FNB Corp (FNB) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FNB first quarter 2005 conference call. This conference call of FNB Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements relating to present or future trend or factors affecting the banking industry and, specifically, the financial operations, markets, and products of FNB Corporation. These forward-looking statements involved certain risks and uncertainties. There are a number of important factors that could cost 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 rates and environment that may reduce insurance margins. Changes in prepayment speeds, loan sale values, 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. Changes in the securities markets or risk factors mentioned in the reports and registration statements FNB Corporation files with the Securities and Exchange Commission.

FNB undertakes no obligation to release revisions to these forward-looking statements, reflect events or circumstances after the date of this call.

At this time all participants above have been placed on a listen only mode and the floor will be open for questions following this presentation. It is now my pleasure to turn the floor over to your host, Mr. Stephen Gurgovits. Sir, the floor is yours.

Thank you, Dana. Good morning, everyone, and welcome to FNB Corporation's first quarter 2005 conference call. I am Steve Gurgovits, President and CEO of FNB. Joining me on this call is Brian Lilly, our Chief Financial Officer. Today's conference call marks the start of our second fiscal year following the spinoff of the Florida operations at the beginning of 2004.

The first year of our return to our roots in western Pennsylvania and eastern Ohio was marked with great success in achieving our goals of business expansion, high-performing results, and strong commitment to shareholder value, as evidenced by the notable dividend payout and high dividend yields provided last year. The year 2005 is starting off with continued success in financial performance achievement and high cash dividends for shareholders.

Regarding first quarter 2005 results, we are pleased to report net income of $0.28 per diluted share. This amount included NSD Bank or merger expenses of approximately a penny a share. If we could exclude these merger costs, our net income after tax was $0.29 per diluted share. This compares to $0.28 per diluted share in the first quarter last year excluding a $2.7 million branch gain and discontinued income from Fund Bancorp. Further these first quarter results are consistent with the guidance we gave in our January conference call and match the consensus street estimate.

Excluding the merger-related costs in the first quarter 2005, we achieved a return on equity of 16.3%, a return on tangible equity of 27.7%, and a return on assets of 1.9%. We believe our returns on equity will place us as being in the top quartile of bank holding companies of our size in the United States. Regarding shareholder value, because of this quarter's favorable financial performance combined with our confidence in future expectations, we were able to deliver a high cash dividend payout.

In the first quarter 2005, FNB distributed 87% of its net income to shareholders. This payout percentage is unusually high because only a partial quarter of the income from the NSD bank acquisition which was consummated in mid-February is included. If NSD's income has been included for the full quarter the payout ratio would have been 76%, which is consistent with our plan. This payout does demonstrate our steadfast commitment to deliver high returns to our investors. On an annualized basis, the first quarter dividend represents a dividend yield of 4.8% at quarter end.

This yield places FNB in the top 1% of all bank holding companies with $3 to $10 billion in assets in the Continental United States.

Now I will ask Brian to provide details about this quarter's earnings.

Thank you, Steve, and good morning to everyone. Net income for the quarter totaled $14.9 million or $0.28 per diluted share and compares to $16.2 million or $0.34 per diluted share in the same period last year. As Steve noted in both periods, we had items that impact comparability. During the first quarter of 2005 we had $485,000 of after-tax expenses related to the NSD acquisition; and in the first quarter last year, we recorded a onetime $2.7 million after-tax gain on the sale of branches. As well as $369,000 after-tax in discontinued income from SunBank Corp.

As you may recall SunBank Corp. was acquired by Omega Financial Corporation in the fourth quarter of 2004.

Adjusting for these items, we have earnings after-tax of $15.4 million in the first quarter of 2005 vs. $13.2 million in the same period last year, representing a 16.9% improvement year over year. On a per diluted share basis, excluding these same items, earnings were $0.29 in the first quarter of 2005, compared to $0.28 for the first quarter of 2004 an increase of 3.6%.

The average number of diluted shares outstanding was 53.8 million, an increase of 6.7 million diluted shares from the first quarter 2004 due to the three acquisitions -- Morrell Butz and Junker Insurance Agency; Slippery Rock Financial Corporation; and NSD -- all of which were completed after the end of the first quarter of 2004.

