FNB Corp (FNB) 2013 Q2 法說會逐字稿

Good day and welcome to the F.N.B. Corporation second-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.

(Operator Instructions)

As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Cynthia Christopher, Manager of Investor Relations for F.N.B. Corporation. You may begin.

Thank you, good morning and welcome to our second quarter of 2013 earnings call. This conference call of F.N.B. Corporation and the reports 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 statements disclosures contained in our earnings release, related presentation materials and our reports and registration statements filed with the Securities and Exchange Commission and available on our Corporate website.

A replay of this call will be available until July 31, 2013. In addition, a transcript of this call and the webcast link will be posted to the shareholder and investor relations section of our Corporate website.

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

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

Our operating results were again strong and F.N.B. delivered another very good quarter. We are particularly pleased with the quality of our earnings. Unlike recent industry trends, F.N.B.'s results have not benefited from a reduction in provision for loan loss expense as we continue to support sustained loan growth. In addition, year-to-date operating leverage is positive through a concentrated focus on generating revenue and managing expenses.

Operating net income for the quarter was $30 million, or $0.21 per diluted share, with strong momentum across a number of key drivers. F.N.B.'s performance is the direct result of loan and transaction deposit growth, a stable net interest margin and good credit quality results. Average organic loan growth was strong at an annualized rate of 6% for total loans, with 12% growth for consumer loans and commercial loan growth of 6%. Production levels for both commercial and consumer remained at record high levels and we enter the third quarter with a healthy pipeline. With annualized growth of 7% in transaction deposits and repos we are also attracting low cost deposits with the relationships.

These are all outstanding accomplishments for the F.N.B. team and reflect a focused effort to deliver sustained organic growth across our footprint. Our ability to deliver these consistent results is due in part to the successful expansion and integration of recent acquisitions. The Parkvale acquisition in Pittsburgh provided us with a solid organic growth opportunities and additional scale to leverage our model. Our success in Pittsburgh validates our strategy with proven results. Our goal is to replicate this success with our expansion into Baltimore and Cleveland. These are two markets that offer similar characteristics and opportunities as Pittsburgh. Our strategy in each of these markets is progressing well with results hitting or exceeding our expectations. Because of the depth of F.N.B.'s executive management team we are able to have two separate teams leading parallel integration efforts for Baltimore and Cleveland.

In Maryland we are very pleased with the integration of Bank Annapolis and the team did an outstanding job ensuring a successful and seamless conversion. Early stage results are positive, pipelines are healthy and loan growth is at or above our targets. We have had great success attracting talented and experienced commercial and retail bankers in the market and have had some exceptional hires. For example, we just recently added a very talented individual to lead consumer banking in the Maryland region. We are also pleased with our success attracting professionals for our other lines of business, including wealth management, private banking, insurance and mortgage. We now have a very strong leadership team in Maryland.

The F.N.B. sales management process is deployed and our culture as a whole has been seamlessly integrated. In June we announced the acquisition of BCSB Bancorp. This acquisition provides us additional scale, access to the attractive Baltimore suburbs and moves us up to the top ten deposit market share position in the MSA. On a pro forma basis we have nearly $1 billion in deposits and 24 banking locations. We view this as a financially attractive and low risk transaction given the leadership team we have established in the market.

The Parkview acquisition expands our existing presence in Cleveland, Ohio. We are targeting a close date in October and we are very pleased to have already secured regulatory approval for the merger, a validating proof point of our core competency as experienced integrator's. In Cleveland we are in the process of executing the same strategy deployed in Pittsburgh and going on in Baltimore. We are very pleased with the existing F.N.B. team in the market and the commercial team that Parkview's CEO, Bob King, has built. With a solid foundation already present, we are focused on augmenting this team with additional hires to support our expanded presence. Given our connections in the market, this is proceeding very well. We have identified a number of well -qualified professionals, including the recent hire of a senior level retail executive, to help drive results.

We have also secured space and signage right for a regional headquarters in downtown Cleveland. This will anchor F.N.B. in the market with strong visibility and provide additional commercial opportunities. In summary, we have a clear strategy for success as we replicate our business model in these high potential markets. Both Baltimore and Cleveland present tremendous organic growth prospects and strengthen F.N.B.'s overall franchise by providing us with the ability to sustain our growth and performance.

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

Thank you, Vince, and good morning, everyone.

