FNB Corp (FNB) 2017 Q1 法說會逐字稿

Welcome to F.N.B. Corporation First Quarter 2017 Quarterly Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I'd now like to turn the conference over to Matt Lazzaro. Mr. Lazzaro, please go ahead.

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 our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our earnings release related presentation materials and our reports and registrations statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until May 2, and a transcript and the webcast link will be posted to the About Us, Investor Relations and Shareholder Services section of our corporate website.

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

Welcome to our first quarter 2017 conference call. Today, I would like to discuss the financial results for the quarter and provide an update on our recently completed merger with Yadkin. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer.

Our financial performance was highlighted by continued organic growth in loans and deposits, strong revenue growth and favorable asset quality. I'd like to start with our key message for the quarter beginning with the successful integration of Yadkin on March 11, which resulted in FNB's total assets exceeding $30 billion. We remain on track to achieve acquisition-related cost savings. And finally, we are well positioned to deliver on our long-term financial objectives.

Before we get into our financial performance for the quarter, I'd like to talk about the successful integration of the largest acquisition in our history. I'm very proud of our team, including the more than 1,000 new Yadkin team members, who worked tirelessly throughout the entire integration process. As a highly experienced and preferred strategic partner, the conversion, completed only 9 months after announcement, is a proof point that our acquisition strategy is a core competency.

In May 2016, we began our comprehensive due diligence process led by Gary Guerrieri and his credit team comprised of more than 40 bankers who re-underwrote 2/3 of the Yadkin commercial portfolio to establish an appropriate loan mark. The acquisition was announced in July. And shortly afterwards, our project management office kicked off the conversion process by organizing multiple work streams involving hundreds of FNB employees across our company.

Immediately following the announcement, our executive management team traveled throughout the Carolina markets, interacting with Yadkin employees. These proactive interactions together with frequent communication resulted in one of the best employee retention rates among all of our acquisitions.

A few weeks prior to the conversion, our team, led by our project management office that included representatives from operations, IT and key business areas, established 4 regional planning centers. Across the Carolinas, FNB employee buddies were involved in training and mentoring with respect to post conversion products, services and systems. Most of the buddies remained in their assigned markets for 2 weeks after the conversion to ensure everything continue to go smoothly.

We were able to complete the systems conversion on day 1 despite losing an hour from the spring time change and battling 2 snowstorms, one in Pennsylvania and one in the Carolinas. I am so proud of the teamwork on both sides of the conversion, which was really 2 core conversions in one, with Yadkin and NewBridge both requiring separate conversions.

In the end, we installed over 1,500 pieces of equipment, sent out over 0.5 million pieces of mail, transitioned nearly 150,000 households, converted 98 branches and upgraded and installed more than 100 ATMs. We are pleased to say that our goal of full bank integration on day one was achieved and believe our efforts throughout the entire process will result in better client and employee retention.

Once again, I'd like to thank our incredible employees on a very successful conversion. Their hard work and dedication is greatly appreciated by all. And although we were busy demonstrating FNB's ability to successfully integrate a large bank, we also delivered a solid financial quarter.

Turning to our financial highlights. Our first quarter operating EPS increased 9.5% to $0.23 compared to the year-ago period, and operating net income available to common stockholders was a record $54.4 million. For the 31st consecutive quarter, FNB posted linked-quarter organic growth with average loans of 5% annualized. Origination volumes were strong during the last few weeks of the quarter, leading the spot organic growth of 7% annualized.

March was a solid month across our markets, particularly in Cleveland and Maryland, and our commercial pipeline remains healthy. Our bankers are having more conversations with our customers about CapEx investment, providing early signals of increased optimism. We believe this optimism will soon turn into action and lead to an overall pickup in borrower demand.

In our new markets, we expect to see good momentum across the entire commercial spectrum including real estate, business credit and equipment finance as our cross-functional teams gear up to deliver the FNB product set across the Carolinas.

Early indications with our new retail customers are very positive and we expect to capture significant deposits going forward as we rollout our workplace banking and treasury management products. I remain confident that our investment in our clicks-to-bricks strategy, which provides transparent, convenient and consistent experience no matter which channel a customer chooses, will continue to attract low-cost deposits, especially in our new markets.

From a revenue perspective, our net interest income was $173 million or 8.5% higher than last quarter, and non-interest income of $55 million was up 7.9% from last quarter, reflecting continued positive trends in wealth management, insurance, mortgage and capital markets. Our fee-based areas continue to be a focus for FNB to deepen customer relationships by providing high-value fee income services while adhering to our ultimate purpose of helping clients achieve their goals.

We are already gaining traction in our new markets with a number of early wins for our commercial bankers. I was particularly pleased with our referrals across our business lines this quarter, including insurance, wealth management and private banking. And I see significant upside and continuing to deliver the full FNB product set to our new and existing customers and prospects.

As I've stated on prior calls, a key component to executing a successful acquisition strategy is an ability to create positive operating leverage and achieved modeled cost-savings. We remain focused on these targets, just as we did with the Metro transaction, where we demonstrated our abilities to successfully achieve our cost-savings target.

As you can see, our efficiency ratio did tick up slightly this quarter primarily because of infrastructure investments in advance of the merger and a normal seasonal increase in expenses. But we remain on track to achieve our assumed expense savings and are progressing well toward our target.

