FNB Corp (FNB) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the F.N.B. Fourth Quarter 2005 Conference Call. This conference call of F.N.B. Corporation and the report it files 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 [financially] 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 or these – 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 the interest margins; changes in [payments] speed, 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 market; 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 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 opened for questions and comments following the presentation.

Now, I would like to turn the floor over to your host, Stephen Gurgovits. Sir, the floor is yours.

Thank you, David.

Good morning, everyone, and thank you for joining our fourth quarter 2005 conference call. I am Steve Gurgovits, President and CEO of F.N.B. Corporation. Joining me today is Brian Lilly, our Chief Financial Officer.

I trust everyone has read our earnings release issued yesterday afternoon. The balance sheet restructuring and efficiency initiative we announced in early December impacted our fourth quarter results and positions us well to the planned future benefits. Brian will provide the details of the fourth quarter results shortly.

In 2005, we believe we delivered on our pledge to supplement our modest market growth through strategic acquisitions. We successfully integrated two acquisitions in our banking business line – NorthSide Bank in Pittsburgh and National Bank of North East in Erie County.

Additionally, our insurance subsidiary expanded our insurance-related product line to include employee benefits for small business through its merger with Penn Group Insurance.

Further, we successfully partnered with former F.N.B. executives in Florida to create loan production offices in Orlando and Sarasota, which have already been instrumental in delivering a steady source of commercial loan originations.

The fourth quarter of 2005 marked the conclusion of a challenging year filled with economic uncertainty. The Federal Reserve increased rates eight times, which has led to a significant flattening of the yield curve. While these events put pressure on financial performance, all in all, we feel that 2005 was successful.

Brian, please give us the details of the fourth quarter 2005 results.

Certainly, Steve, and good morning to everyone.

Yesterday, we reported net income for the quarter totaling 4.7 million, or $0.08 per diluted share. Included in these results are costs associated with the execution of the previously announced actions taken in December in which we repositioned the balance sheet to reduce exposure to rising interest rates and improve future net interest income. We recognized severance and other costs and actions taken to improve the efficiency of our customer service, and we recognized a write-down in the value of the bank stock holdings that we received in the fourth quarter of 2004 in exchange for our prior interest in Sun Bancorp.

We also recorded $250,000 in merger-related expenses associated with the acquisition of the National Bank of North East. These charges are consistent with our previous estimates and resulted in a charge of $0.19 to the fourth quarter. Without this charge, the fourth quarter earnings per diluted share would have been $0.27, and we are on track to realize the projected benefits from these actions.

Turning to the operating details for the fourth quarter --

Net interest income was flat compared to the third quarter as average earning assets and net interest margins were essentially unchanged.

Within earning assets, our averaged loans increased 1% on a linked-quarter basis, which was offset by the planned reduction in the investment securities portfolio that occurred later in the fourth quarter.

Loan growth in our commercial portfolio, net of the North East merger, was notable for its 1% linked-quarter growth as our new Florida loan production offices began generating loans. In fact, by the end of the fourth quarter, the Florida LPO had funded $14 million in commercial loan outstandings; clearly, off to a good start.

The trend in the net interest margin was also encouraging, albeit flat with the third quarter. The margin had been narrowing throughout much of 2005 due to the Fed initiatives to raise interest rates and the increased competition for earning assets and deposits. We believe that the margin will show some stability at these levels even given a few more rate moves by the Fed in the first quarter.

Average deposits in treasury management accounts increased a strong 2.7% on a linked-quarter basis. While the North East merger contributed to the increase in deposits, the bank also realized organic growth of 1.4% linked quarter, or 5.6% annualized. We attribute this growth to a targeted promotion in the Erie market to coincide with the closing of the North East transaction. This promotion, named "First Rate," offered a full suite of new competitively priced deposit products which have been attractive to new customers who are excellent prospects for cross-selling other products and services. The First Rate package was so successful that we began to offer it in all of our markets at the beginning of January.

