Jul 24, 2013
Executives
Cynthia Christopher - Investor Relations Vincent J. Delie, Jr.- President and Chief Executive Officer Gary L.
Guerrieri - Chief Credit Officer Vincent J. Calabrese - Chief Financial Officer
Analysts
Robert Ramsey - FBR Capital Markets Jason O'Donnell - Merion Capital Group David Darst - Guggenheim Securities Aaron Brann - Keefe, Bruyette & Woods Limited Matthew Breese - Sterne, Agee & Leach, Inc.
Operator
Good day and welcome to the F.N.B. Corporation Second Quarter 2013 Earnings Conference Call.
(Operator Instructions). As a reminder today's conference is being recorded.
And now I would like to turn the conference over to Cynthia Christopher, Manager of Investor Relations for F.N.B. Corporation.
You may begin.
Cynthia Christopher
Thank you. Good morning and welcome to our second quarter of 2013 earnings call.
This conference call of F.N.B. Corporation and the reports we file with the Securities and Exchange Commission often contain forward-looking statements.
All 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 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 July 31, 2013. In addition a transcript of this call and the webcast link will be posted to the shareholder and Investor Relation section of our corporate website.
I will now turn the call over to Vince Delie, President and Chief Executive Officer.
Vincent J. Delie, Jr.
Good morning and welcome to our earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer.
I will highlight our second quarter performance and discuss several strategic developments. Gary will then review asset quality, and Vince will provide further detail on our financial results along with the expectations for the remainder of 2013.
Our operating results were again strong and F.N.B. delivered another very good quarter.
We are particularly pleased with the quality of our earnings. Unlike recent industry trends F.N.B.'
s results have not benefited from a reduction in provision for loan loss expense, as we continue to support sustained loan growth. In addition year-to-date operating leverage is positive through a concentrated focus on generating revenue and managing expenses.
Operating net income for the quarter was 30 million or $0.21 per diluted share, with strong momentum across a number of key drivers. F.N.B's performance is the direct result of loan and transaction deposit growth, a stable net interest margin and good credit quality results.
Average organic loan growth was strong at an annualized rate of 6% for total loans with 12% growth for consumer loans and commercial loan growth of 6%. Production levels for both commercial and consumer remained at record high levels and we ended the third quarter with a healthy pipeline.
With annualized growth of 7% in transaction deposits and repos we are also attracting low cost deposits with these relationships. These are all outstanding accomplishments for the F.N.B.
team and reflect a focused effort to deliver sustained organic growth across our footprint. Our ability to deliver these consistent results is due in part to the successful expansion and integration of recent acquisitions.
The Parkvale acquisition in Pittsburgh provided us with a solid organic growth opportunities and additional scale leverage to our model. Our success in Pittsburgh validates our strategy with proven results.
Our goal is to replicate this success with our expansion in to Baltimore and Cleveland. These are two markets that offer similar characteristics and opportunities as Pittsburgh.
Our strategy in each of these markets is progressing well with results hitting or exceeding our expectations. Because of the depth of F.N.B's executive management team we are able to have two separate teams leading parallel integration efforts for Baltimore and Cleveland.
In Maryland we are very pleased with the immigration of BankAnnapolis and the team did an outstanding job ensuring a successful and seamless conversion. Early stage results are positive.
Pipelines are healthy and loan growth is at or above our targets. We have had great success attracting talented and experienced commercial and retail bankers in the market and have had some exceptional hires.
For example, we just recently added a very talented individual to lead consumer banking in the Maryland region. We are also pleased with our success attracting professionals for our other lines of business, including wealth management, private banking, insurance and mortgage.
We now have a very strong leadership team in Maryland. The F.N.B sales management process is deployed and our culture as a whole has been seamlessly integrated.
In June, we announced the acquisition of BCSB Bancorp. This acquisition provides us additional scale, access to the attractive Baltimore suburbs and moves us up to the top ten deposit market share position in the MSA.
On a pro forma basis we have nearly 1 billion in deposits and 24 banking locations. We view this as a financially attractive and low risk transaction given the leadership team we have established in the market.
The Park View acquisition expands our existing presence in Cleveland, Ohio. We are targeting a close date in October and we are very pleased to have already secured regulatory approval for the merger, a validating proof point of our core competency as experienced integrators.
In Cleveland we are in the process of executing the same strategy deployed in Pittsburgh and going on in Baltimore. We are very pleased with the existing F.N.B team in the market and the commercial team that Park View's CEO Bob King has built.
