FNB Corp (FNB) 2007 Q1 法說會逐字稿

Welcome, ladies and gentlemen, and thank you for standing by. Welcome to today's F.N.B. Corporation first-quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session; instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded. Now I'd like to turn the conference over to Mr. Bartley Parker with Investor Relations. Please go ahead, sir.

Thank you, Millicent. 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 or future trends or factors affecting the future performance of F.N.B. in the banking and financial service industry.

Since forward-looking statements relate to future developments, results and events they involve certain risks and uncertainties and actual results may differ materially from historical performance or those expressed or implied in this presentation as a result of the 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 pressure among depository institutions; changes in the interest rate environment that may reduce interest margins; changes in prepayment speeds, loan sale volumes, charge-offs or 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 other 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 call over to Mr. Stephen Gurgovits, President and CEO. Steve?

Thank you, Bartley. Good morning, everyone, and thank you for joining our first-quarter 2007 conference call. With me today on the call are Brian Lilly, our Chief Financial Officer, and Gary Roberts, President and CEO of First National Bank of Pennsylvania.

I trust everyone has read our earnings release issued yesterday afternoon. For the first quarter 2007 we earned another solid level of earnings and returns highlighted by our promotional loan growth, increased wealth management and insurance fee income, a stable net interest margin, continued expense control and strong asset quality. Our first-quarter earnings of $0.29 per diluted share were flat with the prior quarter, but up 7.4% year-over-year.

Our performance ratios were solidly with a return on assets of 1.17%, a return on equity in excess of 13%, and a return on tangible equity nearing 27% which should keep F.N.B. in the top quartile of our peers. We are particularly proud of these results considering the extremely difficult external environment facing the banking industry.

Before I turn the call over to Brian to provide some more first-quarter details, let me address several important current topics in the banking industry.

I believe first-quarter earnings calls for financial institutions are likely to be dominated by concerns about sub prime lending, Alt-A mortgages and credit quality trends in general. With all the negativity surrounding these topics let me frankly address our situation at F.N.B. relative to these concerns.

First let me say that we do not hold any Alt-A loans on our balance sheet. Second, most of the difficulties with sub prime lending relates to customers who chose payment deferred mortgages such as adjustable-rate mortgages or ARMs and interest only ARMs. F.N.B.'s exposure to ARMs underwritten for borrowers in the sub prime category amounts to just $3 million or 7/10 of 1% of our total loan portfolio. Our Regency Finance Company subsidiary, which does business with some customers, whose FICO scores could qualify them as sub prime customers, makes only fixed-rate loans and therefore borrowers are not faced with the risk of increased payments.

Based upon the low level of ARMs within the (technical difficulty) and the low levels of sub prime credits within both the bank and Regency, we do not believe we will experience any significant negative impact as a result of the sub prime lending fallout.

With regard to any spillover affects to our prime customers, we view this as minimal given our stringent underwriting and the fact that the real estate values in our markets have been stable over time and are expected to remain so, mitigating the risk of potential collateral deficiency.

Finally, on the point of asset quality in general, we continue to be extremely pleased with our portfolio performance. Annualized net charge-offs and nonperforming loans continue to compare favorably on both linked quarter and year ago comparisons. And finally, loan delinquency continues to at remarkably low levels.

I help this helps to answer any questions you may have had relative to those three credit topics in the news today. Let me now return to first-quarter results.

As you will recall, we opened our fifth LPO in Florida this past January. Our five LPOs in Florida produced $32 million in gross loan originations in the first quarter. While the pace of originations has slowed from last year, given current market conditions in Florida we remain comfortable with our Florida strategy. However, we continue to be cautious here with regard to lending. We are unwilling to sacrifice asset quality and we continue to require underwriting terms and pricing to our high standards. This combined with a more cautious approach has cleared out our loan production. We are comfortable with this as we believe the path to building shareholder value is underwriting strong credits at acceptable spreads.

With an estimated $80 million in our Florida loan pipeline we remain optimistic that our Florida strategy will provide quality, well priced earning assets for our balance sheet. With regard to Pittsburgh, we continue to be on track with our goal of gross originations of $125 million for the full year 2007. Our capital region based in Harrisburg is off to a good start in its first full year with us on its way towards its goal of $75 million in gross originations for the full year.

Let me now turn the call over to Brian to provide some additional color on our earnings for the first quarter of 2007. Brian?

