FNB Corp (FNB) 2016 Q1 法說會逐字稿

Good morning, and welcome to the F.N.B. Corporation first-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Matt Lazzaro, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the report it files with the Securities and Exchange Commission often contain forward-looking statements.

Please refer to the forward-looking statement disclosure contained in our earnings release, related presentation materials, and our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until April 29, and a transcript and the webcast link will be posted to the About Us Investor Relations and Shareholders Services section of our corporate website.

I will now turn the call over to Vince Delie, President and Chief Executive Officer.

Good morning and welcome to our quarterly earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. I will provide highlights for the first quarter and discuss a number of recent developments, Gary will review asset quality, and Vince will provide further detail on our financial results and then open the call up for questions.

We are very pleased to share with you the quarter's results. But first, I would like to welcome our new Metro Bank team members and congratulate the entire F.N.B. team for a successful conversion and integration. On an operating basis, earnings per share was $0.21, and the first quarter results reflect another all-time high for total revenue and net income. First-quarter record revenue of $186 million represented solid organic loan and deposit growth, a slightly increased net interest margin, and excellent performance from our fee-based businesses.

Looking at the balance sheet on an organic linked quarter basis, annualized average loan growth was 8%, consistent with our guidance on the January call. The first quarter marked our 27th consecutive quarter of organic average total loan growth. Average commercial loan growth of 11% annualized was largely due to strong performance in the Pittsburgh, Cleveland, and Baltimore markets.

At the end of March, our commercial pipelines were at record levels, commensurate with the expanded geographic footprint and new opportunities provided by the Metro Bank acquisition. Organic growth in the consumer loan portfolio was a combined 5%, led by indirect auto and solid results from the residential and home equity-related portfolios.

Total average deposit and repo growth was 6% annualized, which supported our funding needs. The Metro Bank and Fifth Third transactions will further strengthen our funding position. We look forward to converting the Fifth Third branches over the weekend and strengthening our Pittsburgh market coverage.

Non-interest income, which is central to our relationship-based business model, was a record high at $46 million. Our ability to grow fee income is dependent on new client acquisition, investments in product development, and dedicated cross-selling efforts by our teams across multiple business lines. In 2013, as part of our three-year strategic plan, we decided to significantly expand our mortgage banking operation and make additional investments in wealth management, insurance, and capital markets. We considered these investments to be necessary in order to mitigate the risk of a prolonged lower interest rate environment. This plan proved to be a success with fee-based revenue growing significantly over a short period.

For example, 2015 full-year revenues in the fee-based businesses were 37% higher than 2013. And the results of the first quarter of 2016 show that this trend has continued. Looking ahead, we expect additional growth in these product areas as we further develop new and existing client relationships.

F.N.B. continues to invest in new technology geared towards enhancing the client experience, both online and within our retail locations. As part of our clicks to bricks strategy, we deployed some leading-edge technology in the central Pennsylvania market to offer extended hours and improved efficiency in the consumer bank. Innovation is one of our core values and drives how we conduct business, and customer feedback has been positive for the new technology, including the addition of smart ATMs.

As we discussed in January, we are building on these new digital initiatives, and we'll be rolling out updates to our mobile banking app and the eDelivery channel. These enhancements will include customized actionable mobile alerts, biometric login, and new mobile security controls which will allow customers to block or unblock their debit card and set usage restrictions based on transaction size, merchant category, or geographic location.

In tandem with the consumer banking upgrades, we plan to deploy a mobile app for our commercial clients that includes realtime notifications for monitoring account activity, the ability to review and approve ACH transactions, and review positive pay security features. Because of our focus on continuous investment in technology, our retail, private banking, and commercial clients enjoy both a high level of personal service and the best technology.

Along the lines of client satisfaction, F.N.B. was recently named as a winner of nine 2015 Greenwich Associates Excellence in Banking awards. In its fourth consecutive year of recognition by Greenwich Associates, F.N.B. received both national and regional honors for small business and middle market banking.

F.N.B. was one of only 35 banks recognized of the more than 600 banks evaluated. We were separately recognized by Greenwich in late 2015, as a Best Brand in Small Business Banking award winner for trust and ease of doing business. These awards represent the highest number of Greenwich awards F.N.B. has ever received. This commercial recognition on a national scale is representative of the high level of service our team of bankers consistently delivers to our clients. Based upon these results, F.N.B. is now recognized as one of the premier commercial banks across the country.

In the early part of 2016 through acquisitions, we broadened our delivery channels and improved our Pittsburgh market coverage. We are excited about the tremendous potential provided by the investments in these new markets with attractive demographics. Given our current market coverage, I feel we are in an excellent position, as we have grown into a multi-state regional bank with over $20 billion in total assets and over 300 retail locations. In addition to our larger scale, we are fully equipped with leading-edge technology to support evolving customer preferences, and continue to drive market share gains in both consumer and commercial banking.

