FNB Corp (FNB) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the F.N.B. second-quarter 2006 conference 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.

This conference call of F.N.B. Corporation and the reports 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. management's assumptions and beliefs relating to present and future trends 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 margin; changes in prepayment speeds, loan sales volumes, charge-offs and long-loss provisions; less favorable than expected general economic conditions; legislative or regulatory changes that may adversely affect the businesses in which F.N.B. is engaged; technological issues which may adversely affect F.N.B.'s financial operations or customers; changes in 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 turn the floor over to your host, Steve Gurgovits. Sir, the floor is yours.

Thank you, Janice. Good morning, everyone, and welcome to F.N.B. Corporation's conference call for the second quarter of 2006. I am Steve Gurgovits, President and CEO of F.N.B. Joining me on this call is Brian Lilly, our Chief Financial Officer, and Gary Roberts, President of our largest affiliate, First National Bank of Pennsylvania.

We have been looking forward to sharing the results of the second quarter because as you will see shortly, it has been a very active and in our opinion a very successful period. F.N.B. posted net income for the second quarter of $16.6 million or $0.28 per diluted share. We achieved a return on equity of 13.4%, a return on tangible equity of 26.6%, and a return on assets of 1.15%.

We're very pleased with the solid financial performance considering the challenges presented by the flat yield curve that everyone in our industry is coping with. Because we expect that the yield curve will remain largely unchanged through the remainder of the year, we have been proactive in seeking opportunities to offset the potential negative effect of any further shrinkage in the margin. Our goal is to continue our trend of improving earnings per share going forward.

As an example of this, during the second quarter, we restructured and modernized our pension plan. As a result, although our pension costs will remain the same for the long run, we will achieve cost savings in the short term. Most importantly, however, the new structure will substantially reduce the volatility of our pension expense in the future. From our employees' perspective, the pension program is now designed to meet the needs of today's workforce. All of these pension changes will take effect January 1, 2007.

During the second quarter, we've maintained our focus on successful execution of our strategy. As you will recall, the purpose of our entry into the Pittsburgh and Harrisburg markets, as well as the opening of our Florida loan production offices, was to supplement our locally modest organic growth with the stronger growth opportunities available in these regions. I am pleased to report that the numbers are in and our strategy is working. Since December 31, we've realized a strong 8.4% annualized increase in total loans, excluding the Legacy Bank acquisition. The majority of this growth comes from commercial loans, which are up over 21% in the first half of 2006. Supporting this growth, our loan production offices in Florida have generated approved loan commitments of $248 million with outstandings of $155 million through the end of June. We expect the unfunded portion of our outstanding commitments to be drawn down over the next 18 months.

Pittsburgh loan volumes continue to grow as well. In fact, through June, we have achieved a level of $50 million in new loan production, which is right on plan and represents a 172% increase over all of last year. The pipeline continues to grow, and we are on target to achieve our stated goals in that market.

To further illustrate our commitment to serving the Pittsburgh market, we just recently opened a new branch office in downtown Pittsburgh. Centrally located at One Oliver Plaza on Sixth Avenue, the branch is positioned to offer a higher level of service to the area's corporate and professional clients. Frankly, we expect these markets, as well as the growing Harrisburg market, to be the key to our future growth. Remember, at Harrisburg, Legacy enjoyed a five-year compound annual growth rate in commercial loans of 40%, and it gets better. Legacy was just recognized by the Small Business Administration as the National Small 7-A U.S. Lender of the Year.

As further evidence of our growth strategy, we recently expanded our Florida loan production capabilities by doubling the number of offices from two to four. The new offices are in Fort Myers and Naples, joining the existing offices in Sarasota and Orlando. What continues to make this unique to F.N.B. is, once again, we've reunited with former Florida-based F.N.B. commercial lenders. These gentlemen understand our strong credit culture and our stringent underwriting standards. We continue to be impressed not only with the volume these lenders are producing but we are especially impressed with the quality of transactions, the strength of our borrowers, and the pricing on the deal.