Non-interest income totaled 17.7 million, excluding losses on securities sales and the bank stock impairment write-down and was generally lower than the third quarter due to the seasonality of our fee businesses.

Expenses totaled $40.5 million for the fourth quarter and included $1.7 million in one-time charges related to the efficiency initiatives and the closing of North East. Without the one-time charges, the operating expenses would have been just under the $39 million that I shared with you in our last conference call.

Asset quality remained steady in the quarter but was impacted by the addition of North East and recent bankruptcy law changes.

Annualized net charge-offs were 48 basis points of average loans in the fourth quarter, compared to 36 basis points on a linked-quarter basis and 53 basis points in the same period last year. The linked-quarter increase was primarily attributed to a rise in the number of bankruptcy filings experienced by our Regency Finance subsidiary. We've already seen a decline in the number of bankruptcy filings and believe that charge-offs will return to historical levels in 2006.

Non-performing loans to total loans were 88 basis points, with the addition of North East being the primary driver behind the 10 basis points-linked-quarter increase.

We ended the year with an allowance for loan losses of 1.35% of total loans, consistent with the past few quarters.

We further bolstered our capital in 2005 as we ended the year with an average capital -- leveraged capital ratio of 6.9% and a tangible capital ratio of 4.8%. These measures represent increases over 2004 year-end of 41 and 30 basis points, respectively.

At December 31, 2005, F.N.B. continued to maintain well capitalized federal bank regulatory capital measures.

Our 2005 performance ratios from operations, excluding the transactions previously mentioned, included a return on equity of 15%, a return on tangible equity of 28%, and a return on assets equal to 1.2%. These results are consistent with our stated goals and collectively place F.N.B. among the leaders in the 3 to $10 billion peer group across the United States.

Of special note, this year's financial achievements allowed us to continue to deliver on our commitment to our shareholders of a high-cash dividend payout. In fact, in a display of its confidence in the future, the Board of Directors increased the dividend rate in the fourth quarter. Currently, this represents a dividend yield of 5.5%, the highest of all bank holding companies in our peer group.

Steve, that concludes my remarks regarding 2005.

Thanks, Brian.

We started 2006 on a very positive note with the announcement of the expansion of our footprint into Central Pennsylvania with the acquisition of the Legacy Bank in Harrisburg. As I have previously noted, once we solidified our presence in the Pittsburgh market, we would focus our expansion plans on Central Pennsylvania. Therefore, we are extremely pleased that with this transaction, we're able to gain a foothold in that market to take advantage of the opportunities that Legacy brings to F.N.B.

Legacy, a $382 million financial institution, provides us with the strategic position in the market area around our state capital. This is a vital and growing area of the state that offers many opportunities for growth and provides us with a hub from which we can expand into the growing markets of South Central and Eastern Pennsylvania.

Since its inception, Legacy has implemented an effective business plan centered on the efficient delivery of commercial lending. The execution of this plan has been so successful that loan origination had to be participated to other financial institutions in the immediate market area. Legacy experienced a compound annual growth rate in loans of 40% over the past five years. As a result of this merger, Legacy's outstanding lenders will now be able to offer their customers larger lending limits and an expanded array of products and services, such as "First Desktop Banker." In addition, wealth management functions at each bank will complement each other.

In 2005, F.N.B. Wealth Management successfully expanded its business by approximately $116 million in new assets under management, which will provide sustainable, recurring gross revenues of over $500,000 annually. They have been able to achieve these results by focusing on the total client relationship. This focus is echoed by Legacy's mission for its $200 million wealth management business unit. The Legacy transaction is valued at $74.6 million in cash and stock. It is expected to be completed in the second quarter of 2006 and be accretive to F.N.B. earnings after one full year of combined operations.

The Legacy -- the acquisition of Legacy is the most recent example of the application of our strategy of supplementing the modest growth in our local market through acquisitions in markets that are going faster than our current footprint.

