FNB Corp (FNB) 2013 Q4 法說會逐字稿

Good day and welcome to the F.N.B. Corporation fourth 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. 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 Cynthia Christopher, manager of Investor Relations for F.N.B. Corporation. You may begin.

Thank you. Good morning everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports filed with the Securities and Exchange Commission often contain forward-looking statements. Please refer to the forward-looking statements disclosure 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 January 29, and a transcript 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.

Thank you. Good morning, and welcome to earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. I will be highlighting our operating performance and providing a strategic overview. Gary will review asset quality, and Vince will provide further detail on our financial results along with expectations for 2014. Vince will then open the call for any questions.

Let's begin by looking at the quarter, which was positive from both an operating and strategic perspective. Operating net income was $32.5 million, or $0.21 per diluted share. This translates into 107-basis-point return on average tangible assets and a 16.5% return on average tangible common equity.

Organic loan growth continued at an annualized rate of 6%, with commercial loans growing over 4% and consumer 14%. These are great results for the quarter. More importantly, the consistency of our growth is a key differentiator and proof point of the success of our strategy.

We have grown the loan portfolio on an organic basis for 18 consecutive quarters at an average annual rate of 5%. That's nearly five years. This is an exceptional accomplishment achieved during a difficult operating environment and through the assimilation of 4 acquisitions.

Over this time, our loan growth more than offset the planned runoff of $360 million and 2 nonstrategic portfolios, continuing to position us for better growth in the future.

Low-cost transaction deposit growth continued at a rate of 7% annualized, primarily through non-interest-bearing deposits and customer repos. The majority of the growth remains the direct result of obtaining new commercial clients.

In addition to the solid operating results, several positive corporate developments took place that further positioned F.N.B. favorably going forward. In early October, F.N.B. secured an investment grade rating from Moody's, which was followed by the Park View acquisition closing on October 12. We are very pleased with the team we have established and see tremendous potential in the Cleveland market.

At the end of October, we completed a capital offering that strengthened our capital structure and enhances our ability to execute our organic growth strategy. As you recall, we are an efficient deployer of capital. Our recent capital actions position us to comply with Basel III and sustain our growth trajectory. Vince will share further details and rationale behind the capital rates.

Now let's review full-year results. On an operating basis, net income grew 5% from the prior year and resulted in $0.84 per diluted share. Overall, it was a great year for F.N.B., and we are pleased with our ability to maintain high-quality earnings in light of significant profitability challenges impacting the industry.

First, I would like to review some of the fundamental drivers of our performance in 2013. We continue to execute our proven strategy centered on a superior sales management system, robust cross-selling, sound risk management, and expense control. This is apparent in the number of record-setting milestones achieved by many of our business lines.

Full-year average organic loan growth was solid at 6% and even stronger at 8% when we looked at this exclusive of the decline in the residential mortgage portfolio. Driving this growth is record loan production of $3.3 billion. We've achieved record high production levels for the past five years, with the following units all reaching record highs.

The commercial bank reported production of $1.3 billion, increasing 11% over the prior-year and 46% over 2010 levels. Every unit contributed to the growth, including the investment real estate group, asset based lending, leasing, and all six commercial banking regions.

The consumer bank -- consisting of our retail bank, small business, and Regency Finance Company -- grew production to $1.6 billion, a 14% increase over last year and 77% higher than 2010. Our wealth group -- consisting of the fee-based units of wealth management, trust, brokerage, and insurance -- continued to build on momentum and contribute more meaningfully to overall revenue growth.

Throughout the past two years, each of these business units has instituted a diligent sales management process, improved cross sell average with internal business partners, and effectively recruited top talent. Through working more effectively together, the combined revenue for these units grew 11% to $45 million in 2013.

The private banking unit, also part of F.N.B.'s wealth management group, grew outstanding loans 47% and deposits 20% this year. Expense control remains an integral part of F.N.B.'s culture, and the current operating environment prompted additional cost-cutting actions. For example, when looking at personnel levels year-over-year, FTE growth was 4%, while our assets grew 13% as we effectively managed resources and gained scale and our operations. We were able to achieve this result despite the fact that we have been continuously building our risk management and compliance teams.

We continue to optimize our branch network with the consolidation of 7 additional locations, bringing the total to 52 locations since 2010. Excluding acquisition-related locations, this represents 16% of our branches at the beginning of 2010. We have also expanded through nine de novos into higher growth markets.

This is the basic premise of our program -- reposition and reinvest in the franchise to optimize the delivery channel, and improve profitability and efficiency. This has been extremely successful and allowed us to achieve significant cost savings, limited attrition, and contributed to our increased production levels.

During the past two years, we have invested significant resources in our mobile, online banking, and ATM strategy. These efforts directly correlate to our ability to attract new clients and improve retention as we undergo branch consolidation. We now offer a full suite of eDelivery products. The mobile banking platform has been especially well received, with more than 46,000 customers using these services.

During 2013, the first full year of implementation, we have processed nearly 210,000 of our clients' deposits remotely. This will ultimately lead to improved efficiency and a more effective delivery of our products and services.

