FNB Corp (FNB) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's F.N.B. Corporation's second quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Mr. Bartley Parker, Investor Relations. Please go ahead, sir.

Good morning everyone. This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contains forward-looking statements, which are based on current expectations and 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 and the banking and financial services industry.

Such 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 by 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 financial 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 turn the call over to Mr. Stephen Gurgovits, President and CEO.

Good morning everyone, and thank you for joining our second quarter 2007 earnings conference call. With me today on the call is Brian Lilly, our Chief Financial Officer; and Gary Roberts, President and CEO of First National Bank of Pennsylvania.

Before we delve into the results for the second quarter, I want to take a moment to discuss what I believe to be a key topic of interest for second quarter earnings calls for the banking industry. In most articles I have read, analysts have been predicting rising credit costs as credit quality deteriorates. I am pleased to say that is not the case for F.N.B. Corporation.

As of June 30, 2007 our credit quality has shown improvement, both on a linked quarter and year-over-year basis. Our ratio of non-performing loans to total loans has improved quarter over -quarter and on a year ago basis. Net charge-offs improved on a year-over-year basis, and accordingly we reduced our provision as compared to last year.

As we monitor these, as well as other asset quality metrics, we are encouraged that we do not see any signs that would lead us to believe that our asset quality should not continue to remain strong. We at F.N.B continue to hold firm in our principal of sound loan underwriting. We are especially proud of our asset quality. And I commend our entire loan operation for a terrific job.

I would now like to turn back to our comments about our results for the quarter. For the second quarter 2007 we were on track with our plan, earning $0.29 per diluted share, up 4% sequentially, adjusting for the sizable non-accrual interest income received in the first quarter.

Although quality loan growth opportunities were not as plentiful earlier in the quarter, we finished the quarter strongly as shown by our total loans increasing 3.1% on an annualized spot basis. The momentum we had in June carried forward into July, which makes us cautiously optimistic about meeting our expectations for the remainder of the year.

On a regional basis, Florida has an estimated $85 million in its less than 90 day loan pipeline. And we believe our strategy in this market will continue to provide quality, well-priced earning assets for our balance sheet.

With regard to Pittsburgh and Harrisburg, we continue to be on track with our goal. We are pleased that our strategies to manage our assets and liabilities continue to bear fruit, enabling the Corporation's level of net interest income to grow.

Our ability to focus on our core value of deepening and strengthening customer relationships by providing the best possible service helps us meet competition coming from other financial institutions. We also reported positive operating leverage for the second quarter, despite the difficult revenue environment as we continue to prudently manage our cost structure.

Taken together our second quarter results showed continued, solid performance ratios, with a return on tangible assets of 1.28%, and a return on tangible equity of nearly 27%. We believe the return on tangible equity continues to place F.N.B in the top quartile of our regional peer group.

Let me now turn the call over to Brian to provide some additional color on our earnings for the second quarter.

Good morning everyone. As Steve mentioned, our loan growth was slow early in the quarter and accelerated later in June. This explains the flat linked quarter average loan growth versus the quarter and spot comparison, which grew 3.1% annualized.

Our focus categories of commercial, direct installment, and consumer lines of credit grew over 6% annualized as compared to the prior quarter end. The auto industry had a better second quarter, allowing us to replace the natural runoff in the indirect auto portfolio, while residential mortgages continue their paced amortization. Clearly the growth in the end of the quarter positions us well for the third quarter.

On the deposit side the continued success of our Lifestyle 50 and FirstRate accounts, in addition to our business deposit initiatives, lead the 5.7% annualized growth of our deposit and treasury management average balances. In fact, over two-thirds of the linked quarter growth in non-interest and interest-bearing checking was driven by business deposits.

The strong deposit growth also allowed for the continued reduction of our borrowing position, decreasing average short-term and long-term balances by 7.4% from the first quarter. Lower borrowings, combined with the favorable mix of the deposit growth, contributed to an increase in the cost of funds of only 2 basis points when compared to the prior quarter. The 2 basis points represented the smallest increase in the last nine quarters.

