FNB Corp (FNB) 2013 Q1 法說會逐字稿

Good day, and welcome to the F.N.B. Corporation first-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded.

And now I'd like to turn the conference over to Cindy Christopher. You may begin, ma'am.

Thank you. Good morning, everyone, and welcome to our first-quarter 2013 earnings call. This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements. All forward-looking statements involve risks, uncertainties and contingencies that could cause actual results to differ materially from historical or projected performance.

Please refer to the forward-looking statement disclosures contained in our fourth-quarter and -- I'm sorry, first-quarter earnings release, related presentation materials, and in our reports and registration statements filed with the Securities and Exchange Commission, and available on our corporate website. A replay of this call will be available until May 2. In addition, a transcript and webcast link will be posted to the Shareholder and Investor Relations section of our corporate website.

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

Thank you, Cindy. Good morning, and welcome to our quarterly earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. I will highlight our first-quarter results and discuss strategic developments. Gary will then review asset quality, and Vince will provide further detail on our financial results, along with expectations for the remainder of 2013.

F&B had a very productive quarter and a great start to the year. Our operating results were solid. We completed the infrastructure buildout of our electronic banking strategy, and our M&A-related expansion continued. Looking at our results, net income was $29 million or $0.20 per diluted share, representing a 5% increase in operating earnings per share over the prior-year. Our team continues to deliver revenue growth year-over-year. This is an outstanding accomplishment, given the challenges facing the industry.

The quarter includes continued strong momentum in key performance drivers. Loan and transaction deposit growth, a stable net interest margin, and good credit quality, all reflect consistent solid results. In addition, several of our fee-based business units benefited from increased cross-sell strategies with our bankers. Total average loan growth was strong at an annualized rate of 7%. Our growth is the direct result of F.N.B. gaining share in both the commercial and consumer portfolios. Average commercial loans grew 11% annualized, with positive results across all regions. Our long-term strategy of continuously investing in our commercial platform is contributing to this success.

Looking year-over-year, we organically grew the C&I portfolio $249 million or 18%. And during the quarter, our C&I production contributed three-quarters of the total commercial growth. Winning this commercial business is an integral component of our collaborative cross-sell culture. Our bankers are trained and incented to pursue the entire relationship, including treasury management, wealth management, private banking, and insurance opportunities.

In addition to the profitability generated from the loan balances, these relationships provide low-cost deposits, and result in a more favorable deposit mix. The success of this strategy is apparent, with DDA and customer repo balances growing over $400 million, or 18% compared to last year. This relationship-based funding creates a meaningful impact on our ability to effectively manage the net interest margin, and is a direct result of a sales management process sharply focused on performance.

The consumer team is also doing a great job bringing in relationships and loans, with average consumer loans growing 6% annualized. Production levels for both commercial and consumer remained at record high levels. And we have a healthy pipeline as we enter the second quarter. We are also leveraging our strengths to deliver revenue growth in wealth management and insurance. These units have increased cross-sell execution with our bankers, added talented and well-established team members, and fine-tuned the sales management process. These efforts, along with improved market conditions, resulted in wealth revenues increasing 14% this quarter and 22% compared to the prior year. Insurance revenue grew 6% over last year.

We will continue to focus on improving results in these important fee-based businesses. We recognize the importance of balancing all of our growth strategies with a strong risk management culture. Given the current regulatory environment, now is an appropriate time to take a moment to share our risk management philosophy. F.N.B. has a strong risk management culture, developed through long-term and significant investments in compliance, credit administration, and risk management infrastructure.

As a result, we believe we are well-positioned to meet regulatory challenges, as well as prudently manage our growth strategy. While regulatory oversight certainly continues to build in our industry, our steadfast focus and continuous investment will serve us well. Proof points of our strategy are reflected in our very good asset quality performance.

With that, I will turn the call over to Gary, so he can share the quarter's asset quality results. Gary?

Thank you, Vince, and good morning, everyone. We finished out the first quarter of 2013 with steady asset quality results, with several metrics continuing to trend positively, as they have now for several quarters, while others remained stable and at very good levels. Our overall portfolio is favorably positioned, which is evident in our GAAP results for the quarter. And we are also very pleased with the individual performances of the originated and acquired books.

I will now guide you through the credit quality highlights from the first quarter for the originated portfolio, followed by a look at the performance of our acquired book of loans carried at fair value. Finally, I will provide a brief update on the recently-acquired portfolio from Annapolis Bancorp.

Turning to slide 6, and focusing on the originated book, the level of delinquency improved during the quarter by 19 basis points to stand at 1.45%. We can attribute this positive movement to our mortgage portfolio, which, as mentioned in our last quarterly call, experienced some seasonal elevation at the end of the last quarter, which has since cured as anticipated. Nonperforming loans plus OREO were slightly better during the quarter at 1.59%, and as a dollar amount, remained steady over the last few quarters.

Net charge-offs for the first quarter were very good, at $4 million, or 22 basis points annualized for the originated portfolio. This solid performance was driven in part by the seasonally lower levels that we typically experienced during the first quarter, as well as a healthy level of recoveries in our commercial portfolio. The originated provision for loan losses was $6.4 million, a decline from the fourth quarter, and consistent on a year-over-year basis, as we continue to provide for loan growth. Our reserve position was relatively flat when measured against the originated portfolio ending March at 1.39%.

