FNB Corp (FNB) 2014 Q4 法說會逐字稿

Good morning, and welcome to the F.N.B. Corporation fourth-quarter 2014 quarterly earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Matthew Lazzaro, Investor Relations. Mr. Lazzaro, please go ahead.

Thank you. Good morning everyone and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports that 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 January 29th, 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 Vincent 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, provide guidance for 2015, and then open the call up for any questions.

Let's begin by looking at the quarter's operating results. We are very pleased with the continued high quality earnings and positive trends that we have accomplished. Operating net income available to common shareholders reached another record high, at $36 million. And resulted in $0.21 per diluted share. This translates into 106 basis point return on average tangible assets, and over a 14% return on average tangible common equity.

Operating leverage reflects the successful execution of organic and acquisition growth strategy, with strong year-over-year revenue growth of 15% and operating expenses well-controlled at an 11% increase. We continue to grow loans and deposits, manage net interest margin and asset quality was once again excellent.

Looking at loans, average organic loan growth was strong on an annualized rate of 10%, with positive results in the commercial and consumer portfolios. Our consistent ability to organically grow loans and drive market share differentiates F.N.B. Our earnings reflect proportionate provisioning for this new asset growth. In fact, we have consistently provided for growth, rather than relying on reserve release to enhance earnings. This will further highlight our higher earnings quality and superior performance, as we enter a more normalized industry-wide credit environment.

Organic growth and average transaction deposits in customer repos was 12%, lead by 15% annualized growth in non-interest bearing deposits. We remain pleased with our funding position with a loan to deposit ratio, including customer repos, of 92%. Our strategic organic results continue to significantly benefit from our number three market share position in the Pittsburgh MSA. A market that remains our key driver.

The recent expansion markets of Baltimore and Cleveland are also contributing at levels that exceed our original expectation. And present tremendous opportunity as we continue to gain scale and market share, replicating our success in the Pittsburgh metro market.

Now I will focus briefly on the year. 2014 was a transformational year for F.N.B. We are extremely proud of what the F.N.B. team has accomplished, and in our strategic positioning going forward.

Full-year operating net income was a record $136 million, and earnings per share was $0.80. As we have discussed throughout the year, we are pleased with these results. Particularly in light of the negative earnings impact from regulatory items that are specific to F.N.B. during this reporting period, due to the timing of our growth beyond $10 billion in total assets. Please keep in mind that this timing was unique to F.N.B., with the Durbin amendment impacting other applicable financial institutions over two years earlier.

On a combined basis, the Basel III required capital raise and the Durbin revenue loss reduced net income by $16 million or $0.10 per share. On an adjusted basis, earnings-per-share would have increased 7%. On a positive note, as we begin 2015, these items are fully absorbed in the run rate. Our earnings drivers and underlying fundamental operating performance were consistently strong throughout the year, enabling us to deliver record results.

Total loans grew 18%, and deposits and customer repos 11%, including the benefit of two acquisitions completed during the year. Loan production approached $4 billion and set another record high, nearly doubling since 2010. Total operating revenue grew $79 million, or 15%, and our efficiency ratio improved to 57% from 59%. These results are proof points of our diligent focus on growing revenue, controlling expenses, and achieving operating efficiency as we execute our growth strategy.

At the end of the year, total assets are $16.1 billion, a 19% year-over-year increase as a result of strong organic growth and acquisitions. The organic component was over $1.5 billion, or 60% of this total. The additional scale we achieved benefits F.N.B. and its shareholders.

Our market positioning now includes a top position in three major metropolitan markets, and provides us with meaningful scale and opportunities to continue to drive organic growth. Both from a balance sheet and fee income perspective.

On the regulatory front, our larger franchise allows us to continue to successfully navigate the complex and costly regulatory environment. And effectively manage asset quality to our high standards. We have consistently invested in our enterprise wide risk-benefit infrastructure, commensurate with our growth, absorbing significantly increased staffing and overall related expenses. Risk management related staffing levels have increased 60% since 2008.

On the talent front, our expanded presence and size strengthens our reputation as an employer of choice, and benefits are continued ability to attract top-tier talent. We also continue to proactively invest in technology for our clients. Evidenced by our recent announcement that we will begin offering Apple Pay in the first quarter.

Before turning the call over to Gary and Vince, I would like to congratulate and thank the entire F.N.B. team for another great year. Record results were realized across many of our business lines and contribute to solid earnings and strong returns for our shareholders. In summary, we have achieved a strong year-over-year revenue growth. F.N.B. has achieved consecutive link quarter revenue growth for 11 out of the past 12 quarters.

We have very diligently managed expenses and realized acquisition related cost savings. Operating larger organization more efficiently with a full-year efficiency ratio of 57% and fourth-quarter ratio of 56%. Loan and deposit growth remains strong. Benefiting from our established and expanded market presence. We have grown loans organically for 22 consecutive link quarters, or 5 1/2 years.

