FNB Corp (FNB) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to the F.N.B. Corporation Fourth -- First Quarter 2018 Quarterly Earnings Conference Call. (Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Matt Lazzaro, Investor Relations. Sir, 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 registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until May 1, and the webcast link will be posted to the About Us, Investor Relations & Shareholder Services section of our corporate website.

I will now turn the call over to Vince Delie, Chairman, President, Chief -- and CEO.

Good morning, and welcome to today's earnings call. Joining me are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. Gary will discuss asset quality, and Vince will review the financial results.

Today, I'll highlight some of our first quarter trends and provide an update on the progress of several strategic initiatives.

First quarter earnings per share was $0.26, reflecting a year-over-year increase of 13% in operating earnings per share and a 56% increase in operating earnings. We delivered linked-quarter average total loan growth of 7% annualized and noninterest income growth of 4%, providing a good start to 2018. The growth in noninterest income was led by positive results in our fee-based businesses, notably capital markets, wealth management, insurance and mortgage banking. Additionally, the first quarter efficiency ratio of 55.8% improved 137 basis points from the year-ago quarter, and we are encouraged by our early progress on a number of fronts. Vince will cover the financials in more detail in a minute, but first, I want to provide an update on how we are making strides towards achieving our full year expectations.

As discussed on our last call, we were squarely focused on executing our 2018 goals and objectives, particularly driving growth in loans, deposits and noninterest income while managing expenses. It was a good start to the year as we are beginning to see more borrower activity in the commercial space, with loan growth of 7% annualized linked-quarter. Specifically, for C&I loans, we had strong annualized growth of 10% compared to the fourth quarter. The overall commercial loan growth was led by our central Pennsylvania, Cleveland and our Greater Baltimore and Washington, D.C., markets. In North and South Carolina, the Piedmont Triad, Eastern Carolina and Charlotte markets all grew commercial loan balances from year-end, and we expect to see increased contributions in the coming quarters. Looking ahead, we are well positioned to drive growth, and we are optimistic about the significant commercial opportunities we have in front of us and plan to build on this early momentum.

Across the company, we have exceptional leaders in place. We are fully staffed, and we are confident that we can build on our first quarter success.

In addition to the pickup in C&I activity, our equipment finance group has seen more opportunities and increased demand from commercial customers. Continued expansion of equipment finance to small business and middle market borrowers was outlined as one of the 2018 strategic objectives on the last call. In fact, ending commercial leases increased 19% annualized compared to December, and we expect this trend to continue, in part thanks to the passage of the tax reform and the positive impact it has had on our customers and prospects.

Turning to noninterest income. We delivered very good results across our fee-based businesses. Total SBA revenue reached $1.6 million as gain on sale income surpassed $1 million for the first time in the quarter. As we stand today, we have a full SBA team in place actively calling on customers across our franchise.

In our capital markets area, we recently reorganized, including adding local product specialists to support the needs of our larger clients. Capital markets income saw increased contributions from syndication fees in international banking, and the commercial swap activity in our Carolina regions has begun to accelerate. During the first quarter, we executed a number of transactions in the Carolinas with total swap fee income from the region increasing significantly. This is up from virtually nothing last year. Both SBA and the capital markets business were identified as key strategic areas for us going into 2018, and we're off to a good start.

Moving on. Wealth management delivered strong results, up 12% linked-quarter as trust income increased 9% and brokerage increased 16%, each benefiting from the expanded footprint and increased contributions from the Carolina regions. Approximately half of the increase in wealth management fee income compared to prior quarter was from North and South Carolina.

Mortgage banking, which is usually softer in the first quarter, and insurance rebounding from a typical fourth quarter low, both performed very well. And we look to build off their strong base to help us achieve our total noninterest income expectations.

In the consumer bank, average consumer loans grew 2% annualized, led by mortgage and indirect auto loans. On the deposit side, total average deposits decreased slightly with growth in time deposits and savings offset by expected seasonal reductions in business and municipal balances. We have demonstrated ability to gather deposits, and it remains a point of emphasis for us, particularly given the environment. We are confident that our continued deployment of our clicks-to-bricks strategy will generate growth in deposits as well as meaningful household growth that we can leverage to offer our full set of products to our consumer clients.

Looking back, we launched our clicks-to-bricks consumer banking strategy more than 2 years ago, which included significant investments in technology as well as a redesign of our branches. Central to our consumer banking strategy is an unwavering and ongoing commitment to adapt our delivery channels by responding to evolving customer preferences, and we're making progress. For example, when we look at the percentage of non-teller transactions to total transactions, that metric increased 4 percentage points over last year with non-teller transaction volume increasing overall. The mix of customer transaction volume has continued to shift to our smart ATMs, online and mobile platforms. In addition, overall customer mobile and online adoption have both increased from this time last year. These positive trends are evidence that customers are utilizing our investments in technology, and we're pleased with the successful execution of our clicks-to-bricks strategy.

