FNB Corp (FNB) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the F.N.B. Corporation Quarterly Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments following the presentation. 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 F.N.B. 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, change in prepaids , loan sales, volumes, charge-offs and loan loss provisions, less favorable than expected general economic conditions, legislative or regulatory changes that may adversely affect the businesses in which F.N.B. is engaged or changes in the securities markets. 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 call. It's now my pleasure to turn the floor over to your host Stephen Gurgovits. Sir, the floor is yours.

Thank you, Peter. Good morning, everyone and thank you for joining our conference call for the second quarter of 2004. You may remember that during our last conference call, we introduced the idea of using these calls to better acquaint you with FNB's operations by including cameo presentations by CEOs of our affiliates. They will describe their business profiles, strategies, and operations. The idea was well received by the overwhelming majority of the participants we polled following the call. However, as we prepared for today's call, we noticed that in light of the two acquisitions announced this quarter, it might be more appropriate to talk about those in relation to our overall acquisition strategy. So, today we will deviate from our planned affiliate CEO presentation in favor of discussion plan. Joining me today is Brian Lilly, our Chief Financial Officer. Brian will talk about the details behind the results for the quarter as well as the Corporation's interest rate risk profile. First, however, let me note that our second quarter 2004 bottom line was as . F.N.B. Corporation's net income was $0.32 per diluted share. This compares favorably to the $0.30 per diluted share from continuing operations for the same period last year. That's a 6.7% improvement from the second quarter 2003 and exceeded the analysts' consensus estimates for the quarter of $0.31 per share. The continuation of our strong asset quality, increased fee income, and reduced expenses all contributed to these earnings. Also, worthy of note, we held a successful annual shareholders meeting in May at Thiel College in Greenville. This is an especially fitting location because F.N.B. first opened its banking doors in Greenville in 1864. At the meeting, shareholders heartily endorsed the election of all director nominees. And at the monthly meeting immediately preceding the shareholders meeting, the Board of Directors declared a second quarter cash dividend of $0.23 per share. This amount on an annualized basis represents a current dividend yield of 4.5%. That places us in the top 4% of bank holding companies on our across the continental United States. In fact, we were second highest out of the 35 in the group.

On an extremely sad note, we lost one of our good friends and directors with the untimely death, last month, of Ben Wiley. Ben has been a director of FNB Corporation, as well as First National Bank of Pennsylvania, since 1997. He was most recently, Chief Executive Officer of the Greater Erie Community Action Committee and a very well respected businessman in Erie. He provided a strong tie between that community and FNB Corporation. Ben will be missed greatly by all who knew him. We express our heartfelt condolences to his wife and family. On a happier note, we can see the Corporation's continued financial successfully completed its purchase of eight TICO Credit Company offices. And our lead subsidiary, First National Bank of Pennsylvania, announced its intent to merge with First National Bank of Slippery Rock, a $334m bank headquartered in Butler County, Pennsylvania. With this level of acquisition activity in the quarter, you see why we think it's important to discuss our expansion strategies with you today. But, first let me turn the program over to Brian for an overview of the second quarter 2004 results. Brian?

Thank you Steve. First, let me remind you that the results for 2003 are presented on a discontinued operations basis, due to the spin-off of our operations, which was effective on January 1, 2004. Therefore, various assets, liabilities, and net income contribution have been isolated for 2003. I only want to compare this year's results with the income from continuing operations in 2003 . For the three months ended June 30, 2004, net income was $15.1m or $0.32 per diluted share. This compares to net income from continuing operations of $14.1m or $0.30 per diluted share for the same period last year. On a sequential quarter basis, second quarter results were 11% higher than the first quarter, excluding the $2.7m after-tax gain on the sale of the two branch locations. Return on equity for the second quarter was a strong 25.3%, and return on net assets was 1.3%. Second quarter results are characterized by good loan and deposit growth, a slight decline in the net interest income, which was nearly offset by solid asset quality, fee income increases, and lower non-interest expense in comparison to the first quarter of 2004. During the quarter, net interest income on a fully taxable basis declined $737,000 or 1.7%. The primary driver was a six basis point narrowing in the net interest margin from 4.04% in the first quarter to 3.98% in the second quarter. The second quarter earning assets yield of 5.87% decreased four basis points in the first quarter as new loan yields continually booked at levels below the portfolio yields, although we are nearing a crossover, and we continue to execute on our plans to make the change in our loans. Our plan calls for a reduction in indirect consumer loan, automobile leasing, and the residential mortgage portfolio. The loans outstanding in those classifications declined on an average $53m on a length quarter basis. These strategic initiatives are designed to improve asset quality and fee income, while focusing attention on more advanced stage of loan origination consistent with regards to net loans was an increase of $9.1m in average commercial loan. Average consumer lines of credit was $3.6m and we realized a $11.9m increase in the average consumer home equity loans. Each category grew on an average 1% over the first quarter.

