FNB Corp (FNB) 2014 Q2 法說會逐字稿

Greetings and welcome to the F.N.B. Corporation second-quarter 2014 earnings call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

I would now like to turn the conference over to Cindy Christopher with Investor Relations. Thank you. 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 it files with the Securities and Exchange Commission often contain forward-looking statements. Please refer to the forward-looking statement 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 July 31, and a transcript and the webcast link will be posted to the Shareholder and Investor Relations section of our corporate website.

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

Good morning and welcome to our earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. I will 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 an update on our expectations for the second half of the year. Vince will then open the call for any questions.

Let's begin by looking at the quarter. This quarter includes continued high quality earnings with solid revenue growth, a stable net interest margin, stronger than expected loan and deposit growth, good asset quality, and an improved efficiency ratio. These are all positive proof points that the underlying fundamentals of our company are performing exceptionally well.

Operating net income available to common shareholders was a record high $33 million and resulted in $0.20 per diluted share, a $0.01 increase from the prior quarter. This translates into a 107 basis point return on average tangible assets and nearly 15% return on tangible common equity.

Average organic loan growth was strong at an annualized rate of 10%, led by 13% annualized growth in the commercial portfolio. Growth on a spot basis was higher at 16% annualized for total loans and 18.3% annualized for commercial.

We experienced growth across all markets with a heavier concentration from our metro markets of Pittsburgh, Baltimore, and Cleveland. Our commercial success in F.N.B.'s new markets exceeds our expectations and demonstrates that we are realizing meaningful benefits from our acquisition strategy. Our business model is generating results in the larger metro markets and the teams we have assembled across our footprint, including our new markets, are performing very well.

The Consumer Bank also delivered a solid quarter with 9% annualized loan growth and favorable results across the product lines, including indirect auto and the home equity portfolio.

Organic growth in average non-interest-bearing deposits continued at a strong annualized rate of 23%, and these balances accounted for 21% of total deposits and repos at quarter end. Our deposit mix and funding position remains strong, with a loan to deposit ratio, including repos, of 88%.

The core net interest margin remains stable and asset quality was good, both reflecting consistent, high quality results. We continue to diligently manage expenses and our efficiency ratio was 57%, an improvement over the prior period and year-ago results. We have managed to an efficiency ratio of under 60% for the last nine consecutive quarters, an accomplishment that reflects a combination of revenue growth, core expense savings, and effectively managing acquisition related cost savings.

Looking specifically at revenue, linked-quarter revenue growth was $12 million, or 8.5%, and $21 million, or 16%, compared to the year-ago quarter. This is attributed to organic growth and the benefit of recent acquisitions. This revenue growth occurred despite significant regulatory and economic headwinds as our team successfully navigates a difficult environment for the industry.

Our metro market expansion strategy continues to progress successfully. OBA Financial is on track to close and convert in mid-September. This acquisition expands F.N.B. into the highly attractive I-270 corridor, providing scale in the market and cost effectively leveraging the leadership and infrastructure investment we have already made in Maryland. The market has a high concentration of commercial prospects, a key consideration for us. Given our success growing our commercial portfolio, this will further strengthen F.N.B.'s ability to generate high quality earning assets.

I would also like to remind you that the transaction bolsters our capital levels and future EPS accretion. All expansion markets are fully staffed and completely integrated as evidenced by our loan growth. We are beginning to realize the full benefits of our strategy, which began with our entry into Annapolis in April of last year. In fact, I would characterize our position in these markets as currently exceeding initial expectations for talent acquisition and loan production.

To put this in perspective, our commercial pipelines, which are currently at a record high, continue to escalate in part because of these markets. At the end of the second quarter, the total pipeline grew 65% from a year ago, and the metro markets of Pittsburgh, Baltimore and Cleveland, now represent nearly 70% of the total. Pittsburgh remains our largest contributor and Baltimore and Cleveland are building momentum and comprise over a quarter of our total commercial pipeline. The expanded pool of diverse commercial prospects created through our expansion provides us with the ability to achieve high quality growth as we maintain our disciplined underwriting standards in an increasingly competitive environment.