Asset quality results were again excellent as we deploy consistent underwriting standards, footprint wide. Our returns on tangible capital remain upper decile, even as we operate with higher capital levels. In addition, we completed two acquisitions during the year, and most importantly our shareholders benefited with total return results for 2014 that rank F.N.B. in the 85th percentile relative to regional peers. These accomplishments are a testament to the dedication and tireless effort of the entire team.

As a management team, I would like to reiterate that we believe F.N.B.'s positioning to deliver long-term success is exceptional as we enter 2015. We have fully absorbed the earnings impact from significant regulatory related items. Our market position is stronger than ever, and we have a proven ability to generate high quality operating results. We look forward to sharing our progress throughout the year. With that, I will turn the call over to Gary so he can share asset quality results.

Thank you, Vince, and good morning everyone. Our credit quality results for the fourth quarter were very positive as we finished out 2014 well-positioned across all portfolios. We experienced continued good movement in our key asset quality metrics, with delinquency reaching the lowest level we have seen in the last several years and problem asset levels continuing to trend favorably.

Our overall loss performance on a GAAP basis was strong for the quarter at 17 basis points annualized, and 23 basis points for the year. Both very low levels that further contributed to our positive results for 2014.

I would like to now walk you through some of our performance results and our achievements, first on the originated book, followed by some commentary on the acquired portfolio. Booking first, in our original portfolio results for the quarter we reduced our level of NPLs and OREO by nearly $6 million or by 12 basis points to 1.13%. Delinquency trended in a similar manner and was attributable to the reduced level of non-accrual credits. We ended December at 0.99%, marking our best performance over the last several years as we reached a level that we have not been since before the economic downturn.

Quarterly net charge-offs totaled $4.1 million, or 17 basis points annualized, and with these solids result we closed out 2014 with originated net charge-offs of $21 million for the year, or 24 basis points, reflecting performance slightly better than our targeted levels. Originated provision at $7.5 million supported loan growth during the quarter, bringing the ending reserve position to 1.22%, which was down slightly on a linked quarter basis due to the favorable credit quality trends that we have been experiencing.

Shifting next to our acquired book, which now stands at $1.6 billion, we saw further positive movement in this portfolio during the quarter. Delinquency decreased by nearly $6 million to stand at just under $63 million at year end. We also saw further reductions in the level of rated credits, which has continued to trend downward over the last couple of quarters, and we have been successful in reducing the level of problem assets in the portfolio, due to the efforts of our strong and experienced work out and credit teams. During the quarter, we provisioned $2.6 million into the acquired portfolio in support of our quarterly re-estimation. As of year-end, the acquired reserve now stands at $8 million.

We have recently received a few inquiries regarding our activity in the oil and gas space and I'd now like to spend a moment on that with you. First and foremost, as communicated in the past, we have always taken a very conservative approach as it relates to energy lending, due to the volatility in this sector. As it relates to portfolio risk, we have a robust concentration management program in place that allows us to proactively monitor and manage risk across all industries and other risk categories on a monthly basis.

Specifically in reference to the activity within our footprint in the Marcellus shale and energy space, our outstanding exposure remains very low at only 1.75% of our total loan portfolio at year end. Primarily centered in transportation, manufacturing and service industries in the indirect supply chain. The majority of these customers support various industry segments outside of just the energy space, further diversifying their business risk.

While today's price volatility could present challenges for the limited number of companies that operate in this space, we would expect that many borrowers across our region's manufacturing footprints should benefit from these lower energy costs. In summary, as we reflect back on our 2014 performance, our credit quality results across both our originated and acquired portfolios were positive and consistent. Marked by historically low delinquency, reduced problem loan levels and solid loan loss performance.

While we expected the portfolio to perform well during the year, we were able to resolve more problem assets than originally anticipated, which we attribute to our proactive approach to managing our portfolio, as well as the robust lending environment that provided borrowers additional refinancing opportunities with more aggressive lenders. The strong finish to the year would not have been possible without our dedicated and experienced team of banking professionals that carry out our core credit philosophy of prudent underwriting, strong risk management and a consistent lending approach through the various business cycles.

Looking ahead to 2015 we continue to be very pleased with the position, stability, and performance 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 discuss the fourth-quarter's operating performance and provide high-level guidance for 2015.

Looking at the balance sheet, organic average loan growth momentum continued, with average loans growing 10.3% annualized, driven by continued solid results in commercial lending and better than expected growth in consumer lending. Commercial growth totaled a solid $94 million, or 6% annualized, and our commercial pipelines at quarter end remained healthy and were near prior quarter levels.

A strong organic growth in the consumer portfolio was attributable to a combination of organic growth and consumer home equity loans of $93 million, reflecting better market penetration, and organic growth in indirect auto loans of $82 million, reflecting increased consumer demand throughout our footprint for auto loans.

As Vince mentioned earlier, the fourth-quarter's loan volume is a reflection of continued great success in the Pittsburgh metro market and a significantly increased number of prospects and attractive demographics in our two new metro markets of Baltimore and Cleveland. These new opportunities have enabled us to add meaningful banking relationships and strengthen our ability to achieve long-term, sustainable organic growth.