With a solid foundation already present we are focused on augmenting this team with additional hires to support our expanded presence. Given our connections in the market this is proceeding very well.
We have identified a number of well qualified professionals including the recent hire of a senior level retail executive to help drive results. We have also secured space and signage rights for regional headquarters in downtown Cleveland.
This will anchor F.N.B in the market with strong visibility and provide additional commercial opportunities. In summary, we have a clear strategy for success as we replicate our business model in these high potential markets.
Both Baltimore and Cleveland present tremendous organic growth prospects and strengthen F.N.B's overall franchise by providing us with the ability to sustain our growth and performance. With that I will turn the call over to Gary so he can share the quarter's asset quality results.
Gary?
Gary L. Guerrieri
Thank you Vince and good morning everyone. The second quarter marked another solid performance for our portfolio as our key credit metrics remained at very good levels during the period and reflect the continuous stability we have experienced for a number of quarters.
This consistency is also evident when measured against our peers with our key metrics comparing very favorably as illustrated on slide nine. During the quarter our team also completed the integration of BankAnnapolis, which was positioned slightly better than expected and we were able to seamlessly transition this portfolio into our core loan book.
Let's now review some asset quality highlights, first focusing on the originated book followed by an update on BankAnnapolis and the rest of our acquired portfolio. Originated delinquency and non-performing loans in OREO ended the quarter flat when compared to March with delinquency of 1.44% and non-performing loans plus OREO at 1.59%, both very good levels.
Net charge-offs for the 2nd quarter came in at 6.3 million or 33 basis points annualized for the originated portfolio. While this represents an increase over the first quarter at which time we experienced very low net charge-off levels we are pleased with current quarter solid results.
When measured year-over-year our net charge-off level improved by 12 basis points. The originated position for loan losses was up slightly at 6.6 million as we continued to provide for strong loan growth in this portfolio bringing our ending reserve to 1.35%.
Shifting now to our acquired loan portfolio, we ended our quarter at just over $1 billion in loans that are marked to fair value, including approximately 260 million of gross loans added through the BankAnnapolis acquisition. We are very pleased with the position of this portfolio relative to our initial day one estimate and can attribute this to the continued careful monitoring and review work performed by our team throughout the entire due diligence and the integration process.
The remaining acquired portfolio at 790 million continues to perform within our expectations with a level of contractually past due accounts ending the period at 71 million. When excluding the impact of BankAnnapolis acquired delinquency improved by 2.6 million linked quarter.
The acquisition, the acquired provision for the 2nd quarter at 1.25 million remained consistent with the prior two quarters. In closing we finished out the first half of the year with another solid performance as our overall portfolio remains very well positioned.
Our key originated metrics reflects continued consistency and stability as we remained favorably aligned compared to our peers while our acquired book is performing well within our targeted ranges. As we look to finish out the second half of the year and the integration of the Park View portfolio we will continue to employ the same rigorous approach to effectively underwrite and manage the risk in this new portfolio as well as in our existing book of business.
I would now like to turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks. Vince?
Vincent J. Calabrese
Thanks, Gary, good morning everyone. Second quarter operating results reflect continuation of positive trends company wide.
Strong loan and transaction deposit growth continued supporting the net interest margin. Credit quality was again very good.
Fee income results were favorable particularly when looking year-over-year and the expense control initiatives we discussed last quarter are progressing on target. We are very pleased with these consistent results.
As Vince mentioned BankAnnapolis joined F.N.B. on April 6th so there is nearly a full quarter of results included.
We added assets of approximately 435 million, loans of 260 million, deposits of 360 million, as well as 4.6 million in common shares. The quarter also included one-time merger cost of 2.9 million.
Let's begin looking at the quarter starting with balance sheet highlights on slide seven. We have presented both reported and organic growth.
So you can see what was added with the Annapolis acquisition and how we are growing the balance sheet organically. I would focus on our organic growth result.
These results remain strong and in line with our expectations, with loan growth of 115 million linked-quarter or 5.6% annualized, with growth in both commercial and consumer portfolios. Commercial portfolios continue to display strong organic growth, with results again driven by C&I growth.
This growth was largely driven by market share gain, and commercial line utilization remains at historical lows. For the remainder of the year we affirm our loan growth guidance, given year-to-date production levels, and healthy pipelines at quarter end we continue to expect to achieve full year mid-single digit organic total loan growth.
