FNB Corp (FNB) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the F.N.B. fourth-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 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 of 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 prepayment 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 F.N.B. is engaged; changes in the securities markets; or risk factors mentioned in the reports and registration statements F.N.B. Corporation files with the Securities and Exchange Commission.

F.N.B. undertakes no obligation to release revisions for 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, Stephen Gurgovits. Sir, the floor is yours.

Good morning, everyone. Thank you for joining our fourth-quarter 2004 conference call. I'm Steve Gurgovits, President and CEO of F.N.B. Corporation. With me today are Brian Lilly, our Chief Financial Officer, and Gary Roberts, President and CEO of our largest affiliate, First National Bank of Pennsylvania. I will tell you, several of us are struggling with coughs and colds, so please forgive an occasional cough during this presentation.

Today we will review the results of both our fourth quarter and the full year 2004 as well as our outlook for 2005. The fourth quarter of '04 marked a successful conclusion to a year of remarkable accomplishments. As promised, we increased shareholder value through the capable execution of our '04 strategic and financial plans.

First, to summarize, fourth-quarter earnings were 31 cents per diluted share as predicted in our last conference call, for a 2004 year-end total of $1.29. During '04 we experienced nonrecurring events such as the gain on the sale of branch offices and income from Sun Bancorp, as well as the prepayment of federal home loan bank borrowing and onetime merger-related charges. Nevertheless, earnings for the year excluding these onetime items equaled $1.22 per diluted share.

When we compare this performance to our 2003 results, on the same basis of $1.13 per diluted share, are earnings increased 8 percent year-over-year. This performance matches the guidance we provided last quarter, as well as our target range of 6 to 10 percent increase in earnings per share for 2004. But even more importantly, it exceeds our 3-year goal of sustaining a 5 to 7 percent annual improvement in earnings per share.

In fact, consider these 2004 results compared to our specific 3-year performance targets. Return on equity was 23.5 percent, compared to the target of 20 percent or more. Return on assets was 1.29 percent versus the plan of more than 1.25 percent. Fee income was 29 percent of total revenue, compared to our objective of 35 percent. And the efficiency ratio was 56 percent, compared to our goal of 55 percent.

As a side note, our return on tangible equity was 30.4 percent. In fact, this strong performance in the key measures of return on equity and return on tangible equity places F.N.B. in the top quartile of our peer group. Most importantly, this year's favorable financial achievements provided the resources that allowed us to deliver on our commitment to shareholders of a high cash dividend payout.

In 2004, F.N.B. distributed over 70 percent of its net income to shareholders. This represents a dividend yield of 4.5 percent at year-end 2004, the highest of all bank holding companies with 3 to $10 billion in assets in the continental United States.

In addition, recall that following the spin-off of our Florida operation, our plan was to supplement modest organic growth with strategic acquisitions. We believe we have delivered on this pledge as we were able to expand 3 of our 4 business lines through acquisitions. Here is a brief description of each, in the order that they were announced during the year.

First, Regency, our consumer finance subsidiary, expanded into the Greater Columbus, Ohio, market the purchase of 8 offices. This move increased Regency's size to 55 offices and $150 million in assets. This was followed by the announcement of our acquisition of Slippery Rock Financial Corporation, parent company of First National Bank of Slippery Rock. The merger with the $330 million Community Bank was completed in October and had a positive contribution to operations.

At midyear, our insurance agency subsidiary doubled in size through the acquisition of Morrell, Butz & Junker, one of the largest independent insurance agencies in the Pittsburgh market. This acquisition also added the experienced leadership and management necessary to grow this line of business into the future.

No sooner had the Slippery Rock merger closed than we announced our intent to merge with NSD Bancorp, parent of NorthSide Bank in Pittsburgh. This merger will increase F.N.B.'s assets over $500 million, and is forecast to be accretive to 2005 earnings per share. The additional 11 branches will expand our footprint into the prosperous and growing communities in Allegheny and Butler counties.