Earlier this month, we announced that Pittsburgh has officially become F.N.B.'s corporate headquarters, an action that reflects our transformation into a regional financial services company. It aligns how we have been managing the Company for the past several years and we do not expect to incur incremental costs with this change as we currently occupy 85,000 square feet of office space in downtown Pittsburgh. This space houses executive offices, the headquarters for several lines of business, including wealth and insurance, and over 260 professional non-branch personnel. Since 2010, our number of Pittsburgh-based non-branch related employees has grown 60%. In total, F.N.B.'s Pittsburgh region employs 800 people, or a quarter of our nearly 3200 employees.

Our current operations, employees, and branches in the Hermitage area will not be impacted. With its close proximity to Pittsburgh, Hermitage is an ideal location to maintain our operations center and other support personnel. We have invested in excess of $15 million in the Hermitage campus and have grown the employee base 20% over the past two years. We will continue to leverage our investment and support the Hermitage community through additional employment and investment opportunities.

We have accomplished tremendous growth in Pittsburgh since 2004, rising to a top three position for both retail deposit and commercial middle market share and are now the second largest bank holding company based in the market. Having F.N.B. headquartered in Pittsburgh elevates our visibility nationally and is beneficial in the recruitment of talent as we continue to fulfill our strategy.

On the talent front, we have recently filled two key positions. Rick Steiner joined us at the beginning of the year as Chief Marketing Officer. Rick has extensive marketing experience from both PNC and the global law firm Reed Smith.

In addition, Mark Shozda joined as Chief Technology Officer. Mark has over 30 years of experience in the financial services industry and was most recently with Bank of New York Mellon.

The first half of 2014 has been very successful for F.N.B. We have delivered high quality operating results and continue to make significant progress on many strategic initiatives that position F.N.B. for sustained and profitable growth.

Our balance sheet position is strong and we are maintaining capital levels that represent decade highs for F.N.B. Our tangible book value per share is growing consistently as has increased 15% year-over-year. We are beginning to realize the benefits from our recent acquisitions and on behalf of the management team I would like to reiterate that we believe F.N.B.'s current underlying fundamentals are exceptional. I am pleased to have shared several highlights this morning, including solid revenue growth, a stable net interest margin, strong loan and deposit growth, and a top quartile efficiency ratio.

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

Thank you, Vince, and good morning everyone. We ended the first half of the year well-positioned as our loan portfolio demonstrated consistent credit quality results across both the originated and acquired books.

I would like to cover the highlights for the quarter as it relates to the originated portfolio, which as you will recall is our primary book of business, followed by a few remarks on the acquired portfolio. Let's now look at the credit performance for the originated portfolio for the second quarter.

Contributing to our favorable results, the level of originated NPLs and OREO further improved on a linked-quarter basis, down 10 basis points to end June at 1.36%, which was primarily attributable to commercial OREO sale activity during the quarter.

Delinquency also trending positively during the second quarter to stand at 1.13%, a 4 basis point improvement over the March quarter.

Net charge-offs totaled $4.8 million, or 23 basis points annualized, which was slightly better on both a linked-quarter and year-over-year basis. When measured for the first half of 2014, our year-to-date net charge-offs totaled 25 basis points annualized, and were 3 basis points better than the similar period a year ago, demonstrating the continued consistency in our portfolio.

The originated provision for loan losses increased in the second quarter, as expected, to $8.9 million in support of solid loan growth during the quarter, resulting in an ending reserve position of 1.26%. The reserve is down 2 basis points when compared to the prior quarter, remaining directionally consistent with the performance of the portfolio.

I would now like to turn your attention to our $1.6 billion acquired portfolio of loans carried at fair value. The acquired delinquency level improved $7 million during the second quarter, reflecting a 7% linked-quarter reduction to end June at $89 million. The improvement in the past due level reflects the successful exit of several problem credits.