These expectations are in sync with the second quarter's year-over-year total average organic loan growth results of 5.6%. On the funding side we continue to grow lower cost transaction account balances while reducing time deposits.
This strategy has resulted in a strengthened funding mix with transaction deposits and customer repos now representing 77% of these balances compared to 73% a year-ago. Organic growth for transaction deposits and customer repos of 137 million or 7.4% annualized was partially offset by the expected decline in time deposits.
Given our success growing deposits and improving mix we reaffirm our full year organic total deposits, customer repo growth expectations in the low single digits. The second quarter net interest margin was 3.63%, narrowing three basis points linked quarter in line with prior guidance.
This modest decline is primarily due to lower accretable yield which as we have discussed in prior quarters will continue to be lumpy. For the quarter accretable yield totalled 0.5 million, lower than both the last quarter and the year-ago quarter.
We continue to break out these components on slide 12, in order to view the underlying trends in our core margin. As you can see the core net interest margin has been relatively stable over the past several quarters, due to a combination of deposit pricing actions, active balance sheet management, consistent loan and transaction deposit growth.
For the remainder of the year we reaffirm our guidance and expect the full year net interest margins to be in the low to mid-360s with fourth quarter levels being around 360. Next let's turn to non-interest income and expense.
Total non-interest income increased 3.1 million or 9.1%. The results reflect seasonally higher service charge revenue including the benefit of Annapolis and Bancorp related volume and consistent results in wealth management and insurance.
In addition we recognized a 1.6 million gain on extinguishment of debt related to a portion of our trust preferred securities. One of pool trust that held our paper was being unwound, and we had the opportunity to repurchase the obligation at a discount.
Moving to non-interest expense on slide 11, the overall linked quarter increase primarily reflects the addition of BankAnnapolis operating expense and a 2.9 million in merger related costs I mentioned earlier. Looking at non-interest income and expense expectations for the remainder of the year let me remind you that the Durbin Amendment became effective for F.N.B.
on July 1st. While we do expect to fully offset the Durbin impact overtime the exact timing of revenue and expense initiatives we have in place will come into play over the next few quarters.
Therefore non-interest income will experience a decline relative to second quarter levels and begin to trend back upwards during the fourth quarter as we begin to more fully realize the benefit of revenue initiatives. With this in mind we expect non-interest income to be in the $32 million to $33.5 million range with the third quarter near the lower end of this range.
This is consistent with our full year fee income guidance provided on last quarter's call and also takes into consideration the $0.01 per share decline we had discussed in April due to lower service charge volumes. We have communicated in the past, part of our strategy to offset Durbin through expense reduction and containment initiatives.
Therefore we look for non-interest expense to decline slightly from second quarter levels, given the focused efforts we have in place to tightly manage expenses. This revenue and expense guidance does not take into account the Park View acquisition which we closed in the fourth quarter.
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 on-going stability. Our expectations for a slight dollar increase in full year 2013 provision for loan losses remains unchanged.
These expectations take into account the planned strong loan growth and are consistent with year-to-date results. Looking at our capital position at June 30th, regulatory capital levels have slightly declined, primarily reflecting the 15 million trust preferred repurchase as well as the initial impact of the BankAnnapolis acquisition.
You may recall from our initial discussions an announcement that there will be minor dilution in capital that would be recouped over a very short period of time, measured in months. The tangible equity ratio was 6 to 11 with 11 basis point decline entirely due to changes in OCI or unrealized losses on securities given the recent move up in interest rates.
I will remind everyone that our overall interest rate risk management strategy of maintaining a short duration in our securities portfolio holding close to 50% of that portfolio in the held for maturity market should mitigate the impact of future interest rate increases. We continue to exceed all regulatory well capitalized thresholds.
On a final capital note we are in the process of evaluating the final Basel III rules and we will continue to manage capital efficiently in the best interest of our shareholders while remaining in full compliance with these rules. 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 J. Delie, Jr.
Thank you, Vince. The first six months have proven very successful with a consistent strategy in place we've delivered strong operating performance and continue to position F.N.B to deliver sustainable results.
At the start of the year we communicated several strategic areas of focus for 2013. These included the evolution of our delivery channels and continuous reinvestment in our people, processes and infrastructure while remaining keenly focused on expense control and efficiency improvement.
