F.N.B.'s (FNB) CEO Vince Delie on Q4 2016 Results - Earnings Call Transcript

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F.N.B. Corporation (NYSE:FNB) Q4 2016 Earnings Conference Call January 19, 2017 10:30 AM ET

Executives

Matthew Lazzaro - Manager, Investor Relations

Vince Delie - President and Chief Executive Officer

Vince Calabrese - Chief Financial Officer

Gary Guerrieri - Chief Credit Officer

Analysts

Bob Ramsey - FBR & Company

Jason Ong - JPMorgan

Casey Haire - Jefferies LLC

Michael Young - SunTrust Robinson Humphrey

Collyn Gilbert - KBW

Brian Martin - FIG Partners, LLC

Operator

Welcome to the F.N.B. Corporation's Fourth Quarter 2016 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Matthew Lazzaro, Investor Relations. Mr. Lazzaro. Please go ahead.

Matthew Lazzaro

Good morning everyone and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and Non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release under the caption Non-GAAP Financial Measures and Key Performance Indicators. Please refer to these Non-GAAP and forward-looking statement disclosures 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 January 26 and a transcript and the Webcast link will be posted to the About Us - Investor Relations & Shareholder Services section of our corporate website.

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

Vince Delie

Welcome to our conference call to discuss F.N.B.'s results for the fourth quarter and the full year of 2016. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer.

We are very pleased to share the operating results of another excellent quarter for F.N.B. Our fourth quarter EPS was $0.24 per share reflecting 10% EPS growth compared to the year ago quarter. We continued our streak of 30 consecutive quarters of organic loan growth and experienced increased annualized contributions from our fee-based businesses, notably capital markets, mortgage banking, wealth management and insurance. These ongoing trends led to an outstanding year where full year EPS grew to $0.90 and the efficiency ratio improved to 55.4%. On a full year basis, total operating revenue increased to $150 million or 23% as we generated another year of positive operating leverage with revenue growth outpacing expense growth.

Looking at the income statement on a full year basis, non-interest income totaled $202 million, representing a 24% increase from the prior year. As discussed on prior calls, our strategic decision to expand the capabilities of our capital markets group and the scope of our mortgage banking business has translated into strong organic growth in this business unit. 2016 mortgage banking revenues increased 40% resulting from more than doubled production volume which was largely comprised of purchase money mortgages. Capital markets revenue which include syndications, international banking and derivatives ended the year nearly double that of 2015, reflecting an increase in fee-based product sales to our existing customers and prospects.

Full-year wealth management revenues totaled $35 million as these businesses saw benefit from new relationships in the markets of Pittsburgh, Baltimore, Cleveland and Harrisburg. Our fee-based areas continued to be a focus for F.N.B. in order to deepen customer relationships by providing high value fee income services while adhering to our ultimate purpose of helping clients reaches their financial goals. Further expansion in these businesses will continue to diversify our revenue mix.

Noninterest income made up 25% of total revenue in 2016 and will be an area of strategic focus moving forward. New markets provide us with significant fee-based opportunities as we execute our acquisition strategy.

Looking at the balance sheet on a full year basis, excluding acquisitions, average total organic loan growth was $929 million, or 8% with equal contributions from the commercial and consumer segments. Commercial loans grew 7% and commercial pipeline at yearend remained at healthy levels. With about two thirds of the total commercial pipeline concentrated in the Pittsburgh, Baltimore and Cleveland markets. On an organic basis, total deposits grew 7% in line with our guidance. This was led by growth in noninterest bearing deposits as we continue to focus on further improving our deposit mix. We were able to post the strong results while continuing to invest in the future. 2016 saw the implementation of a number of significant technologies as part of our clicks-to-bricks strategy. We introduced digital kiosk in all of our branches and became one of the first banks to provide debit card controls in our mobile banking app. Most recently, we rolled out Touch -ID which allows customers to log into the F.N.B. direct app on their mobile device with their fingerprint. Building on this platform we will deploy additional upgrades in February.

We are focused on integrating our physical branches and digital banking to provide our customers with the best possible experiences.

I'd now like to provide an update for the pending Yadkin acquisition. In early December, we received approval from both Yadkin and F.N.B. shareholders. As I mentioned previously, we've secured the local leadership in North Carolina market and have internally announced our organizational structure. In mid December, we announced the hiring of several experienced commercial and real estate banking professionals to lead our middle market teams in North and South Carolina. We are excited to have these talented individuals onboard. The team is ready to compete and we look forward to putting our expanded product set and capabilities in their hands.