When looking at our accomplishments for the quarter, our Carolina markets have begun to contribute on a number of fronts. In the asset-based lending and equipment finance units, we added several significant relationships during the first quarter, and we are optimistic about capturing even more. As I mentioned, we have product specialists in place for commercial swaps, treasury management and international banking, which each started to gain traction by generating new business during the quarter. As I highlighted earlier, wealth management had a strong quarter, and the mortgage team is already capitalizing on the attractive demographics in those new markets. And they're excited about their prospects for future growth.

Overall, we are pleased with the results in the first quarter, and we are encouraged by the early accomplishments of our teams across the entire FNB footprint. We believe this quarter established a good foundation to deliver a strong performance for 2018 and beyond.

Now I'll ask Gary to comment on asset quality for the quarter. Gary?

Thank you, Vince, and good morning, everyone. For the first quarter of 2018, we finished with continued positive results across our credit portfolio, marked by stable to slightly improving metrics and a continued favorable portfolio position.

Our GAAP results showed generally improved levels with total delinquency down 11 basis points linked-quarter to end March at 1.33%, while NPLs and OREO remained nearly flat at 67 basis points. Net charge-offs were solid at 20 basis points annualized with a quarterly provision at $14.5 million.

Let's now review some of the key results from the quarter for each of our portfolios. Looking first at the originated portfolio. Delinquencies showed further improvement to end March at a very solid 79 basis points, a 9 basis point improvement over the fourth quarter of 2017 and 15 basis points year-over-year. The level of NPLs and OREO remains flat for the quarter at 81 basis points while reflecting an improvement of 31 basis points over the prior year period, which was attributable to robust OREO resolution activity and lower nonaccruals. Originated net charge-offs for the first quarter totaled $11 million or 29 basis points annualized with an originated provision of $14.8 million, which covered net charge-offs and organic loan growth in the quarter. This resulted in an ending originated reserve position at 1.08%.

Shifting now to the acquired portfolio. We ended March with $5.3 billion of loans. Credit quality results were largely favorable for the quarter, primarily driven by lower past-due levels. Contractual delinquency totaled $157 million, which represents an $11 million linked-quarter reduction with all past-due category showing reduced levels compared to year-end. The ending reserve position for the acquired book increased slightly but continues to remain generally in line with prior quarters. Inclusive of the credit mark, our total loan portfolio remains adequately covered with combined ending reserve coverage at 1.64%.

In closing, we are pleased with the position of our portfolio at the end of the first quarter, which reflects stable satisfactory performance which continues to contribute to the company's overall results. As a fully integrated institution, we remain focused on maintaining our strong credit culture with ongoing investments being made to further enhance our robust credit and risk systems and some key talent additions to our highly experienced team of banking professionals. With this strong foundation in place, we continue to execute on our core philosophy of consistent underwriting, active management of risk and appropriate portfolio diversity across all portfolio segments.

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

Thanks, Gary. Good morning, everyone. Today, I will discuss our financial results for the first quarter, provide some brief color on the outlook for the rest of the year.

As you can see on Slide 4 of the presentation, our operating earnings for the quarter were $0.26 per share, an increase from $0.24 in the fourth quarter and $0.23 in the first quarter of last year. The increased fee income and benefit from lower effective taxes was partially offset by the impact of having fewer days in the quarter, a lower level of excess recoveries on acquired loans and a normal seasonal increase in payroll taxes at the beginning of the year.

Let's start with the balance sheet for the quarter, starting on Slide 6. Linked-quarter average loan growth was $344 million or 7% annualized, which included annualized growth of 10% for commercial loans and 2% for consumer loans. We had solid commercial loan production across the footprint with net growth particularly strong in central Pennsylvania, Cleveland and the Greater Baltimore and Washington, D.C., markets. On the consumer side, we had strong growth in residential mortgage and indirect auto, which was offset by declines in direct installment and consumer line of credit balances. The total acquired portfolio runoffs slowed by $130 million, reflecting the expected moderation that I mentioned on the January call and contributing to our overall loan growth for the quarter.

Average total deposits decreased $40 million during the quarter, primarily due to normal seasonal declines in business and municipal accounts, which we expect to rebuild as those entities see inflows in the coming months. On a spot basis, as you can see on Page 9 of the earnings release, our total deposits ended the quarter up 2% on an annualized basis.

If you recall, in the latter part of 2017, we launched an initiative to accelerate growth in deposits and households, which was very successful. We continued that on a smaller scale in the first quarter, where we were able to lock in some longer-term rates that we find attractive in the current environment.

Turning to the income statement. Net interest income declined $3.9 million or 1.7% due to having fewer days in the quarter and the lower level of excess recoveries I mentioned earlier. Total purchase accounting decreased $4.1 million with a slight increase in scheduled accretion of $100,000 and a $4.2 million decrease in excess recoveries.