They also included leveraging our cross-sell culture and the pursuit of potential M&A expansion in attractive markets. There have been significant accomplishments in each of these areas.
We continue to evolve our delivery channels through the electronic banking platform and branch realignments. The trends for online and mobile banking usage are very positive and validate our strategy.
For example, mobile remote deposits have increased in an average monthly rate of 27% since introduction last December. Total customers enrolled in online banking have increased 13% year-to-date with over 175,000 currently enrolled.
Cost control and efficiency improvements encompass several areas including the expense containment guidance Vince provided. The benefits from a strong cross-sell culture are reflected in our results and we are leveraging this attribute in Maryland, Cleveland and across all business lines.
This can be seen in wealth management revenue with year-over-year revenue growth of 20%. In closing I would like to congratulate the F.N.B team on our continued outstanding accomplishments and their dedication to position F.N.B for future success.
That concludes our comments and I would like to turn the call over to the operator for questions.
Operator
(Operator Instructions) We'll go first to Bob Ramsey with FBR.
Robert Ramsey - FBR Capital Markets
Hey, good morning guys.
Vincent J. Delie, Jr.
Hey, Bob.
Vincent J. Delie, Jr.
Hey, Bob.
Robert Ramsey - FBR Capital Markets
First question I had was just around consumer loan growth. It seems that growth on the consumer side outside the resi mortgage was particularly strong in this quarter and I was curious if there was anything in particular sort of driving that growth.
Vincent J. Delie, Jr.
Well I would say Bob that the focus on the sales management system, the score cards that we have put into place in combination with some marketing tactics, pricing changes that we have made and just an increased focus by the field. And I would also add that I think we have got to the point we have been repositioning the delivery channel, we have been exiting some slower growth markets and reinvesting in some higher growth markets and we are starting to see the benefits of that realignment of the retail delivery channels.
Robert Ramsey - FBR Capital Markets
Okay, that's helpful. And then I was wondering at sort of at a higher level you can sort of talk a little bit about you guys have got very strong profitability and price efficiency, you had pretty consistent loan growth, so you are sort of doing a great job on a lot of fronts but earnings seem to be kind of range-bound and I don't know at $0.19 to $0.21 or $0.22 sort of range.
I am just curious what is going to take sort of to get earnings per share up, so you get a little bit better rate environment, is it a question of getting some of the cost saves from the recent acquisitions or what is it going to take to sort of take earnings up for next level.
Vincent J. Calabrese
Well I think part of the historical issue has been compliance with a very difficult regulatory environment. We significantly added to our compliance staff and our risk management staff over the last few years.
So there's been a sizeable increase in expense related to complying with the never ending stream of regulation. So part of it is those are non-revenue producing FTEs that are a necessary part of competing in this banking environment and we've made the appropriate decisions investing in those areas.
So I believe a lot of that is behind us and I think that as we move forward into the market that we positioned ourselves in we will experience great success in Cleveland and Baltimore in terms of organic growth. And the acquisitions we have done albeit smaller have really positioned us much better as a company as we look forward and we would hope to start to reap the benefits of those investments over the coming years.
That's just basic block and tackling and positioning the company to benefit from better markets.
Vincent J. Delie, Jr.
Bob, I would add to it, if you look at year-over-year, the second quarter last year you may recall, we had an [expectation] of accretable yield that we have recorded in the 2nd quarter. So kind of adjusting for that it is up a $0.01, 5% in this environment I think is pretty good.
And I think also your comment about the acquisition, we just brought Annapolis on in the quarter. So that takes a couple of quarters to kind of hit your stride as far as expense saves and I mean the teams already put loans on the books but expense saves take a little bit of time for those to get fully realized.
So that'll also helped in addition to the things that Vince mentioned as far as the new markets.
Robert Ramsey - FBR Capital Markets
Okay, that's helpful color. Okay thank you guys.
Vincent J. Delie, Jr.
Thank you, Bob.
Operator
We will go next to Jason O'Donnell with Merion Capital Group.
Jason O'Donnell - Merion Capital Group
Good morning.
Vincent J. Delie, Jr.
Good morning.
Jason O'Donnell - Merion Capital Group
Just to follow-up on the question that Bob asked and your discussion, it just sounds as though you are seeing you know that organic loan growth could potentially or should potentially be stronger than the sort of higher or higher than rather this sort of this mid-single digit pace that you have all have been at for some time next year, is that a fair assumption assuming now it's the economics status quo.
