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FNB Corp
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Welcome to the F.N.B. Corporation First Quarter 2019 Quarterly Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.
I'd now like to turn the conference over to Matt Lazzaro, Manager of Investor Relations. Mr. Lazzaro, please begin.
Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports on file with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and our earnings release. Please refer to these non-GAAP financial measures and forward-looking statement disclosures contained in our earnings release, related presentation materials, and our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website.
A replay of this call will be available until April 30, and the webcast link will be posted to the About Us Investor Relations and Shareholder Services section of our corporate website.
I will now turn the call over to Vince Delie, Chairman, President and CEO.
Good morning, and welcome to our earnings call. Joining me this morning are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. Gary will discuss asset quality and Vince will review the financial results.
Today I'll provide some first quarter highlights, which reflects strong performance and a solid start to the year with contributions from all areas of our company. I'll then provide an update to our strategic objectives and open the call up for questions.
We're very pleased with an exceptional quarter where operating earnings per share grew 12% year over year to $0.29 per share. Tangible book value per share grew to nearly $7. Return on tangible common equity was again industry leading at nearly 18% and the efficiency ratio improved by more than 200 basis points to 53%.
The mix of the balance sheet also improved as total loans increased 8% annualized on a spot and average basis, with strong performance in the Carolinas. On a linked quarter annualized basis, total spot Carolina loans increased 8% driven by 10% growth in commercial loans. For the total company, loan growth was concentrated in commercial with very strong origination volumes across our footprint, resulting in spot commercial loan growth of 11% and C&I growth of 29%.
Total revenues increased 3% year over year excluding the impact of Regency. Turning to fee income, continued positive results in our core fee based segments were highlighted by increases in our insurance, wealth management, and capital markets revenue, with capital markets reaching record levels of more than $6 million this quarter. Capital markets revenue included $800,000 of contribution from the Carolinas, more than double their contribution from the prior and year-ago quarters.
On the expense front, our management team has done an excellent job managing expenses over the past year, something that has been a critical focus. As evidenced this quarter, expenses were well controlled, resulting in a decline in run rate expenses for the third consecutive quarter and directly supporting the improvements in the efficiency ratio. These profitability levels resulted in strong internal capital generation driving the TCE ratio to 7.15% and increasing tangible book value per share by 13% over the last 12 months.
We are pleased with our strengthened capital position, especially while also rewarding our shareholders by returning $157 million in common dividends over the last 12 months. Asset quality continued to trend very favorably, a direct result of the actions taken to reduce overall risk, particularly with the sale of Regency in the second half of the year. I commend Gary and his team for their prudent and proactive approach as this philosophy has F.N.B. well positioned for the future and well equipped to perform through various economic cycles.
The team's commitment to disciplined and consistent underwriting and a desire to derisk the balance sheet with proactive management and the sale of non-strategic assets were a part of a difficult yet appropriate strategy that ultimately muted the underlying growth of the company. These actions were necessary to adhere to our risk management philosophy, despite expectations to report higher balance sheet growth throughout 2018.
Given that we are positioned more favorably, I'm highly confident that successful execution of our business model will become more apparent in the financial results moving forward. Later, I will talk about strategic initiatives.
But first, I'll ask Gary to comment further on credit quality.
Thank you, Vince, and good morning, everyone. We ended the first quarter of 2019 with our credit portfolio very well positioned as our key credit metrics continued to trend favorably and remain at multi-year lows.
Our GAAP results were solid for the quarter as delinquency stood at 97 basis points, a 10 basis point linked quarter improvement, while NPLs and OREO further improved to 58 basis points, a three basis point improvement over last quarter. Total net charge-offs came in at good levels at 14 basis points annualized, with the reserve position ticking up slightly to 82 basis points.
Let's now review some of the quarterly highlights for the originated and acquired portfolios. Turning first to the originated portfolio, delinquency remained at a solid level at 63 basis points, a slight improvement over the prior quarter. NPLs and OREO also showed a slight improvement on a linked quarter basis, ending March down 3 bps at 59 basis points.
Originated net charge-offs were solid at $4.8 million or 10 basis points annualized. The originated ending reserve position ticked down by 1 basis point to end March at 94 bps, which remains directionally consistent with the performance of the portfolio. Provision expense for the quarter totaled $9.2 million and adequately covered net charge-offs and organic loan growth.
Shifting now to the acquired portfolio, which totaled $3.8 billion at quarter end, our credit results were satisfactory and continue to be in line with our expectations. Contractual delinquency continues to move favorably as evidenced by an $18 million decrease on a linked quarter basis ending March at $102 million. The level of past due credits has been reduced by $55 million over the past year, which represents a 35% reduction since March 2018. The acquired reserve ended the quarter at $8.8 million, and inclusive of the credit mark, the total loan portfolio remains adequately covered, reflecting a combined ending coverage position of 1.34%.
As it relates to the upcoming CECL standard, our credit and finance teams have partnered together to implement and build out our CECL platform, and we are on track to fully comply with the new standard. As we finalize our analysis and the expected impact, we will communicate additional information during the third quarter.
In closing, we had a solid start to 2019 and are very pleased with the performance of the book during the first quarter, which was marked by positive credit results and a solid portfolio position. As I have communicated previously, we remain attentive and proactive in our approach to balance growth objectives and manage our risk profile, which we have been able to achieve through our position in higher growth markets where we can selectively seek out the most desirable credit opportunities.
Our core credit principles and philosophies continue to be front and center in all lending decisions we make across each line of business throughout our footprint, and we remain committed to our tried and true approach of consistent underwriting, attentive risk management, and portfolio diversification across various asset classes and geographies. We are closely monitoring micro and macroeconomic activities for any signs of softness during this later stage economy, and we'll continue to manage our books throughout all cycles using the disciplined, risk-focused approach that has positioned us where we are today.