The growth in our higher yielding loans and low-cost core deposits were two factors contributing to the 6 basis point expansion of our net interest margin as compared to the prior quarter, after adjusting for the sizable pick up of the non-accrual interest income realized in the first quarter. Our forecast includes a continued stable margin for the third quarter.

Building our wealth management, insurance and bank service charge revenue continues to be central to our revenue diversification strategy. In the linked quarter comparison good growth in our fee businesses was offset by seasonal declines in insurance contingent revenue and trust-related tax planning fees. Additionally, we realized a lower amount of gains from our bank stock portfolio. On a year-over-year basis we continue to be pleased with our organic growth in the trust, retail securities sales, and insurance businesses.

Although the revenue for the insurance business was flat year-over-year second quarter, the soft renewal market is masking the growth in our book of business. Specifically, many of the account renewals are benefiting by up to 12% in lower premiums from the carriers, thereby reducing our commissions. However, we continue to achieve our objectives of deepening our commercial relationships, as well as providing a valuable source for recurring fee revenue.

With regard to the bank stock gains, given the current valuations we are not expecting to realize any gains of significance for the remainder of the year. However, we do expect the organic and seasonal fee income growth to cover the lower bank stock gains for the rest of the year.

We continue to be disciplined in cost control. On a linked quarter basis we have maintained site expenses as the benefit of lower employee taxes was partially offset by annual direct -- Director stock grants and higher legal expenses related to the 2007 proxy and loan activity.

Year-over-year our total non-interest expense increased just 2.7%. We achieved positive operating leverage as evidenced by the improvement in the efficiency ratio of 58.3% in the second quarter of 2007. We realized this improvement despite [divesting in auto] market acquisition, and expanding the number of Florida loan production offices. We expect the second quarter total expenses to be a good runrate for the remainder of the year.

Let me also comment on our effective tax rate and our expectations. The effective tax rate of approximately 30% for the second quarter is a better reflection of our runrate, as the first quarter included the effect of reversals recorded in conjunction with our FIN 48 implementations and additional reserves. As Steve noted, we feel very comfortable with our credit quality position at the end of the second quarter.

Annualized net charge-offs were a very good 24 basis points. Of the Corporation's total annualized net charge-off ratio, approximately 14 basis points is attributed to the loan portfolio at the bank, while the remaining 10 basis points is attributed to Regency, our high performing consumer finance subsidiary.

Non-performing loans to total loans improved to 56 basis points at quarter end, which was 7 basis points better than the prior quarter, and 18 basis points stronger than the second quarter of 2006. This represents our sixth consecutive quarterly improvement in this important metric.

At June 30, 2007 our leverage capital ratio was a comfortable 7.4%. F.N.B continues to exceed all well capitalized measures as defined by the federal bank regulators.

That concludes my remarks for the quarter.

We are encouraged by the recent lending activity and continuing good deposit growth. This, coupled with our strong credit quality position and disciplined management of operating expenses, positions us well for the future. Consequently, we're comfortable with the current average First Call earnings estimate of $1.17 per share for 2007.

In closing, we believe our sound strategy of profitably managing our businesses and providing shareholders with an above-average dividend yield, which today is 6% based upon yesterday's closing price, makes us a very attractive investment choice. We thank all of our shareholders for their continued support.

That concludes our formal remarks for the call. I will now ask the operator to poll the audience for any questions.

(OPERATOR INSTRUCTIONS). Kevin Preloger, Perkins Wolf.

I apologize. I hopped on, so I missed most of your commentary. But I just wanted to get an update on Florida, what you're seeing there. I know last quarter you mentioned that you were backing off a little bit because the terms and conditions there and just the market having its own issues. What are you seeing now? And the loans that you are originating down there, any differences in terms of -- are you asking for more equity in projects, more guarantees? If you can give me some commentary there, that would be great.

