FNB Corp (FNB) 2005 Q2 法說會逐字稿

This conference call of FNB Corporation and the reports that follows with the Securities and Exchange Commission often contain 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 prepayment speeds, loan sale volumes, chargeoffs, and loan loss provisions, less favorable than expected general economic conditions, legislative or regulatory changes that may adversely affect the businesses 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 or to reflect events or circumstances after the date of this call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to introduce your host, Mr. Stephen Gurgovits. Sir, the floor is yours.

Thank you. Good morning, everyone. Welcome to FNB Corporation's conference call for the second quarter, 2005. I am Steve Gurgovits, President and CEO of FNB. Joining me on this call today is Brian Lilly, our Chief Financial Officer. Continued success and financial performance achievements and a high-cash dividends to shareholders accurately describe FNB's second-quarter 2005 results. We are pleased to report that we met our earnings guidance and matched the analyst consensus estimates for the quarter. As we forecast, net income for the second quarter was $17.5 million or $0.31 per diluted share. In the second quarter, 2005, we achieved a return on equity of of 15.4%, a return on tangible equity of 30.2%, and a return on assets of 1.25%. Each of these measures matches or exceeds our stated financial goals.

Sustained achievement of our goals at a high performance level is at the heart of the Corporation's investment thesis as outlined by the Board of Directors. Recognition, therefore, of our efforts is very gratifying. In June, 2005, in the ABA banking journal, FNB was recognized as having the ninth highest return on equity in 2004 of all banks and thrifts in the United States with over $3 billion in assets. However, the challenge to maintain high performance is always at the forefront of the Corporation's vision. These second quarter results exemplify our ambition and drive to maintain our commitment to shareholder value. I mention this because these financial achievements reflect the successful execution of the basics that resulted in a 3% increase in total revenue and a 4% reduction in operating expenses on a linked-quarter basis.

Particularly noteworthy is the strong contribution to revenue from loan growth, especially in the commercial and direct installment portfolios and consumer lines of credit. As our regular participants will remember, these loan portfolios have been the Corporation's primary focus over the past few years. These loan portfolios have grown at an annualized rate of 6.7% since the end of the last quarter. We anticipate the commercial loan growth to continue for the remainder of the year as the 90 days or less loan pipeline is growing, and currently stands at $158 million. An increase of 61% over the 2004 year end. Our track record in this area has been a closure rate of approximately 85% of the loans in the less-than 90-day pipeline.

During the second quarter, we announced the pending acquisition of North East Bancshares which have $69 million in assets and four branch offices. Principally located in the eastern portion of Erie County where FNB has not had a presence. With this accretive transaction, FNB achieves the logical extension of its branch network without having to create de novo branches, which had been our alternative plan and would have been dilutive to earnings. We expect to be able to achieve substantial cost savings from this end-market acquisition. In fact, affected employees have already been notified, and the process is proceeding smoothly. This acquisition also allows us to consolidate one of our outdated existing branches located on the west side of Erie into a new North East branch nearby that is more modern and customer friendly.

In May, FNB held its annual meeting where shareholders elected Henry Ekker, David Malone, Peter Mortensen, and Earl Wahl to the Board of Directors. At the meeting the Board of Directors announced the second-quarter cash dividend equaling a payout of 74% of the Corporation's net income, and provide shareholders with a current dividend yield of 4.5%. This dividend yield places FNB in the top 4% of all banks in the United States, with 3 to $10 billion in assets. This action is also consistent with the Corporation's investment thesis and demonstrates our continued focus on delivering high returns to our investors. Now I will ask Brian to provide the details about this quarter's financial results. Brian?

Thank you, Steve, and good morning to everyone. As noted earlier, FNB earned $17.5 million in the second quarter or $0.31 per diluted share. These results compared to $14.9 million or $0.28 per diluted share on a linked quarter basis and $15.1 million or $0.32 per diluted share in the same period last year. Expenses related to the NSD Bancorp acquisition which closed in February of this year affected reported income by $485,000 after tax in the first quarter and another $170,000 after tax in the second quarter. When we adjust for these items, our earnings after tax were $33.1 million or $0.60 per diluted share in the first six months. This compares favorably to $28 million or $0.59 per diluted share in the same period last year, excluding the one-time $2.7 million after tax gain on the sale of branches and $731,000 after tax in noninterest income received from Sunk Bancorp, which as you recall was acquired by a third third party in late 2004.

