FNB Corp
NYSE:FNB
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FNB Corp
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Welcome to the F.N.B. Corporation's Fourth Quarter 2018 Quarterly Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded.
I would now like to turn the conference over to Matt Lazzaro, Manager of Investor Relations. Mr. Lazzaro?
Thank you. Good morning everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to the non-GAAP and forward-looking statement disclosures contained in our earnings release, related presentation materials, in 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 January 29, and the webcast link will be posted to the About Us, Investor Relations & 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 financials. Today, I'll touch on our 2018 financial highlights, review last year's accomplishments and wrap up with a discussion about our strategic objectives for 2019. We'll then open the call up for questions.
First, I'd like to highlight some key 2018 performance metrics. We are very pleased with the record earnings and significant revenue milestones our team achieved this year, which included a strong finish as fourth quarter operating earnings per share increased 28% to $0.30. For the full year of 2018, operating earnings per share increased 22% to $1.13 and operating net income was a record $367 million.
These profitability levels resulted in strong internal capital generation, driving higher capital ratios and increasing tangible book value per share by 10%. For the full year our dividend payout ratio decreased to 43% and for the fourth quarter this ratio finished below 40%. I'll note, we reached these levels in 2018 while returning $165 million in capital directly to our shareholders via dividends.
FNB reported record total revenue which grew 10% to $1.2 billion driven by net interest income growth of 10% and noninterest income growth of 9%. Our portfolios continued to expand with average loan and deposit growth of 5% and 7% respectively, resulting in a year-end loan to deposit ratio of 94%. Noninterest income growth was attributable to increased capital market fees of 29%, growth in wealth management revenues of 13% and increased mortgage banking income of 10%. Double-digit increases were largely driven by success in our North and South Carolina markets as our increased product offering begins to penetrate the customer base in these new attractive markets.
Looking at expenses, we are critically focused on expense management and driving positive operating leverage. Our continued focus on expense reduction will be evident when Vince provides more detail in our guidance for 2019. As a result of our cost-saving initiatives taken this year, the full-year efficiency ratio was 54.8% and expenses were slightly lower on a linked quarter basis which marks two consecutive quarters of declining run rate expenses.
I'll now ask Gary to comment on credit quality and Vince Calabrese will provide commentary on 2019 expectations.
Thank you Vince and good morning everyone. We had a solid fourth quarter which was marked by key credit metrics continuing to trend favorably, many of which have reached new multiyear lows. This has positioned our portfolio well as we move into 2019. On a GAAP basis delinquency ended the year at 1.07% representing a 16 basis point improvement over the prior quarter. NPLs and OREO showed a slight improvement as well down 2 bps linked quarter to 61 basis points. Total net charge-offs were 24 basis points annualized with the reserve position remaining flat at 81 basis points.
I will touch more on our 2018 full year results to provide additional color, but let's first walk through the quarter results for our originated and acquired portfolios. Looking first at the originated portfolio, delinquency ended December at a very solid 64 basis points, representing a decrease of 15 basis points over the prior quarter. NPLs and OREO also moved favorably on a linked quarter basis with an improvement of 12 basis points to end December at 61 basis points.
Originated net charge-offs came in at 27 basis points annualized or $12.1 million. The originated ending reserve position at 95 basis points remained directionally consistent with the performance of the portfolio reflecting provision of $11.1 million during the quarter following the successful resolution of numerous nonperforming credits.
Turning next to the acquired portfolio which totaled $4.1 billion at quarter end credit quality results were in line for the fourth quarter. Contractual delinquency decreased $10 million linked quarter totaling $120 million at year end and it continues to trend in a positive direction. The acquired reserve was up in the quarter to stand at $7.3 million. Inclusive of the credit mark, the total loan portfolio remains adequately covered reflecting a combined ending coverage position of 1.43%.
Reflecting back on the full year of 2018, both our GAAP and originated metrics have trended favorably as we ended the year with our credit portfolio well positioned. As it relates to the GAAP results, the level of delinquency improved by 37 basis points year-over-year while NPLs and OREO improved 5 basis points for the same period. Our 2018 full year net charge-offs were 26 basis points. So if you recall were impacted by the sale of Regency Finance during the third quarter. Absent the resulting one-time accounting impact, our charge-offs would have ended 2018 at a solid 23 basis points versus 22 basis points for the prior year.
Looking ahead to 2019, we remain committed to managing the business through our core credit principles which we continue to consistently drive throughout our organization to support the delivery of credit and management of risk. With our position in higher growth and diverse markets we continue to be very selective in seeking out high quality credit opportunities that will allow us to balance growth objectives with our desired risk profile. We have also taken aggressive action over the last couple of years to take risk off the table which will help better position the portfolio as we move into a later cycle economy.
Despite these positive results, we are carefully monitoring the economy at large for signs of any softness including sectors that could be adversely impacted by tariffs or the government shutdown. Our credit results from year are our product of the disciplined approach our banking teams takes each and every day to focus on sound and consistent underwriting, the selectivity of credits, proactive risk management and portfolio diversification across our markets. We will remain steadfast in this approach and the strategies we have developed to manage the business as we move ahead.
As we stand here today, we are pleased with the number and quality of large corporate C&I opportunities we are seeing which we expect to drive growth in the first quarter and beyond.
I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
Thanks Gary and good morning everyone. Today I will discuss our financial results and provide high level guidance for 2019. As you can see on Slide 4, fourth quarter EPS totaled $0.30 as we finished out the year on a positive note. Our TCE ratio increased 16 basis points from 689 to 705, which now at this level provides us with flexibility moving forward. With a payout ratio under 40% in the most recent quarter we would expect to build on our earnings growth momentum and continue to meaningfully grow tangible book value per share and our TCE ratio.
