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FNB Corporation (FNB) Q3 2021 Earnings Call Transcript

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FNB Corporation (NYSE: FNB)
Q3 2021 Earnings Call
Oct 19, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the F.N.B. Corporation Third Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Lisa Constantine, Investor Relations. Ms. Constantine, please go ahead.

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Lisa Constantine -- Investor Relations

Thank you. Good morning, 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. The 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 Security and Exchange Commission, and available on our corporate website.

A replay of this call will be available until Tuesday, October 26th, 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.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Thank you, and welcome to our third quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. FNB's third quarter earnings per share was $0.34, representing an increase of 10% on a linked-quarter basis and bringing year-to-date EPS to $0.94. Our performance across our core businesses led to record revenue this quarter of $321 million, up 18% on a linked-quarter annualized basis with strong underlying momentum visible on our loan growth, pipeline, fee income, and digital customer engagement.

Let's look at each one of these core building blocks starting with loan growth. Our spot loan growth, excluding the impact of PPP forgiveness, is 8% annualized linked-quarter, driven by a strong pickup in lending activity in both the commercial and consumer portfolios. Spot commercial loan growth totaled 7% annualized on a linked-quarter basis with positive growth in nearly every region across our footprint, notably the Pittsburgh, Cleveland, Harrisburg, and Raleigh region. Consumer lending grew over 8% annualized linked-quarter, led by increases in residential mortgages and direct installment home equity.

As evidenced by the spot loan growth, our teams had a strong quarter, and overall loan production reached record levels as the economy continues to recover. We saw healthy pipeline build and a slight increase in line utilization with the pipeline being up nearly 12% year-over-year. In prior earnings calls, we indicated our expectation for improvement in loan demand and that is now materializing.

Commercial had record production in September and the consumer pipeline jumped 27% year-over-year. Mortgage activity has slowed more recently because of the decline in refinance activity due to higher interest rates -- due to the higher interest rate environment. In addition, revenues have decreased as margins have normalized. Overall, we are optimistic that our total loan pipeline indicate a path for sustained growth.

As we have continued to execute our strategic plan, non-interest income reached a record $89 million with strong contributions from capital markets and wealth management, as well as solid SBA revenue. Our emphasis on diversifying revenue streams has become even more important during the low-rate environment. Through our efforts of enhancing our product suite and expanding our services, our non-interest income now comprises 28% of our total revenue.

Our clicks-to-bricks strategy, introduced several years ago, was designed to integrate our mobile, online, and in-branch channels for a seamless and convenient banking experience. Our philosophy of continuing to invest in technology has resulted in many industry-leading offerings, including our e-store solution center, which features a retail shopping cart experience, our mobile app and our website with videos and substantial digital content. After launching our new website at the beginning of last year, our website engagement has increased 13% year-to-date compared to the same period in 2020, which included increased usage due to COVID and PPP origination.

The platform we built with clicks-to-bricks has been extremely important, driving the increase in adoption and usage of digital channels. We continue to make enhancements to provide our customers with the most flexible banking option as demonstrated by our online application functionality that enables customers to quickly and easily apply for multiple products, including consumer deposits, credit cards, and home equity and mortgage loans.

In May, we launched our digital applications for mortgages on our e-store. And since then, 61% of all applications came through our digital channels, and those -- and of those applications, approximately 46% were submitted outside of normal business hours or on the weekend. In addition, over half of our credit card applications were made digitally in the third quarter. Online applications for small business loans and deposits, as well as auto loans will be available by year-end.

And next year, we plan to launch a single unified application for virtually all FNB loan and deposit products to make the shopping experience for multiple products even easier. Our new interface will reduce customers' input by eliminating redundant application fields and expand our clients' capabilities to upload information in a secure portal to expedite approvals. Broader use of e-signature and automated documentation and disclosures will also be added over time.

F.N.B. recently introduced a chatbot, which will apply artificial intelligence and automation to assist our customer service employees in supporting our customers. The chatbot will identify policies and procedures and provide recommended scripting to address the Top 100 frequently asked questions. We are excited about both the current and upcoming enhancements to our digital platform, which will continue to drive increased client engagement and client acquisition and improve our operating efficiency while differentiating F.N.B. in the marketplace.

With that, I will turn the call over to Gary to discuss our asset quality position. Gary?

Gary L. Guerrieri -- Chief Credit Officer

Thank you, Vince, and good morning, everyone. Our credit portfolio ended the third quarter very well positioned, following continued positive results across all of our key credit metrics. This solid performance was marked by further improvement in the level of delinquency and non-performing loans, reductions in rated credits, and low net losses for both the quarterly and year-to-date periods. Additionally, improving trends across the broader economy and government stimulus have further contributed to these favorable results, including deferrals, which have reached an immaterial level of only 0.2% of total loans.

Let's now review some of the highlights for the third quarter. The level of delinquency, excluding PPP balances, ended September at a very solid 71 basis points, a 9 bp improvement on a linked-quarter basis, reflecting a notable improvement in non-accruals within the commercial book. The level of NPLs and OREO improved to end the quarter at 49 basis points, representing a 9 basis point reduction from the prior quarter's ex-PPP level. The reduction in NPLs during the quarter totaled $18 million and when compared to the year-ago period when NPLs had reached their peak, declined by $68 million, representing a solid 38% year-over-year reduction.

Net charge-offs for the quarter were very low at $1.6 million or 3 basis points annualized, while year-to-date net charge-offs were solid at 7 basis points on an annualized basis. We recognized a $1.8 million net benefit in the provision during the quarter following these improvements in our credit quality position. This resulted in a GAAP reserve position that was down 1 basis point to stand at 1.41% with the ex-PPP reserve decreasing 6 bps to stand at 1.45%.

