F.N.B.'s Delie Chafes at Regulatory Costs Triggered by Growth Spurt

PITTSBURGH — Vincent Delie has given himself no time for a breather.

He has made four acquisitions since F.N.B. named him chief executive in January 2012. Three of those were in Maryland, including the most recent one, OBA Financial Services in Germantown, Md., which was completed in September.

F.N.B., the holding company for First National Bank of Pennsylvania, has hired more than 100 people to handle the additional regulations that were triggered when it passed the $10 billion-asset threshold on its way to $16.2 billion of assets. F.N.B. has integrated employees from its acquisitions. And it moved its headquarters from Hermitage, Pa., to a prime spot along the Allegheny River in downtown Pittsburgh, immediately next to the Pirates' baseball stadium, which bears the name of rival PNC Financial Service Group.

In a wide-ranging conversation, Delie criticized banking regulations that, he says, have dictated F.N.B.'s M&A strategy; those include the cap on interchange fees and stricter supervision that are applied to banks once they hit $10 billion of assets.

He also discussed the value of having a large, local competitor like PNC; the long-term viability of the Baltimore market after the riot last week following the death of Freddie Gray; and the volatile business of lending to oil and gas companies.

What it has meant for F.N.B. to cross the $10 billion-asset threshold?

VINCENT DELIE: I don't think people truly understand the total financial impact to companies. Having gone through it, there are significant headwinds for a company that goes one dollar over $10 billion.

I think it's wrong. It's a bogus level that was just arbitrarily set. There are other ways you can enforce improvement in risk management and have regulations that curtail risky behavior.

I don't know that we've been able to accomplish what was initially set out, to be truthful. We enacted legislation in the Durbin amendment that transferred billions of dollars from one industry [banks] to another [merchants]. It [did not] take into account the delivery channel that goes along with offering checking products. It's more than just the electronic infrastructure. It requires an entire branch-delivery system, which wasn't factored into the equation.

We've had to hire over 100 people just to deal with the regulations. We have data scientists and people to build our system to comply with stress testing. We had to hire lots of people to handle new rules for mortgage.

What did you make of Sen. Elizabeth Warren's plan to enact policies that she called "the unfinished business of financial reform"?

Most of the things that she's focused on are [stress testing] and breaking the banks up. Honestly, I think the focus should be on nonbanks. I don't think that community banks or even large regional banks are the ones that led the country astray. Nonbanks and alternative lending sources, that's where the root of the problem is. Nonbanks should be subjected to whatever the banks are subjected to. It may be convenient for people to point the finger at established financial institutions, but I think it's more political than it is reality.

Of the 100 people that F.N.B. has hired, wouldn't you have needed to hire them anyway because of the bank's growth?

It's a fair question. Some of them. Not nearly to the level that we did. Without the acquisitions, if we had grown to $10 billion and one dollar in assets, we would have been in big trouble. We would have rolled back earnings per share. We completed four acquisitions in a little over two years and we did that to create scale to cope with the increased regulatory burden. I don't know how else to explain it to people. The other reason it was done was to position ourselves in new markets where we had great growth potential. We didn't want to be stuck in the low-growth markets that we're in, with a high saturation and penetration of the market. We studied both Cleveland and Baltimore, we looked at the number of commercial prospects in those markets. There aren't many banks under $50 billion in assets that have a No. 1, 2 or 3 market share position in top 25 metro areas. We compete in an urban market where one of the largest banks in the country sits across the river. Our ability to thrive and compete with a competitor as good as PNC led us to believe we can compete in other markets.

How has the integration of your recent acquisitions gone?

We do acquisitions not just to grow total assets. We do them to position the company to benefit from [our] growth strategy. We've done a great job of setting up systems within our own organization to absorb those acquisitions. We hire regional leadership from larger institutions to lead those markets. We have a very good due-diligence process. In our last four deals, we covered 90% of the commercial loan portfolios. We look for EPS accretion in the first full year. We have a 2,000-item checklist and procedures manual that we've developed. We have proprietary sales-management software that has automated scorecards that we deploy day one after the conversion. Branch managers know where they stand every day relative to loan production, deposit gathering, fee income production and cross-selling.

What is your outlook for M&A?

We've stated that we're going to be very selective because we have built out a fairly large infrastructure and we have positioned ourselves pretty well in very attractive markets. If the right opportunity came up within the existing footprint or an adjacent market where we feel we can deploy our strategy and take costs out and drive growth, we're not going to shy away from it. But we're not going to do acquisitions just to do acquisitions.

Wouldn't it help to add more scale?

It definitely helps to add scale. Could we be larger? Yes. Do we have opportunity to grow organically? Absolutely. We can either buy things or continue to grow at the rate we're growing. Our No. 1 objective is to drive EPS expansion. If we're not able to do that in an acquisition, then we won't do it.

Do you have any concerns about the long-term viability of the Baltimore market?

Baltimore is a terrific city and it's unfortunate it's getting so much attention. I don't think it's going to impact our ability to be successful there. We wouldn't have entered the market if we didn't feel there were great prospects. Being 40 miles from Washington, D.C., it's going to be a thriving area. They're going to resolve the issues that they have and hopefully do a better job at managing the situation that they've had in the inner city.

What is your exposure to the oil fracking industry?

We have very little exposure, direct or indirect. A lot of people have said to us, you've got a burgeoning oil and gas industry in your footprint. We sit right on top of the Marcellus and Utica shales. Shy of tearing down the branches and erecting wells, that's the only way we think we could make money at it. We're not energy lenders. It's a very cyclical business. Our chief credit officer did not want to get into the development business and I don't blame him. Most of what we have, which is less than 2% of our portfolio, are with customers that are in the supply chain. … People ask if our success has been directly linked to oil and gas. There is definitely a benefit. A lot of the farmers we bank had a mortgage on their farm and they signed a land lease and got $4,000 to $6,000 an acre for the gas rights. But they paid off their mortgage, so it really didn't help us. We didn't even find tremendous opportunities from a wealth-management perspective. There were wealthy people from around the country that formed consortiums to purchase gas rights and flip them to the larger companies. That money didn't really stay here. When the price of oil rises and those people with land leases start to benefit from the royalties, that's when we could benefit. The low cost of gas also helps. Manufacturing companies are coming back, like a pipe manufacturer in Youngstown, Ohio, [that] reactivated a plant.