FNB Corp (FNB) 2013 Q3 法說會逐字稿

Good day and welcome to the F.N.B. Corporation third quarter 2013 earnings conference call.

(Operator Instructions)

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

Thank you. Good morning and welcome to our third quarter earnings call. Please note that this conference call of F.N.B. Corporation and the reports filed with the Securities and Exchange Commission often contain forward-looking statements. Refer to the forward-looking statement disclosure contained in our earnings release, 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 October 25, and a transcript of this call and the webcast link will be posted to the Shareholder and Investor Relations section of our 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 third-quarter performance and discuss several strategic developments. Gary will review asset quality and Vince will provide further detail on our financial results along with expectations of the fourth quarter of 2013. Vince will then open the call up for any questions.

Let's begin by looking at the quarter's results. We generated operating net income of $32 million or $0.22 per diluted share. This translates into 112 basis point return on average tangible assets and over 18% return on average tangible equity. These profitability measures exceed peer results as shown on slide 7 of the presentation. A key profitability driver is our ability to deliver consistent loan and low-cost deposit growth. We performed very well during the third quarter with annualized total loan growth of 9%.

Year-to-date commercial production is at record highs. We posted annualized commercial loan growth of 4%. Line utilization rates remained at all-time lows and trended slightly down at the end of the third quarter. While this impacts outstandings in the short term, our strategy, focused on establishing these client relationships, will benefit F.N.B. in the future. Consumer loan growth was a very strong at 25% annualized as we realize benefits from repositioning our delivery channel and expanded footprint and increased seasonal demand.

You will recall that we have a branch optimization strategy designed to continuously reposition are resources. This strategy has generated considerable cost savings through the consolidation of close to 50 locations since the start of 2012. We have chosen to reinvest a portion of these savings to enter higher-growth markets through eight de novo expansions. These actions improve efficiency and deliver growth, supported by our proprietary sales management process, and we are beginning to see tangible results from our efforts. Low-cost transaction deposit growth continued at a rate of 7% annualized through very strong, non-interest bearing deposit growth of $132 million or 28% annualized. The majority of this growth is a direct result of obtaining new, commercial clients as well as seasonal influences. Growth in these low-cost balances strengthens the funding mix and contributed to improvement in the net interest margin.

We have achieved solid growth in loans and transaction deposits over a sustained period of time and slide 9 provides a view of this growth since 2010. Organic loan growth has averaged over 6% and average growth in transaction deposits has been nearly 9%. These results are largely attributed to acquisition related expansion and gaining scale in higher growth markets. Our acquisition strategy continues to progress well. The Park View transaction closed on October 12.

We now have 29 locations in eastern Ohio, with 18 in the greater Cleveland area and a regional headquarters in downtown Cleveland. We are well prepared to execute our strategy. The customer conversion went seamlessly and our team did an outstanding job. We have attracted and retained top talent in the market and have an exceptional local leadership team on board. Production goals are established and aligned with expectations set in our modeling process and our sales management system and culture is already solidly in place.

In the Maryland market, we are hitting or exceeding production goals and the pipeline at quarter end is healthy. We also recently secured space and signage rates for our regional headquarters in downtown Baltimore. This highly visible office building is located in the Inner Harbor and conveys our commitment to the area. The BCSB transaction is targeted to close next February, and it will move us into the number ten market position in the Baltimore MSA.

The expansion efforts are progressing as planned and exceed our expectations in many instances. The smaller scale of these recent acquisitions is lower risk. This is by design and allows us to strategically enter these markets, build a presence and significantly enhance our organic growth prospects. Both markets complement F.N.B.s proven core competencies and we are pleased with the early-stage results.

Given our growth, it was timely for F.N.B. to become a rated financial institution. In early October we secured an investment grade rating from Moody's, which provides enhanced access to capital markets and benefits efforts in the field. Our commercial bankers now have expanded capabilities to obtain the business of certain credit and large depository clients requiring an investment grade rating. This also distinguishes F.N.B. as one of the few rated financial institutions our size. Investments such of these position the Company for sustainable success and are occurring company wide, from mobile banking initiatives that produce revenue growth and account acquisition, to consistent investment in our risk management infrastructure, we are continuously balancing efficiency, growth and risk management.

Looking specifically at our risk management platform, costs associated with our infrastructure have increased over 50% during the last five years. These costs are embedded in our run rate expense levels and reflect our long-term commitment to a strong risk management culture. With the significant investments we have already made we are well positioned to manage increased regulatory burden.