Our NPL coverage position further improved ending September at a very solid level of 317% following the noted reductions in NPLs during the quarter. Our total ending reserve position inclusive of acquired unamortized discounts totaled 1.56%.

In closing, we are very pleased with the position of our portfolio moving into the final quarter of the year and the continued progress we've made to further reduce non-performing and rated credit levels. We remain vigilant and attentive to any emerging risks in both the broader economy and within the markets in which we and our customers operate.

With the continued supply chain and labor disruptions, elevated input costs, and the evolving nature of the virus, our approach to managing and growing our loan portfolio in this highly competitive environment remains balanced and consistent with our time-tested credit principles that have served us well throughout the various economic cycles. This foundation of sound and consistent underwriting, timely and comprehensive management of risk, and selectively pursuing opportunities that fit our desired credit profile will support our future growth objectives as we move ahead.

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

Vincent J. Calabrese -- Chief Financial Officer

Thanks, Gary. Today, I will discuss our financial results for the third quarter and provide guidance for the fourth quarter. Overall, this was a strong quarter, and we are very pleased with the results. Our continued strategic focus on diversified fee income contribution drove non-interest income to a record $88.9 million, up $9.1 million or 11% linked-quarter, leading to record pre-provision net revenue of $138 million on an operating basis and a return on tangible common equity reaching nearly 17%. Our tangible book value per share reached $8.42, an increase of $0.22 or 2.6% on a linked-quarter basis.

Let's walk through the financials in greater detail, starting with the highlights on Slide 4. Third quarter EPS increased to $0.34, up $0.03 over the prior quarter and $0.09 from the year ago quarter. On a linked-quarter basis, total revenue reached a record of $321 million, an increase of $13.6 million or 4.4% and drove net income available to common stockholders to a record $109.5 million, an increase of $10 million or 10.2%.

When excluding PPP, which is more reflective of the underlying loan growth, period-end total loans increased $463 million or 7.8% annualized on a linked-quarter basis with commercial loans and leases increasing $289 million or 7.4% annualized and consumer loans increasing $173 million or 8.5% annualized, building on the strong growth generated in the second quarter of this year. As Vince said, this loan growth was across the footprint with production levels 17% higher than last quarter and 45% higher than third quarter of 2020.

Let's continue with the balance sheet on Slide 7. Reported average loans and leases totaled $24.7 billion with average commercial loans and leases decreasing $942 million, which was entirely due to lower average PPP balances as we saw an acceleration of forgiveness and ended the quarter at $694 million.

On the deposit side, average deposits totaled $30.8 billion, an increase of $0.3 billion or 1.1% primarily in non-interest-bearing deposit accounts. We continue to see a shift in customers' preferences for more liquid accounts in the low interest rate environment as well as maintaining larger deposit account balances than before the pandemic. In addition, we have also seen an acceleration of deposit accounts opened digitally.

Turning to Slide 8, net interest income totaled $232.4 million, an increase of $4.5 million or 2% from the prior quarter. Moving to PPP contribution and purchase accounting accretion, net interest income increased $2.8 million or 1.4%, reflecting an increase in average loans, more favorable funding mix and lower deposit costs. We are expecting a slight tailwind for net interest income, excluding PPP contribution as a significant portion of our loan growth occurred during the end of the quarter.

Reported net interest margin increased 2 basis points to 2.72%, reflecting higher PPP contribution of 23 basis points and a 5 basis point benefit from acquired loan discount accretion, which was offset by higher average cash balances that reduced the net interest margin 26 basis points. Excess cash balances grew to $3.7 billion at quarter end, a 45% increase from June 30. When excluding these higher excess cash balances, acquired loan discount accretion and PPP impact, net interest margin declined 2 basis points.

Now let's look at non-interest income and expense on Slides 9 and 10. Record non-interest income totaled $88.9 million, increasing $9.1 million or 11.4% from the prior quarter with broad contributions from each of our fee-based businesses. Capital markets income increased $5.5 million, reflecting very strong swap activity with solid contributions from commercial lending activity as well as contributions from loan syndication, debt capital markets and international banking. Service charges increased $2 million, reflecting seasonally higher customer activity volumes.

SBA volumes and average transaction sizes continue to be strong with $2 million in premium income included in other non-interest income. Also included in other non-interest income was a $2.2 million recovery on a previously written off other assets.

Reported non-interest expense increased $1.7 million or 0.9% to $184.2 million this quarter. Excluding non-operating items, non-interest expense increased $3.4 million or 1.9%. On an operating basis, the increase was driven by salaries and employee benefits increasing $2.9 million or 2.8% due to production and performance-related commissions and incentives, consistent with record levels of total revenue, which was driven by diversified strong contributions from our fee-based businesses. Overall, we produced a strong quarter and believe we are well positioned for the fourth quarter.

Now, let's turn to fourth quarter guidance on Page 12. We expect PPP forgiveness to be $300 million to $500 million. With the PPP loan balances decreasing, we are estimating a range of $10 million to $15 million with a PPP contribution to net interest income compared to the third quarter's contribution of $27 million. Excluding PPP contribution, we expect net interest income to be up low single-digits relative to the third quarter.

Continuing to benefit from our diversified revenue base, we expect non-interest income to be in the high $70 million to $80 million for the fourth quarter. Non-interest expense is expected to be around $180 million on an operating basis, which is subject to normal production-related incentives and commissions as we close out the year. We expect the effective tax rate to be between 19% and 19.5%.

