Apr 24, 2013
Executives
Cynthia Christopher - Investor Relations Vincent Delie - President and Chief Executive Officer Vincent Calabrese - Chief Financial Officer Gary Guerrieri - Chief Credit Officer
Analysts
Frank Schiraldi - Sandler O'Neill Bob Ramsey - FBR Capital Markets Jason O'Donnell - Merion Capital Group David Darst - Guggenheim Securities John Moran - Macquarie Capital Collyn Gilbert - KBW Matthew Breese - Sterne, Agee
Operator
Good day and welcome to the F.N.B. Corporation first quarter 2013 earnings conference call.
(Operator Instructions) And now, I'd like to turn the conference over to Cynthia Christopher, you may begin ma'am.
Cynthia Christopher
Thank you. Good morning, everyone, and welcome to our first quarter 2013 earnings call.
This conference call of F.N.B. Corporation and the reports are filed with the Securities and Exchange Commission often contains forward-looking statements.
Our forward-looking statements involve risks, uncertainties and contingencies that could cause actual results to differ materially from historical or projected performance. Please refer to the forward-looking statement disclosure contained in our first quarter's earnings release, related presentation materials and in 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 2. In addition a transcript and webcast link will be posted to the shareholder in Investor Relation section of our corporate website.
I will now turn the call over to Vince Delie, President and Chief Executive Officer.
Vincent Delie
Thank you, Cindy. Good morning and welcome to our quarterly earnings call.
Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri our Chief Credit Officer. I will highlight our first quarter results and discuss strategic developments.
Gary will then review asset quality, and Vince will provide further detail on our financial results along with expectations for the remainder of 2013. F.N.B.
had a very productive quarter and great start to the year. Our operating results were solid, we completed the infrastructure build-out of our electronic banking strategy and our M&A related expansion continued.
Looking at our results, net income was $29 million or $0.20 per diluted share, representing a 5% increase in operating earnings per share over the prior year. Our team continues to deliver revenue growth year-over-year.
This is an outstanding accomplishment, given the challenges facing the industry. The quarter includes continued strong momentum and key performance drivers.
Loan and transaction deposit growth, a stable net interest margin and good credit quality, all reflect consistent, solid results. In addition, several of our fee-based business units benefited from increased cross-sell strategies with our bankers.
Total average loan growth was strong at an annualized rate of 7%. Our growth is the direct result of F.N.B.
gaining share in both the commercial and consumer portfolios. Average commercial loans grew 11% annualized with positive results across all regions.
Our long-term strategy of continuously investing in our commercial platform is contributing to this success. Looking year-over-year, we organically grew the C&I portfolio $249 million or 18% and during the quarter, our C&I production contributed three quarters of the total commercial growth.
Winning this commercial business is an integral component of our collaborative cross-sell culture. Our bankers are trained and incented to pursue the entire relationship, including treasury management, wealth management, private banking and insurance opportunities.
In addition to the profitability generated from the loan balances, these relationships provide low cost deposits and result in a more favorable deposit mix. The success of this strategy is apparent with DDA and customer repo balances growing over $400 million or 18% compared to last year.
This relationship-based funding creates a meaningful impact on our ability to effectively manage the net interest margin and is a direct result of a sales management process sharply focused on performance. The consumer team is also doing a great job bringing in relationships and loans, with average consumer loans growing 6% annualized.
Production levels for both commercial and consumer remained at record-high levels and we have a healthy pipeline as we enter the second quarter. We are also leveraging our strengths to deliver revenue growth in wealth management and insurance.
These units have increased cross-sell execution with our bankers, added talented and well-established team members and fine tuned the sales management process. These efforts, along with the improved market conditions, resulted in wealth revenues increasing 14% this quarter and 22% compared to the prior year.
Insurance revenue grew 6% over last year. We will continue to focus on improving results in these important fee-based businesses.
We recognize the importance of balancing all of our growth strategies with a strong risk management culture. Given the current regulatory environment, now is an appropriate time to take a moment to share our risk management philosophy.
F.N.B. has a strong risk management culture developed through long-term and significant investments in compliance, credit administration and risk management infrastructure.
As a result, we believe we are well-positioned to meet regulatory challenges as well as prudently manage our growth strategy. While regulatory oversight certainly continues to build in our industry, our steadfast focus and continuous investment will serve us well.
Proof points of our strategy are reflected in our very good asset quality performance. With that, I will turn the call over to Gary, so he can share the quarter's asset quality results.
Gary?
Gary Guerrieri
Thank you, Vince, and good morning, everyone. We finished out the first quarter of 2013 with steady asset quality results, with several metrics continuing to trend positively as they have now for several quarters, while others remain stable and at very good levels.
Our overall portfolio is favorably positioned, which is evident in our GAAP results for the quarter. And we are also very pleased with the individual performances of the originated and acquired books.
I will now guide you through the credit quality highlights from the first quarter for the originated portfolio, followed by a look at the performance of our acquired book of loans carried at fair value. Finally, I will provide a brief update on the recently acquired portfolio from Annapolis Bancorp.
Turning to Slide 6 and focusing on the originated book, the level of delinquency improved during the quarter by 19 basis points to stand at 1.45%. We can attribute this positive movement to our mortgage portfolio, which as mentioned in our last quarterly call, experienced some seasonal elevation at the end of last quarter, which has since cured as anticipated.
Non-performing loans plus OREO were slightly better during the quarter at 1.59%, and as the dollar amount remained steady over the last few quarters. Net charge-offs for the first quarter were very good at $4.0 million or 22 basis points annualized for the originated portfolio.
