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F.N.B. Corp (NYSE:FNB)
Q4 2019 Earnings Call
Jan 21, 2020, 8:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the F.N.B. Corporation Fourth Quarter 2019 Quarterly Earnings Conference Call. [Operator Instructions] Please note this call is being recorded.

I'd now like to turn the conference over to your host today, Matthew Lazzaro Manager of Investor Relations.

Mr Lazzaro, please go ahead.

Matthew Lazzaro -- Manager of Investor Relations

Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B Corporation and the report 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.

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 28th and the webcast link will be posted to the About Us, Investor Relations & Shareholder Services section of our corporate website.

I'll now turn the call over to Vince Delie, Chairman, President and CEO.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

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

Today, I'll touch on our 2019 financial highlights, review last year's accomplishments and wrap up with the discussion about our strategic objectives for 2020. We will then open the call up for questions.

First, I'd like to highlight some key metrics from 2019. We are very pleased with record net income of $386 million and record operating EPS of $1.18. These profitability levels resulted in positive operating leverage and strong internal capital generation, driving higher capital ratios and increasing tangible book value per share by 13%. We are pleased with this growth as our full-year dividend payout ratio totaled 41%, as we returned nearly $160 million in cash dividends to our shareholders.

F.N.B. reported total revenue of $1.2 billion amid a volatile interest rate environment in 2019. Our portfolios continue to expand with average loan and deposit growth of 5% and 6% respectively. This loan origination and deposit production came from across the footprint with strong contributions from our legacy markets and growing success in F.N.B.'s Mid-Atlantic and Southeast expansion markets. Our fee-based businesses had an outstanding year with operating non-interest income up 10% and many units setting all-time records for revenue. For example, capital markets increased 56%; mortgage banking income increased 44% and wealth management and insurance revenues grew a combined 6%. In the capital markets businesses, we are realizing benefits from our investments in personnel and products, fueled by our geographic expansion strategies as well as solid execution across the footprint.

Looking historically at 2019, I want to spend a few minutes discussing the progress we've made toward the key initiatives previously outlined in the 2018 Annual Report letter. We set out to deliver superior peer-leading returns on tangible common equity and drive internal capital generation and growth in tangible book value per share. Our 2019 return on average tangible common equity of 17% was again peer-leading and 13% growth in tangible book value continues to track above others in the industry. This further supports our long-standing commitment to deliver value to our shareholders. In 2019, our strong financial performance has translated to a total shareholder return of 35%, placing F.N.B. in the top-quartile relative to peers. In tandem with delivering superior returns, we set out to protect our attractive dividend and return capital to shareholders. We've accomplished this goal as tangible common equity reached its highest level of 7.58% in nearly two decades at the end of December.

Looking ahead, we've now surpassed our stated targets and have added flexibility to optimize capital deployment in a post CECL environment. These stated objectives support the overarching goal of our organization to grow revenue by prudently increasing our loan and deposit portfolios, all while maintaining our superior credit quality and risk management culture.

With mid-single-digit loan growth and deposit growth and further improvement in many asset quality metrics, we had another strong year while also improving our funding mix. As a proof point, non-interest bearing deposits grew nearly $400 million, more than 6%, as this remains a critical focus across the Company.

Additionally, we have focused on new household acquisition and deepening existing relationships. For the year, we had strong total deposit growth of 6% and when excluding a planned decline in brokered time deposits of $600 million, total deposits increased nearly $2 billion or more than 8%.

Next, we set out to diversify and grow our fee-based businesses, namely capital markets, mortgage banking, wealth management and insurance. In 2019, each of the units exceeded our expectations with capital markets and mortgage banking income both up over 40%, which directly supported total non-interest income increasing 10% or $25 million to a record $300 million.

Additionally, we aspired to continually evolve toward becoming a data-driven bank and continue to optimize the branch delivery channel. We are focused on technology and risk management infrastructure by diligently investing and upgrading platforms in the retail bank and improving efficiency as well as the customer experience.

Throughout 2019, we closed 25 branches and we continue to execute our established Ready program. Earlier in the year, we announced plans to develop de novo locations in the DC Metro area in Northern Virginia and in Charleston, South Carolina. Our expansion plans in these strategic, geographic locations further enhance our retail strategy and corporate banking efforts in a variety of attractive markets.

As evidence of successful execution of our growth strategy, we are firmly established with top 10 deposit market share in five out of the seven major markets with a population greater than 1 million.

Lastly, we strive to continue to improve efficiency and manage costs. This is evidenced by our efficiency ratio improving 30 basis points to 54.5% from 2018 to 2019, despite pressure on interest rates in a challenging rate environment and significant ongoing capital investments in technology.

Our strategy is proven through various cycles, as evidenced by the solid performance and continued focus on improvement in many key asset quality metrics that Gary will discuss further. All these accomplishments led to a very successful 2019. And we will build upon the strong momentum in 2020.

With that, I'll ask Gary to comment on credit quality. Gary?

Gary L. Guerrieri -- Chief Credit Officer

Thank you, Vince, and good morning everyone. We had a solid fourth quarter to close out 2019 with key credit metrics remaining at favourable levels that are tracking consistent with our expectations and remained very pleased with the current position of our portfolio as we move into 2020.

As you are aware, the new accounting standard for Current Expected Credit Losses became effective on January 1, 2020 which not only brings changes to reserve methodology under the standard, but also marks the end of the prior methodology to account for loans acquired in a business combination. Therefore, I will be focusing a majority of my commentary today on our all-in GAAP credit results for the total loan portfolio.