Next, I'd like to shift your attention to the loan growth we experienced during the quarter and share some insight with you about the consistency of our lending approach and underwriting philosophy. Our recent expansion into the Cleveland and Baltimore markets has provided us with numerous lending opportunities, which has strategically provided us with greater geographic and borrower diversity, and more importantly, allows us to be very selective in our credit decision-making process. We have hired very seasoned credit professionals to oversee these two markets and lead the decision-making process with our overall credit officer group averaging 32 years of industry experience. We have also made significant investments internally to develop and implement a proprietary credit underwriting system, which ensures consistent credit delivery across our entire footprint that is aligned with the Company's underwriting policies and philosophy.

In summary, we had another successful quarter and finished out the first half of 2014 with both our originated and acquired portfolios performing well. We are very pleased with our credit quality results and the positive contribution this continues to provide to our high quality earnings.

As our loan portfolio continues to grow, we will manage it with the same careful and rigorous approach we have always employed, which focuses on our core strengths of quality underwriting and prudent risk management carried out by our seasoned and experienced banking team.

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

Thanks, Gary. Good morning, everyone. Today, I will discuss the second quarter's operating performance and provide an update on guidance for the remainder of the year.

Starting with balance sheet highlights on Page 10, the quarter included strong organic growth in average loans of 10.5% annualized driven by commercial loan growth of $181 million or 13.1% annualized.

As Vince mentioned, annualized growth on a spot basis of 16% in total loans was even stronger. Even with the significant level of activity during the second quarter, we entered the third quarter with pipelines at a record high.

Organic growth in average consumer loans was also good at $71 million, or 9.1% annualized. This was led by a combination of organic growth of $36 million in indirect auto loans and $35 million in home equity related loans.

Average total deposits and customer repos increased $184 million, or 6.4% annualized, on an organic basis. And average transaction deposits and repos increased $264 million, or 12% annualized. We continue to benefit from new account acquisition, particularly on the business side.

Non-interest-bearing deposit growth remained very strong at $130 million, or 23.2% annualized. The reported net interest margin was 3.60%, and on a core basis was 3.59%, only a slight difference as accretable yield adjustments during the quarter were minimal. On a core basis, the net interest margin narrowed modestly by 1 basis point, consistent with our prior guidance. We continue to execute a strategy of managing the net interest margin through pricing and balance sheet management. Consistently generating quality loan growth and low cost deposits is a key element and we are pleased with the stability we have been able to achieve.

Noninterest income, excluding securities gains, grew by $5.8 million, or 17.8%, on a linked-quarter basis. Deposit service charges increased $2.2 million, or 14.2%, given the benefit of seasonally higher volume and a full quarter of BCSB activity. Despite the increase, transaction volumes in some service charge categories are tracking below expectations.

Mortgage banking increased from a very low first quarter, and while we have seen originations pick up, the contribution from this line of business remains light and below where we were originally projecting.

On the other hand, swap fee revenue benefited from the strong commercial loan volume and reached a record high of $2.6 million, increasing nearly $2 million from the prior quarter and driving the increase on the other noninterest income line.

We also continue to see solid results from the fee-based affiliates, including wealth and insurance, as Wealth Management revenue in total increased 9.9%. Insurance commissions declined due to normal seasonality, including contingent fee revenue received in the first quarter.

Noninterest expense, excluding merger and severance costs, increased $4.8 million, or 5.6%. This increase primarily reflected a full quarter of BCSB operating costs. Additionally, we had increased personnel costs due to higher performance based compensation expense aligned with loan growth achieved during the second quarter. The quarter also included slightly higher FDIC insurance expense and seasonally higher marketing expense.

The second-quarter efficiency ratio was 57%, improved from 59% in both the prior and year-ago quarters. Slide 14 provides a view of our efficiency ratio trends since 2011 relative to peers. Over this time, we have gained efficiency, and for both the full year of 2013 and the first quarter of 2014 ranked in the top quartile relative to our peers.