In summary, it was another solid quarter, and we posted record total revenue, record net income, the 13th consecutive quarter of revenue growth, and continued to make significant strides in our fee-based businesses. We are proud of our performance to start 2016, and look to build on the early momentum we have established. With that, I will turn the call over to Gary so he can share asset quality results.

Thank you, Vince, and good morning, everyone. Our first quarter of 2016 was highlighted by the successful integration of the Metro portfolio into our overall loan book, which now stands at $14.2 billion.

As can be expected following an acquisition, we saw increased levels in several of our GAAP credit metrics, including delinquency at 1.4%, and NPLs and OREO at 95 basis points. Net charge-off results continued to remain at steady, solid levels, totalling 18 basis points annualized on a GAAP basis.

I would now like to cover the results of our two primary loan books, focusing first on the originated portfolio followed by the acquired portfolio, at which time I will touch on the Metro transaction. Finally, I will close out my commentary with a brief update on the energy and metals portfolios within our commercial loan book.

Looking first at our originated portfolio, delinquency remains steady for the first quarter at a solid 93 basis points. The level of NPLs and OREO increased during the quarter, up 19 basis points to 1.18%. The largest driver in this category is attributable to $13 million in Metro OREO transfers, the majority of which are bank facilities, as well as the migration of one commercial credit tied to the energy sector, which added $9.8 million to NPLs. Net charge-offs for the first quarter totaled $5.9 million, or 21 basis points annualized, which is in line with the comparable year-ago period.

The originated provision of $12.8 million was up slightly from the prior quarter, which covered net charge-offs, organic growth, some credit migration in the softer sectors, and the aforementioned credit that was placed on nonaccrual during the quarter. The ending originated reserve position is up 3 basis points to end March at 1.26%, which we feel is prudent during this time, given the prevailing weakness in the energy and metal sectors. That said, we are seeing some early signs of improvement in the metals space.

Shifting now to the acquired portfolio, we ended the quarter with $2.9 billion of loans outstanding carried at fair value. Contractual delinquency ended the quarter at $94 million. Excluding Metro, the level of acquired past due accounts remained stable on a linked quarter basis. The ending acquired reserve decreased to $5.6 million, and reflects the results from a favorable loan re-estimation during the quarter, as our acquired book continues to perform slightly better than expected. Inclusive of the credit mark, the total loan portfolio was well covered at 2.05% at the end of the quarter.

Touching briefly on Metro, the loan portfolio at the end of the quarter totaled $1.8 billion carried at fair value. Delinquency was just under $47 million, which equates to 2.6% of Metro's loan book. As with all acquisitions, we closely monitored the portfolio throughout the entire due diligence and pre-close period. It is during this time that we identified pools of loans that we wish to exit in an effort to lower our consolidated risk profile by moving less desirable or underperforming credits off the books. During the first quarter, we successfully executed this strategy by removing a number of these credits from the portfolio. As these opportunities arise, we will continue to take advantage of them to better position the portfolio.

Now let's turn to the energy and metals industries. As you'll recall from last quarter's call, we had experienced some migration in the portfolio due to the effects of weak commodity prices. At quarter end, our energy portfolio totaled $183 million, or only 1.3% of the total loan portfolio, and carries a 7.7% reserve. Delinquency did increase to 6.5% due to the migration of the one credit that I mentioned earlier in my comments. As you'll recall, this portfolio is comprised primarily of service-related companies, with $68 million directly tied to oil and gas that carries an 11.6% reserve, and indirect service-related companies at $83 million carrying a 7% reserve.

Our coal-related portfolio is minimal at only $32 million, and continues to perform well. As it relates to metals, this portfolio totals $320 million, or 2.3% of the overall loan book, and is comprised of metal manufacturers, wholesalers, and fabricators, the latter of which comprises 75% of our metals exposure. Our reserve position across this portfolio is 2.2%.

In summary, we are pleased with our accomplishments during the quarter, which was marked by the integration of Metro, some early progress in moving less desirable credits off the books, and the continued solid performance of our core loan portfolio, as evidenced by our stable credit quality results. Our dedication to maintaining a strong credit culture that focuses on sound underwriting, comprehensive management of risk, and proactive workout of problem assets will remain at the core of our strategic philosophy. As we have seen, this consistency in how we operate on a daily basis will continue to serve us well as the economy moves through its normal cycles.

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

Thanks, Gary. Good morning, everyone. Today I will discuss our financial performance for the first quarter and touch on guidance for 2016. Looking at the balance sheet, organic average loan growth momentum continued, with average loans growing 8% annualized led by strong performance in the commercial portfolio. Commercial organic average loan growth totaled $190 million, or 11% annualized. As noted in today's release, the first quarter's commercial loan growth was driven by strong performance in Pittsburgh, Baltimore, and Cleveland.

