FNB Corp (FNB) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the F.N.B. Corporation fourth-quarter 2006 conference 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 which are based on current expectations, estimates, forecasts and predictions about F.N.B., as well as F.N.B.'s management's assumptions and beliefs relating to present or future trends or factors affecting the future performance of F.N.B. and banking and financial services industry.

Since forward-looking statements relate to future developments, results and events, they involve certain risks and uncertainties, and actual future results may differ materially from historical performance or those expressed or implied in this presentation as a result of future decisions by F.N.B. or by other factors and developments beyond F.N.B.'s control, including but not limited to the significant increase in competitive pressures among depository institutions; changes in the interest rate environment that may reduce interest margins; changes in prepayment fees, loan sale volumes, charge-offs and loan loss provisions; less favorable than expected general economic conditions; legislative or regulatory changes that may adversely affect the business in which F.N.B. is engaged; technological issues which may adversely affect F.N.B.'s financial operations or customers; changes in the securities market or risk factors mentioned in F.N.B.'s filings with the Securities and Exchange Commission. F.N.B. undertakes no obligation to update these forward-looking statements or to reflect events or circumstances after the date of the call.

At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions or comment following the presentation.

It is now my pleasure to turn the floor over to your host, President and CEO of F.N.B. Corporation, Stephen Gurgovits. Sir, the floor is your.

Thank you. Good morning, everyone, and thank you for joining our fourth-quarter 2006 conference call. I am Steve Gurgovits, President and CEO of F.N.B. Corporation. Joining me today are Brian Lilly, our Chief Financial Officer, and Gary Roberts, President and CEO of our largest affiliate, First National Bank of Pennsylvania.

I trust everyone has read our earnings release, issued yesterday afternoon. The report clearly illustrates F.N.B.'s winning results for the year 2006 -- consistent earnings performance, good loan growth while maintaining excellent asset quality, and double-digit total shareholder return.

We are pleased to report fourth-quarter earnings of $0.29 per diluted share. These results bring F.N.B.'s earnings for the full year 2006 to $1.14 per diluted share. At this level of performance, we have achieved our internal goal for the year, as well as matched the analyst consensus estimates. We are extremely proud of these results, considering the extremely difficult external environment facing the banking industry. Through active management, we were able to overcome a good deal of the adversity in this environment.

In 2006, we successfully executed on our plan to supplement low market growth by taking advantage of opportunities in higher-growth markets. We have begun to fully realize the benefits of our acquisitions in the greater Pittsburgh market, as commercial loan production from that region was $100 million, right on target with our $100 million objective.

We continue to be pleased with the results from our partnership with former F.N.B. Florida executives and the operations of our loan production offices in Orlando, Sarasota, Fort Myers and Naples. We're especially proud to report that loan originations have topped $300 million, well in excess of our $200 million goal. This strategy will be very instrumental in the future as a reliable source of quality loan production.

Further, we were successful in teaming up with The Legacy Bank at the end of the second quarter, thereby expanding our footprint in the higher-growth markets surrounding Harrisburg.

As Brian will describe in a minute, our financial performance continues to fuel above-average total returns to our shareholders. In 2006, the total return to our investors was 11.3%, which is on the high side of our targeted range and in excess of our national peer group's median of 8.9% and our regional peer group's median return of 7.6%.

Now Brian will give us the details of the fourth-quarter 2006 results that helped contribute to these successes, as well as a look at what we might expect in 2007. Brian?

Thanks, Steve, and good morning, everyone. Let me start with comments on the fourth quarter. I will then move into a review of our financial targets for 2007.

Regarding the fourth quarter, we reported net income totaling $17.6 million or $0.29 per diluted share. These results equal the previous quarter and are significantly higher than the $0.08 per diluted share for the same period last year. Recall that the fourth quarter of 2005 included costs related to the balance sheet restructuring, merger costs and efficiency initiatives, representing a charge of $0.19. Without this charge, the earnings per diluted share in the fourth quarter last year would have been $0.27. Therefore, this year's fourth-quarter results equal a 6.9% year-over-year improvement on an apples-to-apples comparison.

