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FNB Corp
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Welcome to the F.N.B. Corporation's Second Quarter 2019 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 that 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 that's available on our corporate website.
A replay of this call will be available until July 30th and the webcast link will be posted to the About Us Investor Relations and Shareholder Services section of our corporate website.
I’ll now turn the call over to Vince Delie Chairman President and CEO.
Thank you, Matt. 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 second quarter highlights, which reflect strong performance during the first half of the year including -- and increased profitability from multiple business units. I'll then provide an update on our strategic objectives and open the call up for questions.
There are three important takeaways from our second quarter highlights. First, we continue to strengthen our capital position and drive enterprise value through tangible book value growth and strong returns on tangible common equity. Earnings per share was $0.29 on both an operating and reported basis. And when considering expenses related to branch closures and a non-cash charge of $1.3 million related to MSR impairment. Earnings per share totaled $0.30. When considering these adjustments, EPS rose 11% compared to the year ago quarter.
Second, this quarter's financial performance was driven by consistent operational execution with solid loan and deposit growth and record non-interest income. Highlights include growth in our capital markets fees, mortgage banking revenue, C&I portfolio and non-interest bearing deposits. Our expansion markets within Washington D.C. and the Carolinas have contributed [Technical Difficulty] and we expect continued momentum throughout 2019.
During the second quarter, F.N.B generated more than $2 million indications and interest rate derivative fee income from our new expansion markets. Those higher growth markets also contributed significantly to mortgage banking revenue growth, wealth management revenue and loan and deposit growth.
Lastly, we maintain favorable asset quality while growing and remixing the balance sheet [Technical Difficulty] competitive operating and challenging interest rate environment.
As you may recall, we pursued our expansion into the Southeast to provide sufficient asset growth opportunities to achieve our stated growth objectives, all while maintaining a favorable risk profile.
Additionally our disposition of higher risk portfolios contributed to our solid credit performance. These actions will serve our shareholders well as we move through the credit cycle.
Tangible book value per share grew to $7.11. Return on tangible common equity and the efficiency ratio were again pure leading with levels of more than 17% and 54%, respectively. The mix of the balance sheet continued to improve on an annualized linked-quarter basis, as average total loans increased 7% and deposits grew 8%, which fully [Technical Difficulty] funding needs of loan -- of the loan origination volume.
With solid performance across the footprint, the loan growth was driven by continued C&I growth of 20% annual loss. On the funding side, we were able to hold the core margin relatively stable as we are focused on generating non-interest bearing and transaction deposit growth. Successful execution of these efforts is evident with 12% annualized growth in non-interest bearing balances.
Our strategy to generate non-interest bearing and transaction deposit growth is of the utmost importance given the potential for margin pressure in the current interest rate environment.
Based on our growth in a number of key metro markets over the last 12 months, we expect to have meaningful market share gains across the footprint particularly in a number of our newer markets when we -- when the comparable FDIC data is made available.
Total revenues increased 13% annualized compared to the first quarter with non-interest income increasing substantially, up 58% to a record high of $75 million. Looking specifically at the income, we drove record capital markets in mortgage banking revenues this quarter.
Capital markets revenues were $10 million and mortgage banking results were nearly $8 million. Capital markets experienced a 64% growth rate compared to the last quarter due in large part to several new transactions in the syndication's group, combined with another strong quarter for our derivatives business.
We are pleased with the solid traction they're gaining and we're confident this business unit will continue to produce strong contributions to our performance as we capitalize on our markets in the Mid-Atlantic and Southeast. Mortgage banking production increased 71% linked quarter, and we'll look to generate growth in gain on sale revenues to offset potential interest rate, environment pressures and support overall revenue growth.
On the expense front, second quarter operating expenses were right in line with our expectations as we accomplished the majority of our stated goal to reach at $15 per hour minimum wage by the end of 2019. The increased salary expenses reflected in our core run rate. These profitability levels resulted in strong internal capital generation driving the TCE ratio to 7.32% and increasing tangible [Technical Difficulty] per share [Technical Difficulty] 14% over the last 12 months. As you know, this has been a key focus for us in recent periods.
We are pleased with our ability to generate capital moving forward with added future flexibility, now that we have a payout ratio 42% for the first half of 2019. Asset quality continued to trend very favorably as evidenced by continued solid performance and further improvement in a number of key asset quality metrics.
With that, I'll ask Gary to comment on credit quality. Gary?
Thank you, Vince, and good morning everyone. We finished up the first half of the year with our credit portfolio remaining very well-positioned. As the second quarter was highlighted by a [Technical Difficulty] trends and overall stable results.
On a GAAP basis, the level of delinquencies showed further improvement over the prior quarter to stand at 95 basis points. Additionally, NPLs and OREO also trended favorably down three bps to end June at 58 basis points.
Total net charge-offs were solid at 16 basis points annualized with the ending reserve for the quarter at 83 basis points. [Technical Difficulty] the quarterly results for the originated and acquired portfolios.
Looking first at the originated portfolio, delinquency ended the quarter at 66 basis points, up a few bps over the prior quarter with a long-term trend continuing to move in a positive direction. NPLs and OREO remain at a solid level of 61 basis points, which ticked up slightly on a linked quarter basis, but continues to remain well positioned over the last several quarters.
Originated that charge-offs for the second quarter were solid at $5.4 million, or 11 basis points annualized and on a year-to-date basis totaled $10.2 million similarly reflecting a level of 11 bps. Provision expense for the quarter totaled $12.3 million and adequately covered net charge-offs and organic loan growth.