I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
Thanks, Gary. Good morning, everyone. Today I will discuss our financial results and comment on our guidance for 2019. As you can see on slide 3, first quarter operating EPS total $0.29 a share, as we got off to a good start to the year. The quarter featured loan growth, especially on the commercial side, and our sustained profitability allowed us to continue to build capital with the TCE ratio increasing 10 basis points to end the quarter at 7.15. Benefits from executing our strategies is translating into continued build in tangible book value per share, while still paying one of the highest dividends in the industry.
Now let's look at the balance sheet for the quarter starting on slide 6. On a linked quarter basis, average loan growth totaled $440 million, or 8% annualized, including commercial loan growth of 10% and consumer loan growth of 5%. Growth in the commercial book was led by strong annualized growth in the C&I in leasing portfolios of 24% and 23%, respectively, while CRE increased 2% annualized. We were really pleased with those results as they included contributions from across the footprint. The consumer growth in the quarter was concentrated in residential mortgage up 16% and indirect auto up 7%, partially offset by expected declines in home equity lending.
Turning to deposits. On a linked quarter basis, spot basis, deposits increased $427 million or 7.4% annualized. In terms of average balances, total deposits decreased $87 million or 1.5% annualized during the quarter, reflecting normal seasonal outflows in municipal deposits. The first quarter is generally the low point for those accounts, and we expect to see balances build back into the fourth quarter as we move forward. We also saw average annualized growth of 14% in personal non-interest bearing deposits, 9% in personal money market, and 18% in business money market. On a year-over-year basis, total average deposits increased $1.2 billion, or 5.6%. These figures provide evidence of our ability to gather low-cost deposits.
Looking at the income statement, net interest income decreased 0.7% or $1.6 million and the net interest margin narrowed three basis points from the fourth quarter level. As you know there were a number of forces at play this quarter given the shifts in the interest rate environment. For us the following factors were key drivers: fewer days in the quarter, strong loan growth that I mentioned, seasonal decrease in average deposits which causes a temporary seasonal increase in average overnight borrowings, the impact of the December Fed move on the cost of overnight borrowings for the quarter, continued competitive environment for deposits, particularly for money market balances and time deposits, stable purchase accounting impacts with incremental purchase accounting accretion and cash recoveries the same as last quarter, and a net accounting benefit of $1.6 million in interest expense from retiring sub-debt in recent acquisitions. This was partially offset by $1.1 million of non-interest expense. Also, it's important to note that the full impact of the sale of Regency Finance's higher yielding loans is fully reflected in the current margin and the year-over-year comparison.
Let's look now at non-interest income and expense on slides 9 and 10. The decrease in operating non-interest income of $1.9 million was largely driven by lower service charges as is typical in the first quarter, as well as valuation adjustment on mortgage servicing rights due to the flatter yield curve.
Capital markets enjoyed a strong quarter, including record performances in swaps and international. We also continue to see growth in wealth management with 4.3% growth in trust services and 3.2% growth in securities commissions and fees. Insurance revenue was also strong at $4.9 million.
Turning to slide 10, operating expenses declined $4.4 million compared to the fourth quarter, marking three consecutive quarters of decreased expenses. Our expense control measures enabled the company to report an overall expense run rate that is lower than full-year 2018 levels.
The primary drivers were decreases in outside services and personnel expense, partially offset by an increase in occupancy and equipment related to seasonally high utilities expense and an increase in Pennsylvania Bancshares' tax expense. The downward trend in expenses over the last few quarters reflects our efforts to become leaner and more efficient, especially in our branch delivery channel. As evidenced, the efficiency ratio improved to 53.4% from 54.1%.
Overall, we think it was a good start to the year and we believe we are on track meet our guidance for the year that we shared in January. Next, Vince will talk about some of our growth strategies and cover some 2019 initiatives.
Thanks, Vince. As you may recall, we laid out some major initiatives over the last year, and I want to provide an update on the progress toward those objectives. In commercial banking, our teams are off to a great start. Nearly all 10 regions exceeded or met their origination goals through March. During the first quarter, we began to see nice contributions from other parts of our footprint, notably the Carolinas and Central Pennsylvania.
Looking at our C&I portfolio, the average balances increased 12% compared to prior year. This was led by very strong commercial production for F.N.B.'s commercial teams in Baltimore and Washington D.C., Cleveland, Pittsburgh, and Charlotte.
In the consumer bank, there has been tremendous progress toward improving the customer experience. I am proud to say that S&P Global Market Intelligence recognized F.N.B. for the second consecutive year after careful review of S&P's analysis. The report illustrates that features of F.N.B.'s mobile offering are more robust than most banks evaluated.
As transaction volumes trend higher in digital channels for F.N.B. and our industry, we fully anticipate continuing growth in our mobile user base. As a proof point, our mobile users increased 20% compared to 2017, with the number of mobile transactions up significantly over the last several years. In tandem with Project Ready, we will refine our consumer banking platform to provide customers with multiple outlets with their banking experiences consistent across digital and physical channels. Looking ahead, F.N.B. will expand its clicks-to-bricks strategy beyond retail banking. The first phase will include upgrades to our website with the deployment of enhanced customer onboarding capabilities and a new online shopping cart functionality.
We aim to leverage our technology investments by helping clients better understand and identify solutions to their needs. These new capabilities will provide value-added services to customers through our Help You Decide tool and expanded financial literacy modules. Phase one will also incorporate machine learning tools and other technology enhancements to bring clients more tailored products and solutions, while also reducing the number of keystrokes for our customers and streamlining purchases of products and services.
Along with our digital and physical investments, which are strictly designed to improve the customer experience when engaging with the bank, we have begun to reap the benefits from our extensive training and investment in our employees through our Foundations training program, both culturally and financially. Regarding our physical delivery channel, we continue to optimize our branch network as deposits per branch increased to $63 million, nearly double our deposits per branch in 2012 of $35 million. Through our ongoing optimization program, we have consolidated 36 locations since last May and will continue to add new de novo locations as we are repositioning F.N.B. in higher growth markets, including Charleston, Charlotte, and Northern Virginia.