Average total deposits and customer repos increased $197 million, or 6.4% annualized, with organic growth in non-interest bearing deposits of $94 million, or 14.6% annualized. In total, average transaction deposits and customer repos increased $286 million, or 12% annualized, reflecting solid growth in non-interest bearing commercial balances and seasonally higher customer repos. This growth in low-cost deposits further strengthened our funding mix, as 79% of total deposits in customer repos were transaction based deposits at the end of the fourth quarter. And as Vince mentioned from a total funding perspective our relationship of loans to deposits and customer repos was 92% at year end.

Net interest income grew $2.9 million, or 2.4%, driven by $690 million of average earning asset growth and our continued emphasis on growing low cost deposits. Successful execution of this strategy was evident, as we maintained a flat cost to funds compared to the prior quarter. Net interest income growth compared to the prior quarter was partially offset by $2.1 million lower benefit from accretable yield adjustments. Our core net interest margin declined 3 basis points to 3.49%, right line with our prior guidance.

As we have stated in previous calls, accretable yield adjustments may be lumpy on a quarter-to-quarter basis. A slight movement in the core margin reflects the continuation of recent trends in the current interest rate and competitive environment. Overall, we are pleased with the full-year net interest margin of 3.59%, given this challenging environment. This was in line with our original expectations and was a result of the record organic loan and transaction deposit growth, coupled with the execution of our comprehensive outpost strategy.

Turning to non-interest income and expense. Non-interest income in the fourth quarter included a one time $2.7 million on anticipated gain from an overpayment related to a predecessor bank's acquisition of another bank prior to becoming part of F.N.B., and is not included in our operating results.

It is important to note that this gain of $2.7 million was essentially offset by a $1.1 million non-run rate increase in OREO expense, following the disposition of non-strategic properties from acquired banks, and $1.2 million related to the timing of non-run rate costs for professional services. The properties we sold were part of our continuing efforts to manage expenses and improve our run rate earnings.

Excluding security gains and the $2.7 million non-operating gain, core non-interest income was consistent with the prior quarter. The fourth quarter saw improved contributions from our mortgage banking business unit, driven by increased origination volume. Full-year 2014 results for Wealth Management represent continued success, with total revenue increasing 10% compared to 2013. This was driven by organic sales growth, incremental lift from the recent expansion into Cleveland and Maryland, and improved market conditions.

Non-interest expense excluding merger and severance costs, increased $1.8 million or 1.9%. Reflecting the elevated levels of OREO expense and cost for professional services. S&P's expense items, core non-interest expense, would have been down slightly compared to the prior quarter.

Over the last four quarters, our efficiency ratio has trended positively, reflecting our commitment to diligently manage expenses and create positive operating leverage. The fourth quarter efficiency ratio of 56.1% was improved from 56.7% and 57.8% in the prior and year ago quarters. The most recent quarter represents the fourth consecutive quarter of an improved efficiency ratio as well as the 11th straight quarter with an efficiency ratio under 60%. I think you would agree that this is solid performance in managing the relationship of expenses to revenue.

Regarding income taxes, our overall effective tax rate for the quarter was 30.3% down from 30.8% in the prior quarter. Primarily reflecting the $2.7 million one-time gain as a tax preferred item, which lowered our effective tax rate.

Turning now to our expectations for 2015. We are committed to leverage the investments and infrastructure we have built over recent years to drive meaningful growth in our expansion markets. We are expecting to achieve strong year-over-year organic total loan growth in the high-single digits in total organic deposit and customer repos growth in the mid-to-high single digits.

We expect a full-year net interest margin to narrow slightly from the fourth quarter core net interest margin of 3.49%, due to the expectation of a continued low rate environment. Although I should comment that our forecast is built with an expectation for a modest increase in interest rates in the second half of the year. To the extent that does not occur there will obviously be pressure on our margin forecast.

In dollar terms, net interest income is expected to increase from full-year 2014 due mainly to the strong planned organic loan growth, as well as the benefit from having a full year of BCSB and OBA. Looking at non-interest income and expense, we expect to achieve positive year-over-year operating leverage as we now enter 2015 with the recent regulatory imposed revenue constraints, and necessary investments, fully embedded in our 2014 run rate.

Full-year core non-interest income is expected to grow in the mid-to-high single digits. And core non-interest expense is expected to increase in the mid-single digits. The provision for loan losses should continue to increase over recent 2014 levels in support of strong planned organic loan growth, with quarterly increases expected throughout 2015.

The overall effective tax rate for 2015 is expected to be in the 31% range. In summary, we are pleased with our 2014 performance as our team accomplished meaningful organizational growth and successfully overcame significant challenges presented by a demanding operating environment.

2014 results were marked by strong revenue growth, further improved operational efficiency, positive year-over-year operating leverage, continued improvement in asset quality and solid returns to shareholders. On behalf of the executive management team, we would like to congratulate our employees on another great quarter and a great year and we feel the Company is poised to drive results along a long-term sustainable growth trajectory. Now I would like to turn the call over to the operator for your questions.

(Operator Instructions)

Frank Schiraldi, Sandler O'Neill.

Vince, I just want to make sure I heard correctly on the aspect of the guidance. You said the core NIM will narrow slightly? Is that the guidance for 2015?

