FNB Corp (FNB) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the FNB Third Quarter 2004 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 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 yours.

Thank you, Peter and good morning everyone and I thank you for joining our third quarter 2004 conference call. As the operator mentioned I am Steve Gurgovits, President and CEO of FNB Corporation. With me today are Brian Lilly our Chief Financial Officer and Gary Robert. Gary was recently appointed as President and CEO of our largest affiliate, First National Bank of Pennsylvania. He is a well known banker with 37 years of experience in the financial services industry of which 23 years have been in the Chief Executive Officer role. Gary joined FNB Corporation in 1997, as President and CEO of Metropolitan National Bank; our previously independent affiliate operating in Eastern Ohio. In 2002 a corporation consolidated that affiliate as the First National Bank of Pennsylvania. At which time Gary was Chief Operating Officer. Please join me in extending congratulations to Gary. [inaudible] Gary is only the 12th person to hold this position dating back to 1864. Our stability of leadership has been a major benefit to our bank.

Now onto the business at hand; the quarter ending September 30, 2004 has proven to be a time of continued robust activity of FNB related to the execution of the strategic plan we outlined at the start of the year. The earnings for the quarter were on track at 31 cents per share, which was in the guidance range, with a continuing strong return on equity of 23.7% and return on assets of 1.23%.

The bottomline for the period showed good performance on a linked quarter basis and results have surpassed the same quarter in 2003 by a considerable margin. Last year it was affected by one-time charges associated with the spin-off of our Florida operation. On a sequential quarter basis we continue to realize growth in one of our targeted loan category. But first let me address commercial lending. While our optimism about originating commercial loans based on improving economic trends was supported in the second quarter; the anticipated demand for loans starting late summer and early fall; never really materialized. While we seem to be standing on the [side] taking a conservative posture to economic activities demonstrated on a sustained basis. However, loan demand by retail consumer is still going strong. I am pleased to report that in the third quarter average direct consumer loans in line to [inaudible] were up 9% annualized.

Taking all of this into consideration total loans were consistent with the prior quarter due to the planned reductions in our indirect installment, residential mortgage and other leasing portfolio. Average deposits and customer repurchase agreement grew by 5% annualized on a linked quarter basis. This growth occurred primarily in the more desirable core deposit categories. Further, we saw revenue net of non recurring item increased 7% annualized quarter-over-quarter. These results were influenced by improving net interest income, higher deposit fee, increased insurance commission provided by the addition of Morrell, Butz & Junker insurance agency in August. And speaking of Morrell, Butz & Junker, its affiliation with First National Insurance Agency was one of the highlights of the quarter. Morrell, Butz & Junker is a premier insurance agency operating in greater Pittsburgh market.

Since the beginning of October we have been engaged in other activities of [inaudible]. We completed the Slippery Rock Financial Corporation acquisition and announced our plan to merge with Pittsburgh based NSD Bancorp. In conjecture with the Slippery Rock acquisition; Brenda McBride and Scott McDowell were elected as the Board of Directors of First National Bank of Pennsylvania. These individuals bring excellent experience and skills to our organization and I am pleased to welcome them.

We at FNB are very happy with the progress we have made in executing our plan of growth through strategic acquisition; principally, aimed that the attractive segment of the [inaudible] Pittsburgh NSA. The latter two acquisitions will place FNB clearly in the middle of the fastest growing [core world] of some of the wealthiest community in Western Pennsylvania. Specially noteworthy, is that we have been able to accomplish this expansion without diluting earnings per share, without compromising our ability to continue to pay cash dividends to shareholders at the prescribed level of 65-75% of earning.

Now Brian will share the details of the quarterly results with you.

Thank you, Steve. Net income for the quarter totaled $14.7 million or 31 cents per diluted share. These results compared to $15.1 million or 32 cents per diluted share last quarter and the net loss from continuing operations of $7.8 million or 17 cents per share for the same period last year. Adjusting for the spin related $20 million after-tax charge taken in the third quarter last year, would result in net income of 26 cents per diluted share. Therefore, our 31 cents per diluted share in the third quarter this year is a 19% increase year-over-year.

Year-to-date 2004 results include net income of $46 million with a return on average equity of 25.2% and return on average assets of 1.31%. Let me first discuss two outstanding items that appear in our third quarter results. First, we recognized a $1.2 million pre-tax mark-to-market gains on our equity holdings of Sun Bancorp. Recall that we accounted for Sun on to the equity method of accounting giving our 40% ownership and our two board seats.