The second quarter marked another solid performance for our portfolio, as our key credit metric remained at good levels during the period and reflect the continued stability we have experienced for a number of quarters. This consistency is also evident when measured against our peers, with our key metrics comparing very favorably as illustrated on slide 9. During the quarter our team also completed the integration of Bank Annapolis, which was positioned slightly better than expected, and we were able to seamlessly transition this portfolio into our core loan book. Let's now review some asset quality highlights, first focusing on the originated book followed by an update on Bank Annapolis and rest of our acquired portfolio.

Originated delinquency and nonperforming loans+OREO ended the quarter flat when compared to March, with delinquency at 1.44% and nonperforming loans+OREO at 1.5%, both very good levels. Net charge offs for the second quarter came in at $6.3 million, or 33-basis points annualized for the originated portfolio. While this represents an increase over the first quarter, at which time we experienced very low net charge-off levels, we are pleased with the current quarter's solid results. When measured year over year, our net charge-off level improved by 12-basis points. The originated provision of loan losses was up slightly at $6.6 million, as we continue to provide for strong loan growth in this portfolio, bringing our ending reserve to 1.35%.

Shifting now to our acquired loan portfolio, we ended the quarter at just over $1 billion in loans that are marked to fair value, including approximately $260 million of gross loans added through the Bank Annapolis acquisition. We are very pleased with the position of this portfolio relative to our initial day one estimate and can attribute this to the continued careful monitoring and review work performed by our team throughout the entire due diligence and integration process. The remaining acquired portfolio at $790 million continues to perform within our expectations, with the level of contractually pass due accounts ending the period at $71 million. When excluding the impact of Bank Annapolis, the acquired delinquency improved to $2.6 million linked quarter. The acquisition -- the acquired provision for the second quarter at $1.25 million remained consistent with the prior two quarters.

In closing, we finished out the first half of the year with another solid performance, as our overall portfolio remains very well positioned. Our key originated metrics reflect continued consistency and stability as we remain favorably aligned compared to our peers while our acquired book is performing well within our targeted ranges. As we look to finish out the second half of the year and the integration of the Parkview portfolio, we'll continue to employ the same rigorous approach to effectively underwrite and manage the risk in this new portfolio as well as in our existing book of business.

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

Thanks, Gary, good morning, everyone.

Second-quarter operating results reflect continuation of positive trends Company wide. Strong loan and transaction deposit growth continued, supporting the net interest margin and credit quality was, again, very good. Fee income results were favorable, particularly when looking year over year, and expense control initiatives we discussed last quarter are progressing on target. We are very pleased with these trends and consistent results. As Vince mentioned, Bank Annapolis joined F.N.B. on April 6th so there is nearly a full quarter of results included. We added assets of approximately $435 million, loans of $260 million, deposits of $360 million, as well as $4.6 million common shares. The quarter also included one-time merger costs of $2.9 million.

Let's begin looking at the quarter, starting with balance sheet highlights on slide 7. We have presented both reported and organic growth so you can see what was added with the Annapolis acquisition and how we are growing the balance sheet organically. I will focus on our organic growth results. These results remain strong and in line with our expectations with loan growth of $115 million linked quarter or 5.6% annualized, with growth in both commercial and consumer portfolios. The commercial portfolio continued to display strong organic growth with results again driven by C&I growth. This growth was largely driven by market share gain and commercial line utilization remains at historical lows. For the remainder of the year we affirm our loan growth guidance. Given year-to-date production levels and healthy pipelines at quarter end we continue to expect to achieve full-year mid single-digit organic total loan growth. These expectations are in sync with the second-quarter's year-over-year total average organic loan growth results of 5.6%.

On the funding side we continue to grow lower cost transaction account balances while reducing time deposits. This strategy has resulted in a strengthened funding mix with transaction deposits and customer repos now representing 77% of these balances compared to 73% a year ago. Organic growth for transaction deposits and customer repos of $137 million, or 7.4% annualized, was partially offset by the expected decline in time deposits. Given our success growing deposits and improving mix, we reaffirm our full-year organic total deposits customer repo growth expectations in the low single digits. The second quarter net interest margin was 3.63%, narrowing 3-basis points linked quarter, in line with prior guidance. This modest decline was primarily due to lower accretable yield, which as we have discussed in prior quarters will continue to be lumpy.