This solid performance was driven in part by the seasonally lower levels that we typically experienced during the first quarter as well as a healthy level of recoveries in our commercial portfolio. The originated provision for loan losses was $6.4 million, a decline from the fourth quarter and consistent on a year-over-year basis as we continue to provide for loan growth.
Our reserve position was relatively flat, when measured against the originated portfolio, ending March at 1.39%. Shifting now to our acquired portfolio, we ended the quarter at just over $840 million in loans or 10.3% of our overall loan portfolio.
The level of contractually past due accounts at $55 million improved on a linked-quarter basis by 7.2%, which we can also attribute to the curing of the seasonal increase in the early stage category in the acquired mortgage portfolio. Our acquired provision of $1.2 million was consistent with the previous quarter.
Subsequent to the close of the quarter, we completed the Annapolis Bancorp acquisition, which will add approximately $270 million in gross loans to our acquired book. We have been carefully monitoring and tracking the performance of this portfolio continuously since our initial due diligence process, and it is positioned slightly better than we anticipated at this point.
In closing, we had another successful quarter with our portfolio continuing to demonstrate solid and consistent performance. As we look ahead, we will continue to manage our growing loan book with the same consistent and balanced credit philosophy that has guided us to where we stand today.
I'd now like to turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
Vincent Calabrese
Thanks, Gary, and good morning, everyone. As Vince discussed earlier, the first quarter operating results provide a strong start to 2013.
Year-over-year earnings per share growth on an operating basis was a solid 5%. Linked-quarter EPS trends reflect normal expected seasonality, given fewer days in the quarter and seasonal influences on service charge revenue and personnel costs.
Strong loan growth continued, the margin was stable, credit quality was again very good, and fee income and expenses were largely in line with our expectations. Let's begin with balance sheet highlights on Slide 7.
Loan growth remained strong with average loans growing $141 million linked-quarter or 7.1% annualized. The commercial portfolio displayed very strong organic growth of $116 million or 10.8% annualized with results driven by the C&I growth that Vince discussed.
With commercial line utilization still at historical lows, this growth is driven by market share gains. Given the first quarter's production levels, a healthy pipeline at quarter end, and the team and processes we have firmly in place to drive results, we continue to expect to achieve full year mid-single digit organic total loan growth.
You can also see that these expectations are in sync with the first quarter's year-over-year total average loan growth results of 5.3%. On the funding side, we continue to see growth in our personal and business transaction accounts, offsetting a planned decline in time deposits.
Growth for these transaction deposits and customer repos was $48 million or 2.6% annualized. We consider this a good level following the very strong growth we saw last quarter and taking into consideration that we typically see a seasonal decline in business and municipal balances during the first quarter.
Time deposits decreased $85 million, given the low offered rate environment for these products as we remain focused on attracting lower cost transaction based deposits. Our relationship based strategy has strengthened the mix with transaction deposits and repos now comprising 75% of the total, up from 72% a year ago.
Given our success growing deposits and improving mix, we reaffirm expectations for full year organic total deposit and customer repo growth in the low-single digits. The first quarter net interest margin was stable at 3.66%.
Strong loan growth results and an improved funding mix continue to support the net interest margin. The cost of funds improved 7 basis points to 56 basis points, while earning asset yields narrowed 6 basis points, partially due to the current rate environment, but also reflecting lower accretable yield.
First quarter accretable yield was $1.3 million compared to $2.6 million in the prior quarter that included higher than expected recoveries on marked credits. Effectively managing the net interest margin is a key operating strategy for us and results for the first quarter are in line with our expectations.
Looking ahead, we continue to expect the full year net interest margin to be in the low-to-mid 360's, migrating downwards toward the end of the year. Our strategy of growing loans and lower cost relationship based deposits to support the margin will continue.
In addition, loan pricing will remain disciplined and downward rationalization of overall deposit pricing, including further enhancements to mix, will continue. Next, let's turn to non-interest income.
Total non-interest income increased $1.5 million or 4.8%. As Vince discussed, we are starting to see benefits from increased referrals from our bankers and structural changes we have made in our wealth management and insurance operations, including valuable additions to their teams.
Partially offsetting these increases, service charge revenue declined during the first quarter due to seasonally lower transaction volume compared to fourth quarter levels. The increase in other non-interest income reflects the prior quarter's $1.7 million charge related to the completed consolidation of 20 branch locations, which was partially offset by lower client swap fee revenue and lower recoveries on previously impaired acquired loans.
Looking at our expectations for the year, we are reducing our prior guidance for fee income by approximately $0.01 per share, given the lower service charge transaction trends seen in the first quarter. The lower transaction volume is partially seasonal, but also reflective of shifts in customer behavior and overdraft patterns.
Contributing factors to the shifting behaviors include the availability of increased account monitoring via mobile and online banking. Moving to non-interest expense on Slide 10, we saw seasonal increases in certain line items such as personnel and marketing expenses, which is typical for the first quarter of each calendar year and in line with our planned levels.
Total non-interest expense increased 2.3 million or 3.0% with many moving parts, when comparing to the prior quarter. Personnel costs increased $2.9 million or 7.2%, primarily driven by higher employer payroll taxes as the beginning of the year resets the employer FICA portion.
OREO expense were very low, $0.2 million, yet shows a linked-quarter increase due to the benefit received from the sizable recovery on a property sale experienced in the fourth quarter. Additionally, the first quarter of 2013 included $0.4 million in merger-related costs and the fourth quarter of 2012 included $3 million in litigation settlement costs.
