FNB Corp (FNB) 2007 Q4 法說會逐字稿

Thank you for standing by. Welcome to today's F.N.B. Corporation fourth 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.

And now I would like to turn the conference over to Mr. Bartley Parker, of Integrated Corporate Relations. Please go ahead, sir.

Thank you, Anthony. Good morning, everyone. This conference call of F.N.B. Corporation and the reports it files with the Securities Exchange Commission often contain forward-looking statements, which are based on current expectations, estimates, forecasts and projections about F.N.B., as well as 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 services industry. Since forward-looking statements relate to future developments result in events, they often involve certain risks and uncertainties.

Actual future results may differ materially from historical performance or those who are expressed in or implied by this presentation as a result of future decisions by F.N.B. or factors and developments beyond F.N.B.'s control, including, but not limited to, a significant increase in competitive pressure among financial institutions; changes in the interest rate environment that may reduce interest margins; changes in pre-payment speeds, loan sales 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, Chairman and CEO. Steve?

Thank you, Bartley. Good morning, everyone, and thank you for joining our fourth 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. Also joining us today is Bob New, the Corporation's President and CEO-elect, who joined us on January 15.

As we announced last October, Bob will become CEO effective April 1 of this year. We believe Bob's experience of over 33 years in the financial services industry working for both large and small banks will complement our existing team nicely.

Looking back on the year for a moment, the Board's appointment of Bob was not our only significant accomplishment in 2007. We also strengthened our banking franchise with the first in regent introduction of same-day banking all day. We created business development officers for all of our retail banking regions; hired a Chief Marketing Officer to help us to continue as a premiere financial services organization; and unified our brand with the renaming of legacy branches as First National Bank of Pennsylvania. We grew our merchant banking subsidiary, F.N.B. Capital Corporation, and expanded our consumer finance subsidiary regency finance. We believe these initiatives will create value for our shareholders over the long-term.

Our solid financial performance for the year and continued confidence on our outlook led our Board to authorize an increased cash dividend as well. This marks the 35th consecutive year of increased dividends. Our Board fully supports the strategy of offering F.N.B.'s shareholders a strong cash dividend as a key component of shareholder value.

Perhaps most importantly in 2007, we continued our expansion into Pennsylvania markets with higher growth opportunities than our existing footprint with the agreement to merge with Omega Financial Corporation. This transaction continues to progress and we expect to meet our expectation of an early April closing.

For the year, earnings per diluted share increased to $1.15. We continued to deliver solid profitability with a return on tangible equity of over 26% and a return on tangible assets of 1.25%. We believe that our returns continue to place F.N.B. in the top quartile of our national peer group.

Our performance versus the prior year is noteworthy for the progress we have made increasing the average balances of our core loan categories of commercial, direct installment and consumer lines of credit, also increasing our fee income businesses and maintaining our focus on controlling expenses. The economic environment continues to make our lending business challenging but manageable. We are well served by the fact that our practice of conservative underwriting has helped us avoid the types of losses from loans such as subprime residential mortgages, which are now negatively impacting other financial institutions. The direct origination of our loans has enabled us to maintain consistency in our credit underwriting. Our conservative investment strategy limits our investments of primarily AAA rated securities.

Now turning to loan. The growth in our average loan balances for the year was 6%. On a regional basis, Florida production for the full year totaled $161 million. We remain comfortable with our strategy, which focuses on lending for commercial projects supported by lease rental income.

For example, during the fourth quarter, we financed a total of five commercial projects. All of these projects were either owner-occupied or were based on lease rental income. The typical loan to value ratio was 80%. All projects were additionally supported by personal guarantees.

We also received a full payment on one Florida project, as expected and on schedule, with a principal balance of $15 million. Further, within the last six weeks, approximately 10% of the balances of our entire Florida portfolio has been paid off, again, as scheduled. We go to this detail to reassure you that in spite of the current real estate market conditions in Florida, there still remains opportunity to finance financially sound projects. Also, let me remind you that only a small portion of our loans are in Florida, which represents just 6% of the Corporation's total loans.