Before we move to asset quality, I want to strongly emphasize that we are focused on capturing the full value of the Yadkin acquisition and growing our existing franchise. Prior to Yadkin, we were able to demonstrate FNB's ability to achieve top share position in major metropolitan markets including Pittsburgh, Baltimore and Cleveland. With Yadkin on board, we are now positioned as a premier regional bank serving the mid-Atlantic and Southeast, operating more than 400 locations in 8 states.

We hold the top 10 retail deposit share in 5 major metropolitan markets with populations greater than 1 million, and a top 10 retail deposit share in 10 metropolitan markets with populations greater than 500,000. Across Charlotte, Raleigh, Wilmington and the Piedmont Triad, we now have an -- have additional access to a population of more than 10 million and nearly 190,000 commercial prospects.

Combined with our other major markets, the acquisition brings access to more than 35 million people and provides opportunity to go after more than 0.5 million commercial prospects. With our transformed growth profile, momentum across our entire footprint and greater scale to effectively compete, I see tremendous upside to grow earnings per share with what we have in place today, and I'm excited about the future for FNB.

With that, I will turn the call over to Gary, so he can discuss our asset quality results.

Thank you, Vince, and good morning, everyone. We had a successful first quarter that was marked by the completion of the Yadkin acquisition and the continued satisfactory performance of both our originated and acquired credit portfolios.

On a GAAP basis, we ended March with total delinquency of 1.39%, NPLs and OREO at 77 basis points and net charge-offs totaling 20 basis points annualized. We remain pleased with these levels and the solid execution of the Yadkin integration, which, as Vince mentioned, is our largest acquisition to-date. We are already seeing brisk pipeline activity from our banking teams in North Carolina and are pleased with the discussions taking place.

With that, I will now cover the details of our quarterly results, which can be found on Page 6 of the provided slide deck, followed by some brief additional remarks on the Yadkin portfolio.

If I can direct your attention first to the originated portfolio, the level of delinquency ended the quarter down nearly $10 million or 10 basis points to end March at a very solid 94 basis points. NPLs and OREO increased by 21 basis points on a linked-quarter basis at 1.12%, which is attributable largely to the addition of $19 million in OREO from Yadkin, and to a lesser degree, an increase in non-accruals related to a commodity-based borrower that migrated and has been adequately reserved for. As you will recall from prior acquisitions, these OREO properties are placed in our existing portfolio and therefore have a negative impact to the level of originated NPLs and OREO.

Net charge-offs for the first quarter were satisfactory at $7.9 million or 25 basis points annualized. The originated provision at $11.3 million covered organic loan growth and charge-offs resulting in an originated reserve position that remained relatively flat for the quarter at 1.19%.

I'd now like to discuss our acquired loan portfolio, which including Yadkin, totaled $7.2 billion at March 31.

Contractual delinquency on a linked-quarter basis was down $3.4 million at $65 million exclusive of the Yadkin portfolio and at $159 million when including it. The acquired reserve decreased slightly to end the period at $6.6 million. With the addition of Yadkin, our total loan portfolio remains well covered with the allowance plus acquired credit mark at 2.11%.

To provide some additional color on the Yadkin acquisition, the loan portfolio of $5 billion is largely comprised of commercial credits consisting of both C&I-related and non-owner CRE. The portfolio has performed in line with our expectations from the time of announcement and leading up through conversion with a credit mark of approximately 3.5%, ending slightly better than our initial due diligence estimates. With the conversion now complete, our credit and lending teams will continue to work diligently over the next several months to finalize the integration of the portfolio in accordance with our standard credit review processes.

In summary, the first quarter of 2017 was highlighted by the successful execution of our largest acquisition and conversion to-date as well as the solid credit results for our total loan portfolio. Our banking teams remain focused on proactively monitoring and managing our loan book across the entire footprint with our core credit principles remaining at the forefront of these efforts, including consistent underwriting and credit delivery and a comprehensive risk management framework that encompasses all portfolios and geographies.

We look forward to the new opportunities that the North Carolina market has to offer, which will provide further diversification to our loan portfolio mix and allow us to remain selective in our lending decisions. These factors have been paramount to the historically favorable performance of our loan portfolio throughout the various cycles and acquisitions and we will continue to employ this same approach just as we have always have.

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

Thanks, Gary. Good morning, everyone. Today I will discuss the results of the first quarter and comment on high-level guidance for the full year 2017.

Let's start with the balance sheet for the first quarter on Slide 7.

Looking at organic loan growth, momentum continued with average loans growing 5% annualized. We enjoyed positive contributions across both the consumer and commercial business lines with 4% annualized growth in the commercial portfolio, led primarily by growth in the Pittsburgh, Cleveland and Maryland markets.

Consumer loan growth was 8% annualized led by strong indirect auto volume and residential mortgage activity across our Pennsylvania footprint. As Vince mentioned, we had strong origination volume in both the consumer and commercial portfolio during the month of March with total spot loan organic growth of 7% annualized, which is in line with our guidance.

On an organic basis, average total deposits decreased slightly compared to the fourth quarter while spot total deposits increased slightly at period end. Organic growth and personal non-interest-bearing checking accounts was mostly offset by seasonal drawdowns and interest checking and business demand account balances. From a total funding perspective, transaction deposits made up 82% of total deposits. And the relationship of loans to deposits was 95% at the end of the quarter, in line with our expectations.