Turning to the operating details for the quarter, net interest income on a fully taxable basis was down slightly from the third quarter, but represented a 2.7% increase over the same period last year. On a sequential quarter basis, we continue to manage the investment portfolio down slightly to provide funding for future loan growth. We did not replace maturing federal home loan bank long-term debt, and we grew period-end loans at a 2% annualized rate, after adding back the one-day year-end payoff of the tax anticipation notes of local municipalities.

The loan growth was more notable when one considers that in 2004 and 2005, we had lower linked-quarter outstandings at the end of the fourth quarter before the benefit of acquisitions.

This year, the usual seasonal runoff in the consumer portfolios was more than offset by strong commercial loan linked-quarter growth of 12% annualized, again, after adjusting for the year-end payoffs of the tax anticipation notes.

On a year-over-year, period-end basis, we had a very good organic loan growth, as total loans grew 5% and commercial loans grew 16%. The positive and treasury management accounts increased nearly 1% annualized on a linked quarter-end basis.

In terms of average balance, let me remind you of the large deposit that we discussed in last quarter's call. One of our customers temporarily parked funds that increased the third-quarter average balances in excess of $30 million. This unusual deposit reconciles a sequential quarter average decrease.

Possibly more important than the balances is the fact that we managed a slowing in the cost of funds increase. After five consecutive quarterly increases in the 15 to 25 basis point range, the cost of funds slowed to a 9 basis point sequential quarter increase. The net result is that we widened the net interest margin by 2 basis points versus the third quarter. This is very encouraging as a [singles] reversal in the declines experienced over the past quarters.

Noninterest income totaled $19.3 million and was generally lower than the third quarter, due to the seasonality of our fee businesses. The exception to this was the trust-related fees, as they increased 2.5% linked quarter or 10% annualized. Two-thirds of this increase was driven by the booking of new business, with the remaining one-third benefiting from the good fourth-quarter equity market performance.

On a year-over-year comparison, total noninterest income improved 8.5%, excluding the effects of the restructuring activity last year as all fee income grew. For the year 2006, noninterest income represented a notable 29% of total revenue.

Expenses totaled $39.4 million for the fourth quarter, representing a 3% reduction from the third quarter. On a linked quarter, the decrease was primarily driven by the lower self-insured medical benefit costs and lower operating expenses related to consumer loan production, marketing and OREO. On a full-year basis, we achieved excellent expense control as we actively managed our expense levels in a challenging spread revenue environment.

Full-year expenses did increase 3.4% and were primarily related to the addition of The Legacy Bank in the second quarter. The efficiency ratio improved to 56% in the fourth quarter from 57% last year.

Let me add that we had a minor accounting change in the quarter that may impact your financial models. As a result of changing vendors for our merchant services processing, we are now recording the associated revenue and expense net in the service charges fee income line item. The change results in a decrease of the same amount to both the service charge fee income and expense of approximately $400,000 per quarter. The reclassification has been made for all periods presented.

Asset quality remained at strong levels in the fourth quarter. Annualized net charge-offs were a very good 28 basis points of average loans, compared to 23 basis points a linked-quarter basis and 20 and 48 basis points in the same period last year. Regarding the 5 basis points linked-quarter increase, it should be noted that we were coming off a historically low level in the third quarter.

Nonperforming loans to total loans improved to 66 basis points compared to 69 basis points last quarter and 88 basis points last year. As a result of our strong asset quality and low net charge-offs, the provision for loan losses was $2.5 million, thereby ending the year with an allowance for loan losses at 1.24% of total loans.

At year end, our large capital ratio was a comfortable 7.3% and compared favorably to 6.9% last year. The slight decrease in certain capital measures such as book value per share was the result of adopting FAS 158 during the quarter.

Now let me turn to our plans for 2007. We are optimistic that we will continue the momentum we gathered in 2006. In terms of the balance sheet, we're targeting loan and earning asset growth in the mid-single digits. Commercial lending will continue to lead the way, and we plan to begin reducing the indirect auto outstandings later in 2007 as we continue to focus on more profitable relationship businesses. The loan growth will be funded by similar increases in the deposit and treasury management balances.

