph).

FNB’s fourth quarter operating earnings per share totaled a record $0.44, increasing 13% on a linked quarter basis and bringing the full year operating earnings per share to $1.40. The success of this quarter was further highlighted by record revenue, continued strong loan growth, disciplined deposit cost management, and the closing and conversion of the UB Bancorp acquisition in December.

The fourth quarter’s exceptional performance is captured in its strong profitability metrics with operating return on average tangible common equity totaling 22% and the quarterly efficiency ratio below 46%. In the fourth quarter, total revenue grew 10% linked quarter to $416 million with net interest income as the primary driver contributing 13% growth. In addition to benefiting from the Fed rate hikes, our net interest income reflects strong loan growth, favorable funding costs and the strategic steps our team has taken with the asset sensitive position of our balance sheet.

Net interest margin significantly expanded quarter-over-quarter from 3.19% to 3.53%. Operating expenses were well managed, increasing 1.5% linked quarter. The revenue growth and disciplined expense management resulted in strong positive operating leverage and an 18% linked quarter increase in pre-provision net revenue. FNB ended the year with nearly $44 billion in total assets and $30 billion in loans and leases, a 5% increase linked quarter.

On an annualized basis, excluding UB Bancorp, period end commercial and consumer loans grew 14% and 6% respectively. Continuing a trend, we have upheld throughout the entire year. We saw strong loan growth in markets spanning our whole footprint. Once again demonstrating the importance of our diverse geographic coverage and presence in both mature and high growth markets.

The acquisition of UB Bancorp closed on December 9, 2022 with the systems conversion successfully completed and integrated. With the addition of UB Bancorp’s rich deposit needs, which includes 43% non-interest bearing deposits, we ended the year with the total non-interest bearing deposit mix at 34%. This result was in line with the end of 2021, despite Fed funds increasing 425 basis points, demonstrating the strength of our deposit franchise.

We are pleased with the financial benefits and dedicated employees in UB Bancorp acquisition has brought to us and expect to generate additional revenue as these customers are introduced to FNB’s more robust product set. FNB’s impressive fourth quarter and full year results demonstrate our significant success driving value for our clients, communities, employees and shareholders.

I’d like to call out a few of our many accomplishments. FNB achieved operating earnings per share of a $1.40, one of the highest levels in company history, led by record revenue of $1.4 billion. Total loans grew by $5.3 billion year-over-year, 21% through strategic combination of footprint wide organic growth and the completion of two accretive acquisitions, bringing total assets to $44 billion.

Despite the challenging economic environment, we grew total deposits to an all-time record of $35 billion and reported average balance growth in all four quarters of 2022, while also maintaining a favorable deposit mix comprised of 34% non-interest bearing deposits. We currently hold the top five deposit market share in nearly 50% of our MSAs according to data provided by the FDIC.

We generated over $1.1 billion of net interest income, up 24% year-over-year, driven by solid loan growth, the favorable deposit mix and the asset sensitive portion of our balance sheet. Our team controlled expenses in a high inflationary period, which contributed to FNB’s full year efficiency ratio of 52%. FNB reported total shareholders’ equity of $5.7 billion and a CET1 ratio of 9.8%. Our growing capital base provided our company with unprecedented flexibility even after returning $220 million to shareholders with common dividends and our active share repurchase program, which has $175 million remaining.

Our strong earnings also resulted in 40% dividend payout ratio and 34% on an operating basis, providing our company more internal capital to support future growth and capital actions. Credit quality remains solid with consistent prudent underwriting standards throughout the footprint, with total delinquencies ending the year at 71 basis points, net charge offs at 6 basis points for the full year and a reserve position of 1.33%. We will maintain our steadfast focus on our disciplined credit culture as we continue to navigate changing economic cycles.

We closed and converted two acquisitions. Howard Bancorp at January and UB Bancorp in December, which have enhanced our market position in Maryland, Washington. D.C. and North Carolina. Driven by our continued investment in FNB’s digital delivery channel and our dedicated mortgage employees, the Physicians First Program comprised 25% of retail mortgage production in 2022 and grew those high value households significantly.

We continue to expand our eStore platform, which received over 500,000 interactions in 2022, up 104% year-over-year and introduced online applications for multiple consumer loan and small business deposit products. The success of our digital strategy drove increased adoption across our expanding customer base, including a 17% increase and online applications.

Our consistent performance does not happen without the right culture and the commitment of exceptional people. We focus on fostering a positive productive workplace where engaged employees provide superior service for our clients and attractive returns for our shareholders. Our success in this regard has led to extensive third-party recognition. Since 2011, FNB has received more than 80 prestigious Greenwich Excellence and Best Brand Awards, with 17 in 2022 alone.

These results are based on direct feedback from our commercial, middle market and small business banking partners. Additionally, FNB received approximately 50 awards as an employer of choice, including multiple national and regional honors in 2022. Earning a place is one of Newsweek America’s Top Workplaces for Diversity in 2023. And most recently named to JUST Capital’s list of America’s most JUST Companies for the sixth consecutive year with exceptionally high marks for community development, employee benefits and work life balance.

Our board and leadership team are proud of this year’s achievements and we are confident in our company’s continued ability to execute on our strategic plan in 2023. Even in times of economic uncertainty, we are well-positioned given our diversified loan portfolio, investments in technology, strong liquidity position, capital flexibility and strong historical credit performance.

I will now turn the call over to Gary to provide additional detail on our asset quality. Gary?

Gary Guerrieri

Thank you, Vince, and good morning, everyone. We ended the year with our credit portfolio well positioned and our asset quality metrics remaining near historically level levels. Our performance for the period reflects total delinquency and ended the year at 71 basis points. NPLs and OREO at 39 basis points, rated asset levels remaining essentially flat quarter-over-quarter, excluding UB Bancorp and full year net charge-offs at 6 basis points.

I will cover these GAAP asset quality highlights for the quarter and full year in more detail followed by some insight into our credit strategy. We use to manage the loan portfolio throughout economic cycles. And finally, we’ll provide a brief update on UB Bancorp acquisition that closed during December.

