FNB Corp (FNB) 2017 Q2 法說會逐字稿

Welcome to the F.N.B. Corporation Second Quarter 2017 Quarterly Earnings Conference Call. (Operator Instructions)

Please note, today's event is being recorded.

I would 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 attentive for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our earnings release, related presentation materials and our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until July 27, 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.

Good morning, and welcome to our earnings call. Joining me this morning are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. Gary will discuss asset quality and then Vince will review financials and open the call up for any questions.

First, I will cover some highlights from the second quarter and then provide an update on our long-term strategic objectives.

Looking at the quarter, our performance was solid and included the first full quarter of our North and South Carolina operations. Second quarter operating EPS increased 4% to $0.23 compared to the second quarter of 2016. Additionally, first half 2017 operating EPS increased 6% compared to the first half of 2016 as we demonstrated year-over-year organic loan and deposit growth, record revenue and record net income as well as an improved efficiency ratio. As we stand today, we have essentially achieved the modeled cost-savings target of 25% from the Yadkin acquisition. We expect to generate positive operating leverage and move closer to our long-term efficiency ratio target in the coming quarters.

As evidenced in our first half results, we continue to progress well in implementing FNB business model in our new attractive markets. After a successful conversion and integration in March, the teams in North and South Carolina have shifted from defense to offense with their primary focus on new client acquisition. And during the quarter, we have begun to see a shift in momentum. The overall growth in the commercial loan portfolio in the second quarter was encouraging as we still have a long runway to generate future growth in our new markets with total commercial pipeline ending June at a record $2.7 billion. This represents an increase of 60% over last year with North and South Carolina adding approximately $800 million.

Our commercial pipelines are building rapidly in our newer metro markets as we are seeing more opportunities because of our increased scale and deeper product set. Our significant pipeline is evidence that our expansion strategy has been effective as it is primarily comprised of opportunities concentrated in larger metropolitan markets.

In markets where not too long ago we had very little penetration, we have performed extremely well. For example, year-over-year commercial outstandings in the Baltimore and Cleveland markets are up 30% and 29%, respectively, and now both exceed $1 billion. Pittsburgh is up nicely at 5% year-over-year with outstandings well over $2.5 billion. We believe we can continue this type of success in our established metro markets and replicate our model in FNB's newer markets of Charlotte, Raleigh and the Piedmont Triad.

Looking at the first half in total. Organic loan and deposit growth continued, with average loans up 6% over last year. Average transaction deposits grew 4% organically, and we believe there is further upside to both loan and transaction deposit growth rates moving forward. In our new markets, early indications for customer retention have been very positive with attrition in general performing meaningfully better than any of our prior acquisitions. There is tremendous upside in these markets to add deposit relationships by leveraging FNB CRM systems, introducing our concept branches and by rolling out our clicks-to-bricks strategy and innovative product set that includes leading-edge mobile and online offerings.

We have also expanded our investment in data analytics to make better use of customer information. These enhanced analytical tools, available to all of our bankers through our CRM platform, will enable FNB to quickly and effectively assess what products and services are best suited to meet both customer and prospect needs based on a predetermined set of attributes. Taking advantage of these investments while implementing our clicks-to-bricks strategy and leveraging our footprint-wide solution centers is pivotal to deposit gathering. At the same time, we also remain focused on improving penetration with our treasury management and workplace banking products.

Finally, as part of our ongoing retail optimization strategy, we'll be conducting the evaluation of our retail locations in the coming quarters, including the use and deployment of FNB's concept branches. As traditional branch banking evolves to a more advice-driven rather than transaction-oriented experience, FNB is always striving to create an environment that is conducive to this type of customer interaction. Concept branches are designed to be more open and bright and encourage a more consultative experience through a combination of easy-to-use and easy-to-access products and services. Both knowledgeable branch staff, as well as our digitally interactive solution centers, is available for customer interaction and customized education. The solution centers serve as an intuitive technology resource that allows customers to compare FNB product options side by side as well as answer questions, in brief, self-guided digital review to determine the best account for their needs. The enhanced transparency provided by the concept branch results in more beneficial product choices and a unique banking experience users can actually see and touch. FNB currently has 7 of these concept branches with additional rollouts planned in 2017.

Returning to our financial performance. Fee-based businesses, including wealth management, capital markets, insurance and mortgage had solid quarters, and these business lines continue to build momentum. In particular, we've enjoyed success expanding our capital markets platform, and commercial swap activity for the quarter was at an all-time high.

We remain focused on attracting the best local talent as we round out our teams in our newer markets. Again, I want to emphasize, we are very pleased with our regional leadership and staffing levels in the wholesale and consumer bank, and we believe our product specialists, including treasury management, SBA lending, capital markets, insurance and wealth management, are now in a strong position to serve our new client base and to deliver revenue growth.

In summary, record revenue and record net income highlighted the second quarter as well as year-over-year earnings growth per share. As we leverage our full suite of products, we expect to continue to grow the balance sheet and take advantage of fee-based service momentum we're seeing. With the addition of our new markets in North and South Carolina, it has created several diverse growth engines that enable FNB to maintain our credit discipline while generating sustainable earnings per share.

Looking at the remainder of 2017, our focus is on delivering earnings growth through for our combined franchise and creating shareholder value by progressing towards our stated long-term targets.