Additionally, year-over-year second quarter commercial loans were up 6% and has a strong pipeline. While consumer home equity and lines of credit were up a combined 19.8%, really benefiting from the refinance boom last year. We are pleased with the initial execution that change in the mix in the loan portfolio and anticipate recent volume trend continuing in the same directions as the year progresses. On the liability side of the balance sheet, the cost of funding increased 4 basis points over the first quarter to 3.16%. Higher market rates have begun to work their way into funding and we implemented higher promotional deposit rates in response to competition and to lengthen maturities. I was surprised with the retail repurchase agreement increased this quarter over the last quarter $43m or 12.8% annualized after adjusting for the first quarter bank sales. The increase was split between non-interest bearing demand and time deposits. Non-interest income was $17.4m up $746,000 or 4.5% from the prior quarter excluding the gain on bank sales previously mentioned. Loan and deposit service charges contributed $451,000 to the increase, roughly these and check card income. The income from insurance and wealth management was down $255,000 on a link quarter basis. Contingent fees from insurance operations of first quarter early event accounted for $512,000 decrease offset by legally adjusted credit life commissions. Trust income was down $197,000 due to the annual tax related fees paid in the first quarter and to lower state fees, which tend to be bumpy. Lower retail investment sale during the quarter resulted in a decline of $150,000 in the securities commissions and fees. However, in the first six months of the year, we exceeded the income from retail security sales reported for the same period last year by over $400,000 or up 19%. This performance was directly attributable to the very successful 'coming home promotion' initiated in the first quarter of 2004. Finally during the second quarter, we realized a gain over sales in consumer finance loans totaling related to approximately $30m in education loans outstanding that were about to the higher cost repayment status, with this equity brands of our Regency Consumer Finance Company. Non-interest expense totaled $33.5m, which was $1.2m or 3.3% lower than last quarter. This represents reduced benefit accruals associated with our long-term compensation programs and lower employee payroll taxes. Year-to-date, expenses through June 30, 2004 were down $5.5m from the same period last year or 7.5%. This surpasses our overall goal of reducing the expenses by 7% following the spin-off of Florida. The efficiency ratio was 55.4% for the quarter versus 57.4% last quarter, excluding the gain on the sale of branches. At this quarter as well, we've achieved our standard goal of 55% efficiency. Asset quality, a long-standing asset system in the organization continues to be solid. Non-performing assets were down $1.8m from last quarter, representing a 66 basis points of total assets at the end of the second quarter compared to 73 basis points at the end of first quarter. Net charge-offs at $3.7m were down $840,000 declining from 56 basis points of average loans last quarter to 46 basis points at June 30. This marked improvement in credit quality was a result of favorable trends at First National Bank in Pennsylvania ,where net charge-offs declined from 37 basis points of average loans last quarter to 28 basis points for the second quarter. Further, delinquencies were greater than 30 days past due and accruing a key-leading indicator declined from 65 basis points of total loans on March 31 to 59 basis points at the end of the second quarter. These improvements in credit quality prompted a reduction in the provision for loan losses totaling $1m from the prior quarter, and $283,000 from the same period last year. In spite of this reduction, the loan loss provision equals net charge-offs for the second quarter. The allowance for loan losses remained at 1.43% of total loans and increased to 164% of non-performing loans. On a year-to-date basis, for the six months ended June 30, 2004, net income was $31.3m or $0.66 per diluted share, which compares favorably to the first six months of 2003 where net income from continuing operations totaled $28.7m $0.61 per diluted share. Of course, the gains from branch sales are included in the first quarter of 2004. It's worth noting that as a comparison the net interest margin was narrowed from 4.41% for the first six months of 2003 to 4.04% in 2004. As you recall, early 2003 was a significantly different market rate environment. Resulting lower net interest income was more than offset by expense reductions totaling $5.5m on a year-over-year basis. At this time, we think it's important to share some information with you regarding our sensitivity to rising rates of interest. Looking ahead, net interest income, the largest component of revenue will come under pressure in a rising rate environment. In the past, I've shared with you the results of stock analysis. This analysis continues to reflect nominal impact from our top 100, and top 200 stocks less than 1% of net interest income. The current consensus is for a measured and controlled position toward the rise in short-term rates taken by the Fed Reserve in the to avoid inflationary pressures, yet continue economic stimulation. Therefore we model a gradual 150 basis points increase in the Fed funds rates over next the 12 months. With the Fed funds rates increasing to 3.75% and a 10-year rate increasing 60 basis points to 5.30%, reflecting a flattening of the yield curve. Under this scenario the next 12-month net interest income would be reduced $1.8m or 1%, this will equate a $0.025 per share over the next 12 months.

