FNB Corp (FNB) 2002 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the F.N.B. quarterly conference call.

This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the benefits of mergers between F.N.B. Corporation and Promistar Financial Corporation, and F.N.B. Corporation and the Bank of Central Florida, including future financial and operating results, cost savings and accretion to reporting earnings per share that may be realized from the merger statements with respects to F.N.B.'s plans, objectives, explanations and intentions, and other statements that are historical facts, and other statements identified by words such as believes, expects, anticipates, estimates, intends, plans, targets, projects, and similar expressions.

These statements are based upon the current beliefs and expectations of F.N.B.'s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. F.N.B. undertakes no obligation to release revisions to these forward-looking statements or to reflect events or circumstances after the date of this presentation. It is now my pleasure to turn the conference over to your host, Mr. Gary Tice. Sir, please go ahead.

Thank you, , and good morning, everyone.

I'd like to again welcome you to our first quarter earnings conference call. With me today are our typical team that we have with us, , Vice President of F.N.B. Corp. Vice Chairman of F.N.B. Corporation, Steve also serves as President and Chief Executive Officer of First National Bank of Pennsylvania; Kevin Hale, Executive Vice President and Chief Operating Officer; and John Waters, Vice President and Chief Financial Officer. As always, we will be available to address any questions you may have once we've finished our formal remarks.

I hope that all of you have had an opportunity to read our press release. If so, you will notice that we had another very successful quarter. We are pleased to report that core operating earnings for the quarter were 51 cents per diluted share, which not only met the Street expectations, but were up over 25 percent, 28 percent compared to last year's 40 cents per diluted share. John will go into more detail about the financial results a little bit later. But before he does, I'd like to touch on a few of our accomplishments.

During the quarter, we completed the mergers of Promistar Bank and the Bank of Central Florida. And now, less than a year after relocating our corporate headquarters to Florida, we are the largest bank holding company based in the state. We are approaching $7 billion in assets, and that's up from $4.1 billion just a year ago. We do expect to reach $10 billion in assets over the next few years.

We've accomplished much of this growth during very trying times. But now the national economy, which, by the way, officially slipped into a recession in March of last year, is showing signs of improvement. We also see indications that economic activity is picking up in each of our respective markets. Confirming that the economy appears to be improving, the Fed has stopped cutting interest rates. We believe the Fed will hold interest rates at current levels for at least the next several months.

There appear to be relatively few signs that inflation is heating up, other than higher energy costs, which may relate to more problems in the Middle East, than to our, to economic factors here at home. Overall we believe that the outlook for the economy is much brighter than it was a year, or even six months ago. And we believe that the steps we have taken over the past year give us much greater earnings potential than before.

Now what is one of our top priorities? It's to establish a single corporate culture and pursue a brand identity. To this end, we have recently unveiled our new corporate logo, which combines a handshake and the American flag. This new symbol reflects our commitment to our shareholders, our customers, our employees, and the individual communities that we serve. It also represents our core values of trust and commitment, as well as the spirit of friendship, service and loyalty.

This logo will be complemented by our new corporate slogans, "Relationships Built On Trust", which projects in a clear and concise voice the company's core values. We believe that we have the very best brand name in the country for a bank franchise - First National Bank. And we have elected to build our branding strategy on this. Already we have converted all former Promistar offices in Pennsylvania to First National Bank, and we will complete this branding in Pennsylvania by the end of third quarter. In Florida, we expect to have that completed by the, by the end of the year.

Now there's another key priority for F.N.B. Corporation. That is to increase investor awareness of the company. With more than $6.7 billion in assets, and a market capitalization that exceeds $1.2 billion, we are now large enough to attract the attention of many more investors than we could have just over a year ago. Last month, F.N.B. hosted its first annual investor and analyst conference.

This event was attended by more than 20 institutional investors and banking industry analysts. We provided these investors with an insight into our company's strategic plan for growth and diversification. But we also exposed them to our deep and talented management team. The meeting was broadcast live over the Internet for those unable to attend in person. Now based on the overwhelming positive feedback received from this first-ever event, we would anticipate hosting another investor conference in the near future.

At this time I'd like to turn the presentation over to John Waters, who will report on the first quarter results.