Turning to revenue on Slide 8. Net interest income grew $13.5 million or 8.5% due to organic loan growth, the benefit of acquired Yadkin balances for 2/3 of March and some pre-investing in the securities portfolio in anticipation of the Yadkin transaction to take advantage of higher interest rates. Our treasury team did an excellent job exiting most of the Yadkin's portfolio and repositioning it in accordance with our investment philosophy over the last couple of weeks of the quarter.

Our net interest margin remained stable at 3.35% compared to the prior quarter. Excluding the impact of purchase accounting, the net interest margin expanded 2 basis points to 3.28%, reflecting the benefit of the Fed rate increases.

Let's talk now at noninterest income and expense on Slides 9 and 10. Several business lines provided meaningful contributions to fee income this quarter resulting in an 8% increase compared to last quarter. Our insurance group posted a strong quarter and benefited from the seasonal impact of contingent revenues, while we continue to have good results in capital markets, mortgage banking and wealth management.

The former Yadkin markets have already begun to contribute to fee income and benefit from FNB's broader product set, including services such as expanded wealth management and capital markets capabilities. It is a testament to our transition team that these fee-based product areas are fully staffed and ready to work with our bankers in the new markets. Our business leaders are excited about the fee income opportunities in the Carolinas and we look forward to growing these segments in the new geography.

Turning to non-interest expense. Excluding merger related items, expenses increased $12.7 million or 10% due primarily to our expanded operations with the Yadkin acquisition as well as some seasonality. It is our expectation to fully recognize the cost-savings that we have modeled for the Yadkin acquisition and we continue to expect to reach a more normalized run rate in the latter half of the year.

Regarding income taxes, our overall effective tax rate for the quarter was 22% due to the impact of merger-related expense on pretax income. Excluding the impact of the merger-related expenses, our effective tax rate would have been within our guided range of 31% to 32%. We are pleased with our operating returns for the quarter with return on average assets of 95 basis points and return on average tangible common equity of 15.2%.

I'd now like to discuss the Yadkin merger, which we completed on March 11. As Vince discussed, the conversion process went exceptionally well and the customer and employee response has been favorable. As part of the acquisition, we added total loans of $5 billion and total deposits of $5.2 billion. The total mark on the loan portfolio came in at $179 million, consistent with our original due diligence.

As for purchase accounting and related merger charges, our TCE ratio came in at 6.80% with a tangible book value per common share of 5.86% at the end of March.

Now let's review our guidance for full-year 2017, which has not changed from January. We expect year-over-year organic total loan growth in the high single digits and organic total deposit growth in the mid- to high single digits. We expect full-year reported net interest income to increase $270 million to $290 million year-over-year. Given the size of the Yadkin acquisition, we included some additional disclosures related to purchase accounting.

As you can see on Slide 8 and in our press release, our first quarter 2017 net interest income included $3 million of purchase accounting accretion and about $350,000 of cash recoveries.

For the full year of 2016, the total of these 2 items was $13.1 million. We estimate the full year 2017 net interest income impact of total purchase accounting to be in the range of $15 million to $20 million, which is included in our guidance.

We should note that given the early stage of the Yadkin acquisition and the associated lumpiness of the cash flows, it is difficult to accurately project the impact of purchase accounting going forward.

We expect non-interest income to increase in the $60 million to $70 million range year-over-year. We expect noninterest expense, excluding merger charges, to increase by $150 million to $160 million from our $471 million 2016 core expense base. We remain on track, and as Vince mentioned, have a clear path for the 25% Yadkin-targeted cost saves.

We expect provision expense between $72 million and $82 million for the full year, with higher levels in the second half in support of the expected organic growth in the portfolio. The overall effective tax rate for 2017 is expected to be in the 31% to 32% range.

In summary, this was another positive quarter for FNB in which we successfully completed our largest and most complex merger, while continuing to achieve solid core results. I am very proud of our team's accomplishments and believe that the addition of Yadkin will prove to be transformational for FNB.

Now, I would like to turn the call over to the operator for questions.

(Operator Instructions) And today's first question comes from Jason Oetting with JPMorgan.

Apologies if this is already provided, and I know it's only been a few weeks in the quarter. But how much did Yadkin contribute to both fee revenues as well as non-interest expense in the quarter?

Oh, it's really all in the numbers. I mean, Yadkin's been in the numbers for basically 3 weeks, so it's -- I mean, it's not significant to the total fee revenue. But on the positive side, we've already started to see activity from the team down there as far as generating some kind of early wins. So it's -- I mean, it's small at this phase.

Okay. And now that the deal's closed, I know the message has been that the focus will be on integrating this and focusing on organic growth from here. But if you were back in the M&A market, do you think that would be some time towards the end of this year? And if so, how do you view the strategy for the next deal if there is another one? Would it be more like -- would it be in legacy markets? Or maybe something more adjacent to Yadkin's markets?

