FNB Corp (FNB) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the FNB first quarter 2004 conference call. (OPERATOR INSTRUCTIONS)

This call contains forward-looking statements relating to present or future trends or factors affecting the banking industry and specifically the financial operations, markets and products of FNB Corporation. These forward-looking statements involve certain risks and uncertainties. There are a number of important factors that could cause future results to differ materially from historical performance or those projected. These include but are not limited to -- a significant increase in competitive pressures among depository institutions; changes in the interest rate environment that may reduce interest margins; changes in prepay speeds, loan sale volumes, charge-offs and loan loss provisions; less favorable than expected general economic conditions; legislative or regulatory changes that may adversely affect the business in which FNB is engaged or changes in the securities markets. FNB undertakes no obligation to release revisions to these forward-looking statements or to reflect events or circumstances after the date of this call.

It is now my pleasure to turn the floor over to your host, Steve Gurgovits. Sir, the floor is your.

Thank you Peter and good morning everyone, and thank you for joining in to hear our first quarter 2004 results.

We're going to try a different approach in this conference call than in the past. If the concept is received well by our listeners, we anticipate using similar initiatives in the future.

Because we are a diversified financial institution we engage in a number of businesses that while complementary to banking have their unique characteristics, business strategies and operations. We have learned in past venues that investors and analysts crave a deeper understanding of those businesses in order to gain a better appreciation of their risk and reward. In the past conference calls we have provided summaries of the various businesses and how they contribute to the Corporation's results without getting into a lot of background information. Based on this premise we will be offering a cameo appearance and presentation by CEOs of the Corporation's various affiliates. Of course, and it probably goes without saying, we will always provide a narrative of the financial results for the quarter with color in our cumulative year-to-date performance.

This quarter's call features Regency Finance Company, our high-performance consumer finance subsidiary. Considering this new approach, joining me today as participants are Brian Lilly, Chief Financial Officer of the Corporation, and Bob Rawl, President and CEO of Regency Finance Company.

Before I turn the program over to Brian, I would like to comment that FNB's first quarter 2004 results under the new organizational structure -- that is without the fluid operation -- were successful and follow the plan laid out by the members of our management team. Our reported earnings from continuing operations were 34 cents per diluted share versus 31 cents per diluted share for the same period last year and 13 cents per diluted share last quarter. As Brian will describe later, the net results for the quarter, excluding all the non-comparable, non-recurring items, would equate to 29 cents per diluted share, an improvement of 11 percent over last quarter. Compared to the prior year quarter earnings on the same basis are down seven percent, due solely to a decline in net interest income. This time last year was a whole different ballgame for interest rates than what exists today. The 29 cents per share was the middle of our guided range and matches the average of the analyst estimates. We've managed our net interest margin to mitigate the impact of lower lending yields and moderate growth prospects. Non-interest income from nontraditional sources showed great improvement.

Additionally, I would be remiss if I did not mention the expert and professional execution of our cost reduction plans. Our management in fact achieved the objectives we set out to accomplish as part of the Florida spin-off. This includes disposition of two branches that did not fit our market profile or our profitability targets. I would suggest to the listeners that the entire FNB team, both management and staff, deserves a great deal of recognition for these achievements. Without the superior team effort that they have exhibited in the past several months, we would not have been so successful.

In January I hope you had the chance to see members of the Board of Directors, along with senior management team, commemorating the listing of FNB on the New York Stock Exchange by ringing the opening bell. Needless to say, this was a very exciting milestone for FNB. We're extremely proud to be associated with a he stock exchange that boasts an association with some of the most prestigious companies in the world.

The Board of Directors also declared a first quarter cash dividend of 23 cents per share. This amount on an annualized basis represents a dividend yield debt that is in the top five percent of bank holding companies our size. In fact, we were the second-highest out of 46 financial institutions. This dividend, when combined with that of our sister organization, First National Bankshares of Florida, provided shareholders with a 25 percent increase in cash dividends over last year.

We're proud to have delivered on our commitment to shareholders of improved dividend yield following the spin-off of our Florida operation. Of course, our ability to sustain this level of pay-out, maintain adequate capital levels and provide for moderate growth comes at the expense of the stock dividend, as we mentioned in our press release announcing the cash dividend. It is our view that the high cash dividend and lower applicable tax rate more than compensates for the discontinuation of the stock dividend.

Following our respective presentations, we will all be available to address any questions you may have. Now I will turn the program over to Brian to give us an overview of the first quarter 2004 results.