In summary, we are very pleased with our operating results. The quality of our earnings is strong and profitability drivers continue to demonstrate solid results. We have achieved a major strategic milestone with the establishment of F.N.B. in three major markets - Pittsburgh, Cleveland and Baltimore. This positioning, along with our existing foundation, provides great potential and we are excited about the opportunities ahead of us. With that I will turn the call over to Gary, so he can share with the quarter's asset quality results.

Thank you, Vince and good morning, everyone. It was another very solid quarter from a credit perspective with our overall performance metrics remaining at good, consistent levels. The third quarter's results include very low net charge-offs, a stable reserve position, slightly improved delinquency and continued positive movement in already solid NPL plus OREO levels. I will focus my comments on the originated book, which we believe provides the clearest view of our core portfolio trends and will then briefly discuss our acquired portfolio.

Net charge-offs were very low at $5 million, or 26 basis points annualized, reflecting solid performance for the quarter, remaining just below the year-to-date level of 27 basis points annualized. The originated provision for loan losses was up $900,000 over the prior quarter at $7.5 million, due to strong loan growth while our reserve positions remained stable at 1.34%. Originated nonperforming loans and OREO improved 10 basis points during the quarter to 1.49%, marked by lower nonaccrual at OREO levels due to the resolution of some problem assets. Delinquency remained unchanged in the quarter at a very good level of 1.44%. We are pleased with the current position of our originated portfolio and the further improvements we experienced during the third quarter as it continues to trend as planned.

Shifting now to our acquired loan portfolio, we ended the quarter out $950 million of loans carried out fair value. This portfolio continues to perform slightly better than expected due to the curing and resolution of some delinquent accounts as well as improved future estimated cash flows. The level of contractually past-due accounts ended the period at $58 million, a $12 million decrease from the prior quarter. As a result of these positive loan quality trends, a small benefit was realized as it relates to the acquired reserve. Following the end of the quarter, we finalized the conversion of the Park View loan portfolio. Consistent with our strategy for acquired books, we have been closely monitoring it throughout the course of the entire due diligence process and are pleased with the day one position of the portfolio relative to our initial estimates.

As we move into the final quarter of 2013 we continue to be very pleased with the overall credit quality performance and the solid position of our loan book at this point in the year. The portfolio demonstrated consistently good results and remains within our targeted ranges as anticipated, which we attribute to our strong banking team, sound credit delivery process and a rigorous approach to managing risk. This balanced strategy has driven our positive credit results throughout the cycle. As we grow both organically and through acquisitions, we will continue to manage our book in this manner.

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

Thanks, Gary. Good morning, everyone. Third-quarter operating results of $0.22 per share reflects strong balance sheet growth, a slightly expanded net interest margin, and very good credit quality results. Revenue was maintained at a level consistent with the prior quarter, as solid growth in net interest income offset the $2.6 million Durbin impact.

Let's turn to the balance sheet highlights on slide 13. These results were strong and better than we expected with linked-quarter loan growth of $200 million or 9.3% annualized, with growth in both the commercial and consumer portfolios contributing. Market share gains continue to drive commercial results as commercial line utilization remained at historical lows as Vince discussed earlier. The consumer loan portfolios had strong growth of $172 million, or 25.3% annualized. The growth was predominantly in home equity installment products, originated across our branch network. Two-thirds of the third quarter's volumes represents a first lien position. Looking ahead to the fourth quarter, we expect to achieve continued solid organic loan growth results at an annualized rate in the mid-single digits.

Funding trends were positive with continued strong growth and lower-cost transaction account balances offsetting a planned decline in time deposits. The quarter benefited from new account acquisition and seasonally higher balances in business accounts. Growth in non-interest demand deposits was the primary contributor with growth of $132 million or 27.5% annualized. This further strengthened the funding mix with transaction deposits and customer repos comprising 78% of the total, improved from 74% a year ago. The teams ability to consistently bring in these lower-cost deposits along with the loan relationships is an important contributor to maintaining our net interest margin. We expect to see continued organic growth in transaction deposits and repos at a seasonally related lower growth rate than the third quarter. This, combined with planned declines in time deposits, is expected to produce flat to low single-digit total deposit growth.