Thanks a lot, Gary. Core operating earnings for the first quarter of 2002 were $21.8 million, or 51 cents per diluted share. We're very pleased with these results, as they not only match the consensus estimate and our internal expectations, they include the first published results of our merger with Promistar. Please note that all historical amounts have been restated for that pooling transaction.

These results are up 36 percent, compared to the $16 million recorded for the first quarter of last year, and up 28 percent on a diluted earnings per share basis. For the quarter, the return on average equity was 15.3 percent, and the return on average assets was 1.3 percent. In case you haven't noticed, Smith consistently achieved over 15 percent return on equity, looking back at the last four consecutive quarters. Significant revenue increases in the quarter fueled these outstanding results.

As for the details, revenue, on the fully taxed equivalent basis this quarter, was approximately $97 million, up $13 million or 16 percent compared to the same quarter last year. The major contributor to this gross growth was an increase in net interest income on a tax equivalent basis, of $8.6 million, or 14 percent. This net interest income improvement resulted from growth in loans, as well as prudent management of our cost of funds, resulting in a 31 percent decrease in interest expense over the same period last year, and an 11 percent decline on a linked quarter basis. The net interest margin in the first quarter was 4.68 percent, up 36 basis points from a year ago.

Average loan growth in the first quarter showed a remarkable increase from last year, growing six percent on a year over year basis, and five percent on a sequential quarter basis. If you net out our lease portfolio run off, as we discussed in previous calls, average loan balances grew 7.9 percent in the first quarter over last year. The acquisition of Bank of Central Florida contributed about four percent of these increases, leaving organic growth at about three percent.

Interest expense declined $17 million from a year ago, and nearly $5 million on a linked quarter basis. This favorable trend is a continuation of the positive impact of declining market rates of interest experienced during the last year. Our overall average cost of funds for the first quarter was 3.05 percent.

Total deposits grew approximately six percent year over year. Four percent of this increase was due to acquisitions, leaving approximately two percent in organic growth, which occurred mainly in the Florida market. It's worthy to note that non-interest bearing DDA grew 20 percent over last year, and 14 percent since the end of the last quarter.

With renewed rumblings of the Fed increasing rates later this year, let's take a look at our interest rate sensitivity. As of March 31st, the corporation's balance sheet is positioned to benefit slightly from a general increase in market rates, should the Fed decide to take that posture. Our one year gap is a positive one percent, but of course that's only on the static basis. Modeling the effect of a 100 to 300 basis point rate increase indicates that net interest income would increase about one percent for each 100 basis point rise.

Non-interest income growth also increased at a significant pace, up 19 percent over the first quarter of last year. Deposit fees increased 28 percent over the same period, due to deposit volume growth, as well as fee rate increases. Income from insurance, commissions, and fees was up 27 percent, reflecting a continuation of our growth in this product line. And in spite of market value declines from a year ago, income from trust services increased almost five percent year over year.

Non-interest expense, excluding merger related and non-recurring charges, increased nine percent in the first quarter of 2002, compared to the first quarter of 2001. The largest non-interest expense, salaries and benefits, increased 14 percent in the first quarter. It should be noted that there were two acquisitions subsequent to the first quarter of last year, First National Bank of , at Promistar in August, and the Bank of Central Florida last January. Because these were purchase accounting transactions, historical salary and benefit dollars were not restated beyond their consummation dates. These transactions would have represented approximately one-half of the 14 percent increase in salaries and benefits year over year.

The remaining portion is principally due to merit increases in January, as well as performance compensation payments related to our fee-based services. Looking forward for the remainder of the year, salaries and benefits should decline further as staff and general expense reductions continue to be realized due to the merger with Promistar, which should be fully implemented by the end of June.

Due to our substantial insurance operations, the traditional efficiency ratio measure is not a good benchmark when comparing us to peers. Focusing solely on our banking and finance company operations, for the first quarter of 2002 the efficiency ratio was 59.5 percent. We expect to improve this measure as the year progresses, to a ratio closer to 58 percent, excluding insurance operations.

