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F.N.B. Corp (NYSE:FNB)

Q4 2012 Earnings Call

January 24, 2013 10:00 AM ET

Executives

Cynthia Christopher - IR

Vincent Delie - President and CEO

Gary Guerrieri - CCO

Vince Calabrese - CFO

Analysts

Tom Frick - FBR

Max Hutchson - SunTrust Robinson Humphrey

Damon Delmonte - KBW

David Darst - Guggenheim Partners

Matthew Breese - Sterne Agee

Frank Schiraldi - Sandler O’Neill

Bob Ramsey - FBR

John Moran - Macquarie Capital

Operator

Good day and welcome to the F.N.B. Corporation Fourth Quarter 2012 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided that time as a reminder today’s call is being recorded.

And now I would like to turn the conference over to Cynthia Christopher, Manager of Investor Relations for F.N.B. Corporation. Please go ahead.

Cynthia Christopher

Thank you and good morning everyone. Welcome to our fourth quarter and full year 2012 earnings call. This conference call of F.N.B. Corporation and the reports are filed with the Securities and Exchange Commission often contain forward-looking statements. Our forward-looking statements involve risks, uncertainties and contingencies that could cause F.N.B. Corporation’s actual results to results to differ materially from historical or projected performance.

Please refer to the forward-looking statement disclosure contained in our fourth quarter and full year 2012 earnings release, related presentation material and in our reports and registration statements; F.N.B. Corporation filed with the Securities and Exchange Commission and available on our corporate website.

F.N.B. Corporation undertakes no obligation to revise this forward looking statement to reflect events or circumstances after the date of this call. A replay of this call will be available until midnight on January 31st, by dialing 877-870-5176 or 858-384-5517. The confirmation number is 481-6875. A transcript of this call and the webcast link will be posted to the shareholder and Investor Relation section of our corporate website.

I would now like to turn the call over to Vincent Delie, President and Chief Executive Officer.

Vincent Delie

Thank you Cyndi. Good morning and welcome to our quarterly earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. I will be highlighting our fourth quarter and full year 2012 results and accomplishments. Gary will review asset quality and Vince will provide additional detail on our financial results along with the expectations for 2013.

The fourth quarter was a great quarter and a strong finish to a successful year with operating results reflecting consistent solid performance. Loan and deposit growth was strong and profitability continued to build. We are very pleased with the quarter and full year results and we are excited to review our accomplishments with you.

First, looking at the fourth quarter, operating net income was $32.1 million or $0.23 per diluted share. This represents a 21% increase in earnings per share over the prior year. Return on average tangible assets increased to 118 basis points.

Organic loan growth was strong. With an annualized growth rate of 6%, our core commercial portfolio grew 8.4% annualized and continues to be the primary growth engine. Average consumer loans grew nearly 12% annualized. Both the commercial and consumers teams had a great quarter and accomplished record fourth quarter production levels.

Slide four shows our 2012 quarterly loan growth trends. Our team has accomplished this consistent growth despite a challenging economic environment and historically low line utilization. Additional headwinds included significant reductions in the Florida portfolio and acceleration of prepayment speeds in the residential portfolio.

Our success, consistently growing loans is a result of a focus on people and execution. We have built a great team and continue to invest in our people while leveraging our best in class proprietary sales management system. F.N.B’s proven new client acquisition strategy with its sharp focus on performance has been deployed across all of our business units.

Now let’s review our full year results. It was a great year for F.N.B. We earned record net operating income, up 31% from a year ago. Operating net income was $0.84 per diluted share, representing growth of 17% compared to 2011.

The quality of our earnings is demonstrated by pre-provision earnings per share growth of 10%. Profitability was solid, showing positive trends over the last two years. 2012 results included the following financial highlights.

Return on tangible equity improved to 18.77%, representing growth of 245 basis points and return on tangible assets grew 10 basis points to 1.12%. The net interest margin was 3.73% showing relative stability in the current interest rate environment. Loan and deposit growth were again strong with record production levels for consumer, commercial and small business.

Asset quality metrics were very good and trended positively throughout the year and our efficiency ratio improved to 58%, even with significant investments made during the year that prepare us for the future.

There are many contributing factors to these positive results. In fact, many of our lines of business had great success contributing to top line revenue growth. For example, wealth management accomplished all time high organic sales, doubling new sales volumes from the prior year. The small business unit that handles clients with revenue up to $2 million increased production over 200% since its reorganization in 2010.