The third quarter net interest margin expanded 1 basis point to 3.64%. The margin benefited from the solid growth in loans and non-interest bearing deposits, a lower cost of funds and higher yields on the investment portfolio due to more favorable reinvestment rates and reduced premium amortization. Our diligent (technical difficulty) process and pricing strategies have served us well in managing the net interest margin to a relatively stable position. With our success managing the margin through a combination of levers, we reaffirm our guidance for full-year net interest margin in the low to mid 3.6%s with some slight narrowing expected during the fourth quarter.

Looking now at non-interest income and expenses, total non-interest income decreased $3.9 million as expected due to the $2.6 million Durbin related impact to debit card interchange revenue and the $1.6 million gain on the extinguishment of debt that was recognized in the second quarter. Excluding these items, non-interest income increased slightly with overall solid results from our other revenue streams. On a year-to-date basis, operating revenue grew 3.3% compared to the prior-year period. Non-interest expense excluding merger costs increased $1 million or 1.3% with lower occupancy and equipment and OREO cost offset by higher personnel costs. Increase in personnel costs reflect higher accruals for incentive- and performance-based compensation tied to our financial results, the impact of preemptive hiring for our expansion markets and some severance costs related to the consolidation of six locations. We expect to reinvest the cost savings generated from this year's consolidation efforts into planned de novos and higher growth potential markets.

For the fourth quarter, we expect non-interest income to be in line with the current quarter. On the expense side, expectations are for non interest expense to decline from third-quarter levels. These expectations are for core F.N.B. and do not include Park View. As Gary discussed, asset quality was very good during the quarter as results continued to favorably trend within our expectations. Provision for loan losses is expected to be in the $8 million range in the fourth quarter, slightly higher than the third quarter due to normal seasonal fluctuations. These expectations would result in a full-year provision for loan losses in line with the prior-year level, which is slightly better than our original expectations. The effective rate for the quarter included the benefit of $1.4 million in tax credits realized on the most recent tax return.

We expect the effective GAAP tax rate to return to a 28% to 29% range in the fourth quarter. Regulatory capital levels continue to exceed all well-capitalized thresholds and estimated ratios are consistent with prior-quarter levels - the tangible equity ratio of 6.09% compared to 6.11%, reflecting the strong asset growth during the quarter. As Vince mentioned we recently added Park View to F.N.B. This transaction will add approximately $715 million in assets, $500 million in loans and $620 million in deposits. Given the size of the transaction, we expect it to be relatively neutral to earnings for the fourth quarter exclusive of one-time merger costs.

In closing, I would like to join Vince, congratulating the team on successfully completing our third acquisition, integration and conversion since 2012. This is a core competency at F.N.B. and we are very proud of the team we have in place to make these conversions happen and support our continued growth. This concludes our comments and I will now turn the call over to the operator for questions.

(Operator Instructions)

Jason O'Donnell, Marion Capital Group.

On the expense front, how much, if any, of the linked quarter incremental incentive and performance related compensation expense is nonrecurring in nature?

Well, if you look at expenses, let me just comment on that for a minute. There was quite a bit of noise in the quarter. The first thing I should say is that, the third quarter is when we typically take a hard look at our incentive- and performance-based accruals to see where we stand relative to our performance nine months into the year. Given the very strong loan growth, better than what we had expected, we increased our accruals by close to $2 million to true up the nine-month period.

We also had some elevated medical claims for the quarter, which can be choppy. So, on a combined basis, this added $2.5 million to third-quarter expenses. I don't expect to record anywhere near that amount in the fourth quarter, because one, you'll just have three months worth be expensed. It will be significantly lower than that $2.5 million.

Then, we also had -- just a couple other comments on expenses, for everyone. We also had about $0.5 million in costs related to hiring third parties to help us with stress testing. We'll probably have another quarter of that and then that will drop off. As I mentioned in my remarks, the preemptive hiring in advance of the deals that now that the deals are on board you get the benefit of that by having the team hitting the ground running. Without the merger costs, Jason, just to close that out, expenses would've been $82 million for the third quarter. Looking ahead to the fourth quarter, I expect that to be closer to $80 million with out the merger costs.

Okay, great. One more question on the lending side. Can you tell us where home equity line utilization is pacing, at least in the third quarter and what that trend has been?

Jason, that portfolio averages up a little north of 50%, in that 55% to 60% range. It does bounce back and forth little bit, but that is typical from a line utilization standpoint. The activity and volume in Q3 was heavier to the term loan side, so there was a very good fundings on those term loans, naturally, right out of the gate.

