FNB Corp (FNB) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the F.N.B. Corporation third 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 that are filed 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 or future trends or factors affecting future performance of F.N.B. and the banking of 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 payment and prepayment speeds, loan sale volumes, charge offs, and loan loss provisions, less than 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 reflect events or circumstances after the date of this call.

It is now my pleasure to turn the floor over to your host, Steven Gurgovits, President and CEO of F.N.B. Corporation. Sir, the floor is yours.

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

I am pleased to report that F.N.B. has continued our trend of improved earnings quarter over quarter. In the recently completed third quarter, we are nearly $18 million or $0.29 per diluted share. Return on equity was 13%, return on tangible equity was 27% and return on assets 1.2%. We believe our return on tangible equity remains among the highest in our peer group. Total revenues for the third quarter, at $70 million, were up an annualized 8% on a link quarter basis and 4% over the same period last year. Our recently implemented strategies for planned growth continue to perform as we anticipated. As a result, interest income increased 8.5% over the previous quarter, due to the growth in total loans. Average commercial loans increased 11.5% on a link quarter basis. Commercial loans grew organically, excluding the impact of the Legacy Bank acquisition, by 2.2% for the quarter, or 9% annualized. In addition, the commercial loan pipeline remains strong at $230 million on September 30.

The continued growth and loans from our operations in Florida and Pittsburgh supports this source of future interest income. Frankly, we are very pleased with the results of our strategic plans and their effective implementation. In Florida we have loan outstandings of $186 million and have originated $279 million so far this year. At the beginning of the year, our goal for this market had been $200 million. We have already exceeded that target by nearly 40%. The Pittsburgh market has delivered an additional $75 million to date. Right in line with our production goal of $100 million. We anticipate even grater expansion of our loan capabilities as a result of our recent acquisition of the Legacy Bank which has given us access to the markets in central Pennsylvania.

Now that I've given you the highlights of our successful quarterly performance, Brian will provide the details. Brian?

Thank you, Steve. And good morning everyone. As Steve noted earlier, we achieved $0.29 per diluted share in the third quarter which increased from the $0.28 per diluted share in the second quarter. This growth continues the trend of quarter over quarter improvements in financial performance since the $0.27 we achieved in the first quarter of 2006. We are particularly proud to have delivered on our forecast which we shared with you at the beginning of this year. And we have accomplished this in the face of a challenging rate environment.

Turning to the details of the third quarter, we achieved the quarterly earnings increase through a combination of loan and deposit growth, coupled with continued gains in noninterest income, strong asset quality and expense control. The average earning assets expanded 5% on a linked quarter basis, primarily due to the addition of the Legacy Bank. On a quarter end basis, we managed the earning assets flat as we partially funded loan growth through to runoff in the investment portfolio. This strategy continues to enhance our earning asset yield, improving 15 basis points over the second quarter, and increasing interest income 8.5% on a linked quarter basis.

On the funding side, we successfully grew our deposits and customer repurchase agreements an annualized 4.4% over the end of the second quarter. Of particular note was the success that our treasury management group experienced in selling cash management accounts to businesses in the form of customer repurchase agreements. This category grew $29 million or 15% on a linked quarter. It is worth noting that the strength of our deposit growth coupled with careful balance sheet management allowed us to decrease our borrowings, $230 million or 21% since the third quarter last year.

As discussed in the past few quarters, the challenging yield curve, competitive pricing pressures and the continued shift in deposit mix contributed to an increase in our cost of funds of 25 basis points, to 3.46%. The resulting net interest income on a fully tax equivalent basis was $49.3 million and represented a growth of 3.6% over the second quarter. The net interest margin narrowed 8 basis points in a quarter to quarter comparison to 3.65% as the cost of funds outpaced the increase in earning asset yields. Three basis points of the narrowing is due to the merger with the Legacy Bank. Another [T] basis points resulted from accommodating a customer who temporarily maintained a large deposit relationship before moving those deposits into our [wealth] management department. Due to the short term nature of the deposit, we realized a nominal spread of the funds but benefited by adding a nice investment management account going forward. Net of these two items margin was down three basis points.

Looking ahead, it appears that we should expect the inverted yield curve to last at least through the fourth quarter. Taking this into account, our modeling indicates we can expect a slight increase in net interest income supported by continued loan growth but a slightly narrowing margin as the cost of funds increase.

Earned interest income totaled $20.5 million, compared to $20.8 million in the second quarter. You will recall that last quarter we received a gain on a previously impaired loan of approximately $900,000. Excluding this item, our fee income was up nearly 12% sequentially on an annualized basis. This improvement was primarily due to a 21% annualized increase over the second quarter in insurance commissions, as our employee benefits segment provided expanding revenue. Further, trust fees were up over 9% annualized, excluding the impact of Legacy, reflected an active period of new business relationships in a favorable market.