Yes.

And just curious, it doesn't seem to me, and of course you haven't given 2015 guidance before, but it doesn't seem to me that the thinking has really changed from -- on the margin -- from late last year, despite the fact that the longer end of the curve has moved down a bit. I would think that would make it more challenging to hold NIMs in. Could you just maybe talk a little bit about that?

The guidance itself, we do have in our expectations some modest increase in rates as I mentioned in the second half of the year. Nothing significant, fed funds still under 1%. But we do have some movement starting in the July-August time frame that's in there. The margin being relatively stable includes that happening in the second half of the year.

To the extent that doesn't happen, one of the scenarios we always run is if we keep rates flat from where we are, that would put pressure on the margin. So if we stay in the kind of environment we've been in we would have a little bit more pressure on the margin, but that's our job to manage that. So as we have been, we'd actively managed a balance sheet in a margin to mitigate that.

Remember that one of the key things for us too, Frank, as our very strong DDA growth that we consistently bring in. This quarter I think was another, I want to say15% or so annualized, so we continue to bring in those non-interest bearing deposits as we bring in new customer relationships. And the new markets are clearly helping that quite a bit and that in turn helps the margin, it supports the margin. So if rates just stay where they are, we'll continue to have more pressure there, but I think we can manage through it.

The assumption that you have again shorter-term rates moving higher, does that assume that the longer end moves in sync in that June, July timeframe?

There's some movement in the longer end. Again, not significant movement but there is, it's not one for one obviously, but there's some movement in the longer end.

Finally on the margin. Looking back at interest rate risk shock scenarios from the third quarter Q, is there any reason to think that has changed at all from the 1.5% NII growth and then up 100 basis point environment?

It's a little bit less sensitive, Frank, I would say, it's the plus 100 is probably like a 112 now so just a little bit less asset sensitive. A lot of that is just rates are lower at the end of the year compared to September so that has an impact on mortgage related assets. But the 1231 will be very close to the 930 just a little bit less asset sensitive.

One more on the margin. Again, if that's based on the curve I guess moving across the board, 100 basis points. If the longer end is say anchored where it is now and you get the shorter ending and shorter curve, end of the curve moving up 100 basis points, does that cut into that growth in NII significantly?

I wouldn't say significantly. It'll put pressure on it, but not significantly.

Actually, you're saying of the yield curve flattens out and potentially inverts which it sounds like that's what you're saying. The tenure stays where it is and the short end of the curve moves up. Is that what you were--?

Under that scenario I wouldn't necessarily invert, but just a short end moving up 100 bps

The short end moving up would help us, given how our portfolios are structured. We've got a lot of credit structured off of one month LIBOR. Initially we would get a little bit of help from that. If it inverts and a sustained inverted obviously that would have pressure, but if the short end of the curve moves up we get benefit.

On loan growth assumption on guidance for 2015. Curious about how much of that would be commercial loan growth?

The breakdown between consumer and commercial is probably 60/40 really when you look at it. I don't have the numbers precisely in front of me but roughly that's the breakdown. And I would tell you when you look at the loan growth forecast, 60% being commercial, the moves into -- the strategic moves into the additional MSAs should really start to benefit the Company.

So as we sit today, our pipeline's up 30%, 27% to 30% over the prior fourth quarter period and when you look at it, 60% of that pipeline is sitting in those metro markets. And we've had some really good solid performance out of Baltimore and Cleveland. So our thought is that momentum will continue to go given the pipeline.

Finally, on modeling. I believe I heard core fee income growth of mid-to-high single digits for 2015?

Yes.

I think in the past, you've given off of stated, can you just give us the number of -- the fee income total that's off of? I assume you're pulling out securities gains and that non-recurring piece in this quarter. Not sure what else you may be pulling out of that number to get to that growth rate.

If you look at the slides, Frank, there's a slide that would show the non-interest income on a, what we call an operating basis.

I'll take a look at that.

The one thing I will tell you, Frank, is we've had some great success cross selling wealth. And we would expect that the new markets that we've entered into as we continue to gain relationships, the cross sell of those key income categories has accelerated. Last year we had a 10% increase in our wealth management business topline and we're looking at some pretty good success early on here in the wealth space, so we're very optimistic about that.

Collyn Gilbert, KBW.

How are you guys seeing the competitive landscapes differ between your legacy markets at Pittsburgh and then Cleveland and Baltimore?

I would say that Pittsburgh -- we tend to perform a little better in Pittsburgh because we're established and we've been here for a while. The team was fully built out, Baltimore as of February of last year we weren't fully established in Baltimore. Once we closed the BCSB deal and integrated the bankers that we hired we were up and running. So we're very optimistic about our ability to perform at the same level that we're performing in Pittsburgh in Baltimore and Cleveland.

And the competitive landscape is fairly similar. We sit here in Pittsburgh with some very, very large competitors. I won't name them, but one headquartered here who is a very, very solid bank and good competitor. And we've done well.

So we view it as a game centered around hiring the best people. About making sure that we have products that we can competitively sell against much larger institutions, and rigorously managing the sales process as you know. That's what leads to our success. I believe that model's -- it can transplanted anywhere.