Additionally, our loan-to-deposit ratio ended March under 95%, with total deposits up $1.4 billion on a spot basis year over year. Spot non-interest balances were up nearly $400 million, or 6.5% year over year and 8% annualized from the end of December. A key focus for 2019 across the entire company is to generate non-interest bearing and transaction deposit growth given the potential for margin pressure in the current interest rate environment.
Turning to non-interest income, our core fee based segments produced solid results in mortgage, wealth management, capital markets, and insurance. As I mentioned earlier, capital markets revenues have grown significantly for us, and current pipelines indicate a strong first half for syndication fees, international banking, and interest rate derivative revenues. In the coming months we'll continue to add insurance product specialists to complement our existing teams of bankers in the Mid-Atlantic and Carolina markets.
There is incremental opportunity across our footprint as industry disruptions occur and F.N.B. stands in a unique position to benefit. We offer a better platform grounded in providing high-quality customer service that enables us to compete more effectively in these markets against both larger and smaller banks. F.N.B.'s comprehensive and collaborative approach with our clients differentiates our institution by providing the customers with access to local decision making and local product specialist teams.
Recently, we've been successful recruiting bankers across our footprint, notably attracting key talent to expand the teams in Washington D.C.; Philadelphia; Charleston, South Carolina; Columbus, Ohio; and throughout North Carolina. It is crucial we continue to achieve results that fulfill our commitment to our shareholders, while managing risk and engaging our clients and employees in the highest professional and ethical manner. We are highly focused to better serve our constituencies by listening to their future needs and providing benefit for our customers, communities, fellow colleagues, and ultimately creating greater shareholder value.
With that, I'll now turn the call over to the operator.
Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And this morning's first question comes from Michael Young with SunTrust.
Hey, good morning. I wanted to just start on kind of the expense or efficiency ratio outlook. I know that's been a focus for the company for a while. Good to see some progress here in the first quarter. Could you just maybe expand upon that a little further? Should we expect a continued expansion of catchment radius or something like that with the branch network, and just kind of where are we headed as we move throughout the year going forward?
Sure. If you look at the expense level for the first quarter, it's very good level. Happy with having the third quarter in a row that it -- that it comes down. If you look at what's kind of baked into our guidance for the full year and for the rest of the year, I mean there's a variety of things that come through the expense base. We have annual merit increases that kick in on April 1st. So that kind of moves your expenses up a little bit. We do have some start-up costs for the geographic expansion that Vince mentioned into a variety of markets there, as well as you have increases in commissions that are tied to activity. So that's tied to increased revenue that comes through, and also impacts of continuing to invest in our infrastructure CapEx between systems, and just infrastructure to kind of invest in our systems.
So all of those things will come through kind of as you go through the rest of the year. So the first quarter is a very good level, but I wouldn't just multiply that by four. I mean, our guidance includes all of those things that I mentioned and just a general seasonal level of increasing expenses as activity picks up.
Okay, great. And maybe just switching gears to the strong commercial loan growth in the quarter. Was all of that originated or was there any portfolio purchases or Shared National Credits that were added during the quarter?
Yeah. It was -- it was very heavy across the board, Michael, with really participation from across the footprint. You'll recall during the January call that I did mention that we had a very strong pipeline of C&I opportunities with some very nice companies, including numerous investment-grade credits. So yes, there --- there is some Shared National Credit exposure in there. Those opportunities are opportunities where we want to become a meaningful part of the bank group and are able to do that now with the size of the balance sheet. It was really very broad across numerous industries, including industrial manufacturing, finance and insurance, public administration, professional and government services, and wholesale trade, so really across the board, and good participation from all of the markets that Vince mentioned earlier.
And last one, just if I could sneak it in, how -- what's the current balance of Shared National Credits in the bank.
The current balance of Shared National Credits is just a touch over $1 billion. And in terms of the performance of that portfolio it's grating out on the strong side of satisfactory. So it's a very high performing book of business and one that rates out very strongly.
That includes left lead where we're leading the syndication, by the way. So our philosophy overall is not just to rent our balance sheet. We tend to get into transactions where we have a meaningful relationship with the management team in footprint. We've hired many bankers from larger institutions. In many instances, those bankers have led those transactions or were involved in leading the transactions at their prior institutions. So I'd say our book is somewhat unique, in that there's -- there's ancillary business tied to the participation where we're actively participating and syndicating the credit. If we're not the extreme left, we're in the syndicate that assists with the underwriting.
Also, Michael, the build out of our capital markets platform has been positive from that standpoint and put us in a good position with some very, very nice companies.
Okay, great. Thanks.
Thank you. And the next question comes from Jared Shaw with Wells Fargo Advisors.
Hi, good morning. If we could start with the margin, I guess partly with the growth in the residential mortgage portfolio, is that trying to extend the duration of the portfolio of the balance sheet. And then when we look at the margin with the Fed pausing here and some of those FHLB borrowings rolling off, should we expect to see some growth in margin or will that be offset by the growth in the residential mortgages?
I guess, as far as the guidance for the margin, just a few comments. I mean, our overall guidance, as you may recall, is low-single digits, using kind of total debt number from last year. If you normalize for Regency, you get that mid-single digits kind of apples to apples. So as far as the quarter, obviously, the yield curve inversion put pressure on the margin for the quarter. And with the market now expecting a rate cut as opposed to two increases that we had built in to our budget, as a lot of other banks did, too, when we gave guidance back in January, so you're not going to have that benefit from those higher rates, obviously, as we sit here today, compared to the outlook that was there before.
So I think as far as the net interest income guide, I mean, the strong loan growth in the first quarter and our expectation that that continues should mitigate the impact of the NIM pressure on net interest income for the full year. We do expect to see less pressure going into the second quarter compared to the first quarter given, like you mentioned, with the Fed on pause, you don't have the overnight borrowings repricing up. And then we also have the seasonal build in deposits that I mentioned on a spot basis deposits were up $400 million. So the overnight borrowing level came down nicely on a spot basis and continues to come down as the deposit build. So that'll -- that'll mitigate some of the pressure you see on the -- pricing pressure on some of the deposits that I mentioned, too.