All of this resulted in a first quarter efficiency ratio of 59.8% that was seasonally elevated on a linked-quarter basis. We remain keenly focused on expense control and are targeting core expenses to be flat year-over-year, unchanged from previously provided guidance.
Managing core expenses to be flat requires a number of significant expense containment and reduction measures, while continuing to strategically reinvest in the company for growth. When looked at collectively, in order to fully offset these investments and manage expenses to flat, we have identified expense actions addressing around 4% of last year's run rate expense base.
One significant example was the branch consolidation program completed last quarter. Other actions will be realized throughout the year.
As Gary discussed, we are very pleased with the consistency of our credit quality, given the very good levels we are currently experiencing, we expect results for the remainder of the year to reflect ongoing stability. Our expectations for a slight dollar increase in full year 2013 provision for loan losses remains unchanged, as these expectations take into account the strong planned loan growth.
Looking at our capital position on Slide 11, regulatory capital levels at March 31 are stable or improved compared to last quarter. We continue to exceed all regulatory well capitalized thresholds.
For taxes, we expect an effective GAAP tax rate between 29% and 30% for the remainder of 2013. Now I would like to turn the call back to Vince for his closing remarks.
Vincent Delie
Thank you, Vince. We began the year with a solid start and a great foundation.
We have strong momentum in place, we are focused on the future and we are poised to deliver sustainable results. With our proven success and strategic focus, F.N.B.
is well-positioned to manage the challenges currently faced by the industry. Last quarter I discussed our strategy to reposition and reinvest in the company for growth and profitability while maintaining a low-risk profile.
This strategy has been in place for several years. And it served us well.
Along these lines let s review our e-delivery and M&A progress during the quarter. We have successfully completed the infrastructure build out of our e-delivery platform with the rollout of mobile remote deposit capture and robust online budgeting tools.
We have created an attractive suite of electronic banking capabilities that our team is excited to sell and that are competitive with any offerings across our footprint. This technology investment will benefit us on several fronts.
First, the competitive advantage allows us to aggressively pursue household growth and enhanced retention rates. Both of these are important benefits, particularly given that acquisitions are a component of our overall growth strategy.
Second, this provides customers with the flexibility to conduct routine transactions electronically. And result in a lower cost alternative for F.N.B.
It also provides branch personnel with more time to consult with customers. And offer solutions that lead to long generation and cross-sell opportunities.
With the progress we have made over the past year we are well positioned to adapt our delivery channel to ever changing customer preferences. Looking at M&A earlier this month we completed the acquisition of Annapolis Bankcorp in Maryland.
I would like to sincerely welcome the shareholders, employees and clients of Annapolis Bankcorp to F.N.B. We are very well positioned as we enter Maryland.
The integration went seamlessly and we truly hit the ground running. Building on the strength of our regional model, we have had great success attracting talent in the Maryland market.
And we are pleased to have a strong leadership team in place. We've been very impressed with how the team there has truly embraced our collaborative sales culture.
As you know, we also announced the acquisition of PVF Capital on February 19. This is our third consecutive acquisition in a major MSA.
We'll deploy the same strategy that have proven successful at Parkvale and Annapolis Bankcorp. We intend to attract and retain the best possible team, and immediately deploy our cross-functional sales management model in the Cleveland market.
Given our connections in the market, we have already had a significant number of conversations with bankers. And feel confident that we will be ready to go on day one.
Both acquisitions present tremendous opportunity for F.N.B and strengthen our overall franchise. If you look at the map in the earnings presentation, you will see our regional alignment on a pro forma basis.
This map highlights three major MSA's that we will have the presence in, Pittsburgh, Cleveland and Baltimore. These three MSA's provide access to combined population of over $7 million and 175,000 businesses.
This is important as we position ourselves in the markets that offer significant organic growth opportunities. Given the strength of our commercial platform, markets with the high concentration of commercial prospects bode well for us.
Slide 14 provides a sense of the incremental prospects F.N.B has gaining access to, an increase of 70,000 with the addition of Baltimore and Cleveland. Our success in Pittsburg validates the strategy, which we will be replicating in other markets.
In addition, both acquisitions are consistent with our stated expansion strategy, focused on positioning F.N.B for sustainable organic growth. Expansion in these markets and the continued execution of our organic growth strategy will deliver future success.
In closing, I would like to congratulate the F.N.B team on our continued outstanding accomplishments. We have built a solid foundation.
And I am confident that our strategies will serve us well. And that our team will meet the challenges facing the industry and continue to deliver great results.
That concludes our comments. And I would like to turn the call over to the operator for questions.
Operator
(Operator Instructions) And we'll go first to Frank Schiraldi with Sandler O'Neill.
Frank Schiraldi - Sandler O'Neill
Couple of questions. First, I wondered on the branch optimization strategy that you completed last year.
I recall that you expected to save about $4 million in 2013 on that. Is that already a big gain, in other words, it was about $1 million in the first quarter and that's the run rate going forward?
Vincent Calabrese
Yes, it is Frank.
Frank Schiraldi - Sandler O'Neill
And I wondered if you could just remind us, you talked about core expenses being flat year-over-year. What you are using for core expense?
I mean is that like a $310 million number?
Vincent Delie
Yes, that's $310.
Frank Schiraldi - Sandler O'Neill
And then I wondered if you could talk a little bit about the mechanics of the margin. I know you reaffirmed guidance.