Now let's look at the balance sheet for the quarter starting on Slide 6. On a linked quarter basis average loan growth totaled $165 million or 3% annualized including commercial loan growth of 2% and consumer loan growth of 4%. The consumer growth in the quarter was concentrated in residential mortgage up 18% and indirect auto up 17% partially offset by about $75 million of impact for direct installment loans from the Regency sale. For the commercial portfolio C&I and leasing were up 12% annualized as we saw good origination activity across our footprint. It was partially offset by a decline in CRE balances.
Turning to book deposit on a linked quarter basis, average total deposits increased $368 million or 6% annualized during the quarter. We experienced growth in multiple categories including 4% annualized growth in noninterest bearing deposits, 6% annualized growth in interest bearing transaction deposits, and a 9% increase in average time deposits. Noninterest bearing deposits increased for the third consecutive quarter and we are highly focused on continuing to grow these balances.
I'll note that the increased cost of funds on interest bearing liabilities in the quarter included repricing of longer-term customer funding and longer duration borrowings that helped keep our margin and interest rate risk fairly neutral.
Looking at the income statement on Slide 7, net interest income decreased 1.1% or $2.5 million dollars reflecting the third quarter having two months of net interest income from Regency. For the quarter total purchase accounting accretion was $9.2 million with $8.3 million from incremental purchase accounting accretion and $900,000 from cash recoveries resulting in an adjusted net interest margin of 317 that compares to 320 excluding these items.
Looking at the adjusted net interest margin trend compared to the prior quarter, the impact of higher residential and indirect growth, as well as increased funding costs from the recent Fed moves and lengthening duration for time deposits and borrowings, offset the benefit on loans tied to prime and one month LIBOR.
Let's look now at noninterest income and expense on Slides 8 and 9. The decrease in reported noninterest income was largely driven by the $5.1 million gain from the Regency sale in the third quarter. Excluding this gain, noninterest income decreased $1.3 million or 1.8%. This decline was primarily due to $1.4 million of lower insurance fee income most of which was normal seasonal impacts and $0.5 million dollars attributable to the Regency sale. Mortgage banking income decreased $1.4 million reflecting lower gain on sale margins and seasonally lower sold volume during the quarter. Capital markets and wealth management continue to produce strong fee income contributions consistent with the prior quarter.
Turning to Slide 9 operating expenses declined $1 million compared to the third quarter marking two consecutive quarters of decreased expenses. The primary drivers of the fourth quarter decrease were $2.7 million decrease in FDIC insurance expense and $0.4 million decrease in outside services partially offset by $2.6 million increase in salaries and employee benefits reflecting normal fourth quarter through-ups for incentive accruals and elevated medical insurance expense. The efficiency ratio was at a solid level of 54.1 consistent with 53.7 last quarter.
Next I will discuss our expectations for 2019 shown on Slide 10. Spot loans and spot deposits are expected to increase in the mid-to high single-digits. Net interest income is expected to grow in the low single digits compared to full year 2018 which includes a lower level of full-year purchase accounting in the $20 million to $30 million range for 2019.
I'll note that we managed the balance sheet to a neutral interest rate risk position and are focusing on driving net interest income growth to organic loan and deposit growth. Even though we had pluses and minuses with branch consolidations and the Regency sale, noninterest income is expected to increase in the low single digits compared to full year 2018.
Our core fee businesses of wealth management, capital markets, insurance and mortgage banking are planned to grow high single-digits or low double digits consistent with recent trends. Noninterest expense is expected to be flat to down 2% compared to full year 2018 as we continue to find opportunities to take costs out of our expense base. Provision expense is expected to be $65 million to $75 million with originated net charge-offs in the range of 2018 levels. Finally, our effective tax rate is expected to be in the 18% range.
In 2019 we expect commercial and consumer loan production to pick up through a combination of increased demand and driving market share gains across our footprint, which we believe will lead to achieving our total loan growth targets. On the deposit side we've made solid progress with our deposit gathering strategy. So I'm also optimistic we can reach those targets.
Next, Vince will talk about some of our growth strategies and cover some 2019 initiatives.
Thanks Vince. On last January's earnings call we laid out several major initiatives and I want to provide an update on the progress towards those objectives. In commercial banking our leasing group had another outstanding year with average commercial leases up 40% over last year. Combined with our C&I portfolio, the average portfolio growth totaled 16% compared to 2017. This was led by the very strong commercial production activity in FNB's mid-Atlantic region which includes the Baltimore and Washington DC markets and the Cleveland region. We entered these markets during 2013 and 2014. We are really beginning to see significant contributions from these investments.
We look to build on this success as we capitalize on the opportunities within our newer southeastern markets. For the Carolinas, two out of the four commercial regions met our expectations in terms of commercial origination activity this year. Given that we've had success in capturing deposit share with Carolina FTC - FDIC deposit balances up 5% year-over-year, we believe the attractive demographics will fuel commercial lending opportunities and lead to accelerated portfolio growth moving forward.
During the year we made great strides towards improving the customer experience notably in the consumer bank. As a proof point S&P Global Market Intelligence recognized FNB in 2017 and again in 2018 with the study revealing the features of FNB's mobile apps are more robust than those offered by most national and regional competitors. This recognition is an example of the progress we are making with FNB's technology investments with Clicks-to-Bricks. Our strategy is to continually adapt and improve our digital and physical locations in response to our evolving customer preferences.
During 2018 we further upgraded our digital capabilities to include Zelle and other new mobile features while also refining the overall experience for the consumer by optimizing our physical branch network and adding additional concept branches to our platform. We have also built out the infrastructure necessary to expand the use of artificial intelligence and data analytics to support our marketing efforts.