Yes, I -- this Vince Delie. Thank you for the question. I've emphasized on the previous call and I guess, in my prepared comments, I alluded to the fact that we're going to remain focused on the integration of this transaction. This was a very large, complex transaction. We're very pleased with the integration. We're very pleased with the ability to retain the majority of the key employees. We've had very, very little employee attrition. So we're poised to deliver. And I think it's incumbent upon us as a management team to recognize that while we've been a prolific acquirer, it was done to position the company to drive organic growth and to drive organic growth in a way that lets us maintain the risk profile of the company without taking extreme risk in any particular geography or any asset class. I think we've accomplished that with our M&A strategy. I think we now have significant scale. We have a tremendous group of employees, many of which are from larger institutions. We've built out our capital markets platform. We've built out our fee-based businesses. And it's now time for us to deliver on the acquisitions that we've made. And we've positioned ourselves, as I said in my prepared comments, with significant market share in some of the best markets in the country. We've added a high-growth area to our franchise. So our growth overall, from a population perspective prior to the Yadkin acquisition, was flat. Maryland brought us to flat. It was negative. So we're now in positive territory as a company. The economic statistics that prevail in the North Carolina market are extraordinarily promising. And as I sit today, our pipelines are growing tremendously. So we've had an over-doubling of the pipeline in North Carolina since the last quarter. Obviously, a lot of that is attributable to getting the conversion completed and finalizing the transaction. But having all those bankers on the ground and having them trained in -- on our systems at this early stage in the game is going to be very, very -- is going to help us tremendously produce the results that we've been forecasting. So I think that's my answer. I really don't want to focus on M&A at this point. I think I've made it pretty clear that we're now going to focus on driving EPS accretion and maintaining the trajectory that we had from a revenue perspective and continued across all those fee-based businesses which we're having tremendous early success with. So sorry, for the very long answer. But I think that I needed to clear the deck there in terms of M&A.

Okay, fair enough. If I could squeeze just one more in. I was wondering if you guys could give an update on your indirect auto business. Any thoughts either on growth prospects there or credit risks given where we are in the cycle?

Yes, Jason. This is Gary. I'll give you a quick update there. I mean, our indirect portfolio has been a solid business line for us throughout the last 20-plus years. It is a core business and we've developed very deep relationships over a long period of time with the group of dealers that we do business with, and we're very pleased with the position of that portfolio today. We manage the business from a credit perspective. That's how we run it. And based on our standards, that's how we're going to continue to run it. That portfolio has performed very well through many economic cycles. Average FICOs are north of 750. And today, delinquency stands at 60 basis points with rolling 12-month charge-offs at 46 basis points. So it's a core business. We like it. We run it from a credit perspective and we feel very good about it.

And the next question comes from Bob Ramsey with FBR.

Obviously, I heard you guys reiterate your guidance for a high single digit loan growth for the year. I guess, some of those probably seasonality and some of those industry trends, but starting the year a little bit slower than that. Just kind of curious how the pipelines look. And what gives you sort of confidence in accelerating growth through the year?

We'll, obviously, our pipelines are record levels because of the Yadkin acquisition. But we're seeing very strong demand in the metro markets that we serve. So given our lower relative share, we're able to grow at a faster pace than some of our larger competitors. But we're very optimistic about where we are right now with our pipeline. The pipeline actually, all in is about $2.7 billion. So we are excited about that. That doesn't always necessarily translate into outstanding. There's competitive elements and other factors, but that's a very optimistic sign. And I think over the last few years, we've seen a slow first quarter building throughout the year. And I don't anticipate this year being any different. I think that we're now starting to see opportunities emerge and demand is picking up and it's being reflected in those pipelines. I mentioned the North Carolina pipeline earlier. I'm just -- I mean, I am very pleased with where we are. I mean, essentially several weeks into it and we're seeing a tremendous increase in the number of opportunities available to those bankers. It's very positive and we're very bullish on that. I think that will ultimately translate into us fulfilling our guidance.

Okay, great. And then, shifting gears, talk a little bit about the margin trajectory. I guess, help us sort of think about where things kick off from next quarter with the full quarter impact of Yadkin. I'm thinking you get a handful of basis points of expansion just like kind of blending the 2 balance sheets. And then I know previously, you all had guided for a couple basis points of margin expansion for every additional rate hikes. So I'm guessing the second quarter, we get the benefits of the March hike in there?

Yes, I would say a few things on the margin. I mean, I think -- and we feel good about the margin for the quarter. It came right in line with where we expected given the December Fed move, plus the initial impact of Yadkin for a few weeks. I think that the new disclosure that we're showing, if you look at our kind of margin excluding purchase accounting, we could pick up a couple of basis points there. So that's positive, and that again was right in line with what we expected. When you look at the purchase accounting accretion, you can see it's 6 basis points. Really, it's been 6 basis points this quarter, last quarter and even in the first quarter last year. And then, as we've talked about that the cash recovery piece is the lumpy piece. So this quarter was at 1 basis point kind of the low end of the range. It's been running 1 to 6. It was 3 last quarter. So that's kind of rolling through the total reported margin that you see unchanged at 3.35%. But that kind of underneath picked up a couple of basis points. So the Yadkin loans, as we have said, initially we were going to pick up a few basis points at margin by adding Yadkin. That's in the mix of our overall guidance. I mean, we're giving you guys very specific dollar amounts for guidance in that number. And I think we had talked about it in the past that the margin probably bottom in the fourth quarter and then it would start to build a little bit from there, and that's still kind of consistent with our thinking.