Shifting now to our acquired portfolio, we ended the quarter at just over $840 million in loans or 10.3% of our overall loan portfolio. The level of contractually past-due accounts at $55 million improved on a linked-quarter basis by 7.2%, which we can also attribute to the curing of the seasonal increase in the early-stage category in the acquired mortgage portfolio. Our acquired provision of $1.2 million was consistent with the previous quarter.

Subsequent to the close of the quarter, we completed the Annapolis Bancorp acquisition, which will add approximately $270 million in gross loans to our acquired book. We have been carefully monitoring and tracking the performance of this portfolio continuously since our initial due diligence process. And it is positioned slightly better than we anticipated at this point.

In closing, we had another successful quarter, with our portfolio continuing to demonstrate solid and consistent performance. As we look ahead, we will continue to manage our growing loan book with the same consistent and balanced credit philosophy that has guided us to where we stand today.

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

Thanks, Gary, and good morning, everyone. As Vince discussed earlier, the first-quarter operating results provide a strong start to 2013. Year-over-year earnings per share growth on an operating basis was a solid 5%. Linked-quarter EPS trends reflect normal expected seasonality, given fewer days in the quarter, and seasonal influences on service charge revenue and personnel costs. Strong loan growth continued, the margin was stable, credit quality was again very good, fee income and expenses were largely in line with our expectations.

Let's begin with balance sheet highlights on slide 7. Loan growth remains strong, with average loans growing $141 million linked-quarter, or 7.1% annualized. The commercial portfolio displayed very strong organic growth of $116 million or 10.8% annualized, with results driven by the C&I growth that Vince discussed. With commercial line utilization still at historical lows, this growth is driven by market share gains. Given the first quarter's production levels, a healthy pipeline at quarter-end, and the team and processes we have firmly in place to drive results, we continue to expect to achieve full-year mid-single-digit organic total loan growth. You can also see that these expectations are in sync with the first-quarter's year-over-year total average loan growth results of 5.3%.

On the funding side, we continue to see growth in our personal and business transaction accounts, offsetting a planned decline in time deposits. Growth for these transaction deposits in customer repo's was $48 million or 2.6% annualized. We consider this a good level, following the very strong growth we saw last quarter, and taking into consideration that we typically see a seasonal decline in business and municipal balances during the first quarter.

Time deposits decreased $85 million, given the low offered rate environment for these products, as we remain focused on attracting lower-cost, transaction-based deposits. Our relationship-based strategy has strengthened the mix, with transaction deposits and repo's now comprising 75% of the total, up from 72% a year ago. Given our success growing deposits and improving our mix, we reaffirm expectations for full-year organic total deposit and customer repo growth in the low-single digits.

The first quarter net interest margin was stable at 3.66%. Strong loan growth results and an improved funding mix continue to support the net interest margin. Cost of funds improved 7 basis points to 56, while earning asset yields narrowed 6 basis points, partially due to the current rate environment, but also reflecting lower accretable yield. First-quarter accretable yield was $1.3 million compared to $2.6 million in the prior quarter, that included higher-than-expected recoveries on marked credits.

Effectively managing the net interest margin is a key operating strategy for us. And results for the first quarter are in line with our expectations. Looking ahead, we continue to expect the full-year net interest margin to be in the low to mid [3.60's], migrating downwards toward the end of the year.

Our strategy of growing loans and lower-cost relationship-based deposits to support the margin will continue. In addition, loan pricing will remain disciplined, and downward rationalization of overall deposit pricing, including further enhancements to mix, will continue.

Next, let's turn to noninterest income. Total noninterest income increased $1.5 million or 4.8%. As Vince discussed, we're starting to see benefits from increased referrals from our bankers, and structural changes we have made in our wealth management and insurance operations, including valuable additions to their teams. Partially offsetting these increases, service charge revenue declined during the first quarter, due to seasonally lower transaction volume compared to fourth-quarter levels. The increase in other noninterest income reflects the prior quarter's $1.7 million charge related to the completed consolidation of 20 branch locations, which was partially offset by lower client swap fee revenue and lower recoveries on previously impaired acquired loans.

Looking at our expectations for the year, we are reducing our prior guidance for fee income by approximately a penny per share, given the lower service charge transaction trends seen in the first quarter. The lower transaction volume is partially seasonal, but also reflective of shifts in customer behavior and overdraft patterns. Contributing factors to the shifting behaviors include the availability of increased account monitoring via mobile and online banking.

Moving to noninterest expense on slide 10, we saw seasonal increases in certain line items, such as personnel and marketing expenses, which is typical for the first quarter of each calendar year and in line with our plan levels. Total noninterest expense increased $2.3 million or 3%, with many moving parts when comparing to the prior quarter. Personnel costs increased $2.9 million or 7.2%, primarily driven by higher employee -- employer payroll taxes, as the beginning of the year resets the employer FICO portion.

OREO expense was a very low $0.2 million, yet shows a linked-quarter increase due to benefit received from the sizable recovery on a property sale experienced in the fourth quarter. Additionally, the first quarter of 2013 included $0.4 million in merger-related costs, and the fourth quarter of 2012 included $3 million in litigation settlement costs. All of this resulted in a first-quarter efficiency ratio of 59.8% that was seasonally elevated on a linked-quarter basis.