Even with shares increasing 15% year-over-year, second-quarter preprovision net revenue EPS of $0.37 was the highest level over the past five quarters as shown on Slide 15. Over the time period shown, results include the integration of three acquisitions, the Durbin impact, and the 2013 capital raise to position us for BASEL III requirements. While these events other than Durbin position F.N.B. for sustained long-term success, they also temporarily muted the strong fundamental drivers of the Company. When looking at these results, it is important to keep in mind that, beginning last quarter, the capital raised reduced PPNR EPS and reported EPS by over $0.01 per quarter.

Turning to capital, the link-quarter decline in the June 30 capital ratios reflect the quarter's strong growth while the year-over-year comparisons show our strengthened capital position following the raise last fall with stronger Tier 1 common and TCE ratios and an increased tangible book value per share. In addition, the OBA transaction will come on board with excess capital that can be utilized to support our continued asset growth.

Our outlook for the second half of 2014 reflects expectations for continued solid results across the key drivers, including strong organic balance sheet growth, a stable net interest margin, and consistent asset quality.

We are more optimistic about our loan growth and expect that for the remainder of the year we will perform at the upper end of our previous mid to high single-digit organic growth guidance. Quarterly organic growth in average total deposits and customer repos is expected to be in the mid-single-digit annualized range, consistent with the previous expectations given normal seasonal trends. Additionally, we reaffirmed our expectation for the core net interest margin to continue to narrow modestly during the last half of the year.

Our fee income expectations for the remainder of the year are for continued growth from the fee-based units and other revenue sources. With overall results tempered by previously discussed environmental factors, we are managing through. As I mentioned, we continue to see lower transaction volumes and certain deposit service charge revenue categories, and while mortgage banking volume is picking up slowly, we reaffirm last quarter's guidance for reduced revenue from this line of business, translating into a $0.01 a share reduction for the rest of the year. With these items in mind, and given seasonal influences, quarterly core noninterest income is expected to be in line to slightly lower than the second-quarter results absent the benefit we will see in the fourth quarter from OBA.

Quarterly core noninterest expense is expected to remain relatively consistent with second-quarter levels for the remainder of the year, again excluding the increase in the fourth quarter from the addition of OBA's operating expenses.

As you can see, provision expense increased on a linked-quarter and year-over-year basis, given the strong loan growth. Given our overall asset quality position, this should continue to track to loan growth. And we expect provision for the last two quarters of the year to be similar to second-quarter levels.

For taxes, we expect an effective GAAP tax rate between 30% and 31% for the third and fourth quarters of 2014.

As Vince mentioned, we are on target for a mid-September closing date for OBA, and I would like to remind you of our previous guidance. We expect the transaction to be dilutive to earnings by approximately $0.01 in the fourth quarter, neutral in 2015, and accretive thereafter while being accretive to capital day one.

In closing, we are very pleased with results in the first half of 2014, and our team continues to meet the industry challenges successfully. We stand committed to deliver sustainable, long-term results to create value for our shareholders as we look forward to 2015.

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

(Operator Instructions). Frank Schiraldi.

Good morning. Just a couple -- one question on loan growth. Vince, I don't know if I missed it or not. But in terms of the strong growth in the quarter, could you sort of characterize that in terms of market share gains or just an increase in overall demand that you are seeing in some of these urban centers?

I would characterize it as directly in line with the strategy we laid out over the past year and a half. I think that demand has ticked up slightly, but I think it's more a function of being positioned in markets where there are significant opportunities, and F.N.B. has the opportunity to pursue new relationships, as we've talked about before. So you are seeing loan growth pick up. Other financial institutions are reporting a tick up in loan growth, so demand is picking up but I think it's also -- I think it's a testament to the strategy that we laid out and the fact that we positioned the Company to really benefit as the economy improves over time. That's the real story.

Just given the -- I know the guidance has moved to the higher end of what was previously I think mid to high single-digit annualized growth, do you think, given what we saw in this quarter, that could possibly even be conservative? Is there anything in this quarter that would lead you to believe that it was sort of bulky in 2Q versus what we could see for the rest of the year?