Let’s now walk through our credit results. Total delinquency ended December at 71 basis points, reflecting a 12 basis point linked quarter increase coming off on historically low past due levels in the trailing quarters. NPLs and OREO at 39 basis points were up 7 bps in the quarter with nearly 60% of our NPLs in a contractually current payment status.

Net charge-offs from Q4 totaled $11.9 million or 16 basis points on an annualized basis with full year net charge-offs for 2022, totaling $16.2 million to stand at a very solid 6 basis point for the year, consistent with 2021 levels also at 6 basis points. Total provision expense for the quarter stood at $28.5 million, includes $9.4 million of initial provision for non-PCD loans that were acquired from UB Bancorp, with the remainder providing for loan growth, charge offs and updated economic forecasts that reflected a softer macroeconomic environment requiring additional reserve.

Inclusive of the additional Day 1 PCD gross up of $1.8 million. Our ending funded reserves stand at $402 million or a solid 1.33% of loans at year end. Reflecting our strong position relative to our peers, with the funded reserve ticking down 1 basis point compared to the prior quarter. Our NPL coverage position remains strong at 354%.

I’d now like to briefly update you on our recently closed UB Bancorp acquisition and the successful conversion of this $650 million portfolio during the fourth quarter. Our credit and lending teams continued to diligently review their loan portfolio as part of our standard post conversion process following an acquisition. The book remains in line with our expectations from due diligence with no material impact to our overall credit, loan risk profile or portfolio concentrations at the close of the year.

We’d like to congratulate the team on closing another successful transaction and will bring additional opportunities to expand our customer base and support our corporate growth objectives in the desirable Carolina of markets. We welcome our new UB Bancorp customers and we look forward to the opportunity to provide our expansive set of banking products and services team as we deepen these relationships.

In closing, we had another successful year marked by the continued strength and favorable positioning of our credit portfolio moving into 2023, as well as closing two acquisitions to enhance our presence in attractive markets that will further support our loan growth objectives. Consistent with our proactive and aggressive approach to managing risk, rating credits and positioning potential problem assets, we continue to closely track emerging macroeconomic trends and signs of stress heading into a softer environment. We remain steadfast in our approach to consistent underwriting and managing credit risk to maintain a balanced, well positioned portfolio throughout economic cycle.

I will now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.

Vince Calabrese

Thanks, Gary. Good morning, everyone. Now we’ll focus on the fourth quarter financial results and offer guidance for 2023. The fourth quarter net income available to common shareholders totaled $137.5 million or $0.38 per share. After adjusting for $21.9 million of merger related expenses and $2.8 million of branch consolidation costs, net income reached record levels of $157 million or $0.44 per share.

Full year 2022 operating earnings per share also represented one of the company’s highest levels coming in at $1.40. The growth in the balance sheet brought assets to $44 billion with earning assets nearly $39 billion at the end of the year. This was largely driven by the $1.5 billion linked quarter increase in spot loans and leases, which included organic growth of $824 million or 11.4% annualized and the $651 million of UB Bancorp acquired loans as of the December 9 acquisition date.

[indiscernible] C&I and commercial real estate each grew 6.3% linked quarter. Consumer loans increased 3.4%, reflecting portfolio growth and adjustable rate mortgages and the continued success of the Physicians First Mortgage Program. Full year total loan growth was a robust $5.3 billion or 21.2% on a year-over-year spot basis, roughly half of this growth was related to the previously discussed Howard and UB Bancorp acquisitions with the remaining half due to strong organic growth capping-off three sequential quarters of double-digit organic growth across the footprint.

Average deposits totaled $33.9 billion for the fourth quarter, increasing $301 million or 1% including UB Bancorp acquired deposits over the last three weeks of the year. When excluding UB Bancorp deposits, average non-interest bearing deposits declined only 1% linked quarter $11.7 billion and we maintained a favorable deposit mix at year end with 34% non-interest bearing deposits, demonstrating the strength and granularity of FNB’s deposit base.

Record quarterly revenue of $415.5 million were driven by record net interest income totaling $334.9 million, a linked quarter increase of $37.8 million or 12.7%. The net interest margin increased 34 basis points to 3.53%, as the earning asset yield increased 62 basis points, while the cost of funds increased 30. The largest driver was increase in yields on loans and leases, which increased 68 basis points. In fact, the December loan origination yield was over 6%, the highest since 2009 and approximately 100 basis points higher than the spot portfolio rate at quarter end.

With 59% of the loan portfolio repricing, we expect the portfolio rates continue to increase given the December Federal Reserve rate hike and expected 25 basis point increases in February and March. The fourth quarter also had record positive operating leverage of 29.1% which we expect to rank in the upper quartile of our peers.

On the other side of the balance sheet, deposit costs continue to be a significant focus for our team. Total cumulative deposit betas ended the year at 16.3% below the forecasted 20% by maintaining the previously mentioned favorable non-interest bearing deposit mix and actively managing interest bearing deposit costs. We were able to keep the average interest bearing deposit costs below 1% for the fourth quarter again demonstrating the strength of our customer relationships.

We have been able to effectively manage deposit costs, strategic pricing campaigns supported by our data analytics platform. While competitive pressures on deposit pricing continue to rise, we are forecasting a cumulative total deposit beta to be in the low 20s at the end of the first quarter of 2023.

Turning to non-interest income and expense. Non-interest income totaled $80.6 million, a decrease of $1.9 million or 2.2% compared to the prior quarter. Mortgage banking operations income decreased $2.4 million with a decline in mortgages sold in the secondary market and lower gain on sale margins.

Insurance commissions and fees decreased $1.3 million reflecting seasonality in the fourth quarter. Capital markets income totaled $10 million with this strong level supported by an increase in syndications and solid contributions from swap fees and international banking. On a full year basis, non-interest income totaled $323.6 million, a 2.1% decrease from 2021 primarily reflecting a significantly lower mortgage banking operations income, which was partially offset by several other fee based businesses, again demonstrating the importance of our diversified business strategy.

