FNB Corp (FNB) 2012 Q2 法說會逐字稿

Good day, and welcome to the F.N.B. Corporation second-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. Instructions will be provided at that time. As a reminder, today's conference is being recorded.

And now I'd like to turn the conference over to Cindy Christopher, Manager of Investor Relations for F.N.B. Corporation. You may begin.

Thank you. And good morning, everyone. Welcome to our second quarter of 2012 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. All forward-looking statements involve risks, uncertainties and contingencies that could cause F.N.B. Corporation's actual results to differ materially from historical or projected performance.

Please refer to the forward-looking statement disclosure contained in our second quarter of 2012 earnings release, related presentation materials, and in our reports and registration statements F.N.B. Corporation files with the Securities and Exchange Commission, and available on our corporate website. F.N.B. Corporation undertakes no obligation to revise these forward-looking statements to reflect events or circumstances after the date of this call.

It is now my pleasure to turn the call over to Mr. Vince Delie, President and Chief Executive Officer. Vince?

Thank you, Cindy. Good morning, everyone. Welcome to our second-quarter earnings call. Joining me today on the call are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. I will be highlighting our second-quarter achievements and financial results, as well as providing you with detail on a recent efficiency initiative. Gary will then discuss our asset quality, and Vince will provide a detailed review of our quarter's operating results and an update on our outlook for the remainder of 2012.

The second quarter was another solid quarter for F.N.B. We delivered strong results with positive trends seen across all key drivers. Our earnings reflect consistent growth, with strong loan and transaction deposit growth. We continue to effectively manage risk and expenses. The team remains focused on positioning the Company for growth. We finalized plans to accelerate a portion of our ongoing branch optimization program. We also continue to make excellent progress in the execution of our eDelivery strategy. I will expand on these topics in a moment.

First, let me share operating highlights with you. Beginning on slide 4, net income on an operating basis was $29.3 million or $0.21 per diluted share, representing a 113 basis point return on average tangible assets. These results compare favorably to the prior and year-ago quarter. Revenue growth, excluding the benefit of accretable yield, was also strong at 6% annualized. The net interest margin was 3.8%, an expansion from the first quarter. Vince will provide details on the margin in his remarks.

The efficiency ratio improved to 58%, as we continue to manage expenses and realize cost savings from the Parkvale acquisition. Our portfolios expanded through strong organic growth in loans, transaction deposits, and customer repurchase agreements. Total loan growth excluding reductions in the Florida portfolio was 4.4% annualized, largely driven by commercial loan growth in our Pennsylvania portfolio of over 7%.

Consumer loan growth was also strong at 8.3% annualized. We reported a healthy consumer pipeline at the end of last quarter, and the benefits are apparent in this quarter's results. Our ability to deliver quality, consistent loan growth uniquely differentiates F.N.B., and reflects the talent and depth of our team and the execution of our holistic sales management process.

Asset quality results were good, with stability evident in the result of our core portfolios. We achieved significant exposure reduction in the Florida portfolio, largely reflecting principal payoffs on performing and nonperforming credits. Gary will go over these items in more detail with you. We are very pleased with the quarter's positive results.

Slide 5 provides you with a longer-term perspective of our positive momentum. These graphs depict our operating return on tangible assets and tangible equity from 2010 through the first six months of 2012. In each period, our returns consistently far exceed peer results, with top quartile performance for ROTD.

In order for us to sustain our industry-leading performance, we continuously look to proactively position F.N.B. for greater efficiency and profitability. One area that received significant focus is our physical delivery channel.

Let me provide some background. In 2010, we formalized a systemic process to evaluate our branch network. This ongoing evaluation has resulted in a number of market expansions, market entries, and consolidations. Since 2010, we have expanded in strategic markets through six de novo locations, and consolidated a total of 25 locations when including the 15 Parkvale-related consolidations.

Now, at this time, we have chosen to accelerate the process and consolidate 20 additional branches and offer reduced service at three. Overall, this represents a 7.5% reduction of our current retail branch network of 266 locations. The affected retail branch locations are widely dispersed across our geographic footprint. And we plan to complete this consolidation in the fourth quarter of this year.

Run rate cost savings of $4 million pre-tax are projected, with the majority realized in 2013. When building in attrition assumptions, the projected pre-tax benefit to earnings is in the $2.5 million to $3 million range.