The incoming employees have been engaged in product and process training and will be prepared to have employee scorecard ready for day one. We expect the merger to take place during the first quarter. And I fully expect we will achieve our financial targets and add value for our shareholders. Additionally, merger related expenses and the credit mark continue to track in line with our original expectations.

I want to thank all of our employees for another excellent year. One major highlight was the acquisition and successful conversion of Metro Bank which significantly expanded our banking footprint in the Central Pennsylvania region. A key component to executing our acquisition strategy is our demonstrated ability to generate positive operating leverage and achieve model cost saving targets. If we look back at the Metro transaction, we achieved our model 40% cost save target as evidenced in the consistent improvement in our efficiency ratio. We also enhanced our presence in the Pittsburgh MSA with the acquisition of 17 branches, introduced new technology solutions and continued to invest in our people and processes, all while maintaining our focus on driving earnings growth.

Looking ahead to Yadkin, we've a clear path to achieve the targeted cost savings of 25%. And with our broad product set and pro forma assets of nearly $30 billion, F.N.B. is well positioned for success.

In summary, I'm very pleased with what we've accomplished this year both financially and strategically. And I am incredibly proud of our employees. Our continued growth would not be possible without their tireless efforts. F.N.B. has delivered another year of revenue growth and EPS expansion in a challenging operating environment. We look forward to another good year in 2017 and the successful integration of the Yadkin acquisition.

With that I'll turn the call over to Gary so he can share asset quality results.

Gary Guerrieri

Thanks you, Vince. And good morning, everyone. We ended the fourth quarter with our loan portfolio favorably positioned allowing us to close out another successful year. Our fourth quarter credit quality results on a GAAP basis were positive. With total delinquency remaining essential flat at 1.34%, NPL's and OREO down to a low for the year at 79 basis points and net charge-offs of 31 basis points annualized for the quarter and 28 basis points year-to-date.

In total, we are pleased with our results for 2016 which has been marked by our favorably positioned loan portfolio and the successful integration of our largest acquisition to date.

Let's now review some of our quarterly results after which I'll then cover some of the highlights of our 2016 full year performance and accomplishments. And finally provide an update on the Yadkin integration process. Looking first at our originated portfolio, the level of delinquency at the end of December increased nominally by four basis points over the prior quarter to end the year at a solid 1.04%. NPL's and OREO improved by 17 basis points on a linked quarter basis at 91 basis points with a reduction across both the nonperforming loan and OREO categories. Net charge-offs for the fourth quarter was slightly elevated compared to historic results at $11.8 million or 38 basis points annualized which reflects the final resolution and exit of nonperforming credit that we provided for and discussed earlier in the year.

The originated provision totaled $12.1 million which cover charge-off activity in the quarter and organic loan growth reflecting an ending originated reserve position that was down slightly from the prior quarter at 1.2%.

Turning next to our acquired book of business. This $2.3 billion portfolio performed well during the fourth quarter and is positioned favorably as we prepare for the upcoming Yadkin acquisition. Contractual delinquency on a linked quarter basis was down nearly $7 million totaling $68 million at quarter end. The reserve on the acquired portfolio was up slightly ending December at $7.3 million. Inclusive of the credit mark, the total loan portfolio remained well covered at 1.71% at the end of the quarter.

Now to touch briefly on our full year performance. We are pleased with our 2016 credit quality results for the originated and acquired portfolios which both remain at satisfactory levels at yearend. The successful integration of the Metro book during the first quarter of 2016 which is I mentioned earlier was our largest acquisition to date, initially resulted in some elevated credit metrics as we expected. We are very pleased with the progress we've made in removing the majority of the sub performing assets from the balance sheet in a very short period of time. The credit metrics across the originated portfolio did show some slight increases year-over-year which was largely due to industry softness that some of our commodities based borrowers faced during the year.

Next, I'd like to provide an update on the Yadkin and the progress we continue to make as we prepare for the merger. You'll recall that our credit and risk teams closely track the credit quality performance of the acquired loan portfolio leading up to conversion as part of our robust credit integration process. To date, Yadkin's credit quality has remained stable since our initial due diligence review and our closing credit mark level continues to be in line with our expectations.

In closing, 2016 marks another successful year as evidenced by our satisfactory credit portfolio results and the favorable position of our loan book as we enter 2017. In the year ahead and with the opportunities that Yadkin presents, our team of experienced bankers will continue to manage the growing loan book according to our core credit philosophy of consistently and prudently underwriting credit, remaining attentive and focused on managing risk and proactively working out underperforming loans.

