FNB Corp (FNB) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FNB Corporation third 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 trends or factors effecting the banking industry and specifically the financial operations, markets and products of FNB operation. 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; charge offs and loan loss provisions; less favorable than expected general economic conditions; legislative or regulatory changes that may aversely effect the businesses in which FNB is engaged; changes in the securities markets or risk factors mentioned in 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 we will open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Stephen Gurgovits. Sir, the floor is yours.

Thank you, Dena. Good morning, everyone, and welcome FNB Corporation's conference call for the third quarter of 2005. I am Steve Gurgovits, President and CEO of FNB.

Joining me on this call is Brian Lilly, our Chief Financial Officer, who will discuss the financial details of this quarter's results. In addition, I've asked Gary Roberts to join us and discuss recent events at the bank that should benefit our bottom line in the near future. As you know, Gary is the President and CEO of our largest subsidiary, First National Bank.

I am pleased to report that we earned $18 million or $0.32 per diluted share in the third quarter. Return on equity was 15.5%. Return on tangible equity was 29.8%, and return on assets, 1.26%. These performance measures equal or exceed FNB's stated goals and we believe continue to place the Corporation in the upper ranks of our ranks our peers. We achieved these results in spite of the difficulties caused by a flat yield curve that dampens any bank's ability to grow net interest income.

Total revenues for the third quarter, at $67 million, were up 9% over the same period last year. Although revenue was approximately the same as in the prior quarter, average loans grew by 4% annualized and fee income increased by 10% on an annualized basis over the previous quarter.

We had actually expected even higher loan growth. Today the commercial loan pipeline is stronger than ever, at a level of $165 million; however, unlike the rest of the year when closings averaged 85% of the 90-day pipeline, in the third quarter, closings were down slightly, to 79%. We are very confident that the pipeline's integrity is still in place and we will close the super majority of the loans in that pipeline.

Further, we expect to achieve commercial loan growth as a result of our entry into the Pittsburgh market, but frankly, our results to date have not met our expectations. For that reason we took some steps recently that we feel will enhance our Pittsburgh operation and augment our loan production efforts. Gary will provide greater detail during his portion of today's call.

During the third quarter, our acquisition of North East Bancshares received overwhelming approval from the North East shareholders. That transaction was completed October 7. North East has $68 million in assets in four branch offices. The addition of North East as a natural extension of First National Bank's branch network in the Erie market and eliminates the need to construct new branch facilities, which had been our alternative plan. Erie is second in size only to Pittsburgh in the western Pennsylvania segment of our market.

Having already realized all cost savings and branch consolidation goals, we expect this acquisition, although small, to be immediately accretive to earnings.

Now Brian will provide the details about this quarter's financial results. Brian?

Thank you, Steve, and good morning, everyone.

As Steve mentioned, FNB earned $18.1 million in the third quarter or $0.32 per diluted share. These results compared to $17.5 million or $0.31 per diluted share on a linked quarter basis and $14.7 million or $0.31 per diluted share in the same period last year.

For the nine months ended September 30, 2005 the Corporation reported net income of $50.5 million versus $46 million in the same period last year. Of note, $656,000 of after-tax merger costs, or about $0.01 per share, have been recorded so far in 2005.

Further, income from Sun Bancorp, which was acquired by a third party, and branch sale proceeds, both included in the 2004 results, accounted for $4.5 million after tax or $0.10 per diluted share. Adjusting for these items, net income was up from $41.5 million, $0.88 per diluted share for the first nine months of 2004, to $51.2 million or $0.91 per diluted share in 2005. This represents a 23.3% increase in net income year-over-over and is largely due to the acquisitions completed during 2004 and early 2005.

Turning to the third quarter details, interest income on a fully tax-equivalent basis was $76.8 million, a 2.3% increase on a sequential quarter basis. This improvement is attributable to the 4% annualized growth in average loans, principally in commercial and indirect auto categories, the latter having benefited from a change in the marketing strategy of the auto manufacturers from a low cost financing to a price reduction strategy.

Taking seasonal factors into consideration and planned residential mortgage runoff, as we move into the fourth quarter we conservatively expect net loans to grow at a rate of 1% quarter over quarter.

The yield on earning assets for the third quarter was 6%. This represents an increase of 4 basis points over the previous quarter. Loan yields increased 7 basis points, benefiting only slightly from the rise in short-term interest rates as competitive pricing pressures have continued to keep yields down. We anticipate this trend of slow steady yield improvement to be sustained.