In summary, we have dramatically grown our loan production without any sacrifice in asset quality. In fact, our loan quality measurement trends are improving every quarter. Brian will elaborate on these numbers during his portion of today's presentation.

In my opinion, we have a premier commercial lending team led by a group of seasoned lenders that are motivated to be the best providers of lending services to the small and middle markets. In fact, our calling officers of an average of 20 years of experience in commercial lending and represent a key core competency of the Bank.

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

Thank you, Steve, and good morning, everyone.

As Steve noted earlier, we achieved $0.28 per diluted share in the second quarter, which increased from $0.27 diluted share in the first quarter. We achieved this growth through a combination of loan and deposit growth, which offset a slight narrowing of the margin, coupled with continued gains in non-interest income, strong asset quality and expense control.

The loan growth that Steve outlined grew earning assets 3.4% annualized on a linked-quarter basis, before the impact of the Legacy Bank. In addition, much of the loan growth came with variable rates and helped increase our earning asset yield 18 basis points or 6.6%. We funded the earning asset growth with a 3% annualized deposit growth, again before the Legacy Bank.

We continue to have success growing our first-rate suite of deposits products. We did experience a higher cost of deposits, as our cost of funds increased 29 basis points during the quarter. Most of the increase was expected with the success of our first-rate product. However, we also have seen a shift in the deposit mix. Consumers appear to have reached an inflection point whereby there are moving lower-cost [DVAs] and savings balances to more attractive money market and CD rates.

The resulting net interest income, on a fully-tax equivalent basis, was $47.6 million and was higher than the first quarter, as the balance sheet growth more than offset a 9 basis points narrowing in the net interest margin. Looking forward, a sustained flat yield curve and a continuing rise in our cost of funds will provide pressure on our net interest margin. Considering these factors, our modeling indicates improvement in net interest income going forward, driven by higher loan outstandings with the margin narrowing slightly as the cost of funds increase.

Non-interest income totaled $20.8 million, representing an increase of 3.4% over the first quarter. We realized the seasonal increases in our service charges and deposits and the seasonal decreases in insurance contingency fees. We were pleased to see a 38% linked-quarter increase in retail securities commission and fees. This product line has again become more attractive to consumers as the interest rates on annuity products caught up with the market rates.

Finally, the primary driver of the linked-quarter increase was an $894,000 gain on a settlement of an impaired loan acquired in the previous merger. This loan had been written down to an estimated fair market value in the first quarter last year in accordance with the then-new accounting guidance. Through the efforts of our special assets group, we were able to strengthen F.N.B.'s position and realize a greater value on settlement. Accordingly, we've recognized a gain in other income in the second quarter. Going forward, we will benefit from full quarters of Legacy fee income and expect non-interest income to continue in the range of 20 to $21 million.

Although it's not immediately evident, we are also pleased with our efforts regarding expense control. Noninterest expense totaled $41.2 million in the second quarter, representing a linked-quarter increase of 2.3%. The entire increase is due to the addition of the Legacy Bank. We incurred approximately $1 million in the second quarter with half of the expense in merger-related costs. Excluding Legacy, we held non-interest expenses flat on a sequential-quarter basis.

Looking forward to the remaining quarters of 2006, we anticipate that expenses will approximate a run rate of $41 million with a full quarter's additional operating expenses of Legacy being offset by the lower costs of our pension and post-retirement benefit plans that Steve mentioned earlier. The efficiency ratio is 58.7% in the second quarter. We continue to target that level at 55%.

Credit quality remains at strong levels. Annualized net charge-offs were 27 basis points of average loans for the quarter, representing a 10 basis-point reduction in the linked-quarter basis and roughly half the level of the second quarter last year. Further, the Bank actually had only 15 basis points of the net charge-offs during the quarter, while our consumer finance subsidiary accounted for the remaining 12 basis points.