The organic growth in the consumer loan portfolio was driven by footprint-wide contributions from our residential, indirect, and home equity-related businesses. Organic growth in average total deposits and customer repos totaled $201 million, or 6% annualized, with average transaction deposits and customer repos increasing $207 million, or 8% annualized, reflecting organic growth in business demand, premium sweeps, and business money market balances.

From a total funding perspective, our relationship of loans to deposits and customer repos was 90% at the end of March, improved from 95% at year end. On a pro forma basis, the Fifth Third transaction will further enhance this ratio, bringing it down another percentage point to 89%.

Turning now to the income statement, net interest income grew $13.4 million, or 10.3%, reflecting the quarter's solid organic growth in loans and the acquired Metro balances for half of the quarter. Our net interest margin on a reported basis equalled 3.40% and benefited from higher loan yields on Metro-acquired balances that offset the 3-basis point impact of the sub-debt issued late last September. We were pleased with the slightly better than forecasted net interest margin, given the continued low interest rate environment. Let's look now at non-interest income and expense.

Non-interest income in the first quarter was a record high for F.N.B., increasing $2.9 million, or 6.8%, as wealth management, capital markets, insurance, and residential mortgage all contributed nicely. We continue to be very pleased with the investments we have made in these businesses over the last few years and the prospect for strong growth moving forward.

We have significantly increased the number of opportunities with our added critical mass in Cleveland, Baltimore, and central Pennsylvania, as well as the additional scale coming with the acquisition of the Fifth Third Pittsburgh branches that closes today. As indicated in the earnings release, we also successfully executed on an opportunity in the first quarter to bid on $10 million of previously issued trust preferred securities, and thereby redeem those securities at an economic gain of $2.4 million. The benefit from this gain is excluded from operating revenue and operating net income.

Non-interest expense, excluding merger-related costs, increased $9.2 million, or 9.2%, due primarily to the expanded operating expenses from the Metro acquisition. Our efficiency ratio at 56.4% was consistent with the prior quarter at a very good level. We look to gain further efficiency through realizing the fully phased-in cost savings in the second quarter.

Regarding income taxes, our overall effective tax rate for the quarter was 31%, in line with previous guidance. The successful completion of the Metro Bank transaction during the quarter is another example of how our acquisition strategy provides us with meaningful growth opportunities and continues to serve us well through increased scale and improved efficiency. We are now in a great position to pursue the 45,000 additional commercial prospects in the region. With this acquisition, we added total loans of $1.8 billion and total deposits of $2.3 billion.

This coming weekend we will close the Fifth Third branch acquisition, which will add approximately $90 million in loans, $330 million in total deposits, and 13 branches on a net basis to our Pittsburgh franchise. I would note that our modeled assumptions for the Metro transaction, which include one-time expenses, cost savings, and fair value marks in the aggregate, are tracking consistent with our original expectations.

Regarding cost savings, we are on track to a little ahead on realizing the 40% built into our model. Lastly, and most importantly, initial feedback from customers has been positive, and our overall early results have been in line with our expectations. We continue to expect the acquisition to be accretive to earnings in the first full year.

Regarding our current outlook for net interest margin, I would like to remind you that on the January earnings call we explained that we utilized a consensus economists expectation for five rate increases beginning in December of last year through the end of this year. As we also discussed at that time, we sensitized our projections for a scenario where there were no increases in 2016, indicating a negative $0.02 to $0.03 impact on earnings per share. As you are all well aware, the consensus expectations for the number of rate increases has changed, and we would expect to see some slight pressure on our net interest margin for the rest of the year, depending on the number and timing of any Fed moves.

Regarding the other elements of guidance provided in January, we are still comfortable with the year-over-year projections shared. Specifically, organic loan growth in the high single digits, organic deposit and customer repo growth in the mid single digits, core non-interest income growth in the $30 million to $40 million range, core non-interest expense increase in the $80 million to $90 million range, provision for loan losses in the $12 million to $13 million range per quarter, effective tax rate in the 31% to 32% range, diluted shares of $210 million on a spot basis as of March 31, with an expectation for modest increase throughout the rest of the year related to stock options and normal incentive plan activity.

In summary, 2016 is off to a solid start for F.N.B., as we begin to take advantage of the increased scale and additional opportunities provided by Metro and the Fifth Third branches, while continuing to grow loans, deposits, and fee income organically throughout our expanded geographic footprint. We look forward to the positive contributions from the talented bankers that joined our team from Metro, and leveraging the continued investments in our technological capabilities.