Okay. Thanks, guys

Frank Schiraldi, Sandler O'Neill

Just a couple of quick questions. First, I wanted to ask about, it looks like you guys have had pretty good success in taking lenders and taking business from others and growing organically as well as growing through acquisitions. It doesn't sound like to me from your comments, Vince, you expect a lot of growing pains in the short term on the expense side. Vince, you mentioned that regulatory costs have been built in and are somewhat behind you. I just wondered if you could talk a little bit about 2014 and your expectations for efficiencies in 2014? Should we expect efficiency ratio to hover around current levels? Or would you think directionally we could move up or down?

Well, I can't really comment on 2014. We'll be giving guidance on 2014 later in the year.

January.

In January. So, I can't give any detailed information, but the point of mentioning investment in our risk management systems, a number of equity analysts and institutional investors have asked us what the consequences of moving above $10 Billion means for us. We've repeatedly told those folks that we've made considerable investments all along the way in our risk management system. We actually conducted a study to make sure that we have kept pace with the growth. When we look back at it was remarkable that there was a 50% increase in a number of areas that are directly related to the regulatory environment. I think we've made that investment and on a go forward basis we are very well prepared at this stage in the game to cope with the regulatory climate as we move into 2014 and 2015. So, that was the point in mentioning that. There's been no degrading of our culture and we're very focused on risk management. It's evident in the performance of our portfolio, as Gary mentions, the credit metrics are exceptional. We're still focused on it.

From an overall efficiency standpoint, we also mentioned we consolidated 50 branches. I think in the last 2 years we've consolidated 50 branches, so our efficiency in terms of directly relating it to the efficiency ratio, sure, we would expect to continue to improve over time as we reap the full benefits of repositioning in the higher growth markets and taking out lower performing retail branch locations. Our expectation is that we would continue to improve over time. That's the reason for the strategies that we laid out.

Okay. Is there a goal for the efficiency ratio over time, a longer-term goal? Or has one not been disclosed?

We've talked about it before. I'll let Vince comment on it.

We've talked about over longer-term getting closer to 55% as a goal once you have all the acquisitions bullying gear and fully contributing to the Company. As you know we are very disciplined in expense control. We always have been as a company. We've mentioned in prior call. We've had some initiatives, the branch initiative's something we talked about. Vendor management, we really ramped up our vendor management program. Things like process reengineering, so that as we continue to grow, taking a look at how we move things through our processes is something we'll take a look at.

Frank, as I look around I'm very impressed with what this Company has done. I mean the headwinds in every year it's been something major, FDIC premiums elevated, Durbin, rising regulatory costs, I think we've done a great job of managing our expenses and growing through that and managing integration of acquisitions to give us scale to cope with it. I would expect over time, if we're not thrown another curve, we should be able to perform exceptionally well.

Okay. Switching gears to M&A, just wanted to see if you could remind us on your ability and willingness to do additional deals? How you're thinking about geographies at this point? Is it more fill out the geographies you're in or possibly additional, new geographies?

Well, we've gotten through, as Vince mentioned, we've integrated three. We have one small deal left in February, and that's gone exceptionally well. Because of the Annapolis deal we already have a great leadership team in place there. Integration of that particular acquisition should be a little smoother because of what we've already built. We really don't have a lot on our plate.

I would say we continue to look for opportunities that will enhance shareholder value. We continue to look for situations where we can take cost out and benefit from being in higher-growth markets. Our strategy from an M&A standpoint, we've repeatedly told you and others that our strategy is centered around positioning the Company to benefit from organic growth opportunities. We don't just attach the banks that we buy, we essentially deploy our model and drive growth. I would say we'd be open to looking for opportunities that provide either expense take out or growth opportunities that match our organic growth profile.

Okay, great. Thank you, guys

Bob Ramsey, FBR Capital

This is actually Tom Frick. I just have one overall strategy question. You mentioned you closed over 50 branches the last 2 years, but you're also looking to de novo in some of your newer footprints. How do your new branches look different from your old branches from a square footage or FTE standpoint?