Diluted shares outstanding averaged 57 million during the quarter, represented an increase of 10 million shares over the second quarter of 2004. The three acquisitions of Morrell, Butz and Junker insurance industry, Slippery Rock Financial Corporation, and NSD Bancorp drove the increase as they were all completed after the end of the second quarter last year. We earned $48.7 million in net interest income on a fully tax equivalent basis in the second quarter. This is a 4.4% increase over the first quarter of 2005 and approximately $6.7 million or nearly 16% higher than the second quarter of last year. We attribute the year-over-year growth to additions of Slippery Rock and NSD, which added approximately $800 million in earning assets.

On a linked quarter, in addition to the full-quarter favorable impact of NSD, the improvement is attributed to the growth in loans, as Steve mentioned earlier. Total loans grew at a pace of 6.6% annualized from the end of the first quarter to the second. The yield on earning assets for the second quarter was 5.96%. Essentially unchanged from the previous quarter. As we discussed last quarter, the continued flattening of the yield curve and strong competitive loan pricing has challenged the ability to increase earning asset yields. However, on the liability side, our cost of funds increased 10 basis points, with 5 basis points resulting from the merging of NSD's higher cost of funding and another 5 basis points resulting from market and competitive pricing pressures. We have seen our retail depositors move into time deposits to take advantage of the new higher rates. And as a direct result we expect to see a gradual increase in the cost of funds. The higher cost of funds affected the net interest margin for the second quarter, which at 3.87% was 9 basis points narrower than the first quarter of 2005.

In terms of interest rate risk, at the end of the second quarter, we continued a slightly positive rate risk position given a rate shock of plus 100 basis points. But we still remain cautious about our net interest margin going forward as it may weaken slightly. Noninterest income totaled $18.3 million, an increase approximately $1 million or 5.5% from the second quarter last year. As a reminder, last year's results did include fee income from our equity investment in Sun Bancorp as well as data processing servicing fees. This revenue source ended when Sun was acquired. Reported in last year's second quarter, noninterest income was $558,000, associated with the Sun Bancorp relationship. If we exclude these fees, we realize a 9% increase year-over-year.

Insurance commissions and fees at $3.1 million for the second quarter were up $628,000 or 25% over the same period last year, and was attributable to the addition of Morell, Butz and Junker at mid year 2004. Insurance related income declined on a linked quarter basis due to reduced contingency fees recorded in the first quarter. Discounting for this form of income which are primarily paid in the first quarter every year, we experienced a 2.7% increase in commissions on a sequential quarter basis or nearly 11% annualized.

We attribute the decline in retail securities commissions and fees of $309,000 to lower sales during the second quarter when compared to the first. As was the case with retail deposits, we are seeing our customers self-select higher rate certificate deposits in lieu of annuities whose yield lagged the market at an increasing rate environment. Additionally, in a recent trade publication, it was noted that there has been a 30% reduction in annuity sales industry-wide over the last year. The good news is that our customers are simply changing their relationships with us, not defecting to another financial services provider. The $149,000 decline in trustees on a linked quarter basis was cyclical, resulting from lower tax-related fee income.

Deposit and loan service charge income grew a strong $906,000 or 10% over the first quarter. Seasonal increases in check cards, ATM, and NSF fees were the primary drivers. We expect this level of service charge income to stick throughout the remainder of the year thanks to our larger customer base provided by the newly acquired banks. As training and recruitment efforts begin to bear fruit, we expect our wealth management divisions to be able to take advantage of the larger customer base to achieve similar fee income growth. In summary, through the end of the second quarter, the Corporation has realized a significant 11.7% increase in noninterest income year-over-year. When you exclude brand sale gains and lost income from Sun Bancorp.

At the end of first six months of 2005, fee income represents 28% of total revenues, which is in reach of our long-term goal of 30%. We have a positive story to tell about management of expenses, as well. Noninterest expense excluding merger costs totaled $38 million in the second quarter, representing a linked quarter decrease of 4% on the same basis. Seasonal first-quarter expenses and active expense management in this challenging rate environment are the primary drivers for the decrease. The increase over the same quarter last year is attributable to the acquisitions completed over the last 12 months.

Locking forward to the remaining quarters of 2005 we anticipate that expenses will approximate a run rate of $38.5 million excluding the operating costs of North East, subsequent to its acquisition in the fourth quarter of 2005. The efficiency ratio excluding merger costs was 55.2% in the second quarter, a decrease on the first quarter which was 59.5%, and nearly matches our target level of 55%.