I'll also provide a brief update on the performance of our originated and acquired portfolios to provide a few highlights of how these two books performed. Let's now cover the total portfolio results. The level of delinquency on a GAAP basis ended December at 94 basis points, up 3 bps over the prior quarter's historically low levels. The long-term trend continues to track in a positive manner as the current period showed a 13 basis point improvement over the prior year.

NPLs and OREO trended similarly, up a few bps over a very good Q3 levels to stand at 55 basis points, with year-over-year results improving by 6 basis points. These long-term positive trends are the result of our continued focus on moving criticized assets off the books to better position the portfolio and we were very successful doing so in Q4.

It's worth noting that beginning in Q1 2020, acquired loans will be reported as non-accrual when they no longer accrue interest, as is consistent with the shift from the prior purchase accounting standard to CECL. A majority of these acquired credits are presently reported in the 90-plus past due category.

Regardless of the accounting treatment, we will continue to focus on our current strategy of attentive and proactive work-out of these sub-performing assets. As it relates to loan loss performance, GAAP net charge-offs remained at solid levels, totaling $5.3 million for the quarter or 9 basis points annualized to end the full-year at $28.3 million or 12 basis points. The provision at $7.5 million for the quarter and $44.6 million for the full-year adequately covered charge-offs and loan growth for these periods. Vince Calabrese will provide some additional commentary on the reserve and CECL during his prepared remarks.

I will now briefly touch on the originated and acquired portfolios to provide some comparative results against the prior quarter. The level of delinquency for the originated book ended December at 71 basis points, up 5 bps linked quarter while NPLs and OREO increased 3 bps to stand at 59 basis points. Originated net charge-off levels for the fourth quarter were solid at 10 bps annualized, ending December at $5.3 million with full-year net charge-offs totaling $20.7 million or 11 basis points.

Our acquired portfolio also continues to perform in line with our expectations with contractual delinquency levels continuing to trend favorably, marked by a $47 million reduction year-over-year, representing a 40% decrease. As we close out another successful year, we are pleased with the positioning of the portfolio and our solid and consistent credit results across all books of business.

The long-term consistency and stability in our portfolio are proof points of the disciplined approach we take in our credit and lending decisioning processes, none of which would be possible without our experienced team of bankers across the entire footprint. As we move ahead to the New Year and the changes the CECL accounting standard brings, we remain committed to maintaining our core credit principles to help balance growth objectives with our desired asset mix and risk profile at this later stage of the economy.

Looking back, we are very pleased with the performance of our portfolio throughout the whole year and are looking forward to the business opportunities ahead of us in 2020.

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

Vincent J. Calabrese -- Chief Financial Officer

Thanks, Gary, and good morning. Today, I will discuss our financial results for the fourth quarter and provide guidance for 2020. As noted on Slide 4, fourth quarter operating EPS totaled $0.30, bringing full year 2019 operating EPS to $1.18, an increase of 4% over 2018. As Vince previously mentioned, the TCE ratio is at 7.58%, the highest level in nearly two decades. The tangible book value per share is also at its highest level over the same period at $7.53 per share. These numbers demonstrate our focus on providing meaningful shareholder value, while maintaining favorable asset quality.

Let's start with a review of the balance sheet for the fourth quarter on Slide 6. Linked-quarter average loan growth totaled $504 million or 9% annualized, attributable to commercial growth of 10% and consumer growth of 7%. Focusing on spot year-end balances relative to 2018, total loans have increased over $1.1 billion or 5%.

Spot commercial growth of 7% was led by a $752 million increase in C&I balances as commercial real estate also saw good activity on the origination side that was impacted by continued pay downs in that space. Spot consumer growth of 2% was driven by increases in residential mortgages of 8% and direct installment loans of 3%, partially offset by a decline in home equity line of credit balances.

Continuing on Slide 6, on a linked-quarter basis, average deposits grew 12% annualized. The annualized growth in interest-bearing deposits of 41% and noninterest-bearing deposits of 8% was partially offset by the anticipated decline in time deposits, with a nearly $500 million decline in brokered CD balances. The shift from time to interest-bearing deposits allows more flexibility in managing costs in a changing rate environment.

Turning to the income statement on Slide 7; net interest income totaled $226.4 million, a decline of 1.5% from last quarter as the net interest margin narrowed 10 basis points to 3.07%. Recognizing the interest rate environment impact is not unique to us, the rate cut taken place early in the quarter clearly had an impact on variable-rate loan yields and the net interest margin. Specifically with one month LIBOR down another 25 basis points in the fourth quarter, the net interest margin declined slightly more than expected.

Compared to the third quarter, one month LIBOR fell 23 basis points in October alone, which pressured asset yields from the beginning of the quarter. We were able to partially mitigate some of the decline as interest bearing deposit cost improved 6 basis points on an average basis and 11 basis points on a spot basis.

While we saw deposit cost lag to move down in LIBOR in October relative to variable rate loan yields, we are confident that our deposit rates at the end of December will help support the net interest margin as we move through 2020. Furthermore, we have consumer promotional deposits repricing in February and the anticipated decline in interest-bearing deposit costs we expect will support gradual net interest margin expansion. We expect a relatively stable net interest margin next quarter and then expect gradual margin expansion throughout the rest of the year.