We are excited to bring the Yadkin onboard and we look forward to managing the combined companies in 2017 and beyond.

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

Vince Calabrese

Thanks Gary and good morning everyone. Today I will discuss the fourth quarter and full year’s operating performance and provide guidance for 2017, including the impact of the pending Yadkin acquisition. Looking at the balance sheet for the fourth quarter, loan growth momentum continued with average loans growing 4.9% annualized, led by 10.3% annualized growth in consumer loans. The growth in the consumer portfolio was due to footprint-wide positive contributions across our residential and indirect portfolios.

Average commercial growth totaled $26 million, or 1.2% annualized. The average originated commercial growth was largely offset by pre-payment activity in the acquired portfolio and a number of planned real estate take-outs. We remain excited about the potential for new opportunities in Yadkin’s high-growth, north Carolina markets, notably the markets of Raleigh, Charlotte and the Piedmont Triad. Average total deposits increased $296 million, or 8% annualized, with growth in non-interest bearing deposits of $103 million or 10% annualized. Average transaction deposits increased $324 million, or 10% annualized, mainly due to seasonally higher balances in business demand and premium sweep accounts. This growth in low-cost deposits further strengthened our funding mix, as 84% of total deposits were transaction-based at the end of the fourth quarter. From a total funding perspective, our relationship of loans to deposits was 93% at the end of December.

Turning to the income statement, net interest income grew $1.8 million, or 1.1%, due to the quarter’s growth in earning assets and our ability to fund that growth with lower cost deposits. Our net interest margin equaled 3.35% on a reported basis and 3.32% on a core basis, as we experienced a similar level of non-core accretable yield benefit compared to the prior quarter. Overall, we are pleased with the full-year year core net interest margin of 3.34% given the extended low interest rate environment experienced throughout 2016.

Let’s look now at non-interest income and expense. 2016 saw greater contributions from our mortgage banking business unit as our expanded operations led to a 40% increase in revenue. Our insurance group was another example of where our strategic investments are producing meaningful returns. In 2015, we restructured our insurance team and added revenue producers and key leadership personnel. 2016’s full-year growth of 13% reflects a full year-benefit of these initiatives. As Vince discussed earlier, the investments made to enhance the derivatives, syndications and international banking platforms generated full-year capital markets revenue growth of 48%.

Non-interest expense, excluding merger costs, increased $84 million, or 22%, due mostly to our larger organization and the reinvestment of a portion of acquisition-related cost savings in technology, risk management and infrastructure that will serve us well in the future. Looking back over the last five years, a proof point of our acquisition strategy is the consistent improvement in our efficiency ratio, which is 55.4% in 2016 compared to over 60% in 2011. We were able to grow revenue organically, gain scale through acquisitions, and maintain a disciplined expense management approach, while continuing to reinvest in the organization to support future growth.

Regarding income taxes, our overall effective tax rate for the quarter was 30.5%, in line with previous guidance. Now, let’s look at our guidance for 2017, beginning with organic growth assumptions, which includes the impact of the Yadkin acquisition.

We are expecting to achieve pro-forma year-over-year organic total loan growth in the high-single digits and organic total deposit growth in the mid-to-high-single digits. Given the size of Yadkin, it is helpful to remind you of a few key balance sheet items using their 9/30/16 balance sheet. Total Loans of $5.3 billion. Total Assets of $7.4 billion and total Deposits of $5.3 billion.

Switching to the income statement, the following figures are compared to the full year of 2016, and exclude merger expenses. We expect full-year reported net interest income to increase $270 million to $290 million year-over-year, with total average earning assets expected to increase approximately $8 billion. Note that this is based on the economists’ consensus estimate at the time of our planning process for 2 rate increases in 2017.

We expect non-interest income to increase in the $60 million to $70 million range, year-over-year. As we continue to grow our fee-based businesses, over time we expect to increase non-interest income as a percentage of total revenue as we grow and further deepen customer relationships. We expect noninterest expense, excluding merger charges, to increase by $150 million to $160 million, from our $471 million 2016 core expense base. As Vince mentioned, we have a clear path to the 25% Yadkin target and expect Yadkin to add approximately $30 million per quarter, excluding amortization of intangibles, to our expense base beginning in the second half of the year.