Credit quality remains at historically strong levels. Nonperforming loans and total loans were 81 basis points. Down from 87 basis points last year and 88 basis points last quarter. Nonperforming assets to total assets were at 65 basis points. Again down from 66 basis points in the same quarter last year, and 69 basis points last quarter. Annualized net chargeoffs were 54 basis points of average loans in the second quarter. These statistics compare to 46 basis points in the same period of last year and 43 basis points on a sequential quarter basis.

In the second quarter, First National Bank of Pennsylvania recognized a chargeoff for a $1.5 million loan, which was already on nonaccrual and was fully reserved for in our allowance for losses. Absence this one loan chargeoff, net chargeoffs to average loans would have been 38 basis points. The provision for loan losses was $2.7 million in the second quarter, resulting in an allowance per loan losses at 1.34% of total loans at the end of the quarter, and 1.7 times nonperforming loans. The second quarter asset quality in the season excluding the fully reserved for chargeoff are expected to be the norm going forward for the remainder of the year. The quarter end leveraged capital ratio was 6.8% and tangible capital ratio was 4.5%. At June 30, 2005, FNB continued to maintain its well capitalized federal bank regulatory capital measures.

On a closing note, we will be amending the 2004 form 10-K filed in March to include two omitted pieces of information. First we will add the business address of our independent registered public accountants, Ernst and Young. And second, we have added a exhibit of the Corporations's fixed charges ratio which was at a comfortable 2.0 times at December 31, 2004, including interest on deposits. There are no changes from the financial statements included in the original form 10-K. Steve, that concludes my remarks.

Thank you, Brian. It is very encouraging to see growth in our loan portfolios as economic activity picks up, and we begin to cultivate new prospects from our expansion activity. However, we are not sitting by waiting for growth to appear. Our loan officers are actively pursuing new relationships throughout our expanded market area. And we continue to seek ways to deliver superior customer service in a more efficient manner. It is anticipated that these combined forces will contribute to the Corporations's high-performance profile and ultimately yield greater total shareholder returns.

In reflecting on our passion for superior customer service, I told you about our First Desktop banker product last conference call. If you remember, FNB was the first bank and remains the only bank in the Cleveland Federal Reserve district and the 19th bank approved in the United States to offer this product. First Desktop Banker enables commercial customers to electronically capture their bank check deposit and send that image to the bank without leaving their offices.

Let me digress and give you an update on that product offering. We have sold 44 units since March when we introduced the service, and have only scratched the surface as there are many more prospects that have been identified to contact. Installation at the customer site has been reduced to 24 hours, versus the 5 to 7 days that was experienced at the beginning of the program. These new, existing, and prospective customers bring expanded and additional deposit and loan relationships to the bank, thereby increasing profitability and market penetration. We are very excited about this new service and the prospect -- and the positive aspects that it brings to our customer service image.

Now, relative to our earnings going forward, we do remain comfortable with the third-quarter 2005 street estimate in a range of $0.31 to $0.33 per diluted share. And the range of $1.23 to $1.26 for the full year 2005. Which, of course, excludes a merger related cost for NSD and North East. Before I conclude, I would like to respond to all of you, what some of you have asked me individually regarding FNB's stance on acquisitions. As you know, acquisitions are a key component of our investment thesis. We plan to use acquisitions to supplement the historic modest growth profile of our current market area. This strategy is intended to help us grow each line of business that we operate, as our successes over the past 18 months have demonstrated. But we are not executing the strategy with reckless abandon. We are extremely selective in the merger candidates we choose. They need to be a good fit strategically, they need to be able to assimilate into our existing culture, they must be easily managed from a logistics standpoint, and most importantly, they need to be accretive to earnings and capital within 12 months of closing.

We have passed on twice as many opportunities as we have actually closed because they did not meet all of these criteria. However, we feel that acquisition opportunities are a button for further consolidation, particularly in the banking field. We base this belief on the fact that the regulatory burdens are just getting too costly and distracting for many managements and boards to handle. You can be sure that FNB continues to actively pursue acquisitions that meet our high distracting for many management and boards to handle. You can be sure that FNB continues to actively pursue acquisitions that meet our high standards and contribute to increased shareholder value. That concludes our remarks for the conference call, will you now please poll the audience for any questions they might have.