Lastly, I would like to quickly review our full year 2021 guide given last quarter. We believe we will meet our loan growth guidance of mid single-digits. We expect full year GAAP revenue to be up year-over-year, which will impact the production-related incentives and commissions, bringing compensation related expenses slightly higher. Full year provision is expected to continue its strong performance with incremental provision dependent on the level of loan growth. Overall, we believe we will finish 2021 with solid earnings.

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

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Thanks, Vince. We're pleased to announce that Howard Bank integration is currently underway, and overall, everything is moving very smoothly. We are impressed with Howard's employees and strong customer base, and look forward to working with them. We are still expecting to close the transaction in early 2022.

F.N.B. was once again recognized for our best-in-class digital strategy, clicks-to-bricks. We recently received a prestigious national award for our mobile banking experience. Our continued productive investment in our top mobile offering will soon have a new look and feel with chat support, a credit center, mobile statements and F.N.B.'s proprietary mobile e-store enabling product, service and financial literacy to be available within the mobile app.

Other features include Snap-to-Pay, which enables customers to add a payee by taking a picture of their bill and F.N.B. express deposit, where for a fee, select customers would be offered immediate funds availability for mobile deposited items.

Lastly, I'd like to offer a sincere thank you to all F.N.B. employees. This quarter's performance demonstrates the dedication and drive of our employees. It is because of each person's commitment to F.N.B. and our clients that we have been able to achieve record quarterly revenue. Our employees are the heart of our organization, and I want to thank them for their continued hard work.

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

Questions and Answers:

Operator

Yes, thank you. [Operator Instructions] And this morning's first question comes from Frank Schiraldi with Piper Sandler.

Frank Schiraldi -- Piper Sandler -- Analyst

Good morning.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Hi, Frank.

Frank Schiraldi -- Piper Sandler -- Analyst

Just wondered if you could -- Vince, you mentioned the $3.7 billion in excess cash, just wondering if you could talk a little bit about your thoughts on working that down over time. Do you expect most of these deposits to stick around? What is the expectation for maybe securities builds? Just trying to creep this to the bottom line.

Vincent J. Calabrese -- Chief Financial Officer

Yes. No, I would say, the deposits definitely have been very sticky, the PPP deposits, and we continue to have positive growth every quarter going back to the first quarter of 2020. The goal with the cash level is really -- the primary goal is to deploy it to fund loans as we move forward from here. There is opportunities with the Howard merger once we close that, probably $0.5 billion of that to work related to the borrowings, so that's an opportunity there.

On the investment portfolio, we're basically going to reinvest cash flows. We reinvested a little bit more this quarter. During the quarter, we reinvested $621 million on cash flows of 453 [Phonetic]. There were some opportunities there to put some money to work. Reinvestment rates at 113 [Phonetic] are better than the 15 [Phonetic] we're earning on the cash for sure, but still kind of running lower than the run-off rate of 190 [Phonetic] in the portfolio. So we may see the securities portfolio go up a little bit from here. We might pre-invest a little bit related to Howard's securities portfolio as we get between now and actually closing that. But the primary goal will be put it to fund loans and then using cash for some of the transactions in the first quarter. And in the first quarter, Frank, we take a full look at our whole balance sheet to see if there's other opportunities maybe to deploy some of that cash and any other borrowings that we have on our balance sheet.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. And then just on Howard, I wondered if you could remind us with the timing of the cost saves being extracted, what sort of accretion we should expect from that in 2022 specifically? And would that include things like you mentioned the borrowings that you could use the cash for?

Vincent J. Calabrese -- Chief Financial Officer

Yes, I guess, the overall accretion, if you go back to what we announced when we did the model, was 4% overall. That's kind of a full year -- fully phased-in basis, Frank. When we give guidance in January, we'll give -- we'll refresh everything as far as where they come on the balance sheet and all the different drivers for the full year, but that's really the most current figure we have.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. Have you -- just lastly on that, just in terms of the cost saves timing, I know, you've talked about in the past. I just don't recall when you expect those to be fully phased-in by?

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Yes, Frank, we mentioned in the first full year, we expect to get 85% of the cost saves by the end of the year. So we'll get a big chunk of that upfront with some of the actions we'll take, and then throughout the year, we'll kind of bring them in, and then like I said, we'll get to 100% in the second year.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. Great. Thank you.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Thanks, Frank.

Operator

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

Timur Braziler -- Wells Fargo -- Analyst

Hi, good morning. This is Timur Braziler filling in for Jared. Maybe starting on the loan growth this quarter, two consecutive nice quarters for commercial loan growth. I hear your commentary on seeing utilization rates spike up a little bit, gaining some momentum there. I guess, can you talk through what the utilization rate change was during the quarter? And then as you look at loan growth kind of ex the PPP headwind, this new momentum that you're gaining, how sustainable is this into 2022? And maybe can we get an early look at what your expectation is for 2022 loan growth?

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Right. I think -- this is Vince Delie. We'll cover the 2022 loan growth when we give guidance for next year. So I don't think we're going to dive into that right now. But if you look at the past two quarters, we've had pretty good growth across our geographies. If you recall, we've stated for some time now that our plan was to expand into multiple geographies where we can create enough scale to compete effectively and drive loan growth with geographic diversity, and I think that's happening. We're seeing growth coming from various parts of our footprint, which covers the seven state area. So we're seeing some good opportunities in the Carolinas. Charleston is doing very well. We expanded into Charleston a few years ago, and we have a great team there. Raleigh and Charlotte are performing pretty well. We've got a team in Greensboro that continues to perform well over time. And then our traditional markets, the Mid-Atlantic region with our expansion in Washington D.C. and the Baltimore markets contributing, Pittsburgh contributing, and Cleveland is picking up momentum. So we feel pretty good about where we sit.