Provision expense is expected to be between $72 million and $82 million for the full year, with relatively higher levels in the second half, commensurate with our planned high-single digit loan growth. We expect to maintain our consistent underwriting standards and expect originated net-charge-offs to average loans to be in a more normalized 30 basis point ranges. The overall effective tax rate for 2017 is expected to be in the 31% to 32% range. Shares outstanding are expected to end the year at approximately 325 million shares, reflecting the shares issued for the Yadkin merger expected during the first quarter of 2017.

In summary, 2016 was another strong year of financial performance for F.N.B. as we continue to pursue the strategy of building our franchise through organic growth and acquisitions that create additional scale and long-term shareholder value. The ability to execute this strategy is dependent on the quality of the people throughout our organization and I am very proud of what our team accomplished in 2016 in the face of another challenging year for the banking industry as a whole. Looking ahead to 2017, successful execution of the Yadkin acquisition and continued benefits from our organic growth strategy should drive further improvement in the efficiency ratio, increase deposits per branch, grow earnings per share, maintain our top quartile return on tangible common equity and result in a long-term return on assets north of 1%. We feel very good about how the company is positioned to deliver sustained value for our customers, shareholders and employees.

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

Question-and-Answer Session

Operator

[Operator Instructions]

And the first question comes from Bob Ramsey with FBR.

Bob Ramsey

Hey, good morning, guys. Just a couple quick questions first. From a modeling point of view, is it fair to model Yadkin at the end of the first quarter? Or do you have any better sense of when in the first quarter the deal may close?

Vince Calabrese

First quarter. We are working towards closing it in the first quarter. I can't give you an exact date.

Bob Ramsey

Okay. Fair enough. And then I know you provided expense guidance and said Yadkin adds $30 million excluding intangible amortization. The expense guidance does include that intangible amortization now just to be clear is that right?

Vince Calabrese

Yes. $30 million was the cash expense Bob but our all in guidance is inclusive of everything.

Bob Ramsey

Perfect. Thinking about net interest margin and sort of the trajectory over the year, I know you said the guidance includes a couple rate hikes, is it fair that for each 25 basis points move you guys get maybe one to two basis points of NIM benefit, is that the right way to think about the relationship?

Vince Calabrese

Yes. I'd say just a few things on that topic. I mean I think our margin we feel very good about how the margins held up throughout the year. If you look back at the kind of fourth to first quarter 2015 to 2016, we picked up three basis points there and there were some other dynamics going on. The core margin for this quarter was little better than what we had guided to. Combination of higher reinvestment rate as well as some higher accretion given the run off and acquired portfolio that we talked about. So it's -- the margin held up very well. I'd think as we sit here though the fourth quarter kind of core margin would probably a bottom and that we would kind of have some modest movement up from there and your numbers it is probably two to three basis points for Fed move. The December Fed move we just had is probably worth about two to three basis points in margin in the first quarter. And that's all baked into our guidance.

Bob Ramsey

Got it. And remind me what is the Yadkin -- it may not be in the first quarter, when the Yadkin comes onboard what is the impact of the acquisition to the margin? I know their margins wider --

Vince Calabrese

Yes. They are little bit wider. When we model it, when we are doing due diligence it was going to add about four basis points and that's going to ultimately be a function of when we do our purchase accounting and get it booked and move forward but that's just give you reference point.

Bob Ramsey

Okay. Got it. And then last question I'll hop out but I guess in terms of commercial loan growth, it obviously has been running below the consumer sort of piece, just kind of curious what shift if any you guys have picked up in conversation of clients post election, I guess particularly commercial clients so whether there was any change in sentiment, willingness to borrow sort of outlook, et cetera?

Vince Delie

Well, that's a good question, Bob. I'll take that one. We study this pretty thoroughly. The remarkable thing is the fourth quarter of this year for F.N.B. was really one of our highest levels in terms of new production for the company. So there is a lot of noise going on with the acquired book, there were exits that were planned that Gary was able to execute upon, that really impacted the average balance in the fourth quarter. So when you look at it, if you were to make adjustments for what moved out in the acquired book, we would have had growth rate of about 3% quarter-on-quarter. So would have been more consistent with what we have delivered in the past. So from an opportunity perspective so or focusing solely on new originations and fundings we actually had a pretty good quarter. But because of the settling of the portfolio and the movement of assets out that essential were largely planned it really reduced the outright growth.

Vince Calabrese

And three is on annualized.

Vince Delie

Yes, the three is on annualized, they would have been 12% annualized.

Gary Guerrieri

We also had a few CRE exits to take outs to the permanent market which were expected as well, Bob. So you had some of that in there also.