As Vince mentioned earlier, we expect a solid C&I activity that we have been experiencing to continue in [Technical Difficulty] quarter as we are seeing contributions from across the entire footprint.
Turning next to the acquired portfolio, which totaled $3.5 billion at quarter end, the credit results were favorable and remain in line with our expectations. Contractual delinquency continues to improve with a linked quarter decrease of $13 million to end June at $88 million.
On a year-over- year basis, past dues have been reduced by $32 million, a 27% reduction since June of 2018. The acquired reserve ended the quarter at $4.5 million and inclusive of the credit mark, the total loan portfolio remains adequately covered, reflecting a combined ending coverage position of 1.29%.
In summary, we've finished the first half of 2019 with solid credit results, as our book remains favorably positioned heading into the second half of the year. We can attribute this consistent performance to our balanced approach in which we selectively seek out high quality opportunities [Technical Difficulty] credits consistently and proactively and strategically manage the risk profile of the portfolio. These core credit principles are the foundation of our credit and lending decisioning processes that we employ throughout the footprint and across each line of business.
As we move through this later stage economy, we are focused on the micro and macro economic trends to proactively manage risk, and we'll continue to look for opportunities to present -- better position our asset mix as they present themselves. We remain steadfast and disciplined to the risk focused approach that is ingrained in our culture, which continues to serve us well.
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 provide an update on our outlook for the rest of the year. As you can see on slide three, second quarter operating EPS totaled $0.29. As we continued our great start to the year.
The quarter [Technical Difficulty] especially on the commercial side and we continue to build capital with the TCE ratio increasing 17 basis points and the quarter at 7.32%. Now let's look at the balance sheet for the quarter starting on slide six. On a linked quarter basis, average loan growth total $380 million or 7% annualized including commercial loan growth of 8% and consumer loan growth of 4%.
Growth in the commercial book was led by strong annualized growth in the C&I portfolio of 20% while CRE increased 2% annualized. The consumer growth in the quarter was concentrated in residential mortgage, up 13% and indirect auto up 5%, while home equity balances continued to decline as we've seen across the industry. We were pleased with these results as we continue to see strong activity across our markets.
Turning to deposits on a linked quarter basis average total deposits increased $454 million or 8% annualized reflecting normal seasonal inflows and continued growth in households and commercial clients.
The deposit growth was spread across categories including growth of a $176 million in non-interest bearing $143 million in interest bearing demand deposits and $126 million in time deposits. These results speak to our ability to continue to execute our customer acquisition strategy.
Looking at the income statement net interest income was essentially flat from the prior quarter. For the quarter total purchase accounting accretion was $8.1 million with $7.5 million from incremental purchase accounting accretion and $6000 from cash recoveries. This compares to a total of $9.5 million in the first quarter.
The linked quarter decrease in margin also reflected the two basis points of net margin benefit recorded in the first quarter related to the retirement of debt facilities which I discussed in detail on the last call.
Excluding purchase accounting and the sub-debt activity benefit in the first quarter. The net interest margin decreased two basis points to 3.09% from 3.11%, a result we feel good about given the current rate environment.
Let's look now at non-interest income and expense on slides eight and nine. The increase in operating non-interest income of $8.8 million was largely driven by an outstanding quarter in capital markets which reached a record level of $9.9 million including strong performances in swaps, international and syndication.
We also enjoyed a very strong quarter in mortgage banking which included a 71% increase in production volume compared to the first quarter. We continue to see growth in wealth management with 3.5% growth in trust services and 7.5% growth in securities commissions and fees.
Turning to slide nine, operating expenses increased $7.6 million compared to the first quarter. The primary driver was an increase in personnel expense which reflects our April 1st annual merit increases, as well as commissions for revenue generating activities and continued progress toward our commitment to bring our minimum wage up to $15 by the end of 2019.
In [Technical Difficulty] expense seasonally increased $1.2 million and outside services increased $1.4 million due to the timing of charges such as annual director fees.
Now I'd like to turn to our guidance for the remainder of the year. Our growth in loans and deposits has been within our expectations for mid to high single digit growth and we continue to feel confident in those targets.
As you may recall, in January, we expected full year net interest income to grow low single digits compared to 2018. As we sit here today, we expect net interest income to end up closer to flat given that we had two hikes in our guidance and the forward curve is now calling for two cuts.
As you all know the outlook for interest rates has been volatile and the shape of the yield curve isn't helping the banking industry, while we are not as interest rate sensitive as most banks they're still impacted by the inverted curve and our net interest margin has seen some slight compression.
We are confident in our ability to organically grow core deposits as we have demonstrated mid-to-high single digit growth even with closing 46 locations since last year.
We are tracking in line with our expectations for non-interest income to grow on [Technical Difficulty] and for non-interest expense to be flat to down 2%. We now also expect provision expense to be in the $55 million to $65 million range rather than $65 million to $75 million given that our asset quality remained at very favorable levels. Our expectations for the effective tax rate remain around 18%.
Finally I'll give an update on CECL [Technical Difficulty] and the necessary steps to prepare for January implementation [Technical Difficulty] focus of management and substantial progress has been made [Technical Difficulty] CECL estimates internally and expect to be prepared to share those eternally as early as October.
Based on our preliminary analysis performed during the second quarter using macroeconomic conditions expected at that time, we don't believe the day one retained earnings impact would require us to raise capital.