Relative to interest rates, for planning purposes, we have adopted the economists' consensus that the Fed will ease the Fed funds target 50 basis points in mid- to late 2007 and that they yield curve will move towards a flattening by the end of the year. When applying this consensus outlook to the growth factors highlighted, we expect net interest income will increase mid-single digits year over year and to be slightly stronger in the fourth quarter as the Fed's action will lead to an expansion of the net interest margin.

Our focus on high-margin, low-capital-intensive fee businesses is planned to grow fee income high single digits year over year as we benefit from the 2006 momentum in trust, retail securities and insurance sales. Noninterest expense is planned to increase mid-single digits. (indiscernible), excluding the annualized impact of the Legacy merger and the Florida LPO expansion, core operating expenses are planned to grow less than 2%.

Our efficiency ratio target remains at 55%. After starting the year with an efficiency ratio in the high 50s, we expect to achieve 55% by the fourth quarter.

Credit quality is expected to remain strong, with net charge-offs increasing slightly from historically low 2006 levels. We expect our capital ratios, income tax rates and diluted shares outstanding to be consistent with current levels.

Steve, that concludes my remarks for both 2006 and 2007.

Thanks, Brian. Now that we have reviewed the past and provided some information on 2007, I would like to comment on some of what we hope to accomplish this year.

As you heard today, the Pittsburgh and Florida markets delivered on our 2006 production goals. As we look forward, we have raised the bar. The target for commercial loan production in Florida has been increased to $350 million. We feel very confident in delivering this milestone.

This week, we are pleased to welcome Dale Dignum to our Florida team. Dale will head up our new Tampa loan production office. He brings over 25 years of banking experience, entirely in the Tampa market. Most recently, he served as market president for a large regional banking organization. He is also heavily involved in the Tampa Bay community and is considered a high-profile banker. We are very fortunate to have someone with Dale's banking experience and community profile leading our Tampa team.

Further, under the leadership of Vince Delie, the targeted goal for commercial loan production in the Pittsburgh market has been increased 25% to $125 million. Also significant, following the successful integration of The Legacy Bank last year, 2007 will mark the first full year of operations in our capital region based in Harrisburg. We have projected commercial loan production to achieve $75 million for the year 2007. As we did last year, we will follow the progress of these three teams throughout the year.

In our financial planning for 2007, we are focused on accomplishing three broad strategic objectives. First and foremost, we want to continue to build shareholder value. Once again, we will target total shareholder return in the range of 9% to 12%. We would expect approximately one-half of this return to come from our strong dividend and the other half from EPS growth. With modest EPS growth, we feel this is a lower-risk model for the investor, while still providing double-digit total returns.

In addition, we want to increase the profitability of the franchise. Some of our key tactics include, first, we plan to change the earning asset mix by reducing indirect auto outstandings and reinvesting in higher-yielding relationship-building commercial loans. Second, we plan to reduce our cost of funds by focusing on the growth of lower-cost deposits, including our popular Lifestyle 50 suite of products, and with special emphasis on small-business deposit.

Several tools available to achieve this goal include First Desktop Banker, which is our remote capture product, and the introduction of two new services -- a business banking sweep account and same-day banking all day, which eliminates all daily cutoffs for the processing of deposits.

Third, we plan to emphasize the growth of fee income by concentrating on three primary sources -- wealth management, insurance, and service charges.

And fourth, we will continue to maintain both strong asset quality, and as always, extremely tight expense control. This should improve our return on equity. You may recall that in 2004, our ROE was nearly 22%. Due to the effect of purchase accounting on our four bank acquisitions and our insurance agency acquisitions, our ROE is now 13.2%. We are focusing our efforts to reach 15% over the next 36 months.

With this in mind and the financial targets that Brian shared with you, our 2007 earnings per share is planned to be in the range of $1.17 to $1.21. We believe this will meet our total return goal of 9% to 12%.

Now let me conclude this call by reminding our listeners that we do have a plan in place and we remain focused on our objectives. We believe F.N.B. Corporation has some very positive characteristics. We believe we have the ability to move market share from competitors. We are doing business in several attractive, growing markets, and we continued to enjoy diverse sources of revenue. We feel this positions us well for the future.