It has been our practice in the past to share with you our targeted production versus our goals. With regard to Pittsburgh and Harrisburg -- two of our key Pennsylvania markets -- we exceeded our funding goal of $200 million for the full year. We are pleased with the progress we achieved in 2007 and attribute our success to the strong customer service focus of our commercial lending teams.

Let me now turn the call over to Brian to provide some additional insight on our earnings report for the fourth quarter. Brian?

Thank you, Steve, and good morning, everyone. Let me stat with some comments on the fourth quarter. I will then provide guidance for how we see 2008 stacking up.

In general, we are pleased with the quarterly results. While the markets of financial services companies delivered what seem like daily bad news, F.N.B. delivered a steady quarter with continued peer-leading profitability. Later in my comments, I will address one developer relationship that impacted the credit quality metrics during the quarter. But outside of this one relationship, we continued to be cautiously optimistic on credit quality going forward.

Turning to the operating details. Average loan outstandings grew 2% annualized over the third quarter and was led by 6% growth in average commercial loans. Commercial loan growth was more than enough to offset the seasonal declines in the indirect auto and direct installment loans.

Regarding deposits, our business development initiatives and strong relationship checking offerings helped to offset some of the seasonal decline in the average balances of deposits.

During the quarter, the Fed funds target rate declined 50 basis points. Further, the yield curve was generally lower. As a result of these rate movements, for the first time in 10 quarters we experienced a linked quarter decrease in the earning asset yield. We were able to manage the net interest spread through a linked quarter reduction of 14 basis points in the cost of funds. Most of the lower rate paid was through lower deposit costs. Due to seasonally lowered demand deposit balances, the net interest margin narrowed just one basis point to 3.72% versus the third quarter.

With the exception of insurance related fees, all major fee businesses experienced linked quarter increases. A strong increase in service charges was driven by higher activity in our overdraft protection services. Our wealth management businesses of trust and retail security sales continued the good momentum from prior quarters and grew at an annualized 31% over the third quarter.

Our mortgage origination business had one of its strongest quarters, as the market disruption benefited quality originating institutions. Our insurance agency revenues continued to be impacted by the soft renewal markets. We take some comfort in maintaining flat fees year-over-year against the stated industry experience of approximately a 12% reduction on policy renewals.

We continue to be disciplined in our cost control. The linked quarter decline of 6.3% annualized benefited from lower personnel-related costs, primarily due to the yearly cap on payroll taxes and the fourth quarter lowering of incentive compensation and medical expense accruals.

Regarding asset quality, most of the movement in the fourth quarter's credit quality metrics can be attributed to the actions we took with one Florida developer. Our total relationship with this developer is comprised of two projects. During the quarter, we charged off $853,000 on one project, which was previously specifically reserved, and transferred the net balance of $1.7 million to OREO. The second project has $8.2 million in outstandings. Although the interest reserves are sufficient to meet the scheduled payments into 2008, the weakness of the borrower and slowdown in absorption required early recognition. The project has been placed on non-accrual and we have provided $2 million specific reserve.

Given the actions with this relationship, we can now better understand the changes in the fourth quarter credit metrics. The quarter-end non-performing assets include $9.9 million related to this one developer and accounts for the increase in the ratio of non-performing assets to assets and the decrease of the allowance to non-performing loans ratio when both are compared to the historically strong ratios early in 2007.

Even with this developer relationship, these ratios are returning to levels consistent with the early part of 2006. The $1.6 million increase in net charge-offs versus the third quarter was primarily driven by the previously mentioned charge-off, coupled with higher fourth quarter consumer charge-offs at Regency and the Bank. The $1.5 million increase in the provision for loan losses as compared to the third quarter was primarily driven by the previously mentioned $2 million specific reserve.