On an operating basis, non-interest expense totaled $195.8 million, a 1.5% increase from the third quarter and an increase of 8.3% from the year ago quarter which is primarily driven by the acquired Howard and Union expense basis in occupancy and equipment and outside services. Other non-interest expense increased linked quarter primarily from charitable contributions during the quarter to qualify for Pennsylvania bank shares tax credits.

Salaries and employee benefits decreased from the third quarter due to lower medical costs and seasonally lower production and performance related incentives. Excluding significant items totaling $52.3 million in 2022 and $4.4 million in 2021 full year operating non-interest expense increased $45.4 million or 6.2%.

Fourth quarter’s operating pre-provision net revenue totaled a record $219 million, representing an 81% increase from the year ago quarter. On a full year basis, operating pre-provision net revenue was $669.2 million, an increase of 31.7% in 2021.

Our capital ratios ended the year at levels that are expected to be at or above peer median. Tangible book value per common share was $8.27 at December 31, an increase of $0.25 per share from September 30, largely from the higher level of earnings and the decreased impact of AOCI by $0.09 per share. CET1 ended the year at a solid 9.8% and the TCE ratio totaled 7.24%.

Let’s now look at the 2023 financial objectives, starting with the balance sheet. We expect loans to increase mid-single digits on a year-over-year spot basis. Total deposits are projected to end 2023 at a similar level as of December 31, 2022, spot balances as customer growth continues alongside active management of deposit rates in an environment with rising deposit betas.

Full year net interest income is expected to be between $1.34 billion and $1.4 billion, with the first quarter of 2023 between $335 million and $345 million. Our guidance currently assumes 25 basis point rate increases in both February and March with no additional rate actions projected for the remainder of the year.

Full year non-interest income is expected to be between $300 million and $320 million with the first quarter in the mid $70 million range. Full year guidance for non-interest expense on an operating basis is $830 million to $850 million, which assumes an additional $8 million in FDIC deposit insurance costs, reflecting higher assessment rates, it may remain in effect to the deposit insurance fund reserve ratio meets the FDIC’s long-term goal of 2%.

This expense guidance range implies growth of 7% to 10% and full year 2022 operating expense figures. At the midpoint of our guidance, the efficiency ratio would be below 50% for full year 2023. When excluding the FDIC increase in the Union acquired expense base, the 2023 expense range would be 4% to 7% on a year-over-year basis.

The first quarter non-interest expense is expected to be between $210 million to $215 million as the compensation expense is higher in the first quarter, largely due to normal seasonal long-term stock compensation and higher payroll taxes at the start of the new year.

Full year provision guidance is $65 million to $85 million and is dependent on net loan growth and CECL model-related builds from a softer macroeconomic environment. Lastly, the effective tax rate should be between 20% and 21% for the full year, which does not assume any investment tax credit activity that may occur.

With that, I will turn the call back to Vince.

Vince Delie

Thanks, Vince. As we start the new year, we remain focused on executing our strategy and serving our stakeholders. We will do this by staying true to our values based culture. And delivering on the financial guidance Vince provided with a focus on generating positive operating leverage and efficiently deploying capital in the most effective way to optimize risk adjusted returns for our shareholders.

Before we close today, I want to recognize our dedicated team, who made our performance positive. Every employee contributes to the success of the company, and I strongly believe that we will continue to win at FNB because of our outstanding employees and the excellent culture we have developed together.

With that, I’ll turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Frank Schiraldi from Piper Sandler. Please go ahead with your question.

Frank Schiraldi

Good morning.

Vince Delie

Good morning, Frank.

Frank Schiraldi

Just curious you guys talked in the release a little bit about where you saw the strongest growth geographically. And just curious if you can give a little more color there, specifically on the — what percentage of the commercial growth you’re seeing coming out of the Carolina footprint.

Vince Delie

Yeah. I don’t know that we have the specific – specifics in our finger tips, but I can tell you just from what we get, the Carolina has had an exceptional year. They contributed throughout the year in [indiscernible] all of those areas were big contributors to loan growth. They all exceeded their planned objectives for the year and had a tremendous year in cross-selling. So in addition to eliminating loans that are also able to cross-sell capital markets, products, trust and investment products and insurance throughout that footprint. So they were a significant driver. Pittsburgh has always been a solid market for us given our market share here. The groups in Pittsburgh were [indiscernible] this year.

And I also want to include our expansion market in Charleston. The team down there has done an exceptional job over the last two years and [Technical Difficulty] the last two years. So those areas have been huge contributors. In the past, the Mid-Atlantic region has been a fairly substantial contributor, but we were able to — through various takeouts, reduce the size of the seating portfolio in that market. So we had a little bit more of a headwind coming into the year.

And I will tell you that as we move into next year, the pipelines have softened a little bit kind of globally, but we had two consecutive quarters of pretty solid growth. So we’re down about 15% year-over-year, with the pipeline typically a seasonal low point. And we’re being a little more careful as we move into next year, quite a bit of economic uncertainty and player conservative side. So very excited about where we sit, though, Frank, in terms of originations because it was barely geographically spread out.

We got some assistance from the Midwest and the Northeast with — in some of the slower growth markets because they have a heavier industrial base, and there seems to be a little more activity there to offset some of the declines in CRE opportunities in the Mid-Atlantic region. So it all kind of balanced out. And I think as we’ve said all along, that has been our strategy to have a very longs to grow. Sorry, actual on the portfolio.

Frank Schiraldi

That’s great. Thanks for all the color. And then I just wanted to follow-up on the guide, specifically on fee income. It seems like — I don’t know, even if I can sort of normalize the other line item this quarter, maybe you get the mid-70s number you’re still sort of at — already at sort of the midpoint of that run rate guide for next year. And so just kind of curious if you can provide any puts and takes in terms of where you might see some growth in fees and where we could see some further weakness in 2023.