In terms of margin impact, purchase accounting added 9 basis points in the first quarter, which compares to 15 basis points in the fourth quarter. Also, the fully taxable equivalent adjustment, given the lower federal tax rate, impacted the FTE margin by nearly 4 basis points. Said differently, if you adjust for the changes in purchase accounting and the FTE adjustment, the net interest margin was flat on a linked-quarter basis.

I know that funding cost is a focus for many investors right now, so I'll briefly comment on some of the dynamics of our balance sheet. On the asset side, we expect to continue to get lift from rising rates as a little more than half of the loan portfolio is variable or adjustable, but most of that tied to prime or 1-month LIBOR. If you look at the rate volume table in the press release, while the reported average loan yield was flat linked-quarter at 4.58%, excluding purchase accounting, the yield would have been up 8 basis points. Going forward, as rates move, we will continue to see those loans repriced, although the mix of higher-yielding acquired commercial real estate loans and variable rate C&I-type credits will impact the overall increase.

And then on the funding side, you can see that our cost of funds increased 9 basis points on a linked-quarter basis with the biggest driver being an increase in the volume and rate of short-term borrowings given the loan growth for the quarter and the seasonal declines in deposits I referenced earlier as well as the immediate repricing of this funding source in response to Fed actions. Our deposit pricing strategy and marketing efforts are focused on driving household growth through both our physical and online channels. On the commercial side, we continue to incent our bankers to focus on deposit gathering, cross-sell efforts with our treasury management product specialists.

Let's look now at noninterest income and expense on Slides 8 and 9. Linked-quarter noninterest income increased $2.4 million or 3.7%. Wealth management had a strong quarter due to higher sales activity, higher equity markets and increased brokerage activity, resulting in trust income and securities commissions growing at a strong combined 12%. Capital markets revenue increased 6%, which included growth in all 3 components of swap income, syndication fees and international banking. The capital markets and wealth businesses really started to benefit from our expanded footprint, and we are optimistic we'll continue to see increased contributions in those categories.

Insurance posted seasonally strong revenue of $5.1 million, higher by 13%. Mortgage banking revenue was also strong, coming in at the same level as last quarter even in the face of the first quarter typically being slower for that business. Total SBA revenue was $1.6 million, which included over $1 million of gain-on-sale revenue, more than double the gain on sale in the prior quarter. Overall, we were pleased with the fee income results in the quarter and think that our relatively strong start to the year bodes well for 2018 and beyond.

Turning to Slide 9. Expenses increased $5.6 million linked-quarter when excluding the merger-related items in the fourth quarter. The biggest driver of the increase was a $3.3 million increase in personnel expense that we talked about last quarter due to the normal resetting of employee taxes in the new year. Occupancy and equipment expense also increased $1.8 million as is typical in the first quarter due to costs for snow removal and utilities.

Lastly, as discussed in January, shares tax increased $1.7 million on a linked-quarter basis. The efficiency ratio ticked up to 55.8% from 53.1%, but was improved from 57.2% in the first quarter of last year. The linked-quarter increase was partly due to a lower FTE adjustment related to the new federal tax rate combined with the normal seasonal increase in expenses in the first quarter of the year and the impact of having fewer days of net interest income in the first quarter.

Overall, given our performance in the first quarter, we think we are well positioned to reach our targets for the year. The one area where our team will be particularly focused is on deposit growth throughout the rest of the year, and we believe that we will be able to reach our growth objectives as seasonal flows start to turn and we continue with our successful deposit gathering strategies.

With that, I'll turn the call back over to Vince. Vince?

In summary, we are pleased by the early momentum established in the first quarter. I want to reiterate that our central focus is to deliver a sustained earnings per share growth trajectory. We are encouraged by the increased activity in the commercial bank, notably C&I and equipment finance as well as the number of growth opportunities across the footprint for all of our businesses. We stand today well positioned to deliver a strong 2018 financial performance.

Operator, let's open the call up to questions.

(Operator Instructions) And our first question today comes from Frank Schiraldi from Sandler O'Neill.

Just starting with the NIM. Just wondering if you can give a little more color there in terms of expectations for what you could pick up there as you get the reversal of the seasonality in the first quarter? And also, just with the focus on deposit growth here and obviously the idea that we're seeing some rising deposit costs in the industry, if you still think you can get a net NIM benefit from -- given an additional rate hike here going forward?