March, obviously, you picked up some benefit from that. June, I guess, remains to be seen whether June's going happen or not. I know the probabilities are above 50%, but that ebb and flows quite a bit from day-to-day, really. So I would say that the guidance that we gave before is still intact and we look for margin to kind of build modestly from here as we go forward, which was consistent with the original path that we expected.

Okay, great. Last question and I'll hop out. But just in terms of the tax benefits this quarter, is it likely that, that would sort of recur in the first quarter of '18? And does it have to do with grants that are made seasonally in the first quarter?

No, actually. It's very simple. It's really just the merger costs. When you think about coming up with your tax provision for the quarter, when you have $52 million of merger costs, it knocks your pretax income down very low. So your benefit of permanent items, the resulting tax rate is very low at 22%. If you take the merger costs and the related tax benefit out of the numbers on an operating basis, we're right in 31.4%, 31.5%. So that's really the run rate that you have going forward. It's just the anomaly of the significant merger costs in the quarter, that's it. So first quarter next year would be kind of at a normal run rate, given where we've been kind of tracking. So really, the $0.23, I guess, just to be clear, the $0.23 does not have any benefit from a lower tax rate. It's right smack in the middle of our 31%, 32%. So I think that's important that people understand that.

I think it's also important to note that the -- those onetime expenses that are merger-related are actually greater than what we had planned because we've recognized some of them earlier.

The timing, right.

The timing is off. So...

More in the first quarter, right.

Yes, which explains the tangible book value level. That should reverse out as you move through the rest of the forecast, right? Because we've recognized those expenses in one period before the retained earnings can benefit tangible book value.

Yes. Proportionally, there's more in the first quarter. Some will still come....

Which is why the effective tax rate appears to be what it is.

And the next question comes from Michael Young with SunTrust.

Quick follow-up just on the onetime costs. Since you guys did a single, I guess timing conversion, as opposed to two steps with NewBridge and Yadkin, do you expect that the onetime costs are going to be lower on an absolute basis compared to your initial expectations?

I would say they'll be a little bit lower more because of some success negotiating contracts and bringing the number down some. So we had -- the number that we had originally disclosed encompassed having the 2 conversions into 1 over that period. So -- but in total, we're going to be -- we'll be a little bit better on the onetimes or a little better on the mark in total. And then, the cost saves would be right on the 25%. So as far as the key levers to booking the transaction, that's where we'll be.

And what it would help with would be ongoing expenses because we will -- we didn't delay that conversion. So we were to benefit from a lower cost per transaction by having all of our systems on one system. So there's actually an impact to go forward expenses, but that was reflected in the guidance and in the model.

Okay, great. And just switching gears, if I look at your long-term targets, the main one that stands out, I guess, is the improving efficiency. We're a little bit above that, obviously, because of some of the seasonal factors. But the deposits per branch item seems a little bit low compared to peers. Is that where the remainder of sort of the cost saves are going to come from to get that level higher from here?

Well, there -- we have a system. We have a process that we call Ready. So we continuously evaluate our branch delivery channel. But I would caution you about looking at those deposit balances at this point in time. There's quite a bit of seasonality that impacts the deposits on a per branch basis. And one of the biggest areas that would be impacted would be in the municipal segment. Or looking at the commercial deposits in those branches, the first quarter typically sees declines because people pay their taxes and pay out bonuses or incentive compensations. So you see a -- you typically see lower deposit balances in that first quarter. So it's probably a little tricky. But in terms of looking at the branch delivery channel, we've been doing it for 8 years. We've closed over 50 branches. Over that time, we closed half a dozen last year. So we constantly review our delivery channel. We look at opportunities to optimize the channel. We deploy technology, which is part of our clicks-to-bricks strategy, to kind of offset branch consolidations or to accommodate customers with ITL deployments and advanced ATM deployments. So we -- I think we're very focused on that, and that's why our efficiency ratio has done well given that we've continuously added for infrastructure purposes and for regulatory purposes. I think if you look at the build in the -- if you see that slight uptick in the efficiency ratio, what that is related to more specifically, would be building out the team in advance of the conversion or adding staff to accommodate volume and not waiting for the conversion to do that so that you can benefit more fluidly from the revenue expansion. That's the strategy. Over time, as we start to normalize our revenue growth then achieve the additional cost savings, you'll see that come down. And that's -- our guidance alludes to that. So it should work that way.

Yes, I would just add, too. So to Vince's point, the revenue impact for the quarter would be low given the late closing, but that will start to kick in the other levers we have. Branch optimization is definitely a part of it. We also have an ongoing vendor management program. And particularly with our much larger size now, we're going to be going back to vendors to really renegotiate contracts. And there's opportunities there to just continue to drive the efficiency ratio. And then just the cross-selling of products, given the broader markets will be a significant benefit as we go forward. So the 57% reflects the items that Vince mentioned. We've been running in the 55% to 56% range, and I expect us to return to those in these coming quarters here because of the seasonal items plus the pre-hiring to make sure we are ready for Yadkin to come onboard.

We also have some opportunities relative to occupancy expense that haven't played out as well.

Right.

So there's quite a bit of real estate that's owned across the company that we are paring back.

And the next question comes from Casey Haire with Jefferies.