Nonperforming loans to total loans improved to 74 basis points, decreasing from 81 basis points both last year and last quarter. As a result of these strong asset-quality measures, the provision for loan losses was reduced to $2.5 million in the second quarter from $3 million last quarter, resulting in an allowance for loan losses at 1.26% of loans and 1.7 times nonperforming loans.

Capital ratios are consistent with the first quarter. The quarter-end leverage capital ratio was 7.1%, after adjusting to include Legacy's assets for the full quarter. The dividend payout ratio decreased to 81% in the second quarter and comfortably supported our industry-leading dividend yield of 5.9%. At June 30, 2006, F.N.B. continued to maintain its well-capitalized federal bank regulatory capital measures.

Steve, that concludes my remarks.

Thanks, Brian.

I continue to be encouraged by the success of our expansion into higher-growth markets and tight expense control. We can build on the foundation of these efforts to help sustain income growth well into the future. Relative to our earnings going forward, the flat yield curve and rising deposit costs cause us to remain cautious. That said, however, we're still comfortable with the current Street consensus estimates for the full year, 2006.

Now, on other news, at the F.N.B. Annual Meeting in May, shareholders reelected Robert Goldstein, David Malone, William Strimbu, and Archie Wallace to the Board of Directors. In June, we added a new director to the Corporation board. Dawne S. Hickton is Chief Administrator Officer of RTI International Metals. She brings exceptionally strong governance knowledge and experience to our board. At our board meeting last Wednesday, directors elected Art Rooney II as a new director. Mr. Rooney is President and CEO of the Pittsburgh Steelers. He is a prominent Pittsburgh businessman who will be of immense help to us in the implementation of our Pittsburgh growth strategy. Mr. Rooney was a director of the former Northside Bank for 16 years.

Finally, at my suggestion, the Board of Directors has created a committee to address CEO succession. I will be turning 65 in 2008, and I repeat in 2008, and wish to ensure a smooth transition to the next CEO of F.N.B. This provides the Board with an adequate timeframe to find the best candidate, either internally or outside the Company. I do believe that succession planning is a very important responsibility of the Board and the CEO. Our action, I believe, is simply good corporate governance. In the meantime, it is business as usual at F.N.B. The activities of the committee will not distract management from remaining focused on the continued successful execution of our strategic plan.

Operator, that concludes our remarks for the conference call. Will you please poll the audience for any questions?

Thank you. Gentlemen, ladies and gentlemen, the floor is now open for questions. (OPERATOR INSTRUCTIONS). James Record.

With (indiscernible). Good morning, guys. Would you just give us a refresher of your floor plans? Is this the four that you have now sort of loan production offices? Is that all that was part of your current plan and then also your attitude toward potential acquisitions down there?

Well, actually, we initially opened with the two offices, James. We were able to successfully find and staff with former F.N.B. Florida commercial lenders two additional offices in Fort Myers and Naples. Again, all four of those communities are communities that we knew pretty well, we were successful in previously, and these gentlemen are very familiar with those markets. In addition to those four, we have hopes and plans of opening a fifth in the Tampa area in the not-too-distant future. For the moment, that's about where we are with the loan production offices.

As far as acquisitions, I will say what I have said in the past -- that right now, we are focused on getting these loan production offices up and running. They are obviously doing very well; they are likely to certainly meet our expectations for the year if not exceed them. For the moment, that's what we're concentrating on.

Okay. Then on your expense savings, which I assume you expect to come in the personnel line, could you give us a little more detail on that? Steve, I thought you had said they were going to come in the beginning of '07, and then maybe Brian said we expect some efficiencies next quarter, so maybe you could give us a little more detail on --?

(multiple speakers).

Okay.

Yes, the accounting for that -- that savings arises because of changes in actuarial assumptions, James. The accounting literature tells us that we need to begin booking the actuarial gain back to really a [contrary] expense, beginning with the Board's approval of the change in the plan. That took place at the end of June here. So beginning in the third and fourth quarter is when we will begin the accounting recognition for that actuarial gain in the pension accounting. That will continue for -- I think it's about 13 average life of our underlying employee base.