Sure. Thanks, Frank. I guess, a few things. Let me just comment on net interesting income for the quarter. A couple of things are important to keep in mind when you're looking at net interest income kind of fourth to first. I just kind of walk through that and I'll get to your questions, too, as I'm going through it. So for the quarter, we were down $3.9 million. The key drivers there: 2 less days alone is worth $3.6 million. So that's important to keep in mind. Excess recoveries, which are lumpy, as we've said in the past, were $4.2 million lower from a very strong result in the fourth quarter, and then the seasonal decline in deposits that I mentioned resulted in short-term borrowings increasing $434 million and then the entire $4 billion in short-term borrowings gets repriced up 21 basis points to 1 54. So those are 3 important things that are affecting the overall level of net interest income kind of fourth to first. As far as the margin itself, there's also the FTE adjustment that we talked about, which is just math. Again, it doesn't affect net income in dollars in any way, but it is math. And we all have a new basis or new way of calculating that. So I mean, that reduced margin by nearly 4 basis points. So kind of as you go forward from the first quarter -- I mean, we clearly already started to see the deposits come back in, which happens every year, a couple of times a year. You see seasonal outflows in the first quarter and then it starts to build back in the second quarter, and it swings from $200 million to $500 million kind of -- as you go through the year. So we would expect that to happen in the second quarter. That clearly gives you some benefit, gives you the ability to benefit from the Fed move in March as we go forward into the second quarter and then the corresponding movements going forward from there. And then -- but a lot of it -- the full benefit is going to be a function of the mix of the loans that we're putting on the books and then the success we have and funding it with deposits. And there's a lot of activity going on, on the deposit side. And in the second and third quarter, we do expect to see that level increase. So there's definitely a positive bias to the Fed moves in addition to the influx of deposits coming back in, in the second quarter.

I can't recall. Have you given it in the past? Or could you give just sort of an expectation on a -- your expectation for NIM expansion on -- for a given rate hike here in the current environment?

Yes. No, we haven't. We're not given the quarterly guidance. I mean, last year, we had commented on that, and it's really such a function of mix. It's a function of the acquired portfolio runoff that happens, which did moderate significantly from fourth quarter level that we talked about. So I mean, it's up, Frank, but we're not putting a specific basis point number on it.

Okay. And then just on commercial loan growth. Obviously, it was quite strong. I wondered if you could share with us the pipeline year-over-year. And also, if the runoff now in the acquired book in the first quarter is sort of rightsized in your opinion? Or is there still -- is it still a bit accelerated?

Well, I think, the answer to your first question -- or let me answer the second question first. How about that? We'll talk about the runoff first. I believe it's stabilized. We moved a lot of assets out. We were de-risking, as we mentioned, the balance sheet which we typically do, as we re-underwrite those transactions that we acquired post conversion. So most of the assets have been moved out that we want to move out, and that has stabilized. There's always runoff in the portfolio because there's always payments made on loans and curtailments, so that will happen, but it has stabilized significantly. The first piece of your question relative to loan growth, I mean, we are very pleased across the board with the loan growth, particularly C&I growth. If you look at the pipeline, you ask about the pipeline year-over-year, as of 3/31, our pipeline sat at $2.85 billion. And it was up $300 million over the first quarter of last year. And when we reported, we included the North Carolina pipeline in that number, so it grew from $2.5 billion to $2,850,000,000. Now remember, the first quarter is not the most robust quarter. So that pipeline has continued to build moving into the second quarter. We did have strong production in this quarter, evident in the growth in the portfolios. So the pull-through was there. And what happens is the pipeline resets and then it gets pushed back out. So the overall pipeline is larger. The timing of when those transactions closes is something we need to examine closely, but it should impact us over the next 2 quarters. As you look at the pipeline, the breakdown of the pipeline, North Carolina is up significantly over last year. Obviously, we had just closed the transaction. So they're up about $270 million year-over-year in total pipeline end to end. And that is fairly consistent with where we were last quarter. So the production and the pipeline has grown, and we're very pleased with the performance there in terms of originating opportunities. Now if you look at the portfolios on a spot balance basis and maybe shed some more light on your question, particularly relative to runoff and portfolio growth, on a spot basis, Maryland grew double-digit, Cleveland grew double-digit, charlotte grew nearly double-digit, Eastern North Carolina grew double-digit and the Piedmont Triad area grew in the upper single digits. So pretty significant growth. If you look at the other area where we've recently completed an acquisition, which is our capital region -- Pennsylvania capital region, which is Harrisburg, Redding and Lancaster, for us, that's up solidly double-digit. So there's been a stabilization, and the portfolios have started to expand, as we mentioned. The loan growth across the board, Pittsburgh was flat, Raleigh was slightly negative. So those were the 2 that didn't perform as well. But the strategy from the very beginning, and we said this repeatedly as we conducted our acquisition strategy, was to diversify the risk. It was to provide us with opportunities to grow in multiple markets that look like Pittsburgh. So today, Pittsburgh sits -- we've had considerable growth over time, so we've gained share. And we have a significant share in Pittsburgh. These other markets that we just entered, we have a very low relative share commercially. So our ability to grow those portfolios during a time when growth is not easy for everyone plays out, and that's what you're seeing. So we're very pleased with the quarter. We're very pleased with the contributions that are coming forward from the Carolinas, and we expect that to continue to accelerate as we move through the year. So I hope that gives you enough information.

Our next question comes from Jared Shaw from Wells Fargo Securities.