From a utilization perspective, we've seen a little bit of increased borrowing on credit facilities that support manufacturing and other areas. I think, there's still a lot of cash sitting on the sidelines, and we are still -- many of our clients are still experiencing supply chain disruption, which really prevents them from building inventory position. And then you have the issues with commodity pricing for certain borrowers who basically are on the sidelines because of the higher cost of raw material that they're not stockpiling raw materials for projects, I mean, it's pretty evident, as you read about various aspects of the economy, but that's purely reflected in line utilization.

And then in terms of growth, the one thing I will say is that the pipelines have been fairly robust. We did close quite a bit in the last quarter. So we're rebuilding the pipeline. The pipeline, as I stated in my comments, is up double-digit year-over-year. So we're optimistic about that in the commercial space. On the consumer side, we have a very strong pipeline, I think, and that's up 27% year-over-year, so it appears that consumers have been borrowing.

Gary, if you could just comment on what we funded and line utilization and what we have in commitments that are out there?

Gary L. Guerrieri -- Chief Credit Officer

Sure, Vince. Thanks. In terms of commercial line utilization, specifically to the quarter, we saw a 1.8% increase. So it went from 32% -- a little over 32% to 34%, so almost 2%. So that was a positive move upward and touched on some of the things that Vince mentioned in the activity. And that all said, the supply chain issues and pressures across the economy are real. So that is holding some of that at bay a bit. But it was good to see that increase during the quarter.

The other thing that I did want to mention was, as we talk about the solid loan growth that we did experience, we even saw some significant unfunded closings and future loan growth to come. There were about $0.5 billion of loans that were closed and remain unfunded during the third quarter, and those fundings are split between C&I as well as CRE, and that will fund up over the next 12, 18, the tail end of over 24 months. But that's a really nice headwind for us from a loan growth standpoint as we look ahead.

Timur Braziler -- Wells Fargo -- Analyst

Okay. Thank you for the color. Maybe just switching gears and looking at some of the technology initiatives that are either already implemented or coming online over the course of the next -- the remainder of this year and into next year, can you just remind us what your strategy is as far as partnering with third parties versus building out some of the platforms in-house? And as you're starting to go more toward AI style approach for driving applications, is that going to be -- is part of the underwriting going to be handled by AI as well? And if so, maybe talk through that process as well.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Yes. And our approach is to control the interface. So from a proprietary perspective, we're developing the interface with the client. So our e-store solutions center that I mentioned is very exciting for us, and it opens the door for us to reach millions of customers across our footprint where we may not have physical locations. And they can actually go into the website, pick a product, put it in a shopping cart, put multiple products in the shopping cart and then check out by processing multiple applications. And what we're doing is we're continuing to refine that. We're continuing to add to that offering. We are working with a variety of technology companies, both large and small, to partner with to make that experience better. We are developing a proprietary omnichannel application, which will permit customers to open multiple products on a single application, and that's scheduled to be launched mid next year. I think that, as we move forward, we just added a couple of other products, we added loan products, we stood up the mortgage origination platform. So we've opened about 65% of our total applications in the mortgage business, for example, digitally, which includes the ability to upload information in a portal and process transactions. So that's all going extremely well. And we launched -- recently, we launched the ability to do consumer loans. We're going to stand up small business loans with a portal to upload information to help streamline processing.

So all of that's being built out on the front-end. We're partnering with various entities, large and small, Fiserv in some respect, and then smaller Fintech companies to help deliver the products, but they're being delivered within our framework. So our strategy is to create the interface, control the interface, build out the digital bank, make it as easy as possible to use and keep refining it and changing it. And I think it's been extraordinarily well received by our customers. We've gotten -- we received a national award for the e-store from BCX, which is a pretty prominent award in the mobile space. And when we incorporate that e-store into our mobile application, which is coming out in November, that will open the channel up to even more users. So web traffic is up considerably, mean, if you look at what we've done, I mean, we've actually been able to increase usage in our mobile app on a year-over-year basis, really looking at the first quarter of '20 versus the first quarter of '21 because that takes the pandemic into account. So basically, we're up 40% in mobile banking usage, we're up 25% in web traffic, we're up 29% in online banking usage, 60% -- 62% in Zelle Person-to-Person usage. We're averaging about -- our website also has the ability to schedule appointments through that shopping experience with various bankers or professionals within our company. We're averaging about 800 appointments per month. So it's been sustained. It's peaked at 2,700 during the pandemic and then has come down as people have greater access to the branches, but it's still been fairly robust. And we're averaging about 2,000 deposit applications per month through that site. So I think of all the things we talk about here, that's the most exciting part of what we're doing.

And then on the AI side, we're using analytics for a whole bunch of reasons. We developed a team. We have both the capabilities self-developed to process large quantities of data, so we have the people and we have the infrastructure and data management and the centralized hub to take information from disparate applications and process it fairly quickly. Millions and millions and millions of bits of information can be processed on our systems by our people. And then we have the data analytics team who works with marketing, they work with credit, they work with finance to utilize artificial intelligence to improve efficiency and to really understand product usage and position products for sale within that e-store and within the company. So all of that's going on. We're also using as another example would be the chatbot that we developed. And I think that our people are pretty much plugging in to the technology that we built out and thinking of ways to use it to drive efficiency and revenue growth. So very exciting stuff, and I'll stop there. I'm sorry, I went on pretty long, but --

Timur Braziler -- Wells Fargo -- Analyst

That's good color, VInce. Thank you.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Yep.

