FNB Corp (FNB) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to today's F.N.B. Corporation first quarter 2008 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 your host, Mr. Bartley Parker, of Integrated Corporate Relations. Please go ahead, sir.

Thank you. Good morning, everyone. 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.'s 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.

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 in 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 pressure among financial institutions; changes in the interest rate environment that may reduce interest margins; changes in pre-payment 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. Steve Gurgovits, Chairman of F.N.B. Corporation. Steve?

Thank you, Bartley. Good morning, everyone, and thank you for joining our first quarter 2008 earnings conference call. With me today on the call is Bob New, our President and Chief Executive Officer; Brian Lilly, our Chief Financial Officer; and Gary Roberts, President and CEO of First National Bank of Pennsylvania.

As you know, Bob officially took over as Chief Executive Officer of the Corporation on April 1, having been President and CEO-elect since January 15. Bob has been diligently getting to know our operations throughout Pennsylvania and Florida, and along with Brian and me, meeting with some of you at the investor conferences we've attended during the first quarter. Going forward, Bob will be leading our quarterly earnings calls, so at this time, I'd like to turn the call over to him. Bob?

Thank you, Steve. Let me begin by saying thank you to Steve for his many years of service and leadership with F.N.B. Steve, I'm looking forward to working alongside of you in your new role as Chairman of the Board.

I think it's important to note that although we have a change in leadership, the Company's primary strategies won't change. Our operating strategy remains designed to manage our business for profitability. The seven components of that strategy include operating our business in markets that we know and understand; maintaining a low-risk profile; driving organic revenue growth through relationship banking; funding loan growth with core deposits; targeting a neutral asset liability posture to manage interest rate risk; building our fee income sources; and maintaining rigid control of expenses. Our capital management strategy will also stay the same. We intend to exceed regulatory well-capitalized measures and return excess capital to shareholders in the form of dividends.

Our expansion strategy has two components to it. First, we look to fill in our existing footprint with de novo branches or a small acquisition where it strategically complements our existing network. Second, we'll continue to look to expand our existing footprint with opportunistic acquisitions that add to shareholder value. In either case, we intend to be good stewards of our capital, which means acquisitions should be both accretive to earnings within the second year and not dilutive to capital.

Now let me bring you up-to-date on these strategies. As for expanding our footprint, we finalized our merger with Omega Financial Corporation on April 1. The integration of Omega began well before the actual closing date of April 1, and that gave us a running start of combining operations, sharing best practices and achieving target synergies. We expect the system's conversion to take last place over the Memorial Day weekend.

Also in February, we announced the signing of a merger agreement with Iron & Glass Bancorp. This transaction enhances our Pittsburgh presence by adding branches on the south side of the city, which complements our existing branches on the north side and directly in the city. We believe there are solid opportunities for revenue synergies, given our larger suite of products and larger balance sheet. The relative size of Iron & Glass makes it a low execution risk transaction and we're progressing towards a third quarter closing.

Now let's turn to our first quarter results. Our results for the first quarter are in line with our expectations, as we delivered $0.27 per share in earnings and continued our top quartile peer performance with a return on tangible equity of 24%. These results in a difficult environment reflect the benefit of having a low-risk operating strategy, which has allowed us to focus on new business during the quarter and not deal with the challenges affecting some of our competitors.

We are also pleased that, given the pace and the magnitude of the Fed's interest rate cuts and the resulting competitive pressures on both the asset side and liability side of the balance sheet, we were able to hold our net interest margin steady in the first quarter.

One of the bright spots for us in the quarter is the continued momentum of our commercial banking group. Our 10% annualized loan growth over the prior quarter came from our Pennsylvania markets, with our Pittsburgh region leading the way. Commercial loan production in the first quarter -- which, by the way, is traditionally our slowest quarter -- was $228 million. Now, by comparison, loan production in the first quarter of 2007 was $180 million. So we're off to a good start with our loan production, and our pipelines look good for the second quarter.

Also in the first quarter, we saw solid gains in fee income, namely in bank service charges and wealth management fees. But perhaps most important to us, not only this quarter but every quarter, is our credit performance. Asset quality had held steady in the quarter with charge-offs, non-performing assets and past-dues all remaining at very manageable levels.

With that overview of the quarter and our operations to date, let me turn the call over to Brian to provide some additional insight into our earnings. Brian?