Retail security sales remained strong. We anticipate that non interest income will finish the year in the range of 20.5 to $21 million for the fourth quarter, as growth in certain businesses will drive some of the seasonal decreases in others. For the first nine months of 2006, fee income represents 30% of our revenues.

We continue to manage expenses tightly, and delivered on our forecasted run rate of $41 million. These results are slightly lower than the last quarter in spite of the addition of the Legacy Bank. We achieved this through the realization of a lower pension cost as noted in last quarter's conference call. We expect expense levels to trend below the $41 million in the fourth quarter. The efficiency ratio was 57.1%, represented an improvement over the second quarter result of 58.7% as we closed in on our target level of 55%.

Credit quality remains at strong levels. Annualized net charge offs were 23 basis points of average loans for the quarter. This level represents a four basis point reduction in the linked quarter basis analysis and a 13 basis point improvement from the third quarter last year. Further, the Bank actually had only 12 basis points of the net charge-offs during the quarter, our consumer finance subsidiary accounted for the remaining 11 basis points. It is worth noting that the Bank's 12 basis points in net charge offs are the lowest quarterly level in at least the last four years.

Non performing loans to total loans improved 69 basis points. This was a decrease from last quarter's 74 basis points as well as from last year's 78 basis points. The allowance for loan losses ended the quarter at 1.25% of total loans. This is fairly consistent with the second quarter's loans as a provision for loan losses covered net charge-offs.

Capital ratios are consistent with the second quarter, the quarter end leveraged capital ratio improved to 7.2%. At September 30, 2006, F.N.B. continued to maintain it's well capitalized federal bank regulatory capital measures.

Steve, that concludes my remarks.

Thank you, Brian, for that summary of the third quarter. I remain confident that our strong credit culture, our focus on revenue generation, and ongoing expense control will help to overcome the negative impacts of an inverted yield curve. F.N.B. continues to deliver a solid financial performance, coupled with the strategic vision.

We remain committed to the successful delivery of our investment thesis which calls for a targeted return on equity of 15%, a return on tangible equity of 25%, and a return on assets of 1.2%. We expect to maintain our strong cash dividend which currently yields 5.5%, and ranks F.N.B. as the top dividend yield among banks our size in the entire country. Our goal remains to produce a 9 to 12% total return for our shareholders with earnings per share growth contributing 5 to 6%. I believe this modest EPS growth component of total return, when combined with our dividend, provides the opportunity for a double-digit total return but with lower execution risk.

We are pleased with the response our story has been receiving by institutional investor at our road show presentations. We look forward to continuing to get our story out during our scheduled trips to New York City, Philadelphia and Baltimore in the fourth quarter. I can assure you that we have a plan in place and we are extremely focused on executing this plan. We are committed to achieving our double-digit total return in spite of the challenges presented by today's financial markets.

Considering all the factors that we have discussed this morning, we remain comfortable with the streets earnings estimates for the year. Given today's banking environment, we are pleased with our earnings performance thus far in 2006. This is the third consecutive improvement in EPS quarter over quarter since January.

As a final note, I would like to extend a warm welcome to Jonathan Roberts who recently joined First National Bank of Pennsylvania's management team as Executive Vice President of retail banking. In that role, Jonathan will be responsible for all retail banking operations in the Pennsylvania and Ohio markets. Jonathan has successfully developed and managed retail banking operations for those Pittsburgh banks in charter one. We will all benefit from expertise he brings to our retail operations. Operator, that concludes our remarks for this conference call. Would you please poll the audience for any questions.

Than you very much. Ladies and gentlemen, the floor is now open for questions. [OPERATOR INSTRUCTIONS] We'll take the first question from James Record. Sir, your line is live.

Good morning.

Good morning, James.

I'm sorry, first just a quick model question and then I have a couple questions on Florida. Can I ask you, did you say you expect your noninterest income in the fourth quarter to be 20.5 to 21 million range?

Yes.

All right. Thank you. Where do you -- looking quarter to quarter, could you give a little more color on where you expect expense deficiencies?

Will they decrease from the third to fourth quarter, James?

Yes.

Is that what your referencing? We had, getting back to the pension, we had a nice tick-up in the third quarter. That didn't show all of it, though. We had in the third quarter, some charges, about $0.25 million, related to some personnel moves. You heard we added Jonathan Roberts, some relocation, those types of things. Also, we had just seasonal marketing and some legal accrual that we don't expect to repeat itself in the fourth quarter. So we're not looking for a huge decrease but it will be below the 41 is our expectation.