Asset quality trends remain stable in the first quarter. Net charge-offs as a percentage of average loans for the first quarter were 36 basis points. Non-performing loans represented .58 percent of total loans, and the allowance to average loans was 1.36 percent. As we have stated in the past, credit quality is extremely important to management, and we monitor it very, very closely.

As previously disclosed, we did incur a pre-tax merger related and non-recurring charge of $42.7 million this quarter. These charges relate to the Promistar and Bank of Central Florida acquisitions. The three major categories of these charges were employment contract and severance, data processing equipment and contract write-offs, and professional services. Including these expenses, the results for the quarter reflect an $8.9 million loss, or 21 cents per diluted share.

Gary, this summarizes our financial results.

Thanks, John. At this time I'd like to turn the presentation over to , who will provide some additional information on our Pennsylvania Ohio banking operations, and then after his report, Kevin Hale will discuss our Florida banking operations, as well as the successful growth and integration of our insurance and wealth management businesses -- Steve.

Thank you, Gary. As Gary mentioned, we closed the merger with Promistar on January 18th, and are now ranked as the eighth largest bank in Pennsylvania, and the largest community bank in the Western half of the state.

The acquisition significantly enlarged our market area, and provided us with great growth opportunities. Promistar's customer base provides us with a terrific opportunity to market our value added fee-based services, and we are already seeing positive results. We now have exposure to more than 2.2 million households throughout Western Pennsylvania, however we have penetration in only about ten percent of them, so there are clearly tremendous opportunities.

When we announced the acquisition of Promistar last summer, we said that we expected to achieve a combination of cost savings and revenue enhancements. We have identified, and are now realizing specific cost savings, through consolidation of back offices, and implementing best practices. But we realize there was some speculation that revenue gains, which are not as easy to identify, might prove more difficult to achieve.

Let's take a look at annuities. The process began last July. We identified those employees, got them licensed, and now they are selling. Last year, for the entire year, Promistar did just $249,000 in gross commission revenues. In the first quarter of this year, the Promistar branches did $677,000 in gross commission revenues. These first quarter results are two and a half times the commission revenue produced for all of last year, and we have barely even started.

Another example of revenue growth would be deposit service charges. For the first quarter, First National Bank of Pennsylvania service charge revenue increased $1.4 million, or 38.7 percent when compared with the first quarter of 2001. Adjusting for the acquisition by Promistar, service charge income still increased nearly $700,000, or 18.5 percent.

These are just two examples where our plans to increase fee income are being successfully executed. In residential mortgages last year, Promistar originated $25 million. We do more than that in a month. Our people are now there training the Promistar managers. After all, this is a number one consumer product to leverage sales. We sell deposit product, as well as title insurance, and that leads to property and casualty insurance sales, and so on.

At First National Bank, small business lending is our real niche. Promistar didn't even have a small business division. We did, and now we have duplicated it for our new customers. We have mentioned in the past that as a company we are not growing simply to become bigger, we are doing so to become better and more importantly, more profitable. The opportunity to increase non-interest income by cross-selling to our customers should provide us with excess growth for the next several years, as we bring non-interest income up to our targeted rate of 35 percent of total revenues.

We already have the experience and the personnel in place to capitalize on this opportunity. It may be useful to consider how this accelerates our growth. With the addition of Promistar, we will be able to grow our highly profitable fee-based services even further, enabling us to realize our projected double-digit fee-based income growth here in the North.

As we have told you, the Promistar acquisition will be accretive to earnings this year, and in 2003, and in 2004. By definition, that means we will have increased our growth rate above what it would otherwise have been. When we can generate strong growth in an area where we have a great deal of knowledge and experience, and that growth is profitable, you know we are building shareholder value in a relatively low-risk situation. We are making significant progress in achieving our cost savings and revenue enhancement, and we will continue those programs, which have proven so successful. -- Kevin.

Thanks, Steve. As you know, we closed on our acquisition of the Bank of Central Florida at the end of January. We now have a total of 43 full service financial centers in six counties in Southwest and Central Florida.

The conversion of the six Bank of Central Florida offices will occur this weekend, when they will be renamed First National Bank of Florida, with signs depicting our new red, white and blue corporate logo. The conversion of our 37 other Florida branches will be completed by the end of the year.