Another key consideration to note is that CECL requires a balance sheet gross up of existing acquired loans on day one. The remaining non-credit discount on our acquired loans will accrete into interest income in a similar fashion as purchase accounting does today. Overall, we think it was an excellent first half of the year and believe we are well positioned to successfully navigate the challenging interest rate environment in upcoming CECL implementation.
Next, Vince will talk about some of our growth strategies and give an update on some 2019 initiatives.
Thanks, Vince. As you may recall, we announced several major initiatives over the last year and I want to provide an update on the progress toward those objectives. In commercial banking, our teams have had a strong first half of the year with overall commercial loan production ahead of our expectations and very strong second quarter commercial production in FNB's Baltimore, Washington D.C., Cleveland, Pittsburgh and Charlotte region.
As an update to our Carolina activity, we saw another quarter of growth and average commercial loans in North and South Carolina and have seen their pipelines continue to build for the second half of the year, particularly in Raleigh, Piedmont and Charleston, South Carolina. For the Carolinas as a whole, they continue to be above their loan production expectations through the first half of the year.
In the consumer bank, there has been tremendous progress toward ongoing optimization for both our online and physical delivery channels. In the past, we have used data analytics to improve customer acquisition. The next phase is improving customer retention and gaining share wallet. This includes a redesigned omni-channel online banking platform that provides a uniform experience across delivery channels. We are targeting to roll out our new capabilities in the coming months and are excited about the new features and streamlined process we'll be able to offer our customers.
The new increased functionality will simplify the online experience and create a one stop shopping digital experience that is seamless with customer experience at the branch. These investments should provide us with organic household growth opportunities and a comprehensive offer of products through the digital channel to deepen existing relationships. We intent to leverage our investments in data science and machine learning tools to more efficiently match clients with the appropriate products and services prevent fraud and to manage risk.
Regarding our physical delivery channel, we continue to execute our long standing ready program. Through our ongoing optimization program, we have consolidated 46 locations since last January and have added two de novo locations during that time. We expect to opening of several more de novo locations in the coming quarters and throughout 2020 with a focus on Charleston, South Carolina, Washington D.C., Northern Virginia and Charlotte, North Carolina.
We have continued recruiting bankers very successfully across our footprint, notably attracting key talent to expand the teams in Cleveland and just recently announced the hiring of leadership and an exceptional team of bankers in Charleston, South Carolina. We are already benefiting from significant opportunities in those markets, notably in Charleston, where our portfolio is up 20%.
Furthermore, on the employee front, I am pleased to share with you that F.N.B. was named a best place to work in Pittsburgh for the ninth consecutive year and a best place to work in Cleveland for the fourth consecutive year. Our employees are the heart of our organization and I want to thank them for their hard work and dedication. 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 creating greater shareholder value.
With that, I'll turn the call over to the operator for questions.
[Operator Instruction] And the first question comes from Jared Shaw with Wells Fargo Securities.
Hey Jared.
Good morning, Jared.
Hey Jared.
Hey if we -- it seems like the phone is skipping in and out Jared. So if you need to ask a question twice. We're good with that or if you have any questions about our prepared remarks.
Okay, yeah, there was a couple of skips, but I think we're able to keep up with most of it. Maybe just starting with the margin and you talked about how the initial outlook for the year assumed, continued rate hikes and now we're looking to see rate cuts. How should we be thinking about the margin here? And then, sort of tied in with that, I'm looking at the quarter-over-quarter decline in resi loans, I guess how should we think about the overall balance sheet positioning or repositioning from here heading into a rate cut environment?
Yeah, I would say a few things on the margin. Our original guidance as I mentioned was low single digit growth and clearly it was the net interest income. And remember that was comparing to total GAAP for 2018 which included Regency for eight months and also we had higher cash recoveries in the second quarter last year. So, that was our reference point just to make sure everybody kind of had that straight.
With the two fed increases that we had baked in switching to cuts, we took a fresh look we forecasted the entire balance sheet income statement and look for net interest income to be -- to be flattish as I said given the two rate cuts.
If you look at the margin for the quarter, first quarter to second quarter just to kind of clarify a few moving parts just to make sure everybody has the references straight. For the first quarter, we had a couple of basis points or $1.6 million benefit from our sub-debt we retired. So that obviously didn't repeat itself this quarter, and then the purchase accounting benefit, if you look at it, it's kind of first and second quarter, the normal accretion is I would call it declined a $1.4 million, which is 2 basis points of margin change in the quarter.
The purchase accounting accretion for this quarter, we think is a good run rate as you go into the next couple of quarters, so that that should be pretty stable as you go forward. And the other dynamic, we saw this quarter was as everybody did the impact of lower one month LIBOR, which was leading the Fed cut. So that declined 21 basis points from the end of the year through June 30th, and we have $7.5 billion of our total loans are almost 33% that are tied to one month LIBOR.
Firstly, we didn't get the corresponding benefit on the liability side, so that's another kind of dynamic that swung through there. Even with all that, to have two basis points of kind of core margin compression first and second quarter, we feel pretty good about it. And then as we look forward growth in non-interest bearing deposits continued strong growth in the loan side, particularly on the commercial side looking – baking in the two fed cuts and the impact that has on the liability side. We're looking for net interest income to be kind of flat year-over-year and the margin to be flattish also from kind of where the core would be for the current quarter.
Okay. Okay. Thanks. I guess shifting over to the loan portfolio. One, how severe were pay downs this quarter impacting sort of period end balances? And then again, looking at the decline in resi loans is that something that you would consider to be retaining more of now with the right expectation?