As you will note, these acquisitions contributed significantly to our financial results for the quarter. Net interest income on a fully tax equivalent basis totaled $46.7 million representing an increase of approximately $3.9 million or 9.1% from the first quarter of last year. This improvement was driven by volume increases and earning assets.

The addition of Slippery Rock provided $294 million in additional average earning assets with 63% in the loan categories. And as Steve provided average earning asset growth of $197 million over the same period as last year with loans making up 68% of the increase. The impact of NSD appears to be low when considering its total asset size of over $500 million. The difference represents the fact that NSD was only included in FNB's results since the closing of the transaction in mid-February and, therefore, average balances represented approximately 1/2 of their total earning assets.

Organically, average loans -- excluding the planned declines in indirect auto loans, leases, and residential mortgages -- grew 2%. On the liability side of the ledger, average deposits in customer repurchase agreements were $3.9 billion, an increase of $421 million or 12% over the same period last year. The majority of this growth -- $394 million -- was attributable to the two bank acquisitions noted earlier leaving organic growth at an increase of 1%.

Let me add that over the past year we have (indiscernible) intermediated approximately 2% of deposit balances to our successful retail security sales and created value to the deepening of our customer relationships and the generation of valuable fee income. The net interest margin for the first quarter was 3.96%, 9 basis points wider than the fourth quarter of last year and was driven by higher earning asset yields. Consistent with our interest rate risk modeling, we have benefited from rising market rates; and we continue to maintain a neutral rate risk position given a rate shock of +100 basis points.

2 additional points with regard to our net interest margin going forward. First, adding NSD has narrowed our margin by 4 basis points due to the mark to market adjustments in the purchase accounting. Second, there is a significant competition for loans. Consequently we have not seen lending yields move at the same increase pace as market rates. The continuation of these pricing practices will make it difficult to expand our margin as we had originally planned and may result in a small contraction going forward.

Noninterest income at $18.4 million was up approximately $2.3 million or 14% for the first quarter last year after excluding a previously mentioned branch gain discontinued income from SunBank Corp. The additions of Slippery Rock and NSD provided a $1 million increase year-over-year, principally in service charges on loans and deposits. Retail securities commissions and trust income were up a combined 3% from the same period last year.

Further, insurance commissions and fees at $3.8 million were up approximately $1.4 million or 57%. Most of which is attributable to the addition of Morrell, Butz and Junker at midyear 2004. It should be noted that contingency fees were $725,000 for the first quarter of 2005, compared to $509,000 for the same period last year. This form of income is unique to the first quarter of each year and therefore should not be used in modeling fee income for subsequent quarters this year.

Overall noninterest income for the quarter represented 28% of total revenue -- up from 27% from the same period last year, excluding the branch gain and SunBank Corp items -- and is approaching our goal of 30%.

In summary excluding the items previously mentioned revenue on a fully tax equivalent basis for the quarter was $65.1 million, which is a notable 10.6% increase over the first quarter of 2004 and a 4.4% improvement on a linked quarter basis.

Noninterest expense, excluding merger costs, totaled $39.6 million in the first quarter of 2005. That is a $5 million increase over the first quarter last year and is principally attributable to the impact of the acquisitions mentioned earlier, which were not included in last year's numbers.

Historically, we have had higher expense levels in the first quarter due to employee taxes, stock awards and lower salary deferral related to loan originations, to name a few. The NSD acquisition certainly had an impact as we absorbed their operations and realized our cost savings targets.

Going forward, we expect our expense levels will drive closer to our efficiency ratio goal of 55%. FNB's credit quality trends continue at favorable levels. In fact, annualized net charge-offs were 43 basis points of average loans in the first quarter of 2005 vs. 56 basis points in the same period last year.

Further, net charge-offs were 10 basis points lower on a sequential quarter basis. Nonperforming loans and total loans were 89 basis points down from 92 basis points last year and 94 basis points last quarter. Nonperforming assets to total assets were at 69 basis points, down from 72 basis points in the same quarter last year, and 76 basis points last quarter.