In addition to converting the Bank of Central Florida branches to First National Bank branches, we will increase our insurance presence in Central Florida as we proceed to place licensed agents in many of those new offices. This will allow us to more efficiently provide our new customers with a complete line of insurance products, including life, property and casualty, homeowners and title insurance.

Steve discussed the initiatives that we're taking to cross-sell to our new customers in Pennsylvania. We have a similar opportunity in Florida, by taking aggressive steps to increase non-interest income as we progress to become a diversified financial services provider for our customers.

At the beginning of this month, plans were announced to build a new information technology center in Naples, to provide customer service, operational support, and technical support for our rapidly expanding company. Construction is expected to begin in the third quarter of this year. Operational efficiency is a key component of our strategic plan to provide our customers all the personal service and personal attention of a small community bank, but with the back room operating efficiencies that a large bank infrastructure can provide.

In previous calls we have identified a number of important goals, and I would now like to take a moment to update you on our progress toward those targets. In the first quarter of 2002, revenue from investment services was $1.4 million. This represents nearly a three-fold increase from the $487,000 in investment revenue reported for the same period last year.

While non-interest income as a percentage of total revenue declined to 29 percent, due in part to the Promistar merger, income from fee-based services remains our key focus for revenue improvement, with a goal to achieve 35 percent of total revenue within the next 36 months.

We are continuing to realize synergies between our banking, insurance and wealth management divisions. We have a sales culture in place in our company to reward those individuals who sell, and provide incentives to others who refer business to our licensed sales professionals. We currently serve more than 2,000 institutional and individual clients, with more than $2 billion in assets under management.

And we believe we're particularly well positioned in the fast growing Florida market. In fact, according to the April issue of "Florida Trend" magazine, two of the counties served by F.N.B. rank among the top five in the state in terms of per capita income. In Sarasota county, the per capita income is $42,277, and in our home base of Collier county, it is $42,852. This compares to the national average of $26,503. Collier county also was noted as the third fastest growing county, with a 28 percent population growth rate between 1997 and 2002.

Also in this latest issue, "Florida Trend" named F.N.B. Corporation as a business to watch for 2002. The growth of the Florida market plays well into our plans to further expand trusted investment services. Company-wide in 2002, we expect 1,400 referrals to trusted investment management. Now if you apply a conservative qualification rate, this suggests that we will receive 835 qualified referrals, from which we expect to achieve 300 sales.

The average new account fee is about $6,000, which means we should generate $1.8 million in new recurring fees in 2002 from trust and investment management. We clearly have a tremendous opportunity here, and we plan to take advantage of it.

Gary, I believe you have some closing remarks.

Yes I do, Kevin. Thank you.

Kevin and Steve talked about the progress we are making in integrating both the Promistar and Bank of Central Florida acquisitions into one corporate culture under the First National Bank name. Now we believe that we have created a very powerful brand identity that will enable us to operate more efficiently and grow our earnings significantly. We continue to improve our core bank operations, with state-of-the-art technology that allows us to appear to our customers as a locally owned community bank, while we achieve the operating efficiencies of a big bank. We retain the personal touch and personal service of a small bank, but at the same time, we will provide our customers with a broad array of fee-based products and services to meet all of their financial needs.

We will continue to drive earnings growth by cross-selling our insurance and wealth management services to our customers. We will also continue to expand our footprint in Florida through strategic acquisitions that meet our strict criteria, including being accretive to earnings in the first year. We have a very conservative corporate culture, we believe in maintaining very strong and asset quality ratios, we know our customers, and we will not sacrifice credit quality for growth. Having said that, we do expect to grow our loan portfolio by six percent this year, and we will continue to build on our first quarter performance.

I'd like you to note, that we remain comfortable with the earnings guidance that we have provided you in our previous conference calls. Core earnings per share of 51 cents was in line with our guidance of 50 to 52 cents for the first quarter. Now we expect to achieve core operating earnings per share of 54 to 56 cents in the second quarter, in the third quarter 56 to 58 cents and again, 56 to 58 cents in the fourth quarter. For the full year, we anticipate core operating earnings in the range of $2.19 to $2.23 per share. As we progress throughout 2002, we will provide further updates on these expectations.