Let me further share with you what the repricing in our balance sheet looks like over the next year. Think of three groups. In the first group, we have the market-based assets and liabilities that reprice in the zero to three months time frame. The time based loans total $600m and are in excess of the market-based liabilities. With these moves in fed funds and prime rates, we are matched. In the second group, we place the cash flow from contractual maturities related to loans and investments. These assets total $1b and when combined with the primary loans representing 37% of our earnings assets. The final group is the that figure in to the one-year horizon and that we'd reprice at management discretion. Categories in this group includes savings, money market, and time deposit; effectively our customers' money. These liabilities although effected by competitive pressures can be effectively managed to minimize the negative impact on net interest spreads. These three elements taken together make us really confident that future earnings prospectus while sensitive to raising rates are not terminal to net income. Overall, we concur with this -- outcome of this model results from our earnings guidance going forward. Finally, the effect of raising interest rates will cause some erosion in the value from securities portfolio through the application of Financial Accounting Standard 115. As rates rise, the unrealized loss to the market value of the investment portfolio increases. While the accounting valuation does not affect net income, nor does it consider the increase in value of our core deposits, it does reduce certain capital ratios. At June 30, our tangible equity was reduced $17m from March 31 due to FAS 115 accounting. Our tangible capital ratio at June 30 was 4.0%. This quarter end, market rates will back down slightly. At current rates, intangible capital ratio will improve to 4.39%. In terms of sensitivity, each 25 basis point raise in the five-year treasury rate would decrease the securities portfolios $6.7m on an after-tax basis. This will reduce tangible capital by 15 basis points. We currently maintain capital ratios in excess with the regulatory capitalized measures. And in fact improve the leverage ratio from 6% as of March 31 to 6.13% by June 30. We have targeted this ratio to be in excess of 6.25% by year-end. I hope you find this information useful and helping you to monitor our income. That concludes my comment, Steve. So I'll turn this call back to you.