We remain keenly focused on expense control, and are targeting core expenses to be flat year-over-year, unchanged from previously-provided guidance. Managing core expenses to be flat requires a number of significant expense containment and reduction measures, while continuing to strategically reinvest in the Company for growth. When looked at collectively, in order to fully offset these investments and manage expenses to flat, we have identified expense actions addressing around 4% of last year's run rate expense base.

One significant example was the branch consolidation program completed last quarter. Other actions will be realized throughout the year.

As Gary discussed, we are very pleased with the consistency of our credit quality. Given the very good levels we are currently experiencing, we expect results for the remainder of the year to reflect ongoing stability. Our expectations for a slight dollar increase in full-year 2013 provision for loan losses remains unchanged, as these expectations take into account the strong planned loan growth.

Looking at our capital position on slide 11, regulatory capital levels at March 31 are stable or improved, compared to last quarter. We continue to see all regulatory well-capitalized thresholds. For taxes, we expect an effective GAAP tax rate between 29% and 30% for the remainder of 2013.

Now I would like to turn the call back to Vince for his closing remarks.

Thank you, Vince. We began the year with a solid start and a great foundation. We have strong momentum in place. We are focused on the future, and we are poised to deliver sustainable results. With our proven success and strategic focus, F.N.B. is well-positioned to manage the challenges currently faced by the industry.

Last quarter, I discussed our strategy to reposition and reinvest in the Company for growth and profitability, while maintaining a low risk profile. This strategy has been in place for several years and has served us well. Along these lines, let's review our eDelivery and M&A progress during the quarter.

We have successfully completed the infrastructure buildout of our eDelivery platform with the rollout of mobile remote deposit capture and robust online budgeting tools. We have created an attractive suite of electronic banking capabilities that our team is excited to sell, and that are competitive with any offerings across our footprint. This technology investment will benefit us on several fronts.

First, the competitive advantage allows us to aggressively pursue household growth and enhance retention rates. Both of these are important benefits, particularly given that acquisitions are a component of our overall growth strategy.

Second, this provides customers with the flexibility to conduct routine transactions electronically, and results in a lower-cost alternative for F.N.B. It also provides our branch personnel with more time to consult with customers, and offers solutions that lead to loan generation and cross-sell opportunities. With the progress we have made over the past year, we are well-positioned to adapt our delivery channel to ever-changing customer preferences.

Looking at M&A, earlier this month, we completed the acquisition of Annapolis Bancorp in Maryland. I would like to sincerely welcome the shareholders, employees, and clients of Annapolis Bancorp to F.N.B. We are very well-positioned as we enter Maryland. The integration went seamlessly and we truly hit the ground running. Building on the strength of our regional model, we have had great success attracting talent in the Maryland market. And we are pleased to have a strong leadership team in place. We have been very impressed with how the team there has truly embraced our collaborative sales culture.

As you know, we also announced the acquisition of PVF Capital on February 19. This is our third consecutive acquisition in a major MSA. We'll deploy the same strategies that have proven successful with Parkvale and Annapolis Bancorp. We intend to attract and retain the best possible team, and immediately deploy our cross-functional sales management model in the Cleveland market. Given our connections in the market, we have already had a significant number of conversations with bankers, and feel confident that we will be ready to go on day one. Both acquisitions present tremendous opportunity for F.N.B. and strengthen our overall franchise.

If you look at the map in the earnings presentation, you will see our regional alignment on a pro forma basis. This map highlights three major MSAs that we will have a presence in -- Pittsburgh, Cleveland, and Baltimore. These three MSAs provide access to a combined population of over 7 million and 175,000 businesses. This is important as we position ourselves in the markets that offer significant organic growth opportunities. Given the strength of our commercial platform, markets with a high concentration of commercial prospects bode well for us.

Slide 14 provides a sense of the incremental prospects F.N.B. is gaining access to, an increase of 70,000 with the addition of Baltimore and Cleveland. Our success in Pittsburgh validates this strategy, which we will be replicating in other markets. In addition, both acquisitions are consistent with our stated expansion strategy focused on positioning F.N.B. for sustainable organic growth. Expansion in these markets and the continued execution of our organic growth strategy will deliver future success.

In closing, I would like to congratulate the F.N.B. team on our continued outstanding accomplishments. We have built a solid foundation. And I am confident that our strategies will serve us well, and that our team will meet the challenges facing the industry, and continue to deliver great results.

That concludes our comments. And I would like to turn the call over to the operator for questions.

(Operator Instructions) Frank Schiraldi, Sandler O'Neill.

A couple of questions. First, I wondered on the branch optimization strategy that you completed last year, I think -- I recall that you expected to save about $4 million in 2013 on that. Is that already baked in? In other words, it was about $1 million in the first quarter and that's the run rate going forward?

Yes, it is, Frank.

Okay. And then, Vince, I wonder if you could just remind us, you talked about core expenses being flat year-over-year. What are you using for core expenses? I mean, is that like a $310 million number?

Yes. It's $308 million, so you've got it -- $310 million. Yes. That's to date.

Great. And then, I wonder if you could talk a little bit about the mechanics of the margin? I know you reaffirmed guidance. Is there some purchase -- I know there's some purchase accounting accretion baked into your expectations. I'm wondering as far as Annapolis just closed and then Parkview later in the year. I would assume there is more accretion there. I'm not sure if that's baked in. And could that create an upward bias to your guidance?