Before Vince gets into the financials in more detail, I'll ask Gary to discuss asset quality. Gary?

Thank you, Vince, and good morning, everyone. We finished out the first half of 2017 with our key credit metrics remaining consistent and in line with historical levels over the last several quarters. On a GAAP basis, we ended the quarter with the level of delinquency at 1.44%, NPLs and OREO at 78 basis points and net charge-offs at 23 basis points annualized. In addition, we also saw a significant improvement in the level of rated credits, which was largely driven by positive trends in the Yadkin portfolio after just 1 quarter following that acquisition.

I will provide some further updates on how the Yadkin integration is progressing, but let's first take a closer look at some of the highlights for the quarter on the originated portfolio, after which I will touch on the acquired book.

Turning first to the originated portfolio. The level of delinquency increased slightly during the quarter, up 5 bps ending June at a very solid 99 basis points and remains in line with historical levels. NPLs and OREO decreased on a linked-quarter basis, down 4 bps at 1.08%, with solid OREO sales activity that helped to offset a slight increase in nonaccruals. Net charge-offs for the second quarter were $12.7 million or 38 basis points annualized; and on a year-to-date basis, 31 basis points annualized. The originated provision at $17.5 million supported net charge-offs and strong organic loan growth in the quarter resulting in an ending originated reserve position of 1.15%.

Shifting over to our acquired book. We are very pleased with the performance of the portfolio this quarter, which was marked by stable past due levels, some healthy credit upgrade activity and a flat ending reserve position. The portfolio totaled $6.7 billion at the end of June with contractual delinquency remaining at $159 million on a linked-quarter basis.

Looking specifically at the Yadkin portion of the book. The loan portfolio ended the quarter at $4.7 billion purchased at fair value. With favorable credit activity, we have reduced levels of delinquency and positive credit migration.

In total, the overall loan portfolio, including both the originated and acquired books, remains well covered with an allowance plus acquired credit mark of 2.08%.

As we close out the first half of 2017, we are pleased with the position of our loan portfolio as well as the progress made to date in integrating the Yadkin book of business. We executed on our proven strategy of converting and integrating Yadkin into our standard credit processes, which are built on a foundation of consistent underwriting, attentive risk-management practices and remaining selective in our credit decisions.

Our underwriting teams in the retail, small business and commercial lines are now fully integrated into the legacy FNB credit approval systems while our credit officer group in North Carolina is at full capacity under the leadership of a highly experienced senior credit officer that previously oversaw our Eastern Pennsylvania and Maryland markets.

Finally, our banking teams worked tirelessly on a secondary review of the portfolio, which, after much work in gathering additional information, has allowed us to upgrade a significant number of relationships in that portfolio. With our North Carolina teams now fully integrated into FNB's culture, we are well positioned to continue to grow our existing relationships as well as to seek new lending opportunities to further support the long-term growth objectives of the company and provide value to our shareholders.

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 the results of the second quarter and comment on guidance for full year 2017.

Let's start with the balance sheet for the second quarter on Slide 6. Looking at organic loan growth on a linked-quarter basis, average loans increased 6% annualized. Average consumer loans increased 9% annualized due primarily to increased volume in the indirect and residential mortgage portfolios.

The commercial portfolio grew average balances 4% annualized with growth concentrated primarily in the Cleveland and Baltimore markets. In the commercial portfolio, we had a number of larger transactions close late in the quarter, leading to spot growth of 6% annualized, which will provide a good launch point for the third quarter.

On an organic basis, average total deposits increased $60 million compared to the first quarter as growth in noninterest-bearing deposits was offset by an expected decline in higher-cost brokered time deposits. From a total funding perspective, transaction deposits made up 82% of total deposits, and the relationship of loans to deposits was 97.5% at the end of the quarter.

I'll note that given our strong loan pipelines, we've recently redoubled our efforts on retail and commercial deposit gathering. As Vince mentioned earlier, we expect to leverage our investments in enhanced data analytics through our clicks-to-bricks strategy to drive new household acquisition and deepen existing relationships.

Turning to revenue on Slide 7. Net interest income grew $45.7 million or 26.4% due to organic loan growth and the benefit of a full quarter of acquired Yadkin balances. Our net interest income -- or margin was 3.42%, an increase of 7 basis points compared to the prior quarter. This was due to a combination of a full quarter of higher-yielding loans acquired from Yadkin and the impact of the March and June Fed rate increases. The second quarter net interest margin included 3 basis points of purchase accounting accretion and cash recoveries compared to 7 basis points in the first quarter. So without the benefit of purchase accounting accretion and cash recoveries, our net interest margin expanded 11 basis points on a linked-quarter basis.

Let's look now at noninterest income and expense on Slides 8 and 9. Noninterest income increased 20% over the first quarter due primarily to growth in service charges, reflecting higher transaction volumes from our expanded footprint and strong performance in capital markets and mortgage banking. Interest rate swap activity was the primary driver of growth in capital markets and benefited from the successful expansion of our strategy combined with favorable interest rate conditions in the quarter. Mortgage banking volumes were also strong while insurance revenue was down from seasonally high first quarter levels, which included contingent revenue.

The former Yadkin markets have begun to contribute to fee-based revenues in several areas, and we see significant additional opportunity as we gain traction in those markets and newer businesses going forward. As Vince mentioned, we are very excited about the potential for meaningful fee revenue growth in these markets, particularly from SBA, insurance, wealth management and capital markets.