Slides 8 and 9 provide details for non-interest income and expense. There continues to be strong performance in mortgage banking, capital markets and trust income and operating non-interest income as a whole. As Vince noted earlier, we are extremely pleased with our record fee-based results in 2019, which significantly exceeded our expectations and importantly mitigated the interest rate movements we experienced.

Looking at the fourth quarter, non-interest income totaled $74 million, a 7% decrease from last quarter due mainly to the impact from service charge refunds called out on this side. On an operating basis, non-interest income was down 2% from a record level in the third quarter as we saw strong results from capital markets and mortgage banking income, offset by lower gains on sales of real estate and lower results on our SBIC investment.

Turning to Slide 9, non-interest expense remained relatively flat over the third quarter. On a core basis, when removing the $3.2 million item related to the renewable energy investment tax credit from last quarter, non-interest expenses rose 2% due to higher outside professional services, strategic technology investments in software and equipment and normal merit increases in incentive payout accruals for the strong 2019 performance. Expense management remains a top priority and we are very pleased that we held core expenses relatively flat compared to 2018.

Lastly, I'd like to reaffirm our previously disclosed expected capital impact of the CECL adoption for 2020. Last quarter, we disclosed the estimated day one increase to our allowance for credit losses of 25% to 35% for the originated loan portfolio with the related capital impact expected to range from 11 basis points to 15 basis points of TCE and range from 14 basis points to 20 basis points of CET1 regulatory capital on a fully phased-in basis. As a reminder, the CECL transition on the acquired portfolio results in a balance sheet gross-up of loans and allowance with no capital impact.

Once the day one CECL allowance is established on the acquired portfolio, the remaining credit and non-credit marks of $115 million to $135 million on these loans are accreted into interest income prospectively over the remaining life of the portfolio. The recognition of this accretion is similar to our current process except that the remaining marks or discounts are maintain at the loan level as opposed to loan pools. We expect the overall allowance coverage ratio to be 125 to 135 [Phonetic] using 12/31 numbers.

Now I would like to provide guidance for 2020; mid-single-digit full year spot loan and deposit growth -- I'll note, our 2020 rate outlook reflects a stable yield curve outlook with no additional Fed moves in 2020 and for one month LIBOR rates to remain at the levels they were at the end of December. All comparison is on a year-over-year basis compared to 2019 reported results for the base year.

Net interest income, non-interest income and non-interest expense are all expected to increase in the low-single digits. Provision expense is expected to be in the $55 million to $65 million range, which includes the impact of CECL. Effective tax rate of 18% to 19%, which includes some level of income tax credits we've experienced over the last few years.

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

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Thanks, Vince. Last January, we covered major tenants of the long-term strategy, and I want to provide an update. Throughout 2019, we continued to focus our efforts on optimizing our online and physical delivery channels to improve the customer experience as well as investing in our infrastructure and technology. Coming this quarter, we intend to deploy a new interactive website designed with enhanced functionality. The launch of our new proprietary website creates a one-stop shopping interactive digital experience.

We are excited about the new features and a streamlined account opening process for our customers. Our ongoing investments in innovation are critical to our Company's long-term objectives and ensure that our teams have the resources to exceed customer expectations and in turn, support future revenue growth.

Over the past few years, we have successfully attracted high quality talent as we continue to elevate our profile, especially in our North and South Carolina markets. We are pleased with the quality of our team on the field and the growing contributions from these regions.

Before turning the call over to the operator, I want to thank our entire team for all their hard work and dedication for a successful 2019. We are well positioned for a great 2020 and we'll continue to serve our constituencies, actively engage with the communities, invest in our dedicated employees, and deliver greater shareholder value.

Questions and Answers:

Operator

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And the first question comes from Frank Schiraldi with Piper Jaffray.

Frank Schiraldi -- Piper Jaffray -- Analyst

Good morning.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Good morning Frank.

Frank Schiraldi -- Piper Jaffray -- Analyst

Just wanted to start with the really strong growth in demand in the quarter. Could you guys talk a little bit about what allowed you? I know you -- the thinking was to reduce the planned reduction in brokered CD levels but what allowed you to grow demand as you did? Was there some promotions in there, and then what are your thoughts for 2020? Do you think you continue to see this sort of mix shift in 2020?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Now we have a number of things to drive demand deposit growth. I think we've talked about it in the past. I know each quarter of this year, we've had pretty decent increases. We engage our team with incentive compensation directly geared toward driving that category. That's one of the primary categories in the consumer scorecard, and it's based upon output not activity, so growth in balance sheet. That's one thing that we do. We support that activity with data analytics and leads. We have a pretty robust calling effort in the municipal space, and with our corporate bankers from a treasury management perspective. So we see good solid growth in the commercial demand deposit balances simply because they're being used to support services.

We talk a lot about the other fee income categories, but we've had significant growth in treasury management fee income across the company, and particularly in the Southeast and the Mid-Atlantic and the newer markets we've entered. So that's all helped, and it continues to help and we've continued to see good solid growth. And that was one of the pillars that we focused on to help mitigate margin compression. This year, we mentioned it, called it out in the annual report letter and it was a focus of the company. So everybody did a great job of executing there, but there were a number of areas that we focused on to drive that. Frank, it wasn't one silver bullet.

Frank Schiraldi -- Piper Jaffray -- Analyst

Okay. And then -- but do you think for 2020, you continue to see that sort of trend?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

We do. We...