On that positive note, we conclude our remarks for this conference call. I will now ask the operator to poll the audience for any questions.

(OPERATOR INSTRUCTIONS). Andy Stapp.

Regarding your margin, you had a nice lift in the fourth quarter. Just maybe you could provide some more color as to what you see going forward -- your cost of funds, do you see that going up, or is that pretty much behind you? Loans -- are you getting the 367 margin that you realized in the fourth quarter -- are you getting that currently on loans, etc.?

I think as we have experienced over the last quarter, we see that continuing at least as far as we can see into '07 here shortly. The cost of funds will continue to go up. We continue to put CDs on it slightly higher than what we're rolling off the portfolio, and certainly some of the long-term debt. But what we were able to achieve in the fourth quarter was that our earning asset yield was expanding at a similar pace. We see that continuing at least for the first couple quarters. And then it really depends on the Fed's actions and the competitive pressures.

Just to comments on the competitive deposit pressures, we did see some what I'll call rational pricing enter the market late third quarter, fourth quarter, when the Feds stopped easing, that allowed us to maintain our deposit rates without reaching, as some markets have had to reach.

And you are one of the few companies I have seen that reported a decrease in NDAs. And my first thought was -- with your footprint, not having the booms and busts of some other markets, that you might have more stable NDA than banks in some other markets? But just wondering how your consumer finance division impacts that -- how does that generally fare in a slowing economy?

Andy, if I can take a shot at that, a couple of questions there. On the first one, relative to our reduction in nonperforming loans, we are kind of proud of that. I think it is partially the fact that we didn't have the large runups and maybe we do have a more stable market. Secondly, though, I think you have to attribute it to our strong underwriting. If there is one thing in this Company that we are consistently focused on, it is our underwriting. We have a very talented team of credit people and analysts. And we all, from the top of the house down, have a commitment to maintaining our superior asset quality.

Your second question on the consumer finance company -- their delinquency is higher than the bank [had saw on the] loan department -- you would expect that. It's a higher-reward business. But when you look at their total loan portfolio, it doesn't move the needle a lot for a $4 billion loan portfolio. I can comment that we have experienced leadership in that company as well. And their asset quality, when you look at it, is very, very good.

Over history, how has the consumer loan portfolio fared in a slowing economy?

Historically, they have been pretty consistent, except for the fourth quarter of '05, when bankruptcies were accelerated because of the new legislation. Of course, in '06, they got the benefit of that because they had had historically low loan losses. We are projecting in '07 that their losses and delinquency go back to normal levels.

When you look at their portfolio, Andy, I think it's about 37% of it is secured by residential real estate, and 52%, almost 53% of it are direct loans to consumers secured by automobiles or some type of collateral. I feel pretty confident that in '07 that their delinquency and their losses will be as projected, which are normal levels.

And with regard to asset quality, do you see any disturbing trends in such areas as slippage into 30- to 89-day category, borrowers' financial condition, developer absorption rates, etc.?

Not yet. And as a matter of fact, our delinquency, contractual delinquency, declined in the fourth quarter over the third quarter. So nonperformings are down and delinquency is down. As far as -- I view that as a preview of coming attractions. We're still very optimistic about our loan quality. We are well aware that some of that depends on how soft of a landing we have with the economy and so forth. Some of the statistics we keep reading are pretty encouraging. But again, I think most of this goes back to our underwriting. If there is one thing we will not compromise in this bank, it is asset quality.

Colin Dunn.

Two things I think I missed just in your prepared comments -- I didn't catch what the loan growth target was for Florida, to the extent you provided one, and then a little more detail on what the tax anticipation loans were.

On the first part, Colin, we have established -- we had a goal for Florida this year of $200 million in commercial loan production. And they achieved about $300 million in production, well in excess of the goal. We have raised the goal to $350 million for next year. For Pittsburgh, they were right on top of the goal we set in '06 of $100 million. We've raised that 25% to $125 million. And for the first time, we've established a goal for Harrisburg for '07 of $75 million in commercial loan production.

And would you repeat the last part of your question?