Turning to noninterest expense. Excluding merger-related items, expenses increased $27.5 million due primarily to our expanded operations with the Yadkin acquisition. Although expenses were up 20% this quarter, we continue to benefit from positive operating leverage, and our efficiency ratio improved to 54.3% from 57.2% as we successfully realized essentially all of the targeted Yadkin cost savings through the end of June.

Regarding income taxes. Our overall effective tax rate for the quarter was 28.5%, primarily due to the tax credits generated by commercial lending and leasing opportunities in our new markets. Tax credit relationships have historically been a part of our normal course of business, and we stand to realize greater benefits going forward from our team's efforts in this space. As we leverage our increased scale moving forward, this is an area of focus for us as we evaluate larger opportunities across our footprint to take advantage of these credits.

We are pleased with our operating performance for the quarter with improvement in key long-term objective measures compared to recent quarters. Return on average assets improved 5 basis points to 1% and return on average tangible common equity improved to nearly 16%. With the Yadkin closing behind us and as we execute our business model, we saw improvements in our equity ratios from the first quarter, with tangible common equity to tangible assets coming in at 6.83% and tangible book value at $6 per share.

Now as promised in April, I'd like to update our guidance for full year 2017 to better reflect the timing of the Yadkin transaction and to fine-tune our expectations now that Yadkin has been with us for a full quarter.

We continue to expect loans to grow at an annualized rate in the high single digits from the June 30 period-end balances, which is in line with our stated long-term targets. We expect deposits to grow at an annualized rate in the mid to high single digits from the June 30 period-end balances, again, in line with our stated long-term targets. We expect full year reported net interest income to increase $235 million to $245 million over full year 2016. We continue to expect the total full year impact of purchase accounting to be in the $15 million to $20 million range, which is included in the overall guidance. We expect noninterest income to increase in the $50 million to $60 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 expect provision expense between $65 million and $75 million for the full year. The overall effective tax rate for 2017 is expected to be around 29%.

In summary, this was another positive quarter for FNB in which we made significant progress in the development of our new markets and enjoyed continued success in our other markets. We also made progress toward some of our long-term targets such as improved efficiency, higher return on assets and higher return on tangible common equity, and I believe we are in a position to further that progress into the future.

In closing, we believe the valuation of our shares remains very attractive. Having put to rest any question about our ability to integrate a $7.5 billion bank in North and South Carolina, we think there is significant upside in our stock as we are focused on driving earnings per share growth. With the current valuation levels, we think a good entry point exists for investors that have been on the sidelines.

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

(Operator Instructions) And the first question comes from Jared Shaw with Wells Fargo Securities.

I guess -- if you could start with the auto growth and some of the trends you're seeing there. As you're adding new dealers, is that primarily in Pennsylvania at this point? And what's the opportunity, if so, to see growth into the new markets? And as you add new dealers, how competitive is that? And are you having to give a lot in terms of dealer reserve and things?

Jared, in reference to that portfolio, with the Metro acquisition last year, we were able to take on a few new dealer relationships that we had wanted to get into for quite some time. So we did expand a few dealer relationships there. The indirect business is really across our legacy Pennsylvania footprint as we sit here today. And yes, there are opportunities in our newer metropolitan and the North Carolina markets going forward where we don't operate that business model today. So we do see a future opportunity there, we like the position of where we are today. You'll recall that we do run this business from a credit perspective. The book is performing very well with delinquency at 70 bps and charge-offs running at a very good level at 44 bps. So very well-positioned book and we're doing good business there.

Okay, great. And then on the -- so is that on the mortgage banking business a similar opportunity with the new geographies?

Yes. I'd say the mortgage banking business, the major contributor to the volume this quarter was our core franchise. So we have not yet fully achieved the revenue benefits of the expansion in North and South Carolina. It's starting to gear up, so we're very optimistic about that. In fact, Vince mentioned on the -- in his prepared comments that the capital markets area, the wealth management area, the insurance business, the SBA business and really, to a lesser degree, the mortgage business, they've contributed very, very little in terms of fee income to the quarter. So we're very excited about gearing up in North and South Carolina. We have -- we filled the positions that we needed to fill in those areas for the most part. We're still rounding out the insurance side, but we're in a very good position to start to drive revenue synergy that was unmodeled. And I think given the performance of the company in this quarter, without the benefit of those areas, I'm very excited about it. Our people have now moved from being in a very defensive position, sorting through the credits and dealing with conversion -- the conversion and integration to offensive mode. So we're -- from a fee income perspective, we're looking good as we move forward.

And then just finally, on the deposit side, you had said that the attrition was less than you were expecting. And with some of the move in categories we saw this quarter, do you feel that that's really settled out here? Or do you expect to see maybe some more move maybe within the categories? And I guess, how are you looking at your relationship between the deposits and the borrowings over the next few quarters?