So I mean, overall, the net interest income guide, we're still comfortable with that guide. And the margin from here definitely expect to see more flattish as you go into the second quarter as compared to the kind of pressure that was there for all the reasons I mentioned in the first quarter.
And where was the -- where was the new commercial yield for the quarter?
I mean I could tell you in total, I don't have specifics for commercial. I mean, the loans -- the loan book overall, they're coming in about 20 basis points higher than the portfolio rate overall, if you look at it kind of excluding the purchase accounting, just looking at it on a -- I have it here, kind of a pure coupon basis. New loans are coming in, in the -- in the kind of mid 480s which is comparable to prior quarter and about 20 basis points -- 15 to 20 basis points higher than the starting loan portfolio yield. That's all in, everything.
Okay.
Spreads, I don't know if you guys want to comment on spreads, maybe just what we're seeing.
Spreads continue to be pressured as you're late in the cycle here, but really not much difference from the prior quarter. Higher quality assets are also bringing tighter spreads.
And then looking at capital it's good to see another good quarter of growth of the TCE ratio and you're continuing to build tangible book value and all the -- all the capital ratios with the dividend payout ratio now right around the 40% level and probably projected to go down with growth in earnings. How are you looking at capital, and at what point should we expect to see you maybe be a little more active on capital management now that we've -- we've sort of turned the corner there?
Yeah, I think we've talked in the past about the operating range right now being between 7% and 7.5%. We're obviously very pleased with the movement up the last couple quarters with the higher earnings and the dividend payout ratio being in the kind of low 40s, like you mentioned. So, I think that's really the operating range right now. The build in tangible book value is also obviously important. And that's been nice every quarter if you go back over the last five quarters or so. And that's been increasing at a little bit of an increasing rate, too, which is important. So I think building that tangible value is key.
I think as we sit here today, we still have CECL to finish modeling and work through that. So I think the way I would answer is that as we get closer to 7.5% over time, the higher end of that range, once we have the CECL answer, then there's opportunities to -- depending on the loan growth. If the loan growth stays strong, investing in the company is the best thing to do. So it kind of depends on the loan growth as you get at those kind of higher levels of that range. But once you're at that higher level of the range and you know the answer to CECL, there's opportunities where you could potentially take action as far as capital levels.
Yeah, if we can't deploy the capital with organic growth, we would return the capital in some form. We're not looking to build -- given the risk profile of the portfolio, we're not looking to build capital levels.
Okay, great. And then ...
Beyond what…
Great, thanks. Just finally for me, too, since you've expanded into the Carolinas, there's been a lot of more consolidation. Obviously, there's been the big deal with SunTrust and BB&T. Do you think that that provides incrementally more opportunities, higher than you had initially expected? And do you think we could see that sort of coming up in the near term with taking advantage of some of the market dislocation there? Or is it just more it just gives you more confidence in your already existing hiring plan?
Well, I think we've done a terrific job of hiring people already. I mean, we did an analysis of the team's we've hired at least 60% and we've hired -- turned over about 60% of those bankers and most of the hires have come from larger institutions throughout the southeast. So we feel pretty good about the talent that we have. We've had no problem attracting talent.
I think the company has a great culture and is situated well relative to some large banks from a product perspective. So we've been able to bring people in, Jared, without having the disruption. I think SunTrust and BB&T are both great institutions. I think I would not underestimate their ability to compete even through a large transaction, such as the one that's being done today.
Having said that, we're well positioned in those markets. We're now entrenched. We've become more highly visible. So we've elevated ourselves in many of those markets into the considered set from a decision standpoint with a client. So I think we're in really good place, and it's up to us to execute. That's how we view it. So we'll take what we get and we'll continue to focus on driving our plans.
Great. Thanks a lot.
Thank you. And the next question comes from Casey Haire with Jefferies.
Yeah, thanks. Good morning, guys. Wanted to touch on the fees. I guess if there's one part of your guide that's tracking a little light, it's that one. Vince, I know you mentioned a couple of capital markets and insurance products pipelines are shaping up well. But just your confidence in hitting that low-single digit fee growth guide, and then also a sort of a corollary to that. If you guys were to come in light on the fees, would there be upside to price on the expense side?
Yeah, I think -- obviously, we don't have a crystal ball, so it's difficult to project beyond the next quarter. But I think based upon what we have in the pipeline, particularly from a syndications and derivative standpoint, those two areas are going to be really strong in the next quarter anyway, if everything plays out the way we expect.
Syndications, we've gotten a number of opportunities. We've started to use our balance sheet to participate in large syndicated deals where we're actually assisting with the syndication itself. So we're getting paid premium economics, which is where we wanted to be. I think we're uniquely positioned given the makeup of our bankers to participate in that space and the size of the company. So that's a very positive thing for fee income, particularly in the capital market segment.
Insurance and wealth, I'm very confident where it is. The first quarter is typically not our seasonal peak. We've already got growth. There's a strong pipeline. Those two areas I feel very confident about. International banking, we had a record first quarter in international banking. We've successfully built out the team. So there are product specialists spread across the footprint. We've upgraded our platforms. We have a tremendous leader in that space, as well as derivatives. So I'm very confident that they will get us to where we need to be in terms of the guide.
The unknown variable really is on the consumer side. I mean, obviously, consumer fee income has been trending down. The mortgage banking business is volatile, given the changes in interest rates. I mean, there was a large impairment in this quarter which really brought down the contribution from the mortgage company on the servicing portfolio. We don't expect that to repeat. We've got good solid pipelines in the mortgage banking space. We've added to the teams across the southeast. So we've got some good production...
Seasonal pick up ...
...with seasonal pick up that comes. So I feeling pretty good about where we sit. So I don't expect that to be a miss. I'm hoping we're able to execute and deliver something better. So we'll see.