For the quarter, accretable yield totaled $0.5 million, lower than both last quarter and the year-ago quarter. We continue to break out these components on slide 12 in order to view the underlying trends in our core margin. As you can see, the core net interest margin has been relatively stable over the past several quarters due to a combination of deposit pricing action, active balance sheet management, consistent loan and transaction deposit growth. For the remainder of the year we reaffirm our guidance and expect the full-year net interest margin to be in the low to mid-3.60% with fourth-quarter levels being around 3.60%.

Next let turn to non-interest income and expense. Total non-interest income increased $3.1 million, or 9.1%. Results reflect seasonally higher service charge revenue, including the benefit of Annapolis Bancorp-related volume and consistent results in wealth management and insurance. In addition, we recognized a $1.6 million gain on the extinguishment of debt related to a portion of our trust preferred securities. One of the pool trusts that held our paper was being unwound and we had the opportunity to repurchase this obligation at a discount.

Moving to non-interest expense on slide 11. The overall linked quarter increase primarily reflects the addition of Bank Annapolis operating expenses and the $2.9 million in merger-related costs I mentioned earlier. Looking at non-interest income and expense expectations for the remainder of the year let me remind you this Durbin amendment became effective for F.N.B. on July 1st. While we do expect to fully offset the Durbin impact over time, the exact timing of revenue and expense initiatives we have in place will come into play over the next few quarters. Therefore non-interest income will experience a decline relative to second-quarter levels and begin to trend back upwards during the fourth quarter as we begin to more fully realize the benefit of revenue initiatives. With this in mind we expect non-interest income to be in the $32 million to $33.5 million range with the third quarter near the lower end of this range. This is consistent with our full-year fee income guidance we provided on last quarter's call and also takes into consideration the $0.01 per share decline we had discussed in April due to lower service charge volumes.

We have communicated in the past part of our strategy to offset Durbin is through expense reduction and containment initiatives. Therefore we look for non-interest expense to decline slightly from second-quarter levels given the focused efforts we have in place to tightly manage expenses. This revenue and expense guidance is not taken to the Parkview acquisition, which will close in the fourth quarter.

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

Looking at our capital position at June 30th, regulatory capital levels slightly declined, primarily reflecting the $15 million trust preferred repurchase as well as the initial impact of the Bank Annapolis acquisition. You may recall from our initial discussions at announcement that there would be minor dilution in capital that would be recouped over a very short period of time measured in months. Potential equity ratio was 611 with 11-basis point decline entirely due changes in OCI for unrealized losses on securities given the recent move up in interest rates. I would remind everyone that our overall interest rate risk management strategy of maintaining a short duration in our securities portfolio held in close to 50% of that portfolio in the health and maturity bucket should mitigate the impact of future interest rate increases. We continue to exceed all regulatory well-capitalized thresholds. On a final capital note we are in the process of evaluating the final Basel III rules and will continue to manage capital efficiently in the best of our shareholders while remaining in full compliance with these rules. For taxes we expect an effective GAAP tax rate of 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.

The first six months have proven very successful. With a consistent strategy in place we've delivered strong operating performance and continue to position F.N.B. to deliver sustainable results. At the start of the year we communicated several strategic areas of focus for 2013. These included the evolution of our delivery channels and continuous reinvestment in our people, processes and infrastructure, while remaining keenly focused on expense control and efficiency improvement. They also included leveraging our cross-sell culture and the pursuit of potential M&A expansion in attractive markets.

There have been significant accomplishments in each of these areas. We continue to evolve our delivery channels through the electronic banking platform and branch realignments. The trends for on-line and mobile banking usage are very positive and validate our strategy. For example, mobile remote deposits have increased at an average monthly rate of 27% since introduction last December. Total customers enrolled in on-line banking have increased 13% year to date with over 175,000 currently enrolled. Cost control and efficiency improvements encompass several areas including the expense containment guidance Vince provided.

The benefits from a strong cross-sell culture are reflected in our results and we are leveraging this attribute in Maryland, Cleveland and across all business lines. This can be seen in wealth management revenue, with year-over-year revenue growth of 20%. In closing, I would like to congratulate the F.N.B. team on our continued outstanding accomplishments and their dedication to position F.N.B. for future success.

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

Thank you.

(Operator Instructions)

We'll go first to Bob Ramsey with FBR.