Our cost of funds increased 15 basis points as a result of competitive pricing pressures and disintermediation within our deposit base. We continue to aggressively manage our deposit pricing strategies to match the funding needs of the corporation.

You will note that average deposit balances are down slightly from the previous quarter. This is principally due to the outflow of certain premium money market accounts, redeployed in our trust subsidiary, as well as internal demand accounts, which averaged higher in the second quarter.

This quarter's higher cost of funds directly affected the net interest margin, which at 3.77% was 10 basis points lower on a sequential quarter basis. To put it simply, earning asset yields are not keeping pace with the rise in the cost of funds.

The combination of competitive pressures and a flat yield curve creates a challenging environment. Although we continue to model our interest rate risk position as low against rising rates, the competitive market will continue to cause pressure on the net interest margin, going forward.

Non-interest income totaled $18.8 million, up 2.5% on a linked quarter basis. This improvement was primarily due to a nearly 6% increase in service charges, quarter over quarter. Although some of the increase is seasonal, product pricing initiatives implemented at the beginning of the third quarter also contributed to the improvement. All other non-interest income categories were flat sequentially.

We anticipate that non-interest income before security gains will trend slightly higher, primarily due to the addition of North East. For the first nine months of 2005, fee income represented 28% of total revenues.

Non-interest expense totaled $38 million, which is slightly lower than last quarter but is basically within our range of $38.5 million noted in last quarter's call.

Looking forward to the fourth quarter of 2005, we expect to return to a $38.5 million level plus approximately $500,000 in operating costs, principally for North East, which was merged into First National Bank earlier this month. In addition, we expect to incur approximately $300,000 in pre-tax merger-related costs next quarter in connection with this acquisition.

Efficiently ratio was consistent with the second quarter at 55%, which equals our target level.

You will notice a lower income tax expense of $1.1 million on a link-quarter basis. This is principally due to the successful resolution of an uncertain tax position. That was related to [Promise Star] acquisition, back in 2002.

Going forward our effective tax rate looks to be slightly less than 31 %.

Asset quality continues to be strong. Annualized net charge-offs were 36 basis point of average loans in the third quarter compared to 43 basis points in the same period last year and 56 basis points on a sequential quarter basis.

Excluding Regency, our high-performing consumer finance subsidiary, the bank's stand-alone net charge-offs were 20 basis points, reflecting the lowest level in the past seven quarters.

Nonperforming loans to total loans were 78 basis points, down from 81 basis points last quarter as well as last year. Nonperforming assets to total assets were at 61 basis points, down from 65 basis points in the same period last year, and last quarter.

The allowance for loan losses ended the quarter at 1.34% of total loans, consistent with the second quarter, as a provision for loan losses, covered net charge-offs, and additions to loans outstanding. We remain confident that these excellent asset quality indices will be typical for the upcoming quarter.

The quarter end leveraged capital ratio was 7% and the tangible capital ratio was 4.7%. At September 30, 2005 FNB continued to maintain its well capitalized federal bank regulatory capital measures.

Steve, that concludes my remarks.

Thank you, Brian, for that summary of the third quarter. As you pointed out, these are challenging times in our industry. However, I am confident that with our strong credit culture, our bias towards revenue generation, and ongoing cost containment, we will ultimately reverse the negative impact of a flat yield curve.

Now Gary will talk about some recent activities that support my positive attitude. Gary?

Thanks, Steve.

The first item concerns our entry into the Pittsburgh market with the acquisition of North Side Bank. We have benefited from many aspects of that transaction. We have achieved the cost take-out goals and realized positive growth in the retail and related specters. But as Steve noted earlier, the commercial loan production growth there has not lived up to our expectations, which explains why loans on a spot basis appear flat.

More recently we took an important step to rectify that slow start by appointing Vince Delie, a prominent Pittsburgh bank executive, as the new President and CEO of the Pittsburgh region. Vince has spent most of his career in the Pittsburgh area, most recently as Executive Vice President and Division Manager for Corporate Banking with National City Bank in Pittsburgh. He is well known in the business community and he knows the market well.

Vince joined us on October 3 and is now assembling a team of seasoned commercial lenders. Once that team is in place we expect that we will begin to see the projected $100 million-plus in annual commercial loan production that we had projected for that market.