I know there is some purchase accounting accretion baked into your expectation. I'm wondering, as far as Annapolis just closed and then Park View later in the year.
I would assume there is more accretion their. I'm not sure if that's baked in and could that create an upward bias to your guidance.
Vincent Calabrese
I would say that the low-to-mid 360s that bakes Annapolis does not include Park View yet at this point. It's not significant to the full year.
We're going to close that in middle of October. But it fully has Annapolis baked into it.
And I would say that when you look at that its first quarter where we had lower accretable yields, we did have several basis points of benefit from some loans that we were return to accrual status. So the guidance that we have, the overall guidance for the low-to-mid 360s is still intact.
I think last call I talked about accretable yields of being 500 to 750 a quarter, this quarter it was $1.3 million. But as we've talked about that numbers, it's lumpy, it's volatile, it moves around, could there be a positive surprise there, more things get recovered, entire values that we have on the books, just possibility for that.
It's just hard to predict. So the overall margin, I think with the things that we have baked into the balance sheet, maybe just a couple of other comments, we continue to have a significant amount of CDs, about $400 million a quarter that are re-pricing.
We're still picking up 50 basis points a quarter on those. On the other way the securities portfolio is $150 million a quarter, but similarly we're losing about 50 basis points on that.
So between the two, we're net picking up and that provides support to the margin, the loan growth strategies and plans that we have in place continue to support the margin as of the strong growth in demand deposits and our treasury management balances. So all of those levers are in place and we're comfortable with the guidance that's there.
Frank Schiraldi - Sandler O'Neill
And then I guess, just looking at the components, just curious. Securities balances have been pretty flattish on an average basis over time.
And cash balances have been coming in a little bit over time. Just wondering if securities and then cash if those sore numbers we can expect sort of stag numbers going forward or you're going to be lesser or more liquid there.
Vincent Calabrese
I would say the investment securities we managed really around the same percentage by 19% of total assets. But that number will move up and down as loan growth varies during the quarters.
But really that 19% is where we targeted. When you look at the cash and cash equivalents line has short-term investments that are just overnight balances with the Fed banks.
So those vary quite a bit from month to month. The core cash piece of that excluding the short-term investments, it ranges from $150 million to $200 million.
So we're in a normal range for that at the end of the quarter. And our overall liquidity is very strong right now.
We still have in our securities portfolio about 6% and that is unencumbered. So that obviously helps the liquidity.
So kind of managing the way that we have is still what the game plan is in our minds.
Operator
We'll take our next question from Bob Ramsey with FBR Capital Markets.
Bob Ramsey - FBR Capital Markets
I appreciate the full year margin guidance. But I was hoping you could help me think about the quarterly progression.
And does Annapolis help a little bit in the second quarter and then you see more compression at the back half of the year or just sort of how are you big picture are thinking about the trends for the next three quarters?
Vincent Calabrese
I would say, Bob, Annapolis at $440 million or so is really small to the overall balance sheet. So it's relatively neutral to the margin.
The comments that I made in my guidance was that we do expect the margin to come down, migrate downwards modestly as we go through the year. So with this right environment, obviously there is some compression in there.
But I think it's manageable. And that's kind of all baked into getting a full year in kind of mid-to-low 360s.
Bob Ramsey - FBR Capital Markets
And then, if I remember correctly, I think you guys said last quarter that loan pricing seem to be stabilizing. And I know a lot for other companies, this quarter have sort of highlighted an increase, actually in pricing pressure in the first quarter from where they were a quarter ago.
I'm just curious, what you guys are seeing this quarter and today in terms of low pricing in a level of competition in the market?
Vincent Delie
I can take that. Basically it depends on which segment you're focusing on truthfully.
I mean, when you look at the upper end of the marketplace, I would say that pricing has come down a little bit, but it has stabilized somewhat. I think the pricing tends to be a little more rationale on the larger syndicated transactions, because more capital is require.
As you move down the spectrum into the middle market, I think in the sweet spot of the middle market opportunities in the say $2 million to $6 million, $7 million range, that has become a little more competitive and the pricing has come in a little bit. In terms of what we're seeing in certain segments beyond the last quarter, the comment on the call that I made, in certain segments we actually saw pricing stability.
As you look at, it varies from opportunity to opportunity and from segment to segment. So it's all across the board.
We are seeing pricing holding at a relative level and the leasing portfolio. We're seeing pricing holding in the upper end of the middle market.
It's come in slightly, maybe five basis points or so. The middle market is a little more aggressive, so pricing has come in.
But I think more importantly, because of how we incent our people and what our focus is within F.N.B. we should pour returns, we have model that we use to justify doing a transaction from a return on equity standpoint.
And we factor the cross-sell benefits into that model. So we can move up and down 10, 15, 20 basis points, it will still achieve the returns that we need to meet our hurdles.
But where we won't give is on structure. And we have seen structure deteriorate somewhat.
So I mean I would say that pricing has come in a little and structure has deteriorated somewhat.
Gary Guerrieri
And as Vince mentioned on the structures, naturally we look at a lot of transaction opportunities. And we have walked away from numerous opportunities recently due to structure getting pressured past the point where we would have an interest in that transaction.
And when structure does get pressured to that point, we're not going to move off of our philosophy. So we'll walk away from those opportunities.
Bob Ramsey - FBR Capital Markets
I guess, I am trying to find out who is that you're comprising on structure, is it consistently the same players or is that very large banks, is it tiny community banks, is there any color you can give me on sort of who is the one that's sort of leading everyone else slower?