Thanks Brian. Interest rate is a difficult subject to tackle. But although the fact that you share should make the audience feel more comfortable with our assumptions going forward. On the subject of capital, let me add that efficient management of capital remains an important component of our business strategy post spin. We believe that we have sufficient capital to support the business risk inherent in the execution of our strategic plan. Although consistent with our strategy, is our plan to go through acquisition. So now I would like to discuss that strategy. In our first quarter conference call, I made it that we would experience at best moderate longer deposit growth. This is simply due to the slow growth prospects of the geographic markets in which we operate in Western Pennsylvania and Eastern Ohio. The population growth in this part of the country has been very limited over the past decade or so. We expect to supplement organic and market share growth by expanding business units through acquisition. The prior criteria for this strategy are one, affiliate with good quality companies. Two, expand in non-geographic markets that compliment other business launch of the corporation. We the accreted earnings per share within 12 months. Or provide sufficient cash flow to sustain the targeted cash dividend pay up ratio and finally maintain raw capitalized regulatory capital ratios. We have satisfied all these criteria for the acquisition we will be discussing today. However, the values paid for the target companies we are in line with comparable transaction. We will start with Regency Finance. Regency's organic growth although very profitability over the years, is only a modest amount and is often offset by regular loan pay ups. Though acquisitions have long been the main stay of Regency's goal plan acquiring active portfolios, properly priced in favorable attractive markets and integrating them in to a lower cost structure has proven successful. Until recently Ohio was under service by our consumer finance company because more favorable opportunities surfaced in Tennessee more often. However, once the Tennessee office is successfully integrated in to the Regency, the company was free to direct it's attention closer at home in the adjacent communities in Ohio. Recent acquisition 8 offices in the Columbus Ohio area was a natural expansion of Regency's current footprint. But whether it was actually price or discount and cost reduction were implemented to resolve an accretion to FMB's bottom line. Regency's assets grew 6%. First National Bank of Pennsylvania prime merger with First National Bank of Slippery Rock is similar to Regency's transaction in that it is in a geographic market continues to existing branches.

In fact the addition of Butler County little over the continuous market between the area in Pittsburgh. Butler county has higher growth prospects and other pit market area in Western Pennsylvania due to the population migration from Pittsburgh. Slippery Rock's balance sheet contributes some favorability to the Corporation's interest rate risk profile and the acquisition also improves regulatory capital ratios. Importantly, well not included in our modeling whether your opportunities appears to be very strong insurance product, retail security sales, expanded trust plans and commercial lending due to a higher legal lending limits. Part of the cost savings are currently forecast to be exceeded contributing accretion to the earnings per share 2005. Value equal 2.4 times book value,19.9% core deposit premium comparable to similar transactions in Pennsylvania. As far as execution is concerned, all regulatory application have been filed; record and shareholder meeting dates have been set. Efficiently have been identified all of that employees have been notified. Closing and technology integration will take place in early October. We are on schedule and customers are reacting very favorably to the merger. I hope that this discussion of our recent acquisitions and supporting detail has increased your level of confidence that we have an overall plan with established meaningful criteria and we are executing with careful consideration for our shareholders. We do expect to continue growing through our acquisition's strategy in order to supplement a modest growth in our market area. And now for guidance, as you may be called a prior endings guidance our assumptions included a flat scenario. In addition, we had expected a level of mortgage activity that has not been realized to date. With the recent raise of market rates of interest and the slower mortgage activity, we are adjusting our guidance to be in the range of $0.31to $0.32 for each of the next two quarters. This was equivalent to a range of $1.23 to $1.25 for the full year 2004. Not counting the gain on the branch sales realized in the first quarter of the year. With the gains included, the earnings ranged between the $1.28 to $1.30. Management is confident in it's ability to achieve the results indicated by this range. So, in summary, FNB Corporation experienced a very good quarter with a return on equity in excess of 25%, and the return on asset at 1.3%. Our expectations are to continue to perform above the $310b asset bank holding company peer group, across the United States. With that, I will ask the operator to pull the audience for any questions you might have.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press the numbers one, followed by four on your touch-tone phone at this time. Pressing one for 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. Thank you. Your first question is coming from Sam Caldwell of KBW. Sir, your line is alive.

Good morning guys. I had a quick question on the capital levels, pro forma, the deal with Slippery Rock. What -- can you comment on what you think is going to happen there?

Sure. As we say our lowest capital ratio is at 6.13 at the end of the second quarter here. When we closed that transaction, we expect to pick up 10 to 20 basis points in that particular ratio, between from the referred. So, when we -- so, that's why we put it above our target as a 6.5 at the end of the year.

Okay, and you are pretty comfortable with that level of capital and are you looking to raise any more trust preferred or anything else?