As a direct result of these improving trends and successful problem resolutions related to the acquired assets, we reduced the provision for loan losses to $2.3 million in the first quarter 2005 vs. $4.6 million for the same period last year. The allowance for loan losses continues a strong 1.43% of total loans at the end of the quarter and nearly 1.6 times nonperforming loans. Both consistent with a year ago. These excellent asset quality trends are expected to continue in the future.

Additional equity issued in the acquisitions of Slippery Rock and NSD -- along with the net retained earnings for the quarter -- contributed to the quarter end leverage and tangible capital ratios of 7.2% and 4.4%, respectively. If NSD had been included at the start of the period instead of mid-February the leverage ratio would have been 6.7%.

At March 31st, 2005, FNB continued to maintain its well-capitalized Federal Bank Regulatory Capital measures.

Steve, that concludes my remarks for the first quarter's results.

Thank you, Brian. It is very gratifying to see our strategic expansion initiatives contribute to balance sheet and revenue growth and overall financial performance. Now that we have achieved our first quarter goals, we are diligently working on sustaining improved earnings for the second quarter 2005. We are challenged in this effort by today's uncertain economy and the atmosphere of lower consumer confidence.

But we remain confident and are encouraged by favorable trends transpiring in our market. For instance, commercial loan demand is starting to pick up speed. The pipeline for commercial loans, 90 days or less, is growing and currently stands at $160 million -- an increase of 63% over year end. As a side note, we have historically closed approximately 83% of the loans in the less than 90 day pipeline. The new market areas FNB has entered through the acquisition of NSD are starting to bear fruit.

We plan to more than double the size of the commercial lending team in that region to grow the commercial relationship opportunities in these markets. Those of you familiar with FNB know we do not seek out shared national credits to pad our commercial loans outstanding. We grow through establishing personal banking relationships with commercial clients that operate in our home markets. This core growth supports the expansion in our loan portfolio; and it is successful because of our own core competencies and our experienced lenders who possess in-depth knowledge of the local community.

In addition to core competencies and local knowledge, we also offer our commercial clients access to cutting-edge innovation in the treasury management area. For example First National Bank has recently received approval to offer its commercial customers remote deposit services. This means they can deposit checks electronically without having to leave their offices. First National is the only bank in the Cleveland Federal Reserve district to receive approval for this product.

We call the product First Desktop Banker. In fact, we are told that we are one of only 19 banks in the entire country that offers this service. We are proud of this accomplishment and the opportunities that it will bring to FNB and its customers. We also continue to be encouraged by the favorable commercial customer response to our treasury management products that are driven by relationship banking, sweep accounts and a wide array of the most up-to-date electronic funds management and reporting tool.

As an example, customer repurchase agreements have grown 49% over the past year. Additionally, the wealth management area has been growing over the past two years in trust and retail securities product through sales penetration into our customer base. As you may know, the stock market directly impacts trust asset values under management; and the market's current bearish posture doesn't contribute to improving trends.

In spite of that, our Trust Company continues to see growth. On a cost basis, the assets are up $15 million or 1.3% over year end. Further, through efficiencies and expense reductions, net income from trust operations is up 23% in the first quarter of 2005 compared to the same period last year. In addition, retail securities sales are up 5% in the current quarter, compared to the first quarter of 2004, spurred by new marketing initiatives launched in early March of this year. We have also put into motion other tactics to increase sales volumes and reduce expenses in this line of business and expect them to result in improved earnings as the year progresses.

We do remain cautious, however, as net interest margin pressures still exist. This pressure is more the result of competition rather than the anticipated federal reserve rate increases that have dominated our outlook in the past. Along with our high expectations for commercial lending prospects comes the pressure of too many banks chasing too few loan opportunities. This usually results in lower yields on loans as banks compete for business and potentially compromise credit quality standards. We have no intentions of reducing our emphasis on credit quality or our high-performance standards.

However we are expensing yields below projected levels. Further, we may also experience margin pressure due to competitive deposit pricing and this could become somewhat irrational over the course of the year. Having said all that, we remained comfortable with the second quarter 2005 consensus street estimate in the range of $0.30 to $0.32 per diluted share and the consensus for the full year 2005 which of course excludes a merger-related cost for NSD.