Vincent Delie
It's really all over the board. There are several larger competitors that are really weakening structure.
There are number of small competitors that we face that aren't really in tune with the C&I market. They are looking for earning assets, so they are moving into that space on the lower end of the spectrum.
And they tend to be a looser in terms of structure. But I look at our success.
And I know that, I've listened to many calls, I've read many transcripts. I've seen what others are reporting in terms of growth.
And I reflect on our credit metrics within our own portfolio and the growth over the last three and half years for us. And we have had good solid growth and good solid credit performance.
And this is just yet another quarter, where we've seen that. So I would say the marketplace is still able to provide adequate growth for us to meet our investment pieces.
And we're going to be very selective about what we go after. And if somebody is willing to conceive on structure so be it, we're going to hold true to our credit culture.
And I've mentioned, we've invested very heavily in compliance and credit administration over the last few years for a reason. Because we feel that is the bad absolute right way to move forward, particularly when you have the growth rates that we have.
Bob Ramsey - FBR Capital Markets
And I guess at that point, it does help, it does. And to that point, your C&I growth really was very strong this quarter.
I am curious that you're seeing strengths from any particular geography or niche or size or whether it's sort of broad based across your customer base?
Vincent Delie
I truly attributed to that caliber, the people that we have. We have tremendous team.
We stack up well against the largest competitors in the marketplace. So we have very, very talented bankers.
We have seen growth across all segments as I mentioned. We've seen growth in Scranton, we've seen growth in other eastern portions of our franchisee in Pittsburg, in the middle market and asset base lending, in our investment real estate group.
So we've had growth across the board. And I also attribute that growth to our own proprietary methods of planning, planning activities, planning cross-sell activity and our sales management system and our incentive compensation plans.
I've said it before to others, it is very unique and we've made a considerable investment in those areas and it's paying off. We're getting high quality commercial borrowers.
Operator
We'll take our next question from Jason O'Donnell with Merion Capital Group.
Jason O'Donnell - Merion Capital Group
It looks like there is a disconnect this quarter between the reported FTE NIM and the calculated FTE NIM just using the figures that are provided here, in terms of net interest income and earning assets. Do you know what accounts for the difference this quarter?
Vincent Calabrese
I am not sure what difference you're referring to, Jason.
Jason O'Donnell - Merion Capital Group
Well, just the calculated number what imply that your margins are down 5 basis points linked-quarter, which make sense given that your spread revenue declined and your earning assets are up. I am just trying to reconcile maybe a difference between kind of those figures that we're seeing and what's posted in terms of stable margin?
Vincent Calabrese
I am not sure how the other calculation is being done, but you have to factor in the number of days when you're looking at the margin. And there is fewer days in the first quarter than it would be in the fourth quarter.
So you really have to factor in the number of days that you're earning when you do the margin calc.
Jason O'Donnell - Merion Capital Group
So it's really just a function of the days that we describe as fixed. And then on the operating expense fund, how much is you have in a way of seasonal items, including payroll tax et cetera in your comp and benefit expense this quarter?
Vincent Calabrese
When you look at the expenses overall for the quarter, they were right on top of our plan, literally within $0.5 million. So when I look at the components, the total increase $2.3 million, $2 million of that is payroll taxes, which is when you restart the clock on January 1, and then we add $0.5 million in occupancy and equipment that is just normal seasonal increase, personal filing and those type of things.
So really the (two three) is explained by those and there is pluses and minuses through the other categories. So that kind of it explains the base.
And while we're on expenses, I should just comment about our overall guidance to managing that. I should start with disciplined expense management is a part of F.N.B, it's been a core competency for a long time.
So kind of what we did, given the headwinds that we were facing, now that we're in over $10 billion club this year, we really had our team develop the comprehensive list of action items to mitigate the impacts of (inaudible) and FDIC insurance. The 20 branch consolidation was obviously a key element of that, but we also launched a comprehensive vendor management initiative late last year, which we expect will generate meaningful savings.
We're also very actively managing our properties and exiting properties that maybe aren't being used that we've had on our books for a while, to really remove those non-performing or I should say non-earning assets, and reduce the caring cost. And then other benefits come from things like investment in mobile and online banking to get savings statements and postage.
We now have 40,000 customers that have signed up for that. So there is no silver bullet, but there's a whole bunch of initiatives we have that are designed to get us to manage to flat from that base of 2012.
Jason O'Donnell - Merion Capital Group
And then I guess my last question is on the, I wanted to ask about the mobile banking opportunity in particular and actually mobile RDC. I am wondering if you all could characterize sort of a magnitude to the opportunity here to improve efficiency longer-term by pushing transactions outside of the branch network and I am just curious as to how that kind of fits in with the overall strategy on the efficiency front?
Vincent Delie
I wish I could give you concrete numbers, because then I could actually plan to them. I mean it's so new.
The technology is so new. But it's being adopted so rapidly and our feel about it is that over time, and this is just anecdotal, I'm not going to be able to give you specific numbers, but over time we've seen transaction volumes come down in number of branch locations.
We attribute some of that to having access to more sophisticated ATM machines and the mobile products that we have rolled out. The mobile remote deposit capture feature is absolutely key to sustaining customers as we do consolidation.
So when we look at our branch delivery channel and there maybe branches, where transaction volumes have fallen off or the profitability of a particular location isn't what we expected to be, and it no longer make sense to have that location, we try to consolidate and retention is very important. So customers having access to smart ATM machines, which we have deployed across our footprint having the ability to take pictures and check with the mobile devices I think is fantastic and I use it myself.