In addition to putting new leadership in place in Pittsburgh, we also have embarked on an initiative that promises to further augment our lending production. We are opening commercial and mortgage loan production offices in Florida. As you may recall, FNB knows the Florida markets well and the growth opportunities that exist there. This is a rare opportunity where we have been able to reunite with key executives who were previously part of the leadership team at our former Florida operation. Jody Hudgins, Robert Dyer, and Russell Beckenstein will head up commercial and residential mortgage loan production offices in Sarasota and Orlando. We plan to open additional offices in Tampa, Fort Myers, and Naples, all markets that we know and understand.

The Florida market offers exceptional growth opportunities with rational loan prices, which should help to increase commercial loans outstanding and, consequently, net interest margin. The commercial loans will be primarily real estate based and should be variable rate in nature. This is typical of our prior experience in Florida, where loans are generally acknowledged to be superior in asset quality and provide strong yields. We expect to generate $100 million in annualized commercial loan production, which will supplement our activities in the North.

The mortgage originations will provide a valuable source of non-interest fee income. By the end of the quarter we expect to have 10 full-time originators actively generating mortgage loans, with a goal to reach $200 million in the first full year. These loans will be sold on a flow basis to the secondary market.

The final item deals with revenue and expense. Although the bank already enjoys a reputation for excellent operating efficiency and cost containment, we think we can do even better. To that end, the bank staff has proactively initiated a number of projects that are aimed at improving revenues and reducing costs even further.

These projects include a mixture of revenue generation and expense control measures. For example, we are refining our staffing models at all 144 branch locations. Our goal is to maximize productivity without diminishing our superior customer service levels. In addition, we are on the verge of introducing several new deposit products that we think will generate new revenues at minimal servicing costs.

We are also reviewing our pricing relative to the competition and have identified a few areas where we can increase fee income and yet remain competitive within our market. At the same time, we are examining all non-interest expenses to seek additional cost containment opportunities.

These and many other initiatives are very achievable and will make a positive combination to the bank's financial performance going forward. While a flat yield curve environment is difficult to control, the actions I have just described, in conjunction with our excellent asset quality, represent some of the initiatives we are putting into place in order to assist us in fulfilling our commitment of providing superior shareholder return.

Steve?

Thank you, Gary.

Many of you have asked if the Florida loan production office strategy is an indication that our next move might be to purchase a bank charter in Florida. My response to you would be that, for the moment, all of our focus is on starting, staffing, and operating the LPOs in Florida. We made this move in response to a unique opportunity. Of course, we are always open to respond to any opportunities presented to us, wherever they may be found, as long as they are manageable and will contribute to increasing shareholder value.

However, having said that, FNB has no interest in repeating an aggressive expansion plan in Florida as in the past. We still have important priorities on which we need to remain focussed in Pittsburgh, central Pennsylvania, and eastern Ohio.

And speaking of priorities, this morning FNB issued a press release regarding the creation of a new subsidiary called FNB Capital Corporation LLC. This new subsidiary will conduct merchant banking activity, which allows us to solidify our commercial loan relationships by offering comprehensive commercial product offering. This affiliate will be governed by a Board of Directors chaired by John Rose. John is a member of the FNB Corporation Board, and a principal of McAllen Capital Partners. He has over 31 years of experience in banking and merchant banking.

John and other members of the FNB Corporation board have selected my son, Stephen, to be President and CEO of the new subsidiary. After spending eight years in the field of finance, Stephen joined FNB four years ago as senior portfolio manager in wealth management. He is a CPA with an MBA degree and recently earned the destination as a Chartered Financial Analyst.

We plan to begin this operation fairly conservatively. We will begin by focusing on subdebt financing and do not plan on any equity investments for several years. Additionally, every loan will require approval by a three-person committee consisting of myself, Gary Roberts, and Gary Guerrieri, the bank's Chief Credit Officer. We have established a house limit of $2 million per transaction and we plan to collaborate with other merchant bankers. We forecast oustandings of $6 million by year-end 2006. FNB Capital Corporation will locate its offices in Pittsburgh.

These are interesting times in the Financial Services industry and we are making every effort to position FNB Corporation to be able to sustain our shareholder commitment by continuing to pay high dividends well into the future.