We are extremely focused on improving the growth prospects of F.N.B. We have a strategic vision that is more than simply one of expansion through acquisition. Rather, we only seek and take advantage of those opportunities that effectively position us for future growth.

The results of the action we have taken in 2004 and 2005 will begin to contribute to our growth and profitability in the very near future.

For example, in Pittsburgh, we have a new regional president, a new team of seasoned commercial lenders, and outstanding wealth management expertise.

In Central Pennsylvania, we are gaining a strong proven management team, seasoned commercial lenders, and skilled wealth management advisors with outstanding opportunities to cross-sell and provide the basis for future expansion.

In Florida, we have a unique opportunity to capitalize on a growing economy, working with top commercial lenders with whom we have had excellent past experience.

Our strategic affiliations have broadened our footprint into markets with excellent growth potential. We have built an infrastructure in areas with positive future growth prospects that will enable us to expand organically from this point forward.

Now, Brian will provide some balance sheet and revenue growth highlights for the upcoming 12 months. This will provide you with evidence that our strategic initiative will contribute significantly to our 2006 plan. Brian?

Thanks again, Steve.

To provide a clear understanding of our 2006 plans, my following comments do not include the addition of Legacy.

We are optimistic that 2006 will bring new opportunities to grow in new markets.

Total loans are planned to increase in the high single digits year over year, led by the incremental production of the Florida and Pittsburgh commercial lending initiatives.

Overall, average earning assets should expand 3 to 4% as we tightly manage capital.

We expect balance sheet funding to come from mid-single-digit growth in the average deposits and treasury management accounts.

In addition to the First Rate suite of deposit accounts that is currently being rolled out across our footprint, we will continue to pick up business deposits from Pittsburgh and existing markets.

Relative to interest rates, for planning purposes, we have assumed the Federal Reserve will increase rates 25 basis points in each of their January and March meetings and that the yield curve will have a slight positive slope, on average, in 2006.

Applying this consensus outlook to the growth factors highlighted indicates that net interest income is forecasted to increase low single digits year over year and, more importantly, to double this growth rate fourth quarter 2006 over fourth quarter 2005.

We see positive opportunities in the area of non-interest income as well. We anticipate growth in the category of low double digits, with half of the growth driven by the roll-forward of our acquisitions and the mortgage origination initiatives in Florida and locally. Growth in our wealth management and insurance businesses, combined with seasonal fee increases and growth initiatives in our banking line, account for the other half of the increase in non-interest income.

Non-interest expenses are projected to increase in the mid-single-digit range as we invest in the Florida and Pittsburgh markets, incur a full year of operating expenses from the 2005 acquisitions, and support the planned growth of our fee and banking businesses.

Let me quickly add that without the Florida and Pittsburgh initiatives and the roll-forward of our acquisitions, our expenses are planned to increase less than 2%. This low level of increase is more impressive when you consider that we have covered double-digit increases in pension, medical, and utility costs.

In terms of the timing of expenses, we anticipate first quarter increases due to the resetting of compensation and benefit accruals, higher energy costs in the winter months, and supporting the growth initiatives to take the efficiency ratio of closer to 60% before driving down to our target of 55% in the fourth quarter. We expect asset quality to remain strong, with slightly improving net charge-offs versus our 2005 experience.

Provision for loan losses is planned to cover net charge-offs, and we do see a slight contraction of the allowance for loan losses to loan ratio as our allowance modeling continues to benefit from improved asset quality.

We project an effective tax rate in 2006 of 31% and average diluted shares outstanding of 58.1 million shares before the addition of Legacy Bank. The leverage and tangible capital ratios are projected to be maintained in a tight range consistent with the current levels.

Steve, that completes the details that support our guidance for 2006.

Thanks, Brian.

Considering the assumptions Brian has just outlined, our 2006 outlook for net income is in the range of $1.15 to $1.20 per diluted share before the one-time charges associated with Legacy Bank.

We expect the key performance indicators in 2006 to be consistent with our stated financial targets of a return on equity of 15%, return on tangible equity of 25%, and return on assets of 1.2%.