Regarding our physical delivery channel, we continue to reposition our branch network with positive results. Deposits per branch increased to nearly $60 million at the end of December and FNB achieved $6 million in annual expense reductions. 2018 marks the second consecutive year where average deposit growth exceeded our average loan. I'm particularly proud of the retail team and their accomplishments as we were able to achieve 7% deposit growth while closing 20 locations to improve consumer banking profitability.
Through our ongoing optimization program we will consolidate additional branches as well as repositioning FNB in higher growth markets through attractive de novo locations that can accelerate long-term growth. Our ongoing strategy to accelerate organic growth and improve consumer banking profitability includes investments in technology in response to changing consumer behavior.
These investments will drive significant enhancements to our online platform in 2019, all of which are already reflected in our expense guidance. We look forward to providing these new features to better serve our customers financial needs and we will keep you updated on our progress.
Overall we are encouraged with the recent results across both the indirect and mortgage business as average residential mortgage loan production exceeded $2 billion and indirect experienced record production in 2018. Specifically as it relates to the mortgage business, mortgage banking fee income increased 10% over last year. We are optimistic that we can build on this growth by leveraging our newer markets. We expect the mortgage business to be a meaningful driver to support our growth objectives in 2019.
Turning to noninterest income, last year I discussed the expansion of our SBA and capital markets platform. While SBA did not perform up to the levels we expected at the beginning of the year, we recently hired a new leader for this business who will better execute our desired lower risk strategy in 2019. As I mentioned earlier, capital markets increased nearly 30% compared to 2017 with the Carolinas contribution increasing more than $2 million in revenue. We also believe these businesses have meaningful growth potential and hope to build on our core fee business units in 2019.
These are just a few of the major initiatives we've laid out as part of our long-term strategic plan designed to fully leverage what we've built to meet our growth objectives and maintain our risk profile. I'd like to thank our employees who through tremendous effort make our success possible and to for the eighth consecutive year in Western Pennsylvania and fourth consecutive year in Northeast Ohio voted FNB a best place to work. In addition, FNB was listed as a finalist for the second consecutive year in Baltimore.
Looking ahead, our capital position strengthened meaningfully during the year as we surpassed our targeted 7% TCE ratio reaching 7.05% to begin 2019 better positioned with greater capital management flexibility. We are highly focused to better serve our constituencies by listening to their future needs and creating incremental value for our customers, communities, fellow colleagues and ultimately delivering greater shareholder value.
With that, I'll turn the call over to the operator for questions.
Yes thank you. [Operator Instructions] And this morning's first question comes from Frank Schiraldi with Sandler O'Neill & Partners.
Good morning.
Good morning, Frank.
I wondered if you guys could just give a little – talk a little bit more about loan growth expectations, you know the mid-to-high single digit growth in 2019 reflects kind of a step up, others are I think getting a little – it seems like some are getting a little more cautious on growth expectations, so if you had the primary drivers that the Carolinas and then is it demand picking up or is it runoff slowing?
Well, first of all let me give you a little color around the range. I would use 4% to 8% Frank and then we're giving you a range because there's a lot of uncertainty not with FNB and our ability to execute but with tenderness government shutdown, tariffs, the global economy. But having said that, I feel very, very good about the new markets we've entered. As we've said in the past we - it usually takes us a couple of years to shakeout the undesirable credits to change personnel over, to start to pursue opportunities that are more in line with our risk appetite. And I feel we’re there, we're fully staffed across the footprint.
We had good performance from two of the four regions in North Carolina from a production standpoint. We're expecting the other two to pick up here. They have decent pipelines. We're getting good growth in Washington DC, very selectively. We have a great team there that we've assembled and that faster that covers the DC market. Maryland and Cleveland are performing very well. We've gained market share in those two markets and we've achieved double-digit growth in those portfolios. Those are the reasons that I think we've built the company to withstand downturns in more stressful economic times.
I've mentioned repeatedly part of our strategy in moving into multiple MSAs with good solid deposit share and lower proportional loan share is to enable us to grow at these rates without changing the risk profile of the company. So we - having said all of that I think putting 4% to 8% up here is reasonable. We do have some as Gary mentioned in his comments, we have some good solid large commercial opportunities as we've grown the company we've started to focus up market and we have a number of really solid high-quality opportunities that will drive both fee income and loan growth for the company.
So that's the pieces for our guidance and I think it sounds - I do like you know I will caution everybody about the environment again. We're seeing good opportunities. That could change given the global economic climate, but so far so good. Credit quality has been good. We've spent a lot of time derisking our portfolio. We've mentioned that to everybody over time, that's been a headwind for us from a growth perspective, but it is a reasonable thing to do given where we are in the economic cycle and the uncertainty that's out there. So I think our portfolio itself is in a very strong position as we move forward despite what faces us.
Okay, great and thanks for all that color. And then just lastly just on the – you talked about, Vince Calabrese as talked about the noninterest or interest bearing deposit cost increase in the quarter and just given some of the drivers there it sounded like that increase or that beta is not indicative of what you think run rate is going forward here. So just wondering what you have, or what's a good expectation for beta in the near-term and I guess what you have baked into your model?
Yes, I'll point to Vince for some historical perspective on betas, but before we go there, our strategy has always been to grow noninterest bearing deposits accounts to shift the mix at the company. So everything we do from a pricing perspective is geared towards driving higher levels of noninterest bearing deposits. And I think if you look back over three consecutive quarters including this quarter, this past quarter we are reporting on which is typically a low period for us, we've shown average balance growth double-digit in some of the quarters.
So I think our strategies are working. We're going to continue to pursue growth in noninterest bearing deposit balances and competitively price certain categories to be in the game so that we can bring new households in. The competition is intense, but I think we have a great delivery channel. We have good products. We have a good team and our bankers are very skilled at using the tools that we've given them, artificial intelligence, analytics, the sales management systems we've talked about to manage that growth. So Vince, if you could touch on the betas?