So actually just following up on that last question. You had said that -- it looks like the pipeline was about 10% from the North Carolina area. And did you say that you expect that to grow in momentum, so as we go over the next few years, you'd expect to see more than 10% coming from the Carolinas?

Yes. Actually, it's greater than 10%. So I guess, it's looking like it's more in the 30% range. I don't know how you got 10%, but it's basically $870 million of the $2.85 billion. So it has...

Okay. I thought it was $270 million. So $270 million is just...

No, it's actually up $270 million from the same period last year. So if you look quarter-to-quarter, first quarter to first quarter -- sorry, did I confuse you? But no, it's a significant portion of our pipeline.

Great. Okay. And then looking at the CRE side, so separate from sort of the planned rundown and what you were looking to get out of, how are the pace of the paydowns look? And do you expect to see that sort of tapering here? And could we see CRE growth ramp up? Or are you comfortable with where we are right now?

Well, CRE is about 4 -- of that $2.85 billion in pipeline, it's about $400 million, so the majority of that pipeline is middle market, small business opportunities in the C&I spectrum. I would expect the C&I -- I would expect C&I to continue to show growth, given where we are in the cycle. And with the full effects of tax reform kicking in, I believe that we have good prospects there. Line utilization is up. So that's a good leading indicator. And then the transportation segment, in general, is busy, which is also an indicator for us, particularly flatbed haulers in the Rust Belt. So when we look at this, we're seeing good growth on the C&I side and good opportunities in the pipeline, the majority of the pipeline is made up of those types of opportunities. From a CRE perspective, Gary can speak to our strategy from a credit standpoint, but we've kind of tightened up certain categories. So we felt it was a little frothy in certain asset classes within the CRE space or spectrum. We've also -- we are a -- more of a construction finance shop, so we tend to finance through construction, and there may be a [stop] -- mini firm piece, but we're not a prolific long-term lender in the CRE space, so there are payoffs that impact those balances, which you saw some of it coming through in the acquired portfolios. But Gary, why don't you talk a little bit about what you're seeing in the portfolio?

Yes. We're seeing continued good activity there. As Vince mentioned, we are getting later in the cycle from a CRE standpoint. Multifamily has surely softened, as you would expect, with the significant growth in that category over the last 4, 5 years. So you're not seeing continued significant deals in that space. And we've tightened in that space quite a bit a little while ago. We are seeing diverse opportunities across the CRE space and do expect to continue to see opportunities going forward. So we like that asset class. It's performed exceptionally well for us, and we continue to underwrite it to our standards. So we'll continue to do good business there.

Okay. And then just on the compensation costs. It sounds like you're fully staffed up now. So should we expect to see 2Q compensation pull back from here as we exclude some of the first quarter items?

I think you'll see that the payroll taxes definitely come down. They probably come down -- I don't know, $0.5 million, to $1 million versus second quarter. But then April 1, you have our normal merit increases that go into effect, 2.5%, normal merit increase there. And then you may recall, Jared, from January, we talked about the changes we were making to the minimum wages, which was about $6 million to $8 million for the year, which starts April 1 also.

And that was included in the guidance.

Yes, that was all in the guidance, right. Payroll taxes will be lower. Salaries will be up for those items.

Our next question comes from Casey Haire from Jefferies.

Wanted to touch on the -- so the acquired book, if I'm doing the math right, was it down $400 million quarter-to-quarter? So $400 million of runoff?

$380 million. Yes, it was $380 million versus a little over $500 million in the fourth quarter.

Okay. So Vince Delie, so you're saying that stabilized. So does the loan growth guide assume that the acquired runoff is $380 million a quarter for the balance of the year and that your originated production is that much stronger? I'm just trying to understand because I know loan growth was in a seasonally soft quarter was pretty good, but it is below your guide. And it sounds like you're fighting a decent headwind on the acquired runoff. And I'm just trying to get a sense of can that taper from here? Or does the originated step up?

I'll tell you what, I'd refer you back to the guidance. I mean, we incorporate in our guidance runoff factors and paydown factors, so you're getting an all-in look. So that's what I would use in my model. And we're standing by what we said, which was up for single-digit loan growth.

Fair enough. Switching to the fees. The other line, which I'm assuming, I think that your SBA runs through there, obviously, a nice result. What -- how is the pipeline within SBA? Is 10.8 a decent starting point? Or do we have -- is there some lumpiness there that we kind of -- was there any other over-earning, because we are up $2 million on that line?

Yes, I think the pipeline is pretty solid. We're feeling good about what we gave you in terms of guidance in total. And I think that group will be able to achieve their objectives, that the pipeline is pretty healthy as we sit today. We're fully staffed. We have 14 calling officers now in the seats, which is what we had planned or budgeted. So I think we're in a good spot there.