Operator

Thank you. And the next question comes from Michael Perito with KBW.

Michael Perito -- KBW -- Analyst

Hey. Good morning, guys. Thanks for taking my questions.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Good morning, Mike.

Vincent J. Calabrese -- Chief Financial Officer

Good morning, Mike.

Michael Perito -- KBW -- Analyst

I just have a couple of follow-ups. I wanted to stick on the technology side for a second, Vince, I was curious if you guys have taken a look -- or have anything incrementally you could share about kind of how the unit economics of growing customers is changing as you do more digitally versus kind of the branches historically? And maybe kind of weave that answer, the -- on the cost side, I know you guys aren't talking guidance next year yet, but the efficiency ratio has been fairly flat and you guys have managed to grow revenues a bit more than expenses. I mean, is that a dynamic that you think some of these investments can expand moving forward? Or do you really need rates at this point to kind of drive that efficiency ratio down further?

Vincent J. Delie -- Chairman, President and Chief Executive Officer

No, I think that, that -- those investments in technology will help us do two things as we move forward. It will help us generate revenue more efficiently because we don't have the infrastructure, the legacy infrastructure that we had with a huge branch system, for example. We've cut over 100 branches since I've been here and have still experienced growth. In some markets, we've closed branches, and because of our digital offering, we've actually grown deposits and loans. So that, to me, a clear indication that our cost to originate is much lower than it has been historically moving forward.

And then the growth that we've seen both from a depository and loan perspective is really aided by those investments in technology. And it's only going to get better as we become better, as we refine that delivery channel and improve it, it will become easier for consumers to engage us and get the products and services that they want in a very convenient way. And marrying that with the branch people with our clicks-to-bricks strategy is to integrate the branches into that e-delivery channel so that we have kind of concierge out there that know where people are shopping or what they're looking at online and then they're able to help facilitate sales within the branches. So I think it's all finally starting to come together. We've spent two strategic planning cycles investing in these areas. A lot of that investment is behind us. I mean, obviously, there's more to come, but a lot of the heavy lifting is behind us and it's embedded in our run rate. We've said that all along. We've not shied away from focusing on that because I truly believe that's the future of the industry and we need to be prepared to compete in that space effectively, and I think we've done a great job. Our people have done a phenomenal job of keeping us in the game.

Vincent J. Calabrese -- Chief Financial Officer

Plus, I would just add, efficiency opportunity to drive all the businesses through that channel. We've invested a lot like Fintech, getting each business trust, insurance, wealth business all through that channel, brings in more revenue, more opportunity for customers, helps to drive cost down and efficiency ratio. So that's another element of it too.

Michael Perito -- KBW -- Analyst

Helpful. Thank you. And then on the non-interest income side, I know you guys provided the guide for the fourth quarter. I wanted to talk about two items specifically though. I was wondering if you could maybe give us a little bit more color around the service charge line, which saw a really nice rebound. Is there anything more to that than just kind of a rebound of economic activity? And I guess, number one.

And number two, on the capital market side, anything new from a product or sales process going on within that? Or should we expect that line -- I mean, maybe not $12.5 million, but to be fairly robust if your commercial growth continues to be positive moving forward.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Well, there is two things there. In the -- when you look at fees related to depository transaction, we're really growing treasury management fee income. We've picked up because of the investments we've made and the new client acquisition strategy, we're getting -- we're gaining momentum in the fee space for providing treasury management services to commercial clients. So a good bit of that growth is attributable to that area.

And then on the flip side on capital markets, when you look at what we've done from a capital markets perspective, we continue to build out our capabilities. We have a very good team that focuses on syndicating both C&I and CRE loans, so we get paid to syndicate. We have a debt capital markets group that's taken off and we've done a number of transactions where we're able to participate in bond economics because of our debt capital markets capability that we just completed and built out. We're focusing on municipal finance. We've received the approvals that we need to move forward with generating fee income in public finance. We have a fairly robust government lending program. So that goes hand in hand. So our participation in bond economics within the public finance space will be important moving forward. And obviously, the derivatives area is the core -- pretty important core piece of what we offer and we've continued to add good people across our footprint to help us participate in that activity as well. So capital market is just really a combination of all of that.

And then I can't -- I have to mention our FX capabilities, we're able to compete very effectively against some of the largest players in the country and have won business in the upper middle market, large corporate space because of our capabilities, in FX, that was another area which we consider part of capital markets because they do hedging and spot transactions for customers. So all of that together provides us with a good, strong, diverse source of revenue streams within that capital markets business.

Michael Perito -- KBW -- Analyst

Got it. Helpful color. Thank you guys for taking my questions. Appreciate it.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Thanks, Mike.

Operator

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

Russell Gunther -- D. A. Davidson -- Analyst

Hey, good morning, guys.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Hi, Russell.

Russell Gunther -- D. A. Davidson -- Analyst

Just circle back to the loan growth conversation for a second, and I appreciate the mid single-digit reiteration, it assumes about a like amount for the fourth quarter to get there. And then Gary has a reminder about the consistent underwriting throughout cycles. The strong growth over the past couple of quarters at high single-digit annualized number, the growth in your markets you've moved into over the past few years with LPOs and M&A, I mean, is there any reason, just bigger picture going forward, we shouldn't begin to think about F.N.B. as a mid to high single-digit grower rather than mid single-digits? And what would keep you from feeling more comfortable toward the higher end of that type of a range?