Following the September shareholder vote in favor the Omega merger we resigned our two board seats giving up the control aspects of our holding and therefore, [inaudible] our accounting to the cost basis. This accounting sense required us to mark those shares to market and thereby generating a $1.3 million write-off in the value of those shares. The second item of note was the prepayment of $46 million of federal home loan bank borrowings at an interest rate of 4.38%. Clearly when your reinvestment opportunities and the investment securities portfolio are below your cost of fund; it is better to reduce the higher cost funding. The immediate result of this actually was repayment charge of $1.2 million on a pre-tax basis in the third quarter, thereby directly offsetting the Sun (phonetic) banking.

Looking into the future, the permanent affect of the debt reduction will be a favorable influence in our net interest margin trend. Let me add a few more details with regard to our impact from the Sun and Omega merger. First, we chose to receive over 50% of the proceeds in cash and therefore, we realized an additional gain in the fourth quarter of approximately $500,000. In addition, we had a systems processing contract with Sun that has been terminated in the fourth quarter. The good news is that we are receiving a sizable termination fee in excess of $3 million pre-tax. Unfortunately, we are loosing our recurring revenue strength. Taking into account; the equity accounting the systems processing contract and the future cash dividends -- or reinvestment of proceeds resulting in annual net decrease of approximately 2 cents per share.

Turning back to the quarter's results and focusing on the sequential quarter analysis. Net interest income on a fully tax equivalent basis was up nearly $600,000 or 1.4%. This growth was driven by higher earning assets and additional [call] day in the quarter and was partially offset by the net interest margin narrowing end basis points. At the end of the second quarter we added a $100 million in investment securities funded by similar maturities of federal home loan bank borrowing. This transaction generated a 120 basis points spread; 6 of the 10 basis point narrowing of the net interest margin can be directly attributed to this transaction. Somewhat offsetting the positive benefit was the continuing affect of higher market rates on interest bearing liability. While the net interest margin declined 4 basis points quarter-over-quarter that is after giving affect to the securities transaction we are encouraged by the rising yield on [earning] assets and a more stable margin during the later part of the quarter. This coupled with a favorable impact of prepayments and high cost federal home loan bank borrowings is expected to improve the net interest margin trend going forward.

Non interest income excluding the Sun Bank gain and prior quarter's non recurring gains on [inaudible] loan sales totaling $462,000 was up $674,000 or 4% on a quarter-over-quarter basis. During the third quarter we realized increases in service charges slightly offset by seasonally lower retail investment sales from our branches. The largest factor contributing to the free income trends was the addition in Morrell, Butz & Junker insurance agency.

Non interest expense increased $2.4 million on a linked quarter basis. One-time federal home loan bank borrowing prepayment expense, that I mentioned earlier, accounted for $1.2 million of this increase. Their major of the change is attributable to the ongoing expenses associated with the addition of Morrell, Butz & Junker insurance operations and new Columbus office is acquired by Regency Finance Company in the second quarter and it is a higher benefit cost due to incentive programs effected by FNB higher stock price at quarters' end.

Product quality improved on a sequential quarter basis as each measure showed a favorable trend. Net charge offs average loans annualized were 43 basis points this quarter versus 46 last quarter. Non-performing loans of total loans at 81 basis points this quarter improved from 87 basis points for the second quarter. [Loans] for loan loss remained at 1.43% of total loans and coverage for non-performing loans increased from a 164% last quarter to a 176% this quarter. [inaudible] for loan losses was consistent with the last quarter.

As I have stated in the past our interest rate risk is at the fairly neutral position. This position has total strength and with the addition of Slippery Rock, which was asset sensitive. Relative to our capital ratio, average capital was 6.13% at the end of the quarter well in excess of the regulatory 5% level. [inaudible] capital while not a regulatory measure improved to 4.5% at the end of the quarter reflecting the following four items: first, the net retention of earnings for the quarter; next the issuance of equity for the Morrell, Butz & Junker acquisition; third, lower market rates of interest, which had a favorable affect on our FAS 115 valuation of the investment portfolio and finally, the repositioning of one half of the investment portfolio from the [inaudible] for sale classification to help the maturity. Over the years we have migrated from 50-50 mix to a high concentration in the available for sale category. This accounting reclassification was instituted for two reasons: first, it better reflects management intentions and second, it cuts in half the volatility of the FAS 115 equity adjustment as the health maturity portfolio is not subject to periodic revaluation due to market rate change.

That concludes my remarks. I will now turn the program over Gary Roberts who will give his perspective on our recent acquisitions, as the President of First National Bank of Pennsylvania.