Based upon the reported production levels, the combination of our acquisition strategy and sales management culture has enabled F.N.B. to drive organic growth over the past several years. This strategy was accelerated beginning with the Parkvale transaction in 2012, and followed with 3 acquisitions during 2013 that expanded our presence in 2 additional metropolitan markets.

We are only weeks away from completing the BCSB acquisition, which will provide F.N.B. with more complete coverage of the Baltimore market. With all 3 recent acquisitions nearly complete, we are now very well-positioned in three dynamic metro markets. We are beginning to experience the benefits of our strategic moves, with pipelines building in these markets.

F.N.B. has benefited from an exceptional team of bankers, of sales management culture, and process that drives organic growth, an effective acquisition strategy that provides an expanded universe of potential prospects and operating scale and solid expense control. These attributes are apparent when looking at our earnings trajectory from 2010 through 2012.

During 2013, F.N.B. was presented with significant profitability headwind that, on the surface, muted the underlying growth of the Company. In addition to the persistent low interest rate environment, we effectively managed and grew through regulatory restrictions placed on revenue that resulted in nearly $7 million in lost fee income. The most meaningful loss was related to the Durbin amendment.

On the expense side, our growth beyond $10 billion in asset threshold has resulted in over $4 million in additional regulatory related costs, higher FDIC premiums, stress testing, and increased compliance cost. In all, we estimate that these headwinds impacted 2013 earnings by $0.05 per share. Despite these challenges, we produced high-quality and consistent earnings and achieved milestones during a transformational year. The real story of F.N.B. lies behind the fundamental drivers built over the past several years, evidenced by record-setting production levels across our business units, which should continue, and the strengthening of the overall value of the Company.

Our expansion efforts have produced thousands of new prospects and have positioned the Company well in very dynamic markets. We have continued to attract top talent from much larger institutions and made significant investments in infrastructure and product development.

The earnings headwinds are being successfully absorbed through growth and efficient cost control and are embedded in our run rate earnings. We believe that F.N.B. is in the best position ever to deliver sustainable and long-term positive results.

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

Thank you, Vince, and good morning everyone. The fourth quarter reflected continued positive performance across our credit portfolio as we closed out another successful year with our portfolio favorably positioned. Both our quarterly and full-year results demonstrate the continued stability and positive movement across all asset quality metrics, specifically NPLs and OREO, delinquency, and net charge-offs, all of which improved during the year over already good levels.

I will focus on the trends within our originated book, as this best represents our core loan portfolio, followed by commentary on our required book, at which time I will provide a brief update on the credit impact of the Park View acquisition that was completed in October.

During the quarter, our originated NPL and OREO level improved by 5 basis points to end December at 1.44%. It is important to note that this metric includes $5 million and OREO brought on from the Park View acquisition, which impacted the overall level by 6 basis points. This positive NPL activity also supported the lower delinquency level, which improved by 16 basis points to end December at a very good 1.28%.

Net charge-offs for the fourth quarter met our expectations at $6.1 million, or 30 basis points annualized. The originated provision for loan losses at $5.7 million brought the reserve position to 1.29%, reflecting favorable credit-quality migration in the portfolio, paydowns on numerous rated credits, and reduced NPL levels of $5 million, or 6% from the prior quarter. The benefits from these activities supported our provision for loan growth during the quarter.

On a full-year basis, our net charge-off performance was solid at 28 basis points, ending the year better than our targeted levels.

Shifting now to our acquired portfolio, we ended the year with $1.4 billion of loans carried at fair value, including approximately $500 million from the Park View acquisition that was completed during the quarter. Keeping with our practice of carefully monitoring our newly acquired books, we have been tracking the performance and position of the Park View portfolio since our initial due diligence process, and we are pleased to share that it remains in line with our original expectations.

This acquisition added $25 million to our contractual delinquency level, bringing the overall acquired delinquency to $76 million. Absent the addition of Park View, our 90-plus past-due levels would have been down $7 million, or 12%, as we were successful in exiting a number of problem-acquired credits during the quarter which totaled nearly $10 million.

While some downward migration did occur in a few of the small business pools, which required an increase in the acquired reserve of $1.2 million, the offsetting benefit we gained through accretion from the successful resolution of the problem-acquired credits flowed through the margin line.

In summary, we closed out the year with a solid quarter from a credit-quality perspective and are very pleased with the position of our loan portfolio as we enter 2014.

This past year was highlighted by further resolution and reductions in NPLs, improved delinquency, very good charge-off levels, and the successful completion of 2 acquisitions, both of which we have seamlessly absorbed into our portfolio over the course of the year.

These accomplishments, which further contribute to the long-term stability and diversity of our portfolio, reflect the strength of our banking and risk management teams and our consistent and diligent approach to underwriting across all of our portfolios.

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

Thanks, Gary. Good morning, everyone. Today I will review highlights of our fourth quarter's operating performance and provide our guidance for the upcoming year.

Since the quarter's results are included in last evening's earnings release, I want to spend most of my time discussing our outlook for 2014 and beyond. As Vince discussed, the fourth quarter was a very solid quarter.

Let's begin with balance sheet highlights. Organic results reflect the continuation of the positive trends seen for some time now. Average loans grew organically $120 million, or 5.9% annualized, and we continue to see a good mix of growth coming from both the commercial and consumer banking groups as the diversification of our products set, full deployment of our sales management program is apparent.