Wanted to touch on the provision guidance, which holding at [ 72 to 82 ]. It seems very conservative given starting with the $11 million provision in the first quarter here. I know you guys got a lot of momentum on the loan front. But even with that, I mean, the guidance implies that provision is going to run at $20 million for the remaining quarters I'm just wondering, are you just being conservative? Or is there some loss normalization embedded in that assumption?

Yes, I would just -- a couple comments, Casey. It's important to remember that a good portion of our provision is used to fund the solid loan growth that we have in the first quarter and that we expect to accelerate going forward. And its important distinction too is that we're funding the solid growth in originated loans, which is higher than what appears because we always have to fund the acquired loan runoff that occurs every quarter. And that's been running about $200 million per quarter. So the kind of gross originated loan growth that you have is what we need to provide for. So the provision for the first quarter clearly benefited from a good charge-off quarter, and the provision again more than covered net charge-offs so the absolute level of the allowance has gone up. But the range is really reflective of the growth that we expect to have, legacy FNB plus Yadkin. It's important too, to remember that when we do our organic growth numbers that we disclose, we exclude the day one balance sheet from Yadkin. And then that incremental growth that you have going forward, plus the growth in the rest of the company becomes a higher percentage when you think about it that way. And we need to provide for that as we grow. So first quarter has good charge-offs and we kind of planned at normal levels. But it's really -- the main driver is really the growth that we expect to have in the rest of the year, which is baked into our guidance.

Okay, great. And just switching gears to capital adequacy. One of the -- I know that capital efficiency has long been a theme for you guys. But at $30 billion, that 6.8% TCE ratio does stand out, especially versus your peer group on Slide 12. Can you just give us some updated thoughts and assurances on your ability to run at that relatively light capital level going forward?

Yes, I think we feel very comfortable with where we are from a capital perspective. I mean, to really do a comparison, an apples-to-apples comparison, Casey, you have to drill down into the portfolios and understand what the risk profile of the assets are. And we're a very conservative company. We don't have large structured finance or leveraged finance exposures. We're very conservative in terms of CRE underwriting. So that all comes into play. And there are banks that are multiple times our size. I was just going through some of the -- or in our peer group as well that have a TCE ratio that's only slightly higher than ours, and they have those exposures. So I would think that we're very well positioned that we feel very comfortable with our capital ratios. And I would expect, given the success we're going to have with our acquisition, that those capital ratios will improve over time.

Plus I would just add that as you would expect, with the size of this deal, as we do with every deal, but this one was even larger, there's regulatory approval process and the capital ratios where we run is obviously a big part of that application and one we're comfortable for all the reasons Vince just described and obviously the regulators are comfortable, too. So we're very happy with where we're managing the ratios. They're still well within our ranges, and that's the way we continue to manage.

Okay, so 6.5% to 7% is still your -- is still a comfort zone?

Yes. Remember, I'm 7%. Vince is 6.5%. So...

Okay, just last one housekeeping. On the -- can you guys give how much seasonal expense pressure was there in the quarter between pro forma inclusive of Yadkin like payroll tax specifically?

Yes, it's -- I mean, we don't disclose that level of detail. I mean, if you look at first quarter last year, without the pre-hiring we had, efficiency ratio was 56% and then it kind of drops down from there. So I don't -- we don't give that level of detail out, Casey. But my comment earlier about us moving back down into that 55%, 56% range gives you some feel for that plus the revenue contribution from Yadkin. So it's -- in the past, it's been about $0.01 a share, I think, the impact of the total resetting of expenses.

The next question comes from Russell Gunther with D.A. Davidson.

I just want to circle up on loan growth. I hear you unclear on the organic target for this year in the high single digits. But as you mentioned, you guys have effectively used M&A to transform the organic growth profile of the company and so kind of moving into the Carolinas. Trying to get a sense for can that high single-digit move to low double-digit over time? Or as you overlay this new acquisition on your underwriting standards, are we kind of looking at high single digits going forward?

I would say that we're sticking to our guidance. I think if you look, as Vince mentioned in his prepared comments, the last few weeks of March were strong. So on a spot basis, we came in at 7%. We don't typically quote the spot, but we thought it was important note. And if you look at the pipelines that I have mentioned, clearly we have an opportunity to maintain that higher growth trajectory. Our strategy here has been to manage risk. It's not just about growth. It's about managing risk and asset classes, having diversification in terms of how we grow the portfolio and having geographic diversification that helps us continue with our growth trajectory and positioning the company in those larger markets that have more opportunities. As I mentioned in my prepared comments, the number of commercial prospects that exist within our footprint today provide us with the ability to sustain that mid- to upper single-digit range that Vince spoke about. So we still feel that that's achievable. Obviously, that's impacted by a number of factors, including economic factors, economic outlook, competitive pressures. But as we sit today, we're very successful at gaining share in those markets, particularly when we move into the top 10 deposit share. There seems to be a correlation between having that delivery channel in place and having that deposit share and winning in the commercial space, particularly for us. So I would say we're in a good spot.

Okay, great. And then just to follow-up on the margin. I think I heard you say you're, all else equal, isolating for a Fed impact roughly 2 to 3 basis points on the core margin. Are there any tailwinds there that may exist? For example, some loan floors that eventually burn off or that 2 to 3 could move higher? Or is this sort of the range we should expect until we start to see a more meaningful pick up in deposit costs?