In closing, a reminder that our guidance is not based on any additional acquisitions during the year. However, we will continue to seek new opportunities to expand the franchise. And if successful our focus will continue to be to enhance shareholder value while achieving accretion to earnings per share during the first 12 months as we have already demonstrated.

This concludes our collective remarks for this conference call. I will now ask the operator to poll the audience for any questions.

(OPERATOR INSTRUCTIONS) Andy Stapp.

Cohen Brothers & Co. The percentage increase you mentioned in trust asset. What was that again over year end?

On a cost basis I believe I said it was $15 million or (MULTIPLE SPEAKERS) .3%. That's on a cost basis.

Where are you seeing the loan competition? Is it larger banks, smaller banks?

On the commercial side, Andy, which is where we've spent a lot of our time and attention and especially with the new market that NSD provides is in Pittsburgh. There's a lot of competition out there but what we're finding in Pittsburgh that's working to our advantage, frankly, is some of the larger banks in that market are tending to concentrate on commercial loans of $10 million or more, leaving a segment of the market below 10 million which is, frankly, our bread and butter less competitive.

Now there are other banks, other regional banks that are competing for those loans. But we think we can hold our own against that. So I would say it is generally fairly competitive up and down the scale; but in the Pittsburgh market, we seem to have developed this niche where the bigger banks are looking for bigger deals.

You mentioned that commercial loan demands improving. Could you give us a flavor of where you see the most improvement, maybe also discuss how the local economies are faring in the markets you serve?

Let's start with the second part of that first. Our sense of it is that things continue to gradually becoming a little better. Having said that you have to realize here Andy, in the first quarter of the year -- January and February -- usually pretty dull months. The weather is not favorable and it just seems coming out of the holidays into those doldrums, activity slows down some. We were very happy to see March come and the activity picked up substantially and it has continued into April. So our sense is the economy is getting a little better throughout our footprint.

Where we're seeing a lot of activity is in our new Pittsburgh market. If you look at our pipeline over 90 days, the Pittsburgh bank has the second highest over 90 day pipeline of any of the five regions we operate in. So we have had a lot of success with our new team in that market.

Have you seen much migration from deposits flowing from money market accounts into time deposits?

We've taken the approach in our deposit pricing to target CDs as we have in many of the other competitors. I would say that we have been focused on lengthening time deposits slightly. And we have been successful in that the last quarter. But I would say, it's a wholesale move to jumping in and locking in. I think the consumer is still looking to stay somewhat flexible in the uncertain shorter term rate environment.

Could you tell us what the linked quarter organic loan growth was or if you don't have that handy, would you tell us the amount of NSD loans that you picked up in the acquisition? And it would be great if you can also provide the same information for deposits.

I can tell you a couple of things. I think in my comments you can calculate -- I'm just doing the math in my head kind of quickly here. The NSD of course only had a partial impact for the quarter so of the total earning asset number that I gave you, 133 million of that would be the loan component and 160 million of that number would be the deposit component. That impact of the average balances.

Great.

The year-over-year or the quarter-over-quarter loans -- just repeating a number of things that Steve said first, we always see the first quarter runoff; and it begins really in late fourth quarter historically for our consumers' balances in particular. So we are about flat on the average basis, quarter over quarter. For the categories that we're focused on -- commercial reg installments and our line of credit businesses.

Andy, if I could add to that. Especially our commercial loan department is pretty much on top of their production goals for the year but we did-- we would've gotten more traction in the first quarter in our standings. We had $37 million round number in unexpected payoffs. Now the good news there is these aren't customers who left our bank to go to a competitor. These were customers who entered into transactions that we hadn't anticipated. For instance, in our area market we had a company sell to a Canadian conglomerate and that resulted in about $12 million in payoffs of loans. Those types of activities, we just unfortunately had them in the first quarter to the tune of about 37 million.

Otherwise we would have shown better traction and outstandings, so you can't predict those but, hopefully, we can go through the remainder of this year without those kinds of surprises.

It appears your deposit service charges declined organically on a linked quarter basis. Is there anything driving this other than higher earnings credits?