Tax anticipation [loans]. Regarding that, Colin, we have part of our business annually a year-end payoff for one day of local municipalities' borrowings. We call them tax anticipation notes. It was about $15 million. And as we looked at the third and fourth quarter, actually understated the growth of total loans and commercial in particular that we were feeling very good about. So I thought I'd bring that to your attention that we have that -- that comes through just for one day at the end of the year, then it comes back on at the beginning of January.

And then the rate of runoff you guys expect in the indirect portfolio once you start to let that occur -- how quickly were those loans run down on a quarterly basis?

Well, on average, it is about $15 -- $12, $15 million a month.

Two-year average loan.

About a two-year average life -- a little over two-year average and life for duration. So that is where -- and that's in the back half of 2007.

And then prior to this quarter, I think most of your commercial loan growth had come from the first two LPOs you had set up in Florida? The second two that came online closer to midyear -- how did that office fare this quarter?

Colin, this is Gary Roberts. The Fort Myers office today has about 30% of our outstandings down there, Naples about 13% to 15%. Orlando and Sarasota, the first two that we opened, carry the rest of it, with Orlando at about 34% and Sarasota at 22%-ish, 22%, 23%.

So they have all contributed.

All contributed, and especially out of Fort Myers -- we are real pleased with that production.

And just to be repetitive, Colin, I don't know whether you caught this, but Dale Dignum joined us this week and we are opening up Tampa. And he is very experienced, very well connected, very high profile, and we are extremely thankful to get somebody with his experience and reputation to lead our Tampa effort.

Yes, you had been talking about the Tampa office, I guess, for a few quarters. Are there any other offices you guys have in the pipeline at this point? Or do you have your initial expectations kind of (multiple speakers)?

At this point, we had one at Tampa, and as you say, we have talked about that in the past and were finally able to -- you know, the key is the people, and we were able to get that all done in the fourth quarter. And this week, we opened for business, and expecting big things. Now, we will concentrate on getting that running and perhaps adding some staff to the other LPOs because we still think we have plenty of opportunity down there. And then we will see where we go from there.

I don't remember how much detail you provide on this in the past, but kind of a breakdown on the loans out of Florida -- commercial real estate, construction and residential.

I have some information on that. About 40% are what we call land banking or entitlement. Let me explain that to you. Those are deals where people are acquiring land, aggregating it, perhaps, and then beginning the permitting process, which is pretty extensive in Florida. The impact studies -- it's quite a bit of work and quite a bit of time between the time you acquire the land and you actually get the permit.

Just to give you some color around that, our loan policy, the typical land banking loan would first of all be secured by that land. We typically do not exceed a 50% loan to value, so we've got a fair amount of equity in those deals, and oftentimes have personal guarantees as well. So we feel pretty comfortable with that.

A next significant component would be lot development financing. Now, how is that difference than the first category? I would call this horizontal financing. These are people that have the land, they have been through the permitting process, they have their building permit, and we are financing the infrastructure -- [roads], utilities, everything horizontally, and again, pretty good loan to value ratios and support for those underwritings.

The third category, which is about -- and if I didn't say, that's about 20% of our outstandings -- the third significant category is condo construction or conversion, which is 30%. Now, the bulk of this is really what I would call small- to medium-sized more local deals. These are not usually the 800-unit high-rise on the beach type things. They are done with presale requirement, with deposits. We are dealing with developers that our folks in the Florida markets know. We are dealing in markets and projects that these bankers that we have are very familiar with.

And those three categories are the largest. Beyond that, we have commercial financing and even some residential financing. But the bulk of the activity is in the three that I mentioned. And we feel so far very comfortable with the people we are dealing with and the projects we are financing.

Can you talk a little bit -- I guess the concentrations you have to specific builders [that you think] you do of that portfolio, or specific builders and/or specific developers?

Actually, to be honest with you, looking on our total sheet, Colin, I see most of these things are in the $5 to $15 million -- let's say less than $20 million per project range. We don't really have --

The vast majority of them are under $10 million.