What are we talking about in terms of dollar amount?

Well, we are we measuring that right now. We have our own estimates, but I think it would be too early for me just to throw a number out to you. We have it worked into our own forecast, James, but we have to remeasure, as of July 1, the official number.

All right, thanks a lot.

[Kevin Prielauger].

[Perkins McDonald]. Just going back to Florida for a minute, what is the size of the loan portfolio down there now and if you could give the composition?

Well, we have outstandings. We've got about $248 million in approvals, Kevin. We have about $155 million drawn down on those commitments. As I said in my remarks, we expect the rest to be drawn down over the next 18 months or so. That's largely -- it's almost all commercial real estate. There are different components to it. First of all, I would suggest, Kevin, even though we are having success down there, at least in terms of our expectations, the total portfolio is still less than 5% of the total bank portfolio. But it's mainly on commercial real estate, on apartment buildings, strip centers, land-development loans, mostly in the Orlando and Sarasota market, although more recently, we have been adding Fort Myers and Naples with the two new offices that we opened in the second quarter. But it's generally all commercial lending, commercial real estate.

Okay. Back on the consumer finance segment, just if you could give kind of your observations on credit and the credit outlook, in terms of what you are seeing on the consumer finance area -- you know, any weakness or how do you guys feel about that portfolio at this time, and just I guess the Pennsylvania economy in general where you are operating over in Harrisburg and up Pittsburgh and up in those parts -- how does it look?

Okay, let me start with the consumer finance company. What you have to remember, Kevin, is back in October of last year, the bankruptcy law was changing and did change. Ahead of that, you know, there were a lot of attorneys and others running ads saying, you know, if you want to consider bankruptcy, you better do it because it's more favorable for the consumer under the old law apparently than under the new law. So Regency, like a lot of other people in the consumer credit business, saw an increase in delinquencies in '05. What that actually did then is set the finance company up in '06 to have what I consider to be superior asset quality. Their delinquencies are down from; their nonperformings are down; their bankruptcy filings are down. Their charge-offs are down. I mean, their credit quality in '06 is as good as I've seen it and we've had this company since the early '70s. Now, we all know that, eventually, we will get back to a more normal cycle and probably there will be a normal amount of bankruptcy filings that you would experience in this line of business. But for the moment, the finance company is doing very well.

As far as the local economy goes, I would say it continues to -- you know, it's stable to slightly increasing or improving in the eastern Ohio and western Pennsylvania market. When you get to Pittsburgh, even though that's part of western Pennsylvania, that's such a large market and we have what we think are great opportunities down there. We set a goal, if you'll recall, of $100 million for commercial loan originations this year. We're just about exactly at the halfway point of the year with 50 million approved. We've got a good team on the field led by Vince Delie. We've added Dawne Hickton to our Board, who is a Pittsburgh -- she lives in Pittsburgh; she's a lawyer who is affiliated with a firm that her husband is affiliated with in Pittsburgh. She has Pittsburgh connections. Then with the addition of Art Rooney from the Pittsburgh Steelers last week, we think that gives us a lot more prominence and recognition in the market. Mr. Rooney comes from a very, very well known -- nationally, even -- and very well-regarded family, and we're looking forward to the help of both of those new directors in Pittsburgh.

Harrisburg, being the state capital and being more of part of central/eastern Pennsylvania than western Pennsylvania, enjoys a stronger economy, largely supported by the state -- the state capital and state government. So we're looking at this as steady-as-you-go in our traditional markets, if you will. We have great opportunities for moving marketshares in Pittsburgh, great opportunities of growing in Harrisburg now that we have that deal closed, and continuing to do what we think we do best in Florida, which is commercial lending with some of our former colleagues.

I think, if I recall correctly, in prior quarters, you've kind of thrown out (indiscernible) on Florida on just kind of the loan production targets that you think you could do for the year, and I want to say 250 sticks in my mind for I think kind of the midyear target or year-end target.