Sure, yes I guess a couple of comments on that. If you looked at our results for the current quarter as I commented on, we did have the opportunity to lengthen the term of our CDs. So we did the CD back in 2017. We generated about $650 million of 13-month CDs then. We were able to retain 87% of that and move people into 19 and 25-month CDs, so there is some lengthening there so that comes on at a higher cost in the short run but it's good financial strategy to pursue.
And then we also had some opportunity to term out some borrowings about $300 million of five and six year money that we've put on at very attractive rate. So that's kind of the cost of funds move during the quarter at those two items where we're lengthening our duration there and which will serve us well as we go forward.
As far as the betas themselves, I mean for the quarter, our total deposit beta was 45% up from 40% in the third quarter, so it went up a little bit. Interest bearing deposits went from 54% in the third quarter to 61%. If you look at the betas kind of on a spot basis, interest bearing deposits was actually 53. So as spot was lower than the average and it came down from that it was 67 at the end of September.
So I think as we go into - looking into the first quarter, we would expect the betas to slow somewhat from a level that it was at in the fourth quarter, it could be by a decent amount depending on the mix of what we put on. But directionally, I would expect the betas not to continue to grow and to come down in the first quarter.
Great, thank you.
Okay, thanks Frank.
Thanks Frank.
Thank you. And the next question comes from Casey Haire with Jefferies.
Good morning guys.
Good morning.
Just wanted to followup on, so the NII guide, I know you guys run the balance sheet pretty neutral, but what is it – what does the guidance bake in, in the way of Fed hikes in 2019?
Well, let me comment on the guidance that's in there. The overall guidance year-over-year is a low single digits. I want to point out using GAAP reported net income for 2018 is the base number. So Regency was in there for eight months, so if you kind of normalize for Regency we'd have net interest income growing in kind of the mid-single digits on an apples-to-apples basis.
We do have two Fed moves in the forecast for 2019, but as you know from 2018 the Fed moves were kind of a push and the ability to continue to bring down the short-term borrowings helps that as that was offsetting some of the earning asset pick up that we get from the 45% of loans that are just based on LIBOR prime. So there's two baked in there, but it does not have that significant of an impact if they don't happen I guess is the point I would make there.
And then the other important thing to the guidance is that I mentioned the purchase accounting accretion, so for 2018 that was $38 million. Our range for 2019 is to $20 million to $30 million that I mentioned which is $5 million lower than the $25 million to $35 million we had been guided towards in 2018. So just to kind of put some context around that.
And as you mentioned, we do manage to fairly neutral, so our goal is not to make bets on rates, but just grow net interest income by growing loans and deposits.
Okay great, so I mean if the Fed is on a pause this year, there's not a lot of risk to the NII guide?
Right.
Great, okay. All right, and then just switching to expenses, pretty good cost controls that you are calling for this year, I know Regency, eight months of Regency won't be in there, you know Vince, I think I heard you say that you are going to continue with the branch consolidations. Just what is going to be – or what magnitude of branch cuts or other efficiency initiatives are baked into that guide because we do, you are calling for a step up in loan growth from his current pace, so just what's underlying that expense guide?
Yes, we will continue to evaluate branch locations. There's an initiative that we've got three years in play called REDI here at the company project REDI. So we're going to continue to focus on that. Some of the cost savings from branch consolidation we invested in higher growth areas like Charleston and Charlotte and parts of Ohio that we've targeted to open new locations.
And so, I think that you'll find that net-net there will be expense reductions, I'd say baked into Vince's guidance would be something to the effect of half of what we told you last year in expense saves. So last year we gave you a number, we may do better than that. That's not included in the guidance. It's not easy to rationalize the delivery channel it takes time. so, but as far as your modeling I would assume that about 50% of what we disclosed last year will happen this year.
Okay, so the branch cuts actually are less, but…
$3 million in expense reduction.
Yes, okay, all right great. And then just last one from me on capital management and I know you guys above your 7% TCE and you commented on increased flexibility, are you contemplating any capital management moves this year about may be dividend hike or share buyback or are you still on capital build mode?
Well, I think as you look at where we are in our evolution we mentioned a few years ago, our hope was to get below 40% in terms of dividend payout ratio. We want to build tangible book value per share, so with anything we do would be measured against anything that could possibly impact that. We've had some nice growth there, so we're back up beyond where we were prior to the Yadkin deal and growing nicely with the increased earnings.
So, TBV per share based upon our trajectory should be above 7 bucks and I think at that point we start to look at TCE is one capital measure that we use, but there are others. It opens the door for us to be much more thoughtful about the deployment of capital if we come in on the lower end of the growth range and we feel the market is dicey we will have an opportunity to do some things provided that in our valuation presents opportunities for buybacks or addressing a dividend increase.
We're not going to sit here and accumulate capital for the sake of accumulating capital. We operate a low risk model which means we're not doing certain things and for us to sustain our investment thesis it requires us to be extremely efficient in terms of the deployment of capital. And we're in a place we haven't been since I joined the company 12 years ago. So nice solid capital base, capital ratio is growing, tangible book value per share accelerating, the dividend payout ratio approaching some 40%, that's some pretty exciting times for us in terms of – and for the shareholders in terms of capital management.
As you know, over time we've had to face considerable amount of regulatory burden. There are numbers in excess of $30 million per year that we dealt with and with that behind us and how we're positioned in the markets we're very optimistic about our ability to do some things differently as we move forward.
Great, thanks for taking the questions guys.
Yep, thank you.
Thanks Casey.
Thank you. And the next question comes from Jared Shaw of Wells Fargo.