I would say that the low to mid [360's], Frank, bakes in Annapolis does not include Parkview yet at this point. It's very -- it's not significant to the full year. We're going to close that in the middle of October. But it fully has Annapolis baked into it, and I would say that when you look at the first quarter, we had -- while we had lower accretable yields, we did have several basis points of benefit from some loans that were returned to accrual status. So, the guidance that we have, the overall guidance for the low to mid [360's] is still intact.

I think last call, I had talked about accretable yields being [500] to [750] a quarter. This year quarter was $1.3 million. But as we've talked about, that number, it's lumpy, volatile. It moves around. Could there be a positive surprise there? More things get recovered at higher values than what we have on the books. There is a possibility for that. It's just hard to predict.

So, the overall margin, I think, with the things that we have baked into the balance sheet, maybe just a couple of other comments. We continue to have a significant amount of CDs -- about $400 million a quarter that are repricing. We are still picking up 50 basis points a quarter on those. You know in the other way, the securities portfolio, there's $150 million a quarter, but similarly, we're losing about 50 basis points on that. So, between the two, we are net picking up and it provides support to the margin. The loan growth, strategies, and plans that we have in place continue to support the margin, as does the strong growth in demand deposits and treasury management balances. So all of those levers are in place and we're comfortable with the guidance that's there.

Okay. And I guess just looking at the components, just curious, securities balances have been pretty flattish on an average basis over time, and cash balances have been coming in a little bit over time. I'm just wondering if securities and cash, if those sort of numbers we can expect sort of stag numbers going forward, or you have to be -- or you're going to be lesser or more liquid there?

I would say the investment securities we manage to -- really, around the same percentage -- about 19% of total assets. You know, that number will move up and down as loan growth varies during the quarters. But really, that 19% is where we targeted.

When you look at the cash and cash equivalents line has short-term investments that are just overnight balances with the Fed, Frank. So those vary quite a bit from month to month. The core cash piece of that, excluding the short-term investments, ranges from $150 million to $200 million. So, we're in a normal range for that at the end of the quarter. And our overall liquidity is very strong right now. We still have, in our securities portfolio, about 6% of that is unencumbered. So that obviously helps the liquidity. So, kind of managing the way that we have is still what the game plan is, in our minds.

Okay. That is very helpful. Thank you.

Thanks, Frank.

Bob Ramsey, FBR Capital Markets.

I appreciate the full-year margin guidance, but I was hoping you could help me think about the quarterly progression. And does Annapolis help a little bit in the second quarter, and then you see more compression in the back half of the year? Or just sort of how are you big-picture thinking about the trend through the next three quarters?

Yes, I would say, Bob, Annapolis at $440 million or so is really small to the overall balance sheet. So it's relatively neutral to the margin. The comment that I made in my guidance was that we do expect the margin to come down, migrate downwards modestly as you go through the year. So, there is, with this rate environment, obviously, there's some compression that's there, but I think it's manageable. And that's kind of all baked into getting a full year in the kind of mid to [low-3.60s].

Okay. And then, if I remember correctly, I think you guys said last quarter that loan pricing seemed to be stabilizing. And I know a lot of our other companies this quarter have sort of highlighted an increase, actually, in pricing pressure in the first quarter from where they were a quarter ago. I'm just curious what you guys are seeing this quarter and today, in terms of low pricing and the level of competition in the market?

Yes, I can take that. Basically, it depends on which segment you're focusing on, truthfully. And when you look at the upper end of the marketplace, I would say that pricing has come down a little bit, but has stabilized somewhat. I think the pricing tends to be a little more rational on the larger syndicated transactions because more capital is required.

As you move down the spectrum into the middle market, I think in the sweet spot of the middle market, opportunities in the, say, $2 million to $6 million, $7 million range, that has become a little more competitive and the pricing has come in a little bit. You know, in terms of what we're seeing, in certain segments -- you know in the last quarter, the comment on the call that I made -- in certain segments, we actually saw pricing stability. As you look at, it varies from opportunity to opportunity and from segment to segment. So, it's all across the board.

We are seeing pricing holding at a relative level in the leasing portfolio. We are seeing pricing holding in the upper end of the middle market; it's come in slightly maybe 5 basis points or so. The middle market is a little more aggressive, so pricing has come in. But I think, more importantly, because of how we incent our people and what our focus is within F.N.B., we shoot for returns. We have models that we use to justify doing a transaction from a return on equity standpoint. And we factor the cross-sell benefits into that model.

So, we can move up and down 10, 15, 20 basis points and still achieve the returns that we need to meet our hurdles. But where we won't give is on structure, and we have seen structure deteriorate somewhat. So I mean I would say that pricing has come in a little and structure has deteriorated somewhat.

As Vince mentioned on the structure, naturally, we look at a lot of transaction opportunities, and we have walked away from numerous opportunities recently, due to structure getting pressure past the point where we would have an interest in that transaction. And when structure does get pressured to that point, we're not going to move off of our philosophy, so we'll walk away from those opportunities.

That's helpful. Where are you seeing -- I guess I'm trying to find out who is it who's compromising on structure? Is it consistently the same players? Is it very large banks? Is it tiny community banks? Is there any color you can give me on sort of who is the one that's sort of leading everyone else lower?