Thank you, Steve, and good morning, everyone. Let me focus my comments on the key drivers of our operating performance for the quarter. Commercial loan growth continues to be good with an average balance of 11.7% annualized on a linked quarter basis. This growth was partially offset by seasonal runoff in the direct installment portfolio and weak automobile sales which drove a decline in the indirect installment portfolio. In total average loans grew 1.6% annualized compared to the prior quarter.

On the deposit side the continued success of our Lifestyle 50 and first rate accounts helped grow average savings and NOW account balances 4% annualized over the fourth quarter. This growth partially offset a seasonal decline in DDA balances and lower balances in promotional time deposits. On a spot basis total deposits and treasury management accounts increased 2.1% annualized since December 31st.

Our success in growing commercial loans combined with careful management and disciplined pricing of our deposit products led to a stable net interest margin; that is after excluding the 6 basis points benefit realized from the additional interest earned and on the payoff and return to accruing status of previously nonaccruing loans. The adjusted net interest margin at 3.67% represents stability for the third consecutive quarter.

Of special note, our cost of funds increased just 6 basis points over the fourth quarter, representing the smallest increase in eight quarters. The continue to be optimistic about managing our cost of funds going forward given the stable interest rate environment and continued acceptance of our deposit products such as Lifestyle 50 and same-day banking all day. Our forecast includes a continued stable margin through the second quarter.

Building our wealth management, insurance and new bank service charge revenue is central to our revenue diversification strategy. Seasonal increases and organic growth contributed to an 8.4% increase in non-interest income compared to the prior quarter. Insurance commissions and fees included a combination of annual contingency fee income and success from our efforts to better match available insurance products with the preferences of our commercial customers.

Contingency fee income totaled $1.1 million in the first quarter reflecting favorable loss sharing experience and equaled the first quarter of 2006. Our trust activities reflect the merits of our acquisition of the legacy bank last year and good organic account growth.

With regard to bank service charges, the first quarter of the year is seasonally lower than the fourth quarter in a linked quarter comparison. On a year-over-year basis the decline reflects the highly competitive environment for core deposits and changes in customer behavior with respect to managing their accounts to reduce their necessities. The linked quarter increase in the other non-interest income category reflects swap fees earned through a new program for commercial customers and seasonal tax preparation fees. For the quarter our total non-interest income represented 30% of our total revenue.

Turning to expenses, we are right on plan. Regarding the linked quarter comparison, let me remind you that the start of the new year includes the effect of annual merit increases, the resetting of payroll taxes, and higher levels of state shares tax caused by acquisitions. Additionally, you may remember that from last quarter's conference call that our fourth-quarter run rate was reduced by $600,000 for reversals of accruals related to favorable experience in our self-insured medical plan.

Year-over-year our expenses increased 5.3% and achieved positive operating leverage as evidenced by the improvement in the efficiency ratio to 58.3% in the first quarter. We achieved this improvement despite digesting an out of market acquisition, opening three new loan production offices and operated in a difficult interest rate and competitive environment. We continue to target 55% efficiency ratio by the fourth quarter.

As Steve discussed, our asset quality continues to be strong and in fact improved from an already very good fourth quarter. The first quarter of 2007 annualized net charge-offs were a very good 23 basis points, an improvement of five basis points on a linked quarter basis and 14 basis points year-over-year. Both the bank and Regency, our consumer finance company, realized lower net charge-offs. In fact, the bank is down 7 basis points in the year-over-year comparison with Regency contributing the remaining 7 basis points of improvement.

Nonperforming loans and total loans improved to 63 basis points at quarter end which was 3 basis points better than the prior quarter and 18 basis points stronger than the first quarter of 2006. This represents our fifth consecutive quarterly improvement in this important metric. As a result of our strong asset quality and low net charge-offs provision for loan losses was $1.8 million for the first quarter. We ended the quarter with an allowance for loan losses at 1.22% of total loans and two times the level of nonperforming loans.

At March 31, 2007 our leveraged capital ratio was a comfortable 7.4%, up 9 basis points from the prior quarter. F.N.B. continues to exceed well capitalized measures as defined by the federal bank regulators. Steve, that concludes my remarks for the quarter.

Thanks, Brian. As we've just detailed, we have solid momentum in our commercial lending franchise as well as key businesses such as wealth management and insurance and our asset quality continues to remain strong. From an earnings guidance standpoint let me comment on factors affecting our current outlook.