Before Gary or Vince provide additional color. I thought I'd make a comment. I think that – the spot balance, if you look at the spot balance, there are adjustments for loans that will move into a saleable category. So held for sale and [Technical Difficulty] we made the decision that there was a portfolio of jumbo mortgage loans that we ultimately will exit. We made that [Technical Difficulty] the pipeline in our mortgage company is significant, it's very strong. We took into consideration the margin on those loans and the impact on CECL.
So we made the decision that we were going to exit that portfolio that's why the spot balance, when you look at it appears to be flat. It's actually in line with the average balanced growth when you add that back. We have significant production going on in the commercial bank particularly in the C&I space, with some large corporate borrowers which we expect fundings in the third quarter as well.
So part of it is along the lines of the strategy that we mentioned before changing the mix a little bit to benefit us as we move into a period where reserves are changing in the CECL environment as well as diversifying the portfolio. So, Gary, I don’t know, if you want to add anymore to that, I think that's what you're seeing.
No. I think as we've talked in the past, we're constantly looking at the asset mix of the portfolio as Vince has mentioned. And we're going to position the portfolio for the benefit the organization both financially and from a risk standpoint, as we look forward. So that that's what really drove the positioning there. As Vince said, there were a pool of jumbo mortgages we also sold some conforming mortgages, or could move them into the held for sale category as well. So again, just repositioning of the balance sheet as we – as we look forward.
And obviously, I'd say that, I think that we'll be – Vince reaffirmed the guidance on loan growth, so we feel pretty confident that we can make these changes and not impact our growth trajectory.
Okay. Thanks. And just to confirm where those mortgages those are mortgages you had purchased from the warehouse or pipeline or given the sort of strength in the warehouse pipeline you're – I mean, it's not related at all to the – to the warehouse side or was that – where those originated mortgages?
No. Those were – those were originated mortgage loans over time. And as Gary indicated, the largest portion of them are jumbo mortgage loans that we felt they were single product households. So we looked at them and said hey, you know we have a better use of our capital. We can get – achieve higher returns on our capital, we have CECL coming.
The margin was relatively low, and we said hey, let's – let's take advantage of this opportunity with the interest rates coming down with the inversion and make some changes. I think it was a very good move for the shareholders, and while again, we have to make difficult decisions. We could show outsized growth, but I think Gary's been – done a great job of managing risk and it's evident in our credit metrics and we're going to continue to do that despite the pressure.
Okay.
Yeah. I would just add, Jared. The quarter included approximately was about $108 million of conforming mortgages that were sold during the quarter and then there's about 250 of the jumbo mortgages that were in the held for sale bucket at the end of the quarter that we would expect to sell in the third quarter.
Thanks, Vince.
Thanks. And then just finally for me on the – on the capital markets income, strong quarter there is that is – you think a sustainable level with the investments you've made in that platform?
Well, I think this quarter was an exceptional quarter. As I mentioned in the prepared comments, that we had several large syndication wins which were largely a result of either a larger balance sheet or our move into the southeast or a combination of both so, -- and our expansion in D.C.
So we had nearly $2 million in syndication fee income, in the quarter. Do we expect that to continue? I mean absolutely, but it's lumpy. So, I think we built out that platform. We've started to win transactions, as the left lead and I would expect us to periodically have those opportunities that we didn't have before.
So, again, having a larger balance sheet, moving into the new markets that we've entered gives us enough opportunities to create a fairly sizable business. And we mentioned that early on when we announced the deal. So it's finally happening.
Great, thanks a lot.
Thank you.
Thanks Jared.
Thank you. And then next question comes from Casey Haire with Jefferies.
Yeah. Thanks good morning guys.
Good morning Casey.
Hi guys. A couple more follow-ups on the NIM, so number one on the deposit costs, How do you guys -- I mean, they're held up pretty well on the quarter CD obviously -- time deposits up. How do you expect those to trend in the back half of the year?
Well, I think that on the deposit side, it's been a lot of dynamics going on there. We did have some -- we've had some opportunities to lower CD rates for instance over the last -- really last six months.
So we're actively obviously managing the deposit costs. The non-interest bearing deposits we've talked about a lot, is obviously critical. And we continue to have very nice growth in the DDA's there. So I think that's another element that's very important and we're going to continue to focus on that.
I think we're going to manage that the cost of deposits diligently like we do. Part of selling the mortgages that we talked about putting the held for sale, is to create shelf space for all of the strong loan growth we have coming that we've talked about.
So, continuing to fund the loan growth with deposits is critical. If you look at -- for the current quarter loans held for investment increased $380 million it was more than fully funded with $454 million increase in total deposits.
So I think that kind of relationship is important. And then as we go ahead from here -- we have our normal seasonal increase in municipal deposits that happens kind of beginning of July through October, which typically generates additional $350 million to $400 million in balances that seasonally come in. So that's another kind of key component of it.
So it's -- it's just a constant process. And we are going to manage it closely. We've definitely seen though some ability to reduce the increased as you commented on -- which is helpful.
The total interest bearing checking which includes our money market, in the first quarter it went up 11 basis points this quarter it went up four basis points. So it's a lot of moving parts there but, just a lot of focus on it.
Okay. And then just switching to the loan side, are we now -- we know what's floating rate within your portfolio. But -- just in terms of origination yields where are they tracking today versus the 4.86% in the second quarter?
Well, the origination yields are very close to where they were last quarter. I mean literally within one basis point. So, it does have some impact from LIBOR moving. There's about 10 basis points if I look at the yield, for the May, its first quarter versus second quarter.