Good morning, guys. First question I had was around consumer loan growth. It seemed that growth on the consumer side, outside of resi mortgage, was particularly strong this quarter, and I was curious if there is anything in particular driving that growth?

Well, I would say, Bob, that the focus on the sales management system, the score cards that we put into place, in combination with some marketing tactics, pricing changes that we made and just an increased focus by the field. And I would also add that I think that we've gotten to the point, we've been repositioning the delivery channel, we've been exiting some slower growth markets and reinvesting in some higher growth markets and we're starting to see the benefits of that realignment of the retail delivery channels.

Okay, that's helpful. And then I was wondering at sort of a higher level you could talk a little bit about -- you guys have got very, very strong profitability in price and efficiency, you've had pretty consistent loan growth, so you are doing great job on a lot of fronts, but earnings seem to be range bound and I don't know, a $0.19 to $0.21 or $0.22 range. I'm curious what it's going to take get earnings per share up. Do you need a little bit better rate environment? Is it a question of getting some of the cost saves from the recent acquisitions? Or what is it going to take to take earnings up to the next level?

I think part of the -- the historical issue has been compliance with the very difficult regulatory environment. We've significantly added to our compliance staff and our risk management staff over the last few years, so there's been a sizable increase in expense related to complying with the never ending stream of regulation. So part of it is those are non-revenue producing FTEs that are a necessary part of competing in this banking environment, and we've made the appropriate decisions investing in those areas.

I believe that a lot of that is behind us and I think that as we move forward into the markets that we've positioned ourselves in we will experience great success in Cleveland and Baltimore in terms of organic growth. The acquisitions we've done, albeit smaller, have really positioned us much better as a Company as we look forward and we would hope to start to reap the benefits of those investments over the coming years. That's -- it's just basic block and tackling and positioning the Company to benefit from better markets.

Bob, I would add, too, that if you look year over year, that the second quarter last year, you may recall, we had about an extra penny of accretable yield that we had recorded in the second quarter, so adjusting for that it's up a penny, 5% in this environment, I think, is pretty good. And I think also your comment about the acquisitions, we just brought Annapolis on in the quarter, so that takes a couple of quarters to hit your stride as far as expense saves, and the team's already put loans on the books. But the expense saves take a little bit time of time for those to get fully realized. So that'll also help, in addition to the things that Vince mentioned as far as the new markets.

That's helpful color. Okay, thank you, guys.

Thank you, Bob.

We'll go next to Jason O'Donnell with Merriman Capital Group.

Good morning. Just in following up on the question that Bob asked, in your discussion it sounds as though you're saying that organic loan growth could potentially or should potentially be stronger than the higher -- or higher than rather the mid-single digit pace that you all have been at for sometime next year. Is that a fair assumption, assuming that the economics status quo?

I think -- you really have to take a step back and look at the overall economic climate over the last few years. This Company has grown consistently throughout the downturn, So we've had very nice organic growth in a number of categories throughout the downturn. The economy itself has not really given us any help. Most of our growth has from better execution, market share gains, positioning our people in the right markets with the right opportunities.

As we look forward, just line utilization alone, we talk about that all the time. We sit here today at levels below 40% where historically it's been north of 50%. That in itself would be a tremendous help, if companies started investing again in the future. I believe as we move through this cycle and gradually emerge from the depths of a weak economy we should get some benefit from overall activity increasing and with the large number of clients that we've been able to attract over the last three years here, four years we're in a very good position to benefit from that. So, increased loan demand from commercial borrowers, a better economy, and continuation of grabbing share in higher growth markets should lead to better success from a growth standpoint.

I would just add, too, that, Jason, the way we have talked about organic mid single digit is core F.N.B., so obviously with the acquisitions you're going to get incremental lifts out of those acquisitions in those markets. It's not in my core run rate that I talked about, so clearly there's opportunity for more working off of the second-quarter base just by adding in those additional markets.

We often fail to give ourselves credit for the M&A activity. We really focus internally here on organic -- pure organic growth, I think that's the only way we can continue to deliver the results we've delivered.

Great, that's helpful. Then just switching gears a little bit, it looks like for the quarter core operating expenses were a little bit higher than what we were anticipating. I'm wondering, in terms of the acquisition of Annapolis how long do you expect it to take extract your targeted cost saves?

I would say really a quarter or so. I would think definitely by the beginning of the fourth quarter that should be fully baked in.