At December 31, the allowance for loan losses stood at 1.22% of total loans, a two basis point increase from the third quarter, and represents an amount of over 1.6 times our total non-performing loans. Our period-end capital ratios remain solid as they continued to meet all well capitalized measures.

Now let me turn to our plans for 2008. We recognize some of the economic uncertainty but are cautiously optimistic that our markets will continue the momentum that we gathered in 2007. In order to give more clarity to our organic growth, the following guidance is before the addition of Omega Financial.

In terms of balance sheet guidance, we look to grow earning assets and loans in the mid-single digits. Loan growth will continue to be led by our commercial lending teams. Deposit and treasury management growth is expected to keep pace with the earning asset growth.

We have planned for a lower Fed funds target rate and lower yield curve in general. We expect to continue to match decreases in earning asset yield with a lower cost of funds, thereby maintaining the net interest margin. However, we continued to be cautious of the potential pressure caused by competitors who are holding pricing on deposit in a lower rate environment.

Credit costs are expected to increase in 2008 with net charge-offs increasing slightly from historically low 2007 levels. We have targeted to cover net charge-offs and loan growth in the provision for loan losses.

Our fee businesses will continue to add valuable high margin, low capital-intensive revenues with growth expectations in the mid to high single digits. Growth and retail security sales, trust, mortgage originations, and loan swap income will lead the way. The insurance business is expected to continue to experience a soft renewal market coupled with lower first quarter contingency fees.

Expense growth will continue to be a focus. We are projecting a mid-single digit increase as we absorb the costs of our leadership transition plans, grant normal merit increases, and reset higher benefits and incentive compensation accruals for 2008. The result is an efficiency ratio closer to 60% of first quarter, decreasing to our target of 55% by the fourth quarter. And finally, we expect the income tax rate and diluted shares to be generally consistent with the current levels.

Steve, that concludes my remarks for the fourth quarter and outlook for 2008.

Thank you, Brian. In terms of our earnings guidance for 2008, Brian has provided you with some of the specific components. We recognize there is some uncertainty to the economic environment, but our outlook is cautiously optimistic. Given this outlook, we expect our overall earnings per diluted share for 2008 to range from $1.16 to $1.20 per share, which does not include the impact of the pending acquisition of Omega Financial Corporation.

We believe that presenting our guidance in this format will allow investors to more clearly understand our organic growth profile. As we mentioned in November, we expect the Omega transaction to subtract approximately $0.03 per diluted share for the full year 2008, and to have one-time merger-related charges totaling $0.02 per diluted share.

As we look forward strategically into 2008, our first priority is to execute a seamless integration of Omega Bank. This transformational acquisition will provide tremendous opportunity for F.N.B. to grow in strong Central Pennsylvania markets. We will continue to emphasize our Pittsburgh region, where we are pleased with both progress today and opportunity for the future. We will, as always, but especially in this time of economic uncertainty, closely monitor credit quality and loan production. We will continue to be extremely selective of Florida projects to finance.

Overall, I remain optimistic that we have positioned our Company for growth, will strengthen our capital ratios through the Omega merger, and will continue a successful asset liability process to protect our margins. And finally, stringent expense control is always a given at F.N.B.

Let me conclude the call by saying that we feel we are well positioned in our markets with excellent people to continue our culture of meeting our customer's needs with innovative loan and deposit product. Our conservative growth assumptions allow us to maintain a low-risk profile which, combined with our strong cash dividend, provide shareholders with an attractive investment option.

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

(OPERATOR INSTRUCTIONS). Andy Stapp, B. Riley & Co.

You talked about that one Florida developer being a major driver of some of the deterioration in the asset quality metrics. And I understood that the Regency was a driver, is that correct? And could you give me an idea of how much Regency's charge-offs increased?

Well, on the charge-off number, I think the number was $1.5 million -- over half of that was just one developer. The other half we did have slightly higher consumer charge-offs with half split between the Bank's portfolio. In both these cases you're talking about low hundreds of thousands of dollars of increase.