What is impressive about our 2006 forecast is the associated quarterly target. We expect that the first quarter of 2006 will match our operating results of $0.27 for the fourth quarter of 2005, excluding the nonrecurring items. This is an important improvement over previous trends. As you may recall, the first quarter of our fiscal year is usually down from the previous quarter due to slower customer activity that is typical of the season and the application of the new benefit and salary expense increases.

In the first quarter of 2006, we project that we will overcome this seasonal decline. Further, we expect to achieve an 18% improvement in quarterly earnings from the first quarter to the fourth quarter of 2006. This growth will be driven by the loan, deposit, and fee growth opportunities that we have outlined and will provide the foundation for a quarterly run rate in earnings equal to approximately $0.32 a share by the fourth quarter this year.

Let me emphasize our key message to you today. We do have a plan, we're making excellent progress in the execution of this plan, and we expect this plan to deliver bottom-line benefits in 2006.

Now, on that positive note, we conclude our remarks for this conference call. I will now ask the operator to poll the audience for any questions. David?

Thank you. Ladies and gentlemen, the floor is now open for questions. [OPERATOR INSTRUCTIONS].

Andy Stapp, Cohen Brothers.

I missed the non-interest income guidance. Could you repeat that, please?

Yes, we gave it to you in two pieces. It looks like it's in the lower double-digits. As we're taking half of that from our roll-forward of acquisitions and the mortgage origination initiative in Florida and then the other half coming out of our growth in our wealth management, insurance, and banking services.

Okay. And you gave us some guidance on this, but could you provide some color on how the pipeline's doing in Pittsburgh, Florida, and the rest of your markets?

Andy, we – let's start with Pittsburgh. Our new president joined us about the first of October, and the first thing he did was set aside and set to create his commercial lending team.

Right.

The team is in place. We have seasoned Pittsburgh lenders, and we're looking to originate a substantial amount of loans in the Pittsburgh market, something like about $100 million in production for year 2006.

Now, relative to your direct question, the pipelines are coming. We've closed about $20 million' worth of loans so far that have been approved, and we're expecting that trend to continue as they get out and call on customers and seek opportunities to lend money. But we're very encouraged by the team we have in the field now.

Okay, good. And I guess the rest of your market, it's -- can you give any color that it's, I would guess, fairly stagnant just because of the nature of the markets?

No, the interesting thing, Andy, about 2006 here at F.N.B. is if you take the production we're expecting from Pittsburgh in commercial lending, if you take the production we're expecting out of our Florida LPO, which is –

Right.

-- probably a little more than two times what we're expecting in Pittsburgh, that leaves the rest of our footprint -- and I’m not talking about Harrisburg at this point. I'm just talking about our existing footprint --

Right.

-- having to do approximately what they did last year, which we think is very doable. That's why although Brian's got in the guidance some, what I think, pretty nice loan increase for the year on average, when you break it down into components, if we get what we think we're going to get from Florida and all indications so far is that we will, if we get what we're expecting from Pittsburgh, and we're very optimistic about that, the rest of the core bank pretty much has to just do what they did this year – or do what they did in 2005. So we're looking very positive towards our projections on loan growth.

Okay. And just – oh, could you provide the amount of loans and deposits picked up in the North East acquisition?

It's a small number. It's about $50 million in loans.

Okay.

Just about the same for [inaudible].

Okay, so it's not much change from their [630] call?

No, that's a good one to use.

Okay. And one last minor question. With regard to contingent insurance commissions, do you book them as they [are] received, or do you accrue for them over the year?

No, we book them as received, and that's always a first quarter bump for us.

Okay. Thanks.

Thanks, Andy.

James Record, Moors & Cabot.

Hey, could I ask, the 1.7 million pretax in efficiency initiatives, can you give a breakout between the -- how much of that was in the salaries and benefits line and how much of that was in other expense?

I think there's – let me just check something right here. I think 1.4 million in the salary and benefits and about 300,000 in the – yeah, about 300,000 sitting down in other expenses.