Vince Delie

So there was a lot of activity in the fourth quarter now setting that aside I think that has more to do with our positioning in the market that we are in, having few years under our belt in Cleveland and Baltimore we are seeing some good opportunities there. I would say and looking at the election, the other item that we studied was utilization on facilities. We saw a decline in borrowings and revolving facilities in the fourth quarter for about 1% which was little shocking because we thought the opposite would occur. I think that there is a great deal of optimism within the customer base, at least the customers that I have had conversations with principally because of the change in the tax rate and optimism about less regulation. There seems to be a lot of talk about potential expansion, larger CapEx, there at least conversations occurring about larger CapEx opportunities within our customer base which didn't happen before so I think we are riding on that optimism and I am hoping that turns into funding as we move forward. We are hearing, that's the loan growth story in total.

Operator

Thank you. And the next question comes from Jason Ong with JPMorgan.

Jason Ong

Hey, good morning, everybody. I guess I'll start with mortgage banking. I think in the prepared commentary you said it was largely comprised of purchase money. I was just wondering if you had the split in the quarter and maybe how that compared to historical split?

Vince Delie

Yes. We are running it about 77% to 78% purchase money in this current quarter. It has been -- it's ranged anywhere from I would say the high 60s to 80%. So we -- and to run higher on the purchase money side than the refinance side.

Jason Ong

Okay. Actually my follow up question was going to be thinking out to 2017 and excluding Yadkin, how are you directionally thinking about that business in the face of great outlook?

Vince Delie

Yes. I think actually we are still somewhat optimistic about our business because as I said it's mainly purchase money and we are seeing some improvement in the housing market here locally and in Cleveland. So while Baltimore was a little one frothy than those markets we are starting to see more opportunities on the purchase money side. And I think we are very well positioned going into this year. So despite the fact that there will be rising rates, we are very pretty optimistic about how we are positioned and we are expecting to perform very well and our pipeline would lead us to believe that what I am telling is going to continue at least through the first quarter.

Vince Calabrese

Yes. If you look at the -- we pull the MBA statistics this morning just to see what the most current was. So while refinance is projected to be down 48% purchase is actually projected to be up 16%. So that works well with our business model.

Vince Delie

And really our models geared towards hiring the right mortgage loan originators. We are not really focusing on bringing people over that have lived off refinance activity. We are bringing people in that are well connected with real estate agents and others that provide referrals. So that's really has been the focus from day one and our team has done a great job executing that plan.

Jason Ong

Okay, very good. You guys provided some long term target in the slide deck here. I was just kind of curious what sort of timeframe are you thinking? Is this kind of two to three year outlook or what exactly is long term?

Vince Calabrese

It's really designed to be over the cycle and some of the items are more aspirational as far as where we want to get to. I mean it's on a long term three to five years but some of it is longer than that because it uses the charge off for instance that's kind of over the cycle. When we look back it through the last down turn we kind of peaked it 50 basis points, 44 the bank but our consumer finance get us to about 50. So that's meant to be really over the cycle. Some of the other goals would be over -- I don't know three to five years would be probably a reasonable timeframe to use.

Gary Guerrieri

Yes. We were reacting to some of the questions that we had seen over several quarters people had asked us about the efficiency ratio, what our plans are. Branch rationalization so we thought we would throw some metrics out there. I wouldn't say that there is a hard and fast time horizon but we want to give you some insight directionally as to what we are strategically driving towards.

Vince Calabrese

Yes. And the fee incomes are good example about the acquisitions we've done, the banks required really hadn't much in the way of fee income so we build that and then the acquisition kind of bring us back and then we rebuild. I think the goal would be on a run rate basis to get that number to be closer to 30% and above from the 25% is at now.

Jason Ong

Right. That's actually specifically what I was looking at. You guys have been building up mortgage banking, insurance, capital markets, are you seeing the desire for one of those to really be leading the peck or is it more broad based to get over 30%?

Vince Calabrese

I'd say well it's a few things. I mean we've talked a lot about investments we've made in several businesses. I mean the capital markets category which includes derivative, syndications and international banking. And Vince mentioned earlier it is up 48%. And that's $5.2 million increase from full year 2015 to full year 2016. That's an area that international and the syndication are relatively new. So those are now each contributing $1 million and with nice growth rate. So I think there is a lot of growth still there particularly once we bring in Yadkin, the mortgage banking piece, we think there is continued to be as we roll that out to the bigger footprint, there is opportunity there similarly with insurance. So I think it's -- the investments we've made and that the people we brought into help lead these operations and the sales folks we brought into kind of add to the team all contribute. So just keep moving that number higher.