Thank you Steve. First, let me comment on the presentation of our 2003 results that are included in the data section of our first quarter earnings release.

You may recall that in our fourth quarter release and full-year 10-K filing we presented pro forma results for FNB excluding the Florida operation. The pro forma presentation was appropriate given that as of the date of those results the spin-off of the Florida operations had not occurred. Subsequent to year-end -- specifically January 1, 2004 -- we completed the spin-off. SEC and accounting guidance requires that we no longer present pro forma information, and in its place adopt accounting for discontinued operations. I am sure that you have noted in the data sheet that the 2003 amounts reflect the $8 billion asset company that we were. However, Florida's assets, liability and net income contribution have been isolated, allowing the user to determine the Corporation's results without Florida. You will see the same presentation in our upcoming 10-Q and future filings. Still, we realize the events of the past year have created noise in our 2003 results. In my comments I will address some of those adjustments, but would welcome your questions to ensure understanding.

Now let me turn to the results. As Steve mentioned, for the three months ended March 31, 2004 net income for FNB Corporation was $16.2 million or 34 cents per diluted share. This compares to net income from continuing operations of $14.6 million or 31 cents per diluted share for the same period last year. Included in this quarter's results is a gain realized from the previously announced sale of two branches and their related loans and deposits. The gain totaled $2.7 million after-tax.

In the fourth quarter last year we had net income of $6.2 million or 13 cents per diluted share, which included after-tax restructuring charges of $6.1 million related to the spin-off of Florida operations. Setting aside these charges, in the fourth quarter last year we made 26 cents per diluted share. This quarter without the branch gain we made 29 cents per diluted share. This represents an improvement on an apples-to-apples basis of 3 cents per diluted share or 11 percent. Additionally, excluding the gain from the branch sale the return on equity for the first quarter was a strong 22.3 percent and return on assets was 1.2 percent.

Total revenue for the quarter was $63.6 million on a fully tax equivalent basis versus $58.1 million in the last quarter. Net interest income, the largest component of revenue, grew one percent on a linked quarter basis. While average earning assets expanded 2.5 percent, the net interest margin narrowed 1 basis point from 4.05 percent to 4.04 percent. Maturing loans and investments were replaced with lower yielding assets, thereby reducing the average yield on earning assets. The yield on earning assets in the first quarter was 5.91 percent versus 6.02 percent last quarter and was mostly offset by a corresponding decrease in our cost of funds. Our plan called for this repricing activity and slight narrowing of the margins throughout the year.

The growth in earnings assets was driven primarily by the planned post-spin increase of approximately $100 million in investment securities as we put additions to capital to work. More importantly, though, we experienced a return of commercial loan demand as we realized a strong three percent linked quarter growth in commercial outstanding. As planned, we funded much of this growth from the strategic reduction of indirect loans and lease outstandings.

On the deposits side average balances decreased $46 million on a linked quarter. Half of this decline was a result of the branch sales with the remainder driven by planned reduction of high-cost, non-relationship deposits.

Non-interest income was $20.7 million, up $4.9 million on a linked quarter basis. Deposit service charges declined quarter-over-quarter. A portion of this change is due to seasonality, but we also realigned the structure of certain of our bundled deposit service charges. This change was a conscious decision on the part of our personal banking group to be more competitive. Further, fee income from insurance and wealth management activities increased in the first quarter 2004 to $5.6 million, an increase of $1.1 million or 25 percent on a sequential quarter basis. Those analysts that follow us on a regular basis are familiar with contingent fees from our First National Insurance Agency and the fact that they're principally a first quarter event. That was the case this quarter, as those fees accounted for the entire $500,000 increase and represented a 26 percent increase in insurance commissions on a linked quarter basis. Non-interest income from sales of annuities and mutual funds to our branch system increased $500,000, up 29 percent from the same period last year, and exceeded last quarter by 52 percent. Finally, revenues from First National Trust Company were up 6 percent from the same period 2003 and 10 percent from last quarter. As our sales management programs continue to experience positive results we expect these sources of fee income to increase in the future.

Non-interest expense totaled $34.6 million and was $500,000 lower than last quarter without the restructuring charges. This represents the culmination of our cost reduction program facilitated with the spin-off of the Florida operations. We're fully on track to realize the net year-over-year standings of $10 million or 7 percent that we shared with you in our last conference call. In fact, our first quarter expense levels are down $2.7 million or 7.2 percent from the first quarter of last year.

