FNB Corp (FNB) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your F.N.B. first quarter 2006, earnings release 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 which are based on current expectations, estimates forecasts and projections about F.N.B. as well as F.N.B.'s management's assumptions and beliefs relating to present or future trend or factors affecting the future performance of F.N.B. and the banking and financial services industry.

Since forward-looking statements relate to future developments, results, and events they involve certain risks and uncertainties and actual future results may differ materially from historical performance or those expressed or implied in this presentation as a result of future decisions by F.N.B. or by other factors and developments beyond F.N.B.'s control including but not limited to, a significant increase in competitive pressures among depository institutions, changes in the interest rate environment that may reduce interest margins, changes in prepayment speeds, loan sale volumes, charge-offs and loan loss provisions, less favorable than expected general economic conditions, legislative or regulatory changes that may adversely affect the business in which F.N.B. is engaged, technological issues which may adversely affect F.N.B.'s financial operations or customers, changes in the securities markets or risk factors mentioned in F.N.B.'s filings with the Securities and Exchange Commission.

F.N.B. undertakes no obligation to update these forward-looking statements or to reflect events or circumstances after the date of this call. It is now my pleasure to introduce your host, Mr. Stephen Gurgovits. Sir, the floor is yours.

Thank you [Dina], and good morning, everyone. Welcome to F.N.B. Corporations's conference call for the first quarter of 2006. I am Stephen Gurgovits, President and CEO of F.N.B. Joining me on this call this morning is Brian Lilly, our Chief Financial Officer; and Gary Roberts, President and CEO of our largest affiliate, First National Bank of Pennsylvania.

We are pleased to report that we have begun 2006 with continued success in financial performance achievement and high cash dividends to shareholders. To begin, we realized first quarter net income of $0.27 per diluted share. This is consistent with the guidance we gave in our January conference call and matches the consensus street estimate. We achieved a return on equity of 13.3%, a return on tangible equity of 25.5% and a return on assets of 1.14%. We believe our returns on tangible equity place F.N.B. in the top quartile of bank holding companies our size in the United States.

As to shareholder value, this quarter's favorable financial performance and our confidence in future expectations allowed us to continue to deliver a high cash dividend payout. On an annualized basis, the first quarter dividend represents a yield of 5.5% at the end of the quarter. This is consistent with our objectives for shareholder return. F.N.B. continues to deliver the highest dividend yield of all bank holding companies our size, which would be $3 billion to $10 billion in assets in the continental United States. Now Brian will discuss the details with you about this quarter's earnings. Brian?

Thank you, Steve. And good morning, everyone. Net income for the quarter totaled $15.8 million, or $0.27 per diluted share. The $0.27 was in line with our expectations and is noteworthy for equaling the fourth quarter of 2005 after we adjust for the $0.19 and one-time charges that we discussed in the last conference call.

As you know, we traditionally experience a slight drop in the earnings during the first quarter of each year. This is because consumer activity slows after the end of the year the year at the same time that we implement new salary merit increases and expense accruals. We attribute our 2006 linked quarter progress to strong commercial lending activity, good fee income growth, the realization of expense efficiencies, and continued solid credit quality.

Adjusting for fewer days in the first quarter, the net interest income of $46.8 million was essentially flat on a [linked] quarter basis. The foundation for this quarter's results is the balance sheet restructuring steps that we took at the end of last year. As a result of these steps, we expanded the net interest margin by 4 basis points, provided a capacity to partially fund new commercial loans outstanding, and we rolled out our first rate suite of deposit products that we discussed last quarter.

Our success in the Florida and Pittsburgh markets helped average commercial loans grow 14% on an annualized basis. This double-digit increase more than offset the declines in the other loan categories that we had planned for the early part of 2006. The yield on earning assets grew to 6.42% in the first quarter, up 24 basis points over the fourth quarter. Deposits, including our corporate cash management accounts, grew $89 million, or 2% during the first quarter to end at almost $4.3 billion.