Okay, I mean, if you were to come in light, would there be flexibility on the expense side versus the flat ...?
Yeah, I think we've demonstrated here that we have the ability to manage expenses aggressively, if necessary. I think that what we've tried to do is take cost out of the delivery channel, but we're also reinvesting in the company. I mean, we have a number of de novos in higher growth areas that should contribute and start contributing. We've had great success in Charleston already. We've only opened one location there. So from a retail perspective, we've had bankers in that market from the prior acquisition and a fairly sizable commercial portfolio that's growing nicely.
I think that we have the ability to cut expenses, obviously. Some of the additional changes to the physical delivery channel would require CapEx spend, because I think we've taken out the low-hanging fruit. I mean, now we're getting to the point where if we're going to take out two branches, we probably would have to find a new location and consolidate into one of our concept branches. So that would require CapEx spend. We are looking at that. So we are continuing to focus on that. The website that I mentioned, there's product -- a lot of what we're doing is proprietary. So there is some capital investment in the development of our website, which I think is going to be extraordinarily well received. I've seen the prototype. It's going to be terrific with an Amazon-type shopping experience. That's coming later in the year.
Anyway, those are the things that are happening. And obviously, we have the ability to pare back expenses if we need to.
Okay, all right, great. And just switching to credit, which actually -- that guide actually of $65 million to $75 million, that actually looks pretty conservative versus your starting point here in the first quarter. And the credit metrics are very stable. I'm just -- is that conservative, or are you -- are you just baking in some normalization on the charge-off for the rest of the year?
Yeah, I can comment on that, Casey. I guess just a few data points. Like if you look at last year, we ranged from $14.5 million to $16 million a quarter. The full year was $61 million. So our 2019 guidance of $65 million to $75 million, based on the current credit outlook, obviously, combined with the need to reserve for the strong loan growth that we had and kind of expect to continue. So, with a good start to the year, we do need to provide for that. And if you look at the first quarter, we had a provision of $13.6 million, net charge-offs were $7.6 million. So we've built the dollars of allowance. The basis points I think came down one basis point. So it's a function of the kind of planned growth in the portfolio.
And then lastly, the net charge offs in the first quarter were very good. The first quarter typically is the lowest quarter for net charge-offs. So you can't just annualize that. We're going to work hard to try to be at that level. But you can't just annualize that. So I think the combination of very low charge-off level in the first quarter and the expected loan growth gets you to basis for the guidance that we have out there.
Okay, great. And just last one for me, two housekeeping items. One, what's the expected tax rate going forward and the acquired run-off during first quarter?
Yeah, the guide for the full year was 18%. I mean, it'll move around a little bit. We have some tax credit opportunities that are teed up for either the second or the third quarter. So I think for the full year around at 18% is still kind of a good level to use. As far as the acquired runoff, I mean, we had a very good quarter there. I mean, the number moves around a little bit, but the runoff was $287 million in total -- for the total acquired loan book. That was down from $377 million last quarter. And about 65% to 70% of that is related to the Carolinas.
So, having that number come down by $90 million, obviously, let some of the activity going on down there show through more, and generate some of the net growth that Vince and Gary talked about earlier.
Thank you. and the next questions Frank Schiraldi with Sandler O'Neill & Partners.
Good morning. Just a couple of -- couple questions. First on the -- just given the strong C&I growth, just trying to get a sense of what these corporate clients they are onboarding look like versus what you were onboarding a couple of years ago. And I know Gary mentioned, it runs the gamut geographically, but just kind of wondering if you could talk a little bit about what the average relationship looks like in terms of size, and maybe what the biggest relationships look like that are coming on -- that are being on-boarded now versus couple of years ago?
Well, I think that, first of all, there's not much of a difference between what we were bringing on a few years ago and what we're bringing on today. So we're still focusing on the middle market. The sweet spot for us is still $10 million to $15 million in the upper-middle market and $3 million to $5 million in the lower-middle market in terms of outstandings. We still have the same philosophy. Where we are a full service provider, we don't just rent our balance sheet. We're not just looking for pieces of credit to book. We go in and pitch treasury management, while private banking services for the principals. And the bankers are still incented the same way. We haven't changed our incentive compensation plans materially for the last five years.
So, the focus is still there. Having become a larger institution, sure, we've invested in our capital markets platform. We are starting to see opportunities where we can step up and lead transactions, where we're the agent bank, or we're a part of the agents' group and title. And we're actually still able to provide products and services to those larger companies.
So the change I think -- the only change that's really occurred is the size of the balance sheet and our ability to do things with larger companies. So we don't play actively in the private equity sponsor space. So we're still focused solely on companies that are in market that we can provide capital to that are growing. That doesn't mean we don't do leverage transactions from time to time. But the focus hasn't really changed.
I don't know if, Gary, you want to comment further.
Yeah. The other thing that I can add, Frank, is the granularity in the book continues to be very, very good for the company. When you look at the top 50 clients, the total committed has moved up a little due to the balance sheet that Vince mentioned, our ability to handle some larger clients, it's at $49 million now. The amount borrowed on average across those top 50 clients is only $27 million. So, again, it's very granular from a balance sheet standpoint.
When you look at the CRE side of the house and look at the top 50 on the CRE side. The average is in the low 30s and the average outstanding in the low 20s. So very, very granular positions continue, based on the way we manage the company across the book.
And we've been saying this for the last 18 months to 24 months, but we've taken the opportunity, Frank, to take out certain credits that don't meet our criteria. So Gary has sold five to six portfolios, we sold Regency Finance Company given where we are in the credit cycle. I mentioned in my prepared comments that Gary's team has done a terrific job. And there was incredible pressure on us to report growth, particularly in the new markets that we expanded into, but I felt that our credit team under Gary's leadership did a terrific job of emphasizing credit quality over growth. And that's not an easy thing to present. So with a lot of that behind us, we're in a better position. We're going to report, I believe, more solid growth numbers without that headwind.