Sure. Let me start. The first quarter, if you will recall from our first quarter call -- well, let me start back. Last year we had a $300 million goal, and they generated -- or 200 -- we did have a $200 million goal, and they generated $300 million. So we increased it this year to $350 million.

In the first quarter we had a very conservative production quota. And then we were all right with that, because we're being very selective on asset quality. And we always are, but we particularly are in Florida. And that picked up in the second quarter.

We're not likely -- well, a couple of things. The $350 million goal that we gave them this year was a fully staffed commercial loan team. When the first quarter softened there are three open positions that we did not fill because we didn't think it was the wise business decision to do at that time. And we still have not filled them. So realistically it is not likely we can hit $350 million in production with a less than fully staffed team.

But our best estimate now is that we should get something in the $225 million, $250 million range, so maybe about $100 million less. But then again we have three lenders less, so that is not unreasonable.

Perhaps the most interesting thing is to look at the portfolio. If we divide up the type of loans we make there into three large buckets, if you will, 25% of what we call A&D loans, acquisition, development of land. That is raw land, land that has to be accumulated and then goes through a rather extensive Florida permitting process. Typically those loans are 50 to 60% loan to value, so we do have some good equity positions in those loans. And most often carry personal guarantees with them.

The second category is land improvement, and that is about 40% of what we have outstanding. I call that horizontal lending. It is after the permitting is in place. We're doing roads, infrastructure, utilities, that type of thing. Preparing the land for vertical construction of some project, usually with a construction loan, but most often with another lender. So at point we get paid out of the deal.

And then the last category, which is about 25% of our portfolio, is what I'm going to call other commercial. That is warehouse lending, financing of strip plazas, office buildings, apartment buildings and condos.

And I will tell that we're very, very satisfied with our asset quality at the bank in general, in Florida in particular. We currently have no substandard loans in our Florida portfolio. In fact, we have no delinquencies in our Florida portfolio. But we do recognize, and are happy, that the pipeline that we have outstanding is shifting from A&D and land improvement into other commercial. And that is just fine with us. In fact we're trying to steer it in that direction.

I would also close by saying we have no concentration on any particular project in Florida, or with any particular developer in Florida, or for that matter any particular community in Florida. We think we have diversified the credit risk pretty nicely with different projects, different locations with different developers. And again with our team in Florida having been in that market for years with experience in picking the right locations and the right projects, the right developers, at this point in time we feel real comfortable with where we are at.

Speaking of the, I guess, geography, where is -- is the loan portfolio geographically dispersed kind of the Tampa/St. Peter area going north and south from there, or what other areas of Florida?

I would say if you start with Naples on the south, and go up the West Coast with Fort Myers, Sarasota, and then add on Tampa/St. Pete and Orlando, that is pretty much the footprint that you'll find these credits at.

Is there anything outside of that?

Gary, do you --?

We might have a participation on the East side but no, nothing of any significance.

Most of these are local deals with people that our local lenders know pretty well.

What is the average loan size there, and then maybe the biggest loan?

We don't have that handy with us, but I think we were in the $5 million range of average last time. And the largest [forgot to get].

We will get back to you on that.

But we have a house limit certainly that we don't approach of $25 million. And we don't have anything getting anywhere near that.

We don't have anything over $20 million.

Mac Hodgson, SunTrust Robinson Humphrey.

Just to follow-up on Florida again. I caught that you said you are expecting total production this year to be in the $225 million to $250 million range. Could remind me again what production was in the first quarter and the second quarter?

We have funding year-to-date approaching about $100 million. You know what, Mac, production would probably be at the larger amount. When I talk about funding, that is what I see hitting the outstandings. The production would include some of these credits that will ramp up over time.

You mentioned that you have been encouraged by the recent lending activity and how it picked up in June and carried over to July. Where in general is that coming from? Any kind of economic comments, types of loans, that sort of thing?