The deposit portfolio, we've moved out certain deposit categories that we -- brokered time deposits that had a higher yield on them, it doesn't benefit us, so we've moved a lot of that out. There's a lot of noise in the deposit base. We are gearing up the machine. I mentioned in my prepared comments that we've started to roll out our digital strategy. We've been spending a lot of time working internally on producing leads by algorithms that we've written. Our data scientists are focused on writing algorithms based upon attributes or behaviors that customers express through their account activity. And we've been pushing those leads out to the field. We've just started gearing up. We've generated about 900,000 leads out of our own customer base. So we're really in a great position. We have a great delivery channel to exploit that activity with. And I think that we'll start to see some significant gains in the deposit base. The -- when I mentioned the attrition, the attrition has been extraordinarily low for this acquisition. It's a low single-digit attrition in the transaction account categories, taking -- setting aside the wholesale deposits that we weren't interested in. So we're -- we've done extraordinarily well. The adoption rate for mobile and online is better than any other acquisition. So I would say, all-in, we're looking pretty good as we move forward. So I, again, view this quarter -- there's a lot of noise in this quarter, but it's like landing a 737 on an aircraft carrier in the North Sea. I think we successfully landed, and we're now going to go on the offensive. So I'm looking forward to the next few quarters.

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

Just curious, on the margin, you talk obviously about the purchase accounting accretion that was in this quarter versus last. It would seem to me that based on your not changing your accretion assumptions that a better number going forward might include 7, 8 basis points of purchase accounting accretion. Is that a better way to think about the NIM going forward?

Well, I would say a few things, Frank. I mean, I think, overall, we feel good about the margin up 11 basis points if you put the purchase accounting aside. And I think there's additional benefit here to come from the June Fed move, obviously, that just happened at the end of the quarter. So that's going to help the margin as we go forward into next quarter. I think that we had -- a lot of the loan growth, as I mentioned earlier, was kind of late in the quarter. So it doesn't help all that much from an average balance perspective in the second quarter but gives you some nice -- a really good starting point to the third quarter from a net interest income standpoint. And then the accretion, if you add up the total accretion for the first half, it's $4.9 million. I think that the -- one thing to keep in mind is that we have yet to do kind of a first re-estimation. So with this fun purchase accounting that we all have to live with, the first quarter that you have a company on board, and this was similar last year when we had Metro, that actually really doesn't add anything in that first quarter. And then when you do the re-estimation, it kind of catches you back up for where interest rates are. Fed has moved a couple times since day 1, so it captures those types of things. So I think when you do that re-estimation, you would -- I expect to see the purchase accounting accretion higher in the third quarter. So I think our $15 million to $20 million is still a reasonable range based on what we know today. We do have to go through that re-estimation process. So there's not a certainty as to what comes out of that, but it does have a positive impact kind of as you move forward. So that $15 million to $20 million is what's baked into the margin guidance, and I would use that range.

Okay. But the -- so that's for the full year. So talking $10 million to $15 million left, that's still reasonable for the back half this year? Or is that -- was the $15 million to $20 million for the full year 2017? I don't remember.

Yes, that's for the full year. And the re-estimation is going to inform us a lot as far as how that comes out. So...

Right. But you don't foresee any -- I mean, there's no reason to foresee a big change there? I mean, the $15 million to $20 million is still, as you say, a reasonable estimate?

Yes, so that's still a reasonable range to use.

And I wonder if you could just talk a little bit about what really is the main driver of sort of pulling back a little bit on the revenue guidance, both NII and the fee income side. Is it just a little bit -- you seem to mention timing. Is it just a little bit slower traction than you anticipated? Or if you could just maybe give a little more color there.

Sure. No. I think now that we have our first full quarter with Yadkin on the books, it gives us an opportunity to update the guidance, mainly reflecting the change in legal day 1. So when we originally had modeled Yadkin, we were using February 1 as our kind of legal day 1, when we expected them to become part of FNB. And as we know, at the end of the day, we converted and closed, they became part of us on March 11 over that weekend. So basically, you lost -- we lost 1/2 a quarter of everything. So I think it's important to keep in mind everything is going to be a little bit lower because of that, which is reflected in the current guidance. Revenue is lower, expenses are lower, the provisioning guide is lower. I think if you add it all together, as we said last quarter, it's less than $0.01 of an impact from a kind of pure EPS standpoint. The economics that we modeled are still intact, and we're still on track to generate the 5-plus percent accretion that we talked about next year. So it's really just a function of catching up for the change in the legal day 1 and capturing launch points and all those types of things. So kind of as you go forward, this is a good -- this is based on what we have in our forecast today. So kind of a long way to say it, it's really that change in legal day 1. And we hadn't given the February 1 before because now that we sit here, we have a quarter of it, so we can provide additional guidance on all the components. We couldn't do that after 2 weeks of having Yadkin on our books last quarter.

And then, finally, just on efficiency ratio. You may have implied this, I'm not sure, but it seems to me that the -- your long-term goal, you're basically -- or you should be there in the back half of this year. Is that reasonable?

Well, I think the guidance is where we're looking to get to. I would say, that's not -- from a time horizon, it's not a long term. I think that's a nearer term. I don't know that we're going to get there in the second half of the year. But I think it's nearer than long, let's put it that way. And with 54.3% this quarter, revenue starts to kick in with Yadkin, as Vince was talking about earlier with some of the pieces that really haven't even started to contribute yet, so there's generally more positive operating leverage to be gained as we go through this year and into next year. So the direction will definitely be down. Can't comment on exactly when you get to that number, but we're on a good pace to get there over the nearer term, I would say, as opposed to long term.

And the next question comes from Jason Oetting with JPMorgan.