Lastly, I would like to echo Vince's earlier comments and thank our entire team for their efforts to successfully integrate our largest acquisition to date, and look forward to a smooth integration of the Fifth Third offices this weekend. Now, we would like to turn the call over to the operator for your questions.

(Operator Instructions)

And our first question will come from Bob Ramsey of FBR. Please go ahead.

Hi, good morning. Just curious if you could elaborate a little bit on how we should think about the trajectory for NIM without rate increases.

Do you have sort of less pressure in the second quarter, because you've got a full quarter lift from Metro on those loan yields, and then a little more pressure on the back half of the year? Are there other moving pieces to be mindful of?

Sure. I guess just to comment on margin overall, as you know, you said there's a lot of moving pieces. I think if you -- the best way to look at it is slide 13.

I think we feel very good about the margin for the quarter. It was up 3 basis points on a core basis, which was actually 1 basis point better than what we had originally projected.

The stability you see over the last five quarters includes absorbing 3 basis points from the sub-debt in the fourth quarter. As you look ahead, some of the moving parts here, Metro clearly helped loan yields, added about 9 basis points to our overall portfolio yields.

The Fed move in December provided some upward movement. But then going the other way, as you know, rates generally, where we reinvest our securities portfolio are down 40 to 50 basis points.

So we had reinvestment yields on our normal cash flow that's $700 million a year. And then the Metro investment portfolio, we effectively had to market to market and reinvest.

That was $660 million and it was 40 basis points lower than where rates were just in the fourth quarter. So you really have all of these different pieces kind of working, there's pluses and minuses that are working there.

The slight pressure that we're talking about, as I commented on, it's the timing of the Fed moves too. Obviously they would help. The current consensus, at least with economists is June and December.

The futures market is maybe one at the end of the year maybe, not until next year. So I think it's our job to kind of manage through it.

So Metro will be fully baked in in the second quarter. To your point, you'll have the full quarter's benefit of that, but you'll also have the full quarter's impact of reinvesting their investment portfolio. So it's the slight pressure on our margin with the current projections is really where we see things going.

Okay. Fair enough. And then also, if you could just maybe elaborate a little bit on the lending pipeline? I know you all said that it's at record levels. Just curious how we should be thinking about loan growth in the periods ahead.

This is Vince Delie. The pipeline is good. I mean, we're sitting around $2 billion, so we're at our record level.

Some of that's attributable to bringing on the Metro franchise and having a sizable pipeline evolve in that market as well. So the breakdown is pretty similar to what we've talked about in the past.

About 60% of the pipeline now is from the three Metro markets, Pittsburgh, Baltimore, and Cleveland. And we've got about 40% coming from the community markets, which includes Metro. So that's actually helped those pipelines.

And we've had some good early success in the central part of the state. And as Vince said, from a modeling perspective, we're right on what we had modeled in terms of cost take-outs, the balances coming over, and the one-timers and the credit mark in aggregate. So things are going pretty well there.

Okay. Great. Thank you.

Thanks, Bob.

Thanks.

Our next question will come from Preeti Dixit of JPMorgan. Please go ahead.

Hi, good morning, everyone.

Good morning.

Hi, Preeti.

Just a follow up on the loan growth commentary, obviously good average organic loan growth in the quarter. And I know 4Q was fairly strong. Do you have what the period end organic growth was, and were there any seasonal paydowns or other headwinds here in 1Q that would point to growth maybe ramping through the year?

If you look at on a spot basis, Preeti, the growth was, I think it was 5.1%. So the average balance was 8% -ish and then it was 5% on a spot basis.

We did have a very strong December, which helped the quarterly average. But on a spot basis, it was just a little over 5%.

Okay. That's helpful. Were there any seasonal paydowns on the commercial side that may have impacted that?

Not material paydowns. I mean, we do experience some paydowns.

Normal paydowns.

Normal course in the first quarter. And typically, the borrowing activity accelerates in the commercial segment through the second and third quarter and then slows again in the fourth quarter.

So there's -- from a practical standpoint, though, that can be skewed by bringing on new names. So market share gains can hide some of that, but that's the normal seasonal cycle.

And consumer loan growth tends to be a little bit slower in the first quarter, too, and then that picks up as you go into the second and third quarters.

Right, right. Okay. That's helpful. Gary, was there any specific provision expense associated with that energy credit you cited as moving into nonaccrual in the quarter?

Yes. We did provide for that. We have it provisioned for at this point where we're comfortable that we've got the risk taken off the table and covered. So it was inclusive of the provision for the quarter.

Okay. And I may have missed it, but that $12 million to $13 million provision that you've talked about, it still seems like a fair run rate?

Yes. We haven't changed that guidance, Preeti.

Okay. Great. And then one last one for Vince Calabrese. Can you break out how much of the cost saves were in the run rate as of the first quarter?