Yes, Casey, the other thing running through other noninterest income is we have dividends on home loan and Federal Reserve stock, and those are up reflecting kind of current rates and current pay rates in there. So the 2 main items there are that plus the improved contribution from the SBA, and we expect that to keep building as we go through the year. I mean, all the sales positions are filled, and we expect this number to be a number they build off as we go through the year.

Okay. Great. And just last one from me. The -- it sounds like you guys are pretty much reaffirming guidance across the board. But on the purchase accounting, which came in a little bit light, I know it's tricky to predict, but is 25 to 35 on the year still where you're comfortable?

Yes. No, we have not changed the guidance. So this quarter -- as you know, we've talked about the -- I mean, it's helpful if people haven't had the chance to look at the slide, Page 7, because it really kind of lays out the normal accretion, 7 basis points this quarter, 7 last quarter, 6 a year ago. And that number, we expect it to be stable and kind of increasing as we go forward, but pretty stable. The cash recoveries were 2 basis points this quarter. Last quarter, they were 8. So this quarter was a little bit on the lower end. I mean, that number, it's lumpy as you go through the year. So there's a -- there may be some opportunity there, so the -- but the guidance is still the -- 25 to 35 that we had given in January for the full year.

Our next question comes from Michael Young from SunTrust.

Wanted to start off, Vince, with your comments on the clicks-to-bricks strategy, and you provided a lot of detail there, 2 years kind of anniversary of the implementation of that. Just wanted to see if there's any incremental cost rationalization opportunity to come now if you have more confidence and sort of the omni-channel distribution or anything -- any additional color there?

Yes. I mean, that's a great question. We continue to focus on the efficiencies that we gain as we've rolled out our mobile and online platform upgrades, which happened, I think, a little over a year ago in total. We picked up, as I mentioned in my prepared comments, a number of new clients processing through those channels, which we gained efficiency from. We constantly review transaction volumes. We have a program called Ready that we've talked about over a number of years. And we look at our delivery channel, our physical delivery channel, and we measure performance -- financial performance and look at the numbers of -- transaction numbers of customers served at locations. So we've had opportunities to kind of prune our physical delivery channel, which provides us with benefit. And it's an astute observation. I think now that we have what I consider to be a great product, highly rated or performed well on the S&P Global study on mobile applications. We had one of the best relative to fulfilling the number of attributes in the study. But I think that, that is part of the strategy. The other part of the strategy is the utilization of analysis on our customer base to drive leads for our salespeople, looking at customer behaviors and making sure that we're offering products that fit the need based on certain behaviors in an automated way. That's part of clicks-to-bricks. Another piece of it is actually redesigning the branch. We have about a dozen or so prototype branches that have been deployed, where we've changed the entire format of the branch. So it's more consultative in nature. It included the rollout of digital content for our products and kiosks in our branches. And then the final piece of it, which has been in development for some time and is reflected in the run rate expense base, is the redesign of our website to enable customers to engage in a number of activities on the site. So they will be able to view video content on products, choose products. And we're working on a streamlined application to onboard clients. That whole experience is clicks-to-bricks, so it's a combination of improvements to the physical delivery channel, improvements to the mobile and online applications and improvement to the onboarding process for clients. So we expect it to not only produce better efficiency in the future, but also help us generate revenue.

Okay. And I guess, going back to your longer-term strategic objectives of getting below 50% kind of efficiency ratio. Is it really going to be driven by some additional expense rationalization? Or do you see it more as just scaling up the existing franchise now that you've had the larger addition with the Carolinas?

I think it's a combination of both. I mean, I -- we constantly review our expense base. We have initiatives to perpetually drive down expenses. This company has done a good job historically managing expenses. I mean, there are some items here. It's a little confusing with tax reform. And Pennsylvania capital stock tax going up significantly distorts the view. And then the wage increases that we proposed, which I think are meaningful and will add to our success as we move forward. But it's also about scale and revenue generation. I mean, we -- our ability to generate revenue today is much greater than it was 3 years ago and in a way that doesn't change the risk profile of the company. I mean, if we wanted to put the metal to the -- pedal to the metal and grow our balance sheet, we wouldn't be talking about how we're pulling back in CRE. We would be expanding there, which I don't think would be prudent given where we are in the cycle. So that's -- that all has to be taken into consideration, but I believe we have an ability to reduce the efficiency ratio over time based upon a combination of expense saves and revenue generation and increasing revenue per FTE at the company.

That's helpful color. And if I can sneak just one last one in, just on the full year guide. So far, we're doing pretty well on the revenue side, but if that were to come in a little light, I would assume we would be at the low end of the expense guidance as well? Or has something shifted that might change that outlook?

I mean, some of the expenses are variable, but most of them were kind of fixed in nature. So there's not a one for one. I think what we've talked about in the past is, if revenue really fell off the cliff, which we don't expect that to happen, then you have to take actions on the expense side, but that's not really something that we would contemplate because we expect to have revenue growth...