We credit much of that success to our first rate suite of products. These products have attracted new customers who are excellent cross-sale prospects for other services. The cost of interest-bearing liabilities for the first quarter was 2.92%, an increase of 23 basis points on a sequential quarter basis. We were able to achieve the 4-basis point improvement in the net interest margin to 3.82% on a [linked] quarter basis because of a slightly wider spread coupled with the increase in benefits from the demand deposits.

Quite frankly the expanded margin was a little more than we had forecast for the quarter. For the second quarter, we are forecasting a return to the fourth quarter 2005 level in the range of 3.75% to 3.8%. This forecast does consider one more Fed move of 25 basis points in the second quarter. Non-interest income was $20.1 million, up approximately 7% from the first quarter last year and over 10% on a [linked] quarter basis, excluding the fourth quarter one-time charges.

Deposit service charges continue to grow on a year-over-year comparison as we expand our customer base through acquisitions, but dip slightly in the first quarter as is typical during this time of year. Contingent fees from our insurance agency operations showed good growth and drove total insurance fees up almost 9% over the first quarter last year. The lower commissions on retail security sales continues an industry trend as interest rate increases are causing customers to choose higher yielding alternatives.

Our trust business continues to perform well with fee income growth of almost 8% on a [linked] quarter basis, and 3% over the first quarter of 2005 after adjusting last year for one-time revenues related to a system conversion. With regard to what we can expect in the non-interest income category you may remember that last quarter we shared with you our Florida mortgage production initiative. At that time, we expected this initiative to add $2 million in fees and about $0.01 per share in 2006. Although we continue to make progress in finding the right people the pace is slower than we had anticipated. We still consider this an important initiative but the ramp-up will take a little longer than we originally predicted.

Overall non-interest income for the quarter represented 30% of total revenue, up from 29% in the same period last year. In summary, for the quarter we achieved revenue on a fully tax equivalent basis of nearly $67 million. This is a 2.7% increase over the first quarter of 2005, and a 1.6% improvement on a [linked] quarter basis. Of course excluding the security sale and impairment loss noted on last quarter's call.

Due to our successful efforts to control expenses, non-interest expense totaled $40.3 million in the first quarter and was essentially flat with the first and fourth quarters of 2005. During the first quarter, we began to experience the benefits from the efficiency initiatives put into place last year. The efficiency ratio was 58.8% in the first quarter which is a slight improvement from the first quarter last year. We continue to seek opportunities to lower this ratio to our target of 55%. F.N.B.'s credit quality trends continue to be at favorable levels. In fact, annualized net charge-offs were 37 basis points of average loans in the first quarter, an improvement from the 48 basis points on a [linked] quarter and 43 basis points for the first quarter last year.

Further, the bank actually had only 20-basis points of the net charge-offs during the quarter while our high-performing consumer finance company accounted for the remaining 17 basis points. Clearly, the bank, where the majority of the corporation's assets reside, has had an outstanding track record of excellent credit quality. Non-performing loans to total loans and non-performing assets to total assets showed similar improvement on a year-over-year and [linked] quarter basis.

The allowance for loan losses continues at a strong 1.31% of total loans and represents 1.6 times non-performing loans which is consistent with a year ago. We expect these excellent asset quality trends to continue in the future. The quarter end leverage and tangible capital ratios were 7.1% and 4.9%, respectively. F.N.B. continues to maintain its well-capitalized federal bank regulatory capital measures. Steve, that concludes my remarks about the first quarter.

Thank you, Brian. I trust you will agree that our recent acquisitions in Pittsburgh at our loan production offices in Florida are delivering the expected results. We are confident that the Legacy Bank in Harrisburg will do so, as well. The acquisition of Legacy is the most recent example of the application of our strategy of supplementing the modest growth on our local market through acquisitions in markets that are growing 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.