And having the upgraded mobile budgeting or actually online budgeting tools, where you can set limits and track expenses and you get high charts that are very sophisticated product that we put out there, it really keeps people in place. Those are sticky products.
So it really benefits us on the retention side. But this is my personal belief, but I think that share my belief is shared by the head of consumer banking here and many of our people on the delivery staff, we think that the delivery channels are going to continue to evolve as this technology evolves, and we have to be a participant.
Vincent Delie
I will just add to it, as we enter new market having these tools, it's obviously very valuable for retention as well as for finding new customers. So it's a key to that strategy too.
Operator
We'll take our next question from David Darst with Guggenheim Securities.
David Darst - Guggenheim Securities
Is the growth primarily coming from Pittsburg on the commercial and commercial real estates side or is it pretty broad based?
Vincent Calabrese
I would say its pretty broad based that we've seen. We are an asset-based funding group that covers the entire geography.
We have an investment in real estate group that actually pursues into specialized group that goes after the larger real estate opportunities across the footprint. So those two groups have experienced growth and most of the clients that they brought in are not in the Pittsburg market.
So they are coming from these other markets. I would say that our Stanton market really picked up this year.
They've done a tremendous job. And there has been considerable growth commercially from the C&I standpoint, coming out of that market and that theme.
Pittsburg middle market continues to perform very, very well. We also had people on the ground in Cleveland, who had performed well.
We had our loan production office. We opened a few years ago in Berks County that's performing very well.
So I would say overall our strategy of investing in the right people and giving them tools to manage production and the product set that we offer, which is very competitive with much, much larger players. It's a great combination of assets for our people.
So we're able to win.
Gary Guerrieri
We're really focused on diversifying the revenue stream across the various segments of the loan book. We like that diversification within certain thing it helps us to manage the risk in the portfolios a little better as well.
So we're going to continue moving forward with that focus.
Vincent Delie
This is the very dynamic company with very impressive people working within it. And I think the fact that it's smaller, large enough to handle large transactions, but small enough to be nimble and creative and very effective in the marketplace.
I think that gives us a huge advantage over some of the bigger players, particularly in the middle market. And we've exploited that and that's why we've had success.
David Darst - Guggenheim Securities
And what's your fee income target. And I think you referenced some changes to the structure to both wealth management and insurance, is that a product or actual fee change?
Vincent Delie
What we've done is we've upgraded the talent just like we did in the commercial bank here over the last five years. We've upgraded the talent in those groups.
We streamlined their offerings. We did some things to improve efficiency in both insurance and wealth platform.
The quality and the caliber of the people that we've been able to attract over the last few years is exceptional. So by making those changes and investing in the product set in both insurance and wealth, we've been able to significantly move up market with our commercial bankers.
So as the commercial team becomes better and more sophisticated and goes after larger opportunities, so follows the wealth, and insurance and private banking opportunities and we've been able to capitalize on that. And in fact they're incented, a big portion of the incentive compensation programs at our company are focused on cross-selling and cross-selling closed business within those two business units in particular.
David Darst - Guggenheim Securities
And where would you like to see fee income as a percentage of total revenue?
Vincent Delie
As high as possible, given this is net interest margin environment. But I don't know that we actually targeted particular percentage.
And we would love see it continuously higher and better.
Operator
We'll take our next question from John Moran with Macquarie Capital.
John Moran - Macquarie Capital
Just a quick question circling back on NIM, and I just wanted to make sure that I heard it right. Vince, did you say $400 million a quarter on CDs rolls off, you pick up 50 basis points on that, and $150 million a quarter rolls off in the securities book, losing 50 basis points on that?
Vincent Delie
Yes.
John Moran - Macquarie Capital
And then, just another kind of I guess ticky-tack point of clarification. On the OpEx guidance, flat off the $308 million, $310 million core call it, that of course excludes the two deals, right?
You're talking purely kind of organic core F.N.B.?
Vincent Delie
Yes. That's core F.N.B., right.
John Moran - Macquarie Capital
And then on tax rate, if I'm not mistaken, it looks like that's 100 basis points or so higher than the previous guidance. Is that just a function of making more money, paying more tax?
Vincent Delie
Yes. I mean, we were 28 to 29, the quarter came in and it was 29.3.
So we'll try to be more of that 29 to 30, but right around 29 is a good level.
John Moran - Macquarie Capital
So that is it for the ticky-tack kind of financial questions. I guess one kind of bigger picture, in terms of M&A opportunities, obviously you guys have been active one kind of in the books here, one still pending.
I assume it's safe to say that you'd be an active bidder for something attractive. And maybe then you could spend a little bit of time talking about the strategy there, and where you think you might want to fill in the footprint if at all or is it more just focused on the organic opportunity at this point?
Vincent Delie
Well, our strategy has always been to do acquisitions to help us gain organic growth. So we're looking at those opportunities in light of organic growth.
So if you turn to Page 13 in the deck, you'll see a map that has three circles on it. It's basically a map of our footprint.
It's on a pro forma basis, so it includes Annapolis Bancorp, which we just acquired and the Cleveland Bank which is going to be integrated in October. Our interest is to continue to build-out our existing franchise, so opportunities in the Maryland, D.C.
area are of interest to us. Opportunities actually are circled, but it's not on the areas of the central part of the state really connecting the Baltimore MSA to York and Harrisburg.