So there's impact of LIBOR coming through that. But it's literally within the basis point for the new origination rates.
Okay. So pretty close all right. And then just lastly, you're at the NIM guide of stable in the back half. Does that assume any continue structural changes in the balance sheet like in the quarter?
In the second quarter you guys took the securities book down, which probably helped and then you also reduced the borrowing. So, I'm just curious, if you guys feeling pretty good about deposit growth. Is borrowing reductions part of the plan here just trying to get a sense for what kind of structural contributions you're going to get to keep that NIM stable?
Well. Obviously, we don't have any other sales portfolio, sales other than just kind of normal production plan for the rest of the year. So I mean that's one component. The investment portfolio, the reinvestment rates are just not very attractive as you know.
So given the strong loan growth, we've let that portfolio run down a little bit. Cash flow is about -- $80 million a month. So we're still not fully reinvesting that. We're reinvesting a portion, where we find opportunities and municipal investments.
We're definitely investing in those, but as far as the balance sheet action from here. As we sit here today, we're still not fully reinvesting in the investment portfolio. And then the other dynamics I talk about just normal business growing the DDAs and -- into strong loan growth. But nothing else planned from a kind of balance sheet strategy, management's perspective.
And that includes borrowings as well.
Yes.
Okay, all right. Just last one for me. Tax rate came in a little higher this quarter. What's the expectation for the balance of the year?
Well 18% is still the guide for the full year. We've talked about that we have business mind going after some of these tax credit transactions, so there is some that. We would expect to achieve as between the second half of the year. So that's kind of brings you back down overall effective tax rate of 18% for the full year.
Great. Thank you.
Thanks, Casey.
Thank you. And the next question comes from Frank Schiraldi with Sandler O'Neill.
Good morning.
Good morning.
Just a couple of questions. Just a follow-up Vince quick on the NIM just -- I think you mentioned that there's two rate cuts baked in now, is that sort of a July -- end July, end of September timeframe or is that not right?
Yes. That's the time we have Frank.
Okay. And then just on non-fee income obviously the capital markets income was real strong and can be volatile, but -- and then mortgage banking can be as well especially seasonally, but is that a reasonable run rate in the near-term on mortgage banking revenues or do that reflect backlog in the quarter?
I will tell you that the pipeline is extremely strong going into the third quarter. So, we would expect it to be sustainable for a quarter or a quarter and a half at least until we start to run into the seasonal downturn. So, it's very strong Frank.
Okay.
On the capital markets front, that's extraordinarily lumpy. So, I think we're having good success in the derivatives area early here, but it's too soon to tell. So, I think you'll do well. I think it's a difficult quarter to repeat from a capital markets perspective because it was up 60% plus. So, we'll be working to rebuild that for the future.
Got you. Okay. And it just seems like that the fee income guide. If I just look at my model on that sort of mid-single-digit growth for the year and pulling back on capital markets in the third quarter. I just wondering if there anything else lumpy in this quarter that you would pull out a run rate for the back half of the year?
No, not really. We had good solid performance pretty much up and down the business units. International was a little slower this quarter, they have a lot of things coming. So, that should benefit us a little bit.
Other than that I think everybody is performing pretty well. And you know insurance and wealth have good pipelines and they're fully staffed particularly in the new markets. They're starting to generate some significant opportunities. So, I would say it's steady and growing.
The only thing I would add is the service charges or seasonally higher second and third quarter and then they come down in the fourth quarter, Frank, so that's the only other dynamic.
Yes, there's nationality in the service charges.
Okay. And then just finally just one for Gary. This quarter we've seen some weakness, some credit issues from a number of community banks and obviously, your credit remains pristine and I just wondered if there's any weak patches you're seeing or types of collateral lending that you're steering clear of that you've seen get kind of frothy here recently?
Frank, it's really been more of the same that we've been seeing across the industry. I will tell you there's a lot of aggressive lending going on in the marketplace and that's not something that is new. I mean it's been going on for quite a while now. Those are transactions that -- we're not going to change our structure and we just walk away from them and move to the next opportunity. Our bankers realize that and they support that.
So, we're very focused on the consistency in how we do business and how we underwrite and the portfolio continues to be positioned very well at this point and we'd like where we're at with it.
Okay. But geographically as well there's no pockets that you guys are starting to see get a little bit frothier than others and starting to pull back from?
No, we really have [Technical Difficulty] across all the market.
Yes, I think Frank when you think about our thesis on why we expanded one of the reasons as I mentioned in my comments was to diversify geographically. So, we weren't reliant on a single market or a single asset class and we live by that. We're in the risk management business. You know I've said we've made hard decisions in the face of growth to limit risk and that's not easy to do. So, I think the credit metrics that we have are a result of that action and having the diversification.
So, we target -- we don't target extraordinarily high growth rates. We're trying to play in the sweet spot from a credit perspective so that we can make good decisions and keep things moving through cycles.
And that -- Gary said that repeatedly that's our philosophy. We're going to stand by it. So--
Great thank you.
Thank you.
Thanks.
Thank you. And the next question comes from Michael Young with SunTrust.
Hey good morning.
Hi Michael.
I was wondering -- it did cut out on me, could you just clarify again your fee income guidance and your provision guidance?
Sure. The fee income guidance we didn't change.
Okay.
The provision is 55% to 65%. We had lower that Michael from 65% to 75% given where we came in the first half of the year. So we brought the range down $10 million and then the fee income is still kind of low single-digits, again that compares to 2018 and includes Regency for eight months, so it kind of normalize for that. It's really kind of mid single-digits on an organic basis apples-to-apples.