Yes, we really don't have much in the way of floors overall. But one thing I do want to clarify because I think is a little bit of confusion. So we've changed our nomenclature a little bit with the margin. So I think some folks were taking a core margin last quarter, which was really just the reported margin minus the excess cash recoveries, which takes 3.35% to 3.32% and then comparing that to a 3.28% number that excludes purchase accounting. So kind of apples-to-apples, it's actually up 2 basis points excluding the purchase accounting accretion. So I just kind of wanted to clarify that. But within the portfolio -- I mean, the guidance that we have, I mean, our asset sensitivity position is very similar to where it was at the end of the year. Yadkin changed it a little bit, but not significantly. Yadkin brings in a little bit more fixed rate loans than we had, so that's in there. But it moves our total percentage by a couple percentage points that are kind of fixed versus variable. So it's not a significant move. So -- and I think that a couple of basis points still feels right for the Fed moves going forward.

And the next question comes from Collyn Gilbert with KBW.

Just wanted to check in on some of the guidance that you guys gave. So Vince, the $270 million to $290 million that you guys are sticking to on the NII goals for this year, can you just remind us, do you have rate hikes in there? And if so, how many?

2 rate hikes were in there.

2 rate hikes, okay. Very good. And then on the fee side, so the $60 million to $70 million increase this year, what does that assume kind of for your outlook on mortgage banking?

Yes, I mean, there was an increase in activity, obviously, because it would include...

Bringing the Yadkin.

Bringing Yadkin over, Collyn. So they had a mortgage banking operation to be consolidated into ours. We also, as I stated from the very beginning, our primary objective was to pursue purchase money opportunities, and we've done a very good job with our mix. Our mix has always been north of 70%, 70% or higher in the recent quarters. So that continues. And we do not have the representative share of the mortgage banking originations in the purchase money space relative to our positioning in the market from a deposit share perspective. So we obviously have a budgeted increase. While others may see contractions in that business, I think it's a pure size issue. So we're still small and growing and others may have a higher proportionate share. So they're going to see some of that roll back. But as long as the housing market remains intact, we should do well. And all of that is reflected in Vince's guidance, in addition to the derivative fee income and wealth opportunities and so there's a tremendous amount of activity. I think I should point out as well that we are fully staffed from a wealth perspective in the Carolinas. So that's part of that expense bill. We were able to hire people earlier than we anticipated. So we got them in the seat. So unlike other acquisitions, we're in a very good position with personnel in those markets.

Okay, that's great. That's helpful. And then, Vince, you may have said it and I may not have heard it or you were leading to it, but -- so obviously, you guys took more merger charges this quarter. What is left to take do you anticipate? And is it kind of coming in the second quarter? Is there anything that will trickle in, in the third quarter?

Yes, there's some left. I mean, the original number that we had disclosed I think was about $100 million and we'll be a little bit better than that. So there's still some to come through. Our total number was $52 million -- $53 million that we had in the first quarter. So there's not that much left. I mean, if you take the $100 million and haircut it a little bit, we're going to be a little bit better. But the rest of that piece I would see come through in the second quarter.

And there's a little tiny bit at which -- that come in, in the third...

Yes, there's some related to exiting the non-branch facilities that they have a lot of properties that we're not going to be using. So that -- yes, there's a little bit for that.

A trickle, but it'll be small. It should be small.

Okay, okay, okay. And then just on the expense guidance, I know -- I certainly appreciate the color, but I just want to make sure I understand kind of how you're running the business. So the comp expense was up because I assume, as you guys indicated, kind of some of the pre-hiring needed ahead of Yadkin. But then, does that -- that wouldn't necessarily trend down, though, would it? Or just trying to understand kind of the dynamic there because that was a big jump, I guess, in the first quarter.

But it would trade-off. You're trading it off from it impacting FNB core versus it being a reduction in expense in the model for Yadkin.

Okay, got it.

We didn't have the revenue.

Yes, we didn't have the revenue. We had the expense and we pre-hired, so it's going to impact you. And then over time, it reverses out essentially if you fulfill the forecast, right? Because you're generating revenue and you're not adding the incremental expense to the bottom.

Okay, okay. Got it, okay. And then just finally, I think when you guys announced Yadkin, I think the consensus was kind of anticipating given your accretion targets of 5.5% EPS accretion targets that anticipating about $1.06 of earnings in 2018. It sounds like given your positive messaging and the momentum you guys anticipate that you could be able to recapture that level, I mean, that, that still should be within the target. Is that safe to say? Or do you have any thoughts on that number, based on where you guys were when you announced the deal?

Collyn, I would just say we have been giving guidance for '18 as you know so it's really kind of hard to comment on that. I think what's important is that you picked up on the positive messages here about our expectation with Yadkin as well as in our legacy markets. And we're optimistic about what that would do for '18. But, I mean, I really can't give you guidance on '18 at this point.

Okay. So -- but you're still, I mean, I guess -- if you're still assuming that 5.5% EPS accretion, right, but that part of it hasn't changed? Or has it changed? I guess, that's the question.

That part hasn't changed, but you do the math using the consensus estimates of time because that's the way you kind of need to do it. So...

Yes.