Frank Schiraldi -- Piper Jaffray -- Analyst

Stronger growth in demand.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

We do. We're going to continue to focus on shifting that mix, bringing the deposit cost down to help offset the margin impact. Vince -- as Vince mentioned in the guidance, we expect because of the stable and steeper yield curve, we expect margin to improve slightly over the course of the year. Our goal is to hopefully do better than that by focusing on that mix within our funding base and our people are very skilled at going after those deposits and we use a variety of tools to help them gain that market share. So that should be a focus and should continue to help us.

Frank Schiraldi -- Piper Jaffray -- Analyst

Okay, and then just on -- on operating leverage. I just want to make sure I'm thinking about it correctly. And you guys obviously gave guidance in a bunch of line items, so we can plug that into our models. But just wondering, as you think about -- in 2019, you saw positive operating leverage year-over-year. It seems to me, just given where you ended the year, where the margin was in 4Q versus the beginning of the year, that's going to be a pretty tough ask for 2020 to put up year-over-year positive operating leverage in 2020. So is the thinking more so that you'll -- you're just -- the goal is to move the efficiency ratio for 2020 down from 4Q levels or do you think you can get a positive operating leverage again, year-over-year?

Vincent J. Calabrese -- Chief Financial Officer

No, I would -- the guidance definitely has positive operating leverage in it, Frank, for 2020. I mean, I would say, as you would expect, it was more challenging to get there for '20 than '19, just given the rate environment that we've all experienced. But within our plan, we don't go to the Board without having positive operating leverage.

So revenue is growing faster than expenses, maybe not by a lot, but it's growing faster than expenses, and we can manage the expense side of that as we do. We had initiatives in '19 to take out a significant chunk of expenses and we just have that as part of running the Company and we have similar efforts going on in 2020 to ensure that we do have positive operating leverage.

And then if we get any surprises in yield curve as far as additional steepness; that obviously helps the cause beyond what we have baked into the plan. But no, within our guidance, it's positive operating leverage.

Frank Schiraldi -- Piper Jaffray -- Analyst

For year-over-year [Speech Overlap] the fourth quarter. Okay. Great, thank you.

Vincent J. Calabrese -- Chief Financial Officer

Yeah, full year [Phonetic]. Sure.

Frank Schiraldi -- Piper Jaffray -- Analyst

Thanks.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Thanks Frank.

Vincent J. Calabrese -- Chief Financial Officer

Thanks Frank.

Operator

Thank you. And the next question comes from Jared Shaw with Wells Fargo.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hey guys, good morning.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Hey Jerry, how are you?

Gary L. Guerrieri -- Chief Credit Officer

Hey Jerry.

Jared Shaw -- Wells Fargo Securities -- Analyst

Good, thanks. Just -- if we could start with the margin, I hear you saying that first quarter should be stable with gradual increase thereafter and expecting year-end or one month LIBOR to mimic year-end. But we're already down 13 basis points from year-end on one month. I guess, how does that impact the thoughts for first quarter asset yields? And then as we look out over the rest of the year, obviously here what you're seeing on the funding side, but do you expect to see any benefit on asset yields from continued remix or is it really -- is the gradual increase in margin really going to be funding driven?

Vincent J. Calabrese -- Chief Financial Officer

I would say a few things. LIBOR, if you look at the yield curve that's baked into our plan, has one month LIBOR at 1.75% at the end of the year ended June 30. As you mentioned, the rate is lower than that today.

So we do expect the first quarter to have some slight pressure, not the magnitude of what we saw in the fourth quarter and then kind of built gradually from there. If you look at the 10-year rate that's in our plan, it's 2% by the end of the year. And again this is largely using the Bloomberg economist surveys, and you've got a two-year around 1.69% at the end of the year. So I think that kind of gives you some indication of what's in there.

If LIBOR moves back, as you know, one-month LIBOR is very volatile. It's been up quite a bit from here and then it's come back down. So in the short term, there is still some pressure there. But as I mentioned in my comments, there is still opportunity on the interest-bearing deposit cost side. I mentioned the 6 basis points on average we came down. On a spot basis, it's down 11 [Phonetic], and when I look ahead to the first quarter, we should have the average cost down another 5 basis points to 10 basis points in the first quarter.

So that obviously would help to support kind of the margin being relatively stable in the first quarter. I think that the -- all the components feed into it as you mentioned. The commercial growth being the strongest component of our growth. Those are loans that are tied to one-month LIBOR largely and you get the benefit of rates as they move up there.

So I mean all the moving parts are kind of what's baked in there given the guidance that we have on the loan and deposit growth. So -- but clearly with one-month LIBOR where it is, it puts a little bit of pressure in that first quarter.

Jared Shaw -- Wells Fargo Securities -- Analyst

And then on -- what's the expectation for purchase accounting accretion in 2020?

Vincent J. Calabrese -- Chief Financial Officer

Well, it's that the range that we gave in October for CECL. So $115 million to $135 million that will be accreted in kind of on a loan-by-loan basis going forward. So it's that over some average life period whether it's three or four years. But it's really loan by loan. So as prepayments come in, you'll get benefits of faster accretion. If prepayments are slower, you will get slower accretion. But that's kind of the pool once we're in CECL mode that's going to get accreted in over time.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And what about just the -- just from the pure interest rate marks?

Vincent J. Calabrese -- Chief Financial Officer

That's all in now, Jared. That's the way it's -- it's all in that number. So the total marks and remaining discounts are within that 115 to 135 pool [Phonetic].