The new branches are smaller than some of the older branches. They are more streamlined. We have deployed technology in the new branches that doesn't exist in some of our older locations that aren't as productive. So, having cash dispensers and advanced ATM machines that have remote capture embedded in them, all of those features have been rolled out in the new locations. In some of the new locations that we've rolled out we've gone to teller pods so that there's more interaction with the client. I would say that the strategy has been to shrink the size of the square footage, to move into areas where we've more thoughtfully considered the growth potential or to basically fill in a gap in the delivery channel. We've been very deliberate in where we've gone and I think that we've really evolved the model. So, it's smaller, there's more technology deployed and the people that are sitting within the locations are geared more towards -- they have a more of a sales orientation than they do processing transactions.

Okay, that's some great color, thank you. I wanted to switch gears and talk about you mentioned how NIM was helped by lower premium amortization and higher reinvestment rates. I'm just curious on the reinvestment piece, what are you currently reinvesting out this quarter?

Sure --

And what are you buying to -- sorry.

When you look at our investment portfolio we continue to cash flow about $100 million a quarter. Those securities are coming off at about 2.05% and we're reinvesting at 2.15% right now, duration of about 3.5[%] to 4[%]. Really just buying plain vanilla securities, we don't buy anything exotic. Importantly, we're now reinvesting higher than what is rolling off. Where 2 quarters ago was 50 basis points the other way, so we're actually picking up 10 basis points based on reinvestment today.

Okay.

Then if I could comment on the margin for a second.

Sure.

Overall, obviously we're very pleased with what happened there. The key drivers there, to reiterate, strong loan growth, strong DDA growth and the reinvestment in securities, premium amortization, we really had no accretable yields benefit this quarter. So, that wasn't part of the margin. Accretable yields lumpy from quarter to quarter, there really was virtually no benefit there. Really it was just the strong growth and the balance sheet mix that we were able to bring on.

It's a reaffirmation of the strategy we've deployed in the field and the folks have done a great job of pursuing demand deposits. That's really helped us lower our costs. That's a big part of the margin improvement.

That's good color, too. One final question, we've seen a lot of companies actually see your FDIC insurance expense come down a little bit. Yours was slightly higher quarter over quarter and you cited a revised assessment methodology. I was wondering if you go in to any more detail about that?

Well, this is our first year of being over $10 billion. There's some new line items they've added in the call reports that we're using for the calculation now, so you netted it all together and the most recent invoice we had was about $0.5 million higher than what we're booking in the prior quarter. So, it's probably a good run rate as we go forward, where we were for the third quarter. I don't expect it to keep going up. Then, as they roll forward, with all the various elements of that, things roll off, new things come on. Nothing disturbing there, just I think, part of us now being over $10 billion and getting used to the new approach.

Great. Thanks, guys. That's all I had.

David Darst, Guggenheim Securities.

With the home equity growth, is that a product or something you are trying to manage or move some clients maybe refiing them out of the residential portfolio into a home equity?

It's probably a function of a bunch of different factors to be truthful. The growth, first of all, was across the entire Company. It was more pronounced in the Pittsburgh area because we have a little more density in that market, but it was fairly consistent across the footprint. I think a couple of things are driving that. First of all, if you recall there was a little surge in interest rates so that spurred people to action. We had fairly attractive ten and ten year fixed-rate product out there. People wanted to refinance into it, take advantage of it before rates kicked up.

The second factor is the prepayment speeds in those portfolios have slowed, so the production levels that you're getting have added more to the balances. You're seeing it in the growth percentages. The other aspect of it is, and we've talked about this repeatedly with a number of you folks, we've put a fairly robust sales management system in place. We track activities daily.

Managing the production process in the field has improved tenfold over the last three years here. So, we're getting more of our share of the market than we were getting in the past. All of those factors are baked in to the growth, the portfolio. There is a lot of first mortgage activity going on. Gary, I don't know, you have the statistics of that portfolio?

For the quarter, it was two-thirds of the volume and that's not atypical for our portfolio. When you look at the activity that we've had and reported to you in the past, it has always been a significant piece of our business. On the whole, it's slightly under that two-thirds level today with some of acquisitions that we've brought on, but that continues to be a major piece of our home equity book.

Yes, low loan-to-value, fairly short tenor, average life, it's below nine years on the new production, so it's good solid business.

Can you share with us the yield that you originated those at?

I don't have the yield at my fingertips on a weighted average basis, so I don't have that for you.

Okay.

I can find it and get back.

Okay. With the PVF acquisition, mortgage gain on sale was a large part of their fee income. Can you maybe give us an expectation of -- obviously the environment will bring that down, but also strategically, are you doing anything differently with their mortgage banking operations?