Thank you, Bob, and good morning, everyone. The overall results for the quarter were a function of good loan and fee income growth, as well as a stable net interest margin. In addition, we experienced good credit quality and met our plan for expenses. As Bob mentioned, we are pleased with the 10% annualized linked quarter commercial loan growth. This growth was partially offset by seasonal runoff in the direct installment portfolio and weaker automobile sales, which drove a decline in the indirect installment portfolio. In total, average loans grew 4% annualized compared to the prior quarter. We have good momentum heading into the second quarter with our period-end loan balances above our average balances.

On the deposit side, we did experience the normal seasonal outflows of business deposits in the first quarter, and saw certain competitors become more aggressive with deposit promotions. Managing deposit rates was a key focus, as we responded to the aggressive Fed actions and competitive challenges. Our loan and deposit pricing strategies enabled us to increase the net interest margin 1 basis point over the fourth quarter to 3.73%, as we offset the earning asset yield decrease of 24 basis points with a rate pay decrease of 29 basis points. Looking forward, while the margin continues to be under pressure, we have targeted to maintain the margin in the second quarter.

Turning to non-interest income. Seasonal increases, organic growth, and a $700,000 gain from the Visa IPO contributed to a $1.5 million increase in non-interest income compared to the prior quarter. Insurance commissions and fees included the receipt of $650,000 in contingency fee income, reflecting favorable loss sharing results. The year-over-year decrease in insurance fees of $500,000 was entirely driven by lower contingency fees this year.

The linked quarter increase and other non-interest income category reflects approximately $800,000 in swap fees. These fees are earned through an interest rate swap program for our larger commercial customers who desire a fixed-rate loan, while F.N.B. benefits from a variable rate asset, thereby helping to maintain a neutral asset liability position.

With regard to bank service charges, the first quarter of the year is seasonally lower than the fourth. On a year-over-year basis, the increase reflects higher activity in checking and debit card accounts. For the quarter, our total non-interest income represented 31% of our total revenue.

We are pleased with the delivery of the first quarter expenses, consistent with our previous guidance of a mid-single digit increase and our first quarter efficiency ratio closer to 60%. The start of a new year includes the typical effect of annual merit increases, which contributed half of the $2.5 million increase in expenses on a year-over-year basis.

In addition, this quarter included costs related to the Omega merger, the transition of the Corporation's senior leadership, and the higher accrual expense for the Corporation's long-term restricted stock program. And finally, the first quarter of 2007 benefited approximately $400,000 from the 2006 restructuring of the post-retirement benefit plan.

I should note that the quarter did include approximately $600,000 in one-time expenses related to the Omega merger and relocation costs. Going forward, we would expect expense levels to be slightly lower as we move through the year, with the efficiency ratio moving towards 55% -- that is, before the impact of integrating and operating Omega.

As Bob shared, we are comfortable with our overall asset quality. Our net charge-offs were 27 basis points, which is below the 29 basis points for the full year of 2007. The ratio of non-performing assets to total loans and OREO increased just 1 basis point to 95 at quarter's end. The allowance of non-performing loans remains consistent at 1.6 times. With this in mind, our provision for loan losses of $3.6 million generally covered net charge-offs and loan growth.

Now let me update our full year guidance. I've already shared with you several of the key financial components. Factoring in the changes to the interest rate outlook, and [with] the competitive environment, our guidance for the full year 2008 remains within our previously announced range of $1.13 to $1.17 per share, although we would guide you to the lower end. This range includes the impact from the Omega merger, but does exclude the approximately $0.02 to $0.03 in one-time merger charges.

Bob, that concludes my remarks for the quarter.

Thank you, Brian. Overall, we're encouraged by the pick-up in our lending activity that we had towards the end of the quarter, and our pipelines look good going forward into the second quarter. This, coupled with our solid credit quality and disciplined management of operating expenses truly positions us well for the future.

And in closing, we believe that our strategies coupled with our history of successful execution, our conscious avoidance of those risks in covering other financial firms makes F.N.B. a preferred investment for shareholders. We thank all of our shareholders for their continued support.

That concludes our formal remarks for the call. I'll now ask the Operator to poll the audience for questions.

(OPERATOR INSTRUCTIONS). Mac Hodgson, SunTrust Robinson Humphrey.

Had just a couple questions. Maybe first on the fee revenue. Brian, I think you mentioned $800,000 of the other revenue was due to the swaps. So, I was just kind of curious if that's something you think is sustainable going forward or if it's more of a one time, given the interest rate environment?