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Well, historically, we have been high single-digit pro forma. For a long period of time prior to the pandemic, if you looked at the average growth rate for the company, we were double-digits, including M&A over a sustained period of time and high single-digit organic loan growth. We stripped out the M&A contribution and looked at it on an organic basis. We used to report that out to The Street. So as we move through the cycle, the disruption that we've experienced, which was fairly substantial, given the pandemic, I think we're going to return to those levels. And it's certainly doable given the investments we've made in our platform. If you really look at how we're structured for a $40 billion bank to have the opportunity to compete in 10 fairly large markets, right, where we have a substantial share in those, we consider them mid-sized cities and in the Southeast and the Mid-Atlantic and the Northeast, we have the potential to do that. And we're able to do that and still maintain our credit underwriting standards. I mean, we could grow even faster if we didn't have a great deal of discipline.

I'll let Gary comment further on that because he's on the front- end of this stuff. So I don't know, Gary, if you want to comment? Yes. Thanks, Vince. I mean, we're seeing continued opportunities at a very good pace. The diversification of the markets, we think, is absolutely critical. Russell, to your question, the impact of COVID has us from a guidance standpoint in that mid-single range. As you can see from the last couple of quarters, growth has been strong in that 8-plus percent range. So that's kind of where we like to be and that's where we expect to be and I think you'll see that as we move forward and put some of these issues behind us. That all said, there are supply chain issues that are real. Everyone knows that. Inflationary pressures, labor issues and availability as well as costs. So there's a lot of headwinds in the economy that need to continue to be worked through. But we're very confident in our ability to grow the loan book, and we feel good about what we've been able to produce in the last couple of quarters.

Russell Gunther -- D. A. Davidson -- Analyst

Yes. Thank you, guys. Understood on the growth trajectory. And then just one kind of tangential follow-up. So the recent M&A announcement, prior to that you've been pretty successful with the LPO strategy. As you think about the model going forward, how do you balance or how do you want to balance LPO versus M&A? And any particular market that you want to move into or scale-up in? And what's the best way to go about it?

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Yes, our focus, as I've said, historically, sometimes what I say is taken out of context, but I'll try to be real clear. We're really focused on organic growth on making sure the company is positioned to grow to provide benefits to the shareholders. So when an M&A opportunity comes up like Howard, sure, we're going to look at it, we're going to measure it against other opportunities to invest capital. And if we think it makes strategic sense for us to pursue that type of an opportunity, we'll do it in the most shareholder-friendly way we can. So returns on capital are important to us. We've historically -- we've said that repeatedly, we don't have tons of excess capital. Our strategy has been to grow tangible book value per share and maintain high returns on tangible common equity. So we continue to focus on that. And I think the digital strategy and our investments in the digital platform really gives us a considerable amount of upside as an organization. If we were a technology company without any revenue, people would be valuing us extraordinarily based upon the potential alone. So I look at that and say, how do we deploy capital? We're going to be very cautious about what we do. If M&A comes about, it would have to be something on the smaller end that fits into our footprint, that helps us gain efficiency or pick up clients, so we can use our investments in technology to drive revenue within that customer base. and that's the focus of the company.

Russell Gunther -- D. A. Davidson -- Analyst

Great. Well, that's it from me, guys. Thanks for taking my question.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Thank you. Thanks, Russ.

Operator

Thank you. And the next question is from David Bishop with Seaport Research Partners.

David Bishop -- Seaport Research Partners -- Analyst

Yes. Good morning, gentlemen. Clearly most of my questions have been answered. But Vince, maybe as you look across the various geographies and markets, are you seeing any difference in term -- differential in terms of loan pricing or opportunities that stand out more than others? Thanks.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

It's extraordinarily competitive across the board. I know everybody says that. And I tell my people I've heard that in my old career. Please don't tell me that, you just have to win, right? So you have to deliver the best products at the right time, structure the deal appropriately so we're all secure and the borrower gets what they need and accommodate them. So it's an extraordinarily competitive environment. I think there's spots where the pricing is a little better, but it's not materially different. And if you look at Cleveland, for example, which everybody says is a lower growth market, theoretically should have less competition, it's loaded with huge competitors, US Bank, Chase, Huntington, KeyBanc, PNC, so that market is as competitive as Charlotte, which is loaded with large competitors. So we have to execute better. We have to stay focused on customers. This is still a people business. So we have to make sure that our brand is aware -- people are aware of our brand in the marketplace, and they basically have the right people in those markets to drive growth.

If you look at our strategy from a visibility perspective, we went in, negotiated opportunities to name buildings in Greensboro, Raleigh, Charlotte. We have a 30-story office building with our name in it. And Charlotte is a very cost-effective way for us to promote our brand because we consolidated into that building and moved multiple locations into one building, and actually, those occupancy expenses are pushed, right, or maybe even slightly better. We did that in a number of markets because we bought smaller banks and then merged them together. We bought a big bank that hasn't merged all the operations. So we elevated our profile in all of these cities and we built out on a de novo basis, a very good -- we've optimized the delivery channel from a retail and commercial banking perspective in those markets. So long runway. And I think that we're very well positioned. Well, hopefully, I answered your question.

David Bishop -- Seaport Research Partners -- Analyst

Yes, hopefully. Thanks.

Operator

Thank you. And the next question is from Brody Preston [Phonetic] with Stephens Inc.

Samuel Varga -- Stephens Inc. -- Analyst

Good morning. This is Samuel Varga for Brody Preston.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Hey, there. How are you?