Vince Calabrese

I could comment, Frank. Just I guess, high level, non-interest income was solid again at $80.6 million for the quarter, down slightly from the third quarter. Mortgage banking income coming down. $2.4 million, there’s kind of normal seasonality there. One thing I did want to point out too is that it’s important, the growth in the balance sheet of adjusted for rate mortgages has been higher. We’ve been portfolioing more loans that we might otherwise have been selling in the past. So the fee revenue is a little bit lower on the mortgage banking side. No capital markets for the quarter, very solid at $10 million. We had a higher contribution compared to the third quarter, partially offsetting that reduced contribution from mortgage and the second consecutive quarter with strong syndication fees.

As you look ahead, some of that revenue sources are lumpy like the syndication fees are always consistently at the same level, they kind of come in lumpy, the swap piece also can be a little bit lumpy. So, us guiding to mid-70s again, which is what we guided to for the fourth quarter is really just kind of a function of that as well as we made some changes to consumer deposit fees that we had announced in November. That’s also kind of rolling through the numbers. So it’s kind of a conservative look, I would say, based on kind of what we know today. But the lumpiness you can’t predict with certainty as far as some of the kind of capital markets component. So that’s why the guide at that kind of mid-70s level.

Unidentified Company Representative

Hey, Frank. So Chris [indiscernible] on the Carolinas, over the last three years, the Carolina markets, both and South Carolina produced roughly 40% of our net loan growth.

Frank Schiraldi

Okay. Great. [Multiple Speakers] No, I appreciate that. And then if I could just lastly, just you’re getting closer and closer to that 10% CET1 ratio — and just wondering if any sort of strategic changes we can expect when you do reach that level and pass through it? And I guess, specifically wondering about additional capital return if this could trigger greater buyback activity as we move through 2023. Thanks.

Unidentified Company Representative

Yeah. I would just say, we expect to build a 10 in the near term here, given the level of earnings that we’ve been generating really creating that capital flexibility we’ve never had in the past. So we got [Technical Difficulty] buybacks. I mean our first and best use of capital, as we’ve said all along, the strategy is the same as to deploy it into loan growth. So depending on how strong the loan growth is or how much it slows down, you’ll have more opportunity to do buybacks. So it’s clearly on the table for 2023.

As you know, we remain committed to managing capital in a way to just fully optimize on shareholder value fully aligned with shareholder interest. So we will be looking at that. We’ll be opportunistic as we go through the year. I think in total, we have about $175 million or so of capacity remaining in our former program. So clearly, as we expect to build past that 10% level, the share buybacks are definitely something we’ll be pursuing and evaluating on a daily basis.

Frank Schiraldi

Great. Okay. Thanks for all the color, guys.

Operator

And our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.

Jared Shaw

Hey, guys. Good morning. How are you?

Vince Delie

Good morning, Jared.

Jared Shaw

Yeah. Maybe starting with Vince, your comments on utilizing analytics to help drive the deposit base. Can you give us some examples of how you’re doing that and your deposit performance has been really strong, your beta among the best in the group so far. I guess — how are you getting that and is that going to be a sustainable level or a sustainable avenue of growth as we go forward.

Vince Delie

Yes. This is Vince Delie actually, Steve mentioned that in his comments and I will tell you, we’ve made a significant investment in our ability to analyze large quantities of data. We’ve talked about that before. We have the data. We have an entire team that manages the governance and systems. We’ve invested early and heavily in that area over the last five or six years. We use that team to basically give us a better understanding of the types of clients that we have and to really drill into client behavior expectation and it enables us to be able to provide them with better solutions.

And the answer on the deposit stability and growth, I think we’re an outstanding deposit franchise. I think if you look at the mix, the mix is very strong relative to the peers. The stability of the demand deposit base is very strong. The granularity is strong. So there’s quite a bit that goes into managing a deposit portfolio of that size. There’s not just one silver bullet. So we focus — we use analytics to focus on treasury management opportunities within our customer base. We use the analytics to view customers that are single source or single product customers that may have a loan product that don’t have a fuller depository relationship with us.

We use the analytics tool to tier the clients based upon need that helps us direct our resources more effectively to drive growth. We also use the analytics tool with our digital offering so that we can present products and services to clients as they engage the eStore online. I mentioned in my comments, we had 500,000 views on the website and on the mobile app because our eStore is embedded into our mobile application. So it’s right there for the customers to engage with, that — all of that helps us manage the betas and the deposit outflows and deposit growth and the mix of the deposits. So it’s a pretty complex set of strategies that we deployed and the tactics that underlie the strategy in each segment really are geared towards driving better performance in that deposit portfolio. Hopefully, that answers your question. That’s pretty flat [Multiple Speakers]

Jared Shaw

That was great color. Maybe looking at margin, you project or you expect a couple more 25 basis point hikes. What’s your expectation for DDA diminishment in that scenario? And are you taking any steps to protect margin if we start shifting to more of an expectation for lower rates in the future?

Vince Calabrese

Yeah. I would start with just the non-interest bearing deposits, again, are a big focus in the company. So our ability, as you can see here in my prepared remarks, I mean, EAs were down 1% or so less for the quarter that takes a lot of effort. All the tools that Vince talked about analytically as well as our team on the front line and our relationships with customers that are very strong.

We’ve created a lot of goodwill going to PPP. We’re in that process with existing customers and new customers that we’ve been broadening relationships with. So that — those relationships and our customers’ willingness to talk to us and if they’re looking to move money instead of just moving money is very valuable.

And our team on the front line has been very active throughout the fourth quarter. Talking to customers. We have a large corporate initiative that’s been on the lending side as well as the deposit side. That has been bearing fruit during the quarter. So our goal is to sustain the DDAs and continue to grow them from here. We have a slide in there that shows a percent of full deposits from 16% up to 34%. Our team is incented to work hard to grow those non-interest bearing deposits.

Vince Delie

We have a lot of tools in place, but why don’t you mention also our active asset liability strategy, a focus on preserving margin.