The decision to consolidate these locations reflects a number of underlying considerations. We look at branch profitability, customer transaction volumes, alternative means to serve our clients such as an enhanced ATM network, and proximity to existing branch locations. In fact, the average distance between these consolidated branch locations is only 4.5 miles.

Consideration was also given to shifting consumer preferences and trends to online banking and mobile banking channels. Our significant investment in leading-edge technology positions F.N.B. to meet these preferences and benefit from these trends. This branch consolidation plan is one component of positioning F.N.B. for future growth. Our efforts will enhance efficiency, contribute to greater profitability, and result in a more effective delivery channel.

Lastly, I would like to take this opportunity to provide an update on our eDelivery investment, which is important to our overall retail delivery strategy. We are pleased that the implementation is on schedule with positive early-stage results. Phase 1 is in place with advanced features such as business-to-business and person-to-person payments. Our mobile banking app launch was successful, with 15% of our online customers enrolled since introduction in early June.

Slated for the fourth quarter is Phase 2, which will significantly enhance our online and mobile banking capabilities. Advanced offerings will include mobile remote deposit capture, online total money management tools, and mobile alerts. As you can tell, I'm very excited about this initiative and proud of what our team has accomplished.

Now I would like to turn the call over to Gary to discuss asset quality.

Thank you, Vince. And good morning, everyone. The second quarter was a very positive one from a credit quality standpoint, as several of our key metrics reached levels that we have not seen since 2008. Our core Pennsylvania and Regency portfolios remain solid, as they have throughout the cycle, while our Florida portfolio was reduced during the quarter to only 1% of the overall portfolio, with principal reductions in payoffs on a few sizable credits feeding the driving force, as lending activity in this market increased during the quarter.

If you will direct your attention to slide 8, I would like to walk you through some of the second-quarter highlights, with the focus of my commentary around the Company's originated portfolio.

Delinquency improved to 1.78% at June quarter-end, driven by lower Florida nonaccrual levels, and was further supported by the stable delinquency in our Pennsylvania portfolio, while Regency's delinquency reached its lowest level in over a decade. The positive movement in Florida nonaccruals also drove the Company's nonperforming loans and OREO down by 29 basis points, ending the quarter at 1.93%.

The Pennsylvania portfolio's OREO level further contributed to the lower overall nonperformers, down $2 million during the quarter after we were able to sell several properties that were acquired from Parkvale. The OREO sale activity drove a 5 basis point linked quarter improvement in the level of the Pennsylvania portfolio's NPLs and OREO, ending June at a very solid 1.24%.

Net charge-offs of $7.5 million were 45 basis points annualized for the quarter and 38 basis points on a GAAP basis, with the linked quarter increase reflective of the comparatively low levels that we experienced during the first quarter, and $800,000 related to Florida. When measured on a year-to-date basis, exclusive of the impact of Florida, our originated net charge-offs were only 36 basis points, representing a 6 basis point improvement over the similar period a year ago. The reserve position remained directionally consistent with the quality of the portfolio, ending the quarter at 1.49%.

Turning to Florida, our loan portfolio ended the quarter at only $85 million, while the overall portfolio exposure, including OREO, totaled $104 million. This 33% linked quarter exposure reduction resulted from nearly $50 million in principal payments, of which one-half was attributable to underperforming loans, bringing NPLs and OREO down to $43 million at the end of June. We've made significant strides in Florida. And with the exposure levels down to where they are today, we will limit future discussions with you to only those events that are significant.

Shifting briefly to the acquired book, this portfolio ended the quarter at $1.1 billion, with contractually past due accounts totaling $57 million. As you will recall, these acquired accounts are all marked to fair value.

In closing, our performance during the second quarter demonstrated stability and an overall positive movement in the direction of our credit portfolio. Our originated metrics have begun to reach levels not seen since before the economic downturn, while our acquired portfolio is performing slightly better than we expected. With another solid quarter behind us and a considerable portion of the Florida portfolio now resolved, our loan portfolio is well-positioned for the future.

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

Thanks, Gary. And good morning, everyone. As Vince discussed, second-quarter results were solid, delivering $0.21 per share through the continued positive performance from our key drivers. I will focus my remarks this morning on additional highlights of our operating results and our expectations for the second half of the year.