Yes, under $10 million. Even, Colin, on that point, and this gets back to our underwriting -- we have a legal lending limit that is probably $60 million or so. And the reason I say and so, we don't really calculate it because our house limits are more like $20 million. We just -- could we underwrite a $50 million or $60 million credit? Yes, we probably could. But the problem is we don't want to put that much money in any deal because we don't think it's appropriate, number two, we can't stand the risk of a nonaccrual or a loss. We are not going to get billed into any project, Florida or anywhere else, beyond what we feel comfortable with, which is normally about $20 million as our house limit.

Thanks for that detail. And then one final question -- with the securities portfolio, how much of that is pledged? And I guess the reason I'm asking the question is -- how much more room do you have to continue running that off?

Colin, I'm glad you asked that question. We pretty well have gotten there by the end of the year here. We've got about 17% of our total assets in the investment portfolio. And going forward, the year-end end balance is a little over $1 billion, and we'll see it about that level or slightly increasing as we go forward. And we're doing that for a lot of the reasons that you said, for our pledging and other reasons, to keep the balances there.

Wilson Smith.

I'd like to follow up on Colin's question or comments on the Florida market. The land banking and the lot development -- can you break that out between residential construction projects and commercial projects, and then how much of that on the commercial side is owner-occupied?

We don't have that (multiple speakers)

I don't have that much detail in front of me right now, Wilson, but let me work on that for you.

Now, you haven't been down in Florida all that long, but is your delinquency numbers consistent with the rest of the portfolio?

We are fine.

Yes, so far, so good. But Wilson, just to remind you that F.N.B. was in Florida for seven or eight years before the spin. But these lenders that we have, almost to a person, I think, have been in banking a long time, and they have been in banking a long time in their local Florida market. So like Dale Dignum is new to us this week, but has 25 years in the Tampa market. And of course, he is going to be in the Tampa market for us. So we have a lot of confidence in the underwriting that we have down there and the local experience that these guys have.

Yes, but it does look, when you just went through the numbers, that with 40% of your Florida exposure in land banking and 20% in lot development, that is perhaps the riskiest segment of real estate lending to be in.

But if you look at our land banking part of it, we are in it something less than a 50% LTV, oftentimes with personal guarantees and other collateral supporting it. And it is typical of our bank -- we do not do much unsecured lending or underwriting where we think we have a collateral risk. We tend to be, besides cash flow lenders, well secured in most instances.

You have demonstrated that. Do you have an LTV maximum on the lot development as well?

We don't set it like we do for the land banking, but it is typically similar. And as I look down through this list, we have a number of loans even that have LCs to support them. So I can't emphasize enough that we are aware of all the conversation about real estate. And we are aware, particularly, the conversation about Florida real estate. And one might say -- I will give you this, Wilson, the question could be, gee, if you thought you were going to do $200 million and you did $300 million, and now you're opening a Tampa office, why are you setting the goal only $50 million more than you did last year?

Well, to your point -- could we do more? Probably. Do we want to? Not necessarily, because again, we're looking to -- the one thing that we can't compromise in this Company is asset quality. And so we think we have set a rather conservative goal, given what we have accomplished so far and the addition of a new team in Tampa. So I can only tell you that we are watching it closely. We have credit people on the ground down there. Senior management is very familiar with these projects. We are very hands-on. This is not something that is out there and isolated and we're not monitoring very closely.

Now, Brian, the margin performance was terrific. You're the only guys so far for me that had an uptick in their net interest margin. How much of that performance was due to the change in your business mix as you kind of bring down the indirect portfolio and add the higher-margin commercial lending?

Well, certainly, the -- well, there's two pieces to the margin, as you know. Your question is based on the earning assets, and it has been our focus to increase the profitability of our existing earning assets. And our stated strategy -- it's obvious you trade off the investment portfolio and put on some higher-yielding profitable relationships in commercial banking, you're going to pick up your earning asset yield. And that is certainly one way that we have been managing the margin to make sure that we get the momentum in the earning asset yield expansion.