Hi good morning.
Hey, Jared.
Good morning, Jared.
May be just shifting a little bit to credit, when we look at the dollar level of net charge-offs now that Regency is gone is this, could you give a little breakdown on what we're seeing there and is this a stable level in terms of given the economic outlook where we are now, this 24 or 25 basis points a quarter given the loan portfolio breakdown at this point?
Yes, generally speaking Jared and we've talked about this in the past a little, Regency was approximately 4 basis points of the charge-off levels of the company at full run rate basis. So, you could look at that being removed from that performance. We're looking at charge-off levels as we have in the past. You'll see the consistency that we've shown over the last number of years. We would expect that to continue naturally as long as the economy continues to hold in, in a fine fashion. So I would tell you it's more of the same as we go forward based on the consistency of how we underwrite and how we manage the book.
Okay great, thanks and then on the loan growth there was very good C&I growth this quarter. On the CRE side when do you expect to see may be some of those competitive pressures start to abate, are you seeing in the market any of the other non-bank competition starting to step back or is that still as significant as it has been in the past?
We're still seeing some large payoffs. I'd say we had a higher quality book, so I am not surprised that we saw an acceleration in prepayments in that portfolio. Our clients were able to achieve stabilized occupancy quickly. That makes for an attractive investment by a non-bank investor. So we've seen payoffs at a pretty steady clip. I'll let Gary give you more color right on where we are in the cycle. I would suspect that it should start to wane here.
Yes, I would agree with that Vince. I mean as Vince mentioned it's been a steady flow at a normal pace with the activity in the life insurance company space. The multifamily projects that we financed two and a half three years ago from a construction standpoint, they've stabilized. It's time for them to move to the permanent markets and that's really what we're seeing here.
Okay and then just finally from me, on the indirect auto are you still expanding the dealer network or are you just taking more product per dealer?
Yes, the dealer network Jared has been a core group of dealers that we have banked from 25 to 30 years in timeframe. Occasionally we do add one here and there. Keep in mind we're basically doing business in our Pennsylvania marketplace. We've not rolled it out to any of the growth markets other than the Pennsylvania marketplace. And as we have talked in the past that book is run from a credit perspective, credit first and it’s a very good earning asset stream for us.
We've been able to continue to do good volume there with our core group of dealers and we'll continue to do that as we move forward. Just as a touch point, during 2018 the average FICO on new volume came in at 770, so it's very good paper and it performs very consistently for us through time.
And what's the spot rate on the indirects at the end of the year?
The spot rate was about, the spot growth was about $485 million and the spot point right at 1.9 billion.
No I mean the rate, the yield on it?
Oh, the yield is all over the board depending upon the mix that comes in that particular month. I don’t want to throw a number on it, I don’t have it at my fingertips right now, because we vet it by every category that you could imagine because of different types of automobiles being financed. We'll follow up with you after the call on that.
Okay, thanks.
Thank you. And the next question comes from Michael Young with SunTrust.
Hey, good morning.
Hey, Mike.
Hey, Mike.
Why don’t you circle back to some of the deposit and the deposit pricing question kind of areas of growth and if we go forward this year and we don’t have any Fed hikes, how much kind of remaining pressure do you think we see on deposit pricing throughout the year and is it more focused kind of on the front end here in the first half of the year or is there some wait and see and repricing some of the CDs et cetera in the back half?
Oh I think if you don't see Fed rate hikes it's going to depend on how the industry reacts and non-industry competitors. You've got some crazy rates out there from new entrants. I would say it depends on how that plays out because there's going to be a lot of pressure to maintain margin particularly if the Fed is not increasing rates because there will be less growth on the asset side, so hopefully you'll see pricing rationalization come into play hopefully.
For us, we tend to price certain categories up and then we pursue a strategy of growing the household. So with the higher priced interest bearing deposits that we gather, there's an element of non-interest bearing that comes as well which makes the rate all in more attractive for the rate that we're paying. So I think that it's all going to be a function of how the industry responds to the lack of Fed hikes and what's the root cause of the lack of those hikes, I mean what's happening in the overall economy that's driving that.
In any event, we have to be prepared, and I think the best way to be prepared as we move into a cycle like this is to do what we've done in the past and really focus our people on noninterest bearing deposit gathering, which means banks that have invested in technology and have a product that offers features that consumers want like we have been doing, will be more appealing and it will make it easier for our bankers to gather those noninterest bearing deposits. That's true in small business, commercial and consumer banking.
Okay, and if we see you know greater repricing pressure even though the Fed is not moving rates would you guys start to slow the asset growth side if you're just not getting the right risk adjusted return and any kind of things that you focus on or watch for in terms of managing or monitoring that?
Yes, we've - I mean we've been pretty successful over time if you look back over multiple periods, we've been able to grow deposits commensurate with loan growth or better more than actually more than. So I would say there are a number of things we could do. I think that would be addressed by the environment that you're operating in more so than us taking a particular action because if the Fed is not doing anything that means the economy is not moving at the pace that they expect. Right? Or there are some other factors applying pressure.
And that reverberates back through the customer base and impacts loan demand. So there are things we could obviously do ourselves, but I think we'll be dealt that hand without control. So, and we have to be able to react to it as a management team and take the appropriate actions necessary to protect the margin which is what we would do like we have in the past.
The only thing I would add to is we have opportunities to create shelf space on the asset side if we wanted to. And if there's growth in certain categories that meet our hurdles you know we could have more mortgage loans, we could securitize and direct loans. So there's things we could do on the asset side that creates the shelf space so that you could bring in the growth that you want to bring in.
Okay, perfect. And then if I could sneak one last one in just on capital, you mentioned buyback and dividend increases, you specifically didn't mention M&A, is that still kind of on the backburner for a period of time and any update there?