I'm just wondering, could you break up the contributions to NIM from the recent Fed hikes versus say the higher-yielding Yadkin portfolio and other various items in the quarter?

Yes. We had said before that the Fed moves are worth about 2 to 3 basis points to margin depending on the overall mix. When we brought Yadkin's loan portfolio in, that added about 4 basis points or so to the margin. So you have March's -- you have the benefit from the March move, you have a little bit of the June move and then you obviously have Yadkin in there for a full quarter. So those are the kind of the big moving parts in there. And then you had the purchase accounting accretion and cash recoveries kind of adding 3 basis points on top of that.

Okay, that's helpful. And then I'm looking at the rate on the interest-bearing demand deposits. It looked like they went up about 10 basis points in the quarter. Once again, similar question, but just wondering how much of that is due to like kind of pressure in the legacy FNB portfolio versus maybe some shift because of Yadkin?

Yes. I would say that there's some shift from Yadkin that would be in there, plus you have some of the components of the deposit side are more market sensitive than others. I mean, overall, we haven't really had pressure on the deposit rates, but there are certain segments that -- money markets and some of the business accounts that are -- kind of moved -- not 100 cents on a dollar with the move in rates, but there's kind of a quicker move in some of those. But the vast majority, we haven't had any pressure in moving at all. So I think that's just kind of normal activity, I would consider that. And we had looked at -- we had done this a couple of months ago, just looking at our overall beta with the Fed moves that have happened kind of to date. And we were in the kind of high single digits as far as how much of that has -- of the Fed move to date had been kind of moved through the rates in the portfolio. So that's how I would characterize that.

Okay, that makes sense. And then one more, if I may. With the numerous headlines on retailers struggling recently, could you guys break out your exposure to the retail industry in terms of both commercial real estate as well as C&I lending? And what trends are you seeing in those portfolios?

Yes. Jason, our book is a very diverse book of business, and it really covers a large range of categories. You have everything from automobile dealers, health care, building supplies, gas stations, auto parts, grocery stores, it goes on and on, including C&I categories as well as CRE categories. When you look at the CRE, it's about 6.5% of our portfolio. That portfolio continues to perform extremely well. We have a large number of high-quality borrowers in there, and delinquency runs at 57 basis points. So we're very comfortable with where we sit today and the future outlook of that portfolio.

And the next question comes from Casey Haire with Jefferies.

Question on the liquidity profile. Loan and deposit ratio at 97.5%, a little bit higher than what you guys have been running. Are you guys comfortable there? Or are you going to look to work that down? I know, Vincent Delie, you said that the deposit engine is primed. But yes, just wondering, where does that loan-to-deposit ratio go from here?

Yes. I think our objective is to work it down. And obviously, the most beneficial to EPS growth is trying to grow transaction deposits. So the focus is there. It's there in the second half of the year. We've made adjustments to our compensation plans. We've added the analytics tool that has been rolled out recently, so we've pushed out about 900,000 leads to the employees. The other thing is the attrition rate that I mentioned that was minimal help as we move forward from here. There's some seasonality as well that comes into play. But another statistic I didn't mention that is relevant is 85% of the Yadkin mobile and online users had logged into the system and started using our services within 6 weeks of the conversion date. That's half the amount of time of -- all of our other acquisitions, typically that doesn't occur until we're 10 to 12 weeks out. And what that means is that those folks are utilizing those services to make payments, and we're their primary depository bank. So that's a very strong indicator for retention moving forward. And I think that stabilization in the deposit base as we move into the next few quarters will help us in addition to some seasonal lift and an increased focus in activity. But our goal is to drive it down, but it's to drive it down with lower cost transaction deposits, not necessarily time deposit growth.

Yes. The only thing I would add to that is, as I mentioned earlier, loan growth -- there was a significant amount of loan growth late in the quarter that kind of came on right at the end of the quarter. And obviously, that moves that number up a little bit.

Okay, understood. And then just switching to the expenses. I appreciate the guide, and I can take a look at the model and see what that implies. But I knew you guys pulled forward a lot of the -- you got all the cost saves this quarter. I was just wondering, is there -- did that fully run rate? Is there more to come in the third quarter, whereby the third quarter expense run rate could actually be lower as you fully realize these saves from Yadkin?

Yes. All that's really left to do is there are properties to sell that we've identified that we don't need kind of going forward. So there are carrying costs related to those properties, but that's not a big number. So the vast majority -- other than that, really the cost saves are realized by the end of the quarter. As you went through the quarter, you're realizing it kind of throughput. So as you enter the third quarter, it's really very clean from a cost-savings perspective, absent of just selling those properties. So it's at a good place. And we've accomplished our 25% cost saves, which is very important to know that.

Okay. So we're -- essentially, we're growing from the 2Q expense run rate?

Just for general expenses, you mean?

Yes.

Yes.

Okay. All right. And then just, Vince Delie, a question for you, I mean, with Yadkin now integrated, are you now open to M&A? Or are you hands down working on this -- on keeping Yadkin primed?