Okay. All right, great. And then just lastly, Vince, I'm sorry, if I missed an update, but I know on the last call you talked about the Carolinas and talked about two of the four regions having sort of met expectations from a commercial growth standpoint. And just wondering what you have to do to get the other regions up to speed if not there already, or can you just sort of give us a little more color there?
Well, I mentioned in my prepared comments that all 10 regions are tracking from a production standpoint and that North Carolina in total on a linked quarter basis was up 10%. So we -- I think they're beginning to contribute. There's a good pipeline across the board there. So I feel pretty confident that they're going to continue to do that. We have great people. I'm very proud of the people we've been able to retain and hire. They're very committed to the company. They're embedded in the markets. We're doing a lot more to position the company for them. We've spent a lot of money on training. We've trained everybody in the market. We took all the branch managers, 100 of them through centralized training here. I mentioned that in my prepared comments. We've tracked the progress before and after that training and production's up significantly from those teams. So we're executing our plan as we've indicated. And as I've said, I think we have fewer headwinds to deal with.
Okay. Thanks for the color.
Thank you. The next question comes from Austin Nicholas with Stephens.
Hey, guys. Good morning. Maybe just to hit back on the margin, is it fair to say that the comments on the flattish margin is off that, call it, core 3.14 number as we kind of exit 1Q or is there some variability in that, given kind of debt extinguishments that we saw this quarter in some of the deposit flows?
Well, the debt extinguishment, the $1.6 million is about two basis points worth of benefit that was in the margin for the quarter. So if you're looking at -- just pull up the slide, yeah, the $3.26 million, in total you had the 13 basis points from the purchase accounting. So that brings you down to $3.13 million. And there were a couple basis points from that $1.6 million that we mentioned. And then as you go forward, you just have the cost of the new sub-debt minus the cost of what you retired. So that's kind of the underlying kind of core number if you wanted to get to a number excluding the purchase accounting.
And then as I mentioned, you had the other impacts for the quarter where all the items that I mentioned in my remarks, with the biggest driver really being the short-term borrowings that were about three basis points of pressure on the margin that we don't expect that to recur. You're not getting another Fed move. And, as I mentioned, the spot deposits are already up $428 million or something during the quarter, and the overnight borrowings have come down by similar amount. So that kind of benefits the second quarter going forward.
Got it. Okay, thanks. That's helpful. And then I guess maybe just -- Gary, maybe a question for you. As you think about maybe those five to six portfolios that were sold in the past, and then maybe more broadly I guess anything in the -- in the market, not necessarily in your book that you're seeing that worries you from a credit perspective in terms of specific businesses or specific terms that you're seeing offered that are -- that are maybe different today than they maybe were a year ago would be helpful.
Yeah. In terms of the portfolio, Austin, it stays well positioned today as it has been in quite a number of years. We've worked very aggressively to take risk off of the table over the last two to three years as we've -- as we've touched on earlier, and when you look at -- when you look at the portfolio, there's no segment of it at this point that causes me any concern whatsoever.
Naturally, we all hope that the economy continues to hold in there and that the cycle continues to be positive, as we look forward. But at this point, we're very pleased with the position of the portfolio and its performance.
Understood. Thanks. And then maybe just one last one on mortgage. Appreciate the comments there, but any comments on kind of where your spreads were coming in this quarter versus last quarter? And kind of how you saw them kind of exiting the quarter just in terms of gain on sale spread would be -- would be helpful?
Yeah, I can comment on the gain-on-sale margins for the quarter was $159 million. Little bit higher than -- 11 basis points higher than fourth quarter, but year-over-year down about 17 basis points. So that number as you know around quite a bit. It depends on the mix of correspondence versus retail as well as competitive pressures there. But for the quarter, we were at $159 million. And the production is seasonally lower, as you would expect. It was just a little under $400 million for the -- for the first quarter. And we do expect that to kind of pick up as you get into the kind of the buying season.
And the next question comes from Collyn Gilbert with KBW.
Thanks. Good morning, gentlemen. Just wanted to circle back on the NIM quickly, first, Vince. I presume that your -- the accretion guidance that you had -- that you guys had given of $20 million to $30 million for '19 still holds? Or are there any changes to that outlook?
Yes. No, I think that's still a good number, the $20 million to $30 million range. The first quarter was a good performance there. We re-estimate that every quarter, and the portfolio itself is obviously shrinking, right. So it's a discrete pool of loans that will come down year over year. It came down about 28%. So it's a shrinking balance that's generating the accretion. It's been nice and stable the incremental piece at 12 basis points the last two quarters. But the first quarter was a good level. We're still comfortable with the ranges there. Obviously, if you annualize the first quarter, puts it up at the high end or even above the high end. But like I mentioned, the pool continues to -- just through normal amortization and the normal payments will continue just to come down because you're not adding to it.
Okay, that's helpful. And then just on the -- on the loan growth, I guess, specifically on C&I, that was really strong this quarter. And Vince, I think you had indicated last quarter you’re your through maybe was in 2019, you'd see less pay-downs happen than what you saw in '18. Just curious as to what the trends were like in pay-downs this quarter, and then what your outlook is if you can give any thoughts as to what you think the outlook could be this year for pay-downs?
Well, I think that the pay-downs were accelerated last year because of the portfolio sales and some of the exits that Gary had planned.
And the commercial real ...
And the commercial real estate market was much more active, Collyn, in terms of take-outs I think that slowed a little bit for us. I think that we're in a good position here with fundings on the construction side and large construction side funding up certain opportunities.
From the C&I perspective, I think that we just had a decent pipeline. I mentioned on the last call that there were several larger opportunities that got pushed from the fourth to the first quarter. So we were able to benefit. Everything just kind of fell in place there. We had good production across the footprint. So it contributed the way we had planned for to contribute all along. So without the big payoffs and everybody contributing, I think that's what's leading to the -- to the growth, and we're optimistic that that will continue.