But one of the more notable was the cost of funds side, where for the past five quarters, we have seen nothing less than 16 basis points increase on a quarter-to-quarter basis, as high as 25. So the 9 basis points increase was remarkable. The lower -- for a couple of basis points we are going to see in this environment are CDs continue to creep up. But the stability of our transaction accounts is what achieved that. And we're able to keep our customers happy and stay competitive, at least the last quarter. And for the next quarter, it feels like we can do the same thing. I hedge only because of the competitive circumstances out there. But we have been managing a neutral interest rate risk position. So we feel comfortable where we are positioned. But the competition has been a wild card.

And Wilson, if I could just add onto that, because that is a good question -- we do feel that maybe we differentiated ourselves from some of our peers, both in asset quality with the decline in nonperforming and the fact that we had a little bump-up in the margin.

But as you look at our strategy going into this year, '07, most of the retail folks under the leadership of our new retail head, Jonathan Roberts, are focused on building deposits, but we are very focused on the mix we want to develop. And that is why I made a point of saying that we're looking for the low-cost end of this. We are looking -- going to concentrate on business deposits. We have put in not only our remote capture, which we already have, for two new services, and again, those tactics and those products afford the strategy of building deposits, but trying to force the mix, if you will, or emphasize the mix to the lower-cost end of that.

And Brian, you said that you thought you could at least hold the margin here?

As we look to the first couple quarters, without significant changes in the input, yes, that's what we're -- within a band of where we currently sit.

And your expense control in the fourth quarter I thought was outstanding. Were there any one-time events in there that allowed you to get that down, or is that a good kind of run rate going into '07?

Well, we did mention about the medical benefit -- our self-insured there. As we sized up the claims at the end of the year here, we had what I would call an unusually high adjustment to that accrual of about $600,000 to $800,000. So that would be what I would call one time.

Now, to comment on the run rate of expenses, we do every year go from the fourth quarter to first quarter with a lot of -- with a big increase -- well, relatively large increase. We reset the employee taxes, the merit increase. This year, we are going to pick up a little bit more expense because we will start accruing the 401(k) part of the expense side of the pension change that we made. And on the revenue side, [we're going to lose] two days, because there's just less days in the first quarter.

So the run rate of expenses will be higher. But we look to manage that year over year to only about 5% to that mid-single digits, 4% to 6% range, and then -- with most of that being a legacy carryover. But it will be front loaded. And then it will come down a little bit as the year goes on.

Excellent. Thank you very much. Nice quarter, fellows.

Andy Stapp.

One thing -- you mentioned the decline in your consumer portfolio was seasonal. I would think with the holiday season it would actually go up -- just curious why it tends to go down in the fourth quarter.

The home equity loan portfolio -- people aren't drawing additional funds out of the lines they would be, but out of the home equity installment loans. Those we just typically receive payments in the back half of the fourth quarter to bring those balances down.

Regency actually experiences an increase in demand in the fourth quarter. But the bank --

I got you. I thought you meant Regency. In the decline in other noninterest expense, is that just the general lumpiness in that category from quarter to quarter?

The decline in what?

Your last catch-all, other?

Yes, that is where we would have picked up -- I think I mentioned that we had lower marketing accrual, OREO expenses were lower, and [timber] loan production. And our consumer loan production would match off with the lower fees for attorneys and other things that go through that category.

And service charges were down linked quarter. Could you provide some color on that?

Well, we do have typical higher third-quarter service charges, primarily driven by non-fee overdraft, nonsufficient funds. So we have a seasonal decrease that does take place. But that is a category that the customers continue to get [harder], and we're having less activity, if you will, in the NSF charges. We are monitoring that. But we are making up for it in other categories such as ATM charges and other initiatives that we have in play.

And lastly, could you provide some color on how your pipeline is currently?

We are still at third-quarter levels -- Andy, Gary Roberts. We are still at third-quarter levels. We remain strong and very optimistic based on current backlog.

There appear to be no further questions in queue. Do you have any closing comments you would like to finish with?

Sure, thanks, David. I would like to thank all of you for joining us today on our call. Replays of this call are available through January 26 by calling 1-800-332-6854 with the code 3044. Or you can also access a transcript of today's call on our website, fnbcorporation.com. Thank you again for participating in the call and wish all of you a great weekend.

Thank you very much, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines, and have a wonderful day.