The convent I would make, and then, Gary, feel free to tag along. If you recall the first quarter, our traditional footprint, Harrisburg was right on plan and continues to be on plan. Pittsburgh was right on plant and continues that trend. And the rest of its northern footprint was pretty much where we expected it to be. The laggard was Florida, because of the market and because we probably have tightened up our underwriting some down there. So that was the first quarter.

The second quarter it is more of the same in that Pittsburgh and Harrisburg continue to track with their goal for the year. The rest of the footprint seems to be pretty stable. And we did recognize some pick up in Florida with some fundings that we got during the month of June. In fact, some of that is carried over after the second quarter.

With what we are seeing in Harrisburg, Pittsburgh and our existing footprint, and a little more activity in Florida, especially in the other commercial category, that is what is giving us some optimism that we should have a pretty good shot for the next six months at achieving our goal.

That's helpful. And then a quick question on the deposit side. Pretty good growth in non-interest bearing deposits. I think that reverses a trend over the last couple quarters of declines. Any particular area that is coming from? Is it commercial deposits, or is it retail? Comment on that, if you could.

This is Gary Roberts. It is coming largely from the business sector. We have had a concentrated effort of calling in that area. It is producing results. We're not selling rate, we are selling products and feature and benefits. And earlier in the year we made a decision to hire business development officers in each of our markets that are solely and exclusively focused on business calling. And I think that is starting to show results. Our third quarter campaign -- sales campaign at the branch and small business level will be a continuation of that effort. And so if we continue to prove successful, hopefully, those numbers will continue to grow.

I guess just one final question. On the provision and allowance for loan losses, the last couple of quarters I think you have charged off a little more than you have actually provided for. And I would assume that is because NPAs have come down. Is there a comfort level with the reserve as a percentage of loans, or how do you look at that and manage that going forward?

Yes, I think we are very comfortable. And I think you're right, with the methodology that we have certainly the better credit quality, and specifically some of the reserve relief happens when we charge-off something that has a specific reserve against it. Certainly those trends have been very good and continue to be very strong, but appear to be bottoming out at these levels. We keep saying it can't get any better and then it does. But it is slowing down.

I think as we go forward, and certainly in our forecast, we have seen that we should be closer to net charge-offs and provisioning covering each other.

Wilson Smith, Boenning.

Nice quarter. Brian, can you give us what the fundings were in the Pittsburgh market and Harrisburg market in the first half?

As you recall, our targets were $125 million for the Pittsburgh market. And we're just about 50% of that. And then in the Capital Markets, $75 million, same thing, just about half. That's about what Steve said, that we're about half of those targets. So we are in good shape in both those markets.

Now do you see any opportunities, are you going to try to capitalize on Sterling sale to PNC?

Yes, we -- there are two that interest us. One is the Sky Huntington, because in the western part of our market, Western Pennsylvania and Eastern Ohio, that plays -- comes into play there. And then just earlier this week we were talking, and our staff in Harrisburg is well aware of both the Community Bank combination with Susquehanna, as well as the PNC Sterling. And typically what that does, hopefully at times, it is disrupts relationships, and perhaps this dislodges some people as well. So we're looking for some good talent and we're looking for some good customers in both those -- all three of those transactions.

I would think there would be a real nice opportunity for you to pick up some seasoned lenders in those markets as those acquisitions go forward.

Yes, we've got our eye on a couple. And hopefully at the next quarter earnings call we will be able to tell you how successful we were. But that is always the case. We have been on the other end of those deals where we're making the partnership and somebody is trying to cherry pick us. That happens in the industry. But it is a good point and it is opportunity for us.

Are you seeing anything shake free out of Huntington or from the Sky acquisition in Western Pennsylvania so far?

Gary Roberts. At this moment primarily personnel, as Steve was mentioning. As we get closer to conversion and name changes, there will probably be customer opportunities, or we sure hope so. But directionally at this point, as you might suspect, it is people opportunities that we think can help take us and keep us at the next level.