The private banking team formed in 2009 increased its households to nearly 30% last year. Our asset based lending group is another business unit thus contributed to consistent growth since its inception in 2009. This portfolio has grown to over $300 million in commitments at year end.

The commercial team exceeded their annual cross sell revenue goals by over 30% and treasury management team while collaborating with our bankers was successful in bringing in new accounts, with year over year, average organic growth in DDAs and repos totaling 24%. These balances support the net interest margin and cross sell revenue generation.

You could see that there is a broad base success across F.N.B. Through our investments in these business units and our employees, we have developed a well-diversified revenue stream and a cross sale oriented culture.

F.N.B. continues to evolve and reposition in order to provide solid foundation to support sustainable positive results. Slide 8, provides a summary of some of the significant accomplishments during 2012.

We continue to be active, disciplined acquirers with the completion and integration of Parkvale and the announcement of Annapolis Bancorp. The Parkvale acquisition, one for our larger acquisition to date continues to perform well. Despite consolidating 17 of the acquired branches; we've experienced significant loan and deposit growth in the market.

As expected, our strength and market presence in Pittsburg has clearly proven beneficial for F.N.B. The pending acquisition of an Annapolis Bancorp will take us into the neighboring state of Maryland and a market was very attractive, demographics in growth potential.

We recently made several key hires in the region, including the hiring of Mac Tisdale as regional President. Mac has extensive corporate banking experience in Baltimore and DC markets, previously, working for one of the nation's largest banks. He will work with Rick Lerner to promote the F.N.B. culture.

We focused on our delivery channels both physical and electronic to address the evolving landscape of customer preferences. Since resources have been invested in our leading edge E delivery strategy, we now have 35,000 customers signed up for mobile banking since its introduction this past June. We expect to continue seeing improved penetration in our existing customer base.

Last month we began offering mobile remote deposit capture, a service that has been very well received by our customers. The next phase of our E delivery strategy is slated for implementation throughout 2013.

In addition to promoting account acquisition, this investment is critical in managing retention as we rationalize our retail delivery channel. With this in mind, we accelerated our branch optimization strategy in 2012. In addition to consolidating 17 Parkvale locations, 20 locations were consolidated and we expanded through six de-novos into higher potential markets.

The consolidation of 20 branches alone is expected to produce annual pre-tax cost savings of $4 million. Our sales management system, an integral part of our success continues to be refined and expanded, covering all lines of business.

Our web-based sales management tools are aligned with our financial objectives, incentive compensation plans and risk management systems. As you can see we accomplished a number of significant strategic initiatives over the past year as we continuously position F.N.B. for future success.

Now I would like to turn the call over to Gary for his remarks on our solid asset quality.

Gary Guerrieri

Thank you Vince and good morning everyone. We closed out 2012 with another solid quarter of positive performance. Our fourth quarter credit results further contributed to the favorable trends that we have experienced throughout the year, reflecting the consistency of our core portfolio along with the benefit of significant reductions in the Florida portfolio.

I will now walk you through some quarterly credit quality highlights for our originated book, followed by an update on our acquired portfolio and a brief look at our full year results.

If you will direct your attention to slide 9, non-performing loans and OREO to total originated loans and OREO improved 9 basis points on a linked quarter basis, to end the quarter at 1.6%, and were driven by lower non-accruals.

This also drove an improvement in originated delinquency during the quarter, which was down two basis points to stand at 1.64%. While we experienced an overall reduction in delinquency, early stage levels did tick up by $6 million during the quarter with a majority of the increase due to a seasonal migration in the mortgage portfolio, most of which cured very shortly after the close of the quarter.

Net charge-offs remained relatively consistent with the prior quarter at 38 basis points annualized on a GAAP basis and were up slightly at 45 basis points annualized for the originated book with both measures remaining at very good levels.

Provision for loan losses of $8.1 million was up slightly as we continue to provide for increased loan volumes. Our ending reserve position of 1.39% is directionally consistent with the performance of this portfolio.

Shifting now to our acquired portfolio, we ended the year at $900 million in loans. The level of contractually pass due accounts at $59 million increased slightly from the previous quarter and is largely attributed to the seasonality in the mortgage portfolio that I mentioned earlier.

Looking now at slide 10, I will touch on some year-to-date highlight for 2012. During the year, we reduced our non-performing loans and OREO by $25 million or 18%, representing a 55 basis point improvement compared to year end 2011.

Originated delinquency also improved significantly year-over-year, down 44 basis points to end 2012 at a very solid 1.64%. Our net charge off performance on the originated portfolio was very good at 41 basis points for the year, representing a 21 basis point improvement over 2011 results.