And at York, Harrisburg area, we have an interesting continuing to build out our franchise either through de-novo expansion or M&A. And then in Pittsburg in Cleveland, we would welcome opportunities to if they make sense to continue to add to what we have.
Pittsburg would be more of a cost take-out play because we have a fairly significant market share both from the retail deposit standpoint and from the commercial banking standpoint. Cleveland; there are other opportunities in Cleveland.
So strategically, that's the strategy. And as I've mentioned on the call, if you just look at the three circled areas, those of the MSA's that I mentioned, 175,000 business, 7 million people, 4 million households roughly, I believe.
And if you go to 14, we break that down a little more. What we do very, very well is gain market share.
So we have a very effective group of people. We have a great sales management process that we have invested in.
We have deep product set. And as I mentioned earlier, our competitive advantage is being able to deliver local decisions in a marketplace and product set very efficiently in that smaller bank setting.
Yet, we have the ability to cover most of the middle market. So having a lot of prospects commercially for us is very important, particularly in the face of diminished loan demand.
So that's the strategy over all. I hope that's helpful.
John Moran - Macquarie Capital
I guess just as a follow-up to that, the one circle on that map that is sort of obvious and is obviously another really large MSA, would be Philadelphia. I know, historically, that was not really a focus.
And I guess what I'm hearing you say is, that's probably still the case.
Vincent Delie
Well, Philadelphia is a much larger market than the other markets that I mentioned individually. It's highly competitive.
And to gain scale in that market quickly would be a challenge. The cost of acquiring those talented people is higher.
It's not out of the realm of possibility, but I think that we would rather focus on markets that look similar to Pittsburg where we've had great, great success. In over a ten year period, we have gone from less than 1% share to where we are today, both commercially and from the depository standpoint.
So that type of a market it's appealing to us.
Operator
We'll go next to Collyn Gilbert with KBW.
Collyn Gilbert - KBW
Most of what I wanted to cover certainly has been answered. But just quickly, how do you guys think about your loan mix and kind of what an optimal loan mix would be over the next two to three years?
Gary Guerrieri
Right now, Collyn, the book of business is positioned about 55% all in commercial related business and 45% retail related. We've been focused on the commercial opportunities.
And that really being the core competency of the company, we would like to continue to grow that slightly from where it stands today because it is such an important piece of market for us. So that's really the focus of the company going forward.
Vincent Delie
If you drill down into the commercial portfolio, I would say that our plan is to continue to focus on C&I opportunities. Now, we do have teams that focus on investment real estate business.
And the group that I mentioned earlier has done well. But we've had great, great success from the C&I standpoint.
And if you look at the make up of our portfolio, just focusing on a commercial portfolio and looking at the owner-occupied pieces being more C&I oriented, that portfolio is two-thirds C&I, one-third investment real estate. So I would say overtime, if we felt that we could move in slightly different direction, that there was an opportunity to grow another portfolio, we are relative to our peers are less concentrated in investment real estate.
So Gary likes to balance that. We've invested heavily and are tracking methodology relative to managing diversification of that portfolio from a credit perspective.
And we monitor it frequently. So it depends on the overall economy and how sectors are performing.
Collyn Gilbert - KBW
Sort of tying that into like the C&I focus, and then I think it was Dave that asked the question about fee income targets and you answered, as high as you can. Do you think kind of the trajectory for fees, there's better opportunity to extract it with all your initiatives on the retail side and the consumer side of your business or on the commercial side?
Vincent Delie
Given the regulatory environment, you have Durban, you have presentment issues with NSFs. I mean, when you see it, I mean anticipate robust growth for any institution on the consumer side and fee income.
I think it's going to be a challenge for everybody. Particularly since some of the larger banks who are essentially price setters in the marketplace haven't taken action to impose these on consumers, and the ones that have has been quickly rolled back.
So I think that as we look forward, I feel there is a great opportunity for our company to leverage the bankers that we have on the commercial side. And hence the investment and insurance and wealth platform, I think we're only scratching the surface in terms of what we can pursue opportunistically.
And the market, that we're positioning ourselves in really work well for those other businesses. And we have a hoteling concept, where we keep the commercial bankers together with the wealth and the private banker and insurance sales people.
So they're collaboratively pursuing opportunities. And it's really starting to show in the numbers here.
So we've got some good benefit from that synergy.
Vincent Calabrese
I probably add to it too, Collyn, that if you look at the mix of the total fee income, 34% of it is in the insurance and with the wealth management business. And Vince said, we have invested a lot there and we've got some traction there.
So there is definitely opportunity to grow that higher than mid-single digits over time. And the service charge piece, which is about half, is the piece that's under pressure, but these other pieces, there is no reason why we can't grow those at a much higher rates than kind of what you would expect out of the core bank.
Vincent Delie
And I will tell you that as banks invest in e-delivery opportunities will present themselves in the future to generate new fee sources. We believe that also.
So it will also keep customers in place in the event that new fee strategies are deployed from the consumer side.
Operator
We're going next to Matthew Breese with Sterne, Agee.
Matthew Breese - Sterne, Agee
Could you just remind us of the timing of the deal close for Parkview?
Gary Guerrieri
It's mid-October.
Matthew Breese - Sterne, Agee
At Columbus Day weekend?
Gary Guerrieri
Columbus Day weekend.
Matthew Breese - Sterne, Agee
And then, if expenses were to hit all your targeted goals by this time next year, where would you expect core operating expenses to kind of shake out?