I think we feel a little bit closer to flat but there is certainly some higher earnings credits. And also I think we have seen a number of other companies too. The free checking is having an impact. If we get the benefit of that sitting in our account. The third item would be that our first quarter is always a little bit lower; and as you saw in our trends of last year it gets picked up in the spring and summer months.

And March was better than January and February in service charge.

The linked quarter increased in compensation expense. Is that attributable to the NSD acquisition?

I think it's the number of items that every quarter every first quarter (indiscernible) from the base operations; as NSD added to that, we do have some stock programs with our directors in particular that get expensed immediately. We have a number of items that go through the compensation line and so as you look forward in your modeling, there's going to be a dip in expenses from the first quarter to the second quarter. And so the targeting towards that 55% overhead ratio -- we are looking pretty good there as we go forward.

I believe your effective tax rate was up a little bit and was 31% in the first quarter. Is that a good run rate?

Yes. Yes. It bounces a little bit above that depending on our level of tax-exempt lending and those types of variables.

Now that you completed the NSD acquisition are you going to do any de novo expansion?

Andy, as we said here this morning we don't have any plans on the drawing boards for de novo branch. We do have plans and want to continue to expand in the Pittsburgh suburbs. Whether that ends up being by acquisition or de novo, time will tell. But as we sit here this morning we do not have any plans for de novo branches.

I believe trucking is a big industry in some of your markets. How will the increase in fuel prices impact some of your more energy-dependent customers?

We have a very prominent trucker who is on our board so we tend to keep pretty close to that industry. You're right -- it is a big industry here. They learned sometime ago, Andy, that with the rising fuel cost most of their contracts with their suppliers have fuel escalators in them now. So I think they protected themselves pretty well.

When was the NSD conversion completed?

February 18th. We actually had the shareholder meeting on the 18th in the morning, closed the transaction at the end of the day on the 18th and converted the data processing over that three-day weekend.

Opened up that Tuesday morning on our processing system as branches First National.

And were the costs -- are you anticipated -- were they realized?

We are nailed on those by the end of the quarter. We are all set so we are running into the second quarter of full (indiscernible) realization on the SD (ph) acquisition.

James Record.

Moors & Cabot. Andy asked a lot of my questions.

Andy had quite a list.

I guess maybe as a follow-up you said, Brian, I think that expenses salaries would drop between the first and the second quarter. Is that even, given the fact that you only had half of NSD, have a quarter of NSD in there? First quarter?

Yes.

So you expect an absolute drop?

Yes.

Then maybe another item in the expense line. Occupancy and equipment that was flat, linked quarter despite the fact that you added NSD, I guess, for half a quarter. Is that down seasonally in the first quarter or -- ?

Some of those expenses are timing, maintenance and other. So I think we will have a slight increase in that to reflect the acquisition but no anticipated increases for anything else.

Your other income? Is down pretty significantly linked quarter and year-over-year. Is there anything one time in nature there or --?

The amount here in the first quarter, plus a little bit increase from Northside, will be what we will be seen going forward barring any unusual items. Of course in the fourth quarter, we covered a number of items including the SunBank Corp income from the termination of data processing contract, a write up of a stock. We had a number of other items go through there and then last year, some bank income in total as we talked pretax basis, almost $600,000. And a couple of other repo type items, which are up and down.

So if I adjusted last year for those amounts, we would be sitting right about the 1.3 million again. So the 1.3 million as we reported in the first quarter -- 1.4 million increased a little bit is where I would target that.

Can you give any more information on what the marked to market adjustments were, at NSD? And to what extent that fit into your tangible book for share? And then also, I guess if I could get clarification that you said NSD was hurt the margin the first quarter or --?

Yes the marked to market on about the balance sheet is going to -- we saw in March, a slight narrowing as a result of bringing on those asset and deposit mix with their marks of the rate environment as of February 18. So we have equated that to about 4 percentage points -- excuse me basis points -- on the 396 reported. On the details on the marked to market, James, you got me there. Not one I was ready to get into the details of.

David Honold.