Yes, I think given where the industry stands the sector has gone through some tremendous valuation changes in a short timeframe, I think it makes it more difficult. As I said our focus is on tangible book value per share accretion. I think were we stand today given what we've accomplished, we had to do M&A because of what we were facing from a regulatory standpoint.
I think many people forget that this company emerged over $10 billion in 2014. I mean, really got hit with the full impact of going over, full year impact was ’14, that wasn’t that long ago. So M&A was a necessary evil. We had to grow quickly. We had to take cost out to cope with the regulatory burden and the expense burden associated with building out the risk infrastructure.
So, I think that we're through that and we've built a nice franchise that has a tremendous amount of intrinsic value and we're in some fairly dynamic markets. So we have an opportunity to drive growth in those markets and continue to take market share like we have in Pittsburgh and Cleveland and Baltimore, in the new markets. So I think that we're going to focus on that and continuing to stay squarely focused on managing capital efficiently and driving tangible book value per share growth.
Okay. Thank you. And the next question comes from Russell Gunther with D.A. Davidson.
Hey, good morning guys.
Good morning Russell. How are you?
Hey, I wanted to circle back to your comments on the C&I growth you're seeing and the large corporate opportunities there, what's driving the pickup in opportunity and is that growth kind of all in your core footprints?
It's in the core footprints. I'd say part of it is the growth we've experienced. Our balance sheet, the size of the balance sheet today enables us to move up-market. We have a number of people that came from much larger institutions that have experience in corporate banking, and we are seeing a lot of transactions, some are M&A related, some are just big capital investment that's starting to happen.
So we're seeing it and there are other factors that come into play. I mean when you start to see credit spreads broaden in the bond market, there's a shifting. When spreads became thin, larger corporate borrowers shifted out of their pro rata facilities into the bond market. When those credit spreads start to broaden and the bank market is still fairly competitive, they shift back. And we're getting a tailwind from bond economics changing and the larger companies moving back into the bank, back to the banks for capital. So you've got a little bit of that, you've got some M&A activity.
We've got opportunities with larger companies across a six state area, we compete in seven very large MSAs with a number of large corporate borrowers that we can call on and we've been focused on that, so all of that comes into play and for us that's all new. So those are the new markets that we can capitalize on in a reasonable way without changing the risk profile of the company.
All right, thanks for that. And then the last one from me, Gary you talked about closely monitoring portfolios that could be impacted by tariffs and if the government shutdown really continues to track on here. So if you could you give us some color on what you're watching in particular and where you would find yourself perhaps most exposed if the government shutdown extends meaningfully?
Yes, I mean in terms of, in terms of the industries specifically metals exposure, anything steel related, we're keeping a very close eye on that. That's a core business for us, so it's something that we're very close to target on the side. Right, on the tariff side, talking to our clients. We've got some scrap dealers, so they're potentially impacted as well. Overall, it's concentrated in that space.
I mean you have some one-off borrowers that do business in China that are impacted on a one-off basis as well. But overall we've not seen any major issues at this point. We continue to talk to our clients and remain vigilant in talking to them to stay ahead of it. The good news is at this point we haven't seen any major concerns to date.
As far as the government shutdown is concerned, we've got a - in our Washington DC market we've got a small government contracting book of business, it's about $100 million at this point. We have not seen any impact at all to those clients. They've got very large balance sheets and continue to operate as normal. We do have some smaller clients in that space as well and our bankers are talking with them on a regular basis. Nothing that has shown us any concern at this point, but that's something we'll continue to monitor in the short run here until it hopefully resolves itself sometime.
But the entities that we finance aren’t impacted by the portion of the government that's closed, so there's people who forget that three quarters of the government is still functioning. So, I think the impact to us over time might be in the Maryland area, portions of Pennsylvania where you might have some employees, that you know - employees in the major cities that work for TSA for example who may need relief. We haven't seen a lot of it recently right. Gary?
At this point it's been less than a handful of clients that have called in and that we've reached out to.
So, we've encouraged if you look on our website there's a number for those people to call. We put that out right away. We have a program to deal with any distress that a small business would be experiencing that's it's relying on the Federal Government and can't get paid. We are looking to help the employees of the Federal Government need relief. That was part of the reason we advertised that number, so that we could provide some sort of relief to those that are struggling financially because of it. So we put all the stuff into play early on, very early on, leading up to the shutdown and it's been in place since then. We've not seen a lot of activity to date.
Got it, okay, that's it from me. Thanks for taking my questions guys.
Thank you. Good thing Russ.
Thank you, Russell.
Thank you. And the next question comes from [indiscernible].
Hi, good morning.
Good morning, Matt.
So, a couple of quick questions, with regard to the Yadkin loan book, what percentage of those loans have matured, been re-underwritten and moved into the originated book at this point?
Yes, I'd have to let somebody else answer that question. I don't have that much detail at my fingertips relative to that portfolio. I don't know if anybody, we might have to circle back with you, I don't think we have that.
It’s not a big number.
Okay, and so it’s a different question but sort of related. Where are you with regard to CCIL, are you running parallel, how your conversations with your auditors and regulators gone and can you give us any detail there?
Sure, no I can give you an update on that. I mean, our models are being developed or in development making good progress on it. We've started the, kind of model validation process which is a key step in the process. Our plan is to do parallel runs throughout this year beginning in April with Q1 numbers. We have a very active Management Standing Committee, Gary and I both are part of that and as you would imagine that the full team has been meeting for months and months, working on that.
We are also continuing to monitor the FASB developments and there's some proposals out there that they're going to assess and may or may not result in delaying it to do an impact study, so we're also keeping an eye on that. But, I would say we're right on track with there's couple of year project plan we put together and just moving along that path.