Gary L. Guerrieri
I think you really have to take a step back and take a look at the overall economic climate over the last few years. I mean this company has grown consistently throughout the downturn so we've had very nice organic growth in a number of categories throughout the downturn.
The economy itself has not really given us any help. Most of our growth has come from better execution, market share gains, positioning our people in the right markets with the right opportunities.
I think as we look forward just line utilization alone we talk about that all the time and we sit here today at levels below 40% where historically it has been north of 50%. I mean that in itself would be a tremendous help if companies started investing again in the future.
So I believe as we move through this cycle and gradually emerge from the depths of a weak economy we should get some benefit from just overall activity increasing, and with the large number of clients that we have been able to attract over the last three years or four years, we are in a very good position to benefit from that. So you know increase loan demand from commercial borrowers a better economy and continuation of grabbing share in higher growth market should lead to better success from a growth standpoint.
Vincent J. Delie, Jr.
Yeah, I would say that too, that Jason, the way we talk about organic mid-single digit is kind of core F.N.B. So obviously with the acquisitions you are going to get incremental lift out of those acquisitions in those markets, if not in my kind of core run rate that I talked about.
So clearly there is opportunity for more working off of the second quarter base just by adding in those additional markets.
Gary L. Guerrieri
Yeah, we often fail to give ourselves credit for the M&A activity and we really focus internally here on organic, pure organic growth, if that's the only way we can continue to deliver the results we've delivered.
Jason O'Donnell - Merion Capital Group
Okay, great, that's helpful, and just switching gears a little bit it looks like for the quarter core operating expenses were a little bit higher than what we were anticipating. I am wondering in terms of the acquisition of Annapolis, how long do you expect it to take extract your targeted cost saves?
Vincent J. Calabrese
I would say really a quarter or so. I would think in definitely by the beginning of the fourth quarter that should be fully baked in.
Jason O'Donnell - Merion Capital Group
Okay. And then one more, in terms of the expense base longer term I am wondering roughly how much in expense does the launch of your new regional headquarters in Cleveland towards the end of the year add to your annual expense base?
Vincent J. Calabrese
Yeah that's very minimal truthfully. We had a great opportunity to move in to that space.
We are actually consolidating people from other locations into that space and we are talking at a maximum 10,000 square feet of office space so it's rather minimal. I think the opportunity to move downtown to secure the naming rights, the signage capability is important message to send to Cleveland that we are there to stay.
We are there to compete. We believe in the initiatives that are going on in downtown Cleveland and we want to be a part of that.
So I think it was more about making a statement to the marketplace. So I don't envision that being a major expense burden for us as we move forward.
Jason O'Donnell - Merion Capital Group
Okay, thanks a lot guys.
Vincent J. Calabrese
Thank you.
Operator
We'll go next to David Darst with Guggenheim Securities.
David Darst - Guggenheim Securities
Hey, good morning.
Vincent J. Delie, Jr.
Go ahead, David.
David Darst - Guggenheim Securities
So just with what you have announced in your front running the acquisition to build out the infrastructure in the market in Cleveland, have you already done that with Annapolis or is there more you need to do in Baltimore in anticipation of closing and wrapping that market up?
Vincent J. Delie, Jr.
We are still in the process. We are in the process of building out the team in Baltimore.
Yeah if you look at the Annapolis acquisition in isolation we have fulfilled our plan in terms of hires for just Annapolis. As we expand that strategy and we build out across Baltimore there will be additional hires that we will be making over the coming weeks and months that will supplement what we are getting from BCSB Bancorp.
So we are still building out the team. Having said that, we were able to attract some very high level executives from other financial institutions, much larger financial institutions to provide leadership in the region.
So what we are buying and the people that we hire are going to be added to that team. So essentially we build out the leadership group.
We have the infrastructure in place, we rolled out our sales management systems in the market and we have made some tremendous hires from a leadership stand point. So we are in a really good position as we move towards consolidating Baltimore County.
We are very pleased with where we are. In fact the pipelines in Annapolis are beyond what we expected.
So we are experiencing some very nice commercial growth in that market and it's attributed to the team that we have attracted.
David Darst - Guggenheim Securities
Okay, then just with the balance sheet post the acquisitions closing you may have given us and some other format but where will residential loans be as a percentage of loan portfolio and then is the idea to run that down like you have been doing in the past couple of years?
Vincent J. Delie, Jr.