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, got it. Shifting over to the fee income side, obviously a great quarter for mortgage banking. What are your expectations for that I guess in your 2020 outlook? I mean I'm guessing that that's going to pull back and we're going to see upside growth in the other lines continuing through the year?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah, I would say a couple of things on the non-interest income guidance. I mean the overall low-single digits is based on lower gains on sale of a real estate. We had some gains this year. We were able to move some properties off the balance sheet at a gain. And then lower capital markets revenue coming off a record year in '19 that benefited from the rate volatility helping the cause. So that's kind of two key components to that low single digits.

And then the other components are kind of growing service charges in the low single digits. The other categories are kind of mid to high. Some of our non-banking businesses are in that right around double digits growth. Mortgage banking is kind of mid-single-digit growth expected in 2020 versus 2019. So not as strong as '19 versus '18 but still pretty good level in those mid-single digits.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, thanks. And then just finally for me, down in -- down in the Carolinas, are you starting to see any early opportunities from some of the larger deals that have taken place, you know the SunTrust, BB&T, as well as sort of the First Horizon IBKC deal. Opportunities for additional hiring or customer acquisition?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Well, on the customer side, we've certainly seen a change in attitude by the customer. I mean, we're getting opportunities to have meetings and discuss opportunities. I think in the past, some of these prime borrowers would not open themselves up to that, but I think the uncertainty has created opportunities to at least interface, which is positive.

I don't think with those two mergers were at a point yet where the customers are feeling pain because they haven't really finalized assignments. They haven't integrated systems. They're still going through all that. So we're still in a period of uncertainty. But of course, I think any disruption that exists in the marketplace, given that we're fully staffed and we've kind of -- we have our stake in the market and we're well established, I think we're going to see opportunities, particularly with the quality of the people we've been able to bring over.

On the employee side, we've always had opportunities to hire people from larger institutions. We've mentioned that repeatedly, we've done a pretty good job of changing out some of the bankers and really upgrading, in certain circumstances, with people who have long tenures in the market, who come from larger organizations, that's going to continue to be the case irrespective of whether there's disruption, but certainly that helps us as well. We'll see opportunities to meet and speak with people. We're nearly fully staffed. There's only a handful of positions open in the Southeast, but if the opportunity came up to hire a high-performing banker, we'll certainly move on that opportunity.

Gary L. Guerrieri -- Chief Credit Officer

Jared as Vince mentioned, those opportunities with that particular merger will continue as the combination gets integrated. We have seen over the last, let's say, nine to 12 months new business opportunities that we've already put on the books from that transition as well. So we have generated some new customers that are already on the books based on their concerns about the size of that, and who is going to handle their credit relationship. So we have seen positive benefit. We do expect to see more.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thanks.

Operator

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

Michael Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey, thanks. Wanted to start on the capital front, the TCE/TA ratio finally got above [Phonetic] 7.5%. I think you guys have been articulating the potential for some capital returns, potentially share buyback after we kind of get through with CECL. Is that still the outlook, and what capital levels are you targeting in this sort of environment?

Vincent J. Calabrese -- Chief Financial Officer

Yeah, I would say, as you guys know, we've been working really hard over many years to reach a point where the dividend payout ratio is in acceptable level, and we have enjoyed that nice builds in TCE ratio and tangible book value as we've gone through the year.

Regarding the share repurchase activity, as you mentioned, we'll see the full impact to CECL by the end of the first quarter. So right now, purchasers will kind of continue to be in that opportunistic mode, doing things like repurchasing shares that you need for incentive plan purposes and those types of things in the short term and then opportunistic depending on stock price valuations.

As we've said before, we're not going to just build capital for the sake of building it. And with the solid earnings outlook, we think there will be good opportunity to repurchase shares more programmatically to optimize the capital position as we get further in the year and get kind of past CECL on the books. We think the stock is well below intrinsic value and we will closely monitor the economics and earn back as we move through the year. So depending on where all that looks, I would expect to see us become little more active once we're kind of through that CECL period.

Michael Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. And is there a specific capital ratio that you kind of watch as you're thinking about capital deployment?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

No, I mean the TCE ratio is a key ratio for us in getting north of 7.5%. The 7% to 7.5% that we've talked about is an operating range and being north of that is good. But there is not a set target. We're not going to manage it right to 7.5% on a quarter-by-quarter basis, but we're comfortable at that level. And then that gives us the ability to repurchase shares when the opportunity makes sense to do it.

Michael Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. And I just wanted to clarify from the prior questions, you had mentioned that the plan you delivered included positive operating leverage and even if kind of the macro environment or loan growth or something were to slow, you all are committed to generating that on a year-over-year basis?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah, that's part of how we run the Company.

Vincent J. Calabrese -- Chief Financial Officer

Yeah.

Michael Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, thank you very much.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Thank you. Thanks Michael.

Vincent J. Calabrese -- Chief Financial Officer

Thanks Michael.

Operator

Thank you. And the next question comes from Brody Preston with Stephens Inc.

Brody Preston -- Stephens Inc. -- Analyst

Good morning, everyone. How are you?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Hey Brody, [Speech Overlap] how are you?

Brody Preston -- Stephens Inc. -- Analyst

Doing well, thank you. Want to touch base, what percent -- sorry if I missed this, but what percent of loans are tied to LIBOR, and more specifically, one month LIBOR?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Sure, it's $8 billion or 34.3% of total loans is tied to one month LIBOR and then there is another $2.8 billion or 12.2% that's tied to prime. So those are kind of the two pools that move any time the Fed moves.