Hey, Michael, I saw in your early comment there was a miss on the effective tax rate. Vincent, do you want to comment?
Yeah, I mentioned there that we had -- the full year is at 18%. So this quarter -- this quarter is higher than the full-year, just reflective of the tax credits not happening yet. There's some that we're -- that we're working on. Then we also had some impacts in the tax rate related to stocks that did invest and then you kind of lose a tax deduction on that. So there was kind of reversal of tax benefit on that that brought that number up a little bit higher than it would normally be, but the guide for the full year is that 18%.
Yeah. That's just to give you a little more color on what happened this quarter that's all.
Yeah, I know it's good point.
Okay, thanks. And maybe just as a quick follow up on that, should we expect higher tax credit amortization in future quarters as well? Would that push up expenses or anyone of that?
Not significantly, yeah.
Okay. And then my other question just goes back to the kind of capital management. It sounds like you guys have a better feel now for the CECL impact going into next year. TCE is drifting up above 7%, just kind of wanted to get some updated thoughts on how you're thinking about that relative to your stock valuation at this point?
Yeah, I think clearly, as we've said before having a lower dividend payout ratio being around that 42% area and understanding capital [Technical Difficulty] move through CECL are important components. I think that we run -- we believe a model with a lower risk profile, so we're able to operate with more efficient capital levels and I think as we move forward, while our plan is not to build capital forever.
I mean, we would return capital to the shareholders in some form, so either buying back shares or changing our dividend strategy as we move forward assuming we can't invest that capital and provide higher returns. So it gives us options. I know that wasn't a great answer, because I kind of covered every area we could do. But I think we didn't have that luxury in the past and it's a good place to be.
Okay. But no shift on our post CECL environment in terms of your kind of targeted capital ratios that you guys want to maintain on a go forward basis?
I don't think we're prepared to answer that at this point. We have preliminary information. Obviously things can change right, because there are economic factors that are pulled into that analysis. So our comments are based upon the environment as we shift today and the balance sheet mix.
Yeah, we've talked about a 7% to 7.5% range -- the operating range we're using today. So that's kind of where we stand and then once CECL's fully disclosed and out -- we'll kind of refresh everything at that point obviously. But that's still a good operating range and it's 7.32% now to Vince's point as we move forward there's flexibility we didn't have in the past.
Those are great questions and I think we'll be able to answer them a little better as we -- into the next couple of quarters here.
Okay. And one last one for me if I could. Just help me hear about the omni-channel rollout. Is there any direct expense related to kind of rolling that out that wouldn't be capitalized? So will we see any jump there, or conversely, I mean, should we expect any additional expense saves as that gets rolled out and committed over the next couple of quarters?
Well some of it is already reflected in our run rate, because it was a multi-year build in terms of technology investments. So some of it -- big chunk of it is already reflected in the CapEx spend of the past. There's some coming, but it's not significant for that specific area. There's other technology investment that's going on within the company. We obviously take a step back as we have through the last few years and invest in our company so that we compete -- can compete more effectively. I think if you look at the demand deposit growth that we've had that's really an outlier that can be highly attributable to our desire to provide a more robust product set to consumers both business and consumer clients.
So those are linked together, our ability to take cost out by consolidating branch locations is directly linked and having success with the lower attrition rate is directly linked to those investments and technology. So we're balancing that. There is no significant build related to the omni-channel build out there is an expense associated with it, but it's not huge going forward. There are other things that we are looking at that could potentially help us from an efficiency perspective or from a risk management perspective that have offsets.
Yeah, I would add as you know we're very disciplined in how we manage the overall income statement and expenses and we'll continue to have opportunities where we're looking at -- vendor relationships. Our focus is generating positive operating leverage year in and year out.
So it's our job to find ways to reduce costs in some area, generate additional revenue and be able to cover those things and then some.
All right, great. Thanks.
Thank you, Michael.
Thank you. And the next question comes from Austin Nicholas with Stephens.
Hey, guys. Good morning.
Good morning, Austin.
Hey, maybe just to dovetail on that capital question. Given the TCE ratios continuing to move up, can you maybe just remind us what the message is on M&A, it's been three years ago. I think this week since your announcement of the Yadkin back in 2016. So any comments on how you'd look at M&A given where your capital position is today?
Yeah, I can comment on that. I think it's also -- it has also been 10 years since Vince became CFO, right and I became President of the Bank. So we're right in that suite spot, and I think that -- we've now learned enough or grade enough that we have learnt great lessons.
And I think that the opportunity here is to benefit from what we've built. And we're not out -- given the market conditions, the uncertainty with CECL. We're not out looking to do acquisitions at this point. We are solely focused on driving tangible book value growth, elevating our capital ratio so we have more flexibility and working to truly benefit the shareholders in every way we can.
So that's -- there's been a keen focus on expense, cuts and we've done significant branch consolidation. We continue to invest in the company because I think to extract value in the long run, we have to keep investing.
And I think Gary has been extraordinarily disciplined in terms of balancing growth with disposition of assets and remixing the balance sheet. So all of that pays dividends for our shareholders in the long run.
And our capital strategy as we move forward is not going to change, we do not need to have extraordinarily high capital ratios given our business model and our goal is to return capital to the shareholders if its not being deployed with high returns that's the goal.
And we've been able to achieve geographic expansion through the de novo strategy we've talked about, so that's how we've expanded into some newer markets choosing that avenue as opposed to the acquisition rate.