Included in our first quarter result is compensation cost totaling $250,000 of a new long-term incentive compensation plan. Given our focus on superior returns in a modest growth environment and high dividends, the old stock option program did not meet the needs of the new FNB. Instead the Board of Directors implemented a restricted stock program. Under the new program management is rewarded in part by delivering superior financial performance when compared to peers. The awards are earned over a four-year period which supports management retention. By the nature of restricted stock the award is amortized into compensation expense quarterly and includes the periodic change in the price of the underlying shares.

Our efficiency ratio in the first quarter of 2004 excluding the branch gain was 57.3 percent compared to 58.5 percent for the fourth quarter last year, after adjusting for the restructuring charges. As we have stated in prior calls, our goal is to reduce this measure of overhead to 55 percent, which is better than average of our peer group. We believe this quarter's results indicate we're heading in the right direction.

Asset quality remained strong for the quarter. Annualized net charge offs were 56 basis points of average loans compared to 59 basis points in the fourth quarter. Let me add that for the same period net charge offs for First National Bank of Pennsylvania decreased from 39 to 37 basis points.

Non-performing assets to total assets were 72 basis points versus 69 basis points last quarter. We did experience a net increase in non-accrual loans of $1.8 million over last quarter. This increase was directly related to the addition of two credits totaling 4.7 million during the quarter. These credits are well collateralized and losses are not expected.

The provision for loan losses at $4.6 million exceeded net charge-offs. Therefore, the allowance for loan losses increased to 1.43 percent of total loans and over 150 percent of non-performing loans.

Finally, delinquency rates, a key leading indicator, continued to show improvement from already strong levels, decreasing from 1.52 percent of total loans at year-end to 1.39 percent at the end of the first quarter.

Let me close with a few comments regarding interest rate sensitivity. Our interest rate profile is slightly liability confident (ph). Our internal modeling provides that a 100 basis point immediate increase in rates would result in a nominal 0.3 percent decrease in net interest income. That would be about a $500,000 decrease to our annualized $170 million net interest income, clearly manageable.

With regard to FAS 115 adjustments at March 31st, a 100 basis point immediate increase in rate would reduce the value of our available for sale portfolio by 2.5 percent. This is a slight improvement over last quarter where reduction in value would have been three percent. Our tangible equity ratio which stands at 4.6 percent as of March 31st would adjust to 4.1 percent.

Steve, this concludes my remarks.

Thanks Brian. As I indicated earlier, our next speaker is Bob Rawl, President and CEO of Regency Finance Company. Bob has been with Regency since 1997 and was named President and CEO in 1999. He brings 30 years of experience to Regency, the majority of which was in senior management roles with several consumer finance companies, most notably MBNA. When Bob joined us Regency had $86 million in net loans receivable and 32 offices in Pennsylvania and Eastern Ohio. He is a very strong, experienced consumer finance executive who has ambition, leadership and energy to expand Regency's geographic presence without endangering the legacy of high returns and lower risk.

Bob, please tell us about Regency.

Thanks Steve. Before I get into the numbers, let me explain what a consumer finance company is, and Regency in particular.

We're market funded lenders to primarily middle-class consumers. We purchase retail installment contracts, also called sales finance, from our network of merchants, financing purchases of such things as appliances, furniture and musical equipment, even orthodontia. The average purchase we finance is about $1,800. We also make non-real estate direct loans in amounts of $500 to $10,000 for the purchase of automobiles, vacations, consolidation loans or anything else the customer qualifies for. Our average net loan made is about $3,200. We make first and second mortgage loans for the same reasons I just stated with the addition of some purchased money and refinancing. Over average first mortgage loan is about $40,000, with second at about $16,000.

The kinds of customers we serve are what make a different from a bank. Our typical customer's household income is in the range of 25 to $65,000 with FICO scores ranging from 550 and up. The average score is about 600. Banks usually cut off at a minimum of 640 to 660. We also generally make smaller loans than banks, in the 500 to $1,000 range.

Because the only things we do our make loans, collect them and purchase retail installment contracts we can offer very quick service. Typically new customers receive their non-real estate loans the same day and current customers receive loans almost immediately.

Our operation is decentralized. Virtually all day-to-day decisions are made by the local branch manager. Five regional managers supervise between eight and twelve branches each. Our excellent online real-time operating system updates immediately after any given transaction and allows us to access all accounts from any terminal. This gives the regional managers and home office the capability of watching their accounts from their laptops or PCs, and even inserting comments on the pertinent screens.