Yes. I think, for the time being, we're focused on driving growth in transaction deposits, continuing to gain market share in North and South Carolina. I've -- everything's gone very well, but we still have work to do. So we're going to stay focused. The digital build-out is on everyone's agenda, so we're very focused on ensuring that we have a very strong product set in the commercial and consumer bank digitally and that we have rolled out our kiosks and continue to work on our clicks-to-bricks strategy. We have rolled out a number of new branches that are -- concept branches that are pretty -- are being received pretty well. So we're going to stay focused on that. Data analytics is a hot topic, and we're continuing to build out the team to drive smart decisions for cross-selling. And even credit monitoring and stress testing require those capabilities. So that tends to be the focus. M&A is not on the horizon. We're not engaged in that activity at this point in time, and we're going to continue to focus on driving EPS growth and organic growth in our new markets and our existing core markets.

And the next question comes from Michael Young with SunTrust.

Vince, you gave us some good color on the customer retention that you have thus far. Can you maybe comment on the other side -- on the personnel side and just lender retention, how that's gone and any additional hiring plans you have in the North Carolina, South Carolina markets with all the deals that have gone on there?

Yes. We -- I mean, it's gone extraordinarily well. I think we've been helped somewhat by the disruption in the marketplace. I think most of the places they could have gone to have been sold since we've bought Yadkin. So I think we've been helped there. I think we have a great team, and the people that we've retained really fit in well with the culture. So I think there's quite a bit of synergy from a personnel standpoint. I think the culture fits well. We've not lost many bankers. We've lost a few -- very few other than in the mortgage business where we lost a group. But it's gone very well. And in fact, there's not -- believe me, being in the Northeast and as soon as we head into wintertime, we'll have a lot of people asking to move, I think. But we've had quite a few inquiries about opportunities in those markets from folks at other banks. And I think we're in a very good position to bring in good people if we need to. And I think we've retained a lot of great people. So I would give an A rating to retention of personnel in this transaction, much, much better than others that we've done, and we're very pleased with the people that we have.

Plus the energy is very strong.

Yes, there's a lot of energy. There's enthusiasm that is infectious.

Okay, great. And shifting gears a little bit on the one-time cost. Have we kind of gotten most all those at this point, and it seems like maybe we're at around $60 million thus far versus your original expectation of $100 million, is that about right?

Well, there's some portion -- no, that's a little bit low, actually. There's probably about 20 that Yadkin ends up booking on their books just the way it gets booked. So there's -- I would say, in total, we're probably going to be about 10 to a little more than 10 better than the $100 million at the end of the day. There are still some more smaller pieces to kind of work through. But that $60 million is more like kind of $85 million if you look at it all-in with what's on our books and what they would have booked. It all gets reflected in capital, but if you looked at it kind of in total.

And maybe just kind of dovetailing off of that, overall, the 4.5-year earn back that you originally estimated, you're a little better on cost saves and maybe a little sooner cost-save realization, but maybe you're kind of at the lower end of the EPS accretion range. So net-net, is it about the same in your view?

No, I would say -- I wouldn't say that's an accurate depiction. I think that we feel good about the EPS accretion that we modeled. I mean, we're optimistic about it. We haven't received all the benefits of some of those product areas that I mentioned that are big contributors. If you go back and look at our fee income growth here and our core business, none of the acquisitions that we did contributed to capital markets fee income, mortgage banking fee income, insurance. So we've grown that organically, and we see the Carolinas as a tremendous opportunity for us because they lack those product areas. So the EPS accretion, we feel comfortable with. I think as we measure M&A -- the success of our M&A practice, we're very conservative. So unlike others, we tend to fare on the conservative side in terms of our estimation of one-time expenses, the credit mark. The cost takeouts were right on. Flat rates, we used. We did not use escalation in the portfolios in our modeling in the first year, which is pretty close to reality. It's difficult to grow portfolio when you've got things moving out for credit reasons and there's transition going on. So it's very conservatively modeled. And I think there's upside in the fact that we modeled Yadkin without increases in rates. There's upside in that we didn't model all of the revenue synergy that I mentioned. I think that the expense base getting to 25% and a market extension is an accomplishment, and it's done. So I look at it as -- if I were looking at this quarter outside of the company, I would look at and say, wow, they were able to take on all of those assets. They grew their asset base 50% over --

a little over a year with 2 acquisitions and they've not missed a beat from an EPS perspective with the incremental increase in share count. That's an impressive feat given what has gone on. And to have such stability in the expense base and opportunities moving forward and good retention with employees and the deposit and loan base moving forward, I would be very optimistic.

And I would just clarify, Michael. Regarding the guidance, the half a quarter of movement in legal day 1 affects 2017, doesn't affect our outlook for 2018. So that accretion that we talked about for '18 is still what we're tracking towards. It's just obviously just the sheer volume of not having the loans and deposits on your books for basically almost 45 days just affects '17.

And the next question comes from Russell Gunther with D.A. Davidson.

I'd just like to dig a little bit deeper on the potential cross-sell within the fee income line. You guys seem pretty fired up there. Just a little bit of color in terms of -- you called out capital markets, insurance, SBA. Where do you think the greatest upside is within those fee verticals? And with that, who's kind of running these businesses down there in the Yadkin franchise? Is it these legacy Yadkin folks? Is it legacy FNB that's come down there or some new hires? Just a little color around the opportunity would be great.