Well, Vince looks after statistics. I mean our strategy has never been to grow the residential mortgage portfolio at the bank.
So the growth that you are seeing in the total portfolio actually is growth that's occurring beyond the reduction, a significant reduction in the residential mortgage portfolio over time. So once that stabilizes and we have gotten to a level where we feel comfortable with, you should see larger growth percentages.
Vincent J. Calabrese
That residential portfolio is about 12% of the total book of business and as Vince mentioned I mean that is not a focus to continue to grow that book and we are selling a lot of on a flow through basis there from that standpoint so that will continue to be the focus.
David Darst - Guggenheim Securities
Yeah, understand. I am just trying to quantify, the headwind, that the total loan we are [inaudible].
Vincent J. Calabrese
Well I think given the interest rate environment I think you have seen an increase in mortgage rate there fairly significant. So the prepayments speeds and curtailments in that portfolio should slow dramatically.
So we have been facing that too. You know we are not pulling this stuff on to our balance sheet.
We are moving with portfolios that were acquired that don't fit what we like to see in a portfolio, like residential, long term residential real estate loans on our books. So that portfolio has been running up and those prepayment speed should slow based upon what's happening with the overall economy.
So if things tend to pick up what could happen is growth in commercial will accelerate because of increased loan demand from existing customers, interest rate at that point will be rising because the economy will be improving and hopefully that will reverse scores and you will see slowing in prepayment speeds of that mortgage portfolio. So that I guess that's how I would look at it.
That's my own opinion but hopefully that's helpful.
Vincent J. Delie, Jr.
Yes David I would just add I mean that I think the key point there is the prepayments as refis slowdown we look at our kind of refi purchase mix with the recent movement in rates with 60:40 refi purchase for the second quarter today it's probably more like 35:65 and I think we are happy to just see that portfolio reduce quite as quickly but it's not an area that we grow. Really the additions we make in that portfolio is when we do an acquisition and then we kind of work it down over time.
So I can't give you a percentage but kind of the path to that portfolio and then the growth's being in other categories as a percentage it will just keep declining over time.
David Darst - Guggenheim Securities
Okay. Vince, could you maybe just talk about some of the specific areas and maybe quantify how your net interest income would benefit from this [inaudible] curve by 100 basis points.
Vincent J. Delie, Jr.
Sure. When we look at our interest sensitivity, if we look at our interest sensitivity as of the end of June up 100 to 1.4% kind of a short scenario, up a 100 in a ramp where you are gradually moving up over a 12 month period is 0.9%.
So we are a little less sensitive than we were at March just given the moment in rates and some of the balance sheet growth that we have had. And I guess if you think about one of the things we model for and it's baked in to our guidance is that the recent move up in interest rates what that worth to us it's baked into our guidance and that's about a penny a share of additional net interest income from the recent moves that we have seen.
David Darst - Guggenheim Securities
Okay, good. Thank you.
Operator
(Operator Instructions). We'll go next to Aaron Brann with KBW.
Aaron Brann - Keefe, Bruyette & Woods Limited
Good morning gentlemen. This is Aaron calling in for Collyn Gilbert.
How are you doing?
Vincent J. Delie, Jr.
Good, how are you Aaron?
Vincent J. Calabrese
Good morning Aaron.
Aaron Brann - Keefe, Bruyette & Woods Limited
I am doing fine. Thank you.
I think just maybe follow-up to previous question. Rates have obviously moved up fairly significantly in the last month or so at least from the benchmark rate, yet your NIM guidance appears to be largely unchanged from where it was three months ago.
Is there some dynamic at work that's lessening the margin impact that we should be thinking about either on the asset side or the funding side?
Vincent J. Delie, Jr.
Yeah, I think we got the academic answer, the mathematical answer about the change in rates. Now we will talk about the practicality of what's happening in the marketplace.
I mean many of the loans that we bring over particularly commercially are priced off one month LIBOR or Prime. So if we see a change in the short end of the curve we are going to get significant benefits.
So the assets we price much quicker than the liability. So I think there is you get that benefit.
I think you also get a benefit when you are in the field from the practical stand point negotiating a rate with the borrower, when you are bouncing on the bottom of all-time lows there is very little a basis point here and a basis point there means a lot to you and maybe not so much to the borrower. But as rates begin to increase it actually becomes easier to negotiate spreads that are more favorable and I think because there is more room and that's what tends to happen and I think as we move through this interest rate cycle and rates start to pick up on the short end of the curve and not just with the tenure, treasury there is some benefit to having improvement in the tenure of treasuries but there is a lot of benefit if the short end of the curve moves, the yield curves steepens and the short end comes up we will get more benefit.