Vince Delie

Yes. After Yadkin when you look at it, we are going to be in Cleveland, Pittsburgh, Baltimore, Charlotte, DC, Bethesda; we have operation in Bethesda that calls into DC, Winston- Salem, and Raleigh. We are going to have significant opportunities in these markets. And in five of these markets we are going to have a top ten deposit share. So what that translates into over time is an incredible opportunity for us to lead syndication, the structure of derivative transactions to pursue international banking opportunities, and that's what we've been positioning ourselves for. So now with the $30 billion balance sheet and being well positioned in these markets, we are going to start to really drive the income those categories, those high value fee income categories.

Operator

Thank you. And the next question comes from Casey Haire with Jefferies.

Casey Haire

Thanks. Good morning, guys. I know it's tough to predict the close date of Yadkin, but was just curious, does -- what is the forward guide? What is it baking in for a close date? Is it mid-quarter or is it quarter end?

Vince Calabrese

It's first quarter. So we're working towards -- you know where we are in the quarter. We're working towards getting final approvals and closing it in the first quarter. Can't really give you more specifics than that.

Vince Delie

It's consistent with what we had modeled initially.

Vince Calabrese

Yes.

Casey Haire

Okay, all right. I mean the reason I am asking is because the fee guide up 60-70, if I heard that correctly that's seems a little -- I mean you going to need to get some decent lift from organically, I mean you are going to have average around $70 million assuming we have a flat fee quarter in the first quarter here. It just seems like a healthy uptick in fees, understanding that Yadkin is coming onboard and it is going to contribute roughly $50 million or so a quarter. I am just wondering what is the core driver of the underlying that fee guide organically?

Vince Delie

It is a whole combination of things, Casey. You really drilled down into it, it is -- there is significant opportunity across the board. So remember we are in three quarters of Yadkin onboard, we are going to have a fairly significant mortgage operation in the Yadkin acquisition that is integrated. We are going to have a number of derivative opportunities that have already started to pop up. They don't even offer derivatives. We have syndication opportunities that are starting to flow into the pipeline down there. We are not even together and I think that's where it's going to come from across the board.

Vince Calabrese

Plus you pick up a full year Metro; remember, [Multiple Speakers] Metro wasn't here until February this year so that also --

Casey Haire

Right.

Vince Delie

Just so you understand, when we modeled this and then gave our guidance, we included our assumptions in the Yadkin model in our overall guidance. So you're seeing the full picture.

Casey Haire

Okay, all right. And then I guess just following up on the loan growth guide. I mean C&I, obviously facing some headwinds in the back half of the year. What is your presumption on the mix of the loan growth guidance 2017? Do we get a more favorable mix between consumer and commercial given we have more shots on goal opportunities in the Carolina with Yadkin onboard?

Vince Delie

I think it has been -- if we go back and look at historical growth rate it's been pretty balanced between the two. And if we drill down into production for the fourth quarter it was pretty much 50:50, I mean while the C&I book showed -- took -- there was more pressure on it because of the declines in working capital facility, that has little to do with origination. But it was I think it was 45%- 55% the exact breakdown of the new production that came on. So I would expect the mix to stay fairly consistent probably 50:50 CRE versus C&I moving forward and I would expect both the consumer and the wholesale bank to contribute equally in the plan.

Gary Guerrieri

As far as the split of the portfolio post transaction Casey will be 65:35 commercial to consumer. Today, we are 60:40 so that balance sheet is going to change a little bit with bringing that portfolio onboard to a little heavier way there as well.

Vince Delie

It's true.

Casey Haire

Okay. Understood. And just last one from me in terms of capital adequacy that the TCE ratio sort of near that 6.5 floor that you guys have talked about. How are you guys feeling about your capital adequacy today? Any thought to potentially doing something proactively to shore it up?

Vince Calabrese

No. I would say the investment thesis that we've managed to is still intact. We're going to manage capital efficiently with Basel III and DFAST and all the considerations just as we have in the past. So the same operating levels I've talked bow about in the past, still comfortable with those. Comfortable with where we are and post Metro and Fifth Third and Yadkin we're within our ranges for kind of all of the ratios in. And Yadkin is expected to come even a little higher on a TCE base is, they're higher than we are today, they were at September 30th. That actually is accretive to the TCE ratio. So we are very comfortable with where we are today and where we'll be kind of post Yadkin.

Operator

Thank you. And the next question comes from Michael Young with SunTrust.