Now a little Regency history. Incorporated in 1927, Regency offered traditional consumer finance products to customers from offices in Eastern Ohio. FNB Corporation acquired Regency in 1974 in conjunction with its formation of a bank holding company. This acquisition was an alternative to establishing a credit card portfolio like almost everyone else in banking at that time. Management felt that consumer finance offered asset yields equal to or better than credit cards with lower net charge offs. History has proven that the entry into consumer finance was the right one.

From 1979 to 1998 Regency grew by acquiring 19 offices, mostly in Pennsylvania. In late 1999, two years after I arrived, we acquired 11 offices and $31 million in loans in Mid-Tennessee, follow by an additional 8 offices and $29 million in loans in Eastern Tennessee. The customer base and market areas in Tennessee were very attractive because they were similar to some of our markets in Pennsylvania and Ohio.

Today, Regency has 48 offices -- 24 in Pennsylvania, 8 in Ohio and 16 in Tennessee. We employ approximately 160 people who serve the needs of our 39,000 loan customers and over 10,000 holders of our subordinated notes.

Let me tell you a little bit about our loan portfolio. Net loans outstanding totaled $136 million as of the end of the first quarter 2004. Total loan volume this quarter compared to first quarter 2003 is up nearly 24 percent. The loan mix consists of 53 percent direct non-real estate loans, 30 percent first mortgages, followed by 13 percent sales finance products and 4 percent second mortgages.

Our asset quality is very strong. The total delinquency 60 days and over past due is 3.6 percent of total loans. That's in keeping with our record of the past five years, and we've maintained our 60 day and over past due delinquency rate at between 3.1 percent and 4.9 percent of total loans. Net charge off this quarter were 4.7 percent of average loans on an annualized basis as compared to 4.4 percent on a linked quarter basis. We think that this is superior performance, particularly in light of today's economy.

We give credit for that success to the strong credit quality ethic throughout our company, combined with an extensive follow-up system for past due accounts. Our allowance for total losses is 4.8 percent of total loans and 107 percent of non-performing loans. The yield in our loan portfolio in the first quarter of this year was approximately 21 percent.

We fund the Company through the sale of subordinated notes with maturities that range from one day to ten years. These securities are registered with the SEC at the full faith and credit of FNB Corporation. This source of funds has been steady and very reliable over the past 30 years. At the end of the first quarter 2004 these balances totaled $167 million. Regency's average cost of funds was 3.94 percent at March 31, 2004. Our parent company, FNB, provides capital of approximately $14 million, which equates to a capital asset ratio of nearly 10 percent. If you haven't done the math by now, let me point out that our net interest margin was 17 percent at the end of the quarter. At this level we are up 34 basis points on a linked quarter comparison and up 138 basis points from the same period last year. Fee income at $400,000 in the first quarter is only a minor piece of our revenue. It gives us primarily credit and non-credit insurance products offered in conjunction with a loan. Borrowing a performance measure from the banking industry, our efficiency ratio is 51 percent in the first quarter 2004 and represents our typical run rate.

All of these words and statistics lead us to the real measure of Regency's performance for the quarter -- return on assets, 2.6 percent; return on equity, 27 percent. Now that is high performing and we've been able to sustain that track record. Regency makes up three percent of FNB's assets, but supplies seven percent of its net income. And it only gets better. On March 30th we signed a definitive agreement to acquire eight consumer finance offices in the Greater Columbus, Ohio region. So we will bring the total of offices to 56, increase receivables by $10 million and add 5,000 customers. We are extremely enthusiastic about this move. It fits nicely into our expansion plans. We've also been fortunate to recruit a regional manager who has over 20 years of consumer finance experience and is originally from Central Ohio. The transaction is expected to close on April 30th.

So where does Regency go from here? Well, you can count on us to maintained excellent credit quality profile and superior returns as we continue to seek more expansion opportunities, such as the one we just announced today.

I think I will close now before the callers begin to think this is the Regency conference call. Steve, thank you for shining the spotlight on Regency. You've made this a special day for all of our employees who make all the difference where it really counts, with our customers.

Thank you Bob and well done. I hope that this new approach for conference call topics is well received by our listening audience. Next quarter's cameo appearance will be by representatives from our wealth management affiliates after the amazing performance they delivered this quarter.

We still have some challenges ahead of us such as fine-tuning our sales management process and taking advantage of the economic recovery by providing operating capital to our business customers and prospects in support of their renewed growth while keeping an ever vigilant eye on expense control.