So I guess that's my answer. Vince, I don't know if you want to add to that.
Vincent J. Calabrese
Yeah, I would just add that you know if you look at our total loan portfolio 60% of it is just for variable, 18% of our total loans are type of one month LIBOR at this point. So that won't receive till the short end moves.
So I think that is still to come and its part of our overall sensitivity. But I think the rates that Vincent is describing are being mitigated by the impact of the higher rate environment on our investment portfolio and just generally our loans.
I should also clarify the penny that I mentioned was the full year annualized impact so would be about half of that for half of the year.
Aaron Brann - Keefe, Bruyette & Woods Limited
And finally could you just comment on sort of the loan pricing I think three months ago you were talking that many banks may be, particularly smaller banks were being quite aggressive have you seen any change in that dynamic?
Vincent J. Delie, Jr.
I haven't seen a change. I think the environment is such that everybody is looking for higher yielding, earning assets so it's fairly competitive.
I would say that given what we've been able to accomplish promoting our brand in the markets that we're in we are now in the considered set. So our pipelines are pretty good.
We are being asked to bid on just about everything that's out there because of our positioning, the positioning of the brand and the people that we have. So I think that we will get looks at opportunities.
I think the existing portfolio that we have, the growth that we had experienced, growing our customers, they're pretty loyal and I think we'll be able to maintain margin within our existing customer base because of the high level of service that they get, the people were fairly positive about the experience. So that bodes well for us.
But I do think that the competitive climate is real when it's out there. So we have to contend with it.
Having said that we've been able to maintain our margin so the credit spreads haven't impacted us too much. And again I attribute that to the service level and the excellent job the commercial bankers are doing and the retail bankers are doing in the deal.
Gary L. Guerrieri
So our markets have always been competitive.
Vincent J. Delie, Jr.
Yeah, they are just extremely competitive and all the markets we compete in
Aaron Brann - Keefe, Bruyette & Woods Limited
Understood. Thank you very much.
Vincent J. Delie, Jr.
Thank you.
Operator
And we'll go out to Matthew Breese with Sterne, Agee.
Matthew Breese - Sterne, Agee & Leach, Inc.
Hi, can you hear me?
Vincent J. Delie, Jr.
Hey Matt we can.
Matthew Breese - Sterne, Agee & Leach, Inc.
I am sorry if I missed this but how much in the way interchange revenue is at risk from the Durbin amendment?
Vincent J. Calabrese
That kind of unmitigated is about $2.5 million a quarter. And that goes down [inaudible].
Over time we'll fully offset that. You're going to feel some, don't feel all of that but a good portion of that still in the third quarter.
Matthew Breese - Sterne, Agee & Leach, Inc.
Right I mean the full impact will be in the third quarter with offsetting coming later in the year.
Vincent J. Calabrese
Right in connection with it.
Matthew Breese - Sterne, Agee & Leach, Inc.
And then with the next two acquisitions coming on board where do you see the efficiency ratio shaking out?
Vincent J. Calabrese
We don't really give guidance for next year at this point but I would say that kind of holistically 55% is the long-term target that we have. I think continuing the run, running under 60 with Annapolis coming on-board this quarter we were pretty pleased with that being at a 58% type level.
I think over time getting towards 55, over the next couple of years is the target we would have. But it can take a while to get there, just because you still have FDIC insurance and regulatory cost, those kind of things that are sitting on the expenses as an additional burden but that's the target that we think about.
Matthew Breese - Sterne, Agee & Leach, Inc.
Right and to go from 58%-55% over the next couple of years I am assuming that that's assuming some revenue gains as opposed to expense…
Vincent J. Calabrese
Well it could be a combination of both but I would assume as we move into the higher growth markets that we positioned ourselves in we would have some acceleration of revenue. And with the interest rate environment changing you get benefits there as well.
So we would expect those, all three of those factors to be contributors to a better efficiency ratio.
Matthew Breese - Sterne, Agee & Leach, Inc.
And then my last question as it relates to M&A which should you open the pipe is there a desire to add to that and add another one on the acquisition list and if so what markets interest you guys, where you want to be next?
Vincent J. Delie, Jr.