I actually think we are in great position because of the pipeline that we have post-conversion of these customers. So, we are still experiencing a fairly strong pipeline. And as I mentioned in my prepared remarks, when you break down the pipeline, you can see very clearly that the growth is coming from Cleveland and Baltimore and Pittsburgh, so those major metro markets that we continue to invest in are starting to pay dividends. So, we've got the right people on the ground. Our credit process has been -- everyone has been trained and we have a web-based tool that Gary mentioned that provides consistency. And we've hired some very experienced bankers from larger institutions who are able to pursue opportunities in our business model. And I think, again, it's a testament to what we have built. And there is a pickup in demand, but I think being in the markets where there are numerous opportunities to choose from really puts us in a great place from a credit perspective as well, because we can afford to maintain our standards and still grow at a decent rate.

Okay. And then just finally, I don't know how much you can say on it, but I know this is the first year of DFAS and results are not made public this year, I understand. I'm just trying to get a handle on when companies hear back or when they plan on hearing back from the regulators, comments this year, and what we should expect in terms of analysts, investors, in terms of any feedback or any release from those comments.

This is Vince Calabrese. I would think that companies generally are hearing from examiners now. They're doing a review. Some of the may still be in the midst of the reviews, and like you said, nothing is public this year. Next year will be really the first time that kind of everybody gets a grade that's publicly announced to the world. But I would say you may hear some companies who -- the companies who didn't do well with their exam, they're having to step up their spending, kind of getting ready for next year's exam. A lot of the examination process is really focused on your process itself and are you going to be ready for next year. They're really looking at it on a two-year basis. So I think you may hear folks do that if they really haven't kind of fully put forth the effort for the first go around. But that's about as far as I can say. We are in good shape with our process, and feel good about what we did for the submission and we'll continue to move forward towards next year's submission.

And we have frequent dialogue with the regulators on that topic and others, so we have a pretty good handle on where we need to be.

Okay. That's all I had. Great. Thank you.

John Moran.

Good morning guys. Vince, a quick question. I think you mentioned in the prepared remarks that swap fees drove the other line on the fees. Is that expected to continue, and is any sort of expectation there I assume cooked into the guidance on the fee income?

It was a record quarter for us as far as swap fee revenue, so it's hard to say that that's going to continue at that level every quarter. Clearly, we are seeing, with Vince comments earlier, with the opportunities we have in the new markets, customers -- and kind of with where interest rates are and noise from the feds, I think customers are maybe starting to think, all right, rising rates aren't may be that far off in the distance and are deciding to lock into fixed rates before they move. And I do think those new markets, people are more inclined to take advantage of the program. So, we have some level of swap fee in the guidance, but if we could hit that number every quarter that would be great, but I can't guarantee that, that's for sure. That's a big number.

Got it, thanks. And then just a quick question on -- obviously pretty robust loan growth. Loan yields held in pretty well. Could you help us kind of understand the dynamics there and sort of what new origination might be coming on at versus what it's coming off at? And was there any change in utilization on the quarter that drove some of this growth or was it really getting back to Vince's point, really that the market expansion had better looks in some metro markets?

I would say that the utilization rate picked up slightly, not dramatically, to answer that question. So we had a slight uptick.

It's still very low.

It's still low relative to historical levels as companies continue to work through their high cash positions in the middle market, and upper middle market.

Consumer and small business from a spread, I'm talking spread perspective, so the spread that we charge over our cost of funds, whether it's variable or fixed, consumer and small business was relatively flat year to year-over-year, so we didn't see a significant change in margin.

Middle-market banking has come in. It is intensely competitive, as others have indicated, and margin has come in a bit, so we've seen about a 50 basis point shift in spreads in the middle market from last year to this year.