As we close out another successful year, we are very pleased with the position of our portfolio as we move into 2013. The stability and consistency of our performance is reflective of the strength, experience and knowledge of our banking team.

Looking ahead we will continue to rely on the core foundation of our business philosophies that drive our credit culture, the strength and consistency of our underwriting and our passion for managing risk, which have been the driving forces behind our positive results.

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

Vince Calabrese

Thanks Gary and good morning everyone. As Vince discussed, we are very pleased with the fourth quarter strong finish to successful year. I would focus my remarks this morning on additional highlights of our operating results and expectations for the year. Let’s begin with balance sheet highlights on slide 11.

Loan growth shows continued momentum with average loans growing a $120 million or 6% annualized. The fourth quarter marks the fourteenth consecutive quarter of total organic loan growth with positive results seen in both commercial and consumer portfolios.

Through continue market share gains across all regions, growth for the core commercial portfolio was strong at $89 million or 8.4% annualized. This portfolio has grown for 15 consecutive quarters at an average growth rate of 6.7%, something we are very proud of, especially since we continue to see clients deferring capital expenditures and the commercial line utilization rate remains at historical lows. The consumer portfolio also achieves strong results, with average loan growth of $73 million or 11.7% annualized, driven by home equity related products.

Lastly regarding loan activity, we continue to see accelerated pre payments in the residential mortgage portfolio. On the funding side, growth for total deposits and customer repos was a $141 million or 5.7$ annualized.

We continue to see strong growth in relationship based transaction deposits and customer repos with this average balances increasing $215 million or 11.9% annualized.

Meanwhile time deposits declined 11.2% annualized as we remain focused on attracting lower cost fee generating transaction base accounts, further strengthening our deposit mix.

The fourth quarter, net interest margin of 3.66% included a 10 basis point benefit and $2.6 million in accretable yields due to better than expected cash flows on acquired portfolios.

Full year net interest margin results were in line with our expectations, following the Parkvale acquisition at the beginning of the year. Fourth quarter non-interest income results include the impact of $1.7 million accrual to recognize the expected loss on asset deposals related to the 20 branch consolidation completed during the quarter and the third quarter included a $1.4 million gain on sale of a former headquarters building.

Absent these items, overall fee income results were favorable with the positive trends in wealth management revenue and gain of sale of loans. The lower at charge commission and fees were in fact normal seasonal trends.

Turning to non-interest expense on slide 14, fourth quarter non-interest expense included the previously disclosed $3 million to create settlement funds for a class action lawsuit.

Adjusting for this, non-interest expense decreased to 4.5% through continued expense control, as well as the benefit of lower OREO costs due to $1.5 million recovery on a disposal of a Florida related property and lower compensation and benefits cost which reflect favorable medical insurance claims that were partially offset by higher accruals for commission and incentive complications consistent with our strong financial results.

The full year efficiency ratio improved a 198 basis points to 58%. Looking at our capital position on slide 15, regulatory capital levels at year end are equal or slightly higher than last quarter end, and the tangible common equity ratio increased to 6.1% as we continue to exceed all regulatory well capitalized thresholds.

Looking ahead to 2013 we expect to continue to build on the momentum we have established and leverage the strategic accomplishment Vince discussed earlier to generate continued solid loan growth. Year-over-year organic growth in total average loans is expected to be in the mid-single digits, with the addition of Annapolis bringing the total increase into the high single digits.

On the funding side we expect total average growth in deposits and repos to be in the low single digits on an organic basis and mid-single digits including Annapolis. We will continue to focus on attracting lower cost relationship based accounts and manage the decline in time deposits as we look to support the net interest margin and generate fee income.

The full year net interest margin is expected to be in the low to mid-360s range. Support for the margin will come from the strong expected loan growth and continued improvements in deposit mix. Loan pricing remained disciplined and downward rationalization of deposit pricing will partially mitigate the margin pressure created by the extended loan rate environment and the impact of lower expected accretable yield.

Organic core non-interest income growth is expected to be in the low single digits, and including Annapolis in the mid-single digits. The Durbin Amendment will affect us beginning July 1st. We have taken a number of actions to offset this loss of revenue, including changes in both product structure and pricing. The number of actions have also been taken on the expense size to address these regulatory impacts and maintain positive operating leverage.

For example, the acceleration of our branch optimization strategy in 2012 is expected to result in pre-tax cost savings of $4 million on an annual basis. Additionally solid performance as expected from our diverse revenue sources through continued focus on collaborative cross sell efforts.