We have changed their operation. Their operation was run slightly differently than ours. For the most part, what I see going forward for us is actually in enhancement to our mortgage banking operation. We've done very little in terms of originations across our footprint. As I mentioned, we're now in 3 major MSA s with 7 million people, just in those 3 metro markets. There's over 3 million households. Last year we did $380 million in originations in our mortgage company.

I would tell you that the good news is there's quite a bit of business to go after in terms of purchase money in those three markets. We're gradually investing in our mortgage banking operation to take advantage of that. We're not coming off of huge years of gain on sale. It's relatively small compared to our total net income, so there's a lot of potential for us in that business.

David, I would just comment, too. When we modeled Park View we had a substantial reduction in their mortgage gains that we put in our model relative to where they were running, so that's already baked into our guidance that we have given.

Okay, but strategically you're still going to leave that platform in place and we'll see a ramp up in the gain on sale and it will be skewed to the Ohio market? Is that correct?

I'm not sure that that's correct. I think that as we build out our capability you should be seeing lift across all three of those major metro markets, not just in Cleveland. We have a lot more we can do in Pittsburgh just on the purchased money side. I mean, there's a lot to do. I would say we will leverage our mortgage loan originators across our entire delivery channel.

Okay, got it. Thank you

Collyn Gilbert, Keefe, Bruyette Woods.

Just a quick follow up on the mortgage discussion, Vince, you had said that you had lowered your expectations on PVFC coming into the F.N.B. fold. Can you give a little bit more color as to how much? I mean if I'm looking at a right number, it looks like they had about $2.5 million of mortgage banking fees in the second quarter, and I just didn't know if we should cut that by like 50% or just trying to think about to quantify how you scaled back your expectations?

My recollection is we cut it by about 50%.

Yes, a little more.

From what was a run in or even a little bit more.

Okay.

We did not anticipate that. We did not anticipate us sustaining that level, particularly given where rates were headed at that time so we cut it back significantly.

Okay. That's helpful.

Recall too, overall, baked into that number, given its relative size and where it's coming in, we expect it to be neutral to earnings for the quarter for us.

Okay, that's helpful. Then, just following up on the home equity discussions, the bulk of the production that you guys are doing now, is that loans or lines?

The bulk of the production in Q3, Collyn, were loans term loans.

Term loans. Okay, but you said it sounded like a ten year duration?

Ten year, yes. The average life on those portfolios are eight to nine years. They're bouncing around eight to nine years.

Okay, that's helpful. Then just one other question, Vince, on the provision, I know you had said $8 million you were thinking about for the fourth quarter. How are you thinking about that in terms of net charge-off trends and I guess tieing that into the reserve? I mean, are you at the point where you'll probably get that reserve steady at $125 million?

Collyn, our reserve has been directionally consistent with the performance of the portfolio. As you can see, it has gradually trended down over the last couple of years to today's levels, which have shown continued slight reductions in that reserve level. We'll continue to manage the portfolio in that way and depending upon the performance of the portfolio, adjustments will be made accordingly.

Okay, that's helpful. Just one sort of bigger picture here, sort of strategic question, Vince. You guys have done such a tremendous job of growing organically, acquisitively and while you are certainly building capital internally, how are you thinking about your capital buckets and your overall capital structure going forward? Would you balance the gross sets that you wouldn't necessarily need to come back to the markets to raise more capital, or would you be more opportunistic in adding to the capital structure as growth comes your way?

I would say, just to comment on capital, Collyn, overall. The investment thesis that we've utilize for many years now is still in place. We've managed capital efficiently in the past. We're going to manage cash efficiently under Basel III. The levels, if you do some kind of pulmonary calculations on where ratios would be, we're very comfortable with where the levels are. In the capital stack that we have today, with the rules the way they are, the capital stack is fine. We're very comfortable with where we are from an overall capital position.

So, is there is a certain metric that you're managing to more than another? Is it Tier 1 common? Is it -- I presume is not TCE? Or is it? Could you continue to take that down even below 6%?