And then just the expected timing on the balance? I know you said you're tracking ahead of schedule.

Yes, I would say for the quarter, it's -- by the end of the quarter, vast majority of the cost saves would have been baked in. It takes until you to get to the end of the second quarter really in my mind to fully realize it.

As I was commenting on, we're a little ahead of schedule getting to the 40%, but not quite there. But the vast majority, bulk of it is really realized in the half of the quarter that it was here.

Remember, that transaction closed in mid-February.

Right smack in the middle of the quarter.

Right.

But to really get to the full amount, Preeti, it's to the end of the second quarter. At that point in time, we're on a full run rate with the cost savings baked in as you enter the third quarter.

Okay, got it. I guess the efficiency ratio has been relatively stable here, just above 56%. As you think about those cost savings and the revenue ramp that you're expecting through the year, how should we think about a targeted efficiency ratio for this combined franchise?

I would say the mid-56% level, we're very happy with the performance we've had there, and it's been year-ago quarter, prior quarter at those levels, which we're happy with. I mean, clearly there is some opportunity for further improvement as we get those, the full cost savings from Metro.

So we've talked about in the past as far as a target of getting to 55%. So we can make some progress towards that. It would help to have some more help from interest rates, of course.

We'll see what happens there. But just the cost savings alone, there's some more positive operating leverage we would start to garner in the third quarter.

Okay. Thanks for all the color.

Sure. Thanks.

Thank you.

Our next question will come from Casey Haire of Jefferies. Please go ahead.

Hi, good morning.

Good morning, Casey.

Good morning.

I wanted to touch on the fee guide. Actually first off, the impairment charge, I'm assuming, the gain on the trust preferred, the $2.4 million, I'm assuming that shows up in other income?

Yes.

Okay, great. So if I strip that out and then add back the stub period from the Metro, you do end up at that -- looks like you're at $46 million, is a decent run rate. But to get to the low end of the guide, the remaining quarters of 2016 are probably going to have to average by my math like $48 million to $49 million.

So like a decent uptick, $2.5 million or so from this current run rate. I'm just -- what are the drivers? What's going to be doing the heavy lifting on the fee side to get to that guide?

Well, you have a few things going on. Obviously, Metro just comes on board the middle of the quarter, so there's opportunity to grow the fee base there.

As we've talked about in the past, we have been investing in these fee-based businesses over time. Really, the capital markets, mortgage, insurance, and wealth management and those have been growing very nicely over the last couple years; a 37% increase in those revenues.

And we look for those areas to contribute in the double digit range, definitely north of 10% as a group. So there's opportunity there. There's opportunity with Metro.

And also still opportunity in the newer markets of Baltimore and Cleveland. The banks that we bought in those markets really didn't have a lot on the fee income side.

So we're starting to get some traction there. So the nontraditional banking fees is definitely a key driver to that, plus the full impact of just having Metro on will contribute to that also.

Okay. So even with -- so the stub from Metro coming on board, that negates the loss of the trust preferreds gain, and then just organic growth from a broader footprint will get you to that fee guide?

Right.

Okay. And then another follow up on the NIM guide. Just some of the underlying drivers. One on the asset side, where is -- I know it's noisy with more, with Metro coming on again and the Fifth Third, but organically today where are your loans coming on?

What's the new -- the yield on new production versus that 4.20% existing book today? And then on the funding side, have you reflected the Fed hike in December, or is there any lingering pressure going forward?

Well, let's start with the loan book, because you really have a two-part question here. You're looking at both sides.

Right.

So the loan book, in terms of new yields coming on, the credit spread is what we focus on. Credit spreads have stabilized, given some of the migration in certain sectors, we're starting to see slight improvement in credit spreads.

I think there's some rationalization going on around risk/reward. So I think that's probably a positive. And I'm not sure to what degree that impacts the margin as we move through the next three quarters, because that's only related to new volume coming on.

The repricing of assets within the portfolio, as I've said all along, we tend to stay short, particularly in the commercial book. We don't take a lot of long-term fixed rates into the portfolio. So we're using swaps to hedge our portfolio.

So our yield, where we stand today as items reprice, we're repricing mainly variable rate debt priced off of LIBOR. So really that credit spread enhancement is what helps us as we move forward.

In the consumer bank, it's a little different. There's some fixed rate debt coming on in the home equity category, in the mortgage category, but those margins and the yields on those particular assets are north of 3.5%, 4%, depending on the term and the product.

So on the loan side, that's -- and that's all reflected in what Vince told you in his guidance relative to Fed inaction. So we feel pretty good about where we are from a margin perspective, and as he indicated if nothing changes you're looking at a couple of basis point --

$0.02 to $0.03.