Recognizing that the current operating environment has presented industry wide challenges for all banks, we expect to take additional actions to closely manage our expense base.

Overall non-interest expense results are expected to reflect cost saving actions and diligent expense control, as well as continued investment in growth initiatives such as our E-delivery strategy.

As a result core expenses are expected to be flat prior to the addition of Annapolis, an increase in the low single digits inclusive of Annapolis. As Gary discussed we are very pleased with our credit quality results throughout 2012 and the position of our portfolios as we head into 2013.

We expect this year to reflect continued stability and consistency. The strong planned loan growth is expected to result in a slight dollar increase in the provision of loan losses compared to the full year of 2012. For taxes we expect an effective tax rate between 28% and 29% on a GAAP basis during 2013.

In summary, we had a great 2012 and we’re very pleased with our results across the company. The favorable trends we have been reporting all year continued in the fourth quarter provided some solid momentum and a strong financial position as we enter 2013.

Now I would like to turn the call back to Vince for his closing remarks.

Vincent Delie

Thank you Vince. We closed out the year with a very strong finish. Significant strategic actions were taken providing a solid foundation as we head into 2013. As Vince discussed the current year is expected to present a continuation of the industry wild challenges we have faced over the past several years.

Moderate forecasted economic growth and extended low rate environment and regulatory related pressure on fee income are headwinds that are expected to persist. Our strategy in light of these challenges remains consistent, reposition and reinvest in the company for sustainable growth and profitability while maintaining a low risk profile.

In 2013, we will continue to reposition through the evolution of our delivery channels and with the right opportunity peruse positional M&A expansion into attractive markets. We will continue to reinvest in our people, processes and infrastructure, while remaining keenly focused on expense control and efficiency improvement. There will also be a continuous focus on leveraging the strong cross sale culture we have built. We are very well positioned to capitalize in this area due to the significant investments we have made in personnel and sales management.

I would like to congratulate the F.N.B. team on an outstanding accomplishment over the past year. I am confident that our strategies will serve us well and that our team will continue to deliver great results.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll take our first question from Bob Ramsey with FBR

Tom Frick - FBR

This is actually Tom Frick for Bob. I just had a quick question, I appreciate the commentary on your branch cost savings of $4 million pretax and you talked about how core expenses are going to be flat in 2013. I was just wondering what other kind of the expense actions are you considering in order to kind of hold this level?

Vince Calabrese

Sure, well as you know we have focused on disciplined expense control. It’s just kind of the part of the culture at the organization. So, some of the things that the branch optimization strategy is obviously is a big part of managing our expenses. That’s an annual program that we look at to kind of evaluate all of our branches and last year we accelerated that to really have those savings locked in as we start the beginning of the year.

For 2013 we have a big focus on vendor management and really looking at going out, pushing vendors given the economic environment that exists, re negotiate contracts and really try to garner whatever we can in savings out of those focuses throughout the company.

And then there is a variety, we have a program where employees rightly made suggestions on ways to save costs. We have a variety of other things, suggestions that have come in from the field that we're going to looking to deploy ways to just increase efficiencies. So, really its broad based and something we always focus on and going focus on even more this year.

Tom Frick - FBR

And then if I can move to net interest margin, you guys had ten basis point benefit from accretable yield this quarter. How do you think that trends in 2013 given your low to mid 360's guidance from them?

Vince Calabrese

Are you focusing on the accretable yields or?

Tom Frick - FBR

Yes, yes just the accretable yield piece.

Vince Calabrese

The $2.5 million or so that we had this quarter, it's compellable to the second quarter; the third quarter was a little bit lower. I think as we look ahead to 2013, what’s baked into the guidance is a range to of about 500 to 750 of schedules accretable yield that we would expect see each quarter, some variability and then as happens with the accretable yields, we get some positive surprises.

We will upside to that number but on a scheduled basis, the two and a half compares more to a 500, 750 that we’re at least built into our budget for 2013 and then we will see how it plays out as we go through the year. And that's all baked into my low to mid 360's.

Tom Frick - FBR

And then one final modeling, what was the Florida free balance at December 31. I didn't see in the earliest.

Vincent Delie

At December 31, the loan book was at $68 million top, so it's been reduced significantly.

Operator

And we’ll go next to Max Hutchson with SunTrust Robinson Humphrey.

Max Hutchson - SunTrust Robinson Humphrey

Just a couple of questions, thanks for all the guidance as usual. Vince, on the net interest, non-interest expense guidance, you said flat on a core basis. Are you using the, I think its $319 million core kind of reported number, or is it more a core number?