Sure, yes. In the capital markets arena, we've hired a couple of people from larger institutions who are actually based here that service the area from a syndications perspective. The person that leads syndications for us is a former BofA person. He worked on BofA in region syndications platforms. He's done $40 billion in syndicated transactions in his career. So we have very experienced people. We have very, very little contribution from those markets in that arena, but we've got some good prospects. And we're very excited about our opportunity to lead transactions in that market -- in the middle market. From a derivatives perspective, our derivatives executive hails from -- also hails from a large CCAR bank. He's a BofA person, worked in London, worked in Dubai. He's very experienced. He has hired somebody from a larger institution that's based in Charlotte that covers the derivatives area for us. We've had very, very minimal contributions from that market. And there's a tremendous opportunity there because there's quite a bit to swap as we move forward in that portfolio because they didn't have the product set. Insurance, we're still building out the team. The majority of the folks that work for us here in Pittsburgh hail from a large insurance agency that was based here that we brought over a few years ago, and they're doing very well. SBA, the SBA fee income that Yadkin generated, we have essentially reduced that significantly because we've repositioned that business to focus on our own franchise. So where they may have been contributing 2 to 3x the amount in fee income historically, we've reduced that temporarily, and now it's starting to build back up again. So there's significant upside there. In the mortgage business, we lost a number of people. There was a lift-out that was done. So it was -- it delayed our ability to achieve some of the results that we wanted in that market. But we've made it up elsewhere, and we've been kind of overwhelmed in terms of response from the number of people that want to work for us in those markets. So we've made some marquee hires in Charlotte and in the Raleigh market. We've also hired an international person. We had great success already in international down in that market. We've brought at least 8 or 9 clients over, they are fairly sizable. And the person that runs international for us is a tremendous -- has a tremendous amount of experience and has come from a much larger institution as well. So we have a great team. And we're charged up about it because we're just scratching the surface in those markets. And it's very beneficial to have the commercial bankers in their seats down there and to have the caliber of personnel that we have with these new product specialists mainly on the ground in the Carolinas. So that's why we're so excited about it.

That's great. Very helpful there. And then just a unrelated question, I caught kind of the high single-digit loan growth guide, but if you didn't already, could you comment on expectations for the securities portfolio going forward? And where we might see total earning assets shake out for the end of the year?

Yes. The securities portfolio, I mean, we've managed around that 18% to 20% of total assets. So if you look at the average balance from kind of first to second quarter, it's really just the repositioning of the Yadkin portfolio and kind of selling their stuff and then buying the stuff that we would buy. But I would look at it being kind of within that range. I wouldn't look for kind of additional growth there. And that's always a lever, depending on the loan growth, that you could do a little bit more. But I would use that kind of 18% to 20% is really the range that we manage to.

And the next question comes from Collyn Gilbert with KBW.

Just really quickly -- and I apologize, I know the call is running long. But just on a pro forma basis, do you have the split between what the commercial and retail deposit compositions are -- not pro forma, but now obviously with Yadkin?

I don't understand your question.

Of your deposit base, how much is tied to commercial versus how much is tied to retail?

I have that in a report here somewhere.

Yes, I don't have it.

Okay. While you're looking, I'll just -- and then on the commercial pipeline, Vince, in your opening comments, I think you had said that the pipeline was $2.7 billion at the end of this quarter, up obviously sizable year-over-year. Do you -- what was the pipeline at the end of the first quarter -- commercial pipeline? Do you happen to have that number?

It's pretty similar. It was a little lower, but it was pretty similar, $2.4 billion.

Okay, okay. And then just one final question, given your -- kind of your outlook for growth and where this franchise can go, does it change at all your outlook for capital and how you sort of see your capital levels evolving?

I think as Vince indicated on the last quarterly call, we feel pretty comfortable with our capital ratios because we are able to generate -- we're very profitable. So we're generating enough in retained earnings to fund the need to grow our portfolio at the guidance levels that we've given you. So I don't see us changing course on capital. I think if things begin to accelerate and we're growing faster than that, then we always have a chance to reexamine where we are. But we're not looking to do anything that would be dilutive just for the sake of having a higher capital ratio. That's not necessary at this point.

And there are things we could do to manage the size of the balance sheet too that we really haven't done. But Collyn, to your question, just about 40% of the deposits are business related.

Okay. For the whole bank, Yadkin and...

Yes.

(Operator Instructions) And the next question comes from Brian Martin with FIG Partners.

Just most have been covered here. But just a couple of things. On the fee income, I guess, I think you said -- you kind of talked about the opportunity here. I'm just kind of wondering, this quarter was -- was Yadkin less than you guys thought contribution-wise this quarter? Or is it more just the opportunity for revenue synergies that you guys haven't kind of factored in when you announced the transaction?

Yes. I would say, certain areas, it was probably a little lighter, like I mentioned, the SBA. We totally reinvented that business. So that's starting to take off. So that's a little delayed. The mortgage business is delayed, as I mentioned because we're rebuilding the staff in the Carolinas. We're having good success. We've actually brought nearly all the people on board there. So we'll start to see benefits there as we move forward. So I'd say that -- those 2 business units have been lagging. The rest of them, it's to come. So we're, like I said, excited about the opportunities that are starting to surface for capital markets, insurance as well. It's really starting to percolate. So we're excited about that. So I think it's probably -- the answer to your question is it's probably a combination of both but, again, thinking we're in a pretty good spot moving into the next few quarters.

And both of those businesses in the month of June were contributing. So they were starting to contribute in June and then that kind of launched it into the third quarter.