$0.02 to $0.03 actually adjustment. On the liability side, we've done a good job of growing non-interest bearing deposits. That's really what has helped us manage our low cost of funds here.

And I would expect that to continue and to accelerate because of the new markets we've moved into and the investment that we've made in technology. We're making it easier for our employees and our customers to open accounts.

So I feel pretty good about that area as well. So I hope that all -- altogether, I hope that answers your question.

Yes, thank you.

Our next question will come from Frank Schiraldi of Sandler O'Neill. Please go ahead.

Hi. Just a follow up on the NIM. I guess in lieu of rate hikes going forward, let's -- is it reasonable to assume 3 basis points of core compression in a quarter? And does the full quarter of Metro, given the reinvestment rates you noted, Vince, is that actually a wash, the full versus half quarter of Metro as far as NIM accretion or dilution?

Yes, I would say that Metro with where we had to reinvest the investment portfolio is a push to a slight benefit, maybe 1 basis point to the overall yield, or the overall margin, I should say for the Company. But it's pretty close to a push now.

We had $661 million that we had to invest in like [180]. So if we were doing that three to four months ago, we would have been [220]. So that offsets some of the higher loan yields.

There's still a net positive to the margin from Metro coming in. But it's a little muted from where it would have been if rates were a little bit higher. So that's -- I guess that would be my comment on the Metro side.

And then as we look ahead, Frank, depending on what does happen, with Metro on our books we become a little bit more asset sensitive. So 47% of our loans now are tied to prime, or one-month or three-month LIBOR.

So that was 43% before, so there's -- when rates do start to move there's a little more benefit that's going to come through. But in that flat rate scenario, slight pressure on the margin, slight is slight. So it's in the low single digits is what I would say.

Okay. And then just a question for Gary. I don't know if I missed it, but in terms of the provision in the quarter, did you give a breakout of how much of the provision was related specifically to energy and/or metals?

We didn't break that up, Frank. It was just normal for the normal minimum migration that we saw, absent that one credit. We did, as I mentioned earlier, we did build for that one credit. We feel we took that risk off the table.

Okay, great. And then just in terms of bottom line EPS, I realize it's obviously a tough environment.

You're not getting much help from rates. Could you just talk about maybe what you target in terms of EPS growth here, and if you really need a better rate environment to get some momentum there?

I would say, Frank, that what we target when we build our plan every year is to have -- our overall investment thesis is to generate 10% to 12% total shareholder return for investors through a combination of dividend yield and EPS growth. So the dividend yield has been running around, I don't know, 3.5% to 4%.

And then EPS growth, the other component of that over time. And then we focus on having positive operating leverage. So we need to be able to grow revenue faster than expenses so that we're growing that bottom line earnings per share.

I mean, we don't have a set target. We're looking to grow EPS at a reasonable rate. If we try to put a plan forth, it's 3% growth.

Obviously that doesn't work for anybody. So it's in the mid to high single digits, depending on the year and depending on what happens with rates, it was kind of a range, I guess I would give you.

Okay. All right, thanks.

Thank you.

Our next question will come from Collyn Gilbert of KBW. Please go ahead.

Thanks. Good morning, gentlemen.

How are you, Collyn?

Just want to make sure I understand, the $2.4 million and the TRUPS gain, that was in the other income line of $9.5 million, Vince? Is that right?

Yes.

Okay. And then the other non-operating item that you -- the tax, or sorry, the impairment charge, what was that and what was the dollar amount of that?

It's $2.6 million is the dollar amount. So we have these low income tax credits that we have acquired through acquisition. So there are limited partnerships.

You invest in them for the tax credits. And the way these things work is you get tax credits for 10 years and then there's an additional five-year holding period.

So at the end of 15 years, basically there's very little value to any value that would come back to you as a limited partner. So what happened is they changed the rules for this stuff in 2015, and you have to go to more of this impairment approach and you have to present value the tax credits back.

And so there's a one-time impact of adopting those rules and it's a $2.6 million hit. And then it will be kind of normal amortization going forward.

But they changed the way they want you to look at these. In the first quarter we did a full review of our portfolio and just needed to accelerate some of that amortization that just would have come in over time.

Okay. And that charge flowed through where on the expense line?

That's in other expense.

In other, other. Got it. Okay, that's helpful. And then, Vince, not to beat a dead horse on the NIM, but the -- so Vince Delie, back to your comments about when you're talking about the origination spreads actually improving, that's encouraging.

But with your loan yield at 4.20% and kind of what you've described as the structure for some of the new credits, I mean, are we talking about maybe new origination yields could be somewhere 75 to 100 basis points lower than that 4.20%? Or is that -- am I thinking about that too aggressively?

No, I think you're thinking about that too aggressively. I think the way to look at it is irrespective of -- the make up of the portfolio is the make up of the portfolio today.