Let's begin with balance sheet highlights on slide 10. As Vince mentioned earlier, the second quarter marks the 12th consecutive quarter total organic loan growth, with growth of 2.8% annualized. Excluding reductions in the Florida portfolio that Gary discussed, total growth was 4.4% annualized.

Positive results were seen in both commercial and consumer loans. Commercial growth for the Pennsylvania portfolio was strong, and primarily the result of market share gains, as our commercial line utilization rate remained stable at historical lows. Consumer loan growth was also strong at 8.3% annualized, and benefited from 6.5% growth in home equity-related products.

The increase in our average securities portfolio balances primarily reflects the timing of reinvestment activity during the first quarter. On a period end basis, securities represent 19% of total assets, which is a normal level for us. And we expect to be in this approximate range for the remainder of the year. We also continue to maintain a low duration for the portfolio of 2.7 at quarter-end.

On the funding side, growth for total deposits was 6.3% annualized, with strong growth of 14.3% in relationship-based transaction deposits and customer repo agreements, partially offset by continued managed decline and time deposits shifting of those balances into non-maturity products. We continue to focus our efforts on growing transaction deposits and customer repos, with these balances supporting our net interest margin and deepening client relationships.

Our cost of funds declined 8 basis points linked quarter. The net interest margin expanded 6 basis points in the quarter to [380]. During the second quarter, we recognized $2.5 million in net accretable yield, which was higher than normal, given the implementation of a new acquired loan accounting system this quarter for both CB&T and Parkvale, which reflect better than originally estimated cash flows on our acquired portfolios. Excluding this benefit, the margin was approximately 3.70%.

Overall noninterest income results were positive. Noninterest income increased 3.3% in the second quarter, primarily as a result of seasonally higher service charges on deposit accounts and an increase in other income. The higher other income reflects increased swap-related revenue from our commercial lending activities. Wealth management revenue was slightly higher, and insurance commissions and fees reflect normal seasonal declines associated with contingent fee revenue received in the first quarter.

Turning to noninterest expense on slide 13, total noninterest expense decreased 9.5%, largely reflecting the merger and severance costs incurred in the first quarter, and the benefit of realizing cost savings related to the Parkvale acquisition.

Looking at our capital position on slide 14, regulatory capital levels at June 30 are consistent with the prior quarter-end. And the TCE ratio at quarter-end increased slightly to 6%. We continue to exceed all regulatory well-capitalized thresholds.

Turning to slide 15 and our outlook for the second half of 2012, given our solid results for the first half of this year, our positive expectations for full-year 2012 are essentially unchanged, assuming that we maintain our current economic environment. We expect to achieve continued solid growth results for loans, transaction deposits, and customer repurchase agreements.

Given my earlier comments on net interest income, we are still expecting margin to be in the mid-360s in the second half of the year, subject to potential upward revision if there are any further changes in expected cash flows related to our acquired loan portfolios. We look for noninterest income to increase in the mid-teens as we continue to benefit from our diverse fee income sources. This translates into organic growth in the mid-single digits.

Through the realization of cost savings related to the Parkvale acquisition, and our culture of expense control, we expect the full-year efficiency ratio to be in the high 50% area. This is on a run rate basis. Non-run rate items expected in the last half of the year include costs associated with our branch consolidation plan that Vince reviewed earlier. We project these one-time costs to total $2.5 million pre-tax in the third quarter of 2012.

As Gary discussed, we are very pleased with our credit quality results through the first half of the year. Looking to the remainder of 2012, we expect overall credit quality to demonstrate continued solid performance, and believe the provision will be in the $7 million to $8 million range for the third and fourth quarter as we support planned loan growth. On a full-year basis, this range represents about a 12% to 18% improvement over 2011. For taxes, we expect an effective tax rate between 28% and 29% on a GAAP basis for the remainder of 2012.

Now I would like to turn the call over to Vince for his closing remarks.

Thank you, Vince. We believe that we had a great second quarter with solid financial results. As you can see from the guidance Vince provided, our expectations for the remainder of the year are positive. Additionally, significant progress was made on several strategic actions during the quarter. The branch consolidation we have underway is a decision that will generate significant cost savings and improve the efficiency of our organization. Investments such as the investment in the eDelivery channel position us for growth, and allow us to react and benefit from changing client preferences.