Samuel Varga -- Stephens Inc. -- Analyst

Good. How are you? My first question is around some of the FHLB borrowings, which you currently hold on the balance sheet. I understand that you're planning on using some of the liquidity to pay down borrowings on the Howard side. But I wanted to ask -- according to the last Q, there was about $1.1 billion that was swapped, it was supposed to mature this year. And so I just wanted to ask a little bit about what the repricing dynamic is around the new borrowing replacing the old ones.

Vincent J. Calabrese -- Chief Financial Officer

Yes, I can tell you, the home loan borrowings, we have $300 million more to mature in the next four months. There's $200 million in November with 30 basis points and then another $100 million in January and February at $134 million [Phonetic]. So once those two mature, we'll have $930 million left at 223 [Phonetic], and then that piece there, we'll evaluate as part of the kind of first quarter, the merger and really look at our whole balance sheet. So that's what will be left after that $300 million matures in the next four months.

Samuel Varga -- Stephens Inc. -- Analyst

Understood. Thank you. And then moving over to the fee income. Thank you for the color you provided on just all the different moving pieces there. So I wanted to ask for just a little bit of clarification here. The elevated swap fee income, is that kind of a reset to a higher run rate? Or is there -- is that more of a one-time in nature for this quarter and it's going to step back down? And if so, is there any corresponding offset on the expense side for that?

Vincent J. Calabrese -- Chief Financial Officer

Well, I would say, if you look -- I mean, it's definitely a record quarter for us. If you look over the last seven quarters, we've had three quarters that has had a north of $10 million and another quarter that had a $12 million [Phonetic] handle to it. So I mean, it's a little lumpy because of the capital markets and derivative side of that business. But I think to Vince's point, with all the businesses we've invested in, international syndication, and then the new debt capital markets capabilities we have, which has already added $0.5 million so far year-to-date in its first year of existence, I think that will supplement as we go forward. But it will be lumpy. I mean, our guidance for the fourth quarter doesn't have $12.5 million in it, but it still has a pretty strong number baked into that forecast north of where we were running in the second quarter.

Samuel Varga -- Stephens Inc. -- Analyst

Got it. Thank you. And then a quick last one. I just wanted to ask if you could tell me what -- how much of the PPP fees are left to be recognized?

Vincent J. Calabrese -- Chief Financial Officer

Yes, there is $20 million -- $20 million worth of fees left and then you have interest income on the remaining. Now $700 million is left. It's $20 million of unaccreted fees to come in and then we earned about $1.5 million to $2 million of interest income on that over the quarter.

Samuel Varga -- Stephens Inc. -- Analyst

Understood. Thank you very much for taking my questions.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Thank you.

Operator

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

Brian Martin -- Janney Montgomery -- Analyst

Hey, guys. Good morning.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Good morning, Brian.

Brian Martin -- Janney Montgomery -- Analyst

Just a couple of quick things from me. Just on -- back to the PPP for just a minute, it seems like most of that gets resolved in the first half of next year. I mean, you gave some guidance in fourth quarter, that gets -- if you got $20 million left, that gets a good chunk of it. So maybe first quarter, we're kind of through PPP. Is that fair or how to think about that?

Vincent J. Calabrese -- Chief Financial Officer

Yes, I think so. Definitely, by the middle of the year, Brian, I would envision it being totally gone. The pace of it, it moves around, right, there's clients, changes, we're thinking about tax return filings and when they want to file.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

There were different tranches, too. So you have to take that into consideration. The last $1 billion came on more recently, the last tranche.

Vincent J. Calabrese -- Chief Financial Officer

Yes, there is 576 of the 700 that's from round two.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Yes. So I would say -- I would expect that to come in over the first two quarters of next year.

Brian Martin -- Janney Montgomery -- Analyst

Okay. Got you. Okay. All right. And then just how about -- Vince, maybe just on the core margin, can you just talk about kind of the puts and takes the next couple of quarters here? I guess, it sounds like you mentioned a little bit of a tailwind maybe with the loan growth. But just kind of the puts and takes here in the near term on the core margin kind of ex the PPP, the liquidity and the accretion.

Vincent J. Calabrese -- Chief Financial Officer

Yes, I'll comment on the dollar, Brian, for net interest income margins, just too many moving parts going in different directions with excess cash on the balance sheet and everything. But if you look at the dollars, right, just I'll make a few comments here. So net interest income for the quarter went up $4.5 million. $1.5 million of that was related to PPP and the purchase accounting was down about $0.5 million. PPP was up $2 million. So you had $2 million -- $1.5 million -- $3 million that was related to just kind of core loan growth. The solid spot loan growth that we talked about in the second quarter and third quarter, obviously, contributes to that. We've continued to bring down the cost of interest-bearing deposits. We brought that down another 3 basis points during the quarter. So the average for the quarter was 21, and our spot as we sit here today is 18. So there's already kind of another 3 basis points of benefit in the interest-bearing deposit cost. And then the consumer CDs continue to roll down. It will pick up about 2 basis points a month on the CDs as they mature.

So if you kind of put all those pieces in there and then the level of excess cash, obviously, is significant from a margin perspective, right, as you could see on that slide that we've added, reduced the margin by 26 basis points for the quarter. So I mean, as we start to deploy that, that affects the percentage, for sure, and it also obviously affects the dollars in net interest income, so we've earned 15 basis points on that. So every dollar that we put to work for loans, obviously, is added here to the net interest income. So kind of that all being said is what's baked into our excluding PPP contribution kind of being up low single-digits in the fourth quarter versus the third quarter.