Michael Young

Hey, good morning. Just wanted to start off with NII guide and the 270 -290 increase year-over-year, that's on a core basis excluding accretion, is that right?

Vince Calabrese

It's on a core basis, it includes what would we call normal accretion but doesn’t include --if you have take out of specifically marked loans it create additional benefit it is what not -- that's the piece that tends to be the lumpy piece.

Michael Young

Okay so just normal scheduled accretion?

Vince Calabrese

Yes.

Michael Young

Okay. And then maybe a big picture question here. With the sort of increase in long-term rates from 160 on the 10-year up to 240 now, does that change your appetite at all for any loan categories? I'm thinking specifically related to some of the indirect consumer areas.

Vince Delie

I wouldn't say that it changes our appetite. Obviously, we're monitoring margin in these areas, particularly indirect. So we monitor credit quality and margin in that book of business and as long as we can get adequate returns and the credit quality remains intact, we'll continue to move in the direction we're moving in. If we start to see changes in the returns on that portfolio, we'll change direction. But it's a small portfolio relative to the total and our strategy has always been to grow in a variety of areas so we're not dependent on one particular asset class to drive growth for the Company or one particular geography as you can see from our acquisition strategy. So we're more focused on balance.

Gary Guerrieri

The average life in that portfolio as well, Michael, is relatively short at about 27, 28 months. So it turns very quickly.

Michael Young

Okay. Great. And on the expense side I think you guys have spent a good bit of money in the past upping your sort of technology as you grown at a rapid pace. Are we sort of conceptually over the hump and we should see expect maybe a more limited investment there and we are kind of shifting to more revenue production investment from here?

Vince Delie

Yes. I mean we've always focused on revenue production investments. So we kind of done -- we've done in tandem. Our whole clicks to bricks strategy is retooling the delivery channel, both the physical delivery channel, how we onboard customers, our focus and our strategic plan is to get to the point where customers who are agnostic to how they do business with us can go either channel and feel very comfortable and it is very consistent. So creating digital content for the products and services and then over time developing our delivery of those products and services on the web is part of our overall strategy. And we've done a lot of work there as a company and we are doing in chunk so that we can get to the point where we have virtual branch online and the client will be able to do a lot of things, view videos on products, make choices, apply for products and services in an aggregate fashion very easily. So we've been focused on all of that. And that's been reflected in our CapEx budget over the last few years. So I wouldn't say that it end, I think the digital offering, the mobile offering we have is tremendous. I mean when you look at our mobile offering, for us to be able to offer CardGuard for example, our clients can turn on and off their debit card, set geographic constraints within the mobile app or do a pop money transaction within a mobile app. The app has Touch ID. I mean all the features that exist there are comparable to what other much large, much larger institutions offer in and well beyond what many other the regional and small competitors offer. So we made those investments. We are now focusing on monetizing that investment and getting the word out and focusing on the digital investments we've made in mobile and online. We actually have an online banking upgrade coming in February which adds some additional features which are really cool. And I had a chance to see it. So I don't think that ends. I think we have to invest in that channel. Obviously, we have to continue to rationalize the delivery, the physical delivery channel but our goal is go to make it so that they are connected. So the advertising is consistent, we have the digital kiosk in the branches. You can view the same video content online and we are making it more consistent experience. Anyway that's the overall strategy.

Operator

Thank you. And the next question comes from Collyn Gilbert with KBW.

Collyn Gilbert

Thanks. Good morning, guys. Just quickly on your comments on growth and loan growth. How do you sort of see this either near term or longer term the growth rate trending differently in the Yadkin market versus your legacy markets?

Vince Delie

Yes. We didn't model Yadkin differently to be truthful, Collyn. I mean we applied our own historical growth rates to those markets. My expect is that what exist in the model. My expectation is over time we would see acceleration in growth in those markets. So our product set, the people that we've been able to secure, our ability to execute our business model in those higher growth market should lead to more opportunities for us. And the sheer number of prospects that we've disclosed to you and our due diligence, that's one of the reasons we are interested in those markets while it is competitive, it is competitive everywhere. We think that we will do better in markets that have better growth trajectory that also have the number of opportunities that exist in our lower growth, slower growth markets. So I would expect us to outperform what we did over time. I think it will accelerate and we are already starting to see. I mean there have been a number of inquiries with our team down in North Carolina which have been filtered back to us where clients are looking for us to take a larger position or a take lead role in credit relationships that they are in. So that's exciting. And I would expect that to help us over time.