On the funding side, organic growth for total deposits and customer repos were $71 million, or 2.7% annualized. Growth in transaction deposits and customer repos remain solid, with these average balances increasing organically $138 million, or 6.8% annualized, due to strong results in non-interest-bearing accounts and customer repos.

Meanwhile, time deposits declined 11% annualized given our strong funding mix and overall liquidity position.

The fourth-quarter net interest margin expanded three basis points to 3.67%, reflecting a six-basis-point benefit from $1.7 million in accretable yield adjustments due to better-than-expected cash flows on acquired portfolios. This benefit was partially offset by 3 basis points of compression due to temporary liquidity related to the capital raise.

Net of these items, the margin was stable with the prior quarter. [Applying] to purchase accounting rules sometimes result in the benefit to the net interest margin and conversely a necessary expense through the provision for loan losses. This occurred during the fourth quarter; so while the margin received a $1.7 million benefit, provision on the acquired book was elevated, as Gary discussed earlier.

Looking at these together on a net basis provides a view of the impact of the quarter of the acquired loan accounting rules.

We are overall very pleased with a full-year net interest margin of 3.65% given the current rate environment. This was in line with our original expectations as a result of the solid loan and deposit growth along with diligent pricing actions and our comprehensive ALCO process.

Looking now to core non-interest income and expenses. Non-interest income results were largely as expected, with consistent trends in momentum seen in our fee-based businesses.

The fourth quarter is our second quarter into Durbin, so the year-over-year comparison for service charges reflects the quarterly loss of approximately $2.7 million in revenue. Fourth-quarter non-interest expense included $4 million in merger costs and $2.2 million in trust-preferred redemption costs. On a core basis, non-interest expense increased 4.4%, primarily reflecting the initial quarter of bringing on Park View's operating costs, $1 million in higher employee medical expense due to elevated claims during the quarter, and higher OREO costs. With revenue growth of 5.6%, operating leverage was achieved on a linked quarter basis. This is a positive result, as we expect to gain additional leverage phasing in Park View-related cost savings and revenue synergies.

Our capital position at year end is presented on slide 17. Capital levels at December 31 reflect the benefit of the October capital actions.

Turning to our outlook for 2014, while bottom-line earnings have shown modest growth, we view that as a very positive outcome given the headwinds Vince discussed that we encountered, as we were one of the first banks to cross over the magical $10 billion mark after the new rules were in effect.

Our ability to gradually improve our operating results during the previous two years is a major accomplishment given the revenue and expense burden associated with exceeding $10 billion in total assets. The significance of that movement into the $10 billion to $50 billion category has somewhat masked the strong organic growth we have generated throughout the cycle across all of our businesses. The benefit of our efforts to continue controlling expenses and our efforts to maintain a strong and stable net interest margin, all the while we're enjoying stable and solid asset quality.

Production levels have grown significantly across F.N.B. as we continue to drive market share gains through superior execution. The net result of these efforts has been a very high quality earnings base without benefiting from credit leverage as we continue to provide in excess of our net charge-offs.

Our team did a great job managing through all of these headwinds in addition to the general industry challenges created by the economic and interest rate environment. Even with these headwinds, we have continued to invest in our franchise to enhance and further strengthen our sustainable high-quality earnings stream.

As we discussed previously, we invested $4 million to significantly improve our online and mobile banking offerings. As you know, we acquired four banks during this period, and the benefit from these transactions really began to ramp up in the second and third years of operation, while you absorb 100% of the shares day one. We are very excited about our prospects in the new MSAs we have entered and look forward to meaningful shareholder value creation as we move towards 2015.

We are also investing in our risk management and stress testing infrastructure through a combination of staff additions and programming to build out our capabilities.

Lastly, we successfully executed an opportunistic capital raise to position us for growing beyond $15 billion under the Basel III rules. We felt it was the right time to raise the capital given our pro forma asset size with Baltimore County included and the levels of interest rate at the time. This is also an investment for the future, as it removes uncertainty that was hanging over our stock and allows us to focus all of our efforts on continuing to grow our franchise to generate shareholder value.

As we look ahead to 2014 and 2015, this year will be the year that we finally absorb all of the impacts of growing beyond $10 billion, with the most significant factor being a full year's worth of lost revenue caused by the Durbin amendment and finishing the build-out of our stress testing program as we approach the March 31 deadline.

Taking a look at some of our key expectations, our strategy is unchanged, and we will leverage the systems, processes, teams, efficiencies, and market expansion we have built over the past several years. Specifically, we are expecting to achieve strong year-over-year organic loan growth in the mid to high single digits, total organic deposit growth in the mid-single digits. The full-year net interest margin is expected to narrow several basis points from 2013 due to the expectations for continued historically low interest rate environment. Net interest income is expected to see solid growth due to the benefit of the strong organic loan and transaction deposit growth and the completed acquisition.

Income statement expectations reflect the continued momentum, cost control, and a full year of Annapolis and Park View, with core non-interest income expected to grow in the mid to high single digits despite a full year of Durbin revenue loss. And non-interest expense is expected to grow in the mid-single digits. We expect to continue to achieve solid operating leverage.