KBW. Just want to ask a follow-up, maybe on the margin, because it looks like you had some pretty decent expansion despite the negative impact of the marked to market adjustments. Brian, could you talk a little bit more about what you are expecting for the rest of the year, what balance sheet dynamics could drive further expansion from here?

Well, we've always tried to maintain a neutral rate risk position. And we see that in the foreseeable future for the number of ramps and rate shock (ph) scenarios. But as we realized the 396 from the first quarter we will have a decrease in Northside -- as a result of Northside. I was trying to guide you guys down into the 390 maybe the high 380s or even above that. There's a range that depends really on the deposit pricing and the competitive pressures on the loan pricing. That's really what the one surprise (indiscernible) was that the historical spreads that we received on our commercial and retail loans is just not being realized the early part of this year. I believe that it is going to get back to normal, as the year progresses.

But, certainly, the competitive pressures are there.

That's helpful; and can you remind me, I didn't catch what contingency fees were in the quarter for insurance?

$725,000.

What is the full quarter impact from NSD on the tangible capital ratio sort of pro forma?

Tangible capital ratio is a period (indiscernible) so 4 4 is the (inaudible).

Peter Winter.

Harris Nesbitt. Brian, you just talked about the margin guidance, low 390s to high 380s. Is that a full year or is that what we should expect in the second quarter?

We're looking at -- who knows where rates are going to go and (indiscernible) pressures; but I think as we start here in the second quarter that's it. And as we kind of model out the rest of the year, it felt like we weren't going to be able to expand the margin. But it really depends on the competitive pressures. I think think the balance sheet is positioned well to realize -- not be hurt or not be significantly helped, as I said, more neutral.

I guess there are three loan portfolios that you are looking to reduce. The indirect auto, auto leasing, residential mortgage. Can you just give an update where you are and how big those portfolios are and how much you expect to run off this year?

The leasing, the good news about that, that's about gone. I can stop saying that and probably should. Residential mortgages, that has been running down at a normal pace I'd say about $8 million a quarter -- maybe a little bit more. So that will be a slow leap. We are not adding anything to that of significants. The indirect loan portfolio -- couple years ago, we had credited sheets that we addressed immediately and that's one of the reasons why our credit quality is improving right now. We've got about two years of our own bookings in there and we like what we're bookings. But we just can't get enough of it to support the balance that is out there.

I think the targeted balances for us now, adding in the other acquisitions, we are looking something more in the 350 to 400 range; and I think our balance is now on the spot basis -- pulling out something here in the 489 range. So that is going to continue to run down and it will take a little while to get there.

Do you have any idea how much is coming off a quarter?

I guess I could do the quick math and get about an average duration in there. I think on a quarterly basis, we're probably looking at about $16 to $20 million a quarter.

The final question which is a two-part question. One, I guess you did three acquisitions last year. Two-part question. One is, what is the appetite for more acquisitions or are you more focused on integrating those deals and, secondly, what is the M&A market like in your markets?

Peter, our strategic plan is to take advantage of the organic growth that we can get and we realize it's modest in these markets. We want to supplement that with strategic acquisitions, hopefully in markets that will have some good demographics. And our two bank mergers last year in Butler County and Northern Allegheny County have better demographics because they get the population flow out of the Pittsburgh metropolitan area. The demographics are really good there; and I think we'll have opportunity.

So we want to continue to look to expand in the Pittsburgh suburbs. We also have an eye that someday we would like to get out of the mountains more into central Pennsylvania. Again, where the demographics are stronger -- and then in Ohio where we have 11 branches, we probably would like to develop some fill in strategy there down the road. But we don't want to -- we don't want to buy just to buy. We want to buy things that make sense that we can -- that are useful and create shareholder value for us. We do think that Pennsylvania's still rather unconsolidated and we would expect over time that the consolidation will continue in the bank size we're looking for. Partially because competition is good, strong, partially because the regulatory environment is getting more difficult with Patriot Act, BSA -- things like that.

And then, you get into the Sarbanes-Oxley and the other things that are coming down the road. And it's difficult at that size to have the resources to do everything you want to do. (MULTIPLE SPEAKERS)opportunity.