Looking ahead, we will continue to execute our strategy of proactively reinvesting and repositioning the Company to succeed in this ever-evolving environment. This is not a new strategy for us, and we will remain centered on balancing the need to position the Company for revenue growth, while maintaining disciplined, focused expense control and a low-risk profile. We look forward to sharing updates with you on our progress.

And now, I would like to turn the call over to the Operator for questions. Thank you.

(Operator Instructions) Damon DelMonte, KBW.

I was just wondering, Vince, with regard -- Vince Calabrese, that is -- with regards to the margin, so about a 10 basis point benefit from that $2.5 million. So our starting point then is 370 from a modeling perspective for the third quarter?

I'll tell you, Matt. I would say that the kind of mid-360s is still the guidance that I have, with some upside to that number. You know, this is the first quarter that we utilized the new loan accounting system for our acquired loans. So the cash flows overall have been better than what we estimated originally for Parkvale and CB&T.

So, still kind of guiding to the mid-360s, but if any recoveries that come in, that will provide some upside to that number. And we're going to be going through re-estimating the cash flows, which is something we'll be doing every quarter. So there's -- I can't say with precision, because we have to go through that process; but kind of mid-360s with some upside, depending on how the cash flows come through to normal processing, plus additional recoveries.

Okay. So that mid-360s would be the average for the next two quarters then?

Kind of as a baseline and then with some upside with the -- depending on how the cash flows come in.

Okay. And are you able to quantify the total impact of the accretable yield on the margin? Based on the acquisitions?

It's really the 10 basis points. So that was -- the net accretable yield in total was the $2.5 million. You have premium amortization and you have accretion that are both coming through there. So the 370 is kind of the run rate without the accretable yield.

Okay. How much was the premium amortization this quarter?

Well, it's all netted in that $2.5 million, Damon. I don't have that breakdown at my fingertips here.

Okay. Got you. Okay, great. And then I guess my other question, just regards to your outlook for loan growth. You know, any particular areas of your footprint you're seeing better opportunities than elsewhere?

I would say that we've spent a lot of time investing in our sales management systems here, hiring good people across the footprint. You know the growth has really has come in a number of markets. And we're seeing good success in Youngstown, in Johnstown, in State College. Pittsburgh has been a great performer for us. And narrowing it down into the various segments in the Pittsburgh market, the asset based lending group has performed very well. Our middle-market effort in Pittsburgh has been going very well. So really, I'd say it's been across our footprint.

Okay, that's helpful. That's all I had for now. Thank you very much.

(multiple speakers) Thanks, Damon.

Frank Schiraldi, Sandler O'Neill.

Just had a quick question on loan growth. Wondering if you could talk a little bit about what you're seeing in the marketplace in terms of the growth you're getting. Would you say it's more taking market share away from others? Or are you seeing some increased demand in the marketplace?

Well, I would have to characterize our growth as more of a marketshare grab than seeing increased demand, Frank. Truthfully, it's a very difficult climate from a lending perspective. I mean, we've not seen large CapEx projects emerge; line utilization is still at historic lows. The companies are still positioning their balance sheet to weather uncertainty, related to a number of factors.

So I don't feel that we're in a robust lending environment. I think given where we're positioned, if you look at the market itself, we -- this market has performed better than the rest of the country. So we've had some opportunities because of that.

But as you'll look long-term, given the fact that we've been building our customer base over the last three years, when that activity comes back, we should have a pretty decent run. So once we see loan demand pick up and CapEx spending pick up in the markets that we serve, I think we're very well-positioned to benefit from that. And I would say it is very competitive out there -- and has been.

I would also add it's just our relative market share position. There's still plenty of opportunity for us to continue to take market share from others in the marketplace.

Right. Okay. And then just on sort of 30,000 foot view on M&A, just wondering if you've seen -- Vince, if you've heard any more maybe chatter in the marketplace in terms of M&A in Pennsylvania? And if you could just remind us where sort of geography-wise would be most intriguing to you?

Well, obviously, we've been expanding in Pennsylvania so, any opportunity in the Pennsylvania market would be of interest to us. I believe other markets present opportunities -- Eastern Ohio, Maryland, many of the states that we border, there are opportunities to expand in those markets.