Now for the year, Kevin, we had hoped Florida would generate $200 million worth of loans.

Okay, so you're running out of plan.

Yes, we are running ahead -- there's no question in my mind that we will meet our objectivity year, and if they continue with this pace and with the two new offices, we could exceed that.

Now, is the funding for those loans down in Florida -- that is all kind of taken out of the Pennsylvania banks?

Yes. Mainly what we've been doing is reducing our investment portfolio to provide the funding for those loans and picking up the incremental yield.

Okay. Just on the deposit environment in Pennsylvania, any change from prior quarters or --?

I don't think so. We are still having tremendous success with our seniors product. That's becoming more and more popular, and you know, we have a package of products for them. They tend to tell others that they socialize with about it, and these people want to join. There's a travel package that goes with this, along with a full array of banking services. That's overwhelmingly our largest category of deposits. But we look at that in a very positive way because, number one, the demographics in this market show that it's a very elderly market, if you will, at least the seniors market, and we find these customers to be very loyal. They like the menu of services that come with that package; they like some of the social activities that come with it. We are pretty convinced that this is going to be a pretty solid relationship for us.

But other than that, you know, we continue to work. We are a relationship bank. We are making commercial loans up here, we're getting commercial relationships, and sometimes wealth-management relationships as well.

Okay, that's all I've got. Thanks a lot, guys.

[Colin Dunn].

KBW. Good morning, guys. I was hoping you guys could quantify maybe what portion of the margin declines sequentially might have come from Legacy, considering they had a lower margin than you, obviously understanding that the bank was smaller, but --

Well, and also that they were only in the quarter for a month. If you look at our margin and you go back to our reporting margin here for the second quarter, let me just back tie a couple of things together to you that we've talked over the last couple of quarters. Recall in the fourth quarter that we were about 377. Now, we are about 373, 372. And we had a bump, then, in the first quarter.

When we did the restructuring activity, what we communicated was we were doing that for a couple of things, one on the earning asset side, but it was also giving us some headroom in the space in order to offer some competitive deposit products -- the first-rate accounts which, as Steve was rolling in with -- the lifestyle products have been very successful for us since the beginning of the year. The guidance we gave came out of there was that the first quarter actually inflated more than we expected because the product needed to get up and running. We are seeing the full effect of that and we had expected the margin to be in the 375, 376, 377 range this quarter. It came in a little bit lower because of the mix change that we are experiencing, but it's something that we're managing very tightly.

So Legacy really had very little impact on it right now. We are in the process of finalizing those mark-to-markets and not expecting that we should get a lot of impact out of it, but (indiscernible) more -- I haven't really focused on it because it had so little impact in the second quarter, Colin.

Okay. I just missed the end of the Pittsburgh origination talk. Did you say originations year-to-date were 172% above year-to-date '05 or all of '05?

All of '05. We are almost double last year's total production. We're real pleased with that.

All right. Then how much of the originations from Florida came from the two new offices, the newer offices?

Actually, Colin, I don't have that breakdown in front of me by office, but those two offices were opened in the second quarter, so I think it's very safe to assume that most of that origination is from the former two, Orlando and Sarasota.

Okay. I think you had mentioned, maybe on the previous quarter's conference call, that you had hoped to do more originate and sell of one to four family mortgage loans out of Florida. Did that come into play this quarter or is that still developing?

No, it's in development but it's not in the numbers this quarter.

Okay. Then finally, as I think about the margin over the next two quarters, I know you already mentioned it a bit, but what sort of securities cash flows are you expecting in the third quarter, maybe the fourth quarter, to give us an idea of how you will fund what looks like is going to be some strong loan growth?

Well, with the restructuring that we did in the fourth quarter, we went short with a large chunk of our remaining available-for-sale portfolio. And we will have -- we have at least $150 million coming due over the next nine months in that portfolio. We are also focused on enhancing the profitability and we're looking at other pieces of our business to make sure that we are choosing the right assets to trade when in fact we want to trade them.