How do we expect our earnings to perform going forward? Well, considering the continuation of a flat yield curve and based on Brian's forward-looking comments, we expect to end 2005 with earnings in the range of $1.19 to $1.21 for the year, excluding merger-related costs of the two banks acquired this year.

And finally, this week our Board of Directors, based on their confidence in the future prospects of the corporation, voted to increase the quarterly cash dividend to $0.235 per share to be paid December 15, 2005 to shareholders of record on December 1, 2005. This represents a 2% increase over last quarter's dividend and equals $0.94 per share on an annualized basis. At this level the dividend yield on our common stock is 5.5% based on last night's closing stock price of $17.15 and this places FNB in the top spot among its peer group of 3 to $10 billion bank holding companies across the United States.

This is the 33rd consecutive year that FNB has increased its dividend. This is a strong reflection of our commitment to shareholder value.

Operator, that concludes our remarks for the conference call. Please poll the audience for any questions.

Thank you, gentlemen. [OPERATOR INSTRUCTIONS]

Our first question is coming from Kelly Hinkle. Ma'am, please pose your question and state your affiliation.

Hi, guys. I'm with McConnell, Budd, & Romano.

Hi, Kelly.

Hi. So, when you guys spun off Florida, you found a number of cost saves in the PA operation, so now you're suggesting that there's more to be found in this more challenging environment?

Kelly, we'll let Gary, our bank CEO take a shot at that.

Kelly, we think so. We recently employed a company to help us with our staffing models throughout 144 branches. One of the the blessings of this organization is the size of our footprint and our penetration in our markets and of course the overhead that accompanies that is always a problem. So we think we can do a better job at staffing and that's primarily going to be our focus for the fourth quarter and for 2006.

And then, when will you be giving guidance, if any, for 2006?

Kelly, we expect to do that in our fourth quarter earnings call, which will be sometime in the third week of January.

Great. Thank you.

Thank you. Our next question is coming from Kevin Prolither. Sir, please state your affiliation then pose your question.

Perkins, Wolf, McDonnell. Good morning, guys.

A quick question for you on the Florida franchise. If you could talk a little bit about the people that are going to be running it initially. Were they -- I assume most of them were at the former franchise that you had down, and if there were any noncompetes with Fifth Third, if any of them went there or they just kind of waited to go back in and do their own thing again?

Kevin, we'll let -- again, I'll ask Gary, our bank CEO, to make a comment on that question.

Kevin, thanks for the question. The answer is these individuals are all well known to us. Jody Hudgins, Robert Dyer, and Russel Beckenstein were a part of our franchise back in those days and these are people that we have a lot of confidence in, obviously.

As far as the noncompete, they have nonsolicits. And of course with the growth and the opportunity in the Florida markets, that portion of their former contract with Fifth Third is probably less important to us than the noncompete. We think there's lots of opportunity and as we've mentioned in press releases and this call, these are people we have confidence with, they were in leadership positions in the past, and going forward we think they can do a great job for us down there once again.

Okay. And then I know, going back to another topic on the net interest margin, I know you gave the guidance for the full year. But just in terms of the margin, given the curve now, operating in this environment, if you can just give us a little commentary on that?

The margin, as you've seen, through the year we had a 10 basis points narrowing just in this second to third quarter as the cost of funds outpaced our ability for the loan yields to go. We're seeing that continue here into the fourth quarter, as I kind of guided us. The loan yields will continue to pick up, but our concern is the cost of funds and the competitive pressures that are continuing to bring up the cost of funds higher, faster than what the earnings [inaudible] portfolios can move.

Brian, is the deposit pricing getting any worse, would you say, in your markets?

I'd say it's the same. I'm looking at Gary and Steve. I think as we experienced the -- and look at it weekly in our pricing committee, we see little movements and most of us are doing the same thing, trying to use specials on the CD side and slowly moving up the core deposit and transaction accounts.

Okay, great. Thanks a lot, guys.

Thank you. Our next question is coming from Andy Boorrmann. Sir, please state your affiliation then pose your question.

Sure. Suntrust, Robinson, Humphrey. How are you doing this morning, guys?

Good, Andy.

Question on the Florida thing as well. You mentioned about 100 million in outstandings, do you guys expect that to be pure balance sheet growth or some asset mix shift, or -- how do you expect that to run.

Yes, we've -- we're looking at that -- excited to get the loan growth, but we'll be funding that primarily out of the investment portfolio with that success.