It will be below 41?

Yes.

Okay. That's great. And then can I get you guys to, one, to let us know if you have any sort of high rise condo exposure at all in Florida? And then, in general, just sort of what you're seeing in your markets down there?

James, Gary Roberts, we had one shared credit participation on a high rise project in Florida that is, at this time, is performing as expected and so we don't see any issues there. Our exposure in Florida, it's interesting that you bring that up, because obviously that's a topic of discussion today. Our outstandings in Florida are well ahead of where we thought they would be. But factually, they could be even further ahead had we taken the requests, both at the pricing and credit terms that were proposed by prospective borrowers. So we've maintained our credit standards and even at that we have production that exceeds our expectations down there. Our -- we have no single concentrations in land development or raw land loans, anything like that. So we feel pretty good about where we are at this point in time. And of course time will tell, but we're dealing with borrowers that we've worked with in the past and we're dealing with lenders that we know and we haven't varied from our existing credit culture. All those things give us comfort.

Where is the one condo you mentioned? Can you let us know what your exposure is there and where that condo is?

I don't have a the numbers specifically, I can get that information for you. It is a west coast project.

Okay. And then I'll get off the line, but could I ask you to just give us a little status on your mortgage operation in Florida? And thank you.

Well, mortgage operation I think was discussed in an earlier conference call. We have not been as successful in that regard as we had hoped. We quite factually abandoned that effort early in the year. We -- I'd say early in the year, probably in the second quarter I think we gave it up. Again, the underwriting standards that are required to compete successfully on raw land deals and land acquisition deals and speculators in individual consumer properties are more aggressive than we're willing to be in that market, and so, accordingly, we just were never able to get that particular project off the ground.

All right. Thank you.

We'll take the next question from Marsella Martino. Your line is live.

Good morning. I was wondering if you could give an outlook on credit? Your credit performed very well this quarter. We've seen some of our banks have increases in PAs, and given that the industry has been at some historic lows, I was wondering if you could give some color on what your outlook could be?

Well, Marsella, we're still feeling very confident of our asset quality. If you look at the trend even third quarter to second quarter, we improved in I think most categories. I think it goes back to what Gary was talking about a few moments ago. We have, at this company, a very strong credit culture. We believe in it. We don't vary from it. We're willing to walk away from deals because of it. But we do believe, in the long run, that's the best way to run a banking company. And so having said that, we do not see anything on the horizon at this point that causes us to feel that our credit quality will deteriorate. Obviously, as Brian's remark earlier, but that's been in at least four years. You wonder how much better it could possibly get. At this point we don't see signs that cause us to have concern for it.

Okay. And then actually that's all I have. Thanks a lot.

Thank you.

We'll take the next question from Colin Dunn. Your line is live.

Good morning, gentlemen.

Morning, Colin.

Just to follow up on the credit, you guys do sound comfortable with your own credit quality and the numbers are obviously pretty clean. Are you hearing any actual evidence of weakening in the industries you loan to or the marketplace you lend in from?

Well, I will tell you, Colin, that it's still a competitive environment out there. And whether it's deal structure, quality of the deal or pricing of the deal, we have lost deals, either because we walked away from them or we haven't been willing to match competitor's pricings for them. Because we still fundamentally believe that we're not going to compromise our credit quality. Having said that, I can't speak for other banks, but I can tell you that at meeting that I was in just two days ago with the comptroller of the currency, according to the regulatory survey they've done, he commented that he believed nationwide that there was a loosening of credit structure, particularly on commercial lending. Actually pointed out two areas, commercial lending and home equity lending.

Okay. In terms of balance sheet growth, I understand your margin expectations, and as you said the earning assets were flat from the end of the second quarter to the end of this quarter, what is your anticipation for the fourth quarter and beyond as far as balance sheet goes [inaudible]?

Well, the fourth quarter we're expecting some slight expansion in the earning assets driven by the loan growth. The -- beyond, we're in that beyond project right now, focusing on our 2000 plan and it will be much the same. So maybe I'll defer those until we have more of the facts, Colin. But fourth quarter looks pretty good.

Fair enough. And then, finally, do you guys have any comments or updates on how your search is going for a successor to Mr. Gurgovits?

I can tell you that I think it's public information. We formed a search committee. They have hired a nationally recognized and prominent search firm, and we're getting every Friday updates from that firm on any external candidates that have expressed any interest, and of course we do have at least one internal candidate, and I would say it's proceeding according to the time line that the committee established.

Great. Thank you for taking the questions, guys.

Thank you. We'll take the next question from Wilson Smith. Your line is live.