Having achieved our first quarter goals, we are concentrating our efforts on continuing the loan origination momentum that we have established. We expect to reap the benefits of this momentum throughout the remainder of the year and beyond. I spent a good part of last quarter's conference call discussing our loan growth objectives in the roles of the Pittsburgh and Florida expansion initiatives, as well as the acquisition of Legacy Bank in fueling this projected growth. As an update on these strategies, we pleased to report that the majority of the increased average commercial loan balances came from the Florida and Pittsburgh markets.

In fact, the Florida loan production offices have approved commitments of $116 million in new loans over the past few months with funding reaching $83 million through the end of March. The types of loans being generated in Florida are commercial real estate in nature, including construction. We expect the unfunded portion of our outstanding commitments to be drawn down over the next 18 months.

Pittsburgh is also a growing source of commercial loan originations. In fact, loan production in the first quarter has nearly equaled Pittsburgh's entire production for the year 2005. The pipeline continues to grow and we have achieved our year-to-date objectives.

The Legacy Bank merger is right on schedule. The meeting of shareholders will be held this Monday. Based on the proxies received to date we anticipate overwhelming approval. Subject to shareholder and regulatory approval, we expect to close the transaction and complete the data conversion over the Memorial Day weekend. The Legacy staff continues to be enthusiastic about the prospects of joining forces with F.N.B. Among the benefits they will enjoy are higher lending limits, expanded product offerings for business clients, and trust products that enhance their current trust services.

As for our earnings guidance, we had originally predicted a range of $1.15 to $1.20 earnings per diluted share for the year 2006. In light of the continuation of a flat yield curve and a delay in establishing our Florida mortgage production offices, we expect to be at or near the bottom of that range, including Legacy operations. This does not include the merger-related costs associated with the Legacy acquisition which are estimated at $600,000.

We remain focused on our stated financial targets. There are return on equity of 15%, return on tangible equity of 25%, and a return on assets of 1.2%. For the remainder of the year, management will remain focused on achieving strong financial results. We will continue to maintain our pristine asset quality, and we will focus on cultivating our new lending markets in Pittsburgh, Florida, and Harrisburg. That concludes our collective remarks for this conference call. I will now ask the operator to poll the audience for any questions.

Thank you, gentlemen. Ladies and gentlemen, the floor is now open for questions. [OPERATOR INSTRUCTIONS] Please hold while we poll for questions. Our first question is coming from Marsella Martino. Please state your affiliation and pose your question.

This is Marsella from Keybanc Capital Markets. Good morning, guys.

Good morning, Marsella.

Just a few questions. First off, congratulations on the success in the Florida market. I was wondering if you could talk a little bit about your staffing situation there and if you are planning on hiring additional loan officers in that market?

I think we'll let Gary Roberts, our bank CEO, tackle that one.

Good morning, Marsella, how are you?

Good, how are you?

Good. We today have four lenders on the field down in Florida in Orlando, Sarasota, Fort Myers, and Naples, and, in fact, we do have plans to expand into Tampa, I think, as we announced in our earliest conference call about Florida. So the answer to your question is, yes, we do plan further expansion as well as, perhaps, the addition of yet another back-up lender in each one of those markets to continue the progress that we've made there.

Okay. And are you finding it difficult or competitive to attract these individuals, or how is the competitive landscape down there?

Strangely enough those folks that have joined us in each one of those individual markets are individuals that we have had experience with in the past.

Okay.

So we have not had as much problem as one might suspect in finding that qualified person.

Great, thank you. I think this question is for Brian. In the other fee income line it was up a little more than I had thought. Was there anything unusual in that line item?

Yes, Marsella, that's-- in our accounting for the North Side acquisition, we had a few credits that had to be accounted for under what they call SOP 3-3 where we wrote them down to our best guess at fair value at that time.

Okay.

Subsequent to that there were a couple of actions on a couple of smaller credits that ended up delivering more cash flow than we had estimated and we closed those out. The accounting literature says you have to book that as other income.

Okay.

So there's a couple hundred thousand that flowed through this quarter.

Great. Thank you so much.

Thank you. Our next question is coming from James Record. Sir, please state your affiliation and then pose your question.

Sterne, Agee. Hi, guys.