Any update on potential impact for what you might have to do for your allowance or outlook for provision going forward?
A lot of that in the second quarter. We're still, like as I said developing the models, validating the models and then in the second quarter we would expect to start to get some kind of early looks at the impacts.
Okay, thank you very much.
Okay, thank you, Matt.
Thanks Matt.
Thank you. And the next question comes from Collyn Gilbert with KBW.
Thanks, good morning guys.
Good morning, how are you?
Good. Just a question on the NIM, so adjusted NIM this quarter was 316 excluding all the monetization [ph] whatever. If we could think about the trajectory of that given kind of the natural repricing and maturation that's occurring within the portfolio, are you expecting kind of that core NIM to gradually migrate higher as we move throughout 2019, again not assuming any rate hikes, just kind of neutral impact on rates, but just trying to get an understanding for the direction of that NIM?
Yes, I mean as you know it depends on the mix of the earning assets that we put on. Right? The last couple of quarters have been kind of the heavier pieces have been kind of indirect and mortgage which are on the lower side of things. So the more commercial growth that we get this year mix wise will obviously help move the margin up. I think that the - if we don't get a Fed move or where we sit today expecting the betas to come down obviously kind of helps the margin.
The challenges we all know with rates to have been so volatile in the last three, four months as far as how much rates have moved. So it's hard to have a really good crystal ball as you get deep into the year, but if you kind of look ahead to the first quarter, I mean we would expect stable core NIM compared to the fourth quarter level which you kind of get down to 316 if you take out all the purchase accounting and then add the purchase accounting on top of that you get to 328, so that's kind of the perspective I would share at this point Collyn.
Okay, that's helpful. And then did I hear you say when the question came up about operating expense guide that you're looking for $3 million of OpEx reduction in ’19? I know you guided to the percentages but that…
You are speaking specifically to the branches, just the branches, yes that's what was included to that.
So for us looking into our guidance Collyn there's other initiatives too, cell phone, there's a whole variety and issues; re-renegotiating contracts or processing contract is up this year. So there is a variety initiatives we're going after and the three wishes for the branch consolidation benefit.
Got it. Okay, that's helpful. And then just finally, Gary on the provision guide that's coming in higher in ‘19 than certainly what you delivered in ‘18. I'm just trying to understand I guess without Regency I would have thought maybe net charge offs would be would be coming down in ‘19 relative to ‘18 levels, but and I apologize if this is part of Damon's question, I'm sorry, Jerry question, but I just wanted to get clarity on that?
Yes, I guess I'll make a quick comment on the provision guidance and then Gary on charge-offs do you want to add anything else. But if you look at the 2018 the provision range from $14.5 million to $16 million a quarter, so the full year was 61.2. I mean our guidance for ‘19 of $65 to $75 is based on the current credit outlook that Gary described which we're in a very good position as we enter ‘19 and then reserving for the plain growth in the loan portfolio. So really the combination of the 2 is kind of how you get to that range which is pretty close to kind of what we had for the full year of ‘18, but that's how we're thinking about the provision.
And Collyn, as mentioned earlier, the Regency thing, if you remove four basis points, that's going to right size things for you on a go forward basis. So from that standpoint, we expect charge-offs to be in a consistent range absent Regency, subject to the economy holding. We are what everyone feels is a later cycle economy, so once you get later in the year does that cause any impact? No one can tell at this point. We feel very comfortable with our consistent underwriting and we feel good about the portfolios as to where it sits today.
Okay, okay, that's helpful. I'll leave it there. Thanks gentlemen.
Thanks, very much Collyn.
Thank you. And the next question comes from William Wallace with Raymond James.
Thanks, I'll try to be brief. On the fee income guidance, Vince in your prepared commentary you spoke about the new hire for a lead in the SBA business and then you also spoke about it sounded like an expectation of continued growth in the mortgage banking segment. On the mortgage side, if I look at the second year, the second half of 2018 versus ‘17 it looks like mortgage was down slightly and I'm just curious, what are you anticipating from kind of gain on sale margin perspective and a volume perspective in ’19 to get that growth back?
Yes, well there are a number of initiatives that we've put into effect this year that should benefit us next year. There were some marquee hires in Maryland and in the Carolinas, big producers that should start producing. Some of the - I'd say earnings or margin pressure came from great volatility in the interest rate space, so some of it is purely related to our hedging activity.
So, I would say as we move forward as things begin to normalize particularly in an environment where we don't have an elevation in rates we should see some steady growth or expansion in that margin and we should see production gains coming out of the Carolinas and in Maryland that are fairly substantial. So that's why we gave the guidance we gave.
In the fourth quarter there was about a $0.5 million reduction from mortgage servicing rights impairment in that number, so the underlying number was high by about $0.5 million.
Great, and then on the SBA side, with the new hire is it - I don't know when that might have occurred, is it, do you have enough visibility to get a sense as to how much of an overhaul there might be to the business or is it really just having somebody else who can kind of drive…
Well, as you know, the business has been dramatically overhauled. So we were in a risk off mode relative to SBA we've said that for some time. So we've been shrinking the volume by focusing more on end market opportunities as a product area versus a national calling effort to slap a guarantee on anything that moves and hope that we live through a cycle.
I think that the focus has changed and this person in particular hails from I think region, so he's had some experience utilizing the product the way we want to utilize it, and I think it's a great business when it's used for small businesses to provide capital where they might have a slight collateral deficiency, but it's not a product we're going to use to provide venture capital for companies or to engage companies that have had operating issues or deficit cash flow.
So it's a different model. It's going to take discipline. It's incredibly difficult to watch revenue decline in a particular area, but I think it speaks volumes about the company's ability to manage risk and we're very optimistic about the team. We have 100% of the sales people in place under this new leader and his mindset as I said is in direct alignment with ours and he's doing some good things to get the production out of the bankers that we have in the seats here.