Okay, and then one more. In terms of the expense base longer term I'm wondering roughly how much in expenses does the launch of your new regional headquarters in Cleveland toward the end of the year add to your annual expense base?

That's very minimal, truthfully. We had a great opportunity to move into that space. We're actually consolidating people from other locations into that space, and we're talking that a maximum 10,000 square feet of office space, so it's rather minimal. I think the opportunity to move downtown to secure the naming rights there, the signage capability, is important. It's an important message to send to Cleveland that we're there to stay, we're there to compete. We believe in the initiatives that are going on in downtown Cleveland and we want to be a part of that. I think it was more about making a statement to the marketplace, so I don't envision that being a major expense burden for us as we move forward.

Thanks a lot, guys.

Thank you.

We'll go next to David Darst with Guggenheim Securities.

Good morning. I guess with what you announce, front running the acquisition to build out the infrastructure in the market in Cleveland, have you already done that with Annapolis, or is there more you need to do in Baltimore in anticipation of closing and wrapping that market up?

We're still in the process -- we're in the process of building out the team in Baltimore. If you look at the Annapolis acquisition in isolation, we have fulfilled our plan in terms of hires for just Annapolis. As we expand that strategy and we build out across Baltimore there will be additional hires that we will be making over the coming weeks and months that will supplement what we're getting from BCSB Bancorp, so we are still building out the team.

Having said that, we were able to attract some very high level executives from other financial institutions, much larger financial constitutions, to provide leadership in the region, so what we're buying and the people that we hire are going to be added to that team. Essentially we've built out the leadership group, we have the infrastructure in place, we've rolled out our sales management systems in the market and we've made some tremendous hires from a leadership standpoint, so we're in a really good position as we move towards consolidating Baltimore county. We're very pleased with where we are. In fact, the pipelines in Annapolis are beyond what we expected, so we're experiencing some very nice commercial growth in that market, and it's attributed to the team that we've attracted.

Okay. Then just with the balance sheet post acquisitions closing -- you may have given this in some other format -- but where will residential loans be as a percentage of the loan portfolio? And then is the idea to run that down like you've been doing the past couple of years?

I think while Vince looks up the statistic, our strategy has never been to grow the residential mortgage portfolio at the bank. The growth that you're seeing in the total portfolio actually is growth that's occurring beyond the reduction, a significant reduction in the residential mortgage portfolio over time. So, once that stabilizes and we've gotten to a level where we feel comfortable with you should see larger growth percentages.

That residential portfolio is about 12% of the total book of business and as Vince mentioned, that is not a focus to continue to grow that book. We're selling a lot of on a flow through basis there from that standpoint, so that will continue to be the focus.

Understand, I'm just trying to quantify the headwind that total loan growth might have.

I think given the interest rate environment I think you've seen an increase in mortgage rates that are fairly significant. So the prepayment speeds and curtailments in that portfolio should slow dramatically. So we've been facing that, too. We're not pulling the stuff onto our balance sheet. We're living with portfolios that were acquired that don't fit our what we like to see in a portfolio. We don't like residential -- long-term residential real estate loans on our book. So that portfolio's been running off and those prepayment speeds should slow based on what's happening with the overall economy.

If things tend to pick up what could happen is growth in commercial will accelerate because of increased loan demand from existing customers, interest rates at that point will be rising, because the economy will be improving. And hopefully the Fed will reverse course, and you'll see a slowing in prepayment speeds of that mortgage portfolio. I guess that's how I would look at it. That's my own opinion. But hopefully that's helpful.

David, I would just add that I think the key point there is the prepayments. And as refi's slow down, if we looked at our refi purchase mix with the recent movement in rates with 60/40 refi purchase for the second quarter, today it's probably more like 35/65. And I think what'll happen is you'll just see that portfolio won't reduce quite as quickly. But it's not an area that we grow, really the additions we make to that portfolio is when we do an acquisition and then we work it down over time. I can't give you a percentage, but the path to that portfolio, and then the growth being into other categories, as a percentage it'll just keep declining over time.

Okay. And Vince, could you talk about some of the specific areas, and maybe quantify how your net interest income would benefit from this being at the curve about 100-basis points?