So that -- no, the 5.5% accretion is still what we're -- what we expect and that's what we're targeting. And then that number obviously moves up and goes forward into '19 and beyond. But that's still what we're targeting.

The one thing we did say in prior calls, Collyn, is that we did not model Yadkin with rate increases, okay? So back when you look at the consensus estimate at the time, there were rate increases baked into it. We modeled it without it, so the 5.5% accretion is reflective of a flat rate environment, okay, not escalating rate environment, not a flat yield, okay?

And the next question comes from Frank Schiraldi with Sandler O'Neill.

Just one question I had left actually was on the efficiency ratio. So pretty sure on your slide deck, can you guys target less than 53% efficiency ratio sort of longer term. Just checking my math from your guidance because it seems to me like you could get there or should get there really on the back half of this year. Is that -- so I'm just kind of wondering on the timing on that 53% or lower? And could you get there in the back half of 2017?

Yes, I would say, I mean, a few things there, Frank. I mean, the -- where we've been running, if you look at the fourth quarter, right, we were running 55% and change. I think, clearly the addition of Yadkin and the scale from Yadkin helps to drive that number down. You do get benefit in the efficiency ratio there. And as we've talked about in the past, we -- when we modeled the transactions, we modeled it well south of kind of where we're running once you take out the cost saves. So I mean, there's opportunity for that number to continue to move down meaningfully. The timing of getting there, I guess, you could question is how quickly do you get there? I think this 53% is attainable. And it's just a matter of the timing to get there and probably pause there.

And the next question comes from Brian Martin with FIG Partners.

Just one question, just back on the expenses there. I guess, the first clean quarter from an expense standpoint, now that you've gotten the conversion done. I mean, is it second quarter or will it be third quarter by the time you guys kind of get everything in where you want it to be? Sounds like it's more in the third quarter?

Yes, it would be the third quarter. By the time you have folks that have obviously stayed on past conversion to help with the transition and then we mentioned the properties earlier. So I would expect, similar to metro, by the third quarter, you had a clean quarter within the third quarter. So you have the vast majority -- vast, vast majority of the cost savings out by June 30 and then you have a clean run rate in the third quarter.

Okay, that's perfect. And then just going back to the guidance. I think the -- I think when you announced the Yadkin deal and kind of gave guidance last quarter, you talked about kind of the average earning assets that can -- seeing -- given the $8 billion, does that stay intact versus from what you guys said? Or I didn't hear if you mentioned that, maybe I missed it earlier.

So I think that the loan's being in the high single digits. And then our securities portfolio, we typically manage that around 19% to 20% of the total. So I didn't comment on our earnings assets, but the loans being the biggest driver. Obviously being in the high single digits is what's in the guidance.

Okay, but no change from the $8 billion dollars that you talked about last quarter? Sounds like all that guidance was the same?

I don't remember saying $8 billion, I'm trying to remember. The guidance -- what I would say -- if I said $8 billion last time, the guidance is still intact.

Yes, okay. I got you. Fair enough. And then the -- just on the NII guidance. I mean, I think with the changing of the nomenclature, I guess, on the accretion, the add that you're picking up for the net interest income, does that include -- what accretion does it include? Does it include any at all?

No, it does include $15 million to $20 million of total purchased accounting, which is largely going to be kind of the normal scheduled accretion. Given the size of Yadkin, we thought it was important to start to break this stuff out. So to put that in perspective, I guess, Brian, so for last year, in total, the total purchase accounting, the combination of the normal accretion plus the cash recoveries was $13.1 million in '16, baked into our guidance is $15 million to $20 million of total purchased accounting. Again, a combination of 2 items for '17. And it's early to predict with certainty, obviously, but we feel that's a pretty reasonable range. That's what's in our guidance.

Yes, okay. That's helpful. And then the -- just the last thing, just going back to the mortgage just for a minute. I guess, my assumption is with the Yadkin being not in the numbers really for this quarter, minimal on the mortgage side, but we should really think about obviously that the number's getting better going forward or maybe just the first quarter being below watermark maybe for the year if seasonality kind of plays out as it usually would?

I think that's a fair statement. And as I mentioned earlier, Vince Calabrese included that in his guidance so -- and that's reflected in the overall numbers.

Okay. Yes, and then the last thing for me was just on the margin. Have you guys seen any pricing pressure on the funding side at all with the rate increases thus far? I guess, do you think that's a ways off? Just trying to getting...

Yes, it has been minimal at this point. So we've not seen a lot of pressure. Now obviously that could change. But as we sit today, it's been minimal.

Thank you. And as there are no more questions, I would like to return the call to Vincent Delie for any closing comments.

Yes, I'd like to make a brief closing comment. So first of all, I'd like to thank everybody for the great questions and for joining us on the call. I know this was a very complicated quarter in terms of reporting, but it was a very, very strong quarter. And I can't emphasize enough how pleased we are with the conversion, with the fact that we were able to convert 2 systems over a short week and have very, very little disruption for our customers. But the team did an exceptional job, and there were a lot of people, hundreds of employees working late and being repositioned across our company. So for us to deliver such a solid quarter from a performance standpoint speaks volumes about the character of the people that we do have. So I just wanted to say one more time, thank you to our employees, and we're looking forward to delivering that shareholder value creation that we have modeled. So thanks for joining the call. Have a great day.

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