Regency's increase, I think it was $400,000 third quarter to fourth quarter. And that was just getting them up into the low 4%'s, which we've talked about in the past, is our normal level coming off of a very low second and third quarter.

Okay. And do you expect it to stay around that level?

Well, we certainly believe we've got the right credit mentality in the Regency business and have seen good performance. And I think that's consistent with our guidance where we've said slight increases.

And you said the remainder was consumer loans at the Bank. Is that mostly indirect auto?

No, as a matter of fact, it wasn't. It would have been more in the home equity or residential mortgage here or there; but nothing that we see as a trend.

Okay. I missed your Harrisburg production. You said you exceeded that. How much did you exceed it by?

Well, Andy, what I said was our Pittsburgh and Harrisburg regions. And we combined them for this call just -- it's a market, we've emphasized both of those and we exceeded our 2007 production on a combined basis for those two markets.

We were almost right on top of the Harrisburg.

Harrisburg was almost a target and Pittsburgh was slightly over, but on a combined basis, they ended up in excess.

Okay, great. Thank you.

Damon DelMonte, KBW.

A question for you on the provision. You'd mentioned that charge-offs would match provision going forward in '08. Is what we saw in fourth quarter indicative of where you see trends going? Or should we look back to the third quarter?

Well, I think it's -- fourth quarter was higher. We certainly absorbed $850,000 commercial. But as we looked at it, I think the total year came in around 29 basis points. And as we look at our 2008, just slightly above that would be our expectations.

Okay. Great. And then with regards to Florida, any color on what you expect for production in '08? Or are you going to be pulling back efforts down there?

Well, as I said in my remarks, we're going to be very cautious and very selective on projects we finance. As, again, we did in the fourth quarter, we're looking for primarily those commercial projects supported by underlying rental cash flow as opposed to any type of land development or land speculation. So, I would expect that our production in 2008 would be similar to what it was in 2007. Again, with the emphasis as I stated.

Okay, great. And could you just remind us what the total balance is again?

Yes. We ended the year at about 260 -- I'll round it up -- $265 million in total Florida exposure.

Okay, great. I think that's all I have. Thank you very much.

David Darst, FTN Midwest.

Steve, it sounds like you had a net decline in the Florida portfolio during the quarter?

No, as a matter of fact, from an outstanding basis, we were flat.

Yes, it's about flat, David.

Okay. So the 15 million of production --?

That would have offset some of the payoffs. [Right], Steve?

Right.

Okay. And then how about throughout the other footprints in the fourth quarter? Are you seeing pretty good demand still? Or is it higher payoffs that are slowing the growth?

David, Gary Roberts. Demand remains, I guess, constant. Our backlog, our pipeline is reasonable at this point. We're going into 2008. We're not disappointed. Obviously, we always wish there was more. But, no, I think we're okay for the first quarter. I guess what happens during the first quarter with the economy will dictate what happens in the future.

How about on the competition from the larger banks that had to bring [sales] assets back on the balance sheet or have other capital challenges? Are you seeing some larger deals that you haven't seen before?

Well, we experienced some benefit from the Sky/Huntington merger. And frankly, David, we would expect that to continue. Sometimes those customers don't consider moving until their lines of credit come up for renewal or they have some such of event with a new bank. Obviously, we're targeting some calling efforts in that regard.

As far as our other competitors, [NAP], Citi, PNC, people like that, we don't see any increase from that competition. It's pretty much the same as it's always been. But I think we're going to have opportunities in the marketplace. And particularly out in our Eastern market where after we close the Omega deal the first of April, I think that additional presence in that market will help our existing branches, because we'll just have more brand recognition in those markets.

Okay. And you indicated a couple -- I guess they're new hires or positions that you had during '07; one was the marketing. And then you indicated some new business development officers?

Yes. We put a new Business Development officer in each of our regions, strictly focusing on developing relationships. They could be deposit relationships, they could be treasury management relationships or other services as well.