Well, it's really all over the board. There are several larger competitors that are really weakening structure. There are a number of small competitors that we face that aren't really in tune with the C&I market. They are looking for earning assets and they're moving into that space on the lower end of the spectrum. And they tend to be looser in terms of structure.

But I look at our success, and I know that -- I've listened to many calls; I've read many transcripts; I've seen what others are reporting in terms of growth. And I reflect on our credit metrics within our own portfolio, and the growth over the last 3.5 years for us. And we have had good solid growth and good solid credit performance. And this is just yet another quarter where we've seen that.

So, I would say the marketplace is still able to provide adequate growth for us to meet our investment thesis, and we're going to be very selective about what we go after. And if somebody is willing to concede on structure, so be it. We're going to hold true to our credit culture. And I mentioned, we've invested very heavily in compliance and credit administration over the last few years for a reason -- because we feel that is the absolute right way to move forward, particularly when you have the growth rates that we have.

And I guess to that point -- you know, it does help. It does. And to that point, your C&I growth really was very strong this quarter. I'm curious if you're seeing strength from any particular geography or niche or size? Or whether it's sort of broad-based across your customer base.

You know, I truly attribute it to the caliber of the people that we have. We have tremendous team. We stack up well against the largest competitors in the marketplace. So we have very, very talented bankers. We have seen growth across all segments, as I mentioned. We've seen growth in Scranton; we've seen growth in other eastern portions of our franchise in Pittsburgh, in the middle market, in asset-based lending, in our investment real estate group. So we've had growth across the board.

And I also attribute that growth to our own proprietary methods of planning, planning activities, planning cross-sell activity, and our sales management system and our incentive compensation plans. I think it's -- I've said it before to others. It is very unique and we've made a considerable investment in those areas. And they are -- it's paying off. We're getting high-quality commercial borrowers.

Great. All right. Thank you, guys. That's helpful color.

Appreciate it.

Jason O'Donnell, Merion Capital Group.

It looks like there is a disconnect this quarter between the reported FTE NIM and the calculated FTE NIM just using the figures that are provided here, in terms of net interest income and earning assets. Do you know what accounts for the difference this quarter?

I'm not sure what difference you're referring to there, Jason.

Well, just the calculated number would imply that your margin is down 5 basis points linked-quarter, which makes sense, given that your spread revenue declined and your earning asset growth is -- your earning assets are up. I'm just trying to reconcile maybe the difference between kind of those figures that we are seeing and what's posted in terms of a stable margin.

I'm not sure how the other calculation is being done, but you have to factor in the number of days when you're looking at margin. And there's fewer days in the first quarter than there would be in the fourth quarter. So you really have to factor in the number of days that you're earning when you do the margin calc.

Okay. So it's really just a function of the days that would describe that difference?

(multiple speakers) Yes, [30, 60].

Okay, okay. And then on the operating expense front, how much did you have in the way of seasonal items, including payroll tax, et cetera, in your comp and benefit expense this quarter?

When you look at the expenses overall for the quarter, they were right on top of our plan, literally within $0.5 million. So when I look at the components, the total increase, $2.3 million, $2 million of that is payroll taxes, which just-- when you restart the clock on January 1. And then we had a $0.5 million in occupancy and equipment that's just normal seasonal increases for snowplowing, heat and those types of things. So really the [two-three] is explained by those and there's pluses and minuses through the other categories.

So, that kind of explains the base. And while we're on expenses, I should probably just comment about the overall guidance to managing to flat. I should start with disciplined expense management is part of F.N.B.; it's been a core competency for a long time. So part of what we did, given the headwinds that we were facing now that we're in the over $10 billion club this year, we really had -- our team developed a comprehensive list of action items to mitigate the impacts of Durban and FDIC insurance.

The 20 branch consolidation was obviously a key element of that. But we also launched a comprehensive vendor management initiative late last year, which we expect will generate meaningful savings. We're also very actively managing our properties, and exiting properties that maybe aren't being used that we've had on the books for a while, to really remove those nonperforming -- or I should say non-earning assets, and reduce the carrying costs.

And then other benefits come from things like our investment in mobile and online banking. We get savings statements in postage. We now have 40,000 customers that are signed up for that. So there's no silver bullet, but there is a whole bunch of initiatives we have that are designed to get us to manage to flat from that base of 2012.

Okay, okay, that's helpful. Thank you. And then I guess my last question is on the -- I wanted to ask about the mobile banking opportunity in particular, and actually mobile RDC. I'm wondering if you all could characterize sort of the magnitude of the opportunity here to improve the efficiency longer-term, by pushing transactions outside of the branch network? And I'm just curious as to how that kind of fits in with your overall strategy on the efficiency front?

I wish I could give you concrete numbers because then I could actually plan to them. I mean, it's so new, the technology is so new, but it's being adopted so rapidly. And our feel about it is, that over time -- and I know this is just anecdotal; I'm not going to be able to give you specific numbers -- but over time, we've seen transaction volumes come down in a number of branch locations. We attribute some of that to having access to more sophisticated ATM machines, and the mobile products that we've rolled out.

The mobile remote deposit capture feature is absolutely key to sustaining customers as we do consolidation. So when we look at our branch delivery channel and there may be branches where transaction volumes have fallen off, or the profitability of a particular location isn't what we expect it to be, and it no longer makes sense to have that location, retention, we tried to consolidate. And retention is very important.