Just in terms of the types of competitors. So you've got the larger banks in the similar markets, but is the rationality among the small banks sort of the same that you're seeing in Pittsburgh as you are in Cleveland and Baltimore? It sounds like what you're saying is there's not a large difference among the three markets.

I don't see a material difference among the three markets to be quite frank. Gary might be able to add some additional color, but to be honest we're in an environment where it is competitive. And our success is predicated upon our ability to execute better than others. We've towed the line on credit. It becomes a game of numbers, as I've mentioned to before, you really have to have a broad array of opportunities to select the best credit opportunity for the Company from a risk, reward standpoint.

So expanding into the markets that we expanded into -- and by the way, we made a considerable investment in conducting those M&A transactions and adding the personnel. So while our efficiency ratio is in line with our expectations, and I think a very good relative to peers, we've already made those investments that are necessary to position us to grow revenue.

And we did it with the thought in mind that it would become more competitive and we need to have plenty of opportunities to go after to fulfill our investment thesis. And I think we've done that very successfully and I think this past quarter is an indication of how well we've executed and the credit metrics are seasoned and we're performing very well. Gary, I don't know if you want to add anything.

I would concur with Vince's comments. The markets have very similar competitors on the large-scale, on the smaller scale some of them act a little differently is terms of how they handle business. But the key is our banking teams in the market, our consistent approach to how we handle the credit business and the underwriting and lending activities. And we roll that out very nicely across the footprint when we enter these new markets.

So we're real pleased with the early results of the investments in Baltimore and Cleveland. And we think they're going to do nothing but provide continued growth opportunities and give us the ability to select the highest quality credit opportunities as we move forward.

Gary, you had mentioned every quarter you come into the re-estimation of where you stand with your reserve. Was there anything specific that led to the build this quarter? That you saw?

No, well specifically around the acquired book, Collyn, as mentioned, we do go through that re-estimation every quarter. We go through each of the portfolios, analyze their performance, where their trending, what the loss performance is, and in terms of the economy we look at the external factors.

Early in the quarter we downgraded a couple of credits in the acquired book and we took a pretty conservative view with them. I can tell you that we're a quarter past that now and I'm real pleased with where we stand with those couple of opportunities and the potential outcome, so I feel real good about that. But nothing other than those couple of credits.

That's helpful. One final question.

Vince, would you put $1 million in the lower accretable benefit that you saw this quarter? Was that in terms of the NIM? Basis points impact to the NIM, do you have that?

I'll give you the figure. There's a slide in the slide deck too -- the impact in the third quarter, remember third quarter was very big was an 11 basis point? So we went from 363 reported to 352 in the third quarter.

And then the fourth quarter was 5 basis points. So 354 to 349 on a core basis so you get the 3 basis points of compression. If you look at the core margin from the 352 to 349.

That's very helpful. Thank you.

Preeti Dixit, JPMorgan.

Can you talk about what new loan yields are coming on at that? And then, excluding any impact from higher rates, are you assuming any pick up in funding cost this year to keep up with the loan growth, I know so for you've been able to hold funding cost fairly flat here.

You've got a two-pronged question here so we'll start with the loan margin, the spread. It's been very competitive throughout the year. Margins have come in. I think everybody pretty much has said that on their earnings calls.

In the last quarter or so it seems like it's stabilized somewhat but I would say it still came in slightly 3 basis points to 5 basis points. In the portfolios we're seeing -- we're not seeing margins significantly off of what we had forecasted from the beginning of the year so we expected the acceleration and competition. The name of the game is to try to cross sell treasury management services, wealth services to garner non-interest bearing deposits. So this kind of ties into the second half of your question.

So many of our bankers are incented heavily not just to originate loans but to cross sell and bring in deposit balances. So that's been working very well for us, as Vince mentioned we had a nice quarter of growth in non-interest bearing deposits. 15% off of a 24% annualized link quarter growth rate in the third quarter. So we've been able to drive those DDA balances along with the growth.

Actually, it kind of lags the commercial growth because we end up picking up the treasury management accounts and activating them after we've originated the credit, so you don't get the full effect of the benefit until later. But it's gone very well for us. It's part of our strategy and I would anticipate that activity to continue into 2015 and continue to assist us from a funding cost standpoint.

On the loan growth, given your comments on pipeline being very strong and the expansion markets now ramped, could that high-single digit guidance prove to be a bit conservative given the pace that you've been running at? Just trying to get a sense of maybe how production is shaping up and then your expansion markets and if you're seeing hiring opportunities there?

I don't know about hiring opportunities. I think we've hired just about everybody we need and we've hired some very talented people. So we're pretty good in that space.

I would say that as you look at the growth opportunities in those particular portfolios in Cleveland and Baltimore, there's significant upside for us. We haven't hit our stride yet.

Having said that, it's kind of tough to call at this stage in the game because things change. We're not going to give on structure, the climate is competitive. We've already talked about that. But we win because we've hired great people who are well connected in the marketplace. We make local decisions.