Earlier I shared with you that Florida production was lower in the first quarter than what we had targeted, reflecting conditions in that market. While we are comfortable with our pipeline for the rest of the year, we do expect to be below our full-year production targets. Another factor affecting our outlook is the level of competitive pricing we are seeing on the lending side, pricing we choose not to match.

And lastly, recall that for planning purposes we had adopted the economist's consensus that the Fed would ease the Fed fund's target by a total of 50 basis points in mid to late 2007. The current consensus is that the Fed will ease 25 basis points in late summer. In spite of these factors we are still comfortable within our original earnings guidance range of $1.17 to $1.21 per diluted share, but guide you to the lower half of that range.

In closing we believe our sound underwriting principals contribute to F.N.B. Corporation's low-risk model. With our high touch service offering we have the ability to move market share from our competitors. We will continue to maintain our opportunistic expansion strategy and work to further diversify our sources of revenue. The many initiatives underway at F.N.B. position us well for the future. That concludes our formal remarks for this call. I will now ask the operator to poll the audience for any questions.

(OPERATOR INSTRUCTIONS). Colin Dunn, KBW.

My first question related to comp expense. I was curious to know if there were any comp accruals related to any contingency fees and insurance that occurs in the first quarter that might not be there in the following three quarters?

There certainly would be a little bit of incentive comp related to those but not significant amounts.

And would a trajectory similar to what we saw last year where the comp kind of declined gradually throughout the year? Is it reasonable or rational to assume it's a similar trajectory this year?

Yes, I can't call in my mind exactly the pace of decline, but that would be consistent with payroll taxes and a couple other things that benefit that line item.

Okay. Could you give us a little background on the new swap product you have for commercial customers?

Sure. It's a service that our commercial customers are interested in getting fixed-rate longer-term loans and in meeting that need we have a desire to have variable rate loans. And in completing that -- it's a simple swap transaction in that context. But what we're able to do is we're able to substitute our credit rating with the credit rating of those particular borrowers and therefore realize a benefit in the swap rates on our side.

And per the account literature that gets recognized immediately. So in essence it becomes a fee. So we had about $150,000 in the first quarter. And the guys were working on that last year and the training and rolling that out and it's starting to pick up some momentum.

Did that help you generate any additional low-volume this quarter as well?

I don't know about additional loan volume, but certainly more attractively priced volume from our standpoint. I guess we enjoy the variable side.

I think it would make us more competitive in our proposals to customers to be able to offer them the long-term fixed-rate.

Colin, at last it's Gary Roberts. Steve is exactly right; we're unwilling to go 10, 15 years fixed given ALCO constraints. And having that option allows us to take care of customer needs and realize some fee income on the front side.

Okay. A question related to -- I know we've prodded you guys a lot on the composition of the Florida loans. Just one other question on that with respect to construction loans. You said they are supporting the construction of residential real estate; could you describe a little bit where on the spectrum of residential real estate these developments lie and would you consider these entry-level homes, mid-level homes or the larger homes?

This is Gary. I would say they're mid to upper level. For the most part they range in price from $500,000 to $1 million.

Okay, great. And then just one final question if I could. The small amount of securities you sold in the quarter, were those being carried under water?

No, actually those were securities that were called and we realized a gain on it. They were some trust preferreds that we had in corporate.

Thanks, guys. Thank you for taking the questions.

Wilson Smith, Boenning.

Good morning, gentlemen. Brian, could you give us a little more color on the margin and the change from the fourth quarter? The cost of funds was up I guess about 6 basis points, but your yield on loans was up more like 18 I guess.

I think it was up 12 -- no, you're right; it was 14 it was up, our yield on earning assets. It included 6 basis points -- we calculated the benefit at 6 basis points of benefit related to the recovery of interest income on previously nonaccruing loans. So the interest income -- the yield pickup of 14, adjust that down to 8 and we've got some stability there then. And the total margin of 367, which is exactly equal to the margin we had in the fourth quarter. So our cost of funds increased and our yields are matching nicely.

Okay, thanks. I had missed that when you went through it the first time. The run rate is more like a 367 and not where you were?

That is correct; that's correct.

And do you feel that the net charge-offs in the first quarter are sustainable?

Every quarter we look at that and they are low and we know it hasn't turned. And our guys are doing a great job and we expect that it will turn and we had planned that it would turn and we're beating our estimate that we had in our plans. So we're continuing to enjoy that, but expect that it will go up over time.

Okay. And for the year do you think that since the reserve percentages have been coming down slightly over time, do you think the dollar amount of the reserve is going to stay there or do you think the absolute level of reserves come in this year?