So customers having access to smart ATM machines, which we've deployed across our footprint; having the ability to take pictures of checks with a mobile device is, I think, fantastic and I use it myself. And having the upgraded mobile budgeting or actually online budgeting tools where you can set limits and track expenses, and you get pie charts, a very sophisticated product that we put out there, really keeps people in place. Those are sticky products. So, it really benefits us on the retention side.

But -- this is my personal belief, but I think that I share -- my belief is shared by the Head of Consumer Banking here, and many of our people on the eDelivery staff, we think that the delivery channels are going to continue to evolve as technology evolves. And we have to be a participant.

I would just add too -- as we enter new markets, having these tools is obviously very valuable for retention as well as acquiring new customers. So, it's key to that strategy too.

Great. Thanks, guys.

David Darst, Guggenheim Securities.

Is the growth primarily coming from Pittsburgh on the commercial and commercial real estate side? Or is it pretty broad-based?

I would say it's pretty broad-based. We've seen -- we have an asset-based lending group that covers the entire geography. We have an investment real estate group that actually pursues. It's a specialized group that goes after the larger real estate opportunities across the footprint. So those two groups have experienced growth. And most of the clients that they've brought in are not in the Pittsburgh market. So they're coming from these other markets.

I would say that our Scranton market really picked up this year. They've done a tremendous job. And there's been considerable growth commercially, from a C&I standpoint, coming out of that market and that team. Pittsburgh middle-market continues to perform very, very well.

We also had people on the ground in Cleveland who have performed well. We had a loan production office we opened a few years ago in Brooks County that's performing very well. So, I would say, overall, our strategy of investing in the right people and giving them tools to manage production, and the product set that we offer, which is very competitive with much, much larger players, is a great combination of assets for our people. So, we're able to win.

Yes, we really focused on diversifying the revenue stream across the various segments of the loan book. We like that diversification. We think that it helps us manage the risk in the portfolios a little better, as well so we're going to continue moving forward with that focus.

This is a very dynamic company with very impressive people working within it. And I think the fact that it's smaller -- large enough to handle large transactions, but small enough to be nimble and creative, and very effective in the marketplace, I think that gives us a huge advantage over some of the bigger players, particularly in the middle market. And we've exploited that, and that's why we've had success.

Okay. Got it. And then what's your -- do you have a fee income target? I think you referenced some changes to the structure to both wealth management and insurance. Is that a product or an actual fee change?

Well, what we've done is, we've upgraded the talent, just like we did in the commercial bank here over the last five years. We've upgraded the talent in those groups. We streamlined their offerings. We did some things to improve efficiency in both insurance and the wealth platform. And the quality and the caliber of the people that we've been able to attract over the last few years is exceptional.

So, we -- by making those changes and investing in the product set in both insurance and wealth, we've been able to significantly move upmarket with our commercial bankers. So as the commercial team becomes better and more sophisticated, and goes after larger opportunities, so follows the wealth and insurance and private banking opportunities. And we've been able to capitalize on that. And in fact, they're incented -- a big portion of the incentive compensation programs at our Company are focused on cross-selling, and cross-selling closed business within those two business units in particular.

Okay. And where would you like to see fee income as a percentage of total revenue?

As high as possible (laughter), given this net interest margin environment. But I don't know that we actually target a particular percentage. But we would love to see it continuously (multiple speakers) move higher.

Higher is better.

Okay, great. Thank you. Good job.

Thank you.

John Moran, Macquarie Capital.

Just a quick question circling back on NIM, and I just wanted to make sure that I heard it right. Did you say $400 million a quarter on CDs rolls off, you pick up 50 basis points on that, and $150 million a quarter rolls off in a securities book, losing 50 basis points on that?

Yes.

Okay, thanks. And then just another kind of, I guess, ticky-tack point of clarification. On the OpEx guidance, flat off the $308 million, $310 million core call it, that, of course, excludes the two deals, right? You're talking purely kind of organic core F.N.B.?

Yes. That's core F.N.B., right.

Okay. And then on tax rate, if I'm not mistaken, it looks like that's 100 basis points or so higher than previous guidance. Is that just a function of making more money, paying more tax?

Yes. I mean we were [28% to 29%]. The quarter came in, I think it was [29.3%]. So we'll probably be more at that [29% to 30%] but right around [29%], is a good level.

Okay. So that is it for the ticky-tack kind of financial questions. I guess one kind of bigger picture, in terms of M&A opportunities, obviously, you guys have been active one kind of in the books here, one still pending. I assume it's safe to say that you'd be an active bidder for something attractive. And maybe then you could spend a little bit of time talking about the strategy there, and where you think you might want to fill in the footprint, if at all? Or is it more just focused on the organic opportunity at this point?

Well, our strategy has always been to do acquisitions to help us gain organic growth. So we're looking at those opportunities in light of organic growth.

So, if you turn to page 13 in the deck, you'll see a map that has three circles on it. It's basically a map of our footprint. It's on a pro forma basis, so it includes Annapolis Bancorp, which we just acquired, and the Cleveland Bank, which is going to be integrated in October.

Our interest is to continue to build out our existing franchise. So, opportunities in the Maryland, DC area are of interest to us. Opportunities -- actually, a circle that's not on there is the central part of the state really connecting the Baltimore MSA to York and Harrisburg. In that York/Harrisburg area, we have an interest in continuing to build out our franchise -- either through de novo expansion or M&A.