Finally, just last month, we opened a new branch office in Seven Fields, in the heart of the thriving Cranberry region of southern Butler County.

As you can see we are making positive inroads into areas of the region that offer opportunities for growth. By any measure, 2004 was a successful year of outstanding financial performance and strategic growth that enhanced an already attractive Financial Services franchise.

We accomplished a lot in 2004, and we anticipate another strong year in 2005. Later in the program, we will provide some color and earnings guidance for the new year, but first Brian will discuss our fourth-quarter and year-end results. Brian?

Thanks, Steve. Net income for the quarter totaled $15.8 million or 31 cents per diluted share. These results compared to $14.7 million or 31 cents per diluted share last quarter, and income from continuing operations of $6.2 million or 13 cents per diluted share for the same period last year.

During the fourth quarter we had some items of nonrecurring nature that netted to a slight benefit to the bottom line. First, as I mentioned in last quarter's conference call, F.N.B. received an additional $4.8 million pretax as a direct result of the Sun Bancorp merger with Omega Financial Corporation. This non-interest income represents a termination fee due to Sun's cancellation of the data processing contract with us and a securities gain on the exchange of Omega shares for our remaining equity investment in Sun.

These gains gave us the opportunity to eliminate certain negatives spreads in our wholesale investment and borrowing portfolios. This plan resulted in prepaying $60 million of higher cost Federal Home Loan Bank borrowings and the sale of approximately $55 million of low yielding investment securities. The net effect of this action was a $1 million prepayment expense on the borrowings and a $1 million loss on the sale of securities.

We anticipate that this action will improve net interest income in 2005 and beyond. Further, we realize capital ratio benefits as the current yield curve does not provide attractive opportunities to replace these wholesale earning assets.

Finally, the Corporation recorded $1.7 million in the merger-related expenses associated with the acquisition of Slippery Rock. Absent these nonrecurring items, earnings per diluted share in the fourth quarter would have been 30 cents. These results represent a 15 percent increase over the 26 cents recorded in the same quarter last year, adjusting for the after-tax restructuring charges of 13 cents per diluted share.

The remaining highlights for the quarter revolve primarily around the inclusion of Slippery Rock in our financial results. Net interest income on a fully taxable basis increased $2.3 million or 5.4 percent from the prior quarter, primarily due to the addition of $272 million in earning assets from the Slippery Rock acquisition. In addition to $100 million in investment securities, Slippery Rock added $172 million in total loans. A $200 million increase in deposits is also attributable to Slippery Rock.

The net interest margin for the fourth quarter was 3.87 percent, representing a decrease of 1 basis point and was driven by the addition of Slippery Rock. Without Slippery Rock, F.N.B.'s net interest margin would have been flat on a sequential quarter basis.

Other than the impact of the nonrecurring items I mentioned previously, non-interest income was down approximately $200,000 on a linked-quarter basis. The addition of Slippery Rock provided $400,000, and a sales campaign related to retail securities resulted in additional fees of $300,000. Our retail securities sales increased 27 percent on a linked-quarter basis and 24 percent year-over-year.

Offsetting these favorable items were seasonally lower insurance commissions and fees, lower equity security gains, and the discontinued Sun Bancorp revenues.

Noninterest expense totaled $38.6 million in the fourth quarter, representing a $2.7 million increase over last quarter and is entirely achievable to Slippery Rock. As I mentioned previously, $1.7 million of the increase was merger-related expenses. Aside from this nonrecurring item, the remaining expense increase represents the addition of Slippery Rock's operations.

The efficiency ratio excluding nonrecurring items for both periods was 57 percent in the fourth quarter of 2004, a slight improvement over last quarter. As a closing item about expenses, we are please to note that the targeted expense reductions for the Slippery Rock transaction have been fully realized.

F.N.B.'s credit quality trends not including the effect of Slippery Rock performed at historic levels in the fourth quarter. The increase in nonperforming assets over last quarter of $7.4 million was attributable primarily to the addition of Slippery Rock. Nonperforming assets to total assets were at 76 basis points, up from 69 basis points in the same quarter last year.