I wouldn't want to be below 6% on that. We look at the leverage ratio, is obviously a key one. The level that we're at, we're comfortable at. It could go a little bit lower, but not much lower than that. I mean 8% is kind of a level that I wouldn't want to be below, the TCE at 6%. The levels that we're -- we don't have a hard fast number that we're managing. We just looked at the overall balance sheet growth and at the levels that we have baked into our guidelines, the actual levels reflect that and --

I would say, if you look back, Collyn, historically at the performance of the portfolio from a risk perspective and our historical capital levels, we're actually higher than we have been historically. I would say that our desire to manage capital efficiently is going to continue into the future. I think we're in a good place and we've done a good job of managing through the cycle, and because of our lowest profile our capital ratios are clearly enough to support our growth and the risk profile of the portfolio

One point to add to that, as we've talked about, we've done several acquisitions here over the last couple of years. Each time you do those you need to get both the Fed and OCC to approve that and they've been very comfortable with the way we managed capital. We never had to make a change because of them. To Vince's point, in the past we used to run lower, but we've adjusted that over the last few years and are very comfortable where we are.

Okay. That's great. That's all I had. Thanks, guys.

Matthew Breese, Sterne Agee.

For the fourth quarter, with Park View, did your margin guidance assume any accretable income?

Park View's margin coming in is really, they're 3.25% or so and relative to the size of us it really doesn't move the dial. Out of the gate you're going to have just normal accretion that would be booked, so, no, I'm not expecting any significant changes. Usually, that stuff will come over time if you have positive or negative events that you have to work through. Really, pretty neutral to the overall margin for the quarter. Then, next year when we give guidance -- (multiple speakers) I'm sorry?

The total end core margin in the low 3.6%s for the fourth quarter?

Yes

Okay. Then beyond Park View, with BCSB right around the corner, I'm assuming it's the same, very little impact to the overall margin trend?

Yes, their margin is comparable, so yes.

Okay. Stepping back, getting back to the M&A discussion, is it fair to assume that you guys are where you want to be as far as acquisitions go in Ohio and Baltimore? Or, would you consider adding on in those markets if the right deal came along?

Obviously, I think we've got -- there's a lot to do in the markets that we're in, so we could continue to grow. Our plan is not to sit at number ten in Baltimore. We want to grow our market share either organically or through acquisition. The same is true in Cleveland. Pittsburgh, there are opportunities I think down the road, maybe, to do something to help take cost out in market deals. I don't think we need to do anything to enhance the delivery channel or the team that we have. I think both are great. I can tell you that we will look at opportunities provided that there's good EPS accretion in the first year, that we get IRRs that are attractive to us, well above our cost of capital, and we are moving into markets that we think we can grow organically at a rate faster than our legacy markets. That's the criteria we use.

Right. How would you characterize deal flow over the last three to six months? Has it picked up or slowed down or just overall color would be great?

We had record production levels in a number of areas in the third quarter. So, the pipelines going into the third quarter were very, very good. We're seeing good, early indications coming out of Maryland. The first day after our close in Cleveland, and we have some great activity going on, it's surprising actually on the consumer and small business side. I'm very optimistic about where we're headed. Having said that, as you move through pipelines there's a lot of seasonality in our business and as you come off of high percentage growth quarters you have to bleach your pipelines, you have to rebuild it again. I think we're well positioned to do that

Right. I was talking more about from an M&A standpoint.

Oh, I'm sorry, I though you meant production wise. M&A, we consistently look at opportunities and we're very, very selective. I would say that the number of opportunities that have come across the desk has been fairly steady for the last four years, to be truthful.

Okay. That's great, thank you, guys.

Nate Middleton, FIG Partners.

Just wanted to continue on the M&A talk, just asking what you're seeing out there as far as pricing and how it's changed, if it has changed over the last 12 months from what you guys are seeing?

I haven't seen much of a change in pricing to be honest with you. I think it's been fairly consistent. There have been only a couple of deals announced that would give you a good indication, particularly in the markets that we're in. I don't anticipate major changes in pricing. I think it's been so choppy, the economy, what's going on with the government, all the regulation, that there's quantitative easing, they're going to stop, I mean it's been so choppy I don't know that there's a lot of clarity. I think that creates a situation where everything stays the same to be truthful.

The deal flow has been low.

Yes, there's not a ton going on. So --

Okay that sounds about right. Okay, thank you, guys.

Frank Schiraldi, Sandler O'Neill.

I just had a couple of follow ups. I wanted to ask about fee income. Vince, I think you had mentioned in your guidance that fee income levels were expected to stay steady in 4Q. In the past you talked about revenue offsets to Durbin. I think you've mentioned that could show up, start showing up in the fourth quarter. I just wondered if there could be some upside to that number given some potential revenue offsets, or if that's something maybe we could see in the beginning of next year?