I think the -- what we had planned was that the actual loan increases as the year would go on. We're starting to -- some of the release that happened in the past was in our indirect portfolio and a couple other places, but that is history has been good now for a couple years. And so going forward we won't have the extent of release that we've had in the past. And we certainly expect that the commercial loans have seasonally increases here and consumer will come back to us. So I think the allowance will move up a little bit.

Great. One last question if I could. The level of investment securities -- Colin had mentioned that. The amount that you sold, is -- the dollar amount, are you comfortable with that? Is that a good run rate for the rest of the year?

No, I think that's high. We don't get called on securities and we don't have the habit of selling our investment securities. But the bank stock portfolio is where some of those gains were taken and that number will be smaller going forward. I don't expect to be called on some of the other things we have in our portfolio that have gains in them.

But the absolute level of the bond portfolio, are you comfortable with where that is now or do expect to see that come in some more?

No, no. I think the bond portfolio at about 17% of assets is stable. It hit just a fraction over 17% of assets at the end of the year, Wilson, and that's where it is at the end of the first quarter and that will be pretty consistent going forward. What we did is we took that -- as we discussed in other calls, we took that down to level that we built from the bottom up that said how much do we need to pledge and how much do we need for our suite, how much do we need for our liquidity purposes? And that comes out to about 17%.

Great, thank you.

(OPERATOR INSTRUCTIONS). Kevin Preloger, Perkins Wolf.

Good morning, guys. I apologize; I was on and off the call here earlier. And Steve, your remarks regarding the pipeline in Florida kind of pulling back just given the conditions down there, can you elaborate on that? And then is that across the board for all types of lending? And then I guess secondly, are you seeing anything of that sort in the Pittsburgh and Harrisburg markets or those are behaving relatively better?

Let me start at the back and move forward. The rest of our footprint, Harrisburg, we gave that a goal of $75 million, they were right on top of it at the end of the first quarter. Pittsburgh has a goal of $125 million; they're right on top of it at the end of the first quarter. And for that matter, the rest of our northern footprint -- although we don't break down the individual geographies by goals -- they're all pretty much where we wanted them to be at the end of the first quarter.

The only lag we have in the loan production has been Florida, which is a combination of a couple of things, Kevin. One, we're more cautious. Two, it's still competitive down there and we're not willing to sacrifice structure of pricing, which has an effect on production. But we do have an $80 million pipeline and we do feel that from this point through the remainder of the year will be party much at the production levels we were looking at. What may not get made up is the shortfall in the first quarter.

Okay. And is that on -- that's just on the regular construction lending down there?

All kinds of loans.

It's really across the board. It's just that -- I'm sure part of it is we're more cautious; secondly, the market is softer and that's pretty much across the board.

How's credit quality -- the credit quality trends down there been?

On the Florida portfolio?

Yes.

Kevin, we're happy to say that we have no criticized assets down there, no substandard. The quality of the portfolio remains good. We're not dealing with any issues in Florida at this particular time.

Have you hired any more people down there or is it kind of the headcount is still the same relative to Q4?

I'll let Gary address that.

Kevin, we were fortunate to bring on two additional folks that have joined us from -- that came along with Dale Dignum. Dale was not a recruiter of those individuals, but they found that his joining us was attractive enough that they joined as well. So we're real pleased about that and we continue to look for additional manpower in our Sarasota and Fort Myers offices, although those two offices have produced well we think there's still more opportunity there.

Okay, thanks a lot.

Wilson Smith.

Steve, I don't know whether you want to provide us with the detail. Kevin asked most of the follow-up questions I had, but would you be willing to tell us what the actual additional loan volume that was added in the markets during the quarter?

You mean --

For Harrisburg and Pittsburgh?

Well, actually it's about 25% of the goal literally, Wilson, there. I don't have their dollar numbers, but when we calculate it they're just about on the button with 25% of what they need for the year. So it's 25% of 75 or Harrisburg and 25% of 125 for Pittsburgh.

Great, thank you.

And at this time we have no other questions standing by in our question roster. I'd like to turn the conference back to our speakers for additional or closing comments.

Thank you, operator. And thank you all for joining us today. Replays of this call will be available through April 27th by calling 888-203-1112 and entering the pass code 451-2111. You can also access a transcript of today's call on our website, www.FNBCorporation.com. I guess this concludes our conference call. We do appreciate your participation and have a great weekend.

Thank you, everyone, for your participation on today's conference. You may disconnect at this time.