And another key hire, frankly -- now that you brought that up -- last year, it really was a very attractive hire for us was the gentleman who heads up our Treasury Management operation. He's really taken that whole product to another level.

Okay. So how many regions do you have?

We track six regions when you count Florida as one of the regions. But -- and we sit with five today. Omega, I think would be --

Omega will be its own region.

Yes.

Okay. So that's five to six new people you hired last year? Or were they promotions or other realignments?

Some of those, David, we're internal fills. And so there may have been an increase in staff of maybe two. But for the most part they were internal transfers of responsibility.

Okay. And how about your delinquencies in Florida? Can you give us some color on that watch list?

Well, as we sit on December 31, David, I'm pleased to report that the entire Florida portfolio is paying as agreed. Obviously, we're aware of the market conditions and we continue to monitor it, but as of the end of the year, everybody is paying as agreed.

With the exception of the one credit (multiple speakers) --

Yes, the one credit.

Brian has already described it as a non-accrual. Yes.

Okay, great. Thanks.

Mac Hodgson, SunTrust Robinson Humphrey.

Remind me again -- or maybe update me on the outstandings of the Regency portfolio? I know it's very small. I was just kind of curious.

Well, Mac, it's about $150 million in total receivables.

$150 million?

Yes. About 11% of that number is indirect. And that's primarily white goods, TVs, that sort of thing; appliances. And frankly, that's just purchased through dealers in order to get additional households on their books that they can direct-market to. That's not really a major emphasis for them.

38% of their portfolio is secured by residential real estate. And 86% of that amount is secured by a first lien on residential real estate. And then the balance, which would be about 50%, is made up of just all other types of direct loans -- car loans, home improvement, debt consolidation, that type of thing.

Got you. Okay, great. And would you be able to update the mix in Florida? I know you did a presentation that had a breakdown of the Florida mix as of 9/30. I'm assuming it hasn't changed much.

Well, actually, that's the answer. The total outstandings are pretty flat and the mix is pretty much the same, honestly, as what's on September 30.

With a little -- to the extent the mix has changed at all, it's -- it really hasn't changed. It's about 49% in the raw land category; about 15% in actual what I call horizontal development, which is roads and curbs and sewers and that sort of thing; and then 36% in other commercial real estate -- strip centers, office buildings, those types of projects -- apartment buildings.

(multiple speakers) pointed out that that vacant land is -- that you've talked about is half (multiple speakers) of that portfolio is commercial.

Yes, good point. Sometimes when you talk about raw land, people get concerned that, well, this is land for speculative residential development. And half of that amount really is for commercial development. And interesting on that point, as we do, we get reappraisals on this at certain periods of time. What we're finding on the commercial land, a lot of that has remained steady or actually has increased in value.

So, would that be because demand is still pretty high for commercial properties?

Well, as I've said before, and I really honestly believe this, people tend to paint Florida with one brush and say the real estate market in Florida is soft. But the fact of the matter is, there's still population growth in Florida and there's still sprawl occurring in Florida. And that infrastructure need is still there for pharmacies and doctor's offices and dry cleaners and all those support services. And these strip plazas and professional office space for doctors, attorneys, and accountants, that need is still there.

And so this land, if it's obviously in a good commercial location, and some of these loans now have been booked 18, 24 months ago, is actually we found it has actually increased in value. Because I think the need is still going to be there for infrastructure development, on the commercial side, especially.

Okay, great. And the 10% in paydowns in Florida that you mentioned since the end of the year, what category would that fall under from a mix standpoint? Would it be the raw land or the other or residential --?

Mac, those were two condo projects that paid off as scheduled, on time.

Probably in the other real estate, then.

Yes. They would have been on the other real estate.

Okay, great. And then maybe, Brian, if you could comment on the margin again? It sounds like you're hoping to hold the margin relatively steady depending on what competitors do, obviously and what the Fed does. I'm curious if you could give any more color on what competitors are doing, from -- both on the credit pricing side and on the deposit side? Obviously with Countrywide going, I'm not sure how active they were in your market, I don't know if you anticipated any relief there?