But we have increased our calling efforts.

Oh, no question.

We are actively calling on relationships at all those banks that are involved in those acquisitions, because now is the right time to present alternatives.

And one last comment. As you well might imagine, moving commercial relationships is not an overnight event. You may get overnight commitments, but as a result those things take time to move accounts and long relationships, and all the other pieces and parts that go with it.

Absolutely. Absolutely. Well, it sounds like you've got some good opportunities there.

We think so.

Your asset quality did prove in the quarter. Was it just one or two credits or was it just some gradual improvement throughout, and maybe at Regency or something?

Regency as a category is having a great year. We really did think that -- if you recall in October of '05 the new bankruptcy law, their bankruptcies and losses accelerated in the fourth quarter of '05 because of that legislation. And then we expected, and it did happen in '06, we would get a breather because some of the '06 losses were probably pushed forward into '05. We had every expectation that '07 would return to what I'm going to a "normal" year. But it hasn't. Their asset quality still continues to be very, very good. And Regency can look out about 180 days, so we're just about at the halfway point. And as I said in my remarks, both Regency and the bank, we see no metrics that cause us to believe the asset quality is going to get anything but as good as it is now or perhaps even better, but we don't see it deteriorating.

Terrific. One last question if I might. You talked about the commercial growth, but you also had very strong direct installment growth. Can you give us a little color on that?

We had a very successful second quarter campaign. And again, we sold product and benefits and not rate, and we were pleased with the results. It was called our Home Inspection Campaign, and we asked our customers in our markets for a free -- or invited them for a free home loan inspection. And that produced very good results. So we were pleased that. As Brian mentioned, our indirect business, which we are not intentionally growing, just had a very good second quarter, enough to hold numbers outstanding. So those two things combined gave us some pretty good consumer results.

Are you finding that the spreads are holding up in the indirect business? Because we have been hearing from a couple of banks so far this quarter that the spreads were getting narrow, and they pulling back in the indirect business.

We have not seen that. That has not been our experience.

But we're also not pushing a product (multiple speakers) so we have maintained our spreads pretty strong over the last couple of years.

Excellent. Thank you.

The whole topic of retail I'm encouraged by, because Jonathan Roberts who joined us to head up our retail bank about (multiple speakers) six, nine months ago, has a broad retail background. And it has taken him a while to get the lay of the land and come up with a strategy. But previously we didn't have a strong retail strategy, and I think we have absolutely strong commercial strategy. But on the retail side, we needed somebody to own it and manage it and direct it. And I think he has helped a lot, and you are starting to see those numbers in the deposit. Next you are starting to see it in the direct installment loans. And hopefully we can maintain that.

Terrific, thank you.

(OPERATOR INSTRUCTIONS). Charlie Smith, Fort Pitt Capital.

Congratulations on the credit quality. I will be amazed if you can maintain those trends.

We're going to try real hard.

Back to Florida for a moment. Over the last six quarters would you say -- what would you say the percentage of your Florida portfolio is represented in the overall portfolio of the bank? How has that portfolio grown as a percentage of your total?

Maybe to answer it a little bit easier, we've got about $230 million outstanding on the books against a $4.4 billion. As you can see it is still pretty small and it is still developing.

And in the 56 basis points in non-performers, what fraction would you say is represented in Florida? The same as the overall portfolio?

The point I made in my remarks is that we have no delinquency in Florida, and no substandard assets in Florida.

No losses in Florida.

No non-performing.

No non-performing in Florida.

(OPERATOR INSTRUCTIONS). There appear to be no further questions. I would like to turn things back to Mr. Gurgovits for any additional or closing comments.

I want to thank everybody for joining us today. Telephone replays of this call will be available through July 27 by calling 888-203-1112 and entering the confirmation number 8264203. A transcript of today's call is also on our website at www.FNBCorporation.com. Again, thanks for attending, and have a great day.

Again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.