Okay. And just in general, I mean, how quickly do you expect some of the synergies to kind of materialize? I mean, I guess, just is it kind of gradual and, I guess, maybe more so evident in 2018?

Yes. I think you'll really start to see it in '18. I mean, it should accelerate. And in the fourth quarter of this year, I would expect us to see some benefit given the size of the pipeline. So that typically lags the booking of the credit by a little bit. But usually, those arrangements are made while you're bringing a client over. So I think you'll see it. It will start to show, and it should accelerate as we move into '18.

Okay, that's helpful. And then just one specific question. Within the fee income presentation in the release, kind of the other line item in there, there was a fairly significant increase from first quarter to second quarter, a couple -- $2.5 million, $3 million. Is there anything unusual in that item? Or is it -- was this just reflective of Yadkin and pretty core as you look going forward?

Yes, I would say most of it is Yadkin. The SBA contribution's in there. We had higher home loan dividends because we have kind of a bigger balance sheet and some additional borrowings and stuff and kind of a variety of other smaller items. So a good portion of it would be Yadkin related.

Okay, all right. And just as it relates to the margin, just if you guys -- can you just give a little thought on kind of where the core margin heads with rate -- with each rate increase? I guess, inclusive of Yadkin, is that 2 basis points benefit from, I guess, potential rate increases inclusive of Yadkin? And then, I guess, can you comment just -- you talked about maybe getting a little bit more assertive on the deposit-gathering efforts. Does that factor into that margin pickup potentially from rate increases, just as you weigh how you're going to handle -- maybe getting more assertive on deposits?

Yes. The 2 to 3 that we've talked about for the Fed moves is inclusive of Yadkin. So that's kind of all-in. I think an important point about the margin, too, as we go forward into the second half of the year is that when you look at the relationship of kind of rates on new loans to the overall portfolio yield, this quarter, we finally actually turned the corner. So the rate on the newly made loans is actually a little bit higher -- 1 basis point higher than the overall portfolio yield. So that's obviously a positive. I mean, that's been a detractor for everybody as we've been going through this kind of interest rate cycle. So that would be kind of over and above that, a couple of basis points, that would help. And the investment yields, we moved up about 6 basis points first to second quarter, and that will carry into the -- that level will carry into the third quarter as far as the overall portfolio yield. And then the deposit side, as Vince talked about earlier, obviously, that -- the transaction deposits helped the margin. So the more success we have there, the bigger the benefit to the overall net interest income and the margin.

Perfect, okay. And then just the last thing was the -- I think you said this, but just the efficiency ratio kind of with the cost savings kind of factored in. I mean the efficiency ratio or the operating leverage out to -- if you execute as you expect, we should kind of be at a peak level of that efficiency ratio and some moderation in the future quarters, is that kind of how to think about it?

Yes. I would look for -- embedded in the guidance is continued positive operating leverage, for sure, as the revenue kicks in more down in the Carolina markets. And with the cost savings out of the base, clearly, that -- those 2 items alone generate positive operating leverage. And another thing we've been doing, as we've talked about this in the past, is kind of vendor management focus and going back to our vendors. And now that we're, as Vince said, 50% larger than we were basically a year -- a little over a year, 1.5 years ago, we're going back and pushing vendors hard on renegotiating those contracts. And at $30 billion, you have more leverage than you had at $20 billion. So there's some renewed focus on that, too, which provides positive operating leverage to as we go forward.

Okay, perfect. And maybe just one last comment. Just on kind of the loan pipeline. I guess, it feels like the momentum really began to pick up later in the quarter, I guess. But I guess, as you guys have kind of said, the guidance is pretty similar to your long-term record. I guess, do you feel like you just need a couple of more quarters to see this momentum continue to build before you potentially look at increasing the growth rate? Or I guess, is that kind of wrong to think about it that way? I guess, just like quarter, giving kind of more updated guidance as you get more, I guess, deeper with your Yadkin presence and how that unit is performing. And I guess, is that a possibility, I guess, or how to think about it, fair to think about it that way?

Yes. I think -- first of all, the Yadkin commercial bankers have only been on board here with us for 4 months. So while we are seeing good positive results and the pipelines are building, it takes a little bit of time to work through that pipeline to make it reality, number one. Number two, we are somewhat selective from a credit perspective. So we try to moderate our growth to reflect a lower -- low to moderate risk profile in the portfolio. So that's part of our overall strategy, and we mention it periodically. So we want to be positioned so that we can deliver upper single-digit growth in the loan portfolio and not take on additional risks. So we do moderate in that regard. And I think, hey, I'd look at it as -- that people are actually out there and active. I think if I could predict the headline for us here, I'd say we've moved from defense to offense, and we're starting to see good momentum. So I guess, that's how I'd characterize it. I'm very pleased with where the pipelines are.

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

Well, I'd like to thank everybody for participating in today's call and your continued interest in FNB. I think that the questions have been terrific. I know there's a lot of noise in the quarter, so I appreciate all the thoughtful questions as we sort through the acquisition and focus on moving forward. We're very optimistic, as you can tell from our tone and demeanor. We're very pleased with the quarter, and we're excited about the next few quarters. But before I get off the call, I do want to thank all of our employees because they -- I mean, if you really think about all the things that have been accomplished, it's amazing. So again, if they're on the call, thank you, and we look forward to creating additional shareholder value down the road. So with that, I'll turn the call back over to you, operator. Thank you.

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