Once again, I'd like to thank everyone for participating in today's call, and having said that, I'm going to turn the presentation over to and ask if she would poll the audience for any questions. Thank you.

Thank you, ladies and gentlemen. The floor is now open for questions. If you have any questions or comments, please press the numbers one, then four, on your touch-tone phone at this time. Pressing one four a second time will remove you from the queue, should your question be answered. Lastly, we do ask while posing your question, that you please pick up your handset if listening on speakerphone for optimum sound quality. Please hold while we poll for questions. Our first -- thank you -- our first question comes from . Please state your affiliation, then question.

Hi, it's at Robinson Humphrey. Wanted to ask, I guess first of all from Steve regarding Pennsylvania, what is the Citizens transaction from last year doing in your backyard, is that creating some opportunities? And then I have a follow-up for Kevin or Gary in Florida.

, what we think of far ...

It's .

Oh, I'm sorry. , initially there was a heavy marketing campaign by them prior to the closing of the Mellon branch sales, that they spent a lot of money and had a lot of visibility with that. Actually since the sale's been consummated, we haven't seen too much to our disadvantage, in fact, in certain pockets of different types of services, we've actually had some improvements in some opportunities to obtain some new customers because of changes in service charges, changes in service structure. So, at this point in time, I'm cautiously optimistic that we'll continue to be able to acquire some new business as a result of those branch sales.

And Steve, if I can just add to that, what I've heard through the various sources that I have is that it's rather difficult to change the Mellon corporate culture from what it was to the Citizens, which is more of a truly a retail based environment, and I understand that that's one of the challenging things that Citizens is facing, but again, that's only what I hear, but I think they're focusing on changing their culture right now. But we do expect them to be a formidable player in this market.

OK, and then Gary or Kevin, from a Florida standpoint, can you address the pervasive issue of loan pricing, and sort of some of the challenges you have there, and how you're working around that?

Sure, Kevin?

Sure, , we focus on loan pricing in every loan committee meeting, and we actually encourage, on a weekly basis through discussions with our primarily commercial lenders, the need to point out that the value added, that our structure presents for our borrowing customers, as well as the fact that we sincerely believe that by providing a higher level of service we can, we can be paid a higher price in those loan transactions.

And if you look at the Florida net interest margin, and the Florida yield on earning assets, it's proven that out. We continue to be able to improve that on a month-by-month basis. And loan demand in Florida is strong, and our activity has remained strong. In fact November, December, January and February were four of the best months we've had in the history of the bank in terms of new loan originations.

I think the other thing that we have to add, is when Kevin really talks about service level, we can respond quickly to a request, and I think that really, really sets the stage, customers have been used to dealing with us and getting an answer right away, and we're continuing to do that. Even though the bank might be $2.5 billion, the emphasis that we have is that we're still a community bank that can respond rather quickly. And quite frankly, customers are willing to pay a certain amount for that level of service.

Gotcha. OK, and then last question quickly, in Florida is there any seasonality to your deposits in the second, third quarter?

We experience some seasonality every year, , and it starts today with IRS checks being posted against accounts. But you know what you have to remember in Florida is that most of our customers, especially higher net worth customers, retain Florida as their domicile. So they don't move their funds, they don't close accounts and move them to the North as they head North for the summer months. They keep the account relationship, while they may draw the balance down a little bit. That's where we see the seasonal effect. We don't see a seasonal effect like we used to in years past where people would close their accounts. There's a much more conscious effort to maintain Florida as their domicile, and to continue to pay their living expenses with checks drawn on their Florida account.

But you should expect that we will hit a low in September as we have over the last, let's see -- I've been in Florida for 25 years, and every September that's always our low peak, and I will say that the fluctuations are a lot less than when I first started in banking, but we will have a reduction of deposits and then they'll pick back up in October and we'll start to ride again.

Very well. Great, guys. Thanks a lot.

Our next question comes from . Please state your affiliation, then question.

K.B.W. My question is on this $33 million in first quarter salary and benefit expense, how much potential synergy comes out of that $33 million number?

I've got the finance guy, he's -- John's looking up in the air right now, and I know he's calculating that, so I'm giving him a few minutes to work on that.