And I would say that -- to answer your first question; I kind of went backwards -- but your first question was about the chatter in the marketplace and the activity. I definitely envision -- I've seen more activities, more chatter in the market. And I think as we continue to move through this cycle, with all of the items facing financial institutions, I think we're going to see an acceleration in the number of opportunities. So -- and I think that's starting to begin.

Okay, great, that's all I had. Thank you.

(multiple speakers) Thanks, Frank.

Mac Hodgson, SunTrust Robinson Humphrey.

Just a couple questions. Vince Calabrese, on the net interest margin, just to go back over that again. It was always my understanding that when accretable yield goes up on improved cash flows, you see that benefit over the remaining life of the acquired portfolio. And so should we expect to see -- and I don't think this is what you were saying, but I'm just trying to clarify it -- should we expect to see that 10 basis point benefit going forward, but it could be less as a result of revaluing the cash flows in the future? Or am I kind of just misinterpreting the 10 basis point benefit we saw this quarter?

No, I think there's a couple of things. As you know, this accounting that's in place is super complex that they put in place. And it doesn't really -- I don't think, helps the reader with getting clarity to what's happening in this underlying portfolio.

But this is the first quarter that we've utilized this new loan system. So there's looking at the cash flows estimated for Parkvale and CB&T since we've had them. So there's add element going through there. When you have recoveries on impaired loans, Matt, those come in sooner, because the loan is gone, so there's some recognition of income that comes in at the time that those recoveries happen.

So there's a level of recoveries that got captured this quarter. There's no guarantee that's going to happen as you go forward. But a lot of it's driven by this being the first quarter that we use the system. So there's definitely some upside to the kind of base forecast that I'm giving you. And I think, as we get a couple more quarters under our belt of using this system, we'll have more and more clarity about how it projects out going forward.

Okay. Great, that helps. Then a question on the branch optimization. Just wanted to go back over the $4 million of pre-tax annual cost savings are expected. And then I think, Vince, you made a comment about $2.5 million pre-tax net of attrition. And I just wanted to get maybe a little more clarity on your assumptions on the delta between the $4 million and the $2.5 million.

Well, when we modeled this move out, we took into consideration some disruption in the customer base. So we were modeling a 5% to 10% attrition rate. And you really have to look at that in tandem with the expense saves. So that's how I'm netting down the $2.5 million to $3 million.

One other things I can add, Mac, is we're -- we have a very aggressive proactive plan in place to manage these clients. And we have gone through a number of these in the past. And those programs have been very successful in maintaining our client base. But, as Vince indicated, we do build in a margin of attrition, Mac.

And I'll add to that. I mean, we actually have -- I mentioned in my comments, there's a systemic process that we go through within this organization, to look at our delivery channel, to ensure that we're operating in the most efficient manner. So we look at a whole bunch of metrics on each one of those branch locations -- transaction volumes, production, production quality; there are a whole bunch of metrics. And we're analyzing that delivery channel every quarter.

So we've made some moves in the past to consolidate, and we've made some moves to expand in the past. And it's all about repositioning our delivery channel to take advantage of growth opportunities and operate in the most efficient manner possible. So we've just decided to accelerate that a bit, given some of the things that are on the horizon.

Mac, I would just add to Gary's comment. Vince commented the average distance between the consolidating branch and the receiving branch is 4.5 miles. So I think that, combined with our very proactive approach, you know, very comfortable with that 5% to 10% kind of attrition ranges baked into the $2.5 million.

Okay, great. That's all very helpful. Just one last one, Gary, as it relates to Florida. Obviously, great progress this quarter on reducing some of the exposure there. I was curious if we should read anything into that movement this quarter as it relates to just the Florida market in general? Are other banks in that market getting more aggressive and obviously taking some of your credits away from you? Is that kind of how the paydowns happen?

Yes, lending activity did increase in the market during the quarter. We have seen it ramp up through the early part of this year. I think I reported that to you last quarter. So that activity does continue to get stronger across that market, Mac, as we have continued to go through the cycle here.

Okay, great. Thanks for the help.

David Darst, Guggenheim Securities.