Collyn Gilbert

Okay. That's very helpful. And then just one final housekeeping item. Just I want to make sure, confirm. When you are all are anticipating the timing of the merger charge and how that rolls in and also just the rolling in of the cost saves, just to make sure we got that right.

Vince Calabrese

The timing of the one times usually happens over a couple of quarters. So I would expect to see some this quarter and some next quarter and then the cost savings by third quarter we should kind of be at a clean run rate from a cost saving perspective. Similar to --

Collyn Gilbert

2018

Vince Calabrese

Third quarter of 2017.

Collyn Gilbert

2017. You'll have cost saves

Collyn Gilbert

Right. Got it.

Vince Calabrese

Similar path with Metro.

Operator

Thank you. [Operator Instructions] And the next question comes from Brian Martin with FIG Partners.

Brian Martin

Hey, guys. Most of my stuff has just asked here but just maybe just one clarification. You talked about that accretion income is factored into your guidance. The $1.5 million or $1.9 million that was in there this quarter is that kind of what you guys are treating is core that was not accelerated in this quarter. I am asking more for the future but I just want to make sure I understand the current quarter the accretion that's in there.

Vince Calabrese

No, the $1.5 million to $1.9 million is what we call kind of the accretable yield adjustments or benefits that come out resulting loans that we've move off, they are better than mark. So that's kind of the non core piece, yes, that's the extra piece right.

Brian Martin

Okay, all right, got you. And you did say and then just two clarifications. Maybe I missed it. On any of the guidance did you talk about the effective tax rate and kind of any -- what assumptions you guys are making regarding that?

Vince Calabrese

We said 31 to 32.

Brian Martin

Okay. So no -- okay. So no drop there. Then just --

Vince Delie

We're hoping for 15 now.

Vince Calabrese

Yes. 15 would be nice.

Brian Martin

Okay. That's where I was getting at. And then just maybe I just missed it, average on the asset guidance kind of what can you just restate what that was and just kind of what your commentary was on that.

Vince Calabrese

We just said earnings assets were going to increase about $8 billion year-over-year.

Brian Martin

Average earning assets will increase 8 total?

Vince Calabrese

Yes.

Brian Martin

Okay, all right. And then I guess just going back to your last comment on kind of the loan growth. I guess the thought is that if you outlook is the guidance kind of mid single digit given what you are doing down North Carolina and the better nature of those markets, I guess the guidance could be perceived as being somewhat conservative if those markets are higher growth market and you execute as you expect to execute. Is it fair to say?

Vince Delie

Yes. Remember, we have a bigger balance sheet and Gary is very selective so the multiple markets help us manage risk. So I would stick to the guidance and hopefully we do better in those markets than we do in our legacy market over time, over a longer period.

Brian Martin

Okay, got you. Okay. And just the last two things from me. Can you give any numbers on the pipeline as far as where it stands today relative to last quarter, last year? And then just the last thing was on M&A. Given you've got enough on your plate here, I guess how do we think about potential, additional potential M&A and is that still a thought or I guess are you kind of in the mode to get Yadkin integrated, completed, before you pursue additional opportunities or just any comment on those two would be helpful.

Vince Delie

Yes. I'll start with M&A. I've said on the last call and I guess I want to reiterate that it that our primary objective is to get Yadkin done and converted and moving forward. I think once that happens, we have a tremendous opportunity. I mentioned the number of large metropolitan areas where we'll have a top 10 deposit share. We've got just an incredible opportunity to drive market share gains in those markets without acquiring. So our focus is going to be on doing just that. So we're going to focus on driving growth. It's not really like it has been in the past. I think we have achieved the scale that we need to compete effectively. We've made significant investments in our infrastructure and in our product set. So we're ready to go. We're going to make it happen. I think from a loan growth perspective, I mentioned the quarter was a very strong quarter from a production and funding perspective, for acquired clients. There was a lot of noise in the acquired portfolio. But I think given all of that, given the amount that was processed in the fourth quarter, we still have a very healthy pipeline in the first quarter and it's in the $1.6 billion range. So like I said, given moving what we moved off the pipeline and closed, that's a pretty healthy place to be. And that does not include anything from Yadkin. They're not part of us yet. So we're very pleased with where we sit.

Operator

Thank you. And as there are no more questions at the present time. I'd like to return the call to management for any closing comments.

Vince Delie

No. I just I'd like to thank everybody. I'd like to thank our employees in particular because this year has been a tremendous year for us. We've accomplished quite a bit both strategically and in relation to converting acquisitions. Once again it was a great quarter, great year and we are looking forward to delivering again in 2017. So thank you very much.

Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

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