Let me ask Kevin a question, then. What was the core loan growth in Florida this quarter out the Central Bank of Florida deal? I know you had good originations, but does that translate into strong loan growth?

Yeah, the growth was four, I'm sorry, , the growth was a little over two percent for the quarter if you take out the Bank of Central Florida.

All right, and that's versus the last quarter on annualized?

Well, the last quarter on annualized was about three percent.

OK. In Pennsylvania when you talk about the revenue gains that you're getting, the annuities, the service charges, the mortgages and the small business division, does just annualizing those four things get you to your 18 percent revenue synergy estimate? Or do we need even more than this to hit the 18 percent?

No, I'm going to speak to that, . Those numbers are ahead of our projections for the first quarter. So we're very, very comfortable that we'll meet the expectations, and probably exceed them. We have yet to even get into the mortgage originations and that number wasn't very large in our first forecast. But quite frankly where we've been very successful is on the investment side, and on the trust side. It's ahead of projection, significantly ahead of projection, so we believe that we will exceed those numbers.

All right. What does the new technology center add in expenses in '03?

I will tell you that we are not finished with the budgeting of that. We, all we've done is, at this particular point is buy the land, and we're probably going to phase that building in. It's going to replace an existing building that we have, that we expect that we will sell and so we're probably going to expand the center by about 18,000 square feet. And if you take that depreciation over a five, excuse me, a four-year period, that's basically all that we're talking about. We've got people in different locations where we're paying rent, et cetera, et cetera. So we're not going to see that significant of an increase, but we do have the land available to expand that center into about 120,000 square feet for the future.

OK. And I guess that salary and benefit question is my last, is my last one.

, this is John. You know, there are some benefits that are in that $33 million, benefits from the standpoint that it is lower on a linked quarter basis. So we have received some of the benefits that are in there. What I would expect as we go forward, it's going to be about a million two to a million and a half ...

Each quarter.

... on a quarterly basis. Thank you.

OK, thanks guys.

Once again, if there are any questions, please press one, then four on your touch-tone phone at this time. Our next question comes from . Please state your affiliation, then question.

Good morning. with Midwest Research. How do you all see the M&A environment shaping up going forward?

, that's probably going to be my question. We're going to continue to stress Florida as our M&A target area. We are looking for the right acquisition. As you know we went to Orlando, we'd like to fill in between Orlando and over on the East Coast, Martin county, as well as Palm Beach, maybe a little bit into, into the Boca Raton area. We're going to continue to look, and I still have a good relationship in the Florida Bankers Association. We're not going to do a deal just to do a deal. It has to be accretive in the first year of earnings and it has to be a one or a highly rated two bank. And that's where we're going to turn our efforts, there have been some transactions that have occurred, that quite frankly we weren't satisfied that we wanted to carry it any further than we did. So, we'd looked at some transactions, and we'll continue to look at transactions. And we do expect that the merger activity will be in the state of Florida.

OK, so even though pricing might be moving up a little bit, ya'll are still going to stick pretty firm with the accretive ...

Absolutely.

... accretion goal?

There's no question about that.

OK, and then what about non-bank acquisitions?

Oh, we're definitely going to continue on the insurance side, as well as on the trust side, and the other opportunities that may be afforded us. But insurance and the trust side will be one area that we'll definitely concentrate on. We are concentrating right now.

And should we look for a deal, or two deals on the trust or insurance side this year?

I would tell you that when one, when one appears for us to look at, we'll make that decision at that time, but I can tell you that I have goals that we would be able to at least have one or two transactions by the end of the year, but that doesn't mean we're going to close it, but we are looking forward to that opportunity.

OK, great. Thank you.

Sir, there appear to be no further questions in queue. Do you have any closing comments you'd like to finish with?

Yes, I do, . Thank you very much, and I'd just like to thank everyone for participating today with our call. John, Kevin, Steve and I are available, you can feel free to call us any time and we'll share basically this same information that we shared on this call, and we'll get into more details assuming that it's already been disclosed. So with that, again thank you very much. Kevin, John or Steve do you have any other closing remarks?

No, thank you for your attendance on the call.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

END