So there's a margin already built into that yield of 4.20% that takes into account loans that do have a tenor longer than a few months. So there are still assets that come on that have a longer term that produce a higher yield, particularly real estate assets.

I was just stating that the credit spreads have broadened slightly and if you look at the commercial books specifically, and I'm not talking about the consumer book because that would be different. Over the last at least as long as I've been here, the majority of the originations that have come on have come on priced on a shorter-term basis.

So that and the amount of fixed rate debt that's coming on is basically out of necessity. So where others would have stretched for yield in a low rate environment and put long-term fixed rate assets on their balance sheet to get a better yield, we haven't done that.

So the repricing, the impact of repricing that portfolio, any improvement that you would see would be more indicative of changes in credit spread versus changes in behavior relative to fixed rate, bringing fixed rate long-term debt on the balance sheet. So I wouldn't expect the yield to change dramatically over the next nine months in that category.

Okay, okay. That's helpful. That was it. Most of my stuff has been asked. Thanks.

Thanks, Collyn.

Our next question comes from Matt Schulties of Boenning. Please go ahead.

Good morning.

Good morning.

Hi. Couple of quick questions on the housekeeping side and then one larger strategic one. And the TRUPS gain is in other non-interest income, and that implies a decreased linked quarter in that line item. Can you address why that would have decreased ex that line item, or that TRUPS gain?

You're looking at, what, fourth to first quarter?

Yes.

Well, it's actually up if you take that out. It's up from $43.1 million to $43.6 million, if you look at the -- if you take the TRUPS gain out.

I meant literally the other line item from $9.3 million to $9.5 million.

Other line item.

It's the other non-interest income component, total non-interest income.

There were a bunch of things going on there. We had -- in the fourth quarter we had some additional BOLI income that was related to some claims that was $0.5 million or so. We have lower dividends on our federal reserve stock that we own thanks to the government changing --

We're funding highways and bridges now.

Yes. That's $0.5 million difference there. We do have some seasonality in some of the other capital markets activities from fourth quarter to first quarter. But those would be the big pieces that are going through the other other line.

Right. Okay. Just wanted to check. And if you could -- I know you discussed it or you mentioned it in your prepared remarks, but the total metal exposure again in the credit side?

Yes, the total exposure there at the end of the quarter, we had $320 million in that portfolio.

Okay. Thank you. And then lastly, with the number of acquisitions you've done and the size of the branch network, is there any possibility that you undertake a significant analysis of your real estate and branch locations and try to, say, shrink your square footage by 25% or 30%. Or do you run the bank on a day-to-day basis to consider that, so that's already baked into your outlook?

Well, we've mentioned on previous calls, we have an ongoing process. It's called project ready. It goes way back to before it was vogue to shut branches down.

I think we were one of the first banks to really go at it aggressively because of the acquisitions and the overlap we had. In fact, if you go back and look, I think we've taken about 60 branch locations out over a five-year period.

Some of it's due to M&A because there's overlap and they are in close proximity to each other. Others were taken out because we looked at the transaction volumes, the profitability of the branch, the prospects for future growth, and we realized that there were diminishing returns.

So we basically have made decisions to eliminate. And that continues. And I think that as you look at our innovation, branch in State College and the one we've announced in Oakland, what we're trying to do is figure out what the appropriate model is moving forward.

I mean, I believe, as you probably do, that the delivery channel is changing and evolving. But as you look at research, you can't just exit every location because there are indications coming back from a variety of sources that, including the customers, that those locations are still important to them.

So we're in a difficult place. But we do constantly look at efficiency, look at the branches. We have experimented with a smaller footprint from a branch delivery perspective.

And our entire clicks to bricks strategy that I've talked about is geared on incorporating the experience, the eDelivery experience, into the branch location. And as we move forward, we are focusing more and more on enabling customers to engage in either the web-based delivery of those products or the mobile-based delivery of those products, and arrange meetings in the branches, being able to do more transactions online.

You can now open an account at our bank through our mobile app digitally, or through a mobile device I should say, digitally from origination, application, to funding. But you can also come into the branches, because we've designed our products to have digital content associated with them.

So we're trying to incorporate that experience so people are able to go online, shop, make a decision to buy there, but also can set an appointment up and come into the branch and get a similar experience and get help when they need consultative help. But we constantly look at our branch delivery channel, and I would say as those client preferences change and we see a reduction in the requirement for physical locations, that investment in technology we're making help us migrate away from them and you'll see fewer locations.

The only thing I would add to that, too, is part of that program that Vince referred to, we've closed, consolidated 60 or so branches. Part of what we do is we reinvest that, and we've probably done 13 de novos over that same five-year period.

Good point.