Okay, thank you. And could you guys comment, are you being shown many deals in Florida, one?

And then, secondly, maybe if you could comment on sort of your sense of potential deal activity, not just for you guys but for the industry in both the Florida and your core markets?

Well, James, let me start in the back and work forward on that.

We still continue to believe that with the burden of regulation, with [CSA, AML] regulations, with 404, that the burden of regulation on smaller banks is going to be costly, number one, and difficult, number two. So we would expect to continue to see further consolidation from, especially banks, let's say, the 0 to 700 million in asset size. So we would expect to be active this year in looking at things.

However, as I said in my remarks, we don't want to buy just to buy. This is not about just growing assets. This is about developing and entering markets where we can get stronger organic growth opportunities than in our traditional markets.

So, yes, I think we'll be able to see deals. The question is, will they be what we want where we want them?

Relative to Florida, yes, we're looking at opportunities down there, but again, the opportunity would be to, if we were successful and who knows whether we will be, it would be to support the mortgage origination/commercial lending activities that we have started in Orlando and Sarasota. But, by the way, we would expect, hopefully, to have further LPO and mortgage originations at other sites in Florida, particularly along the West Coast.

Okay, thanks, guys.

[Andy Borman], SunTrust Robinson Humphrey.

On Florida, one question. You had stated -- I have in my notes after the third quarter call you had stated you were trying to get at -- you were going to try to have 10 mortgage originators working by the end of '06 -- I'm sorry, by the end of fourth quarter. Is that -- did you guys hit that goal, or --?

No, we didn't quite reach 10. We do have mortgage originators, but, Andy, probably what's changed since our first look at this, originally, we had planned to have 10 originators all located in Orlando. And we've since moved off that. We see the need and the opportunity, frankly, to work down the West Coast and not have all these people just based in Orlando. So we've gone off our original concept. We do have several on the ground in Orlando, and as we speak, we're recruiting in the Sarasota/Fort Myers/Naples area for mortgage originators.

Okay. And then the second kind of part of that question was you were looking to generate about 100 million in commercial production and 200 million in mortgage production by the end of '06. And then you'd earlier said that you thought that the new Florida LPOs would be about double what Pittsburgh was going to be, about 200 million. Is that 200 million commercial, or is it split commercial and mortgage? How does that break out?

That 200 million I've referred to for Florida, Andy, is commercial.

Okay, okay. So that's actually going to be higher than you guys were thinking at the third quarter call?

Yes, and the reason being that when we had the idea to do these LPOs, we sat and looked at what we thought and worked with our people in Florida about what we thought the prospects were. Frankly, it's taken off meeting every bit of our expectations. But the one thing that you have to remember is although we're looking at 200 million in originations in Florida, particularly -- not Pennsylvania, but in Florida -- the funding of those is slower than what we experience up here.

Right.

So it's not the matter of approving a loan and then booking it the next week. A lot of these take time to close, and some of them are construction. So we're looking at 200 million in production and at least over half that in funding.

Okay. And then my last question is on the residential kind of consumer side, there was some run-off in the fourth quarter. How much of that do you expect to continue into the first half of '06, or is that something that you think will slow down or maybe be flat given the new offices down in Florida?

The residential mortgage portfolio, Andy?

Yes.

Yes, that's in a run-off mode, if you will. [Inaudible] see, oh, I think about 8 million a month, about 25 million a quarter, that that portfolio would come down. We are selling all of our originations. A few years ago, we began to do that, and so that generally will come down. We will see, as we ramp up in Florida, that that will stabilize for a couple quarters just because of the flow. The pipeline has to build a little bit. But, generally, we're not looking to hold residential mortgage assets.

Got it. Would you let that go effectively all the way down?

Well, I think we constantly -– as we look at it in asset and liability management, sometimes those are better assets to hold than investment securities. And so we do look at it in that context, also. And I wouldn't be so bold as to say that.