Okay and one follow on to that, have you guys, has there been any decision process around whether or not you might want to start to balance sheet some of the production given some pressure on the premiums paid in the market from those zones?
Good news about doing better quality deals is that we can make those choices and we look and we have put some of the production on our balance sheet because the gain on sale is not high enough to give it up. So when you're willing to put something on your balance sheet and not just sell it under the previous model, it also speaks volumes about the risk profile of those credits. I don't know if you want to say anything more Gary?
No, we've been doing that all along Willy, for the last six plus months we've been making decisions on the credit by credit basis and we have put more on the balance sheets in the recent periods there.
And that's because there are credits there originated out of our footprint where as I've said somebody's smaller business is growing and they need capital and that bridge is a collateral shortfall, slight collateral shortfall, that's how we're using the product.
All I would add to, Willy which is one other point, it's important to keep in mind that we've changed the business model a lot in the last two years as we mentioned. I mean the total contribution is a little over paying your share, so just to kind of put that in context, I think we feel good about the activity picking up, but in total it's about a little over pay.
Yes, thank you. I'm shifting gears real quick on to the tax rate. Would you, it looks like your guidance includes some expectation of tax credits. I'm wondering if you'd give one what the dollar amount of credits were in the fourth quarter and how you're anticipating additional credits in ‘19 if I'm correct in my assumption?
Yes, I mean you can do the math. For the fourth quarter it's a little over $6 million, if you do the math to our guided tax rate and effective tax rate that we booked for the quarter. And I think that as we've said this is part of the business, it's been part of the business for at least a couple of years in our leasing operation on the wholesale bank side and we'll continue to go after this. We have a pipeline that we have teed up for ’19, so there is some level of that in the '19 guidance. And depending on how we do, we could do a little better. So it's a function of bringing the business into the bank. So it's going to be part of the business. We have people that are focused on this and looking for these opportunities.
And we have more with the broader markets we're in there's more opportunities to go after it, so we will continue to do that. Then we also have other tax credits, store tax credits, R&D tax credits we're pursuing, as well as low income housing that we've always been pursuing. So we're definitely more active on that the tax credit side to lower our effective tax rate for the company.
Okay, thanks guys. That's all.
Thank you.
Thank you.
Thank you and the next question comes from Brian Martin with FIG partners.
Hey guys.
Hi Brain.
Good morning, Brian.
Hey I'll keep it short since a lot of it's been covered, but just maybe one for Gary, just a run off in the acquired portfolio Gary, I mean is that I guess, did you guys talk about that being lower, I mean it sounds like it's been trending lower but your outlook for 2019 and I guess less impact or just can you give some guidance on how you're thinking about that runoff?
Yes, actually Brian I could comment on that. This is Vince. I mean the acquired runoff for the quarter was $377 million. It was $320 million last quarter. This quarter is the second lowest of the year. So it's still lower than it had been running prior to the third quarter and it's really just a function of additional CRE payoffs that happened both in the Metro footprint as well in the Carolina footprint was really why the number kind of went up a little bit from where it was last quarter.
I mean looking ahead you have a shrinking book, so I would expect that number to definitely be lower for full-year of 2019 than what it was in 2018. But even with the pickup like I mentioned it is still the second lowest of the year.
Okay, all right and just you guys talked about the two regions in the Carolinas doing well and you have two may be just not meeting what you guys expected, I mean when you look at may be why those regions didn't perform as well as the other two, I mean I guess and why you are optimistic they get better, I guess I'm just trying to understand a little bit better just that outlook to get them going back up, I mean I hear you guys talked about having some concerns on the economic climate and maybe growth being a little bit slower, but then you're talking about the loan growth being up and just trying to reconcile those two why the optimism on those other two regions picking up as you go into 2019 here?
Oh because we have good people in the seats. We have – the portfolios if you backed out the CRE that's being taken out there's good production there that should lead to growth. So we're not giving up on them. The two regions that performed better actually had more C&I concentration in the base, so they expanded nicely. The other two I'm optimistic about moving forward because we've shaken the tree. So there's a lot of the stuff that we didn't want gone. We've got good people in the seats that can move them up-market, they have decent pipelines. So we're feeling good about the Carolinas in total. So there's been a little bit of investment in personnel there as well that should pay off, that's why.
Okay, all right, that's helpful. And just the other one, just going back to the SBA for a minute and I realize it's a small piece of the puzzle, but the government shutdown, does that impact to that? I mean it is just so small right now and I don't really worry about that or I guess it seems like some of that business is not occurring, so just is that affecting you guys? It didn’t sound like it is based on your comment that you're not really being impacted by it, but did I misunderstand that or?
It kind of just delays things a little bit Brian in terms of like new applications it would slightly delay them.
Okay, all right. I think you guys answered all the other questions I had, so I appreciate it. Thanks guys.
Thank you.
Thanks Brian. Take care.
Thank you, Brian.
Thank you. And as that was the last question this morning, I would like to return the call to Matt Lazzaro for any closing comments.
Well actually it's Vince Delie again. I'd like to thank everybody for participating in the call. We had lot of great questions. The company performed very well last year. I'm very pleased with the performance of the company. And we stay keenly focused on the areas that we spoke about, driving the dividend payout ratio down, creating tangible book value and continuing to focus on growing in a way that doesn't present risk for us or take us outside of our risk appetite.
So again, very strong year, looking forward to this year I think we've got a good game plan. We've got our arms around expenses and we have a good plan there. So we're looking for some good, solid, positive operating leverage and performance. So thank you everybody for calling and look forward to the next quarterly call.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.