Vincent Delie

Really its core. If you look at core expenses for 2012 as a whole, compared to what we have planned for to 2013. So it’s not a core basis.

Max Hutchson - SunTrust Robinson Humphrey

Not a core basis, okay. I can try and follow up with what you guys (inaudible) rest of presentation. And then on the Annapolis, remind us when that’s expected to close?

Vincent Delie

It is scheduled close, I believe, April. First week of April, April 6 is the exact date Mac.

Max Hutchson - SunTrust Robinson Humphrey

And on the margin guidance Vince, I think you just had $500,000 to $750,000 is going to schedule for a quarter end ‘13 of accretion. Remind me again the offsets; I think that that would put you down in the, kind of the low 360 to the high 350s. Remind the offsets to get you to the low to mid 360s for the year versus the 366 this quarter?

Vincent Delie

Well it’s really just, you mean why is it coming down Mac?

Max Hutchson - SunTrust Robinson Humphrey

No, I would, if you take the accretable yield difference from this quarter, relatively you are expecting for next year, it seems like there would be more margin pressure than you’re guiding. Sort of remind me, maybe the offsets of that that would keep the margin relatively stable.

Vincent Delie

Yeah, there is a variety of things. We continue to have significant amount of CDs that are still going off, are still getting benefit from that. We still have $350 million to $400 million a quarter of CDs. We are picking up 45 to 55 basis points on that. The strong loan growth that we have and as you know the way we run our business, we’re not just bringing in the loans, we’re bringing in the demand deposits and the operating accounts. We have some significant growth planned for that. That obviously help us to support the margin.

Our investment portfolio, while the reinvestment rates are very low, reinvestment is about 130; the stuff that’s rolling off is lower than what it had been. So last quarter we were losing a 100 basis points. This quarter we are losing 75, kind of as we look through the first quarter. So the impact on an incremental basis is less than it’s happening there. And it’s just us managing the margin. It’s a big focus at company and everybody in the field is motivated to punch in (inaudible)

Vince Calabrese

We have aligned our incentive compensation plans; will assist in the shift in deposit mix. So their incentive to bring in DDA balances and low cost deposits, so that really has been a driving force behind us bringing down our cost of funds and managing through this difficult interest rate environment and I would expect that that would continue to be the case as we move forward. So we will get some help from the people in the field who are keenly focused on margin improvement and bringing in low cost deposits that will fund our operation.

Vincent Delie

But there is still, even with that all, there are some level of expression that’s in that number. But those things obviously help to mitigate the impact.\

Operator

And we will go next to Damon Delmonte with KBW.

Damon Delmonte - KBW

Just to kind of keep on the theme of the margin, can you talk to me a little bit about pricing dynamic you’re seeing in the market place and what’s the typical commercial real estate loan is pricing at and the CNI loan as well?

Vincent Delie

Yeah, sure, I mean, it’s definitely come down somewhat from last year, when you look at the spreads. I think you can see if you looked the Thomson Router information on loan spreads, particularly in the syndicated market, you can see those spreads coming in, in relation to the spread over our cost of funds. You see that come in a little bit.

I would say overall it come in probably 25 to 50 basis points over the last year. So it is more competitive. I think that pricing is definitely, has been coming down over the course of year. But surprisingly when we look at some of our business units, take leasing for example, the margin actually ticked up a little bit in the fourth quarter.

So what I think is happening now, I’m hoping, that there is a little bit of pricing rationalization sitting in. So it seems to have stabilized. And as you bounce along the bottom from a cost to fund standpoint, people who run models that look at returns on equity when they do these deals start to rationalize the pricing.

So I think that’s probably happening. And we have seen it at least in the last quarter pricing has stabilized somewhat. So that’s how I would characterize it. Obviously I am not as in touch with as I used to be but looking at the reports that I see I thinks that’s a pretty good characterization of what’s going on.

Damon Delmonte - KBW

And then Vince we discussed the guidance of the margin for the year, does that take into account any potential impact from the Annapolis deal?

Vince Calabrese

Yeah that’s baked into it.

Damon Delmonte - KBW

Okay would you expect that there will be a positive impact from the margin, given potential mart-to-market marks that you take?

Vince Calabrese

It's pretty neutral Damon. I think given its relative size to the total balance sheet and the position of their margin, it's really relatively neutral.