The provision for loan losses should increase over 2013 levels, with quarterly increases as we progress through 2014 to cover our strong loan growth expectations. We look for the allowance for loan losses as a percent of total loans to trend down slightly from current levels during 2014.

Given all of these factors, combined with the benefits of the capital raise, I can tell you that our foundation is very strong. And as we navigate through 2014, we are well-positioned to leverage all of our investments from meaningful expansion of earnings-per-share growth in 2015 and beyond.

Now I would like to turn the call over to the operator for your questions.

(Operator Instructions) Bob Ramsey, FBR.

A quick question. I know you guys gave guidance around net interest margin for the year. I'm just curious was the accretable yield benefit this quarter sort of a one-time event where you lose those basis points next quarter, or was it sort of a change in your assumptions about cash flows that will sort of persist in the future periods as well?

Well, I would say, if I could comment on margins, obviously we're very pleased with the performance for the quarter. There's several things working through that, and then I'll comment on accretable yield.

You know, the key influences working through there are strong loan growth, strong DDA growth. We are now reinvesting securities slightly higher than the rolloff rate; that's obviously a positive. Premium amortization is lower than it's been running in the prior quarters. The accretable yield benefit of $1.7 million that we had did reflect some resolution of some loans that were individually marked.

So, you know, as I've said in the past, accretable yield's going to be choppy. Bob, I kind of look at kind of a core run rate of accretable yield being $500,000 to $750,000 a quarter. So the $1.7 million is obviously a little bit elevated. Last quarter we didn't have any, so it's really going to be choppy depending on positive or negative changes in the cash flows.

Okay. That helps me to sort of think about why you have ups and downs; the run rate is probably $1 million [in] this quarter lower for net interest income.

And then if I sort of think about fee income, I was expecting a little bit more of an uptick this quarter in fee income, you know, particularly because of the acquisition. Now, I know a lot of the fee income at the acquired company was mortgage. Is sort of the mortgage market the reason the income was not stronger this quarter than it otherwise might have been, or was I overestimating, you know, the benefit of PVC -- PVFC?

No, the mortgage banking is definitely a key part of the decline. If you look at our -- the change in the mortgage banking revenues third to fourth quarter, you know, you can see that came down to really a very low level of [370]. That number kind of on a more normal run rate should be somewhere between $1 million towards $2 million. So the mortgage banking level this quarter is the first quarter we're taking on Park View.

But also if you just look at what's happened, as everyone knows, with the mortgage refi market during the year, the level of gains that Park View was generating last year and earlier in the year is significantly lower kind of coming on board with F.N.B. than where it was. So I would expect that number to move back up. We did have a nice growth in the wealth management businesses. Insurance was pretty stable. Service charges were up a little bit. The key delta there is the mortgage banking, but I would expect that to start to move back up from there.

Okay. That's helpful. And then last question, and I'll hop back out. I think I was expecting a little bit of a stub preferred stock dividend this quarter that wasn't there. Next quarter, do you have a full quarter's preferred stock dividend, or is there a little bit of catch-up from the end of 2013? Or how should I think about the preferred dividend expense next quarter?

Yes, there will be a little bit of a catch-up because you don't book it until you declare it. So it's similar to an equity dividend. So you'll see this dividend that will appear in first quarter will have some extra days, and then going forward you'll be at just kind of a normal 90-days, one quarter's worth.

Okay, perfect. Thank you, guys.

(Operator Instructions) Collyn Gilbert, KBW.

Vince, just to follow up on the NIM discussions. You mentioned that securities are now coming on at a higher rate than what's rolling off. What is the loan yield differential that you are seeing in terms of what is rolling off versus what's being originated?

Well, the new loans that are coming out, I mean -- I don't know if you guys want to comment on spreads maybe.

Yeah, I don't -- you know, I -- we -- first of all, I don't think that we went out long relative to others to begin with. So from a repricing perspective, it's kind of stabilizing. So we don't see massive reductions in yield versus what's going off at what's coming on. If you look at the makeup of the portfolios we've mentioned before, we have a higher portion of the variable-rate and adjustable-rate loans in the commercial book, so -- and on the retail side as well. So that margin compression won't be as dramatic.

So I would say we're not seeing significant declines in yield. We're not seeing any spread compression from a credit spread standpoint in certain portfolios. In others, it is more competitive. But that's usually measured in [eighth to a quarter] of a point on yield [loan] yield, not a significant number.

Okay. So then if we exclude accretable yield, recognizing obviously that's somewhat unpredictable and somewhat volatile, do you think the NIM has bottomed or went -- or are we getting close to a bottom? Or do you have a sense of that sort of inflection point?

Yes, I would think we are very close to that. My guidance talked about just several basis points of compression in 2014. The low rate obviously still hurts, particularly on the short end of the curve.

To Vince's point, we still have 60% of our loans that are variable or adjustable rate. Half of that is in the 12 months or less. So that still has an impact on the overall margin but very modest. As I said, my guidance is for several basis points and gradual decline. But I would say I expect we're pretty close to the bottom.

Yes, the prepayment speeds, as you would expect, have slowed dramatically. Most of the refinance activity has occurred. So we're seeing a stretching of the life of the portfolio, so that should help as well -- as a byproduct.