And our de novo strategy is working very well for us both with the loan production offices that we have and the branches that were markets -- new markets we're expanding into to fill in the gap. So we're going to play that out for a while and see how that goes and build our own customer base.
That's really helpful. And then maybe just on the expense side as you think about that de novo strategy paired with the ability to continue to consolidate branches, is it fair to say that the -- at least the occupancy growth number can be -- could be relatively -- will not be outsized given the de novo strategy because you will continue to right size your other branches at the same time that -- it seems like you've been doing over the last few quarters?
It shouldn't be, but it's not an equal trade-off. A new de novo locations typically, Barry is coming to me asking me to pay a lot more, because we want to be in position A if we're going to make that investment, we want to make a good investment in it -- in a location.
So typically there's more expense associated with opening a de novo branch. I don't think that's unique to FNB, I think the others experienced the same issue versus closing one branch. So it's not a one-for-one typically because you're closing branches that aren't performing and they're not always in the best locations.
So but I would say that our ability to manage occupancy expense as we move forward will be reasonable given the de novo expansion. The footprint of those new branches is smaller, they’re more technology oriented, the business models a lot different today. There's fewer people in those branches, because we deploy ITLs and other technology. So I think that there's great opportunity for us. Yeah, we have the scale, we didn't have historically, so a great opportunity for us to move into higher growth markets.
Yeah, that's helpful. And then maybe just trying to square some of the margin comments with the NII guide. Just on the accretion, it sounded like the expectation is for us to remain in that $8 million a quarter accretion level in the back half. It created excess cash recoveries.
Yeah, I mean the incremental component of that was $7.5 million, so that feels like a good run rate for the rest of the year. The cash recoveries have been around that level. They move around a little bit last couple of quarters, it's been a basis point. So that may move a little bit but the $7.5 million is kind of a good run rate and in total the cash recoveries are the low number. So probably around those levels, which is reasonable too for the rest of the year.
Got it. Okay, great. Thanks for taking my questions.
Thank you.
Thank you. The last question comes of Collyn Gilbert with KBW.
Thanks. Good morning, guys.
Hey. Good morning, Collyn.
The most of questions that I had had been covered, but just really quickly just following-up on the accretion comment. So Vince, the $7,500 or $7.5 million holding at that level for this year, do you have any thoughts as to how you think that's going to trend in 2020?
No, we'll include that column when we do our January guidance. I would say, today pre-CECL to $7.5 million, I'm referencing is the kind of normal accretion. Next couple of quarters feels like a reasonable level a good run rate to use. I think in my prepared remarks, I commented that even in post-CECL, there's still accretion that will be recorded related to the acquired loans where the accounting works for that, and we'll obviously give you those numbers in January. But I think the words I used was in a similar fashion to the way we do it today, so that there's still accretion that will occur post-CECL and we'll quantify that come January.
I think that was a good question is that what you were thinking Collyn relative to the changes on the reserves?
Yeah. The CECL, yeah, and then just -- and then just the pattern of -- I mean I would assume that the pattern has slowed down, okay, down to be similar in 2020.
Yeah.
Okay. That's helpful. And then just one last thing on the growth, the loan growth, so obviously you know you guys are talking about accelerating loan growth in the back-half of the year to kind of keep in your mid- to high-single-digit loan growth targets, and the commercial trends have been good. Just on the resi side, just to make sure I'm hearing you. So, do you expect the resi mortgage growth to kind of return back to levels that you guys have been putting up in prior quarters?
Yes.
Okay. And with the commercial, the loan growth -- go ahead.
Yeah, both the commercial pipeline and the mortgage pipeline are very strong, in particular moving into the third quarter. So I would say, yes, to your -- if that's what you're asking about the answer would be yes.
Yeah. Okay. Okay. Yeah.
Let's put that in perspective, Collyn, just a little bit -- production for the quarter was $679 million in residential mortgage. We sold about half of that, okay? So, as we go forward -- Vince talked about the pipeline, which indicates the strong production in the third quarter also. So I would expect -- I agree with what Vince said, but just to give you some numbers around it as far as what we saw that --.
I'm glad you're not disagreeing with me.
No, I agree with you. Put some numbers around.
Yeah, okay, thank you. Thank you for putting that.
No problem.
Okay. That's great. That's all I had. Thanks guys.
All right. Thank you.
Thanks, Collyn.
Thank you. And our next question comes from Russell Gunther with D.A. Davidson.
Hey. Good morning, guys.
Good morning, Russell.
Hey, Russell.
Hey, Russell.
Just quick follow-up on expenses. Wondering if you could size up for us what the annual merit contribution contributed to this quarter's results. And then just clarify for me whether the plan de novo as you talked about are incorporated in the expense guide for 2019?
Sure. The merit increase was just under $2 million, it's like a $1.8 million for the quarter and that obviously becomes run rate effective April 1. And then yeah, de nova are baked into our guidance.
Okay, great. And then just last one for me. Would you be able to kind of quantify for us what a 25 basis point cut would mean to the margin. Just trying to get a sense for kind of one and done for a bit? What the impact might be if any to your NII guide for this year?
Well, I think what I -- what's baked into my guidance Russell is two Fed cuts, and I commented that I expect the margin to be kind of flattish from where it is this quarter. So, I mean that kind of tell you what's the impact is of the two Fed cuts. You know, what I mean...
Okay. That's it for me. Thanks very much.
Okay. Thank you, Russell.
Thanks, Russell.