Gary Guerrieri
I can't. We don't give guidance beyond what Vince has given you.
He doesn't permit me. So I don't know if you have any other color you want to add Vince.
Vince Calabrese
No, I would say that over time we target, and if you look at the efficiency ratio, part of our expense management strategy has been to manage expenses very closely and then continue to grow the revenue. So we've talked about it, efficiency ratio target over time of closer to 55%.
So there is an opportunity there that number should improve as we get into next year. But as far as dollars of expenses, we're not really in a position to give any additional colors on that.
But the efficiency ratio gives you some direction.
Gary Guerrieri
And that's a good point. We do focus on the efficiency ratio.
And obviously we like to see improvement year-over-year.
Matthew Breese - Sterne, Agee
And as far as timing goes for 55% efficiency, I mean, from here, it seems like that could take a little while, especially with deals coming on. Could that be like a couple of years out or is that even a longer-term target?
Vincent Delie
It's more than a year. I mean, that's I would say it's a longer term target.
With what the government is taking out of banks, obviously that puts pressure on your ability to get to those efficiency ratios between FDIC insurance and Durban and those things. But I don't think its five years to get there, but it's more than a year.
Matthew Breese - Sterne, Agee
And maybe big picture, I mean, everyone's headed toward the mobile banking platform, and assuming branch traffic is going to follow suit and be down year-over-year more than it was last year, I mean, how do you guys think about your branch network, the efficiency ratio, and is there the possibility for further branch closures?
Vincent Delie
Well, between the Parkvale deal and what we've done on our own, we've closed more than 40 branches in the last 18 months. So we are focused on it.
We have a process in place where we evaluate the performance of those branches and our delivery channel, both from a pure production standpoint and looking at transaction activity and from a financial standpoint. So we are monitoring it frequently.
We call it project-ready, it's ongoing. But branch rationalization and evaluating the delivery channel and redeploying in higher growth markets where you have up side and maybe consolidating in markets where consolidation helps financially, that's an ongoing process.
And I would expect that that would be happening at other institutions and the number of branches over time probably comes down collectively. And that would be advent of the technology that we're rolling out and makes it easier to do that.
So I would expect that banks would start to position themselves in markets where, there is always a people element, so they will position themselves to be able to touch as many individuals as possible in our lower cost delivering model.
Vincent Calabrese
Plus, our electronic score card helps elevate all the branches.
Vincent Delie
We've invested heavily also internally. We have a data warehouse that we developed and there is a digital score card that we use and we track performance on a number of key metrics daily in our retail delivery channel.
So we know exactly when our branches producing a particular loan, for example, in a particular category or what fee income they are generating. So we've gotten it down to science and we used that data, those data points to help make decisions about the delivery channel.
Matthew Breese - Sterne, Agee
And my last question, how would you guys size up the M&A market to date, and deal flow, and the number of things you've looked at recently compared to a year ago? Has the activity picked up or have things slowed down?
Vincent Delie
It's been fairly stable over the last five years for us. I don't think that it's any different in terms of pace than it has been.
I think there have been, obviously, we've done three deals in the last three years. But I think the deals that we've done were good opportunities for us.
So we've seen a few better opportunities that fit with our strategy that we have in the past. I would expect that to continue, given everything that we've talked about, the regulatory environment, net interest margin pressure, all the things that every bank has to cope with, should lean to more activity.
We feel one of our other core competencies is consolidating financial institutions. I mentioned earlier, we've invested heavily in our compliance, risk management, audit functions over the last five years.
I mean there has been dramatic increases and the amount that we spent in those areas, and that's already embedded in the run rate expense for the company. So we're very well-positioned to be a consolidator.
Our currency provides us with an opportunity or risk management culture puts us in the right place with the regulators. And I think that our ability to integrate, execute and deliver EPS accretion is proven.
So we're still in the market. Pricing expectations have come up.
So hopefully that doesn't continue. But that's where we are.
Operator
We'll take the next question from Max Hutchson with SunTrust Robinson Humphrey.
Unidentified Analyst
This is actually (Michael) in for Max. I just wanted to get a little bit of color on, you kind of just touched on the pace of conversations maybe more overlay, since the last deal in the last two months here.
And then, if there has been any change in terms of the size of institutions that are kind of pursuing or exploring other strategic options?
Vincent Calabrese
I think they're more smaller institutions, probably because they are feeling the pressure. I haven't seen this many large opportunities.
I think that from our standpoint a small deal takes as much and happens with larger deal, when you carry it all the way through the conversion. So we would like to see more activity, I don't think it's fair yet, and we'll see as time goes on.
But I agree that the pace to really what we've seen come in the door to look at is really been about the same.
Vincent Delie
It's been fairly consistent.
Vincent Calabrese
More companies, but there is, though we have announced, but there is also things we've looked that and passed on that have been smaller and not in markets that were focused on, given the strategy that Vince discussed earlier. So now the pace is about the same.
At some point it will increase as we all expect, but it's just a matter of that.
Operator
That concludes today's question-and-answer session. I'd like to turn the conference back to Mr.
Delie for any additional or closing remarks.
Vincent Delie
Well, I really appreciate everybody calling in, thank you for continued support. If you feel so compelled, you can view our latest commercial on YouTube.
We have a commercial that demonstrates some of the investments we've made in mobile and e-delivery. So if you do view it, give us a call and let us know what you think.
Have a great day and thanks again. Take care.
Operator
That does conclude today's conference. We thank you for your participation.