Vince Calabrese

Yeah. I would say we as you would expect, I mean our treasury team studies at daily. I mean we’ve been looking at hedging opportunities really for the last year, and we did some small amounts of hedging, I don’t know, six months or so ago, but decided not to put more on because of where levels were and what was expected to happen with rates. You don’t have to go back that far when everybody was locked in that rates are just going to fall off a cliff one quarter or two quarters into the year and then the protection and that became very expensive. So we’ve put some on.

Naturally, our asset sensitivity has been kind of approaching neutral. If you look at the asset sensitive our interest rate risk position, you’re down to like 1% or so for plus 100, minus 100. So organically, it’s been kind of coming down as we’ve been deploying cash just kind of the natural movement of the balance sheet. So we’ll continue to monitor it, Jared. But at this point, the price points haven’t made sense to us to load up on hedges for the balance sheet. But we’ll continue to look at it and we’ll be smart about it when it makes sense. And if it does make sense to us, we’ll put something done. We’ve done about $1 billion or so of received fixed swaps over the recent period. So we have that component there.

But the natural asset sensitivity coming down, and as you know, net interest income is at a much higher base. So it’s kind of coming off of that. So having that lower interest rate risk a more neutral interest rate risk position is a positive and as we move forward. So we’ll continue to monitor as we have and evaluate any hedging opportunities that make sense. But the main deposits are always valuable and in this environment, we’re even more valuable. So our team’s success in growing those non-interest bearing deposits, which is key for us, and that will always be a focus.

Jared Shaw

Okay. Thanks. And just finally for me, just on the capital management side. What’s the appetite for M&A here? And maybe, Vince, what’s your view of sort of the current state of bank mergers overall?

Vince Delie

But I think I wouldn’t want to be an investment banker in the short run here. I think it’s been a pretty challenging environment. Investment banking fees, in general, was down 20%, given what’s happened with AOCI is that level it becomes very challenging to do a deal that’s accretive that doesn’t have substantial relevance to it. And we’ve stated repeatedly that we’re not interested in diluting tangible book value.

We have as Vince said, we have capital flexibility that we’ve never had before, which could mean a number of things and we did become more aggressive in buying shares back if loan growth slows, if you look at the dividend payout ratio on an operating basis, we’re down to 34% unheard of it. I mean we took the reins here 80% — 70%, 80% payout ratio. So we have incredible flexibility moving forward. We want to make sure it benefits our shareholders.

So our focus is just driving shareholder returns and making sure that we’re making smart decisions with capital so that we can move the stock price up and repatriate appropriate levels of capital at some that’s the strategy moving forward.

Jared Shaw

Great. Thanks.

Vince Calabrese

Jared, just to go back on the interest rate risk. On Slide 11, we did add a chart there that shows the interest rate risk sensitivity over time and you can see kind of how it’s moved down. We have plus 200, plus 100 shot. You can see how it organically has come down close to neutral by the end of the year, point that out to.

Operator

And our next question comes from Casey Haire from Jefferies. Please go ahead with your question.

Casey Haire

Yeah. Thanks. Good morning, everyone. Question on the funding strategy. So the guide outlines about $1.5 billion of loan growth with deposits flat. Just wanted to understand what’s the outlook for funding that loan growth, be it bond book or borrowings?

Vince Calabrese

Yeah. I would say we still have some excess cash, Casey, to put to work. So we’ll deploy that as we go through the year. I think if you look at the loan-to-deposit ratio, what’s in our guidance and kind of in our plan, we get down to maybe 90% — or up to 90%, 91% by the end of the year, which is still a very comfortable level for us. So a combination of deploying the cash, and we might have some small level of borrowings as we get towards the end of the year. But overall loan-to-deposit ratio, very comfortable with those levels.

Casey Haire

Okay. Very good. And just I guess as a follow-up to that is, what is a comfortable mid-cash position for you guys as well as what is too high a loan-to-deposit ratio?

Vince Calabrese

Well, I mean in the past, I remember when we got up to about 97%, we started to get uncomfortable. And we took some actions at that point, some promotional CDs open and those types of things to kind of bring it down. So I’m not saying that’s the level, but our prior history, that was when we decided to start doing things. So I think if you got up to 95-ish 97, and we would you look at other options or strategies we should deploy at that point.

Vince Delie

We have many tools at our disposal to drive deposit. The question is, how much margin you want to give up in this environment.

Casey Haire

Okay. Very good.

Vince Calabrese

Casey, just to clarify, Casey, I don’t have a figure in front of me. So there’s $1.2 billion if you look at our balance sheet at the end of the year of interest-bearing deposits. So that cash being deployed to support the loan growth would be the [indiscernible] would go.

Casey Haire

Yeah. Understood. Okay. And then apologies if I missed it. Any updated Cume beta is coming in very nice surprise positively versus what you were expecting this year. Any updated thoughts on where Cume beta ends up?

Vince Calabrese

Yeah. In my prepared remarks, Casey, I mentioned kind of low 20s at the end of the third quarter. And if we look at kind of overall, I would say, well, a few comments on betas, right? I think our team has done an admiral job in the field strategically managing interest-bearing deposit costs. While we’re building non-interest bearing. It’s a lot of effort, as you would expect. It’s daily effort talking to customers, managing the relationships, being smart about rating rates for customers that have kind of full relationships.

So it’s been a very active process. It will continue to be an active process for us. We ended the year, as you saw on the slide, 16.3 getting down into the low 20s by the end of the first quarter. And then if you look at kind of the midpoint of our guidance by the end of the year, kind of cumulative total beta will be in the high 20s is what we’re kind of projecting as we sit here today versus about 24% in the last hiking cycle.

Casey Haire

Okay. Got you. So apologies if I missed that. So high 20s through the cycle is what you’re thinking?

Vince Calabrese

At the end of the year, yes, it’s pretty kind of [Multiple Speakers]

Casey Haire

Okay. All right. Just last one for me, maybe one for Gary. So the provision guide of 65 to 85. You guys do mention a softer macroeconomic environment. We’re all kind of struggling with CECL modeling. Just wondering if any color on and you can provide on what — how softer that macro is, be it unemployment rates, GDP, et cetera.