All right. One more quick question -- where is the -- what's the size of the Regency portfolio now?

About $150 million.

For a round number, $150 million, Colin.

Okay, pretty stable. Thanks a lot, guys.

Andy Borrmann.

Robinson Humphrey. Just a couple quick of questions -- one, can you tell us how the loan production was for the Legacy bank this quarter?

I don't have the number in front of me. We just closed it over Memorial Day weekend, so it's really one month of production. Gary?

What I can share with you and not in a production term, Andy, but when we did our due diligence of course and put the modeling together at the end of the fourth quarter, we developed a 2006 plan that we thought made sense in concert with the Legacy team, in that the loans that they can over with are almost right on top of that plan in outstandings. So we felt good with the momentum; it grew in the first quarter and into the second quarter, and we feel good with the momentum they had at the June 1 totals that we had.

Andy, I'm looking at a report here that I have been digging up while is Brian was talking. It looks like it's about $11.5 million closed in the month of June.

Okay, that's good. One other question -- a lot of questions have already been asked but are you all still kind of letting the consumer portfolio run off, or has that kind of slowed? It looks like maybe it slowed -- the runoff had slowed down in this quarter.

Well, you know, we have indicated -- I'm stumbling over my tongue there. We've indicated, in the past, that we were focused on growing the commercial portfolio in their direct and lines of credit portfolio for our consumers and that we're using really as a lever the indirect and the mortgage residential portfolio, so some of those will continue to decrease. That's what I was meaning earlier when we were making the decisions between the investment portfolio and other non-relationship-oriented portfolios.

Okay. That's really all I have, guys. I appreciate it.

David Darst.

Good morning. FTN. The deposit products that you had mentioned, are they helping you to also drive higher service-charge growth over the next year or primarily just deposit growth?

It's primarily deposit growth focused, the increase that we saw in this particular quarter. It has given us the opportunity. Make no mistake. We have new money requirements coming in there and it has given us the opportunity to attract new accounts and to generate deposits, but the big jump that we had [first] second quarter was more seasonal than related to those products. But yes, it is a (indiscernible) strategy from that standpoint.

Do you have any other programs or strategies that you will implement over the next six months?

I don't know if we've got that much time to go through all of those! (LAUGHTER). Our team is pretty active in a challenging environment constantly. Well, Gary Roberts is here. I don't know if Gary, you have any --?

David, we're planning on introducing at least one new product that we think will add to our non-interest-bearing deposits and hopefully help increase some service charges as well. It will be appealing to a different customer segment than our current product line today addresses. And hopefully, we will get that all done within the next 30 to 45 days and you will see the announcement.

Okay. Then how about, with respect to Harrisburg, do you have any branching plans or hiring or expansion plans that you can share with us?

We don't have any expansion or branch plans at this particular time except that what we have done, David, is we've reallocated some salary dollars in our commercial loan department. We've moved them out of some of the areas which are perhaps slower-growing, where we may not have as much opportunity, and we've reallocated those dollars and people to the Harrisburg market so that we can take advantage of what we think are going to be stronger opportunities.

Does that mean you are looking for lenders?

We are always looking for good lenders, always.

In some cases, we transfer them, and in other cases, we're looking.

Yes, it's a combination of both. We transferred some of our existing team out there, and as well as with would always be interested in, in a good commercial lender.

As you will remember from our remarks, you know, we have a very seasoned team. We do think that's one of our key core competencies. It builds relationships and with on average 20 years experience that every lender has. I mean, we have a very competent commercial lending team.

(OPERATOR INSTRUCTIONS). Sir, there appear to be no further questions in queue. Do you have any closing comments you would like to finish with?

Sure, I will. First of all, I want to thank everybody for participating today. Replays of this call will be available through July 28 by calling 1-800-332-6854 with the code 3044. You can also access a transcript of today's call on our Web site, www.FNBCorporation.com. Again, thank you for your participation and have a good day.

Thank you, 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.