The borrowers know we're a consistent provider of capital and that's what sells. We're good at grabbing market share and we're good at structuring credit and making sure that we cross sell. Good execution is going to matter in 2015 just like it mattered in 2014.

Vince, just some color on the M&A landscape, it looks like deal activity for the industry is picking up. Are you still looking maybe at any fill in opportunities in Cleveland, Baltimore? Or is this a year of focusing on the organic picture?

Every year is a year of focusing on the organic picture, I think if you go back and read my comments, $I.5 billion in organic growth. That does not count what we acquired. That's fairly significant for this Company.

So anything we do from an acquisition standpoint is done to enhance shareholder value and to position us to continue to drive organic growth. We don't acquire just to grow. We acquire to position the Company.

I mentioned on the last call we're going to be very, very selective. There have been a number of transactions that were done in our footprint. You didn't see our name on the other side of the announcement.

We are conservative and continuing to deploy what we consider to be our strategy relative to M&A, which includes achieving certain financial metrics in the modeling. It's hard to say. We're opportunistic buyers, but I would say we're very well positioned as we sit today and we want to deliver for the shareholders.

I would add too, Preeti, that being very disciplined and how we allocate our capital is just part of how we run the Company forever really. It's part of our underwriting strategy and having the new markets where we can be even more selective on what we put on the books is important.

Similarly with acquisitions, we have a lot of good momentum here and we want to be careful about not diluting that and being disciplined in what we're willing to pay for an acquisition. I think it all holds together well for us.

Matthew Breese, Sterne Agee.

Thinking about your margin assumptions and your prediction that maybe rates will increase in the back half of 2015. Within those assumptions, what do you guys assuming for deposit betas on interest-bearing accounts?

I would say a couple of things, Matt. First of all, we're not predicting. We don't go off and do our own interest rate forecast. We look at the Bloomberg consensus that's put out every month. And we might make some tweaks to it, but we really we largely will go along with that and it makes sense to us.

What's ultimately going to happen with the rates, no one really knows for sure. Our job is to manage it in all the different environments. The betas, we don't really disclose the betas. I do have that, I'm just looking for a piece of paper that I have -- our general approach to managing when rates do start to move up, that's baked into my guidance. There's some ability that you always have to lag the movement in rates on the deposit side.

Vince was commenting earlier on the loan side. We do have a significant portion on our loans that are tied to LIBOR and Prime, about 40% of our loans are tied to that. Those move pretty quickly. Once rates move.

On the deposit side, we'll manage it. There's definitely some increases baked in. Our total cost to funds within my margin forecast goes up probably about 10 basis points over the course of the year. So that does include some movement on the liability side. It's -- I don't disclose specific betas but it's baked into our forecast.

The total cost of funds going up 10 basis points, is that from fourth quarter 2014 to fourth quarter 2015?

It's full-year to full-year.

Going back to your M&A commentary. Obviously you guys have not been involved in many transactions. Is that indicative of how you feel about M&A valuations and prices recently versus where they were 12 months, 18 months ago?

If you go back and look at -- I'm going to do a commercial now, so please excuse me, -- but if you go back and look at the strategy and Baltimore as we said in the past, we assembled a series of banks. And when you look at the price that we paid as a multiple of tangible book, we were at 1.4 times tangible book for $1.5 billion financial institution, essentially once you put the pieces together. We were able to move into that market in what I consider to be very, very attractive pricing and we built out the team and we assembled the components that we needed to drive organic growth and plugged it into our delivery channel. So we made some, I thought, very smart acquisitions that were priced well.

On a deal by deal basis, we look at every transaction separately. And we look to get EPS accretion in the first full year, it has to be a good strategic fit for us so if we're buying something even in market, it has to provide us with the ability to achieve the growth objectives that are built into the modeling. There have been a number of transactions that have come about and for one reason or another we felt they were either overpriced or unattractive markets or we just hit our limit on pricing.

So valuation comes into play in some instances. In others, it may be the underlying book of business that sits within the bank. So it varies from deal to deal.

Valuations are relative. And they change over time and the industry changes, so currencies, the value of currencies change. So really you have to drill down into the financial modeling and it has to be accretive for the shareholders.

Outside of Cleveland, Pittsburgh and the Maryland markets, what new markets do you view as attractive that could potentially be new places that F.N.B. goes?

We have some pretty good opportunities in the markets we've recently expanded into. Remember, we did I think five acquisitions in the last three years, so our teams are working really hard to integrate those acquisitions and we have done that successfully. And we're starting to get really good momentum. We don't want to do something that would harm our ability to grow EPS, even in the short run.

We have often mentioned Virginia. That's one area. It's adjacent to where we are in Maryland because we're now down the 270 corridor in Gaithersburg and Bethesda. I'd say nothing's changed.

It's still the same answer that we gave before, but I will say that we've been very, very selective and we will continue to be selective, very cognizant of producing EPS growth. So that's what we're focused on.

My last question regarding your comments around energy price volatility and how that could present some challenges. I was just hoping you could provide a little bit more detail around that, and what kind of challenges? Do you mean from a growth, trajectory standpoint or from more of like a credit quality standpoint?