The CRE piece moving into the secondary market, Collyn, last year was fairly heavy. It's kind of a function of when you started those projects, finishing the construction period, getting to stabilization, and then moving on. There was more activity when you look back three plus years ago of those type of projects. You'll have the sporadic one here or there at this point of the cycle, but it was -- it was very heavy based on the investment activity that started three, four, or five years ago.
And then Collyn, as far as the acquired, I would just -- if I look back at the last five quarters, the run-off there has been as low as -- this $287 million is the lowest we've had. It's been as high as $417 million over the last five quarters. So I think as where we are relative to the acquisition date, I would expect the number to be more at this lower end of the range than at higher end of the range, but it does move a lot from quarter to quarter.
Okay, that's helpful. And then just on the resi book, Vince you know what the split is between ARMs and fixed and then what the blended yield is on the resi mortgage book right now?
I don't have the ARMs to fixed handy.
It's 90/10.
90/10?
Yeah.
Yeah.
90/10 ARMs versus fixed or other way around?
Fixed versus ARMs.
No, fixed versus ARMs, yeah.
Okay. And do you have ...
That's current production, right, or portfolio?
Portfolio.
Portfolio. Not current production, Collyn.
Got it. Okay. And then do you happen to have what the -- what the blended current yield is on the resi book?
I don't have that handy. And we can follow up with that.
Okay. Okay. And then just finally. Vince, I know you ran through a lot of detail as to what some of the initiatives you guys have ongoing within the bank. But I guess just more specifically, opportunities in the Carolinas, just given the SunTrust-BB&T merger, are there any kind of on-the-ground strategies or any sort of near-term initiatives that you have to be very targeted to take advantage of that disruption?
We do. I mean, we have -- we have calling initiatives. We have a pretty robust system that tracks prospects. So we're able to understand where prospects are domiciled. So we do run those campaigns. But I think it's -- as I said earlier, they're both great institutions. They're good, solid banks. They're great in the middle market. At least, BB&T was a big competitor for us across most of our footprint; SunTrust only more recently in the southeast. But, they're both good competitors. So we're just going to have to execute. Nothing's easy.
So while there's disruption, I believe they're going to fight to keep their clients. We just need to keep calling consistently and offering good advice and bringing ideas to the table, and we'll get -- we'll get a seat eventually. But that typically there's -- it takes a fairly long time to develop a relationship with a client to where you get to the point where they trust you and they want to move their relationship to yourself. It takes a little more than the announcement of a transaction. They're going to have to screw something up from an execution standpoint to really make it easy, but I think they're good institutions. So that'll be a challenge.
Okay. Do you have ...
Hey Collyn, your question on the mortgage. So the origination rates for the fixed rate mortgages in the last quarter were between 450 and 470 is where we were putting those on for the fixed rate. And the adjustable rates are between kind of around 430-ish is where the adjustable rates were during the three months of the first quarter.
Okay. And did you -- did you happen to pull what the portfolio yields are in each -- on the book ...?
I just have the origination.
Okay. We can follow up.
We can slow that obviously, but yes.
Yeah. Okay. And then just, Vince, back to the BB&T-SunTrust discussion, have you guys -- do you have a sense of within your client base within the overlapping markets, how much of your customers have banking relationships with BB&T or SunTrust or maybe you have a portion of it, but maybe their lead relationship would be at that institution?
Yeah, we have a -- we have a general idea in commercial banking where we participate with BB&T or SunTrust, obviously. On the consumer side, it's a little more challenging. But we -- there are methods for us to determine if we have a split relationship, and we've explored those methods. So we -- like I said, I think we have a pretty good plan to go after business, just like we do routinely.
So we're not really going outside of what we normally do. We do this generally. So if we see a relationship that's split and some other institution is the lead, we pursue that opportunity, based upon the services that are being provided by that institution. And that happens all the time with us. We actually even write algorithms to help us source leads internally. And that's the normal course of how we generate leads for our consumer and commercial bank.
Thank you. And the next question comes from Russell Gunther with Davidson.
Hey. Good morning, guys. You mentioned, Vince, the Fed fund futures pricing and a potential for a rate cut. So, one, I wanted to confirm that your guys' NII guide no longer considers any rate increases. And then two, ask if there's anything you guys are considering at this point from a balance sheet strategy to protect against the rate cut environment?
Yeah, I would say that. I mean, we're always actively analyzing the balance sheet for opportunities to maybe create shelf space for like the very strong commercial loan growth that we talked about earlier, especially as we sit here today with CECL coming and we're definitely analyzing the longer-term components of the portfolio, things like mortgage, is there opportunities to move some of the on-balance sheet portfolio off the books, evaluating things like that. The indirect portfolio is a place where we could do some sales or securitize there. So we're looking at that as well as all the different asset classes on the balance sheet, particularly given the strong commercial loan growth that we had during the quarter. So we disclose our asset sensitivity information as far as any impact if rates go down, and for the plus 100, the plus 200, and the minus 100, I mean we have all of those figures that will be out there in the 10-Q. So, I would pause there.
Got it. Okay, great. And then on the capital front, so Vince, you mentioned kind of 7.5% TCE is that bogey where you might consider some capital return for deployment. And Gary, appreciate that we'll get a more complete CECL answer in the third quarter, but I just ask based on any of the early innings analysis you've done, is there anything that would suggest you would consider raising capital in conjunction with CECL implementation?
No, I would say, as we sit here today, as Gary commented, we're still going through the process. So now we're doing parallel runs. We're analyzing the different scenarios. There's a lot of moving parts to CECL. We're right on track with where we need to be. And then in the third quarter, we'll talk about what the results look like, at that point. And those won't be final, but based on the economic forecast outlook at that point in time.
Got it. Okay. And then, last one guys on the Philadelphia market, looks like you moved in there a little more meaningfully this quarter. Just give us a sense for kind of what your -- what's your exposure there is currently, what you see as the growth opportunity going forward for 2019?