Gary Guerrieri

Yeah. It’s pretty much across the board, Casey. And during the quarter, we also saw some softer economic forecasting in our CECL models, which impacted the provision to the tune of about $8 million. So we’ve got that built in through 2023. So that is a pretty good portion of where we’ve guided to across the year.

Vince Delie

The other naturally is — the other naturally is loan growth as far as the driver there. And loan growth we’ll move those numbers a little bit within that range, as we’ve talked in the past.

Casey Haire

Thank you.

Operator

And our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.

Daniel Tamayo

Thank you. Good morning, everyone.

Vince Delie

Good morning.

Daniel Tamayo

Sorry, I just wanted to clarify that last comment, Gary. Did you say that $8 million reserve build is what was built into your assumptions for the 2023 provision?

Gary Guerrieri

No. I’m sorry. The $8 million was CECL macroeconomic forecast changes in Q4.

Daniel Tamayo

Okay. I apologize. All right. Terrific. Do you have a thought on kind of how much reserve build is in the guidance relative to what would be just loan growth or charge-off activity?

Gary Guerrieri

Yeah. CECL impact is about a third. Loan growth is about half of it.

Daniel Tamayo

Okay. All right. Thank you. And then maybe we could just talk a little bit more about the margin. I know we’ve talked a lot about deposit betas, but just interested in your thoughts on actually the pace of the margin. We can kind of back into what the rest of the — what the 2023 would look like based on your guidance, but just interested in terms of, if you do continue to get expansion in the first quarter and kind of how much — how accelerated the contraction you’re expecting after that point would be?

Vince Calabrese

Yeah. I can comment on that, Dan. The outlook just to restate again, includes an additional 50 basis points of hikes in February and March and then no additional Fed actions for the rest of the year. Our guidance would imply a slight increase in margin from the 3.53 level that we were at in the fourth quarter, peaking maybe the second quarter and they’re based on what’s in our plans, but we’re talking single digits of basis point movement there. So there’s still some upside to that level. And then similarly, on the other side, it comes down a little bit from that peak, but we’re tucking in the single basis point type level. So that’s what’s baked into that.

Daniel Tamayo

Okay. Great. I appreciate. Okay. Terrific. And then I just wanted to again clarify an earlier comment. I think you said the midpoint of your expense guidance would assume that you or would be under 50% efficiency ratio in 2023. I just want to make sure that, that’s what I heard. And if there was kind of a — I had an original question, like how likely you think it is that you do stay under 50%. So I guess assuming your expenses come in about where you expect — you would expect that to be under 50% is an accurate statement?

Vince Calabrese

Yeah. Using the midpoint of our guidance kind of across all the different categories, that’s you’re very right. That’s an accurate statement.

Daniel Tamayo

Okay. And is that kind of becoming a longer-term goal for the bank to stay under 50% efficiency ratio or if we get into a lower rate environment, do you think that might drift back over.

Gary Guerrieri

I would say our goal would be to continue to reinvest in the company. And with the changes in the margin based upon macroeconomic factors, it could swing back and forth over 50, under 50.

Vince Calabrese

Yeah, low 50s, I would say, would be a reasonable longer-term kind of.

Gary Guerrieri

But I will tell you that there will be capital investment required as we move forward, particularly in technology for us to stay competitive, for us to maintain margins in the future and to keep doing what we’re doing with the betas and it’s not a pre-pass forever. So we have to keep watching what we do, and we’re going to have to manage the margin. We’re in a very good period for our organization and our — for this time, we’re benefiting. But obviously, the world is going to change. So we diligent on expense control, and we continue to reinvest in the help. Sorry, I didn’t.

Vince Calabrese

No, no, — that’s good. I would just add to that, I didn’t mention the kind of cost savings targets for 23, which is $9 million. As you know, we’re a disciplined manager of expenses continue to invest, as Vince said, in a variety of initiatives on the digital side and de novos and some of our kind of digital infrastructure. And then one other thing I would add, in the past, I’ve talked about kind of project improvement process improvement, I should say.

We’ve always had a focus on that, renegotiating with vendors, facility space optimization. But the process improvement side of it, we’ve recently reorganized a little bit internally, adding some additional resources to drive the corporate-wide focus on process improvement. I think there’s a lot of opportunity deploying RPA type technology to really drive further efficiency as we go forward. And we’re still in the early stages of that, but that also will contribute to, I think, allowing us to have sustainably in the low 50s as you move forward, given all those efforts.

Daniel Tamayo

Terrific. Thanks for all the color. That’s all for me.

Operator

Our next question comes from Michael Perito from KBW. Please go ahead with your question.

Michael Perito

Hey. Good morning. Thanks for taking my questions. Obviously, you guys covered most of it. Just a couple of quick ones to wrap this up here. Just, Vince, in terms of the kind of geographic footprint, you mentioned a little bit about some pipeline and some stuff like the Carolinas, et cetera. But just as we look at kind of the bank today, any opportunities or areas of focus for you guys in 2023 that we should be mindful of, maybe something like Philadelphia, where there’s been a lot of mid-caps taken out over the last couple of years. Just anything kind of like that, that you guys — that’s on your radar that you would convey to us at this point?

Gary Guerrieri

Yeah. I mean I will tell you that we have studied Philadelphia from a commercial lending perspective. We do have an office there. Our plan is to continue to expand it. We think there’s some opportunity there in the middle market, large corporate space. I also think Philadelphia, when we ran our model we looked at MSAs because of the number of companies domiciled there, and the competitive climate. It’s score now pretty high. The dynamic keeps changing. There are fewer competitors, right?

Basically, we’re seeing it as an opportunistic area to expand. And there are several other markets that we launched into that will continue to boot. We’ve had tremendous success in Charleston. Our plan is to continue to grow there. We are looking at de novo expansion in Richmond. We’ve studied opening a loan production office commercial only and Atlanta. And those are pretty much the areas that we’re focusing on, but nothing earth shattering or there’s no movement retail de novo expansion.

