F.N.B. Corporation
Q1 2021 Earnings Call Transcript

Published: 20 Apr 2021

[Operator:]

Good morning, and welcome to the F.N.B. Corporation First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. . After today’s presentation, there will be an opportunity to ask questions. . 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.

[Matthew Lazzaro:]

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.

[Vince Delie:]

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.

[Gary Guerrieri:]

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.

[Vince Calabrese:]

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.

[Vince Delie:]

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?

[Operator:]

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

[Frank Schiraldi:]

Good morning, everyone.

[Vince Delie:]

Good morning, Frank.

[Frank Schiraldi:]

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?

[Vince Calabrese:]

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.

[Frank Schiraldi:]

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?

[Vince Delie:]

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.

[Frank Schiraldi:]

All right. Okay. Thanks, guys.

[Vince Delie:]

Thanks, Frank.

[Vince Calabrese:]

Thanks, Frank.

[Operator:]

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

[Jared Shaw:]

Hi. Good morning, everybody.

[Vince Delie:]

Good morning, Jared.

[Vince Calabrese:]

Good morning, Jared.

[Jared Shaw:]

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?

[Vince Calabrese:]

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.

[Jared Shaw:]

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?

[Vince Delie:]

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.

[Jared Shaw:]

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?

[Vince Delie:]

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.

[Gary Guerrieri:]

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.

[Vince Delie:]

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.

[Jared Shaw:]

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

[Vince Delie:]

Thank you.

[Vince Calabrese:]

Thanks, Jared.

[Gary Guerrieri:]

Thanks, Jared.

[Operator:]

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

[Michael Young:]

Hi. Good morning. Thanks for the questions.

[Vince Delie:]

Hi, Mike.

[Vince Calabrese:]

Good morning, Michael.

[Michael Young:]

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?

[Vince Calabrese:]

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.

[Michael Young:]

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?

[Vince Calabrese:]

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.

[Michael Young:]

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?

[Gary Guerrieri:]

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.

[Michael Young:]

Okay. Thank you.

[Operator:]

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

[Russell Gunther:]

Hi. Good morning, guys.

[Vince Delie:]

Good morning, Russell.

[Russell Gunther:]

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.

[Vince Delie:]

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.

[Russell Gunther:]

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

[Vince Delie:]

Thank you so much.

[Vince Calabrese:]

Thanks, Russell.

[Operator:]

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

[Elan Zanger:]

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?

[Vince Delie:]

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.

[Vince Calabrese:]

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.

[Elan Zanger:]

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?

[Vince Calabrese:]

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.

[Elan Zanger:]

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

[Vince Calabrese:]

Thank you.

[Operator:]

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

[Samuel Varga:]

Good morning. I’m on for Brody.

[Vince Delie:]

Good morning.

[Samuel Varga:]

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?

[Vince Calabrese:]

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.

[Vince Delie:]

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

[Gary Guerrieri:]

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.

[Vince Delie:]

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.

[Gary Guerrieri:]

That’s really where it's at today.

[Samuel Varga:]

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?

[Vince Calabrese:]

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.

[Samuel Varga:]

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?

[Vince Delie:]

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.

[Samuel Varga:]

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

[Vince Delie:]

Thank you.

[Operator:]

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

[Brian Martin:]

Hi. Good morning, guys.

[Vince Delie:]

Good morning, Brian.

[Brian Martin:]

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?

[Vince Calabrese:]

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 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.

[Brian Martin:]

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?

[Vince Calabrese:]

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.

[Brian Martin:]

Okay.

[Vince Calabrese:]

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.

[Brian Martin:]

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?

[Vince Delie:]

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.

[Gary Guerrieri:]

It's very active.

[Vince Delie:]

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.

[Brian Martin:]

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

[Vince Delie:]

Thank you, Brian.

[Vince Calabrese:]

Thanks, Brian.

[Operator:]

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

[Vince Delie:]

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.

[Operator:]

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