Sure. When we look at our interest sensitivity -- let me just grab my -- if we look at our interest sensitivity as of the end of June, up 100 to 1.4% in a shock scenario. Up 100 in a ramp where you're gradually moving up over a 12-month period is 0.9%. So we're little less asset sensitive than we were at March, just given the movement in rates and some of the balance sheet growth that we've had. And I guess, if you think about the -- one of the things we model for and it's baked into our guidance is that the recent move up in interest rates, what's that worth to us that's baked into our guidance. And that's about a penny a share of additional net interest income from the recent moves that we've seen.

Good. Thank you.

(Operator Instructions)

At this time we'll go next to Aaron Braun with KBW.

Good morning, gentlemen, this is Aaron calling in for Colin Gilbert. I think I'll just maybe follow up the previous question. Rates have obviously moved up fairly significantly in the last month or so, at least from the benchmark rate, yet your NIM guidance appears to be largely unchanged from where it was three months ago. Is there some dynamic at work that's lessening the margin impact that we should be thinking about, either on the asset side or the funding side?

I think there's -- we got the academic answer, the mathematical answer about the change in rates, now we'll talk about the practicality about what's happening in the marketplace. Many of the loans that we bring over, particularly commercially, are priced off of one-month LIBOR or prime, so if we see a change in the short end of the curve we're going to get significant benefit. So, the assets will be priced much quicker than the liabilities, so I think there's -- you get that benefit.

I think you also get a benefit when you're in the field from a practical standpoint negotiating a rate with a borrower. When you're bouncing along the bottom of all-time lows there's very little --. A basis point here and a basis point there means a lot to you and maybe not so much to the borrower. As rates begin to increase, it actually becomes easier to negotiate spreads that are more favorable, and I think because there's more room, and that's what tends to happen.

And I think as we move through this interest rate cycle and rates start to pick up on the short end of the curve and not just with the ten-year treasury, there is some benefit to having improvement in the ten-year treasury, but there's a lot of benefit if the short end of the curve moves. The yield curve steepens and the short end comes up. We will get more benefit. I guess that's my answer, Vince, I don't know if you want to add to that.

Yes, I would just add that if you look at our total loan portfolio, 60% of it is adjustable or variable. 18% of our total loans are tied to one-month LIBOR, to Vince's point, so that won't receive the benefit until the short end moves, so I think that is still to come and it's part of our overall sensitivity. I think the rates that Vince is describing are being mitigated by the impact of the higher rate environment on our investment portfolio and just generally on loans. I should also clarify, the penny that I mentioned was a full-year annualized impact, so it would be about half of that for half of a year.

And finally, could you just comment on the loan pricing. I think three months ago you were talking that many banks, maybe particularly smaller banks, were being quite aggressive. Have you seen any change in that dynamic?

No, I haven't seen a change. I think the environment is such that everybody's looking for higher yielding earning assets, so it's fairly competitive. I would say that given what we've been able to accomplish promoting our brand in the markets that we're in we're now in the considered set, so our pipelines are pretty good. We're being asked to bid on just about everything that's out there because of our positioning, and the positioning of the brand and the people that we have. So I think that we'll get looks at opportunities.

I think the existing portfolio that we have, the growth that we've experienced growing our customers, they're pretty loyal and I think we'll be able to maintain margin within our existing customer base because of the high level of service that they get. People are fairly positive about the experience, so that bodes well for us. But I do think that the competitive climate is real, and it's out there. So we have to contend with it. Having said that, we've been able to maintain our margin, so the credit spreads haven't impacted us too much. And again, I attribute that to the service levels and the excellent job the commercial bankers are doing and the retail bankers are doing in the field.

Plus our markets have been always competitive.

It's extremely competitive in all of the markets we compete in.

Understood. Well, thank you very much.

And we will go last to Matthew Breese with Sterne Agee.

I'm sorry if I missed this, but how much in the way of interchange revenue is at risk from the Durbin amendment?

Well, the unmitigated is about $2.5 million a quarter and that's why -- over time we will fully offset that, but you're going to feel some -- won't feel all of that, but a good portion of that feel in the third quarter.

Right. The full impact will be in the third quarter with offsetting coming later in the year.

Right and into next year.

And then with the next two acquisitions coming on board, where do you see the efficiency ratio shaking out?

We're not -- we don't really give guidance for next year yet at this point, but I would say that holistically 55% is a long term target that we have. I think continuing to run it under 60% with Annapolis coming on board this quarter, we were pretty pleased with that being at 58%-type level.