Hi, James, how are you?

Pretty good, thanks. Just a quick sort of housekeeping. The occupancy and equipment line, sort of jumped up a good bit this quarter. Is there anything to add to that, Brian or is that--?

Well it will always jump from fourth quarter to first because of the seasonality and certainly the utilities costs and other winter -- snow removal. So if you compare really year-over-year.

Yes.

That's the way I tend to look at that line. It's up a little bit and, of course, we had North Side and North East that were added.

Okay. One other one. I think historically you had suggested a 31% tax rate. I think last year was a little screwy because of the one-time items you had, but is that still your expectation?

That's what we use for planning purposes. I know the quarter came in just a little bit less than that. But for our planning purposes we use about 31, but it could be-- it's going to be slightly below that.

Okay. And-- thank you. And if I could get you guys also-- I'll ask this and then sign off-- I know you guys were getting into Florida right when I think some of the other lenders down there sort of, you know, pulling back a little bit, and I guess I would like to hear your thoughts sort of on the real estate environment down there and-- and sort of a-- what sort of precautions you are taking and what you are seeing in the markets that you are in down there?

Well, James, we're average starters first of all. We're dealing with, as Gary mentioned, former executives that we know real well and have a lot of confidence in. They were part of our leadership team when we had a Florida bank, so we're very comfortable with our staff. Second of all, we're dealing-- they are dealing with-- with customers that they know that they've-- and often times have dealt with in the past in markets that they are familiar with. And then-- we put in the structure, what-- what I label of quality control filter in that our former senior credit officer from F.N.B. who, before the spin, was based in Florida, [C.C. Caughill], very experienced lender. Had a lot of confidence in C.C.'s credit skills. He's [INAUDIBLE] north Florida market and the projects we're doing. And the process is all these deals that we're looking at go through him for signoff and if-- if he doesn't like the deal we never see the deal.

If he-- after having looked at-- perhaps the project and the financials, projections and what not approves the project then it comes up here to Pennsylvania for further underwriting. We're very confident with the structure and the people we have in place. As far as the general overall market conditions, in the markets we're in we're being cautious. We're being aware that-- of-- of today's circumstances, but it hasn't affected our projects, and it hasn't affected our developers so far. I don't know if there's anything you want to add to that, Gary?

No, I think you've said it all.

Thank you.

Thank you. Our next question is coming from Colin Dunn. Please state your affiliation, then pose your question.

KBW. Good morning, guys.

Good morning, Colin.

I guess the first question would be, I think you've probably already answered it, but with respect to the net interest margin, excluding the impact of the restructuring and the [flop] that came on, there was probably a little bit of core compression this quarter of some of that yield curve related. Might some of that also have been related to maybe mix shifted in the deposit base based on the introduction of more savings and [NOW] accounts versus non-interest bearing?

For the quarter we were able to manage, as I mentioned, the yield went up 24 basis points and the cost of funds went up 23 basis points. We clearly, when we did the restructuring in December, had an eye on putting in place a premium money market account to give our customers an attractive-- and our regions-- an attractive account acquisition strategy and we certainly are seeing success in that. That will increase those deposit costs, but we did give ourselves that flexibility out of that restructuring. I think as we go forward the flatness of the yield curve, certainly, it's hard to position your balance sheet for every situation. But we're feeling it's going to be in a relevant range here, as I mentioned, the first quarter was a little strong. We had some longer loan fees in it and a couple of other things that gave us a little boost, but feeling okay here for a short period of time, and as I think the best of any of us can be thinking right now.

Okay. With respect to the deposit growth, looked like, you know, there was the-- some pressure on the non-interest bearing accounts and then on the stronger [NOW] and money market accounts. Was there any cannibalization there?

We certainly plan for a little bit of cannibalization. But we have seasonal drop that always happens in the first quarter after the buying season of the Christmas holidays that our DVA deposits will drop, both in personal and business, and then they'll recover-- they'll actually recover up through the tax days. And-- and certainly some-- our customers, I think we have seen this in the industry in total as we track our movement of customers, is that they are looking for the higher ground, and they are getting smarter and being attracted to the higher rates. Gary if there's anything you want to add?