[OPERATOR INSTRUCTIONS] Our first question is coming from Erin Jacobson, please state your affiliation and pose your question.

Yes, I'm with KBW.

Hi, Erin.

Hi. I was wondering if you could talk about how much further margin compression you're expecting from NSD? If any?

Well, NSD would be fully work interested our results. As you recall, that was a partial quarter in the first quarter. So we lived with their full asset liability, balance sheet in the second quarter.

Right. So that's fully worked in. Sorry about that. And then you ran down your reserve a little bit in the quarter. I was wondering if you could talk about where you expect that to go from here?

Actually, we're pretty comfortable with the asset quality at the bank and our outlook for the remaining two quarters of the year. We're seeing in all portfolios, in the consumer portfolio, our indirect portfolio, and our commercial loan portfolio, if we're looking at trends in nonperforming, delinquency, and the performance of these portfolios, we're real comfortable with the -- that our asset quality will remain strong through the next two quarters.

Okay. So you're thinking you'll leave it around the same levels as--?

Well, Erin, what we and all of our peers have been driven to over the last couple of years is a model for our allowance calculation that takes into effect historical charges, also multiple years. We have been continually receiving the benefit of that credit quality environment today in that. And as we've mentioned, our credit quality trends continue to be very strong. So in today's accounting world and sensitivities, we're booking to the model.

Sure, okay. Great. Thanks a lot.

[OPERATOR INSTRUCTIONS] Our next question is coming from James Ruggart. Sir, please state your affiliation and pose your question.

With Moors and Cabot. Good morning, guys.

Good morning, James.

Just on the margin, could you guys just give us a little color? What would be the ideal rate environment and then what would be the most harmful rate environment for your balance sheet?

Certainly the short-term rate moving up and the lack of a a correspondent move in the middle term rate is what is putting pressure on the earning asset yield. The consumers are looking to the short-term rates and almost demanding that they get market rates for the deposits opportunities that they have with us. It would be better if the middle term rates. I'm not saying long term because we really don't do much lending in the 10-year time frame. Certainly, two, three, four, five years. Getting those rates to move up would be beneficial to us.

Okay. And what if the Fed starts moving down at this point? Is that--?

Well, I'm not into economist and we're not in the game of projecting, James. What our market sensitivity -- we try to position ourselves very neutral. When we say slightly positive, we're very close to neutral to slightly positive. And manage right within that to minimize that risk.

Okay. And then what -- when exactly does the -- the North East deal close?

We're expecting to close that, James, over Columbus Day weekend, which is about the 10, or 11, of October. That second weekend in October.

Okay. And then your loan growth during the period, you guys don't provide the composition. Is that -- the bulk of that was commercial, and direct installment?

In lines of credit, those three portfolios that we focused on all grew real close to that annualized rate of 6.5 to 7%.

So it's mostly home equity, is it construction or C&I, or?

No, it's commercial, just good old-fashioned commercial lending and home equity by consumer and then lines of credit. A little bit deeper act of use.

It was a more active quarter generally, James. What I take comfort in is if you look at our commercial and pipeline, it's up substantially since year end. And approximately what it was at the end of the first quarter, even though second quarter had a lot of bookings. So we -- we just can -- continue to see generally higher levels of activity.

Okay. Very good. Thanks, guys.

[OPERATOR INSTRUCTIONS] Our next question is coming from Randolph St. Ledger. Sir, please state your affiliation then pose your question.

Hi, this is Randolph St. Ledger with Harris Nesbitt.

Hey, Randolph.

Just looking at the tax rate, it looked like it went down a little bit. Just wanted to get some color on that.

We do have slight fluctuations because of our tax exempt lending. There really isn't much else. We have made a conscious effort to slightly, very slightly increase municipal holdings within our investment portfolio because we were pretty low there. So we might have had a little more opportunity there. But there's nothing unusual on there, Randolph.

So this tax rate is not -- we shouldn't look at that as like a go forward?

Yes, absent anything else, sure. Sure, we do have some variability in our tax exempt and rolling type income. But I don't see anything that's unusual at this time.

Okay, great. Thanks.

[OPERATOR INSTRUCTIONS] I'm showing no further questions in the queue at this time.

Okay. Well, I'd just like to remind everybody, that replays of this call will be available through July 29, 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. I'd like to thank all of you for your participation and wish that each of you have a great weekend. Thanks for participating.

Thank you, sir. 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.