Brian Martin -- Janney Montgomery -- Analyst

Got you. Okay. All right. That's helpful. And just -- maybe I just misunderstood what you guys said or didn't quite kind of get it on the loan growth side. But I get the year-over-year pipelines are up. When you -- it sounded like you -- given the strength this quarter and the rebuilding that you're kind of going at right now the -- is the -- are the loan pipelines lower today than they were at the start of last quarter or similar type of levels? Just linked-quarter, how did the pipelines change?

Vincent J. Delie -- Chairman, President and Chief Executive Officer

It varies. It varies. The consumer pipeline is stronger. So it's up -- as I said, 27% was up substantially. The commercial pipeline is up year-over-year. On a linked-quarter basis, it will be down because we had a huge production, which was absolutely huge. And as Gary indicated, there's $0.5 billion in unfunded commitments that we'll fund up over time within that big production period that we have. So that's how I would look at it, commercial rebuild, consumer very strong, and as we move into the last quarter, hopefully, they balance each other out, and we're able to capitalize on some of the larger opportunities we have in the promotional pipeline.

Vincent J. Calabrese -- Chief Financial Officer

Plus you have the tailwind of the unfunded loans that we'll start to fund up. So that also benefits the loan growth.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

And that will carry over into next year as well. So that's not just one quarter.

Brian Martin -- Janney Montgomery -- Analyst

Right. Okay. Perfect.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Okay.

Brian Martin -- Janney Montgomery -- Analyst

Okay. Yes. And then just on the -- maybe one for Gary. Just on the classified, I think you said the rated credits were down, Gary. Just do you -- can you comment on just what happened with classifieds are criticized in the quarter? And then maybe just talk about how we should think about the reserve, prospectively, given how strong credit appears to be?

Gary L. Guerrieri -- Chief Credit Officer

Yes, continued positive movement across the criticized categories, Brian. And when you look at this quarter, similarly strong as compared to the last quarter, about $130 million reduction in Q3; about 60% of that reduction was classified. So continuing to be able to move classified assets off the books just in the normal course of other banks refinancing them. So our special assets team is continuing to take advantage of that opportunity with the underwriting that's being seen out there. So that is a positive move, and we'll continue to take advantage of that.

In terms of your question around the reserve, I mentioned some of the headwinds in the economy before, supply chain, inflation, labor costs, and those issues, those are real, as I mentioned. Subject to the economy staying strong and moving forward through those issues, I would expect that you'll see continued slight reductions in the reserve and potentially normalizing as you get into late 2022 and into 2023. So we'll see how the economy holds out and we'll continue to manage that as we go forward. Naturally, loan growth comes into play there as well, so something that we'll continue to monitor on a regular basis and manage accordingly.

Brian Martin -- Janney Montgomery -- Analyst

Okay. Perfect. Then maybe just one last one if I can sneak in. Just on the fee income, I think the service charges have been a topic in the industry with -- I guess, I saw the growth this quarter. But just as we think about that line item, it's something that continues to grow at this point or is this something where you guys are, I guess, looking at what competitors are doing on the service charge line going forward?

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Well, it depends on what category within the service line reporting item. Overdrafts, down. I would expect it to trend down. We rolled out a product, which just received certification where clients can't overdraft and it's our second best product in terms of sales performance. So I expect -- and I expect continued pressure to make changes in that category for the industry, not just for us. So that's not an area of focus. We're trying to look for ways to provide, we call them, high value fees to our customers and to build the revenue streams within other categories of the service charge area. So treasury management, as I mentioned, is one area where we've consistently grown double-digit in that area, but it's been muted by other contributors to that category. And we expect that to continue to grow. There are a number of other products that started rolling out. Debit card has done really well, actually rebounded pretty nicely from the pandemic. So you're seeing interchange contribution to that category. We continue to roll out commercial cards and procurement cards for our clients. That's driving interchange fees within the category. So like our capital markets strategy, we're looking for diversification within that area. And that's how we would view it going forward is modest growth in that category based upon that, the execution and diversification strategy.

Brian Martin -- Janney Montgomery -- Analyst

Perfect. Okay. That's helpful. Thanks, Vince. Thanks for taking the questions guys. Appreciate it.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Thank you.

Vincent J. Calabrese -- Chief Financial Officer

Thanks, Brian.

Vincent J. Delie -- Chairman, President and Chief Executive Officer

I don't know if we have any other questions?

Vincent J. Calabrese -- Chief Financial Officer

Hello?

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Hello? Is the operator still on the line? Okay. Well, I'm just going to close out the call. I think we're having some technical issues. So if somebody does have a question, please call us, and we'll try to respond appropriately.

But thank you, everyone, for participating in the call. I think we had a great quarter. There's a lot of very exciting things going on for us here at F.N.B. And I'm very thrilled about our positioning and where we sit and the quality of the portfolio and the work that our team has done. So I'd like to thank everybody for all of their contributions here at F.N.B., and thank you, our shareholders for continuing to invest in our company. Thank you. Take care, everyone.

Duration: 65 minutes

Call participants:

Lisa Constantine -- Investor Relations

Vincent J. Delie -- Chairman, President and Chief Executive Officer

Gary L. Guerrieri -- Chief Credit Officer

Vincent J. Calabrese -- Chief Financial Officer

Frank Schiraldi -- Piper Sandler -- Analyst

Timur Braziler -- Wells Fargo -- Analyst

Michael Perito -- KBW -- Analyst

Russell Gunther -- D. A. Davidson -- Analyst

David Bishop -- Seaport Research Partners -- Analyst

Samuel Varga -- Stephens Inc. -- Analyst

Brian Martin -- Janney Montgomery -- Analyst

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