But I think there are opportunities for us to extract additional high quality growth in our existing footprint, where we may not have the density. And then the other thing that we’ve done strategically was substantially increased our ATM rollout. What we found is that that’s helped us immensely with the retention of customers growing DDA, [indiscernible] expanding small business opportunities. So we’ve done that through both branding opportunities and direct placement of ATMs and ITMs.

So our ATM network grew more than 30% across our footprint. So we have 1,200 ATM locations. So 250 of those were rolled out in North and South Carolina and then another 250 in Maryland, Virginia and Baltimore Washington D.C., Northern Virginia. So we’re trying to supplement our physical delivery channel and for branches with other channels to distribute cash and then we’re marketing our eStore which enables individuals and small businesses to open accounts online. Anyway, that’s the strategy. And I think from a geographic perspective, there’s plenty of opportunity within our existing footprint for us to continue to grow.

Michael Perito

Yeah. I mean, that makes sense. So from the outside looking at it would seem like, especially around the 95 corridor, like Virginia, like you mentioned, Philadelphia, like there — a lot of the competitors there, though, are much more loaned up right, probably a lot less willingness to lend, deposit betas are a lot higher. The balance sheets are a lot smaller. It would seem like you guys have a pretty attractive value proposition for some lending talent in those markets coming from the West and South as opposed to coming from the New York area where there’s just more balance sheet constraints?

Gary Guerrieri

Yeah. And I think our treasury management offering, at least as it scores out through [indiscernible] and other surveys is pretty well respected. So that enables us to go in and garner deposits as well. We go in, we become the principal bank. We get the operating accounts in cross-sell treasury management services. And I think we’ve proven moving into the Southeast that our products stand pretty well if you look at the non-interest income growth of the company, a lot of that was driven from our expansion into the Southeast.

And there was quite a bit of skepticism about our ability to compete. I think we’ve put that to rest. If you look at the growth in various categories, it’s been fairly substantial and it’s been very robust. So we have the product capabilities as well to go into some of the markets that we don’t have density within our existing seven states footprint.

Michael Perito

Great. Thanks for that. And then just last for me, just on the effective tax rate guide, it says assumes no investment tax credit activity, can you just remind us quickly what the activity looked like last year? And just also if you do move forward with any transactions there, what you guys typically look at from an opportunity standpoint?

Gary Guerrieri

I guess it’s Vince C answer. Go ahead.

Vince Calabrese

No, I would just say, I mean, it’s a line of business for us, but we don’t have some transactions each year. I mean, in ’22, I don’t think we had one in ’22, we had maybe a couple in ’21. So I mean there’s an active business process there, and we may have some this year. We just don’t want to put it into guidance if we do, then it’s a positive additive to the guidance there.

Michael Perito

Is that like housing income tax credit stuff though or is it like more like what? [Multiple Speakers]

Gary Guerrieri

Renewable energy tax credit typically sold may have a long gestation period. So there’s a long — it takes a lot of time to get to the finish line. So even some supply chain issues with the solar panels. So that’s elongated some of those projects.

Michael Perito

Perfect. Thank you guys.

Gary Guerrieri

Thank you.

Operator

And our next question comes from Brian Martin from Janney Montgomery. Please go ahead with your question.

Brian Martin

Hey. Good morning, guys. Congrats on nice quarter [indiscernible]. Just one clarification. I think it was Vince D, you mentioned the pipeline is just — can you — I guess, was it 15%? I’m not sure if you were speaking more to the commercial, the consumer. Just give us an update on what those pipelines. I know they’re a little bit softer, but just connecting the dots here just now whether it was commercial or consumer and just kind of how they’re trending here.

Vince Delie

This is Vince Delie, and I was speaking specifically to commercial pipeline, non-consumer. So and what I said we had two very strong quarters in terms of production that tends to have to reset. We’re moving into a slower seasonal period, so our pipelines are down. And given all of that, when you look at it on a comparable basis, taking seasonality out of it, we’re still down 10% to 15% and the rebuilding — and they’re rebuilding the pipeline. That’s just something that illustrates where we are economically. I think there’s a lot of uncertainty, I think, our borrowers are on the sidelines for a little bit here to see what happens, right? And it’s going to be a little while until we start to see that build back.

Brian Martin

Got you. Yeah, in to second quarter. And then on the consumer side, how is that trending today?

Vince Delie

Yeah. Consumer pipelines, there’s seasonality there as well. So it’s kind of tough to say. I think the pipelines in general have been pretty consistent with where they’ve been seasonally, maybe down a little bit. Mortgage, there’s more production coming online. In terms of opportunities for us to take on adjustable rate mortgages on our balance sheet. So we’re seeing growth in that category.

Direct consumer, we’re seeing a little bit of lowness in the [indiscernible] space now. But that tends to build back up again as we move through the normal housing sales fees on the home improvement season starts to pick up here at the end of March. So it’s a little tough to tell small business is up. Small business is up pretty much across the board. We have some good momentum the number of markets that we’ve entered. We have a fairly sizable portfolio there to the total bank. It’s not – yeah, it’s over a $1 billion, relative to commercial foot [indiscernible] but we are seeing some really good positive momentum in the Carolinas and the Atlantic region.

Brian Martin

Thanks for the color. Maybe just one or two other, just on the inside the guide on the fee income side. Just kind of your thoughts on mortgage, obviously being kind of a low point for the year and sort of just trying to — as you think about next year, I guess, can you give any thoughts just on high level on how you’re viewing the mortgage activity given kind of what we saw throughout the year?

Vince Delie

I think I’m going to turn this over to Vince in a minute that I think — basically, the mortgage business, we’ve always kind of tracked globally what the expectations are from a number of statistical sources that tells us where the world is expected to be. We tend to do a little better not a little better, we do a lot better than what the typical forecasts are. So I attribute that to the geographic dispersion of our originators. We’ve had great success in certain segments as well Physicians program that we had that portfolios now grown substantially over $1 billion.