Damon Delmonte - KBW

Okay and then I guess just lastly kind of bigger picture, you have the Annapolis deal closing you guys said April 6th. How does that change your view or how does it impact your view on M&A going forward, I mean is it likely that if something came up you'd be in a position to go after it in 2013 or do you think you need a little bit of time to digest this one and get comfortable with the new market, that you're moving into?

Vincent Delie

Well it's a good question. If you look at our history we've been able to integrate at least two deals in one year. This is relatively small acquisition. So I would not expect it to inhibit us from pursuing other opportunities. I think as we stated in the past, we do these deals and expand into these markets to continue to grow. So we'll continue to look for opportunities to grow through acquisition when the right situation arises.

So the pricing has to be right, we look for EPS accretion in the first full year and decent IRRs, IRRs well above our cost of capital and recouping diminution of capital on a relatively short period of time. So there are targets out there that meet those thresholds, we're interested.

And I think given Parkvale behind us, when you look at Parkvale, we closed Parkvale, really we consolidated those branches in February. So, we consolidated those branches and also we're pursuing closing the Annapolis deal. There's been quite a bit of integration but we really haven't missed the beat from original plans on that Parkvale acquisition.

So it's performed really-really well for us and delivered the accretion that we expected. The early stages of the integration Damon are moving along very positively. We're very pleased with that at this point.

Operator

And we'll go next to David Darst with Guggenheim Partners.

David Darst - Guggenheim Partners

Could you maybe comment on your mortgage banking strategy and I guess more specifically how you’re handling the runoff from Parkvale that you've been able to capture more of that in an originally pursued model.

Vincent Delie

Yes, it's never been a primary focus for us historically although we are in the process of re totaling our mortgage banking operation and have been. So we have been building out the team over the last year itself and that is certainly an area of opportunity for us as we move forward.

In relation to the portfolio that’s re-pricing, obviously given the interest rate environment we are seeing quite a bit of acceleration in those prepayments speeds in that portfolio and the growth in the other business units have actually outpaced that run off.

So there is a great opportunity for us once we get our mortgage banking operation up and running for us to generate some fairly significant gain on sale opportunities and that would be, even if it wasn’t a great re-finance market because of how we’re positioned in the markets that we are in. So even on a purchase loan basis we have great upside. So I think it’s an area that we are continuing to focus on and should provide some good benefits for us into the future.

David Darst - Guggenheim Partners

What’s the timeline that we would begin to see the outcomes from the re totaling?

Vincent Delie

Well it’s going to take some time to build out the team. So I would expect improvement this year. Hopefully it would be reflected in the numbers. I can't give you a specific time, but it’s an ongoing process and something that we have continued to focus on over the last 24 months or so, and we have continued to make great improvements there. So hopefully it will provide benefit in the intermediate term.

David Darst - Guggenheim Partners

Vince, just from a big picture perspective, the value proposition at F.N.B. for shareholders has been, that’s kind of low single digit EPS growth, half payout ratio and something I guess 4% to 6% dividend yield. Should we begin to think of the company differently, given that your lending trends have accelerated, you are looking at something higher from a loan growth perspective and the payout ratio is going down now, do you need to accrete more capital, retain more earnings to support this growth?

Vincent Delie

I wouldn’t say that we changed our investment thesis. I think that it’s still the same basis. I think that what you have seen is really some extraordinary performance in market share gains through a very difficult time period.

So we have grown because of the investment we have made and our sales management system, how we have aligned our incentive compensation plan. The people that we have hired have been paramount to our success.

So I would expect us to continue to move in the same direction we moved in and I don’t see our investment thesis changing. I will tell you that we are efficient users of capital and we would deploy capital in the best possible way for our shareholders.

So, if we repatriation of capital is a method to achieve those total returns that’s the path we will take. If we are seeing extraordinary growth, we will be reinvesting in the company for growth.

So, it’s kind of difficult to say given all the term loan. Our performance has been so stable throughout this time period, people often forget the headwinds that we faced and continue to face as an industry. So I think, we are just moving forward very cautiously and we continue to focus on providing excellent shareholder value, that’s the answer. And I don’t see us deviating wildly from our investment thesis.

David Darst - Guggenheim Partners

And do you think anything has changed in the local either economy or competitive landscape, going into 2013 relative to the results you achieved in 2012?

Vincent Delie

I do. I think we are better positioned than ever. So, I think now you have a company that was nowhere in terms of market share, one of largest MSAs in the country and we’re now number three by a number of measures, and very well positioned and as we expand into new markets like Maryland that discipline and that sales management system that we have rolled out, we’ll pay dividends there as well. So, I think we are very well positioned as we move into next year.