I think that's a pretty good observation. The Lifestyle 50 accounts which have grown in popularity among our customer base and the first rate suite of products, as Brian mentioned, which was a planned for expansion, have resulted in-- along with the seasonality that Brian mentioned-- have resulted exactly as you have seen, and it was planned for.

Okay. And the final question, just would relate to expenses. Comp expenses a little higher than I had expected, is that associated with the strong contingency fees in the quarter and might we see a decline in the following quarters as contingency fees decline?

I can't address your initial observation because it certainly wasn't higher than what we expected, but there certainly would have been a little bit of commissions from that. We're looking for total expenses to be relatively stable as we go forward. We do get a little benefit out of the employee taxes as the year plays out.

All right. Thanks a lot, guys, for taking the questions.

Once again the floor is open for questions. [OPERATOR INSTRUCTIONS] Our next question is comes from Andy Borrmann. Please state your affiliation, then pose your question.

Robinson Humphrey. How is going this morning, guys?

Good, Andy, how are you?

Doing well. Doing well. Couple of questions, one, I have to think of the $83 million that you talked about being funded at the end of March in Florida is kind of above plan, or at least-- I don't know if it's above plan or not, but it's pretty strong. Are you guys looking at you giving guidance to $200 million from Florida this year, are you guys still looking at that as likely, or does the $83 million make you rethink that number higher?

Well I would answer it this way, Andy, $83 million is certainly encouraging to us if we're going to meet our plan of $200 million. At this point in time we started the year looking for $200 million in production and we think we will certainly get to the $200 million figure. I think it's too early in the year to speculate whether we are going to get some other ending other than the fact we feel very comfortable with our original projection of $200 million.

Do you feel like the $83 million maybe was-- was there some low-hanging fruit in there with these guys coming over with existing relationships maybe?

It is Gary Roberts. Yes, I think there's probably a little bit of that and to Steve's point of the $200 million number in the earlier question, things are slowing a little bit in the Florida market and of course that being the case bubble or no bubble we're being cautious under the framework that he had described. So 83 sounds like an early-- an early win, but you know, as we proceed through the year, we're coming out of season here for them pretty quickly, so I'm not sure the results are going to be dramatically better than we expected at least at this point.

Okay. That's fair. And then one of the questions, with the balance sheet restructuring you all had in the fourth quarter, on an average basis your earning assets were down about 10%, you know-- I think that's [linked] quarter annualized as I'm looking at my model, yes. Couple-- 2.5% maybe, straight from the fourth quarter. How are you guys expecting that to fall out for the rest of the year? I know you are funding some of the loans out of securities, and you've got some other consumer stuff run-off. But how do you looking at earnings assets growing throughout the rest of the year?

We did in our restructuring delever slightly by getting rid of about $100 million in a Fed fund purchase position, so that's what you are seeing quarter-to-quarter.

Right.

Andy. As we planned out the year, we saw the strong growth, I think we said upper single digits in loans being funded by balance sheet expansion, but also continued reduction in the investment securities. So we were looking for earning asset expansion for the year to be in that 4% range.

Okay. Okay. I think that's probably it for my questions at this point any way, if I come up with something else I'll give you guys a call.

Good, Andy. Anytime, thank you.

Our next question is coming from Andy Stapp. Please state your affiliation, then pose your question.

Cohen Brothers. Hi, guys.

Hi, Andy.

All of my questions have already been asked. Nothing for me.

Good.

Okay. Well it's good to talk to you Andy.

Thanks, good to talk to you.

Once again the floor is open for questions. [OPERATOR INSTRUCTIONS] Our next question is coming from Michael [Wapnick]. Please state your affiliation, then pose your question.

The Herald newspaper in Sharon. Hi, fellows, just one quick question for you, excluding the Pittsburgh market how has your loan volume been in the rest of the western Pennsylvania market?