I would say the guidance I gave has that baked in. I mean there's been some things we've done with restructuring are checking accounts, which has given us some benefit. I think we continue to monitor the competitive environment as far as what others are doing, and part of how we're offsetting Durbin is by the growth that we've had in the loan portfolio and bringing in the demand deposits. As Vince referred to the headwinds earlier, there were some significant headwinds coming into the year and sometimes solve them different ways than what you were planning, so --

Our brokerage and wealth business have performed exceptionally well year over year, Frank. It's already baked -- some of that is already baked into the numbers. Some of that was related to adding personnel in those areas in the past who are now producing, so you're seeing it there.

I would add, too, Frank, that as you know some of the larger banks are talking more and more about rationalizing the retail banking side. We're not going to be a leader in this, so we're closely monitoring others are doing. If there's opportunities we'll obviously do that, but I think Vince's point on the non banking affiliates is really started to contribute more than they were and that helps a lot.

Got you, okay. So, the revenue offsets that you were talking about were more broad based. Just a question on Regency Finance, I know it's a small piece of the pie, but just wondering. I think you've expanded that geography a bit over the last couple of years and is that helpful to the growth? Is that subtractive? Does it not move the needle? How do you think about that business in the bigger scheme of things?

That business, it's a highly profitable business. It's not very scalable. The portfolio really hasn't grown that much over time. Actually, the net income has shrunk relative the total company's net income. I mean they performed well, but we've grown at a much faster rate than they have, the total Company. It's just a highly profitable business that isn't easily integrated into the rest of the Bank and as long as they produced returns like they've produced its attractive for us, we continue to invest modestly into it.

Frank, I would say that the geographic expansion we've had has been a function of really good managers that have come to us from other companies. Our guys have networks and if you find some opportunities in a market with some really good people, you can build a strategy around that. That's really been -- the growth in that portfolio has come out of that expansion. Relative to the size of the Company, as you said, it's not significant but it's nice growth for them.

Okay, great, thank you.

Nate Middleton, FIG Partners.

You brought up the Durbin a minute ago, can you give a little color on how you are offsetting the impact from that?

Well it's a combination of things. It's, I think as I mentioned, the strong loan growth that we've had obviously contributes, net interest income, growth and loan growth has been better than what we had initially planned. We have commented on expense initiatives that we've had. The branch optimization strategy is ongoing. We consolidated six offices this year. That contributes. The vendor management is another place that we've had a more robust of a program this year than we've had in the past. That's contributing. There's no silver bullet. It's really a --

Nate, we had a plan going into this year that had 25 line items on it to help overcome that headwind. It ranged, as Vince said, from additional growth in certain portfolios to a better execution from a cross-sell perspective with the wealth shop and investment in wealth, to expense initiatives related to vendor management and putting vendor management systems in place to eke out efficiency, to consolidation of branches. We, in a prior period, we told everybody we took the action preemptively on 20 branches. We accelerated the ready program to help cope with what was coming, so that was built into this year's performance. It's not one silver bullet. There were a number of initiatives and I'm very pleased with where we are, given that, that issue is now behind us.

Great, thank you for that.

Bob Ramsey, FBR Capital.

Yes, guys, just one follow up. How much of the direct installment loan growth came from Regency Finance this quarter?

It would be minor, very small.

It was less than $3 million.

Okay, got you. Great, thank you.

There are no further questions at this time. I'd like to turn it back to our speakers for any additional or closing remarks.

I had one other comment that I did mentioned earlier. I wanted to clarify the treatment for the income taxes for the quarter. There's been some different views on what was there. As I mentioned in my remarks, we had $1.4 million in a tax credit that was realized related to a student housing project. The impact to that to earnings for the quarter was $0.01. It wasn't $0.02. If you relate it to our total shares that outstanding.

Beyond that we had some minor tax return true up that we booked. If you took those items out, our effective tax rate would have been 28% versus the 24%, so it's only $0.01 of difference. Then as I mentioned, we had additional incentive accruals of $2 million to $2.5 million that we booked altogether. I just wanted to clarify that so that people had a clear understanding on that. We would thank everyone for participating.

Yes, thank you for participating. We appreciate you showing an interest. This was a great call with a lot of good questions, so thank you very much. Take care.

This concludes today's conference. Thank you for your participation.