Annualized net charge-offs were 53 basis points of average loans in the fourth-quarter 2004 versus 59 basis points in the same period last year. On a sequential quarter business, net charge-offs increased approximately $1 million due to seasonal activity at Regency and a single loan at the bank. Net charge-offs for the year 2004 were 50 basis points of average loans compared to 56 basis points for all of 2003.

The allowance for loan losses was 1.5 percent of total loans at the end of the year and nearly 1.6 times nonperforming loans, both consistent with prior trends. The additional equity issued in the acquisition of Slippery Rock, along with net retained earnings for the quarter, contributed to year-end leverage and tangible capital ratios of 6.5 percent and 4.5 percent, respectively.

At December 31, 2004, F.N.B. continued to maintain its well-capitalized federal bank regulatory capital measures. Steve, that concludes my remarks for the 2004 results.

Thanks, Brian. At this point, we will share the outlook for 2005 with you. One note for consideration, we have not included the potential impact of the NSD Bancorp acquisition, which is projected to close on February 18, just a few weeks away. I will summarize the impact of that event later in the call. I will now ask Gary Roberts to provide some corporate balance sheet and revenue growth highlights for the upcoming 12 months. Gary?

Thank you, Steve. We are optimistic that this new year will bring exciting opportunities. The completion of the Slippery Rock acquisition provided a gratifying boost to average loans outstanding at the end of last year. Building on that momentum, average commercial loans are expected to increase 12 percent year-over-year, of which 9 percent is organic. Direct consumer loans are forecast to gain nearly 8 percent while residential mortgages, indirect loans, and leases decline about 4 percent from 2005. Overall, average total loans should increase approximately 6 percent.

Average deposits and customer repurchase agreements are projected to increase on a similar trend, up 7 percent, of which 4 percent is organic. The organic growth is driven by both retail deposit strategies and attractive treasury management benefits for commercial customers.

Changing the subject, here are a few items to note about non-interest income. First, we anticipate service charges to grow pretty much in proportion with deposit growth. Wealth management revenues from trust and retail securities sales are expected to increase 7 percent. Insurance commissions and fees, up 23 percent last year, will be getting a significant boost with the full-year effect of the addition of Morrell, Butz & Junker. This source of fee income is forecast to increase 38 percent in 2005.

Summarizing these items, total non-interest income is forecast to be up over 9 percent. Slippery Rock will contribute 2 percent of that growth.

We expect asset quality to remain strong, with net charge-offs similar to our favorable 2004 results. Speaking of asset quality, we are pleased with the results of our early efforts in improving Slippery Rock's loan portfolio weaknesses, as evidenced by our year-end combined asset quality statistics.

Our integration expertise was extremely helpful relative to other tasks associated with the Slippery Rock transaction. We have met all of our expense reduction targets. Fee income opportunities have been positioned for implementation, and we had a successful data processing conversion. As a result, our staff feels very prepared for the upcoming affiliation with NorthSide Bank.

That pretty much summarizes the outlook for 2005. Now Brian will continue with some additional finance information.

Thank you, Gary. Relative to interest rate planning, we decided to break with our usual flat rate assumptions for profit planning purposes, and have instead used an increasing rate model for 2005. Specifically, we have planned for short rates to rise 100 basis points and the yield curve to continue flattening with the 10-year rate increasing only 20 basis points.

Applying this consensus outlook to the growth factors reviewed indicates that net interest income will increase approximately 8 percent in 2005, resulting in a net interest margin gradually expanding to 4 percent by the end of the year. Therefore, total revenue including the fee income Gary has mentioned should be up 8 percent in 2005. Fee income to total revenue is expected to be 29 percent for the year, equaling our 2004 results.

Non-interest expenses are projected to be increased $11 million or 8 percent year-over-year. The annualized effect of last year's expansion activity explains $7 million of the increase. The remaining increase represents a normal 3 percent expense growth, due to such things as merit increases and rising benefit costs.