We, as Steve mentioned, the strategy coming out of the spin was to be a very efficient capital of managed Company and not to retain capital that we didn't need, to support the modest growth in our balance sheet, that we see in our market. So, the accountable generation of the Company is sufficient to support that growth and maintain the high dividends that we have, and the business risk in the profile of the Company isn't taking any unusual business risk, that would require us to maintain significantly higher levels of capital. SO, yes, we do feel comfortable at that capital level.

Okay, great. Thank you.

Thank you. Your next question is coming from Andy Staff at Cowan Brothers. Your line is alive.

Good morning.

Good morning Andy.

Looks if, the decline slightly last couple of quarters -- did it run off on the retail side? Do you expect loans to continue to catch it downward?

Yes Andy, it's sort of alluded to in the call. We have a plan in our 2004 strategy, and continue into '05 for a couple of categories, principally the indirect consumer portfolio that we are releasing and the mortgage portfolios, that rebound for our long -- our total long portfolios. We expect that, that will continue into 2005, indirect currently running in the $20m to $25m decrease per quarter, with all the leasing becoming less significant as the quarters moved on. The mortgage portfolio anywhere from -- in that $10m range.

Andy, having said that, we do see a pretty on the commercial side. Our commercial originations have averaged, and I'm going to give you an average of about $30m a month, for the first five months of this year. That exceeds $30m in June and our expectations for July would be that we will be somewhere in north of $50m sales -- and the pipeline looks good. So, Brian has explained the consumer strategy, on the commercial side, yes, we are optimistic we are going to have a pretty good year.

Okay. How long do you foresee this plan run off continuing?

Well, yes, use of it to taking it by categories and indirect loans, we have current balances in the $400m range and are -- have targeted with the buying criteria we set out there, to be in about $10m a month. If you extend that out, we'd expect to get to a level, leveling around at $250m to $260m with the duration of that portfolio. So, we have a few quarters left to move into that. So, let's go into '05 before that portfolio. On the mortgage side of balances, you will to continue to look at that, currently we are taking the fee income. But there is a point at which would vary -- booking variable rate loans, if at all possible and looking at the portfolio side, that we might moved there in and out. But that's really what's happened over the last several quarters with the refinancing. But as you know rate is going up, things might be slowing a little bit, the yield opportunity might look attractive to us as we look at that next. So, that's a little bit more of our strategy that let's us maximize the return to our shareholders on that portfolio.

Okay. Your second quarter service charges were strong. Do you think that's a good rate, run rate going forward? Or might it settle down a bit?

We see the third and fourth quarter building at those level. There is a little bit of seasonality that gets into the summer vacation for insurance charge, of course we have some of the check card in emergencies and a number of those things also, that's a whole pretty strong. The first quarter, when we've looked at it, the details behind it doesn't have some seasonality as generally is lower.

Anyhow we do have a price increase that's incorporated in the very end of our second quarter that we didn't get the full quarter effect on it. Well on that going portion in the next couple of quarters.

What do you add that your provision for your loan-losses matched net charge offs? Is this something we might see going forward?

We'd re-evaluate the allowance first and foremost and at 1.43%,our credit quality being so very comfortable. In fact, charge off something more comfortable. We're already accounting regulations around that say you need to keep finding places and make sure of that are adequate, you know in all the sense. So booking more than that charge off and building the allowance is something that doesn't make sense to us. We'll be watching that, and making sure that we don't just are a clearly increased allowance coverage.

Okay, that's it. Congratulation on a strong quarter.

Thanks Andy.

Thank you. Once again if there will be any remaining questions or comments please indicate now by pressing 14 on your touchtone phone. There appears to be no further question in the queue, do you have any closing comments.

Yes Peter I do. I would like to thank everybody for joining us today. A reminder to all that replay of this call will be available till July 29 by calling 1-800-332-6854 with the access code #3044, and change codes will also be available later today at our Web site at www.fnbcorporation.com. And finally, I just have to thank everybody for your continued interest in our corporation and hope you have a good day. Thank you.

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.