And then in our indirect portfolio, the spreads have come in 25 to 30 BPS year-over-year. But we have been able to offset that with a continued focus on growing DDA balances in the consumer bank and in the commercial bank with a heavier emphasis on the commercial side. As I've mentioned before, as we bring on new relationships, we cross-sell treasury management and other services we set for balances and the companies apply their earnings credit. So we are able to pick up fairly significant DDA balances. So, that's helped us manage the overall yield in the portfolio.

Okay, that's helpful. And then if I could sneak one last one in just on the tax rate guidance. I think up 30% to 31%, I assume that's just more income (technical difficulty) sources. Is that fair?

You got it.

Okay, great. Thanks for taking the question, guys.

(Operator Instructions). Collyn Gilbert.

Thanks. Good morning guys. My question is on the expense side. Vince, just wondering if you could give a little color or maybe breakdown on -- and I know you guys have kind of suggested what the all-in expense costs have been over time, getting yourselves set for the new regulatory environment. But just thinking about kind of expenses going forward, the run rate and then what you've currently spent to date kind of on BSA type of issues as we are seeing some banks, especially acquisitive banks, kind of trip up on that item, and I just wondered if you guys could offer some color as to where you stand.

Sure. I would just say if you step back and look at the quarter overall, it was a very good quarter on an operating leverage basis. 57% efficiency ratio, something we feel good about coming off of 59% last quarter.

As far as the spending on compliance and the risk management type matters, as we've talked about in the past, we've been investing all along so there isn't any outsized investment or expenses that we are having to step up to stay in compliance. We've always done that.

We did have some stress testing that we've talked about between the second half of last year and the first quarter this year, costs for consultants to kind of support the process and help us kind of put our submission together, but in the second quarter, kind of the remaining effect of that is more some of the few staff that we added to be kind of dedicated to that process. But really nothing significant that I would point to on that.

I would add, BSAAML, we've added significant resources over the last 8 to 10 years in that area. While other banks should have been building out those compliance staffs, they didn't. We focused on it. We mentioned it before. As we continue to grow, we monitor transaction accounts and staffing levels relative to the size of the Company, and we make sure that we include all compliance credit and audit adds to staff in our modeling from an M&A perspective. So as we build out the Company, we are building out those areas. And we just concluded -- some of our exams have been recently concluded, and we don't have any issues to speak of. So, I can't speak for other institutions, but I think that our institution culturally has always been focused on compliance and ensuring that we have adequate staffing levels to deal with whatever is coming at us.

I would just add we do continue to add, but since you're coming off of a very strong base or infrastructure that's already in place, it's very manageable. You're adding one person here, one person there as we are growing. So it's not anything significant.

Okay. That's helpful. And then just on the expense line, I know some of it was inflated because of the full effects of BCSB. I'm just trying to understand, Vince. So the run rate on expenses that we should see, what is that, the growth rate on OpEx that we should be seeing exclusive of deals? I know obviously the change in OBA coming in, but just thinking about kind of that expense line. Or should we think about I think your comments you guys made introductory is targeting that efficiency ratio to stay below 60%, is that the best way to think about it?

I would say that. And my comments were that we expect to remain relatively consistent with second-quarter levels. So you're going to be right around that level (multiple speakers)

Okay.

I don't know if that's the right way to characterize it.

Vince Delie

With OBA being additive in the (multiple speakers).

Right.

Sure. Got it. Okay, good. And then just one final question. Vince, as you talk about kind of the growth outlook and obviously to the success you guys have had in your new markets and now guiding to a little bit of the upper end of the loan growth range, how do you think about capital as you kind of perhaps set your sights to be a much larger organization?

I think it's a great question. And as we continue to look forward and experience good success growing, I think it really validates the strategy of pursuing OBA. When you really look at it, to get that 30 basis point lift really positions us -- in TCE ratio -- positions us to continue to sustain the growth trajectory that we are experiencing. So we feel very comfortable about capital.

We've always stated that we are an efficient utilizer of capital, that our philosophy, relative to capital, is extremely shareholder-friendly. If we can't get the EPS accretion through growth, we're going to return capital to the shareholders in the form of dividend, and we stand by that.