Thanks Brian, I will enjoy doing that. The staff of the bank couldn’t be more excited and energized about the recent addition of First National Bank with Slippery Rock and last week's announcement about NorthSide Bank. The new growth opportunities that these banks bring to First National Bank are tremendous. They give us the ability to attract new deposits and [inaudible] in the fastest growing markets in Western Pennsylvania. As everyone knows our historical growth prospects have been of a rather modest nature; adding the very desirable more than half of Allegheny County and the Butler County provides First National Bank with the continuous trade area that will add significantly to our growth prospects. NorthSide trade area grew on the average 10% annually over the past 4 years and those projected household income growth of over 11% for the next 5 years. This is greater in both the Pennsylvania and National averages. In addition to retail banking opportunities they are equally good prospects for small business. In the 15 mile radius surrounding NorthSide's market area there are over 29,000 businesses of all types and sizes. These businesses all require banking products and services. Competitively at First National Bank, we believe that we provide a level of service that surpasses our customers' expectations. This enhances our ability and commitment to grow beyond our current market share. Relative to the operating efficiency we achieved the cost savings in excess of 40% with the Slippery Rock acquisition and we have our [decided step] on a similar target for NorthSide. Frankly, we are very confident that this is an achievable goal. Revenue enhancement from increased fee income offered yet another significant opportunity to increase the bottomline. While FNBs model reflects only a modest increase; in NorthSide's non interest income; we believe record revenue will receive a real boost from both the wealth management and insurance operations, particularly due to addition of Morrell, Butz & Junker. Steve, we are truly excited about our future prospects.

Thanks Gary and keep up that great enthusiasm. For those in the audience who did not have the chance to listen to last week's conference call regarding the announcement of the NSD Bancorp merger. I encourage you to visit our website www.fnbcorporation.com, where the script is posted.

As is usual on our conference calls we feel it's appropriate to update our earnings guidance for the [inaudible] quarter. On our conference call last quarter we shared our outlook for the fourth quarter, which was in the range of 31-32 cents. At this point in time we are projecting diluted earnings per shares to be in the range of 33-34 cents for the final quarter of 2004. Including in these amounts are some non-recurring items related to the further disposition of our Sun Bank relationship as previously discussed by Brian along with period expenses incurred with the Slippery Rock acquisition. These items represent an estimated amount approximating 3 cents per share. Removing the net affect of these occurrences; reduces our earnings per share in the diluted basis to a range of 30-31 cents. But we've recognized that these trends follow the guidance previously provided. Frankly speaking, the amounts can be easily reconciled when considering the loss income from the equity accounting treatment and the servicing agreement related to Sun Bank. Taking full recognition of all of them that occurred during the year would result in total EPS amount in the range of a $1.30-1.31 for 2004. Excluding fourth quarter non-recurring items as well as the [inaudible] gain in the first quarter, results in diluted earnings per share of a $1.22-1.23 for the year.

As for 2005 we have [commenced] fine tuning our profit plan and at this time it will be premature to provide any projections for next year. We will provide guidance for 2005 during our fourth quarter conference call to be held in January. I will now turn the program over to the operator for the audience for any questions. Peter?

Thank you ladies and gentlemen the floor is now open for questions. If you have any questions or comments please press the numbers "1" followed by "4" on your touchtone phone at this time. Pressing "1" 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 pickup your handset if listening on speakerphone for optimum sound quality. Please hold while we poll for questions. And today your first question is coming from Randall [inaudible] Edwin (phonetic).

Hi good morning gentlemen.

Good morning.

Just calling to get some more color on the net interest margin, can you just go over the effects, the 10 basis points decline and also what's your outlook as going forward?

A reconcilement from the quarter-to-quarter was down 10, as you mentioned. 6 to that basis points we knew it's going to take place but the $500 million of investment securities that we added with the [inaudible] at the end of the second quarter. So the 4 basis points that we saw is the combination of the wholesale money going up to slightly and some of our customers buying the higher promotional rates that we have out there. It didn't -- so that caused the 4 basis points with some of the carry over from the second quarter. We saw in the last couple of months in the quarter of flattening of that margin and so we are optimistic that we are going to see that -- pickup as we go forward, while it remained flat the relates our currently sitting -- and slow down the deterioration for the decline that we've seen in the last couple of quarters. [inaudible] to add there?

No, that's great thanks.

Okay.

Thank you. Your next question is coming from Mike Rocknic (phonetic) at the Herald Newspaper.

Hi Steve.

Hi Michael.

Just looking for some more information about the Sun Bancorp, I couldn't quite hear everything slightly but I gather your divesting your stock holdings and company believe with that what 5 or 10% just looking for more information on that?

Well Michael we own about 14% of that outstanding stock of Sun Bank. Further, we have two board seats on their holding company in Bancorp. With that arrangement that we went to a equity accounting treatment whereby 14% of Sun Bank earnings will pass through into FNB's earning, so that was one relationship. Secondly, and separately we have a contract where our data center -- had a processing work for Sun Bank. Now in September Sun Bank agreed that their shareholders agreed to sell the company to Omega. With that our data processing contract has terminated as there is a penalty that Brian referred to that is in excess for $3 million pre-tax that we will receive in the fourth quarter, terminating that contract ad then secondly, and separately our equity accounting ends because we've resigned our board seats and we then require to mark that investment to market, which in our case was a mark up and that gain was reflected in our financials.