Vince Calabrese

Dave I would just add to your question on the capital retention, dividend payout ratio of 58%, full year was 61, that level of payout the capital that we retain is funding to support the loan growth, the strong loan growth that we have been experiencing. So I think that’s just to add to what Vince was saying

Operator

And we will take our next question from John Moran with Macquarie Capital.

John Moran - Macquarie Capital

Real quick kind of tricky type of question on OpEx. I want to make sure that the guidance is inclusive of the $4 million in annual cost saves on the branch rationalization.

Vince Calabrese

Yes it is.

John Moran - Macquarie Capital

Okay. And then just on two other kind of bigger picture questions. It looks like point-to-point loan growth was a little bit stronger than average loan growth. Anything happened kind of with uncertainty around the tax situation that might have pulled forward some growth from first quarter, second quarter or I think it’s just kind of accelerating as we had into 2013?

Vince Calabrese

Well, I think in the last few years we have had a little bit of that, I wouldn’t say that it’s been a huge driver of what closed in the fourth quarter, but there has been a little bit of that in the last couple of years because of the issues with taxation, uncertainty around tax rates. So I would say that that’s part of it but I truly believe that the momentum that we've experienced, particularly in the fourth quarter is a direct result of measuring production as we move through the year and the team out there focused on making sure that they hit their numbers to get their incent compensation. I think, that's a big part of it. So over the last few years, we've seen that actually improve and actually every team that we have has contributed to the growth. So, it's pretty remarkable.

John Moran - Macquarie Capital

And then on the deposit side, just curious some others have kind of mentioned that they’ve see some impact from tag aspiration, wondering if you guys have seen any of that?

Vince Calabrese

We've not seen any impact that I know of. I haven't seen or heard that it’s been an issue.

Vincent Delie

It's phenomenal. I think there is maybe one account.

Operator

And we'll take our next question from Matthew Breese with Sterne Agee.

Matthew Breese - Sterne Agee

Going back to accretable yield, the guidance of $500,000 to 750,000, compared to this quarter $2.6 million, going into this quarter was the $500,000 something you had modeled out, or were you looking originally at something much higher for this quarter?

Vincent Delie

No, I would say that the fourth quarter, model 5% of 50 is our projection of 2013 but in the fourth quarter, we had some positive occurrences that happened. We had some loans that were specifically marketed, that we got paid off on. We had some of the pools that had positive outcomes where you bring the rest of the mark because you don't need it.

So there were some kind of triggering events that occurred in the quarter that elevated that number. We had our second re estimation process that we went through, the second is more comprehensive than the first as you kind of get more completed doing those and so that generated some additional value in there.

So as I’ve said before it’s going to be volatile and lumpy as you go through the quarter. So I didn't expect to have $2.6 million during the fourth quarter and I think, the $500,000 to $750,000 is an indication of what we would think kind of more on a regular schedule basis so, But it will, I think, it will just be volatile each quarter and I think there's upside to that number next year but you really don't know, depends on how the loans get results, one by one.

Matthew Breese - Sterne Agee

Outside of accretable yield, were there any other factors that benefited the margin, prepayment income perhaps?

Vincent Delie

No, I would say in fact the quarter had some impacts from our fed balances were up 35%, cash to fed, during the fourth quarter, average balance third and fourth quarter and that actually have notched the margin down. Prepayment activity in our security portfolio was up maybe $0.5 million from where it was running earlier in the year but that’s not a significant increase from the level that it had been running on a quarterly basis. So yeah, noting particular to point out, other than kind of just normal operations beyond those items.

Matthew Breese - Sterne Agee

Okay, my last question, you guys talked about a mix shift in deposits letting the CDs run off and building core deposits. So could you give me some better idea of where you think, core deposits to total deposits will shake out over the course of the next year?

Vincent Delie

I think that the transaction deposits and repos, I would expect those to grow in mid-single digits. We said low single digits for total, so I would take kind of normal mid-single digits for the trends, and which is basically excluding the CDs, so transaction deposits and repos.

Operator

And we will take our next question from Frank Schiraldi with Sandler O’Neill

Frank Schiraldi - Sandler O’Neill

Most of my questions have actually been answered and I didn’t want to beat a dead horse on the margin issue but I just want to make sure I’m understanding it. So if I could, if the margin is 366 recorded and then you said you had 10 basis points of accretable yield, so you get to 356 which I guess you can call sort of core. But then it sounds like for next year you are expecting like two to three basis points of accretable yield per quarter to flow through the margin and so if you are looking at a mid to low 360s number you are expecting some, I guess some modest expansion of the core margin, year-over-year. Is that fair, at least half of, not year-over-year, but at least off of the fourth quarter run rate.