Okay. Thanks. And then Vince, just your comment on the mortgage. 370 this quarter; you expected to get up to one normalized level -- [$1 million] to [$2 million]. What will take it back up? Is it just kind of a refocusing and getting people back on track to start to generate more volume? Or I'm just curious how that gap gets closed.

This is Vince Delie. I think part of it is we went through a transition. We converted a bank that used the slightly different model-- they originated in the branch; we don't originate in the branch, we originate through originators. So part of that is a transition in personnel, the hiring of personnel, sustaining that in the face of a shift in focus from refinance to purchase money. So all of that will take time to transition.

Unfortunately, the timing of when that deal went down versus all of these changes isn't the best. But I think that we've got the right strategy in place. We've got the right people that we're putting in place there from an origination standpoint. So the emphasis will shift more quickly to purchase money, and we expect that business to build back over time.

Okay, that's helpful. Thanks. And then just one last question. If you guys are preparing for the stress test in March, can you just give us a little more color as to exactly what's going on in the organization that is setting you up to prepare for that?

Sure. We've been working on this for quite a long time. I guess to put it in perspective, we've already done three years of stress testing. This will be our first year as part of this new group where we're submitting a formal stress testing plan.

But there's a lot of activity. We have steering committee that's made up of Gary, myself, other executive officers in the Company. We're building out modeling to be able to create the kind of loss estimates for the loan portfolios and the various stress and the adverse stress scenarios. We are doing some programming to create infrastructure so that we can more easily do these types of forecast on a go-forward basis. For now, it's annual, but we know eventually they're going to probably make us go to twice a year and someday quarterly. So we're investing some in the infrastructure itself so that we then have a tool that we can use for more than just the regulatory stress testing when we do acquisitions. We want to have a tool that we can use to kind of plug those acquisitions in and see what it would do to the impacts there. So there's just a lot of effort throughout the Company to be ready for that.

We're on track for the March 31 deadline and feel good about where we'll be. As you know, we run a very low-risk model; that clearly helps when you stress our portfolios, the fact that we are starting from a very strong credit quality standpoint. So more to come, but there's -- as you would expect, there's a lot of activity there.

Okay. That was great. Thanks, guys.

Frank Schiraldi, Sandler O'Neill.

A few questions. Just, I guess, a follow-up on the stress testing. Vince, when you talk about investment in infrastructure, do you think about maybe some other one-time expenses -- I don't know -- perhaps some consulting fees associated with it? Is there -- what are the sort of short-term expenses, and where do they fall terms of the calendar?

Oh, there's probably [$0.5 million] in the fourth quarter. There's probably somewhere between [$250 million] and [$0.5 million] in the first quarter, and then it's really just the depreciation on stuff. And we're using our existing systems. So we didn't go out buy a new system. We have very strong systems here that we could leverage to be able to do that.

So it's not a significant amount. And kind of as you go forward, we'll end up having four people that are part of the team that will be working on this as well as modeling for acquisitions and those types of things. So it's not significant. But the consulting piece, Frank, which is the piece that kind of jumps up, will really fall off after the first quarter.

The longer-term piece of it is basically adds to staff to accommodate this activity. I mean, we've added significantly in the finance arena and compliance. We shifted positions; people internally who were in other positions in the Company shifted into the stress testing category. So we had to backfill their position. So it is an expensive endeavor, and the long-term impact is reflected in the run rate here now because we've added the team. So hopefully that's behind us from a run rate standpoint.

That team is in place today.

Yes, they are here today (multiple speakers).

Okay and then you talked a little bit about branch rationalization after as -- I'm sorry if I missed it, but I'm wondering what there could be down the road or at least as we look through the rest of 2014 and potential cost saves there.

Yes, we've done a pretty good job of managing expenses in the retail delivery channel. First of all, we installed software to help us manage headcount in the branches, which has had a meaningful impact on reducing the number of FTEs in that world. We've also -- I think we've done a very good job of consolidating locations that had a minimal impact on our ability to drive growth. And you see that in the escalation of our production since 2010. I mentioned some statistics that are fairly -- I mean, they are remarkable.

And when you really look at the delivery channel, are we at our optimal state? Probably not. There's probably a handful of branches here and there that we evaluate annually, quarterly, monthly to check on performance. So there's probably more to do there. I wouldn't say it's -- taking out 16% of your branches, excluding the M&A consolidation, is pretty healthy chunk of your delivery channel, so I wouldn't say there's a lot left out there. But one good takeaway would be consider how many branches were consolidated, and then look at the escalation in production. That ultimately leads to increased efficiency. And I think the benefits of some of that have helped offset the impact of all these regulatory requirements and lost revenue that we've mentioned.

So very well done by the team and strategically phased-in to help offset that. I think we've done a very good job there.

I would add too, Frank, that our team is always looking for opportunities throughout the footprint where if there's a prime location that comes up, is there an opportunity maybe to consolidate two offices into one or into new markets. So we'll continue to look for those opportunities, and there's always a hit list of places we're looking for.

It won't be 20 branches again, though. We did that. I don't want to mislead you. There's not a big chunk of branches that you would take out simultaneously. So it will be more of a fine tuning and refining.

Got you. Okay, and then finally on the BCFB deal that I believe is going to close in Q1. Can you just remind me -- I think it's basically neutral to tangible book value, and then can't remember what it does to a TCE ratio. But how does that impact those two?