Will the termination of the contract will result in any job loss, in the sense -- data center?

No, not at all Michael because we -- when we got this contract that we were able to provide the processing for them without creating any additional job, so when the contract disappears we will not be reducing any job.

Okay thank you very much.

You are welcome.

Thank you. Your next question is coming from Peyton Greene at FTM Midwest Research.

Hi good morning, a couple of questions, one, Brian what should our assumptions be for the Slippery Rock contribution in the fourth quarter in terms of net interest income expense and non interest income?

You know Peyton I don't have it at my finger tips. You know, we closed at -- I was focused on -- NorthSide in last couple, I can get back to you.

Okay great and then in terms of DP contract; what was the revenue contribution on an annual basis?

We were looking about pre-tax, after-tax about -- the outstanding expense about $500,000-600,000.

Okay, alright, great and then so I mean just in thinking about the margin it should continue to go down in the fourth quarter because of the addition of Slippery Rock is that fair to say?

With the addition of Slippery Rock there is an impact there that I don't have at my finger tip.

Okay.

I have been looking at the [figures] without analysis, just trying to make sure that the base bank.

Okay.

But their margin is running below our so expected, if you will, but the modest impact is --

Sure okay and then the effect of the leverage program; it was a $100 million program is that right?

Yes.

And it was about 6 basis point linked quarter hit to the margin?

Yes.

Okay great and let say, alright, so half of your [assuming] position is now gone because you elected for cash, correct?

As of October 1, recall if that transaction close in the fourth quarter technically.

Okay, now I mean do you intend to hang on to the balance to your position or will you end up closing out of all of it, -- do you know yet?

I think [inaudible] we were monitoring that as we do all of our equity portfolios and we take a look at the opportunity..

Okay, great, thank you very much.

Thank you. Ladies and gentlemen if there will be any remaining questions or comments please indicate now by pressing "1", "4" on your touchtone phone. Thank you your next question is coming from James Record of Moors & Cabot.

Hi guys.

Hi Jim.

Hi Jim.

I am sorry to ask you this again you said that database contract was 500,000 or 600,000 for your after-tax?

After-tax.

Okay and then can you give some guidance on overall asset sensitivity in your last call, and -- I know you've commented on the margin already, but to what extent does I have said the two deals [inaudible] to extent has your -- I guess you are slightly liability sensitive to what extend has that changed as a result of that debt repay?

Well -- let me bit a little clear on that James. We -- in the last call as I recall mentioned that we were slight --at a in a scenario that I think is about rates going up a 150 basis points, is that what you are referring to?

Yes.

We measured about 1% debt to net interest margin that I characterize as within the [groundwork] of the assumptions manageable. With the rates coming down and the additional of Slippery Rock at same measurement although we did it at a 100 basis points and we have already seen 25 or 50 of that move that would result of a zero impact. So -- we are in that round of that fairly neutral position that I was saying. So slightly liability sensitive, I think little bit too strong of a turn and so as we are doing the measurement now, and of course, with the rates coming down from the mortgage cash flows pickup and bring more flow into the early period, which improves that gap position. So we look at it now, we are flat on to neutral to slightly positively with rates going out, but as you know within that [inaudible] assumptions, slightly you are plus or minus.

Right. That's helpful, thanks.

Thank you. Your next question is a follow-up question from Peyton Greene.

Yes, Brian just in terms of the interest rate sensitivity and will long rates coming in 50-75 basis points like they have and short rates going up by a similar amount. What does that do to the interest rate sensitivity for you all?

Well it benefited it and just slightly -- benefited it slightly from the end of the second quarter to the third quarter. I think all of us like rates to move up higher, certainly the investment opportunities for the long with 10-year bond; so it's not there 4% below isn't very attractive, which is why we took some of the action on the debt side, but generally neutral.

Okay and then on the FHL -- the advances that did you prepaid, what was you are reinvestment rate on those?

Well, the potential reinvestment rate was 341, which is why we didn't do as I call that trade as a negative spread of the 438 versus 341 and -- so we had a benefit there about $450,000 a year -- which pays that off in 3 years.

Okay.

Thank you very much.

Thank you Mr. Gurgovits, there appear to be no further questions in the queue, do you have any closing comments you like to finish with?

Sure Peter. I would like to thank everyone for your attention. A reminder, that the replay for this call will be available through October 28, 2004 by calling 1-800-332-6854 with the entry code #3044. Transcripts will also be available later today on our website at www.fnbcorporation.com. And my final comment will be to thank everybody for your continued interest in our Company and wish you a good 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.