Brody Preston -- Stephens Inc. -- Analyst

Okay, great. Thank you for that. And when do these loans typically reset? Is it every 30 days?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah, it's kind of throughout the month.

Vincent J. Calabrese -- Chief Financial Officer

Most of them are on it -- most of them on a one-month reset, right.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah, so various days through the month.

Vincent J. Calabrese -- Chief Financial Officer

Yeah.

Brody Preston -- Stephens Inc. -- Analyst

Okay. Just want to flip over to the average balance sheet, so you had some pretty strong average loan growth, I think it was plus 8% on a linked-quarter annualized basis. But relative to the period end, that was only 4%. It looks like maybe there were some pay downs toward the end of the quarter maybe consumer and indirect. Is that fair to say?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Nothing unusual.

Vincent J. Calabrese -- Chief Financial Officer

Yeah, nothing unusual Brody. I mean, you have some short-term tax instruments that come due at the end of the year and they do pay down, right, during the last week of the year. So you have some impact there. We did have one or two CRE transactions move into the secondary market. So there was some slight impact there right at the end of the year.

Brody Preston -- Stephens Inc. -- Analyst

Okay, all right. But overall, you feel pretty comfortable with that mid-single digit balance sheet growth sort of target.

Vincent J. Calabrese -- Chief Financial Officer

Yes.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yes.

Brody Preston -- Stephens Inc. -- Analyst

Okay, just want to step back to the deposit strength, you understand that the non-interest bearing is sort of driven by a lot of different -- I guess, a lot of different items, but just from a geographic perspective, wondering if you could touch on sort of what drove the strength this quarter.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Well, our legacy markets continue to perform very well. We've had a number of wins across the footprint, so there were some significant wins in the Southeast, in the Mid-Atlantic, which really helped from a commercial perspective large treasury management customers. Overall, I mean truthfully, it's just a very well managed process from top to bottom, and we've mentioned the investment in technology that we've made. Our mobile app is rated very highly by S&P Global. We've invested all along in the infrastructure to use digital analytics and to help equip our sales teams with information.

We have digital scorecards that we monitor daily that are offered to the retail folks, the branch personnel. Commercial bankers have scorecards as well. So we've spent a lot of time and energy making sure that we're managing that process very effectively and we have products and services that are competitive and stack up well against some of the largest competitors in the country. That's really why we've been able to drive that demand deposit growth. And I know F.N.B. doesn't sound like a technologically advanced bank given the name but we've spent quite a bit of -- expended quite a bit of our resources both from a personnel and capital expenditure standpoint into providing our people with good products and services and the ability to compete and then measuring that performance has always been a key driver of our success here. So...

Vincent J. Calabrese -- Chief Financial Officer

In the markets we've entered, there's a lot of opportunities...

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

The markets we've entered are much more dynamic than the markets we're in. I mean they grow, there is population growth. There is business formation. We mentioned the thesis when we announced the acquisition. We did an extensive study of the markets that we moved into from an M&A perspective and we felt that we can compete effectively. And I think we've proven that over the last few years. We hope to continue to reap the benefits of our geographic expansion. I think it creates a very positive operating environment for us as we move through the cycle.

Brody Preston -- Stephens Inc. -- Analyst

Okay, great. Couple more from me. Just wanted to touch on what drove the service charge refund this quarter.

Vincent J. Calabrese -- Chief Financial Officer

Well, we have gone back and evaluated certain transactions related to pre-'19 customer activity and determined that we would refund certain service charges to customers. Just part of our overall product offerings, we're continually challenging ourselves internally. We analyze customer activity and customer responses just to make sure we're taken kind of appropriate steps related to service charges. So it's really a one-time item. It doesn't affect the run rate going forward.

Brody Preston -- Stephens Inc. -- Analyst

Okay. And then the South -- and so the South Carolina markets with Len's hiring and at the Investor Day, you guys had some pretty strong commentary around some of the initial success following his hire. And just wanted to sort of touch on what the pipelines look there.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

The pipeline is very strong there. We've had some really solid hires, Len and Elizabeth and the team down there have done a great job of attracting talent. So, we are very optimistic about Charleston moving into next year, particularly because we're going to have a number of locations open and available to our clients by the middle of the year. It should be very positive for us. And the commercial pipeline is above a $100 million and has been. So we feel very good about them.

Vincent J. Calabrese -- Chief Financial Officer

Yeah, they hit the ground running, really.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

They've really done a great job.

Brody Preston -- Stephens Inc. -- Analyst

Alright, then one more if I can. Just wanted to get a sense, just sort of reiterate your thoughts around any potential M&A from here as we look forward to 2020 and 2021.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah, I think as we look forward, we're not -- again, we're still focused on operating the Company that we've established. I think we're in great markets, we're going to exploit our position in those markets. There's a lot of disruption all around us. I think we have significant opportunities to grow organically.

I think we've done a good job over the last few years of generating positive operating leverage and being very disciplined from an expense perspective, but still rooting out opportunities for growth and de novo expansion and investments in technology and we're going to continue to do that and we've made some great investments.

I think the website is going to be rolled out and it will be very well received. We shared a demo with a small group of you. I think that there's a lot of exciting things coming. Obviously, the interest rate environment is not what we -- what we favor or predicted. It's the opposite of what we predicted, but we've always been able to manage through those times and come out the other end with good credit quality and expansion in fee income and a shift in deposit mix, which has helped us just like this year and we never would have expected to get where we are this year without the margin help.