Yes, I think, to be fair, we constantly look at expense initiatives. So I don't want to alarm anybody if we take action. I'm very confident, given what we presented, that we have good traction in the markets that we expanded in. And over time, that translates into not only loan growth, but fee income growth for us. We've proven it time and time again. So I'm very confident that we're going to deliver the revenue growth that we have forecasted and that we will continue to manage expansion -- expenses judiciously.

Yes. If things like shares tax has nothing to do with the revenue side...

Yes, we can't propose an increase in Pennsylvania State year's tax, right? It's a money grab.

Our next question comes from William Wallace from Raymond James.

My question is on the SBA business. You mentioned in the prepared remarks the $1.6 million in the first quarter, first time over $1 million. Are you profitable at $1.6 million?

Yes.

Segment profitable?

Yes.

And our next question comes from Russell Gunther from D. A. Davidson.

A follow-up on a couple of fee items. First, on the mortgage banking line. You guys flagged for us how you are able to offset the industry headwinds. I wondered if that's something you guys think you'll be able to do going forward? And is that deeper penetration of the Yadkin that would allow you to sort of outrun both origination and kind of margin headwinds?

Yes. It's a similar strategy to the commercial strategy that I mentioned. We've expanded our mortgage bank significantly into the markets where we have relatively high retail deposit share. So we've been gaining mortgage share in those markets. And I think there are a number of studies that indicate where we are. But we've gained tremendously, particularly across Pennsylvania. And North Carolina now, at least in the past quarter, contributes about 20% to the total. So I would say our focus on purchase money mortgages, which is a pretty high percentage of what we do, which produces a higher margin than other forms of origination, that coupled with the expansion in our new markets and the building out in our new markets and actually achieving what we should have achieved last year in the first quarter of this year with North Carolina is helping us. And that should continue to bode well for the mortgage company. I will tell you, there are pressure -- there is pressure on margin in that space. It's very competitive, but I think we're in a better position because we are so diverse geographically.

Okay. Great. And then I appreciate...

Is that helpful?

Yes, that's helpful. I just had a follow-up on service charges as well. That number was down a little more than I thought even despite anticipated seasonality. Just wondering, is that a change in customer behavior, some retooling you guys may have done internally or anything Carolina footprint-related?

No. That was just normal seasonality there, Russell. There's nothing else unusual to point out. Just kind of normal activity that you would see. And as we know, people are managing their money probably more effectively than they had in the past. So people are watching their fees. So -- but nothing that we've changed other than that normal activity.

Okay. Great. And then last one from me on the securities portfolio. You guys had mentioned in the past maybe delevering the Yadkin portfolio a bit. Just curious as to your thoughts on size of the portfolio going forward, maybe to think about it as a percentage of earning assets, kind of stick around here, grow, just some general comments, please?

Yes. No, I would say that the delevering we were going to do we did kind of early on right after the conversion. So looking at the size of it, I mean, we're -- I think we're a little over 20% of total assets right now. I mean, we're kind of managing that 19% to 20%. We're a little bit north of 20% because there were opportunities that our treasury team found, which rates haven't moved, to put some additional investments on the books, kind of pre-invest some of the cash flows that run every month. So [putting] that 19% to 20% range is kind of a normal operating range for us.

And our next question comes from Brian Martin from FIG Partners.

So just wondering, can you talk a little bit about the consumer portfolio and just kind of what you're doing on that front? Maybe it was a little bit less this quarter. The commercial looked nice, and the total loans were kind of -- in general, where you guys up. But just the consumer side, anything going on there, just on how you guys are thinking about the balance of the year and just initiatives there?

Yes, I'd say consumer, if you look at home equity and direct installment, we weren't the most competitive provider in terms of pricing, so we're trying to hold the line on pricing which brought the volume down a little bit. I think that there are opportunities there, particularly given that the consumer segment isn't experiencing strain. I mean, it seems like there's opportunity to continue to grow. I think you may have seen a little bit of pullback, we're thinking, on the home equity side because of the tax law changes and maybe a little confusion about what that means for borrowers. So it has not been -- we've not put forth our strategies yet to drive growth in those segments. That's coming. So we are becoming a little more aggressive in this space as things settle out. And I also think that from a direct -- indirect standpoint, we continue to be selective in the indirect auto space. I know we've had some growth in that portfolio. It reports directly to Gary. So I'll let him comment on it. But still, good production there. And then mortgage originations, the items that are coming on to the balance sheet are typically jumbo mortgage loans that are being provided to our private banking clients. That's the production that you're seeing there. Gary, I don't know if you want to comment on anything outside?

Yes. Regarding the indirect space, we continue to work with our long-tenured relationships with our dealer network across our Pennsylvania footprint. That continues to be a steady flow of volume. As I've mentioned to the group in the past, I mean, we run it from a credit perspective. The underwriting is very consistent there. Delinquency in that book at the end of the quarter was 64 basis points and rolling 12-month charge-offs at 36 basis points. So it's a very high performing book of business for us, and we see continued opportunities there. The other thing you have in the first quarter with the home equity business, you have a lot of seasonality early in the year, where Q1 is typically a little softer from a production standpoint, so you have some of that coming into play as well, Brian.