Well, we've been calling into Philadelphia out of our Berks County operation for a while. So we are -- we were in Chester, we were Berks, so we were calling in that market. I would say that our move into that market was centered around opportunistic hiring more than anything. So I think we had planned on having some sort of loan production office in the market to assist with calling on companies, because we're still calling from outside of the market, and an opportunity came up for us to pursue somebody and several other individuals. And we felt it was appropriate at this time to do that.
That market -- when we did our analysis of the markets that we compete in, while that market is highly competitive, at least from our estimation, and we did not pursue M&A activity in that market because we couldn't find a reasonable candidate to gain enough scale to really benefit us there, we do feel that there are a number of opportunities there. So if we can go in -- it scores out very high on our matrix, our analysis of the top 100 MSAs that we've looked at.
So we felt that having some presence there from a commercial loan standpoint made sense. And that's really -- that's what drove that. And Columbus is similar. We've had people calling into Columbus for some time. So similar situation. We've had a person on the ground there, and unfortunately, he had an illness. So we had to -- had to replace that person. So we did that. And we have -- as I've said, in both markets, we have pretty sizable portfolios.
Appreciate it, guys. Thank you.
Thank you. And the next question comes from Brian Martin with FIG Partners.
Most of the stuffs' been answered. But just a couple questions, Vince, the loan portfolio, just kind of the loan pipeline, last quarter you kind of gave some guidance on these larger transactions that came through, and you talked about Carolina already, but just the pipeline today, just given the strength that was shown this quarter, can you just talk about how the pipeline looked today? Maybe the strong start to the year suggests that maybe the upper end of your 4% to 8% guidance seems to be more appropriate today based on kind of what we're hearing, but just kind of where that pipeline is at today.
Yeah, the pipeline, we sit in a good position with the pipeline. It's a good pipeline. It's pretty widely dispersed. I think your assessment of our guidance is correct and our guide to the upper end I think, Vince, is that correct to say...
Yeah.
...on loan growth. I would caution you though, because I think that from a net interest income perspective, we've -- there's margin pressure, too, right, because we ...
Okay.
So we're balancing it all out with expense control. And so while we are ...
The fee businesses...
The fee businesses and hopefully changing the mix of our liabilities. But I think that we're in a good place here. So we're feeling pretty confident about the upper end of the range on the guide that we gave.
Okay, perfect. Yes, that sounds like it. And just on the funding side, with the -- with the Fed on pause, I guess have you guys started to see the deposit pressure easing in the market? Again, is that kind of in some of the numbers this quarter? Or it starts kind of leaving the first quarter, just kind of how you're thinking on the funding side?
Yeah. I think we've talked quite a bit about that internally here. On the consumer side we saw irrational pricing. It seems like some banks had put their marketing programs into play before the change in outlook on rates. So there were some pretty aggressive money market rates in the marketplace. Commercially, I'd say the same. I think initially, early in the quarter, there were some pretty aggressive money market rates out there from competitors. But I think that's kind of stabilized and backed off a little bit as people had a clearer view of where rates were going.
So we're back to a more reasonable, I think, competitive climate. People are shaking their heads here. So I think that's a good sign. And it all depends on what happens with the economy. I think if things continue to chug along and there's loan demand, that could impact pricing. But then who knows what happens with the Fed. So we're just trying to drive -- we mentioned earlier, we're focusing on -- obviously, we get big inflows of deposits starting now. So it's already started. So the first quarter is usually negative, and then it builds significantly. So we're seeing that trend. That helps us because it reduces overnight borrowing with lower funding cost deposits. That should help a little bit, but we had rate increases baked into our forecasts that aren't going to happen, so.
Another reference point is just on the time deposits, Brian. So we've actually backed off some of our rates over the last few weeks on CDs just given the kind of the market environment that Vince is describing.
Okay. So I was going to ask, when you think about deposit strategies, because I know you said that was a focus of yours this year. Nothing else -- was there anything particularly doing on the -- on the deposit side to drive growth this year that was different than what you were doing before based on the change of the Fed here?
No, I'd say it's fairly consistent. Our people, they get compensated to grow non-interest bearing and transaction accounts. So they really don't get comped in the consumer bank on the -- on the time deposits or the high-cost deposit categories. We use that as a tool to market so that they're able to get the whole household. But that -- so the behavior is fairly consistent. We did step up our marketing efforts here, so we accelerated some marketing spend, so it should flow through. That's another area from an expense perspective. It builds over the course of the year, by the way. But we brought it forward because we felt there was an opportunity for us to do some things in the new markets that we're in. We were seeing some good momentum. So we brought the digital advertising forward and then had a more robust campaign here in April which should help.
And the non-interest bearing deposit focus is always there, so...
Okay
Particularly in the New York market, there's a lot of opportunity there still.
Okay. That's helpful. And just the last one. The tax rate you guys gave I thought was 18%. And you also talked about some of the strategies you're doing. Does that include some of the tax credit strategies you're thinking about over the next couple quarters that 18% type of rate?
Yes. Yeah, and that's kind of -- that would be the full-year rate, Brian, so yes that would include some tax credit activity.
Okay. I think, Gary, you mentioned that the Shared National Credit balance this quarter, how much of a change was that year-over-year linked quarter? Do you have an idea? Was that a big change or was it pretty insignificant?
It was up slightly, Brian. It wasn't anything that was extremely large.
Okay.
Again, the diversity in that book, there was a lot of names in it.
Alright. I appreciate it, guys. Thanks. Good start to the year.
Thank you. And as there are no more questions, I would like to turn the floor to management for any closing comments.
First of all, I'd like to thank everybody for the questions. I think we're very pleased with the quarter. I hope you're pleased with the quarter. We expect to continue the momentum. I think the team has worked really hard to position the company to deliver and to execute on our plan. I would just like to say thank you for continuing to show interest in F.N.B. and thank you for the great questions. So have a good day. Take care, everybody.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.