But we got together as a team and we cut expenses. We focused on fee income. We manage the teams a little tighter in the field to ensure that they produce the demand deposit growth and we came out the other end with a positive outcome. I expect that in 2020 as well.

Brody Preston -- Stephens Inc. -- Analyst

All right, thank you very much everyone.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

[Speech Overlap] Yeah. Thank you.

Operator

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

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Hey, good morning guys.

Gary L. Guerrieri -- Chief Credit Officer

Good morning Russell.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Just a follow-up on your comments for growth. So one, I wanted to confirm that the loan growth guide is off of an end-of-period number. And then two, if you could just comment on sort of loan verticals that you'd expect to be drivers of that growth as well as what markets maybe stronger sources of strength for you?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Well, I'll let Vince answer the question on the guidance period end...

Russell Gunther -- D.A. Davidson & Co. -- Analyst

That is period end. [Speech Overlap] Yeah.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Okay. So I think from a growth perspective, there are a number of areas that we focused on where we've had great success, particularly in the DC area, we're focusing on C&I in Maryland, and DC. We had good solid performance there, moving the teams up market, so not necessarily a vertical, but focusing on larger opportunities where we can garner additional business as we've done extraordinarily well in that space this year, with a significant increase in syndications fees, derivative opportunities and treasury management fee income.

I expect that to continue into next year. We've only scratched the surface. If you look at the CRE space, we have a number of large projects that we're evaluating. We're very careful about what we go after because we still feel that credit quality is king and we need to stay focused on our credit appetite, not deviate -- not be tempted to deviate. But I think those are two areas of focus. Manufacturing is a little slower. It's a smaller portion of our portfolio than it has been historically. But I'm expecting that. Personally, I'm expecting that to come back around in the latter half of this year, principally because of the trade agreements that are being signed and some other positive indicators.

But I think that there certainly has been a slight contraction there. But those are the factors that will drive growth. I also believe that we're doing a better job in the new markets. We've trained those people. We spent a lot of money bringing everybody through credit training and bringing everybody through our foundations training. And those bankers in particular are much more skilled and able to source small business opportunities. We expect SBA to do better this year. They have a significant pipeline.

So really, that will be more of a fee income event, but still on the credit side. We also expect small business in general across the footprint to perform better. We've made some changes there. So there are a number of areas where we can produce growth. And if you remember, we're one of the regional banks our size that has the geographic dispersion and the concentration in those attractive markets.

So for us to be in Charlotte, Raleigh, the Piedmont Triad, Baltimore, Pittsburgh, Cleveland, Washington DC; that gives us the ability to go after a large number of prospects and achieve our growth objectives without changing our risk appetite. So there's plenty of opportunities for us to go after and there's a lot of disruption across that entire area. That's the strategy on the growth side from a loan perspective.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

No, that's great color, Vince. I appreciate it. And my last question, as a follow-up, guys, would be, I guess just sort of big picture, does the growth outlook contemplate a reduction in kind of elevated pay downs that were a headwind for '19 or for that environment to stay relatively the same. Would just be curious as to what's baked in?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah '19, you know it wasn't really pay-offs in '19 it was -- it was pre-determined sales. We sold a large mortgage portfolio. I think it was $400 million, right.

Vincent J. Calabrese -- Chief Financial Officer

Yes, [Indecipherable].

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

So, there were some things that we did that were intentional and made good financial sense going into a CECL environment. So we're staying disciplined and focused on making good decisions. I think if you look back at the prior year, we sold a number of distressed assets that we had acquired. We moved out over $300 million and we sold Regency Finance. So we've created an environment -- you saw the charge-offs this quarter, our credit quality was pristine.

So I think we're -- given how we're positioned going into the cycle, we should continue to benefit from good solid credit quality as well, but that's -- those were the headwinds, they were self-imposed and I truly believe having been in this business for 30 years that we can't just reach for growth. We have to be disciplined. That's the trap that everybody falls and that's why we expanded so aggressively geographically so that we would have the opportunity to achieve our investment thesis without changing the risk profile anyway...

Gary L. Guerrieri -- Chief Credit Officer

Hey Russell, just one additional comment. As it relates to CRE, we do expect the secondary market activity to continue throughout the year. It has slowed from its tepid very strong pace back in 2018 and early '19, but that activity continues and we expect it will continue through 2020 as well.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Very good. Thanks, Gary. Thank you very much. That's all I have.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah, thank you.

Gary L. Guerrieri -- Chief Credit Officer

Thanks, Russell.

Vincent J. Calabrese -- Chief Financial Officer

Thank you.

Operator

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

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Thanks guys, good morning.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Hi Collyn.

Vincent J. Calabrese -- Chief Financial Officer

Hey Collyn.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Just one quick last question. Just on the loan growth, I know Vince you had mentioned kind of the outlook for mortgage banking in your fee commentary, but just curious how you're kind of thinking about the balance for resi mortgage growth in your outlook for 2020.

Vincent J. Calabrese -- Chief Financial Officer

It's in that mid-single digits -- kind of probably mid-to-high single-digits I would say is what's kind of baked into the overall mid-single digits. And we may do another sale in the second half of the year, similar to what we did this year. For CECL, if you have jumbo mortgage loans where there's only a single product in the household. And over a certain period of time, if you're not able to expand that relationship, we would consider doing something like that again later this year. So that's kind of baked into the overall kind of mid-single digit guidance too.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. And then just now that you're kind of in these more robust markets, what's the split that you're seeing between refi and purchase overall in your resi mortgage business?