Could you give us some incremental data on the residential mortgage portfolio that you got from Parkvale? Just like the average yield type of loan and what you think the expected duration of that portfolio is? Just trying to get a sense of how fast we might see that portfolio run off.

Yes, I would say, David, the -- I don't have the yields right here, but the duration of the portfolio definitely under 10 years, is what we're -- what we've modeled for accounting purposes, priced somewhere between [7] and [10].

So should we expect a similar level of runoff that we saw this quarter to continue? Or will you be actually replacing some of those loans and putting them back on the books?

Probably pretty close to the page that you've seen this quarter is what I would expect, as we go forward. (multiple speakers) The residential mortgage portfolio, just to remind everyone -- for interest rate risk purposes, we don't really keep much of the fixed rate. I mean, we sell that production for the portfolio that you see; we'll just continue to have some runoff. It's a fixed rate market, is what people are looking to originate. So, as things were refinanced and then we sell the loans, I think that the increase -- or the decrease that's in there is within a reasonable range of what I would expect the next couple of quarters.

Okay. And what's the average deposit per branch of the group that you're consolidating?

It's in the $16.5 million range. That's the average. So, I mean, these are relatively small in terms of deposit size -- and loan footings, for that matter.

Okay.

Yes, the average loans are under $5 million per (multiple speakers).

Yes, so it's -- really, it makes a lot of sense when you look at all the numbers.

Okay. And Vince, at what point do you think you're actually ready to announce or pursue another acquisition?

Well, I think -- we've stated our acquisition strategy in the past. I mean, we obviously will evaluate opportunities. If they provide accretion within one year, if we can recoup diminution of capital within a 12 to 18 month period, you know, we're in the game. So, you know, I would say, as the activity picks up, there should be opportunities to expand.

Okay.

And structurally, David, I mean, we could, if there was an attractive opportunity right now, we could pursue that. So, I guess (multiple speakers) --.

You could. Okay. Got it. (multiple speakers) No, that's my question. Okay, thanks a lot. Nice quarter.

(multiple speakers) Thank you.

Mike Shafir, Sterne, Agee.

Just to kind of go back to the margin for a minute, if we think about the yield on interest earning assets, I mean, it only declined 1 basis point sequentially. I'm assuming a lot of that has to do with the addition of the accretable yield. If we were to think about excluding that, what would that number have gone to, in terms of the yield on interest earning assets?

Well, if you take the $2.5 million -- I mean, just take the $2.5 million out, you know, the impacts of the margin overall is 10 basis points. The total earning asset base that we have -- I can come back to you and just do the math on that, Mike.

Okay, that's fine. I guess I'm just trying to get an idea of reinvestment yields, specifically in the securities portfolio, and kind of how you guys are thinking about that. I know you're keeping it short. But with a 10, you're declining almost on a daily basis, it just seems like it's going to be tough to prop -- to continue to prop that yield up.

Yes. No, I can answer that one. And you're right. Now when we look at our securities portfolio, I think as I mentioned, the duration is still short at [2.7]. But when we look at what's cash flowing off the portfolio, we continue to have about $50 million a month that's cash flowing. That's coming off at [2.25]. I mean, we're reinvesting right now at [1.40]. So there's an 85 basis point difference in that cash flow, that $50 million that's current each month, given where rates are.

We continue just to buy plain vanilla securities. We're not stretching it on structure at all. And [140] is what's there right now. What I would comment, though, on going the other way, is we continue to have a significant amount of CD maturities that are helping to offset that. I mean, the next couple of quarters, we have between $400 million and $450 million of CDs that are maturing. We're picking up 55 to 75 basis points on that on average. So that's obviously helping the margin. As well as we'll continue to have the loan growth that's coming with demand deposit growth and repo balances also supports the margin. So (multiple speakers) there's a lot of moving parts.

Yes, we've had some terrific commercial demand deposit growth, which has helped the overall margin. So, that's been a huge benefactor for the Company.

Okay. So as we think about the cost of funds now at 69 basis points, I mean, that's pretty low. I guess how much more do you think that could decline over the next several quarters, if we think about [440] -- when you said $400 million to $450 million in CDs, is that over the next six months? Or is that over Q3, and then Q4, an additional $400 million?

Yes. No, that's -- it's $400 million to $450 million per quarter.