So there’s little pockets that we go after, but there’s also certain markets that tend to have better housing markets generally than our legacy markets like the Carolinas and the Atlantic region. Where we have originators dispersed. I think we’ll probably outperform the market overall again this year, I would expect that I think that the servicing portfolio that we have has been a good hedge for us from an earnings perspective. So that’s helped us but go ahead, Vince. You’ve had a couple of others back.

Vince Calabrese

Yeah. I was just going to kind of add to look at production overall for the fourth quarter, $967 million, seasonally down in the third quarter, but now 16%. So [indiscernible] to Vince’s point, the high-level industry forecast right now is for production originations to be down 24%, baked into our expectations and our guidance is more like a down kind of 14%. So we would expect to outperform the industry like Vince said and we have done that in the past, and we continue to do that.

Brian Martin

Got you. Okay. So a little bit lower. You’re talking about 14% year-over-year is kind of what you’re looking at there, right, Vince?

Vince Delie

Yeah, full year to full year, right.

Brian Martin

Okay. Perfect.

Vince Delie

And just one more thing. I mean, with the lowering of the 10 year interest rate, we have seen a pickup in lockup volume in both mortgage and in the consumable, just saying that.

Brian Martin

Yeah. No, that make sense. And just to remind me, I guess, on the deposits, there’s been a lot of talk about the beta. What did you guys exit the quarter on the cost of deposits? I guess I know you talked about the betas where they tried to, but for like the month of December, where were the — I think you said loan yields were I thought they were 6% for the quarter on the origination yields, but the cost of deposits as far as exiting in December, where were you guys there?

Vince Calabrese

Yeah. Total deposit costs ended December at 79 basis points and interest-bearing deposits ended a year at about 1.14%.

Brian Martin

Got you. Okay. Perfect. And last one for me was just on the deposits. You guys talked about the guide being relatively flat, just the mix. I mean, I know you talked about the work it takes to keep the deposits where they are. Just where you are now on the DDA as you kind of look throughout the year? I mean, do you expect that number to come down a bit? Is that kind of in your forecast or I guess do you think the efforts you guys have — you can kind of maintain this level you’ve reset to?

Vince Calabrese

We’re going to work hard to maintain and grow that in source of funding for us, honestly. I mean there’s been some mix shift into CDs as you would expect, more particularly in the municipal and commercial side. I mean there’s been some shifting into CD. The key is that it’s still kind of staying in the house. So it’s moving around a little bit. And the non-interest bearing deposits, like I said earlier, it’s a big focus in the company with existing clients, but also bringing in new clients.

Vince Delie

But you — really, we have to see how things play out throughout the year. I mean, there’s going to be pressure on non-interest bearing deposits with [indiscernible] in the existing book as we move into a period of extended high rates, Brian. So we’re going to have to work really but I think we’ve outperformed at least what we’ve seen reported recently, and we’re going to keep doing what we’re doing to maintain those balances to the best of our ability because that really drives our profitability through the mix. You are right.

Brian Martin

And you’re at a much higher base now with all the efforts you guys have had here over the last year or two is the money you’ve taken in.

Vince Delie

There’s considerable granularity in that interest-bearing deposit base. So we — there’s some hope there, Brian.

Michael Perito

I got you. Okay. Thanks, guys. Nice quarter.

Vince Delie

Thank you very much. Appreciate it.

Operator

Our next question comes from Emmanuel Navis (ph) from D.A. Davidson. Please go ahead with your question.

Unidentified Participant

Hey. Good morning. Most of my questions have been answered, but could you just give me a reset on the Physicians First Portfolio? You said it’s about just over $1 billion, kind of like the year-over-year growth? What are like new loans coming in on? Any kind of extra color there would be great.

Vince Delie

I’ll start out with the program itself, so you understand. We have a dedicated team that originates mortgage loans in the space. They’ve done a terrific job. We’ve built out on our eStore platform a digitized product offering the bundles, a set of products for physicians. So that’s been offered electronically on the eStore and we use that the eStore to promote the product digitally and we’ve done very, very well. I mean I can tell you the CAGR on this portfolio is, it’s fairly significant, 65% since we started 2018. So it’s grown nicely.

We started with the originators first and then we supplemented their effort with the digital offering and set up the campaign. If you just look at households with physicians, we’re up 66% in Eastern North Carolina and the Mid-Atlantic region alone. So we’ve had some good success in those market. The full year production was over $0.5 billion. It’s been — the portfolio stands at $1.2 billion at year-end. So the program has worked very well for us, and those are high-value households in that we feel confident that with our digital capabilities and our analytics will be able to continue to penetrate that household with additional products and services. So it’s a good program for us. The credit quality is stellar in that portfolio.

Gary Guerrieri

We’re also rolling out as we speak, the small business side of that equation for the physician practices. So that’s something that we’re working to as we speak, and we’ll start to see some activity there as we get into 2023, this guidance base growth low.

Unidentified Participant

Perfect. I appreciate that. So you’re building on it. Thank you.

Operator

And ladies and gentlemen, with that, we’ll end today’s question-and-answer session. I’d like to turn the floor back over to Vince Delie for any closing remarks.

Vince Delie

Well, I’d like to just thank everybody for your interest and the good questions we had today. It was a tremendous year. We really hit on all cylinders. I think the company is in a really good position moving into this year, and that doesn’t come without a tremendous effort from our employees. So I’d like to thank all of our employees and executive leadership team and the Board of Directors for their support and confidence.

I think over the last four or five years, we’ve proven that we can execute on a number of levels, and this company keeps exceeding my expectations in terms of what we deliver and what our employees deliver in the field. So I want to thank them and thank our shareholders for sticking with us and supporting us and we’re really looking forward to the coming. So no matter what the challenges are, we’re going to get there and we’re going to win together. So thank you very much.

Operator

And ladies and gentlemen, with that, we’ll conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.