Where we've reinvested some of the savings from consolidating those branches into markets that we weren't in that we wanted to get in. And that's an opportunity to use the more evolved footprint for those branches.

So that's part of that. And it's an ongoing process. We do it every year and it will continue.

Okay. Thank you.

Thanks.

Our next question will come from Brian Martin of FIG Partners. Please go ahead.

Good morning.

Good morning, Brian.

The margin issue I had was addressed. But just two other things. Just if you could comment just on where the mortgage pipeline sits today and how that's tracking?

And then maybe just lastly, just if you can give any update if there is anything on the dialogue as far as M&A goes in the markets, more or less than what it's been? It seems like activity has been down a little bit, but just any commentary on activity you're seeing.

Yes, the mortgage banking operation, as I indicated in the prepared comments, we've made a significant investment in, as well as the other fee-based areas that we mentioned. And we did that because we felt several years back, now almost three years ago, that if we were stuck in a sustained low rate environment, we would like to diversify away from net interest income.

So as we sit today, our mortgage banking operation has performed extremely well. We've made considerable investments in the back office and in technology, personnel, and we're at a record level in terms of pipeline.

We're sitting at about $240 million at this point in time. And we have a very detailed plan, that we had a three-year strategic plan that we put into effect for that group. And we have a very detailed annual plan and they are tracking very well to that plan.

So we're very pleased with that group. That answers the mortgage banking question. We're also very pleased with the performance in wealth, by the way.

We've made additional hires and investments in the insurance arena from a product standpoint in wealth. We've added some people who have actually brought a planning component to the table, so that's helped us drive business.

And we're getting a large number of referrals out of the markets with better demographics for our wealth shop, particularly the central part of Pennsylvania. That's accelerated tremendously. So that's actually leading the Company in referrals for our wealth shop.

So we're very, very bullish on the fee income categories that we mentioned. On the M&A front, I think things have slowed, principally because of how volatile the markets were in the first quarter.

I mean, there was a considerable amount of volatility across the board. There were several sectors from a credit perspective that have slid. And you know about those from others reporting.

We're very happy that we don't have as much exposure in those areas, but that's probably slowed things up a little bit on the national scene. And I think given where we are from a rate perspective, that may change.

So we're not -- banks, particularly smaller banks that are even more dependent on spread income are facing higher regulatory costs and no margin relief. I would expect that to change over time.

Okay. Perfect. And maybe just one last housekeeping question, maybe it's more for Gary. Just your exposure to shared national credit; do you have by chance what that number is?

I can give that to you, Brian. It's probably important for me to walk you through our philosophy first, so you understand where our focus is there. We're basically a customer and relationship-focused institution as it relates to those type of transactions.

The client has to be in our market. We have got to know the management team and the company well. And we've got to be able to generate ancillary business there.

So we are not focused on just buying a piece of paper. And we're not focused in the leveraged finance space there. So our capital markets team has really, as we've grown it out, focused on supporting our clients and servicing all of their banking needs, as their credit needs grow.

So that's really how we approach this space. And when you look at our book, F.N.B.-led shared credits at the end of the quarter were $245 million.

And our purchased portfolio was at $670 million. And that portfolio as well, we have significant relationships from an ancillary business with those clients.

And just so you know, we do not have a leverage -- we do not have a group that focuses on leveraged finance. We don't have an equity sponsor group.

As Gary mentioned, those are credits that are generally originated in our footprint. They are typically larger companies that we have a relationship with in some way.

And they provide us with good opportunities from an ancillary business standpoint. And we know the management team.

So it's a little different. So people ask that question and there are some institutions that have large books of leveraged finance transactions or participations in companies that are in the high yield space, and we're not doing that.

Okay. That color is helpful. And just -- is there a, I guess as far as the energy exposure within those, I guess it's -- I guess we can back into what you gave us the numbers earlier as far as the exposure. But nothing significant in terms of the shared national credit?

No. I can give you those numbers. They are actually very small. In terms of the oil and gas, it's only $25 million.

And the coal-related piece of that, it's $20 million. So it's a very tiny piece from an energy standpoint.

Got it.

The other thing that I can touch on briefly here while you're on the shared question is everyone's familiar with the shared national credit exam that many institutions have been talking about. And there's been a lot of discussion around them, from the regulatory bodies.

I'm pleased to tell you that our exam around that portfolio was very positive, and we're very pleased with it. So just wanted to communicate that as well.

Okay. That's all very helpful. I appreciate the color. And that's all I had. Thanks for taking my question.

Sure. Thank you.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

Well, on behalf of the F.N.B. Management team, I would like to thank everybody for their very detailed and thorough questions. We had quite a few.

So thank you for participating, and we look forward to our next quarterly call. I hope everybody has a good rest of the earnings season. So take care. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.