I think over time getting towards a 55% over the next couple of years is a target we would have. But it's going to take awhile to get there just because of -- you still have FDIC insurance and regulatory costs and all those kind of things that are sitting on the expenses as an additional burden, but that's the target that we think about.

Right, and to go from 58% to 55% over the next couple of years I'm assuming that's assuming some revenue gain as opposed to expense?

Well, it could be a combination of both, but I would assume that as we move into the higher growth markets that we've positioned ourselves in we would have some acceleration of revenue. And with the interest rate environment changing you get benefits there as well, so we would expect those -- all three of those factors to be contributors to a better efficiency ratio.

Okay. And then my last question, as it relates to M&A, with two deals in the pipe is there a desire to add to that and add another one onto the acquisition list? And if so, what markets interest you guys, where do you want to be next?

Well, let me answer it in two pieces. First of all, I will say that we truly have developed a core competency in our ability to integrate these acquisitions, and the three that we've done are relatively small and play a very important strategic role for the Company. But the success we've had in attracting talented people to help us move forward with those acquisitions has been extremely pleasing to us. It's beyond what we expected. So we are very fortunate that we've been able to attract the people that we've been able to attract.

As we build out those teams, sure, if additional opportunities come up we'll take a look at them. Keep in mind that we are very focused on EPS accretion. As Vince mentioned earlier, when you do an acquisition you get the shares right away and then the execution comes over time, so the EPS accretion comes over time, as you see in the models, and we're very focused on that.

We're going to manage what we have, and if something comes down the road it has to meet the criteria that we've established, and that's EPS accretion within a very short timeframe, and minimal dilution to tangible book, with the ability to recoup any capital diminution in a short period of time. All of those rules that we've established still apply and the IRR has to be north of 15% generally. So that's the answer to the first piece.

From the location standpoint, obviously in market deals are attractive because of the ability to take expense out and to add to the existing platform. We'll evaluate how we're performing from a growth perspective because in every acquisition that we do here at this Company, the acquisition is not the end game to solve for a lack of growth in the portfolios. We do acquisitions to position the Company to continue to grow organically, which is why we fixate on being transparent about organic growth, and I can't emphasize that enough.

If the acquisition has the opportunity for us to take cost out, positions us to continue to grow organically, we'll take a look at it. And in what markets across our footprint and adjacent markets, if there's an ability to again hire great people in an adjacent market we'll look at that, but that's where we are.

And if it relates to overall size. You guys have done some smaller deals recently and it seems to have worked out pretty well, does that change your thinking of potentially doing something more transformative?

No, not necessarily. Again, we really focus on shareholder -- creating shareholder value and that's our primary focus. We have done larger acquisitions, Parkvale is an example. That was almost $2 billion in assets and the integration went extremely well and we've benefited from that. So, we're not -- the size -- we don't really manage the Company looking at total asset growth, we manage the Company based upon our ability to grow earnings and position this entity to produce earnings growth in the future. So, we'll look at every acquisition through that lens.

I would add, too, that the reason we've done smaller deals is because that's what's been -- the opportunity has in the marketplace, so if there was something larger we would clearly look at it. It's not that we're excluding that, but as you know there haven't really been any larger transactions in our core market. So we've been opportunistic in the past and would continue to be. There's not a size limit that we have in our mind but it would have to meet all the criteria that Vince talked about earlier.

Okay. Thank you, guys.

We'll take follow-up question from Aaron Braun with KBW.

Sorry, I just wanted to follow up on two things and confirm that I heard them correctly as it relates to the guidance. Were you targeting fee income at $30 million to $33 million -- I'm sorry, $32 million to $33 million per quarter for the second half of the year?

Just remind myself what I said here. $32 million to $33.5 million range with the next two quarters, with the third quarter near the low end of that range.

Okay, so $32 million to $33.5 million, okay. And operating expense, that should decline in 3Q presumably in part as you get more of the cost saves out of Annapolis, and would 4Q, do you think it would be relatively flat from there?

Yes, I would think pretty stable from there.

Okay.

Before Parkview, that's without the addition of Parkview. Core F.N.B.

I appreciate that very much.

And this does conclude today's question-and-answer session. At this time I will turn the conference back over to Mr. Delie for closing remarks.

Well, I'd like to thank everybody for participating in our call and we had another great quarter and we're excited about the future. I appreciate you guys calling in and appreciate the questions. Have a great day.

This does conclude today's conference. Thank you for your participation.