Yes, no, you're right. It's very neutral, the impact to those measures. We're bringing over about $600 million or so in assets. It's neutral to their IRRs and high teens, and then the accretion pretty much neutral to 2014 but then starts to open in 2015. So you have it correct (multiple speakers).

Yes, thank you.

(Operator Instructions) Matthew Breese, Sterne Agee.

Going back to your expense guidance, you guys gave good commentary there. But I was hoping you could tie that into how we should be thinking about the overall efficiency ratio. In the past, you've mentioned kind of eyeing that 55% mark.

I think in the past when we've talked about that, the 55% is kind of an over-time head goal given the regulatory burden that's there. That's not something we're projecting or targeting to try to get to in 2014. So I would say -- but that's still a longer-term goal that we would shoot for. And the guidance that we have as far as the operating leverage that we're continuing to expect in 2014 obviously will provide some benefits to the efficiency ratio. So I think, over time, we will continue with the revenue growth that we have; we'll continue to move towards a mid-55% type figure. But that's over a few years; that's not really in the short term. So generating positive operating leverage every year obviously continues to chip away at that.

Okay. So it's more for 2014, slight improvement to the overall efficiency ratio?

Yes. That's what our guidance would encompass.

Okay. And then, as far as loan growth in 2014, I was hoping you could talk about the different areas of focus -- Ohio, Pittsburgh, Baltimore -- and where you expect to see particular pockets of strength or weakness. Any color there would be great.

Well, you just hit the three that would be the biggest providers of production in our plan. And I can tell you just -- in looking at Maryland, for example, the Annapolis deal, we are much further along than we expected to be from a portfolio perspective. So the pipeline there is pretty strong, and we've had growth beyond our expectations.

So I would expect BCSB combination with Annapolis to create a large enough platform. Our move into downtown Baltimore, the hiring of all the bankers that we've hired should lead to pretty decent production levels coming out of that market. And we're very optimistic about it. We've got a fairly robust pipeline that continues to build.

In Cleveland, same story. We moved into Cleveland, we hired a regional President, we went downtown. That franchise has been rebranded. We've been canvassing the market, and the team we've put on the field there is the best you can find. So I'm very optimistic about what's happening there. The pipeline is fairly robust and growing, and we're excited about that.

Pittsburgh -- Pittsburgh has been delivering fairly solid growth for the last six years. We've grown the portfolio in Pittsburgh over $1 billion dollars organically since 2005, 2006 timeframe. Thousands of accounts; hundreds of middle-market clients. So we've done a great job of growing our share. But our share still sits in the teens, so there's a lot of upside terms of market share graph.

And as the Company continues to grow, we continue to focus on larger opportunities that we otherwise wouldn't have been able to manage where we can provide treasury management, wealth solutions, and kind of trade from a cross-sell perspective more effectively. So we're seeing -- we will see good growth in those three markets.

And then in some of the smaller markets that we're in, Scranton for example -- the team in Scranton, they've done an exceptional job this year. We are beyond where we had initially modeled that portfolio going back to the CBT acquisition. So they've grown fairly nicely. And I would expect to see growth in some of the smaller markets as well. So overall, we're pretty optimistic about our prospects.

No, that's great color. And then, as the balance sheet grows, could you give us some update on M&A prospects, the kind of sweet spot deal you look for; and kind of tie that into, in terms of size, what would be a good match for F.N.B.?

well, Well, we -- every -- as you know, we've said this before. I think doing a small deal and doing a larger deal requires the same amount of work, so you've got to mobilize the teams the same way. And you go through the conversion; it may be less onerous with fewer transactions but still similar process. So [$0.5 billion] is pretty much what we looked at -- [$0.5 billion] and up. We look at opportunities that might be slightly smaller that fit in strategically where we can take cost out or we feel the markets are good add-on markets. Obviously, our goal is to continue to grow market share in the new markets that we've entered. So if there are opportunities in those markets, we're very interested provided that they provide us with EPS accretion in the first full year and there's limited diminution of capital.

So that's the criteria that we use, and I would say we've got plenty of opportunities across Pennsylvania and Ohio and Maryland to keep us busy.

Yes. I would just add, too, that I think the [$0.5 billion] -- if you look at our track record, we've actually done very well with buying some of these smaller banks in markets that we're -- we think there's a lot of upside to grow, and take it and then grow it organically. So that's a key criteria for us is that we need to have the ability to grow it organically.

So we would love to do multibillion-dollar transactions if they are available, but the smaller ones are kind of right in our wheelhouse. And our guys have done a good job integrating it and then creating the organic growth, and Annapolis is going to be a good example of that.

That's great. Thank you.

Thanks.

John Moran, Macquarie Capital.

At this point, I just got a couple of quick kind of ticky-tack questions probably for Vince. On the preferred just revisiting that, you mentioned -- and I think we were expecting kind of a little stub period here in the fourth quarter, too. Am I correct in thinking that that would be about an extra $1 million or so versus what it would run-rate at in the first quarter?

I mean, it's an extra 14 days of dividend, so I'm sure if you have 14 days worth -- I can't do that math in my head (laughter). I'm sure if you have it right.

We're all bankers, so we can't do math.