Vincent J. Calabrese -- Chief Financial Officer

Well, it varied quite a bit this year, as you would expect given the interest rate movements. In the fourth quarter, 54% was purchase. It was 68% the quarter before. So you had some kind of additional refi activity coming through just given where rates were. So I mean normally we are more in that 70% to 80% kind of purchase activity in kind of a normal state.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Okay, that's all I had. Thanks guys.

Vincent J. Calabrese -- Chief Financial Officer

Thanks Collyn.

Operator

Thank you. The next question comes from Brian Martin with Janney Montgomery.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Hey, good morning.

Gary L. Guerrieri -- Chief Credit Officer

Good morning Brian.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Good morning Brian.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Hey, just two things for me. Most have been covered. But just on baked into the loan growth Vince, just the -- I know it's mid-single digits. I guess when you look at the C&I, which is a component of the margin, and the benefit, the C&I growth this year and your expectations grow a little bit more than that mid-single digit, kind of help on the margin. Is that kind of how you're thinking about it or is it fair to think that's just more single-digits, just in line with the actual guide?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

I would say it's in line with the guide.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Yeah.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

I don't -- yeah, we -- and our hope is that we beat the guide, but that's where our best estimate as we sit today is. So...

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Right, OK. And the pipeline today, Vince, you said I guess maybe you said and I missed it, but just kind of where it is at today, the commercial pipeline?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

I didn't give total pipeline information. I mentioned Charleston was still at or above $100 million in commercial pipeline.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Okay.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

So still very solid.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

I guess are you able to give any commentary on just either [Speech Overlap].

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Well, the only thing I will tell you is that production -- we talked about production, but there is an unfunded component to our production calculation because we give people credit for commitments, a certain percentage of credit. But when you look at the production coming out of the Southeast, for example, I think it's up, what, 40% year-over-year Vince. Is that right?

Vincent J. Calabrese -- Chief Financial Officer

Yeah, that sounds right.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

So, we've had some good solid growth in terms of the number of transactions that we book. Now there's things paying off and the portfolio is moving but we had some very, very solid activity in the Southeast this past year. We expect that to continue and the pipelines overall are pretty comparable to where they've been historically at this time. So we -- that gives us the confidence to forecast mid-single-digit growth.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Okay, that's helpful. And just the other -- only other thing for me was just on the, on the expense guide. I guess have you guys -- can you comment on just operation ready or just kind of what you guys have in there for branch reductions this year. I guess is there something baked in this year on the branch reduction side or how should we think about that?

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah, I would say a couple of things. I mean our guidance of low single digits for 2020 reflects kind of investments in several strategic initiatives that we've been talking about the clicks to bricks scenario, the website that Vince commented. So, we have continued investment. As you know, that's part of running the Company. We're always investing every year, new branch teller platform, de novo expansion. So those initiatives are all kind of baked into it on the kind of the increased expense side.

And then we have continued discipline expense management to help fund those investments and deliver the positive operating leverage. And again, that's something that we can control. The cost management initiative sides includes that the Ready, continued looking at optimizing the retail network, including continuation of the normal kind of Ready activities that we have each year, continued vendor renegotiations, facility optimization, how we're managing cash in the vault, and on and on. I mean there's a long list of kind of initiatives that we have in the Company that we're -- that we're working on.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Okay. So there are some in there, just I guess is how to think about it, fair [Phonetic].

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Yeah. No. There's definitely some additional optimization opportunities in the branches, for this year.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Okay. All right, that's all I had guys. Thanks.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Okay, thanks, Brian.

Vincent J. Calabrese -- Chief Financial Officer

Thank you.

Operator

Thank you. And next is another question from Michael Young with SunTrust.

Michael Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey, thanks for the follow-up. Vince, just wanted to ask if -- we've kind of had a period of rising rates where people were locking in duration and extending duration on the funding side, and then we've kind of gone the other way obviously over the last year. During this period of kind of more stable rates, are you looking to make any shifts structurally within the balance sheet to maybe take advantage of in this kind of period of hope for stability I guess?

Vincent J. Calabrese -- Chief Financial Officer

Well, I mean we're always looking Michael. I mean we did opportunistically put some fundings on last year at very good rates when it made sense to do that and locked in some funding. So, I mean our treasury function, in our ALCO function, we're constantly looking at opportunities. I mean we don't have any plans for any major shifts. We'll continue to look at the asset side of the balance sheet in a CECL environment where there's opportunities to maybe create some more shelf space for commercial loan growth. We'll continue to look at that too. I mean it's just part of kind of how we manage the balance sheet ongoing, so if there is more good opportunities to do something on either side of the balance sheet, we'll do it.

Michael Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, thanks.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

All right, thank you.

Operator

Thank you. That concludes the question-and-session. I would like to return the floor to management for any closing comments.

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Well, thank you. Thanks for all the great questions and thanks for the support throughout the year from our shareholders. I think we had a terrific year and we're looking forward to 2020 and continuing that momentum. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Matthew Lazzaro -- Manager of Investor Relations

Vincent J. Delie, Jr. -- Chairman, President and Chief Executive Officer

Gary L. Guerrieri -- Chief Credit Officer

Vincent J. Calabrese -- Chief Financial Officer

Frank Schiraldi -- Piper Jaffray -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Michael Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Brody Preston -- Stephens Inc. -- Analyst

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

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