I think the opposite is what Gary said, I can let Gary answer, but quite frankly we don't have much exposure at all to the energy segment. We're certainly not in the development side. We've said that repeatedly to people as we've been on the road and over the years because of the hype around Marcellus Shale.

The portfolio is, we have less than 2% of our portfolio has any exposure at all to the oil and gas industry. So from a credit perspective we're not concerned about the impact of the current situation on our customer base, as much as others could be.

Having said that, what Gary said in his comments were, when you look at the inverse, you look at what low energy costs do to rust belt areas that have a heavy manufacture component. It actually helps those companies achieve greater profitability because it brings their cost to manufacture down. Gary, if you wanted to comment --

I would just reiterate Matt, that we will always take an conservative approach to this space. Historically there's not been an enormous amount of activity around it, but we've got some very strong core customers that we've had for a number of years that touch this space. And as I mentioned earlier, the book of business is very small. It's very granular and it is heavily tied into the supply chain of supporting the energy areas here of Marcellus Shale that we've seen across our footprint.

That supply chain is focused around service industries, manufacturing, transportation, and those companies are -- they added the energy business to their portfolio of business opportunities. So that core group of customers which is where we're doing some business has many other industries that they've served historically. And they've added the energy space to it. So it's kind of a reverse relationship there. We're really not focused directly into the energy --

We don't have the expertise here or the credit appetite to play in that space. That requires a special expertise. As Gary said, we are on the periphery.

We finance companies that may have received some benefit because they've been added to the revenue base because of the activity for the infrastructure build. But that's pretty much the extent of it. Very conservative in relation to that sector.

If I could go back to your question -- I found the piece of paper I was looking for, just to give a little color on the betas. On average, we're about 50%-ish, as far as the movement. And I would say, as you would expect on the consumer side savings those types of accounts are probably at the lower end, 15%, 20% type and in the commercial side and sweeps and those types of things are more in the 75%, 85%, 90% range. Just to give you a little bit of color of what's baked into our model.

I spilled enough so that Vince could get --

Brian Martin, FIG Partners.

Can you talk a little bit about, I know you don't give a breakdown of loan balances by market, but can you talk about your growth outlook for 2015 maybe just as you talk about the momentum picking up in these newer markets? Maybe how much of the growth you'd expect to come from the newer markets, in particular Cleveland and Baltimore relative to Pittsburgh?

I'd say historically Pittsburgh's generated about half, before the new market, it's generated about half -- a little more than half maybe of the growth. So the other markets that we're in, we have relatively high market share and those markets tend -- they're not large markets so they don't tend to grow very rapidly either. So the move into Pittsburgh was to help diversify our growth prospects and give us enough opportunities to move, as I said into a market that provides us opportunities to go after higher quality borrowers where we're not hitting up against the saturation point from a market share standpoint.

Moving into Baltimore and Cleveland, we would expect production levels, and we've achieved production levels, commensurate with our initial modeling for those deals and actually exceeding what our initial expectations are. So I would expect today when you look back, the pipeline for Pittsburgh Baltimore and Cleveland represents about 75% -- 60% to 75% of the total pipeline. That was the case throughout the latter half of the year, particularly in the last three months of the year.

That's probably going to continue. I would suspect it would continue given where the pipeline sits today.

So those new markets, while they will contribute to the overall growth of the Company and their growth will be significant on a percentage basis, the portfolio balances are relatively small. Pittsburgh sits at about $2 billion in outstandings and those are much, much smaller.

The hope is -- and when I started here 10 years ago, the balance in Pittsburgh was $300 million. The hope is that we can gain the same type of success that we've gained here in those markets over a sustained period of time. And given the early indications, I would suspect that's achievable.

I would just had one comment. If we look at the production in 2014 for the full year, Pittsburgh's probably about 40% to 45% of the production. Maryland's 10%, Cleveland's 10% and then the other markets are the rest. And then we look for those two new markets to increase contribution going forward.

Back to M&A. The likelihood, assume you guys are looking at deals, would you expect the likelihood of an in market deal versus a entering a new market is greater or is that kind of incorrect?

I don't even want to handicap that. I don't know. I'll be honest with you. I don't know.

If the right opportunity comes up in market, certainly if we can take cost out and gain scale and the model works, we would consider it. If the right opportunity comes up in an adjacent market and its additive from an EPS perspective, we would be interested. So it's kind of hard to handicap the different scenarios.

Lastly it sounds like there's still room for operating leverage and the efficiency improvement in 2015. Just wondering on your expense outlook if there's any inclusion of maybe a branch rationalization, anything on that front or you're thinking about that at all?

I'll let Vince answer that. But in terms of branch rationalization I think if you go back and look at the old earnings calls from several maybe 3 years or 4 years ago, we were out say we had a branch rationalization program going on that was continuous. And it continues to this day.

We call it project ready, when we're looking at repositioning and realigning the delivery channel. We've consolidated over the years a number of branches, some through acquisition, some just because it made financial sense to consolidate given the changes in client preferences and the advances in technology.