Well, we saw, certainly in the quarter, the reversal of the increasing earning asset yields that we all experienced with the commercial loan pricing grabbing the benefits of a lower yield curve. And so our yields are moving down paced with that. What became a little troubling is that the movement in the shorter term rates on the yield curve, our competitors weren't moving that as quick as we'd like. Now, it happened we were able to manage that with the quarter, being able to maintain the margin basically flat.

But that is probably the concern as we go forward, that we'll get our fair pricing out of the commercial side, I believe, as I sit here now, although it will be tighter than it has been; maybe not tighter, but it will be lower in absolute terms. And the deposit side is the focus. The liability pricing side is the focus as we go into the next couple of quarters, to maintain that margin.

Okay, great. And maybe if you could provide -- I think you did give the date, but I was curious when you expect to close the Omega transaction again? And maybe walk through kind of your process from your side? You know, the steps you take in integration and getting everybody ready and on the same page, that sort of thing?

Well, I'll take the first part of that and then ask Gary to talk about the integration that he's been heading up.

We're expecting to close it, Mac. Right now we're aiming for about April 1 to close it. Their shareholder meeting is scheduled in March, as is F.N.B.'s special shareholder meeting as well. We have been doing a lot of work communication-wise. We had employee meetings with all their employees in December, to do everything from telling about F.N.B. Corporation and comparing benefits and that such thing.

And then Gary has been heading up an integration team made up of representatives of both F.N.B. and Omega. And I'll let you comment on that.

Yes, just very quickly. As you might suspect, we've already been meeting on a regular basis. And the goal obviously is to take two really good companies and make a great one. And we're looking at their products, services, and systems and our own, and determining which should be the surviving. And accordingly, that's the process we're in right now. I think that the similarities between the two companies in terms of our management style and our demands for customer service are amazing parallels. And so I really believe that the integration process will be pretty smooth.

And how are you finding, I guess, a comparison on the credit side from an underwriting and credit quality and asset quality management?

Well, you're aware of the large problem credit that tainted their ratios. And with the exception of that, as we look at underwriting styles and typical advance ratios for the two organizations, they're pretty close.

Okay, great. Thanks, guys.

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

I wanted to get a sense for where house prices are going in your Northern markets. The Case-Shiller index is running at minus 6.5, minus 6.7 year-over-year. I imagine your markets are much less than that since we didn't see the upside. Can you give us any sense for that?

Are you talking of residential --?

Residential, yes.

Well, actually, as you might expect, we don't get the run-ups that some of the hotspots in the country got. So, we're not getting the downward adjustments to the magnitude some of those markets are experiencing as well. I would describe our house prices generally, Charlie, as just steady. It's not a lot of appreciation, not a lot of fluctuation. And the truth of the matter is, we had a really decent fourth quarter, because we are seeing some benefit as some of these brokers that used to exist and sort of pick at us from a market share point of view. With all the issues surrounding their business today, we're finding that Realtors are really coming back to the local banks. And that should benefit us, I think. And we're working on those relationships because I think there's opportunity for us there. But the house prices, I think, are stable.

So your sense is you're gaining back from some share from the originate-and-sell type folks?

Absolutely.

Okay. Great. Thanks.

And with no further questions left in the queue, I'd like to turn the conference back over to Mr. Gurgovits for any additional or closing remarks.

Well, I'd like to thank everybody for joining us today and remind them that a replay of the call will be available from 2:00 Eastern time today until midnight Eastern time on February 1, 2008. The replay can accessed by dialing 888-203-1112. The confirmation number is 808-7554. A transcript of the call will be posted to the Shareholder and Investor Relations section of F.N.B. Corporation's website at www.fnbcorporation.com.

That concludes our call. I think everybody for their participation and interest, and have a great day.

Once again, this does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.