I think it has meeting expectations, Michael. I think the general overall economic conditions have continued to-- to improve. The consumer is typically slower this time of year, part of that is weather-related and so forth. We have every expectation with the warmer weather and home improvement season, vacations, education cycles coming up that we might get a little more activity there. On the commercial side, our plan for the year was we were going to get most of the growth from Pittsburgh and Florida and that's certainly the case, and we hope to add Harrisburg to that after we close in another month. And the rest of our footprint is-- is holding it's own.

Very good. Thanks, guys.

Thank you. Our next question is coming from David Darst. Please state your affiliation and pose your question.

FTN. Good morning.

Hi, David.

Steve, you indicated your originations in Pittsburgh year-to-date have exceeded 2005, is that correct?

I think my remark was it nearly exceeded. It is-- it is very, very close to the entire production out of Pittsburgh for last year.

Okay. Is it reasonable to assume that the bulk of your production in Pittsburgh occurred in the last four to five months of the year once you had a management change within that market?

Yes. That-- that's a good assumption and even-- even stronger into the first quarter this year because I think Vince [D'Ali] joined us, I want to say about the first part of October. And of course, then he set about immediately building his team of lenders which took the fourth quarter to basically do. We did get some production out of the fourth quarter. But the team is now on the field in place and making good progress.

Is his team fully staffed or will he add more lenders?

We're two lenders short at this time and hope to have those positions filled-- well, this quarter.

Okay. And Brian, could you give us an idea of how-- what period insecurities might do in the second quarter? How much cash will you expect?

At the end of the second quarter?

From the second quarter to June 30-- or from March 31 to June 30.

David, I would be purely guessing, and I guess I'm not comfortable doing that. I know we have $1.131 billion. And I think we're going to runoff through the rest of the year for the last nine months about $150 million, so if you just pro rate it for that, but don't hold me to it.

Okay. And was there anything unusual that happened within your average share count during the quarter? It looks like it declined.

Yes, you know it-- well, good-- good pick up there, David. We adopted 123R on a prospective basis and that had us revisit how we accounted for some of our restricted shares and it actually brought down the count on a go-forward basis. Going forward you'll see the same kind of additions each quarter for stock options and other things.

Okay. So the first quarter average is a good number and then we'll see the growth going forward from--

Out of those shares? Yes.

And then there will be no buy backs?

We-- we-- we do-- when we're not in a deal period but we have been in a deal period for so long, but-- we haven't been buying back very much at all.

Right. Okay. Great thanks a lot.

Thank you. Our next question is coming from [Charlie Smith]. Please state your affiliation and pose your question.

Yes. It's [Forfeit Capital]. Good morning. Your trust income line year-over-year was up about 3%. At that time period the S&P was up almost 10%. Can you give me some color on what's going on there?

The trust income line year-over-year, you do need to make one adjustment that we do internally. We had a system conversion that accelerated some little accrual items that bumped the first quarter last year by about $120,000, so we look at it internally and that grew 3% to 4%.

Okay.

In total.

All right.

And with our mix of assets that was-- that was about right.

What is the mix?

We're about half in the fixed income money market and about half in equities.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] I'm showing no further questions or comments at this time. Did you have any closing comments, gentlemen?

Yes I do, [Dina.] As a point of information for our shareholders, the corporation has distributed it's Annual Report, our 10-K, and proxy statement for our upcoming annual meeting. The meeting is scheduled for May 17th at 4:00 p.m. in the Howard Miller Student Center of Thiel College in Greenville, Pennsylvania. We encourage all shareholders to vote by proxy and attend our annual meeting. If you hold F.N.B. stock in street name and have not received our proxy material, we urge you to please contact your stock broker. Replays of this call will be available through April 29, by calling 1-800-332-6854 with the code 3044. You can also access a transcript of today's call on our website at www.fnbcorporation.com. This concludes our conference call. I personally thank all of you for joining us today and wish you a good weekend.

Thank you, gentlemen. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and end joy the rest of your day.