So it's kind of, for the time being, 25 million a quarter is what you guys expect?

Yes.

Andy, I would add to that, at times, we may book a residential mortgage and portfolio. Why would that be? One, there may be in the North more acreage than eligible in the secondary market. Or it may be somebody who we think even though they're signing a 15, 20, 25-year mortgage, is not likely to stay in a home that long. Maybe it's a young professional person coming to town. This is his starter home. And our practice – and our experience has been that three to five years down the road, they're ready to upgrade into something larger.

Sure.

On a [indiscernible] basis, we may add to the portfolio, but Brian's right, our theory is really to originate these to sell by practice.

Okay, thanks, guys. Talk to you soon.

Thanks, Andy.

[Don Shilling], [The Vindicator].

I assume with your efficiency initiatives then you found ways to do things with less people? I was wondering if you could talk about that and if you have any numbers.

Well, we don't have any numbers, but I would say it this way. That's a combination of –- we had some people take early retirement, and so many of those people weren't replaced. We had some full-time positions that were reduced to part-time positions. Then we had some part-time positions that were eliminated. What we did is we went through our entire system from A to Z and looked at our business volumes, looked at our customer accounts, looked at when we do business within a day, and streamlined our staffing so that we would have proper staff there to take care of the customers during the busy times of the day when they were there. And at other times of the day when we noticed our volumes dropped off in terms of customer visits, we were able to reduce staff at that location. All in all, it's probably about 90-some [FTEs] totally.

Okay. And is that where the million and then 1.4 million was coming from?

Yes.

Okay. And was most of that in the field, branch operations?

It was pretty much through the entire bank, so with our technology center and 145 branches and some support staff areas that we have to support those branches.

Okay, thanks.

Pretty much across the board.

All right. Thanks.

[Collin Dunn], KBW.

Just a quick question on the consumer bankruptcies in the quarter. Could you quantify the impact to the loan loss provision instead of just net charge-offs if, in fact, there was an impact to the provision?

Well, the way you asked that question is what's got me tied up. We do a modeling that tells us what our allowance needs to be at the end of each period, and what gets factored into that is certainly the historical and the provision [both] out of that, based on what we believe we need to have on the balance sheet to cover the loans.

Now, our net charge-offs influence that number, but for the one-time effect of bankruptcies, we did build that into the model that said that's a systemic charge-off issue going forward. So I'd say that it had the impact but not as significant as the higher net charge-off movement from the quarters would suggest.

All right. That's helpful. Thank you. Then in terms of the First Rate deposit product suite, could you talk a little bit about, I guess, what that involves and I guess you said you started in one market and have since rolled it out but across the rest of the franchise?

Yes, that's a pretty exciting initiative. We saw an opportunity with North East -- National Bank of North East coming on to test market up there in a contained way a suite of products that includes a checking -– financial checking, a savings, and a money market rate that is more competitive in the marketplace and rolled that out. And so real nice accounts come rolling in, significant funds, and saw it at rates better than what we could attain in the wholesale markets and did it with managed disintermediation in our current account base.

Based on the results of that in the fourth quarter, we rolled that out systemwide on January 1 through marketing and advertising and are getting real nice results across our market.

All right. And then, finally, I guess I think you mention that there was some funding that you might also pick up from the Florida LPO. That would not be in the form of deposits, right, or I guess if you could –

No. If that was the impression I left, I apologize. We do not have deposit-taking capabilities down in the Florida market.

Okay. Well, that's all. Thank you very much.

Okay, Collin.

[OPERATOR INSTRUCTIONS].

Gentlemen, there appear to be no further questions.

Okay, I have a closing comment, David, if I can.

I'd like to thank everybody for joining us on our call today. Replays of this call will be available through January 31 by calling 1-800-332-6854, with the code 3044. You can also access a script of today's call on our website, www.fnbcorporation.com. I want to thank you for participating in our call today and wish everyone a great day. Thank you.

Thank you very much, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines and have a wonderful day.