Is the pricing still pretty irrational? Is that one of the -- has that been an issue at all?

I think the price expectations, obviously, the currencies are falling off as the sectors has suffered recently in the market. My suspicion is the expectations of potential sellers probably haven't adjusted accordingly.

(OPERATOR INSTRUCTIONS) David Darst.

FTN Midwest. Can you comment on whether your rural footprints, rural markets are giving you any insulation from deposit pricing competition?

Yes. This is an interesting franchise because we do have a number of branches in more rural markets. We have a number of branches in communities where we are the only bank in town. That's a double edged sword.

On the one hand, it does give you the insulation from deposit pricing and loan pricing for that matter. But on the other hand, you don't get the demographics and the growth that you're looking for. So that's why we are contented to run those branches very profitably in those communities while at the same time looking to Pittsburgh and other places for the growth. That's really the strategy.

Okay and a lot of the banks that I think you would target as an acquisition opportunity are the smaller ones that Sarbanes-Oxley could become a burdensome cost for. And the dates for those banks to comply to move in the 2006. Has that created any conversation or any change in some of the targets that you had perceived?

I clearly think between the more intense regulatory environment with BSA (ph) and the Patriot Act, for instance, can Sarbanes-Oxley on top. I definitely think -- lease (ph) is what I hear in my conversations. That there are a lot of banks starting to talk about whether they should pursue strategic alternatives; and we are always out there trying to tell our story, trying to make people familiar with our Company -- especially our strong dividend and the liquidity of our shares -- and hopefully some of these conversations might develop into something worthwhile down the road.

Kelly Hinkle.

McConnell Budd. I was wondering if you could give an indication as to when you expect to reach a 55% efficiency ratio?

I'd like to do that in the second quarter here. I think we have a fighting shot at that.

Previously you had given assumptions about average loan growth for the year of 6%. You still think that number is achievable or not so much after the first quarter?

That was also in our targeted category. It's not across all (indiscernible).

I was under the impression that it was total average loan growth for the year but I could have had it wrong.

There's a mix in there that's certainly off to the start, we've forecasted that we would be slow in the first quarter. And with the activity in March and April we are very encouraged.

James Record.

Can you tell me why -- I know you said this in your opening comments -- but what your charge-offs were at the finance company if that contributed to the improvement?

I don't have that specifically but I would tell you that the finance company was pretty level, year-over-year. That wasn't the source. The bank actually had at least in my experience here, the lowest charge-off for the quarter that it's ever had. Net charge-offs were 23 basis points at the bank. So we are getting it out of the business and the consumer portfolios of the bank.

And you think that could continue or at least close that range?

Yes.

We have expectations, James, that our asset quality will continue to improve throughout the year.

Quick on the securities portfolio. Seems like it was up about 70 million -- I thought NSD had about 160 so just maybe your posture on your securities going forward?

We certainly -- I guess I'm not sure, maybe be a little more specific.

It seems like if you added what NSD had pre-deal to what you guys had pre-deal that your securities were down maybe 100 million.

I think we were pretty close although we did do -- at the end of the year -- we did sell off some higher -- well, we sold off some lower yielding investment securities and then retired some higher costs, Federal Home Loan Bank. And I think that was late fourth quarter. So if you look that average to average, that's probably what's influencing that. It wasn't a big transaction but that would influence the quarter to quarter link.

Gentlemen, I am showing no further questions in the queue. Did you have any closing comments?

Yes. Thanks Tina. As a point of information for our shareholders, the Corporation has distributed its annual report, our 10-K proxy statement for the upcoming annual meeting. This meeting will be held on May 18th at 4 PM in the Howard Miller Students Center at Teal (ph) College in Greenville, Pennsylvania. We encourage all shareholders to vote by proxy and attend our annual meeting. If you hold FNB stock in street name and have not received our proxy material, please contact your stockbroker.

This concludes our conference call. Thank you for joining us today. Replays of this call will be available through April 29 by calling 1-800-332-6854 with a code of 3044. You can also access the transcript of today's call on our website, www.FNBCorp.com.

Thank you for participating and have a great weekend.

Thank you, gentlemen. Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful evening.