And then in Pittsburgh and Cleveland, we would welcome opportunities to, if they make sense, to continue to add to what we have. Pittsburgh would be more of a cost take-out play, because we have a fairly significant market share, both from a retail deposit standpoint and from a commercial banking standpoint. Cleveland, there are other opportunities in Cleveland.

So, strategically, that's the strategy. And as I've mentioned on the call, if you just look at the three circled areas, those are the MSAs that I mentioned -- 175,000 businesses; 7 million people; 4 million households, roughly, I believe. And page -- if you go to 14, we break that down a little more.

You know, what we do very, very well is gain market share. So, we have a very effective group of people. We have a great sales management process that we've invested in. We have a deep product set. And as I mentioned earlier, our competitive advantage is being able to deliver local decisions in a marketplace and a product set very efficiently in that smaller bank setting. Yet we have the ability to do -- cover most of the middle market.

So having a lot of prospects commercially for us is very important, particularly in the face of diminished loan demand. So, that's the strategy overall. I hope that's helpful.

No, definitely. I guess just as a follow-up to that, the one circle on that map that is sort of obvious and is obviously another really large MSA, would be Philadelphia. I know, historically, that was not really a focus, and I guess what I'm hearing you say is, that's probably still the case.

Well, you know, Philadelphia is a much larger market than the other markets that I mentioned individually. It's highly competitive. And to gain scale in that market quickly would be a challenge. The cost of acquiring those talented people is higher. It's not out of the realm of possibility, but I think that we would rather focus on markets that look similar to Pittsburgh where we've had great, great success. Over a 10-year period, we've gone from less than a 1% share to where we are today, both commercially and from a depository standpoint. So, that type of a market is -- you know, it's appealing to us.

Got you. Thanks very much for taking the questions, guys.

Thank you.

Collyn Gilbert, KBW.

Most of what I wanted to cover certainly has been answered. But just quickly, how do you guys think about your loan mix and kind of what an optimal loan mix would be over the next two to three years?

Right now, Collyn, the book of business is positioned about 55% all-in commercial-related business and 45% retail-related. We, being focused on the commercial opportunities and that really being the core competency of the Company, we would like to continue to grow that slightly from where it stands today, because it is such an important piece of the market for us. So, that's really the focus of the Company going forward.

If you drill down into the commercial portfolio, I would say that our plan is to continue to focus on C&I opportunities. Now, we do have teams that focus on investment real estate business, and the group that I mentioned earlier has done well. But we've had great, great success from a C&I standpoint. And if you look at the makeup of our portfolio, just focusing on the commercial portfolio, and looking at the owner-occupied piece as being more C&I-oriented, that portfolio is two-thirds C&I, one-third investment real estate.

So, I would say over time, if we felt that we could move in a slightly different direction or there was an opportunity to grow another portfolio, we are, relative to our peers, a less concentrated in investment real estate. So, Gary likes to balance that. We've invested heavily in our tracking methodology, relative to managing diversification of that portfolio from a credit perspective, and we monitor it frequently. So, it depends on the overall economy and how sectors are performing.

Okay. Sort of tying that into like the C&I focus, and then I think it was Dave that asked the question about fee income targets and you answer, as high as you can. Do you think kind of the trajectory for fees, there's better opportunity to extract it with all your initiatives on the retail side and the consumer side of your business? Or on the commercial side?

Well, given the regulatory environment, you have Durbin, you have presentment issues with NSFs. I mean, when you see it, I mean, I don't anticipate robust growth for any institution on the consumer side in fee income. I think it's going to be a challenge for everybody -- particularly since some of the larger banks, who are essentially price-setters in the marketplace, haven't taken action to impose fees on consumers. And the ones that have, have been quickly rolled back.

So, I think that as we look forward, I feel there's a great opportunity for our Company to leverage the bankers that we have on the commercial side, and hence, the investment in insurance and wealth platform. I think we are only scratching the surface in terms of what we can pursue opportunistically, and the markets that we are positioning ourselves in really work well for those other businesses. And we have a hotel in concept where we keep the commercial bankers together with the wealth and the private banker and the insurance salespeople. So, they're collaboratively pursuing opportunities. And it's really starting to show in the numbers here. So, we've gotten some good benefit from that synergy.

I'd probably add to it too, Collyn, that if you look at the mix of the total fee income, 34% of it is in insurance and the wealth management businesses. And, as Vince said, we've invested a lot there and we've got some good traction there. So there's definitely opportunity to grow that higher than mid-single digits over time. The service charge piece, which is about half of it is the piece that's under pressure, but these other pieces -- you know, there's no reason why we can't grow those at much higher rates than kind of what you would expect out of the core bank.

I will tell you that as banks invest in eDelivery, opportunities will present themselves in the future to generate new fee sources. We believe that, also. So, and it will also keep customers in place in the event that new fee strategies are deployed on the consumer side.

Great. All right, thanks for that color.

Matthew Breese, Sterne, Agee.

Could you just remind us of the timing of the deal close for Parkview?

It's mid-October.

Yes, Columbus Day weekend.

Columbus Day weekend.

Okay. And then, you know, if expenses were to hit all your targeted goals by this time next year, where would you expect core operating expenses to kind of shake out?

Yes, I can't --we don't give guidance beyond what Vince has given you. He doesn't permit me. So, I don't know if you have any other color you want to add, Vince, or --?