We are able to maintain this relatively low increase in expense due to the productivity gains we have realized over the past 12 months. The efficiency ratio is projected to average 56 percent, but trending to 54 percent by the end of 2005.

The leverage and tangible capital ratios are projected to increase to 6.6 percent and 4.6 percent, respectively, by the year-end 2005. This assumes our cash dividend payout will remain in the range of 65 to 75 percent, which sustains our commitment to shareholders.

The effective tax rate will be slightly higher this year at 32 percent, while average diluted shares outstanding will reach 51 million before the addition of NSD Bancorp. Well, Steve, those are the particulars that will make up our guidance for 2005.

My thanks to both Gary and Brian for their presentations. Included in the Corporation's results is our Regency Finance subsidiary. That operation projects a slight 2 percent increase in loan growth for 2005, but with a narrowing net interest margin due to rising rates. However, at a return on assets of 2.6 percent and return on equity of 29 percent, Regency remains the best performing affiliate in the Corporation.

Before I discuss the earnings and growth forecasts for 2005, let me first take a moment to remind you of how F.N.B. Corporation differs from the national average. As you are aware, our geographic footprint is in western Pennsylvania and eastern Ohio, which is characterized by modest growth prospects.

Following the spin-off of Florida we defined ourselves as a high-performing financial institution that targeted a dividend payout ratio of 65 to 75 percent, providing a yield of 4 to 5 percent to shareholders. Assuming an efficient stock market, this would give shareholders a total annual return of 9 to 12 percent on a sustained basis. Further, we would supplement the modest organic growth with strategic acquisitions to enhance the Company's franchise value.

At this point, here is a recap of 2004's results. Our reported GAAP net income per diluted share was $1.29. During the year, we had some items of a nonrecurring nature. First, a gain of slightly more than 5 cents per share on the sale of two branches; and as Brian explained, nonrecurring items provided a net benefit to fourth-quarter results equaling 1 and a fraction cent per share.

Finally, due to the sale of Sun Bancorp, the fee income realized in prior years from both the data processing contract and our equity ownership position will not be included in 2005 and beyond. Therefore, this will have a negative impact on our after-tax results of approximately 2 cents per diluted share annually. Considering all these factors, we actually have comparative operating results of $1.20 per diluted share in 2004.

Having said all that, and contemplating the 2005 assumptions, as outlined by Gary and Brian, our 2005 outlook for net income is in the range of $1.25 to $1.30 per diluted share. The midpoint of this range actually represents an increase of approximately 6 percent over the comparable 2004 earnings per diluted share of $1.20, and is consistent with our 3-year target of a range of 5 to 7 percent.

This results in a 2005 forecast of a return on equity of 20 percent, return on tangible equity of 29 percent, and a return on assets of 1.3 percent. These are in line with our 3-year targets. As you can see, we're doing what we promised, delivering reliable growth and profitability and an outstanding dividend yield.

Narrowing next year's prospects down to the first quarter of 2005, we are estimating net income per diluted share to be in the range of 28 to 30 cents. We recognize that this outlook is less than the linked-quarter, but exceeds the reported results for the first quarter last year, after adjusting for the lost revenue associated with Sun Bancorp.

The sequential quarter decline is typical of first-quarter performance at F.N.B. over the years and is primarily attributable to higher expenses consistent with the start of the new year.

Following the completion of the NSD Bancorp merger in the first quarter, we expect to see an additional increase in earnings per share of 1 cent for the year 2005, excluding a onetime merger-related charges. This is consistent with the model that we detailed at the time of the announcement of the merger. Therefore, 2005 bottom-line range including NSD Bancorp is $1.26 to $1.31 per diluted share.

Although this guidance is not based on any additional acquisitions during the year, other than those already mentioned, we will continue to seek new opportunities to expand the franchise in the next 12 months. As in the past, our focus will be to enhance shareholder value while achieving accretion to earnings per share during the first 12 months.