So we are good stewards of capital. We plan on managing capital very efficiently. I am very comfortable with our capital levels as they sit today, and I think it's put us in a great position with our loan to deposit ratio and our capital levels and the markets we have been positioned in that this company is in a tremendous place. So we are very pleased with where we are.

Okay, that's helpful. And then just the comment you made looking at OBA, as we look at potential acquisitions for you guys in the future, so capital accretion, is that going to be kind of an important component then of deals?

That was an added benefit with OBA. I think OBA also positioned us in an area in Maryland that has a high density of commercial prospects. So, as we've stated before, we are looking to do acquisitions that position the Company to achieve significant organic growth targets. So, that one worked both from a capital accretion standpoint and positioned us for growth. So, that remains our focus.

Okay.

I would say if you go back to the key parameters we use, Collyn, too, is we wanted to have accretion in the first full year, internal rate of return well above our cost of capital, high teens or higher, and then if there is any definition of capital, to recoup that in kind of 18 to 24 months we've talked about. So those are still kind of key standards that we use when we look at transactions.

We have been very, very selective from an M&A perspective. So we've turned down quite a few opportunities because they didn't fit strategically. So, we are not bent on growing assets through acquisition. We have an organic growth machine that works very effectively and provides the best accretion for our shareholders. If we can supplement that with an acquisition, that's what we will do.

Okay, that's great. That's helpful. Thanks so much, guys.

Matthew Breese.

Good morning everybody. I had one quick question on the securities portfolio. It increased somewhat this quarter, and I wanted to get a sense of where that will shake out as a percentage of the overall balance sheet looking over the next 6 to 12 months.

I would say, as far as the investment portfolio, we continue to manage it to about 18% to 19% of total assets. Just a couple other comments about the portfolio too, the overall duration is still on the short side, 3.4% at the end of June. It was 3.6% at the end of March. So from a size perspective, we are comfortable with that kind of 18% to 19%.

As far as where we are reinvesting today, we are reinvesting slightly lower than kind of where we are rolling off, losing about 10 to 20 basis points on that. But we are staying short, so we are not going to go long in the securities portfolio. We are very mindful of extension risk and really manage the duration to be short and not to be subject to significant extension risks. So, it's really a very conservative portfolio and helps to generate some net interest income. But current levels is about 18% to 19% is really the way we operate.

Okay. That's helpful. And then kind of a follow-up to Collyn's M&A question, how have overall levels of conversations with other banks been over the past six months? Meaning have more sellers come to you looking to partner or less?

I wouldn't say that it's extraordinarily more. I think, because of our success in integrating companies and our currency and the dividend yield, we are obviously a preferred buyer. People come to us and they want to become part of the organization. They want to roll their equity over into F.N.B.'s equity because of the performance we've had. So we've had quite a few looks over the years. And I would say that that pace has been fairly steady, and has probably picked up a little bit. But I think we get our share of looks, and as I've said, we are very selective, so we've made some good choices.

Have there been similarities among the banks that are looking to partner with you, especially in light of what you said, it picked up a little?

Similarities in terms of --

Size, (multiple speakers) composition, type of bank looking to sell?

I would say it's fairly consistent with what we have seen historically. Now, I don't think it varies widely. If you go back over time and examine what we have acquired, I think most of the banks that fall in that range of $0.5 billion to $2 billion, if they have been sold in the last 18 months, we probably talk to them, or have had conversations with bankers.

And the reasons are probably the same, really. All the extra compliance burden and scrutiny from the regulators, if there's not successors that are in place, that's often a common reason. So I would say the reasons are the same.

Okay. Thank you guys.

Brian Martin.

Good morning. Can you just talk about -- you mentioned -- I caught the end of it -- but on the fee income, you talked about certain areas that weren't tracking kind of what your expectations were, and just kind of maybe just elaborate a little bit more on that front and I guess what your expectations are to correct that and get it tracking more so where you guys are expecting it to be.