(multiple speakers) that extra 14 days of just to kind of get you forward. But we looked at it, and the accounting is very clear that you don't book until you declare it. So we'll have basically 104 days this quarter, and then you'll have 90 a quarter as you go forward.

Got it. Okay, that's helpful. And then Vince, tax rate, I know in the past you guys had guided to [28] to [29]. Is that still a good thing to use going forward?

Yes, that's still a good rate to use for 2014.

Okay. And then the last sort of ticky-tack one that I had was just kind of timing on BCSB. It sounded like you guys said in prepared remarks, kind of a couple of weeks away. Still fair to say that that kind of comes in halfway through this first quarter?

Yes (multiple speakers). We're very -- we're in a very good place. So we would expect the conversion to occur in the next -- I mean, it's coming up here. (multiple speakers)

That's locked down.

So that's locked down. Everything is in place, and we should be up and running by the middle of February -- you know, at the [end] of February.

I think to Vince's earlier point, the team that we've hired for Annapolis is already in place.

Yes, we already hired -- we pre-hired the management team; we built out the team. Once we did the Annapolis deal, we kept going. So we have everybody -- just about everybody is in place there. So we're ready to roll day one.

Plus the headquarters (inaudible).

And we moved into downtown Baltimore. That should be available by the end of February as well. So we'll all be in place and moving.

Got it, got it. That's helpful. So in terms of sort of incremental OpEx, most of it has already been absorbed, and we can layer in some additional once this one closes, but you guys are ready to kind of rock 'n roll down there?

That's right.

Terrific. Hey, I appreciate you taking the questions. Thanks.

Thank you.

Brian Martin, FIG Partners.

I think a couple of mine were answered. I guess two kind of I guess I'll call ticky-tack as well. On the expense guidance you guys gave, I guess my assumption is that excludes the kind of one-time items and the -- as well as the OREO look year-over-year, kind of the mid-single-digit growth?

Well, it would exclude the one-time costs. And the OREO -- our normal range is more like [750] to [1 million], so it was a little bit higher this quarter. I don't expect that fourth-quarter level to recur at that same level in 2014. But OREO is part of that guidance, that kind of a normal run rate. But it definitely would exclude the one-time costs for Baltimore County.

Okay. And the same thing on the fee income guidance, the mid-single-digit. That includes the impact of Durbin as well as the impact of Baltimore, correct?

Yes.

Okay. That includes both of them. Okay. And then just the last thing. You touched on the M&A. Just can you talk about just the level of opportunities maybe you're seeing now versus what you were a quarter ago? I mean, some of this activity has seemed to pick up in the marketplace recently. Vince, is that consistent with what you guys are seeing as far as increased number of opportunities or with people you're having discussions with?

I would say it's been fairly consistent for us. I think that many view us as the optimal buyer given our valuation and our dividend yield. So I would say we've had a fair number of looks throughout the last few years, and the momentum hasn't changed much for us.

But I will say that we are getting to a point now where I think that people are starting to rationalize their existence, and they are looking at some of the things that are facing the industry that are daunting -- investment in technology, the regulatory environment, all of that. And you know, I think there are more serious talks going on. I guess that's how I would (inaudible) adjusted.

Okay. And as far as how you would characterize your capabilities. If you look at some of these smaller deals that may offer more cost saves and kind of -- how many of those could you guys handle at one point versus just doing one larger transaction?

We had three going on simultaneously, so we don't prefer do that. I'd like to do one larger one, but we look at every opportunity. We really look at it through the loan lens of a shareholder. And if it doesn't work, it doesn't work. If it works and we feel strategically it provides either short or long-term -- ultimately both -- value to the shareholders, then we pursue it. And there are some instances where a smaller transaction makes a lot of sense because it gets you into a market that otherwise would be extremely costly.

So particularly in the Maryland market. If we go into Novo, there's a pretty hefty price tag on moving into the key locations from an expense standpoint. So buying an existing company makes sense especially when you trying to build out your delivery channel to gain market share. And I think what we've done better than most banks in the country is moving into a major metro market, buying smaller organizations, putting it together under our business model, and driving organic growth and market share gains.

And attracting the teams (multiple speakers) --

And attracting the talent. I don't know of anybody that has done it better than us. So I know I'm patting our team on the back, but if you look at Pittsburgh as a case study, it's remarkable, the market share gains. And the Greenwich folks and anybody else that surveys the marketplace will tell you it's a remarkable story, and we have a tremendous opportunity to replicate that in the markets we entered.

Okay. I appreciate your taking the questions. Thanks very much.

Collyn Gilbert, KBW.

Hey guys, just two quick follow-ups. One, the -- can you tell us what the dollar amount of NII contribution is going to be from Baltimore County?

We're not -- our guidance isn't that precise, Collyn. You can kind of look at where they're coming in. I guess if you look at their third quarter financials, let's see -- so their 9/30 financials (inaudible), their margin was 318. I don't have their net interest -- I mean, it's not S&O. I mean, that kind of (multiple speakers).

No, I know, I know. I just was kind of trying to think about how you're thinking about it and if it dropped from September quarters, I would think and just -- yes. Okay. Because all the growth rates and everything you gave, Vince, was inclusive of Baltimore County, right?

Right. Yes.

Okay. Okay.