One last item this 2005 earnings guidance does not include is the impact of the newly revised Financial Accounting Standard 123R requiring expensing of stock options. As it stands today, F.N.B.'s diluted earnings per share in '05 will be affected by 1 cent per share per quarter following the adoption of the new standard, which cannot be later than the third quarter this year.

That includes our collective remarks for this conference call. I will now turn ask operator to poll the audience for any questions. Peter?

(OPERATOR INSTRUCTIONS) James Record of Moors & Cabot.

Could you tell us -- the 60 million in wholesale leverage that you wound down, can you give us an indication what the spread was? You said it was negative, I believe. And also when during the quarter that happened?

That happened at the end of the quarter, late December, James. And that was about an 80 to 90 basis point negative spread.

Okay. I believe in your guidance you said you thought your margin might approach 4 percent by the end of the year. Would that be your expectation for the fourth quarter, or before for sort of at the end of the fourth quarter?

When I picked that up, I was looking at December of '05 in our profit plan. I cannot recall what the fourth quarter averaged, but at the end of the year is what I was meaning from, today's level of 3 87.

If the yield curve flattens less than your assumptions that you provided us, can we assume your margin will be a little bit higher?

I think we have tried to position ourselves to be in the neutral position. I cannot give you that guidance, James. You are asking a question I'm really not prepared to answer.

Okay. Thanks.

David Honold at KBW.

My first question was on the effective tax rate in the quarter. It looked a bit lower. Is that just basically due to the gain on the Sun stock?

No, I think we had a couple of items. We implemented a couple of tax strategies during the year that saved us some state taxes, and they really came to a head in the fourth quarter. So we had a couple of accruals that reversed. But I think those items were in the hundreds of thousands range, not a big movement. Did not see that as -- we also had some other things that offset in other places. So a couple of items in the state tax savings that would be hitting the fourth quarter.

Okay. If you are able to can you give us a little more detail on the loan growth by category? Or is that pretty much just what you have that gets you to the 9 percent organic number?

I think we gave you some pretty good detail there.

We had commercial at 9; consumer I think on a weighted average basis came out at about 5 percent. Different categories within there of course varied accordingly. One, our home equity and revolving lines up about 7 percent. Direct lending as I recall -- I don't have those numbers in front of me, but about 5 percent.

Then our mortgages we continue to expect that to run down. I think we have about 8 to 10 percent run off in there.

It's an 8 percent decline.

Then indirect loans have been running down through the year. But we have seen some favorable returns in the credit quality side. So we have implemented strategies that we will be seeing that flatten out here in outstandings in the first quarter. And looking just to maintain a flat (technical difficulty) 2005. Those would be the big categories, David.

Thanks. That's helpful.

Andy Stapp at Cohen Brothers.

I did not catch the loans and deposits that Slippery Rock brought to the table. Was it 174 and 200? Did I catch it right?

I think we had Slippery Rock had 172 in loans and it was a little over $200 million in deposits.

Okay. The other question I had, if your interest rate sensitivity position is essentially neutral, how are you getting the increase in margin? Is it through a shift in asset mix?

No. Well, yes, a little bit of that because of the loan growth in 2005. But what we have seen, as I have reported in other calls, is the new loan rates were at lower levels than what we experienced in our portfolio. So through 2005 -- I'm one of those that has the cold here. I am struggling a little bit.

Through the year of 2004 we saw our portfolio yields declining as the new rates. As we experienced the rate increases in the back half of 2004, our new loan yields were going on at or exceeding the portfolio yield. So we are looking at 2005 where our portfolio yields, when we get towards the middle of the year, will turn up. That is giving us the ability to manage our margin.

The other side of that that is important is that about 3 years ago we had a pretty big push on what was called step CDs. Those were at the 5, 6 percent cost of fund basis. A lot of those if not all of them are maturing here in the first, early part of the second quarter. So we're getting a slight benefit out of the cost of fund side too that allows us to manage in the higher rate environment our deposit rates.

Okay. The increase in NPAs coming from the Slippery Rock acquisition, can you shed some light on what type of credits they are? How quickly you think you can get these problem loans resolved?