Okay. That's helpful, Gary. And then maybe just another 1 or 2. Just the -- on the -- maybe you can just talk a little bit about -- just kind of going back to the margin for a minute, kind of your deposit pricing strategy, and it sounds like you've got an opportunity to maybe see some of that deposits come back in and the borrowings come a little bit lower. So I mean, it seems like the margin maybe has a bit of an upward bias, at least, on the core side, as you think about next quarter. And so I guess, just kind of thinking about that and maybe just the -- your outlook on -- it sounds like you feel like you have the ability to outrun the funding cost pressure with the loan yield benefit from rising rates. Is that, in general, seem fair, I guess, as we think about the balance of the year and another rate increase or 2?

Well, I think if you look at the kind of the overall funding position, as I mentioned earlier, regarding the flows, we're already seeing that kind of normal influx in deposits. We'd expect to see the loans-to-deposit ratio improve kind of first and second quarter. And at first quarter, it's at a comfortable level, as well as more of the rate movement on the loan book. As we mentioned, if we look at the overall yields, excluding purchase accounting, it was up 8 basis points on the loan side, and that was kind of offset by 9 basis point increase in the cost of funds, but the borrowings moving. So I think with -- to your point, with the deposits coming back in, I think that helps that relationship as you go forward. And you'll see the benefit more of the loan growth coming through as well as funding with deposits. And you'll get to see more of the benefit of that Fed move. As far as kind of the other drivers on the deposit side, I mean, we've been seeing net growth in checking and savings balances on the retail side and combined with growth in the 13- and 25-month bucket on the time deposits. We've had net checking account growth. Some of it gets masked by the seasonal flows on the commercial side, but we've had net checking account growth in 10 of the last 13 weeks and savings growth every week, about 1 out of 13, so 12 out of 13. So both of those are important, and particularly, the net checking account growth, obviously, it adds customers. It adds ability to offer them other products. And then we've had CD growth. Every week since last July, I mean, we've generated almost $1 billion in net growth since the fall. We have some attractive rates on the 13- and 25-month that are creating some good traction for us. So that's kind of the things that are happening on the deposit side. And then as far as the betas, I mean, there's so many different ways that people are looking at betas. But if you looked at our -- for the first quarter, kind of total deposit beta would be 26% of the Fed move. Interest-bearing would be 35%. So I think that -- so far, that's been manageable. I think the way we model it, we model total deposits more of 33% in the interest rate risk analysis that we do. So I think it's just going to be a balancing act for all the banks. And if loan activity ramps up, I think it will put more pressure on the deposits, but that's our job to manage.

Right. Okay. No, that color is helpful. And just one comment, in kind of the text of the release and just kind of your prepared remarks, you talked about the origination activity on the commercial side being pretty strong in the Cleveland, Baltimore and Pennsylvania, without a lot of commentary on North Carolina. Just kind of -- can you offer any color on just the origination activity in those markets? Or am I just misreading it? And you guys are suggesting it's stronger? But just trying to understand the activity in North Carolina. It sounds like from what you said earlier as far as some of the growth rates that you're seeing pretty good growth in those markets as well.

Yes. 3 of the 4 markets have either double-digit or near double-digit growth. So I mentioned that earlier spot basis. So they performed well. Just generally, Cleveland, Maryland have been performing at a high level, and now the capital region, which is Harrisburg, Lancaster and Redding have begun to contribute meaningfully. So those are positive lines.

Yes, I got it. Okay. And then just the -- I think the one you talked about that maybe wasn't performing was Raleigh. Anything, I guess, tied to Raleigh that makes us somewhat of an anomaly? Or is that just more time on your part to...

Well, I think there's less opportunity from a C&I perspective there, to be truthful, particularly as you move up market. I think the other markets in North Carolina, believe it or not, have more opportunity for us. That doesn't mean it's not a good market. It's a great market. And I think we'll see -- there was a lot of portfolio movement on our part moving things around. ABL moved out. Small business moved out. So just the stabilization of the portfolio and having the people in seats were fully staffed there now. So we should start to see some growth there as well. But I think Charlotte, in my estimation, for us, is a much better market.

Ladies and gentlemen, at this time, we reached the end of today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

Yes. Thank you, everybody. I really appreciate the time and the great questions, very detailed questions. We're very, very optimistic about where we sit. We're very pleased with the first quarter. It's a good base. There was good growth despite it typically being a seasonal low point for us. So we delivered a very solid first quarter. We make good progress relative to our 2018 strategic objectives. So we built a great foundation, and we're looking forward to updating you on our progress throughout the year. So thank you, everybody, for participating in today's call, and thank you for your continued interest in FNB.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.