Okay. And I may have missed it, as a matter of fact I'm pretty sure I missed it. What time frame is that 100 million, do you expect to have -- is that the end of '06? 100 million outstanding?

Right about the end of '06. We have a ramp-up period, just to get the team on board here, so it will show itself in '06.

Sure. And you expect to have all five of those offices open by when? Have you said?

Well, we have a couple open now, Andy, and I would expect by the first quarter we should have the rest of the offices open.

Okay. That's it. Thanks, guys.

Thank you. Our next question is coming from Andy Stapp. Sir, please state your affiliation then pose your question.

Cohen Brothers. Hi, guys.

Hi, Andy.

With regard to -- you mentioned that your non-interest income was 28% of operating revenue. Is that sort of where you see that, upcoming quarters?

Yes, I think we've been pretty consistent in that level. We're grown it a couple of times, but certainly the net interest income spread, which is the other 70%, and our acquisitions have covered that, also.

And I missed your guidance as what you think you can do in Pittsburgh in terms of loan production, was it $100 million?

Yes, we're shooting for $100 million on an annualized basis, Andy. You know, when Vince gets his total team in place -- I can tell you this. When we talked to Vince about that, he doesn't seem to think that's going to be difficult to do.

Okay. Great. That's all I have.

Thank you. Our next question is coming from Marsella Martino. Ma'am, please state your affiliation and pose your question.

Good morning. KeyBanc Capital Markets.

Good morning, Marsella.

Good morning. Just a question, just for some color on the growth that you are seeing in the commercial portfolio. Is that across both commercial and commercial real estate?

Well, it's across all our commercial products, but Marsella, I have to be quick to point out, so that the audience understands, although we do commercial real estate it's not what you might expect under that category heading. A lot of our commercial real estate is owner occupied. It's also associated with other C&I relationships we might have with a company as opposed to doing speculative real estate deals on the interstate.

Right.

And so, yes, we've seen it pretty much across all lines.

Okay. And some other banks have commented on being impacted negatively by [inaudible]. What are you seeing in that arena and have you seen any moderation or acceleration?

Well, initially -- and it's to be expected, I think. After we acquired First National Bank of Slippery Rock and maybe more particularly, North Side Bank in Pittsburgh, there's always some disruption. First of all, during the period from when the deal is announced to when it's closed, you have competitors knocking on your customers' doors and sometimes this disrupts relationships. So during that period of time, and yes, we did see some payoffs, but recently we don't see that, that's stabilized and in fact what we hope to do is build from this point on.

Okay, great. Thank you very much.

[OPERATOR INSTRUCTIONS] Our next question is coming from Peter Winter. Sir, please state your affiliation then pose your question.

Harris Nesbitt. Hi, guys.

Hi, Peter.

A question on the provision expense. If I looked -- the prior three quarters you drew down reserve and this quarter you built reserve. Is that a change going forward, in terms of the reserving thinking?

I think as you -- as I look at the reserves I see it a little bit differently, Andy. We ended the year at 143 and we're at 134 now, so we haven't been -- we did not build -- we are consistent, second to third quarter in our reserves. Peter, sorry.

The provision expense if that's what you're referring to, that we increased provision expense from the first couple quarters to the third quarter, you have to recall in the first and second quarter we were absorbing Slippery Rock and North Side. Both of those acquisitions had portfolio problems. Not huge, manageable. And our team got those in and shed some assets, wrote some things off and took care of those assets so that really, the second and third quarter is a little more of the trend that we will see.

So in other words, you're going to -- the provision is going to be in excess of net charge-offs going forward?

I can't say that. We -- as you heard in a number of the statistics, as you digest the asset quality, it's still very strong. The bank, as I mentioned, lowest net charge-offs in seven quarters. So we could continue. And you know that model is very quantitative these days in how much allowance you're allowed to have on your balance sheet and some of the history of historically higher charge-offs continue to burn off. So there might be a little bit. We don't see a significant decrease in the reserve, but it is the allowance that -- on the balance sheet we are focussed on there.

Okay, thank you.

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

Okay, thanks, Dena.

This concludes our conference call. You can access a replay of this call for the next week by calling 1-800-332-6854 with the code 3044. A transcript of today's call will also be posted on our website, www.fnbcorporation.com. Thank you for joining us today and have a great weekend.

Thank you, gentlemen. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.