Gary, do you want to tackle that?

The specific dollar increase I don't have. Types of credit, they're traditional real estate credits for the most part. Many of them are at this point in time near breakeven cash flow. They may be in some cases longer-term workouts, to be quite candid, Andy. That is not that we don't expect that these credits will be repaid or that we expect or anticipate credit loss resulting from the credits. But they look like they may be on the books for a while.

Adding to that, because First National Bank has a special assets department that focuses on our seriously delinquent or nonperforming assets, I would expect, and we have already demonstrated, because we have been working with them well before the merger was completed, and that is why we have made so much progress on their asset quality. I would expect that to continue.

That is the economy, if we see the pickup that we think is going to happen in 2005 and beyond. Obviously, market rents increase a little bit, we are going to turn those cash flows around in a hurry. If that happens, of course, we go from nonperforming; and these credits are refinanceable at that point.

Okay. I thought compensation expense would be down on a linked-quarter basis due to the Slippery Rock acquisition. But it was actually -- or I thought it had been up, but it was actually down. Can you shed some insights there?

On the linked-quarter basis?

Yes. It was essentially flat.

I am going to look at that. You were expecting what?

I would have thought, with the addition of costs coming on from Slippery Rock, that it would be up.

We had a number of items going through there that essentially offset. But there is quite a bit of headcount reduction in the Slippery Rock acquisition. There is also the benefit of FICA that hits the fourth quarter with a number of our people. We did have a little bit of reversal of some incentive comp, but not a lot to make up that. So that could be just enough to cause it to move.

Okay. Are all the cost saves achieved at Slippery Rock?

Absolutely.

Yes, they were.

When did that occur?

We closed them on October 8.

When did the conversion occur?

That weekend.

Same weekend.

Our team's pretty good and well practiced at that.

Good.

That is our same plan for NSD. We are going to close it on the 18th, hopefully, subject to their shareholder approval; and also convert that same weekend.

Good. The other question I had regarding other noninterest expense, if you back out the flubbed (ph) prepayment penalty, that expense item was up around 1.3 million on a linked-quarter basis. Was that merger-related expenses?

A lot of the 1.7 million related to Slippery Rock's onetime would have gone through that other expense category.

Lastly, on your non to maturity deposits, did you raise rates on those during the quarter? Now accounts, your interest-bearing transaction accounts?

I know what you're talking about.

There were no adjustments.

It's a little bit here and there on some promotional items, but no.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Kelly Hinkle at McConnell, Budd.

I might have misheard you here, but in talking about probable earnings, when you came up with a number for 2004 in your estimate, did you say that 2004 earnings were $1.20?

We got to the $1.20 if you take out the gain that we experienced from the sale of the two branches; take out the non-recurring items, the gain on the sale of the branches, the revenue from SunBank, both from the data processing contract that we had enjoyed, which was terminated, and also from our equity ownership in Sun.

So that the branch plus the net benefit in the fourth quarter, Kelly, add up to about 7 cents. The 129 minus the 7 cents. Then as Steve just mentioned, the recurring revenue from SunBank disappeared in the fourth quarter.

As we said last quarter and repeating this quarter, that is about a net benefit of 2 cents a year to us. So we were building our '05 outlook from the really recurring business side.

So you're backing up the fees you would get from Sun?

Yes, trying to give you an understanding of how we are delivering for '05.

Discontinued operations, then (ph)? Okay, thank you.

Bob Stacy, (ph) private investor.

I'm an individual shareholder of NSDB. My question is, after the completion of the merger next month, do you expect the quarterly dividend per share to remain at its current level of 23 cents a share?

Yes, that is our expectation at this point in time.

Okay, thank you.

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

Yes, thank you Peter. Thank you all again for joining us today. Replays of this call will be available through January 28 by calling 1-800-332-6854 with the code 3044. You can also access a transcript of today's call on our website, www.FNBCorporation.com. Thank you all again and have a great weekend.

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. Thanks for your participation.