And that margin guidance includes it as well.

Includes it, sure.

I would say that, you know, we've talked about our strategy. We'll go in, and we deploy our model so that is being the primary provider of treasury management services, providing capital, going after 100% of the business. That's why we've had great DDA growth in the markets that we've entered, and we would expect the same thing to happen in Maryland over time. So the margins over time migrate -- the net interest margin migrates to look more like the rest of the Company over time.

Okay (multiple speakers). And then I have a couple --

Principally growth in lower-cost deposits.

Okay. And then just one kind of last big-picture question. You guys -- as you kind of look at the institution going forward and as you look out for the next two to three years, in all the investments that you guys have made to date and moving into the new markets, do you think that structurally F.N.B., we could see that single expense growth, that single-digit expense growth rate drop to, say, 1% to 2%, or do you think the real operating leverage is going to be -- it's just going to be more on the revenue side longer-term? Does that expense -- the ongoing investment that's going to need to be made, to your point Vince, about technology and changing the branch structures and those sorts of things will always keep that expense probably growing in that mid-single-digit range?

Well, I think it's difficult to say because we've gone through such a period of turmoil. I mean, there are so many external forces outside of all of our control that forces us to take -- if we wouldn't have invested as heavily in our risk management systems, I mentioned before, $10 million increase in run rate expense, which is already in our core expenses related to the building out our risk management team. Some of it's to accommodate growth; some of it's to comply with the never-ending number of regulations coming down so that we maintain our relationship with the regulators and we can continue to do acquisitions.

So I -- it's hard to say. I think that, as we move forward, I see the opportunity for us to grow revenue as being greater. Think about where this Company was positioned before and where it's position today. The potential for us to grow revenue is much, much greater -- 10 times greater. So I would expect us to continue to focus on expense control as we normalize relative to the current regulatory climate, which we feel we've taken a big bite of out of that apple, and we start to gain our foothold in the new markets we're in and drive revenue growth. The operating leverage should improve over time.

I can't really say which. I know we'll have revenue growth because of the markets we moved into -- or at least the potential to grow, but the expense side is really difficult to peg.

I would just add to that, Collyn, that one of the things we're in a natural point our lifecycle where we're taking a look at processes and looking at process reengineering, and a lot of banks are doing that. So I do think that there's room, to Vince's point, to expand the operating leverage as we continue to grow where you could be seeing a little bit slower on the expense growth side. But that would all be dependent on the process reengineering as well as we've talked about in the past vendor management. We've been much more comprehensive and really negotiating with vendors and trying to optimize those. So there's room for increased operating leverage given the revenue growth profile that Vince is commenting on.

Okay, okay. Thanks, guys.

Thank you.

Peter Winter, BMO Capital Markets.

Thanks for taking my question. One area of focus for you guys when returning value to shareholders is the dividend yield. That dividend has not increased for a couple of years now, but you've got stronger capital and you've got some momentum on the revenue side. I'm just wondering what your thoughts are on the dividend going forward.

Well, we constantly evaluate how we are deploying our capital. And, as you know, we've gone through a period here where we have stress testing facing us, Basel III was being rolled out. We had to address the capital stack and make changes to the types of tranches of capital that we have relative to the rules. So there's been a lot of noise. I think throughout that period, we've been in the top 10 out of the top 100 banks in terms of dividend yield. So we have demonstrated a commitment to the dividend, and that should say a lot about the organization and what our intentions are going forward. So in the event that we get comfortable with where we are from a regulatory standpoint, we get through all the noise around stress testing, our goal would be to either deploy the capital for above-market potential growth or return it to the shareholders.

So I wouldn't rule anything out. But our philosophy relative to the dividend, Peter, hasn't changed. I know it's been a long time, but it hasn't changed.

Okay. It just seems like with the capital raise, you're in a better position.

Yes, we are in a much, much better position today. You are absolutely right. And given the risk profile, the portfolio, and the performance of the portfolio from a credit perspective, we're in a much better position to evaluate whether we should return capital. And I think that's where we are.

I would add, Peter, if you go back a year or so, the Basel III rules were uncertain. So we've talked about on the conference calls that we wanted to get more certainty around what the landscape was going to be. So now Basel III is known; we've addressed that. Stress testing is something that we talked about. We're very comfortable with where we are. We still have to finish going through that process.

And then our dividend payout ratio will be at the low-end of our range. So there's an opportunity to do there, and as Vince said we evaluate it every quarter. So there's clearly an opportunity there, but it has kind of got to keep working through -- the last step is really working through the stress testing and then evaluate the opportunities to deploy the capital.

Great. And do you have a Basel III estimate as of today that you can share?

You know, if you look at the Basel I, it's about 20 to 30 basis points below that. We're still putting the systems in place for the full-blown Basel III, but it's about -- the tier 1 common is about 20 to 30 basis points below the Basel I level that we have in the slide deck.

Got it, great. Thanks guys.

I'd like to turn the conference back to Vince Delie for any additional or closing remarks.

Well, I'd like to thank everybody for participating in the call. We had quite a bit of participation. I appreciate everybody getting on the call despite the fact that we are being buried by snow and temperatures below zero. So stay warm, and look forward to speaking with each of you down the road. So take care. Thank you.

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