No. I would say that, over time, we target -- if you look at the efficiency ratio, part of our expense management strategy has been to manage expenses very closely, and then continue to grow the revenues. So we've talked about it, an efficiency ratio target over time of closer to 55%. So there's opportunity there that that number should improve as we get into next year. But as far as dollars of expenses, we're not really in a position to give any additional guidance on that. But the efficiency ratio gives you some direction.

That's a good point. We do focus on the efficiency ratio, and obviously, we like to see improvement year-over-year.

And as far as timing goes for 55% efficiency, I mean, from here, it seems like that could take a little while, especially with deals coming on. Could that be like a couple of years out? Or is that even a longer-term target?

It's more than a year. I mean that's -- I'd say that's a longer-term target. With what the government is taking out of the banks, obviously, that puts pressure on your ability to get to those efficiency ratios, between FDIC insurance and Durbin and those things. But I don't think it's five years to get there, but it's more than a year.

Right. And maybe big picture, I mean, everyone's headed toward the mobile banking platform, and assuming branch traffic is going to follow suit and be down year-over-year more than it was last year, I mean, how do you guys think about your branch network, the efficiency ratio, and is there the possibility for further branch closures?

Well, between the Parkvale deal and what we've done on our own, we've closed more than 40 branches in the last 18 months. So, we are focused on it. We have a process in place where we evaluate the performance of those branches and our delivery channel, both from a pure production standpoint, and looking at transaction activity, and from a financial standpoint. So we are monitoring it frequently. We call it project-ready. It's ongoing.

But branch rationalization and evaluating the delivery channel, and redeploying in higher growth markets where you have upside, and maybe consolidating in markets where consolidation helps financially, that's going -- that's an ongoing process. And I would expect that that would be happening at other institutions in a number of branches, over time, probably comes down collectively.

And you know, that would be advent of the technology that we are rolling out. It makes it easier to do that. So I would expect that banks would start to position themselves in markets where I think there is always a people element. So they'll position themselves to be able to touch as many individuals as possible in a lower-cost delivery model.

Plus our electronic scorecard helps elevate all the branches.

Yes, we have a -- we've invested heavily also internally -- we have a data warehouse that we developed, and there is a digital scorecard that we use. And we track performance on a number of key metrics daily in our retail delivery channel. So we know exactly when a branch is producing a particular loan, for example, in a particular category, or what fee income they're generating. So we've gotten it down to a science. And we use that data, those data points, to help make decisions about the delivery channel.

Okay. Then my last question, how would you guys size up the M&A market to date, and deal flow, and the number of things you've looked at recently, compared to a year ago? Has activity picked up? Or have things slowed down?

You know, it's been fairly stable over the last five years for us. I mean, I don't think that it's any different in terms of pace than it has been. I think there have been -- obviously, we've done three deals in the last three years, but I think that the deals that we've done were good opportunities for us. So, we've seen a few better opportunities that fit with our strategy than we have in the past.

I would expect that to continue, given everything that we've talked about, the regulatory environment, net interest margin pressure, all the things that every bank has to cope with, should lead to more activity. We feel one of our other core competencies is consolidating financial institutions. We -- I mentioned earlier, we've invested heavily in our compliance risk management, audit functions over the last five years. I mean, it's -- there have been dramatic increases in the amount that we spend in those areas. And that's already embedded in the run rate expense for the Company.

So we are very well-positioned to be a consolidator. Our currency provides us with an opportunity. Our risk management culture puts us in the right place with the regulators. And I think that our ability to integrate, execute, and deliver EPS accretion is proven. So, we're still in the market. Pricing expectations have come up. So, hopefully, that doesn't continue. But that's where we are.

All right. Well, I appreciate the color. Thank you very much, guys.

Thank you. Thank you for your questions.

Mac Hodgson, SunTrust Robinson Humphrey.

This is actually Michael in for Matt. I just wanted to get a little bit of color on -- you kind of just touched on the pace of conversations maybe more of late since the last deal in the last two months here. And then if there's been any change in terms of the size of institutions that are kind of pursuing or exploring other strategic options?

You know, I think there have been more smaller institutions, probably because they're feeling the pressure. I haven't seen as many large opportunities. I think that, from our standpoint, a small deal takes as much time as a larger deal, when you carry it all the way through to conversion. So, we would like to see more activity. I don't think it's there yet, and we'll see, as time goes on.

But I agree. The pace of really what we've seen coming in the door to look at has really been about the same. I mean, it's (multiple speakers) --

Yes. They've been about -- it's been fairly consistent.

-- smaller companies, but there's -- you know what we've announced, but there's also things we've looked at and have passed on that had been smaller or not in markets that we're focused on, has given the strategy that Vince discussed earlier. So, the pace is about the same. At some point, it will increase, as we all expect, but it's just a matter of when.

Okay. That's all I had. Thanks.

Okay. Thank you.

That concludes today's question-and-answer session. I'd like to turn the conference back to Mr. Delie for any additional or closing remarks.

Well, I really appreciate everybody calling in. Thank you for your continued support. If you feel so compelled, you can view our latest commercial on YouTube. We have the -- a commercial that demonstrates some of the investments we've made in mobile and eDelivery. So, if you do view it, give us a call and let us know what you think. Have a great day, and thanks again. Take care.

That does conclude today's conference. We thank you for your participation.