Well let me answer in two pieces. First of all I will say that we truly have developed a core competency in our ability to integrate these acquisitions and the three that we have done are relatively small and play a very important strategic role for the company but the success we have had in attracting talented people to help us move forward with those acquisitions has been extremely pleasing to us.
It's beyond what we expected. So we are very fortunate that we have been able to attract the people that we have been able to attract and as we build out those teams, and additional opportunities come up we'll take a look at them.
Keep in mind that we are very focused on EPS accretion. As Vince mentioned earlier when you do an acquisition you get the shares right away and then the execution comes over time so the EPS accretion comes over time as you see in the models.
And you know we are very focused on that. So you know we are going to manage what we have and if something comes down the road it has to meet the criteria that we have established and that's EPS accretion within a very short timeframe and minimal dilution to tangible book with the ability to recoup any capital diminution in a short period of time.
So all those rules that we have established will apply and the IRR has to be north of 15% generally. So that's the answer to the first piece.
From a location standpoint obviously in-market deals are attractive because of the ability to take expense out and to add to the existing platform we will evaluate how we are performing from a growth perspective because in every acquisition that we do here at this company the acquisition is not the end game to solve for a lack of growth in the portfolios. We do acquisitions to position the company to continue to grow organically which is why we fixate on being transparent about organic growth and I can't emphasize that enough.
If the acquisition has the opportunity for us to take cost out, positions us to continue to grow organically we will take a look at it. And in what markets across our footprint in adjacent markets if there is an ability to again hire great people in an adjacent market we look at that but that's where we are.
Matthew Breese - Sterne, Agee & Leach, Inc.
And as it relates to overall size and you guys have done smaller deals recently, it seemed to have worked pretty well, that changed your thinking on potentially doing something more transformative?
Vincent J. Delie, Jr.
No, not necessarily again, we really focus on creating shareholder value and that's our primary focus. We have done larger acquisitions, Parkvale is an example.
That was almost 2 billion in assets and the integration went extremely well and we benefited from that. So we are not -- beside we don't really manage the company looking at total asset growth, we manage the company based upon our ability to grow earnings and position this entity to produce earnings growth in the future.
So we will look at every acquisition through that lens.
Vincent J. Calabrese
I would just add to that. The reason we have done smaller deals is because that's what's been the opportunity has been in the marketplace.
So if there was something larger we would clearly look at it, not that we are excluding that but as you know there haven't really been any larger transactions in our core market. We have been opportunistic in the past.
We continue to be so. So there's not a size limit we have in our mind but it e would have to meet all the criteria that Vince talked about earlier.
Matthew Breese - Sterne, Agee & Leach, Inc.
Okay, thank you guys.
Vincent J. Delie, Jr.
Thank you.
Vincent J. Calabrese
Thank you.
Operator
And we'll take a follow-up question from Aaron Brann with KBW.
Aaron Brann - Keefe, Bruyette & Woods Limited
Sorry, I just want to follow-up on two things and confirm that I heard them correctly as it relates to the guidance. Were you targeting fee income at $32 million to $33 million per quarter for the second half of the year?
Vincent J. Calabrese
Just remind myself what I said here, $32 to $33.5 million range for the next two quarters, I said the third quarter near the low end of that range.
Aaron Brann - Keefe, Bruyette & Woods Limited
Okay so 32 to 33.5, okay. And operating expense that should decline in 3Q, I guess presumably in part as you get more of the cost saves out in Annapolis and with 4Q you think it will be relatively flat from there?
Vincent J. Calabrese
Yeah I would think pretty stable from there.
Aaron Brann - Keefe, Bruyette & Woods Limited
Okay. Thanks.
Vincent J. Delie, Jr.
Before Park View.
Vincent J. Calabrese
Before Park View, yeah that's without the addition of Park View.
Vincent J. Delie, Jr.
Yeah, it's kind of core asset base.
Aaron Brann - Keefe, Bruyette & Woods Limited
I appreciate that very much.
Vincent J. Calabrese
Okay.
Operator
And this does concludes today's question-and-answer session. At this time I will turn the conference back over to Mr.
Delie for closing remark.
Vincent J. Delie, Jr.
Well I would like to thank everybody for participating in our call and we had another great quarter and we are excited about the future. So I appreciate you guys calling in and I appreciate the questions.
Have a great day.
Operator
This does conclude today's conference. Thank you for your participation.