Thank you. And the next question comes from Brian Martin with Janney Montgomery.
Hey, guys.
Hey, Brian.
Hey, Brian.
Hey, most of my stuff was covered. Just Vince just on the loan growth, just being it sounds particularly strong going into 3Q here. Can you just give a little color on just where in particular the strength is, and if you're see any lumpiness there something like you're talking on the capital markets, some of syndication fees being larger, you just kind of -- it's a bit more lumpy as it's pretty granular just kind of geographically and -- granularity.
Yeah, I think overall, it seems like it's fairly good across the board. When you look at the Carolinas, the Carolina markets in total are nearly equal to Baltimore Cleveland and Pittsburgh in terms of pipeline, which is pretty good for us. I mean that's a strong message. If you look at Raleigh, specifically, who's been under pressure, the portfolio has been under pressure with large CRE take outs, principally, their pipeline is the highest per loan officer in the company.
So D.C. has a strong. We've built out a team in Bethesda a couple of years ago. They've been doing extraordinarily well. Doug has been doing a great job there for us. So they've got good things happening. And then Pittsburgh has some large corporate opportunities funding up that are on -- the margins not huge on them, but there's some volume associated with them and...
It's really across the board Brian, and that's what feels really good. It's coming out of all the markets, good C&I activity. C&I activity really ramped up everywhere in some of the markets that weren't producing it, and the pipelines are strong.
Yeah, and the credit coming in seems reasonable. It's not -- we're not stretching to do things. So I think the strategy of having good bankers and all of those markets that have local connections, we've done a good job of managing that production. I think that's starting to payoff for us as we indicated a couple years ago.
Yeah. Okay. And then just maybe Gary mentioned on the payoffs -- someone mentioned on the payoffs on the CRE side. I guess, is that your expectation that continues? Are you're seeing -- the pace of that slowdown at all, so you see ...
We're running out of deals too -- we're running out of transactions to be taken out, but I think Gary...
I mean, it's kind of -- it's a little lumpy as we've talked about. I mean, we had a few during the quarter. You're going to have that on a go-forward basis. As long as the credit markets hold, based on the booking of those assets the completion of them and the lease up.
We're not a prolific long-term lender. We tend to stay short. We finance the construction and then maybe do a little mini perm, bridging a takeout and that's the business model. So, I think that we will always have payoffs, but we had an acceleration …
We do.
… in payoffs there for a little bit. And I jokingly said we're running out of transactions. I think, we've originated a new batch. So, that's a business that goes on, but there are periods as Gary mentioned where there's an acceleration in the takeout. And when you play in higher quality transactions, the ability to access capital outside the banking space is -- it's more liquid.
So, we will have more those as we go-forward.
Okay. I just trying to characterize if they were still very elevated or if it there more normal this quarter I guess ...
If you -- I think I might be right, tell me if I'm right with this number. I think we're running at about $300 million in the acquired book.
Yeah.
Is that right, in payoffs paydown.
That's right.
So, it's stabilized about that level.
Okay. That's perfect. And then just the last one for me was just on the strength in the non-interest bearing this quarter. I mean, was there any significant -- anything of significant in there as a certain markets or just kind of across the board? Just on that front.
It was -- I would say it's three things. Number one, it's a focus on the consumer bank and we trained everybody up. So, we spent a lot of money training everyone. How they interact with customers, so it's some training in the consumer bank and household growth associated with that training. The data analytics tools that we've developed help us when we find a borrower that doesn't have a depository relationship with us we're able to elevate those referrals through our CRM system using data analytics to help people that's helped. Our ad campaigns, we stepped up a little bit and some of the promotions we ran not in the DDA category, but in other categories has helped strategically.
So, it's a combination things, small business and middle market banking has contributed. And we're still building balances so -- because we have seasonal inflows, not just in the municipal space, but there are compensating balances that are funded as we move into the third quarter with some larger corporate and middle market and small business borrowers. So, we'll see -- we should continue to see benefits from that. So, it's a combination of a number of strategies.
And I mentioned before I think having the branch delivery channel, some look at it as an anchor or they say you have all these branches. And then I think when it comes down to generating activity that really plays in our favor. So our goal was to try to optimize that delivery channel without disrupting the ability to drive customers in the door …
Okay.
… anyway.
Okay. Geographically, was there any particular market or just kind of across the board on that?
Yeah. I mentioned in my prepared comments that we do an analysis. We look at the FDIC data. We don't have everybody else's growth number [Technical Difficulty] and when we look at our own growth numbers, well over half of the markets have had pretty sizable increases in deposits. So that should show well -- when the overall analysis is done because when you look at a multiyear period having those increases has led to market share gains.
So, we did that analysis. We looked at the -- southeast in particular performed well, again, which is there is a tailwind there, because we -- better economies and population growth that people moving into those markets, that has helped us. And I think we've been able to hold on or grow in markets that aren't growing as fast.
So, that -- all of that in combination helps us and I think it produces a good result in terms of non-interest bearing deposit growth.
Okay. I appreciate the color guys. Thanks so much.
Yeah.
Thanks, Brain. Take care.
Thank you. And as there are no more questions at the present time, I would like to return the floor to management for any closing comments.
First of all, I'd like to thank everybody for the time, a lot of great questions today. I'm very excited about the first two quarters of the year. I think we've done exceptionally well, and I'd like to congratulate our team across the company in all 10 of the markets that we manage. Everybody has done a spectacular job and I couldn't be prouder. So, thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You now disconnect your lines.