Vincent Delie

I would say that Frank, I mean first of all the accretable yield all in, you need to look at the margin on an in basis. Like if you looked at the core margin taking out all the accretable year-over-year, there is flat. So that there is little bit compression in there so, I wouldn’t say that the core is going up next year because of the factors that we talked about earlier. I think we really need to look at the all in low to mid 360s. I’m telling you, what’s in our plan. So that really, with that level of accretable yield that’s in there and we are still projecting rates to stay where they are now. So there continues to be some pressure on the investment side that’s baked into that and then some of the other levers that we talked about. So, low to mid 360 is really the range. That’s what going to be as we go through the year.

Frank Schiraldi - Sandler O’Neill

I am sorry if I missed it but was there anything else besides the deposit remixing on the funding side? Is there some sort of restructuring opportunity that you guys are looking at that could boost the margin?

Vincent Delie

No, I would just say the normal focus on bringing in good quality loans and bringing in the demand deposits and the treasury management business, it’s really what’s supporting the margin. So there is not any restructuring built into that.

Frank Schiraldi - Sandler O’Neill

Okay. And then just wanted to double check on the provisioning, when you gave guidance, you said provision for the full year, I thought slightly above 2012 full year levels right, not off the four Q levels, that’s not necessarily the run rate.

Vincent Delie

Right. So for the full year was $31.3 million, so slight dollar increased from that base.

Operator

And we will go next to Bob Ramsey with FDR.

Bob Ramsey - FBR

One quick question; on your loan growth, your loan growth was very good this quarter. Are you guys seeing incremental demand from your clients, organic demand, or just is it still kind of market share gains?

Vincent Delie

Yeah I would characterize it as a continuation of what we’ve had. We’re not seeing significant lift in demand. In fact, line utilization contracted slightly. So it’s not happening from working capital. There is very little large spending. This is a continuation of what I have said the last few quarters.

So our sales management systems and our incentive compensation is largely geared towards new client acquisition. I made that comment earlier in my remarks and I still feel that that was the right move to make several years ago and our people continue to drive market share gains and that’s where the bulk of this growth is coming from. It’s coming from market share gains and an investment in niche areas that provide a higher growth opportunity like private banking and asset-based lending then other segments. That’s the strategy.

Vince Calabrese

And I would add too, Bob, the uncertainty in the economy continues to affect costumers and their willingness to make those investments. So I think that that’s still overlaying everything. At some point that will change but that's definitely still a factor.

Vincent Delie

And when that changes, we should reap the benefits of that because we brought over 100's of clients. So it's the larger end of commercial banking. So, we should get the benefits of the Cap Ex spend and hopefully someday increasing working capital facilities.

Operator

(Operator instructions). And we'll go next to John Moran with Macquarie Capital.

John Moran - Macquarie Capital

Hi sorry to jump back into the queue guys. I actually had one thing I forgot to ask. Vince, I think you said obviously Durbin kind of kicks in the middle of the year. You guys have been over $10 billion. Are there other additional sort of regulatory costs that we need to think about at the end of 2013, 2014, with sort of crossing that line and some additional scrutiny that maybe the regulators will have with you guys?

Vincent Delie

Really the only other additional cost that kicks in is the FDCI insurance, once you are above $10 billion for four quarters which we are as we enter 2013. Now, FDIC insurance for the year is going to go up to $2.5 million. So that's an extra cost in addition to Durbin and then beyond that, I don't see any other. I think that's $50 billion is when a lot of things change regulatory. I mean there are certain things, as you are over $10 billion, as far as many just different focuses within the examiners and those types of things but from a cost stand point, it's really Durbin and the FDIC insurance.

Vince Calabrese

We’ve kind of built our compliance team over the years. We've done a number of acquisitions. We have very good relationship with the regulators. We have a culture here, of compliance and understanding the rules and regs and I think that investment that we made over the years has really helped us today, because there are a number of institutions that are playing catch up. So that's already, some of the expenses associated with the complying with the more complex regulatory environment is already baked into the core expense base of the company.

Operator

And there are no other questions at this time. I’d like to turn the conference back to our speakers for any closing remarks.

Vincent Delie

Well I’d just like to say thank you everybody for participating on the call. We appreciate your interest and look forward to producing another very productive year in 2013. Thanks.

Operator

Thank you everyone. That concludes today's conference. Thank you for your participation.

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