So we've done that and we continue to do it. And I'll give you an example. We just opened a brand new facility in Johnstown. Johnstown doesn't seem like a dynamic market, but we went three branches into one. And improved the customer experience, because some of those facilities had limitations.

So we went into a brand new state-of-the-art facility with drive-up capability and new ATMs in a market that we've been in for many years. And we were able to gain significant efficiencies. So that just happened.

So those of the types of things that we have our retail banking team focused on continuously. So that's not something that we start and stop. I think over the years, you can see we've consolidated over 50 branches since we started talking about this. So it's something that we're very aware of.

And I think that's why, if you look at the peer group, we lead and we're in the upper quartile in the peer group from an efficiency ratio standpoint because we've been able to do that very effectively with limited attrition. It's an ongoing strategy within the organization. Vince, I don't know if you want to comment on any --

I had a couple of points. Part of that ready program is also investing the savings from those consolidations into markets as well as doing the two into ones and three into ones. It's part of how we continue to generate operating leverage as well.

We will reinvest some of that in those new locations that take two, three years to get to breakeven. And that's served as well and we've continuously done that. So we'll keep looking at that.

As Vince mentioned vendor management, we continue to work very aggressively and working over the vendors to achieve whatever savings that we can there. We'll continue to be looking at just our operations overall. We've commented the last couple of calls that's looking at operating efficiency throughout the Company and its something we always do and we'll continue to do that. The key for us in that operating leverage is us growing revenue. Our ability to grow revenue in the core footprint enhanced by the new markets is really a key part of that.

There's still positive to that operating leverage. Our focus is to continue to be top quartile or better on the efficiency ratio and to manage the overall relationship.

We've invested. We've reinvested in the Company, I give our team credit, to achieve that efficiency ratio given the level of investment and online banking, bill pay, we upgraded both, we have budgeting tools online. We have mobile remote deposit capture that we came out with shortly after the larger banks.

We offer pop money instant payment. We just announced we're participating in the Apple Pay program on the payments side.

So we've made some significant investments in technology and that has been funded partially through the consolidation effort that has taken place. Shifting client preferences we're on top of it, our team actually reacted appropriately and that's really helped us maintain our customer base where you otherwise would have seen greater attrition. The deployment of smart ATM machines in markets where we consolidated also helps.

I give them a lot of credit. We've been investing -- we've been very smart about where we cut costs and how we invest in the future. And that's paid dividends for us.

The only other thing I'd comment on is, I mentioned in my remarks that we had an increase in OREO expense. And it's really related to some properties that we got through acquisitions. We took some small hits on some properties to exit and that helps the run rate as we go forward. Managing the properties that we have, as acquisitive as we've been, we have properties that we'll continue to try to move out so that we improve the run rate expenses. So that gives us some operating leverage benefit too.

That's helpful. To clarify some of the earlier questions, the expense growth, you're talking the guidance you give is based on full year 2014 core numbers and looking at that relative to 2015, correct?

Correct.

Collyn Gilbert, KBW.

Vince, you had indicated I think in your guidance comments that the NII net interest income would increase. I think you said that the dollar amount would increase. Could you give any more specifics around that?

I didn't give a specific, but the loan growth that we talk about is the key driver. So high-single digits there, slight compression in the margin you can kind of do the math from there. (Multiple speakers.)

Okay, just wanted to confirm that. Thanks.

Frank Schiraldi, Sandler O'Neill.

Not sure if I missed it, but on the accretable yield, 5 bps in the quarter I think that's something like $1.5 million, is that scheduled, assuming you get the same amount of accretable yield next quarter, is that basically it for accretion going forward from the purchased books?

When you say is that it, Frank, what do you need?

I guess how long does this accretable yield run for, given the expectation of 5 basis points a quarter?

I would say the 5 basis points this quarter, and similarly the 11 basis points in the third quarter, were kind of the extra benefit from the proactive movement of problem assets, acquired loans off the book. You get that kind of extra juice. We've said it's going to be lumpy, and it will be lumpy. And it's really tied to our ability to continue to move assets off the books.

We've added two more banks in 2014 after adding two in 2013. So there's accretion kind of contractual accretion that's still underneath. And then the adjustments that I quote and it was $1.8 million this quarter, it was $3.9 million last quarter is really tied to those activities moving assets out at an economic benefit to the Company. So there will continue to be accretable yield and the absolute level is going to continue to fluctuate.

So when we think about margin guidance, the slight narrowing on the core we can just add back in any sort of accretable yield assumptions we have?

We just have some kind of core credible yield in there, not counting on any exits at that point.

At the present time, there are no more questions. I would like to turn the call back over to Management for any closing comments.

First of all, I'd like to thank everybody for their interest in F.N.B. and their support of F.N.B. I think we've had a terrific year and I look forward to delivering another good year in 2015.

I know there are a number of economic variables out there. We've covered a lot of them on the call here today. I'm very confident in the Management team that we have here and our ability to deliver consistent results quarter-after-quarter, and despite what's out there beyond our control I'm confident that our team can continue to deliver. Again, thank you and look forward to the next call.

That concludes today's teleconference. Thank you for attending today's presentation. You may now disconnect your lines.