Sure. I would say a couple of things. The mortgage business clearly, as far as the fee income that that generates, it's still running very low relative to kind of what we were hoping to have this year from that business. So that's a key part of it.

And I would say on the deposit service charge, you still see changes in customer behavior that affect some of the levels of fees as people in some ways are managing their money maybe a little bit tighter, so you are not collecting as much fee as maybe you used to. And those are kind of the key areas, and you can't just change that. I am we are looking to manage the overall profitability and what are levers that we have to kind of hit our target. So that is something you basically have to overcome, but it has an impact on the rest of the year. Those are really probably the two categories I would comment on.

Okay. All right. Just from the margin perspective, you gave some color. The accretion income going forward, the difference between the core and the baseline should not be all that material from an accretion standpoint. And just secondly, with the same thing on the margins, it sounds like this pickup in loan growth, the guidance is kind of for flat margin. And I guess is the expectation we are starting to see some flattening in the loan yields or some stabilization in the loan yields on the newer business.

I would say as far as the margin overall, obviously we are very pleased with the stability there and there's a lot of effort behind that and a lot of new business generation that supports it. So the way we manage it overall is to be slightly asset sensitive.

The accretable yield, as I talked about in the past, is lumpy. I've referred to a range of $500 million to $750 million per quarter as being kind of normalized, and we were a little below that. But I am still comfortable with that as being kind of a normalized range. Some quarters, it may be higher than that depending on what the activity is that runs through the acquired book. But the strong loan growth that we have obviously generates some nice net interest income. The margin guidance was to have it come down modestly the rest of the year, so nothing significant but some slight decline from kind of current quarter levels. So, you do have some kind of rolling down still of yields in the investment portfolio I already commented on, and some of the loan portfolio, but it's manageable. And with strong the DDA growth that Vince talked about earlier, that obviously funds a good portion of loan growth and supports the margin.

I would also add that we've commented before about the duration of the commercial portfolio in particular. It is very short in duration, so we are not benefiting from bringing on longer-term fixed rate assets with a higher yield. So, that's been the case for some time as evidenced by the derivative fee income. We tend to keep -- our portfolio reprices typically monthly off of LIBOR or as prime base. So we are not really coming off of yields moving down because we are a term lender. So, that's something to keep in mind. So, that's played into the stability of the margin here for us.

That's a good point, because 60% of our loans are adjustable or variable, and 40% of the loans are tied to LIBOR or prime, to Vince's point. So that's a key fact too.

Okay. That's helpful. And just maybe one last housekeeping thing. The swap income this quarter, what -- you talked about this quarter, when we look at full-year 2013, how much revenue did you have in 2013 per se on the swap line versus kind of where you're at year-to-date?

2013 I don't have handy in front of me.

Yes, I would say that the swap fee income -- I mean we can't really, we don't have the information here handy. I'm not sure we have disclosed that to people for the full year. But I would say it attracts the commercial lending activity. So, if we have more robust quarters, we tend to have more robust derivative fee income, because we swap the client into a fixed rate and keep the variable. So that's typically what's happening. So, you'll see it. It will track what's happening in the commercial book, go back and forth where we have been. So --

Okay. Thanks for taking the question.

It seems that we have no further questions at this time. I'd like to turn the floor back to Vince Delie for closing remarks.

I'd like to thank everybody for participating in our call.

I think we had an exceptional quarter. The quarter -- obviously solid loan growth, solid deposit growth, a top-quartile efficiency ratio, consistent asset quality, and a stable net interest margin. We are very proud of the performance we have been able to deliver. Keeping in mind that F.N.B. demonstrated the ability to perform despite the fact that we are one of the few banks that navigated past $10 billion late in the game here, so facing considerable headwinds. And I do believe that we are very well positioned relative to BASEL III and the rules that have been pushed down from a regulatory standpoint, and we will continue to focus on maintaining our high standards in terms of complying with the regulatory environment.

So thank you very much. I appreciate everyone participating and look forward to next quarter's call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.