Good morning, gentlemen.

Good morning, Wilson.

Brian, can you give us a number on the loan growth out of the Harrisburg market? You told us about Florida and Pittsburgh.

We've -- I'm pulling out some of that detail now. We're four months into it, Wilson, and as we saw we had initially a couple of credits that we knew we were going to leave and so I'm trying to -- we're slightly up from about the middle of the third quarter. And we've got good momentum.

Probably the most interesting, Wilson, if I could interrupt for just a second, is as we measure our pipelines, that I mentioned earlier, as of September 30, central Pennsylvania or Harrisburg, however you want to refer to it, has the third largest pipeline of the different regions that we operate. So we are encouraged. And you have o to remember, we just closed this memorial day weekend. We had new policies, new procedures, a lot of training that we had to get done during the summer vacation period. So now that we're back, everybody is back to work and the training is completed, we're starting to see that their pipeline is growing actually quite nicely.

Let me just add to that, Wilson, this is Gary Roberts. Typically, post conversion during that credit culture transition and credit policy transition operational procedures and so on, it's not uncommon to see a shrinking in the portfolio. I guess the good news is in the Harrisburg market is we haven't seen that. It's remained flat. As Steve said, on top of that, they now have the third largest pipeline. So we're quite encouraged about the future of what that region is going to hold for us.

And at this point, the increase in the commercial of 45 million we saw linked quarter basis, is that basically all commercial real estate?

No.

No, that would be -- there's some C&I lending in there as well. It's all types of lending.

Sure. Pittsburgh market was a major contributor, obviously Florida was. And our central region and eastern regions are doing quite well, quite good as well. And those are non, typically non-real estate markets.

Okay. And how is the -- is the Pittsburgh market, with the growth that you've had there, is that contributing to core deposit growth? As you've discussed, it appears as though that most of your deposit growth came from CDs and then repos.

Well, let me say quickly, this is Gary Roberts again, in Pittsburgh, One Oliver Plaza ,which is the new branch that we've recently opened there, has probably been our most successful branch ever in total cash management and customer deposit accounts after a near 90 days of operation we've already acquired $20 million in customer deposits. That's pretty encouraging, of course. Our Lifestyle 50 account, which was mentioned in U.S.A. Today, as an account that was designed specifically for our market in western Pennsylvania, has met with tremendous success, and over the year continues to grow in percentage of total retail deposits and total bank deposits. I think at the beginning of the year we were in the 35% range of total bank deposits. Today it's about 39%. So our Lifestyle 50 product, our Desktop Banker product, our treasury management, as Brian had mentioned earlier, One Oliver Plaza, all of these things have come together and really given us some deposit traction for the year.

Wilson, if I could just add onto that, we're relationship oriented bank. So almost all of the C&I lending that we do in the north carries with it a relationship, whether it's the general checking account of the company or that and the payroll accounts, we cross [inaudible] -- we use our commercial lending expertise and core competency to drive the growth of core deposits.

Great. And just one last question. How is the watch list look?

Actually, Wilson, it's consistent with all the other metrics that we monitor. We sit here, because we're aware of what's going on in the world and in some places, but the local economy seems to be holding up pretty well. And we do not see any signs in our portfolio at this time that cause us concern.

Great. Thank you.

Thank you very much, ladies and gentlemen. The floor remains open for questions and comments. [OPERATOR INSTRUCTIONS] And we'll take the next question from Ryan Hagler. Sir, your line is live.

Hey, guys. Brian Hagler with Kennedy Capital. Sounds like I may have missed this earlier, I tuned in late. Can you tell me what the loan balance at the end of the quarter was in Florida? And remind me what it was in at the end of the second quarter?

We reported 155 at the end of the second quarter and 186 at the end of the third quarter, Brian.

Okay. And then whatever commentary you may have made on the expectations for the margin going forward?

Well, we're expecting the margins to be slightly down, but if you didn't hear the reconcilement, we had 8 basis points that we did narrow from the second to the third quarter, but 5 of those basis points are accounted for by 3 from Legacy Bank, combination with the Legacy Bank, and 2 from the special customer relationship that will actually bounce back here in the fourth quarter. So we saw really a net 3 down quarter to quarter, and we see slight narrowing as we go into the fourth quarter.

Okay. Great, guys, thanks.

There appear to be no further questions. Do you have any closing comments you would like to finish with?

Yes, thanks, David. This concludes our conference call. You can access a replay of this call for the next week by calling 1-800-332-6854 with the code 3044. A trans transcript of today's call will also be posted on our website, www.fnbcorporation.com. We certainly thank you for joining us today on the call and wish everybody a very good day.

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