I can't emphasize enough the importance of control and efficiency at FNB. I would refer you to an article in today's Wall Street Journal under the title "Manager's Journal", which validates our model. The article states, and I quote, "slow-growing efficient banks outperform their less efficient, higher growth peers by a factor of four to one." We will be relentless in our pursuit of efficiency. These are the areas that we need to master to deliver on our commitment to providing superior returns and increased shareholder value.

For the second quarter we're providing guidance in a range of 31 cents to 33 cents per diluted share, which supports our earlier guidance of $1.26 to $1.32 for the full-year 2004.

Let me remind you that our original guidance reflected a flat rate environment. While management remains confident in its ability to achieve the results indicated by this range, there are two factors related to interest rates that could influence the 2004 actual results at the end of the day. There is the possibility that with increased economic activity the Federal Reserve could increase market rates of interest to keep inflationary pressures in check. Considering this fact, a risk does exist that we could under-perform in our net interest margin. Absent the Fed increasing rates, there is also the possibility of irrational competitive deposit pricing to secure funding for potential increases and loan activity. First National Bank's posture has been to manage its funding costs within rational competitive pricing guidelines in order to meet the changing needs and preference of its customers, but also to achieve adequate net interest margin goals. An increase in interest expense without a commensurate opportunity to realize higher yields on earnings assets will put pressure on the net interest margin. Management is cognizant of the challenges that lie ahead to achieve the anticipated results for the year and is actively taking measures to mitigate the downside risk.

So in conclusion, FNB Corporation experienced a very good quarter with return on equity in excess of 22 percent and return on assets of 1.2 percent. These results will prove to be a solid platform on which to base future performance, along with trending increases from wealth management, commercial lending and Regency, and aided by effective cost controls.

With that, I will turn the program the program back to the operator to poll audience for questions.

(OPERATOR INSTRUCTIONS) David Honold, KBW.

My question relates to the inflows to non-accrual status. I think I caught these numbers -- correct me if I'm wrong. Of the 1.8 million increase that was due to two credits of in aggregate 4.7 million, could you just talk a little bit more about those two credits specifically? And then apparently there must have been some outflows as, and if you could give us some color on that that would be helpful.

I will be happy to do that. First of all, we did show an increase in non-performing totally of 1.8 million and the result of net increase was two loans that totaled $4.6 million that we put on non-accrual. So obviously we have been able to move some credits out of that category during the quarter.

The two credits are both commercial loans. They're both secured by the general assets of the company, real estate, inventory, receivables and equipment. We also have on the one credit personal guarantees. Both of these credits we're working cooperatively with the borrower to liquidate. One of the credits we do have a sale of equipment already in hand to close, as well as the sale of the real estate. The other credit we don't have a purchaser lined up yet, but we are working, as I mentioned, cooperatively with the borrower. We've analyzed both credits, we've updated our collateral values on both credits and we do not expect that we will suffer any loss in the sale of -- the liquidation of those loans on either credit.

Obviously I should add but for the addition of those two credits we would have a handsome reduction in non-performing loans.

Can I ask a follow-up question on Regency? I just wanted to get some color on the average loan yield. Obviously it's pretty impressive. Are there any sort of regulatory restrictions that you would be faced with in a rising rate environment or would those loans simply reprice upward with prime?

With rates to increase we would be able to increase our rates on probably half our portfolio, our real estate portfolio and our sales managed (ph) portfolio. The small non-real estate portfolio pretty much is at max state (ph) rate, so there would certainly be risk there to the net interest margin if rates go up significantly. But since we are funded by subordinated notes our rates don't follow exactly on how the prime rate does or what the Fed does.

Is there an average FICO score that you track for all or different parts of the portfolio?

Yes, we look at -- we input all the FICO scores, and average comes out about 600. We go as low as 550, maybe even lower sometimes on a refinance, a customer that we know. But a new customer, the low would be 550, averaging about 600. We have a lot of customers, you'd be surprised, that are in the 700 FICO range that prefer to do a personal business with a consumer finance company. Particularly in small towns that rent (ph) they are used to dealing -- their parents lent from us, their grandparents lent from us, so it's a good relationship business.

Thanks.

(OPERATOR INSTRUCTIONS) Sir, there appear to be no further questions in the queue. Do you have any closing comments you would like to finish with?

Yes I do Peter. I want to thank all of you for participating in our call today. Replays are available through April 27th by calling 1-800-332-6854 with the access code #3044. Transcripts will also be available later today on our website at www.fnbcorporation.com. Finally, a reminder that our annual meeting of shareholders will be held at Thiel College in Greenville, Pennsylvania on May 12th at 4 PM. I look forward to seeing you there. Have a great day.

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.