Okay.

And we're -- like I said, we're picking up 55 to 75 basis points on that. So you know, there's still some room there. And then the demand deposits, obviously, significant growth that we've had there, helps tremendously to support the margins.

So there's still room in our overall cost of funds. And people have been shifting from CDs into savings and money market, and as you know, those rates are lower. So there's still room there. And it's all baked into the guidance that I've provided. I mean, my base of mid-360s incorporates what we expect to happen there, and then kind of the upside on the required loan accounting.

Okay. Thanks a lot, guys. I appreciate all that help.

Bob Ramsey, FBR.

This is Tom Frick for Bob. Just a question on Phase 2 of your eDelivery strategy scheduled for 4Q 2012. What is the added cost of this initiative? And will it offset a portion of the $4 million in branch consolidation savings?

You know, the cost of this initiative is already baked into our guidance for the year. And we disclosed that in an earlier quarter, so I don't know if you want to give them some information?

Yes. No, I can restate what that is. I mean, the total investment is approximately $4 million pre-tax. A lot of that's capitalized. And the expense increase that's baked into our guidance for this year is $1.5 million. And that's, again, is to Vince's point -- that's already baked into our guidance.

Okay. Got you. Thank you.

So the branch optimization project is a new announcement.

Yes, that's -- right. That's additive.

And then, you know, last quarter, you guys reported a healthy consumer pipeline translating into a pretty strong growth this quarter. How are your consumer, and for that matter, commercial pipelines heading into the third quarter?

Yes. I mean, our pipelines, when you look at our pipelines, we look at it two ways. We look at the short-term 90-day, up to 90-day pipeline in each one of the business units, and then we look longer-term at the total pipeline. And our short pipeline looks fairly healthy. So as we move into the third quarter, we have a pretty decent pipeline.

And the consumer pipeline is comparable to where we were at the end of March.

Yes, absolutely.

Okay, great, thanks. That's all I had.

John Moran, Macquarie Capital.

Most of mine have been answered at this point, but just kind of circling back on funding costs and maybe additional levers that you guys can pull there. I think there's like $200 million or so of TruPS out. Obviously, those are kind of going away for everybody; recognizing, of course, that it's still cheap Tier 2 capital. Are there highest higher cost coupon TruPS that you guys could look to, to kind of just do away with?

Yes, there's -- I mean, we look at that on a regular basis, John. I mean, there's several tranches to our TruPS that we have. There's one tranche that's on the small side, that's a fixed rate, it's got like a 10% rate on it. And it's something that we model it and it's dilutive to get rid of it right now. It is still cheap capital.

And with us being one of the grandfather companies, while it's no longer fully grandfathered, it puts you in the 10-year cycle. So there's a long period of time to replace that. And I would expect, over time, particularly that one tranche, that we would replace it. It's pretty small -- I want to say it's like $16 million. The rest of that [200] is really very nicely priced right now. I mean, it's floating at LIBOR plus a pretty good spread.

So -- but over time, it's -- you know, everybody else is looking at it, and potentially looking at the preferred market as a way to replace some of this over time. And we'll be looking at that too. But right now, there's no immediate opportunity or need to do something quickly, given the overall timeframe.

Okay. Thanks. And then just a few -- Vince, if you happen to have kind of point-to-point what the duration of the securities book was at -- I think at quarter-end, you mentioned it was 2.7. What was it at the end of the first quarter?

2.4.

Okay. So, lengthened out, just a touch. Was there -- I don't know if you care to kind of elaborate on that a little bit, kind of where you guys redeployed this quarter. I mean it sounds like it was at 140 basis points. It couldn't have been exotic. But (multiple speakers) --

The duration on the money we're reinvesting is 3, 3.5. So it's -- we've gone from the [2.4 to 2.7], but we're not going to go out on the curve at all. I mean, it's just not worth it. So -- but we've just gone out a tick.

Sure, understood. Thanks very much.

Mac Hodgson, SunTrust Robinson Humphrey.

(technical difficulty) -- on the capital, I was going to touch on that too. So I'm good, thanks.

Thanks.

And at this time, there are no other questions in queue.

Okay. Thank you, everybody. Thank you for joining the call and look forward to meeting again next quarter.

That concludes today's conference call. We appreciate your participation.