Well, it certainly is higher in the interest rate environment that we're in, but that interest rate environment continues. So our team continues to work with larger customers in the second quarter here probably as we go through the year. But the first quarter definitely was very strong. We had a very -- a couple of real nice deals we were able to work out with our commercial customers.

Okay, great. And the $600,000 in Omega-related expenses -- would those be included just throughout the non-interest expense items? Or would they be in one of the categories specifically?

It would primarily be in the other and in the salary and benefits. We did a little pre-hiring of people as we moved some of the functions to our Hermitage area. So that would come into the salary section. And just to clarify that, it wasn't all $600,000 related to Omega. We also had Bob's relocation expenses were part of that $600,000 too. And that was one time.

Okay, great. And maybe on the loan growth, it was good commercial loan growth in the quarter. I've seen that from other competitors in the market. And some other banks are speaking to a lot of that loan growth being driven by the lack of the conduit market and the disruption in the capital markets. So, smaller banks are able to pick up maybe borrowers they wouldn't normally have lent to, given competitive reasons. And I was just kind of curious if that's something you'd echo and if you were seeing a strong loan growth as a result of that.

Mac, this is Bob. What we're seeing is that this is a continuation of our relationship banking focus. These are primarily loans that we have been targeting and they're not these large syndicated credits where we don't have relationships with customers. So, our loan growth is coming from expanding our customer relationships and recruiting new customers.

Okay, great.

Mac, if I could just add, we're a little bit more bullish on that, particularly in our western part of our franchise with the disruption in NatCity and others. The teams have put some really strong marketing programs together. And when we've been close in relationships, they're bringing in some good accounts that way.

Yes, the real growth came from the Pittsburgh and central regions. And the central region is right here in Hermitage Youngstown, where NatCity has a stronger presence.

Okay. And do you have any comments on the Florida market, how it's doing from a production standpoint? And obviously credit stats were good in the quarter, so I'm assuming there's no further deterioration there.

Yes, let me give you -- this is Bob -- let me give you an update on Florida. We had a slight uptick in our outstandings. We grew outstandings by about 4%. The total exposure, however, actually went down by just under 2%. We reported, I think, in the fourth quarter on credit quality and said that we had taken one credit in OREO and put two loans totaling about $10 million on non-accrual. We've had no change to that in the first quarter, so that credit quality metric is holding up.

Going forward, we continue to watch that and monitor it very, very closely. We do quarterly reviews of each one of our credits in Florida. We are well aware that that economy continues to soften. And Mac, I don't know if we had told you this before, but I spent about a week down in Florida in February, just looking at every one of these projects that we had financed. I think I probably looked at about 80% of the portfolio. I came away from that visit feeling fairly comfortable that we'd done a pretty fair job on our underwriting. There were good LTVs on the project. Most of them had guarantors. The risks were well documented. We do a quarterly review of these credits. I'm comfortable with our monitoring process and our action plans for every credit.

Having said that, we still understand there's risk in Florida, but I believe we've got a pretty good handle on those risks and we feel like it's manageable.

Okay, great. That's it for me. Thanks, guys.

David Darst, FTN Midwest.

Bob, you said you -- could you just touch on the growth of the Florida that you mentioned -- you said you grew outstandings by 4%?

Yes, that's about $12 million. We did -- in this quarter, we did four new loans. One of those was a small loan to an individual as a personal line of credit. And then we did three other in-market transactions. One was a C&I loan to a group of doctors and two others were commercial real estate loans that met our underwriting for commercial real estate projects.

Okay. Then you made a you reference to reducing your exposure to under 2%?

For the total exposure, the total commitments in Florida reduced about 1.5% from quarter to quarter.

Okay. And how large is that ORE down there?

ORE or CRE?

We had one project down there, about $1 million.

Okay. And then, Brian, could you give us an average share count, diluted share count, to use for the second quarter?

No, but -- I don't have -- there's nothing unusual that's happened from the first quarter to the second.

I mean, considering Omega.

No, we didn't. You know, I -- I've got a number off the top of my head. I want to say about 86 million, but I'm going to have to -- I'll firm that up.

Okay. And then any other updates on central Pennsylvania or the Pittsburgh market?

No, activity is brisk and our pipelines are strong. As a matter of fact, we're at all-time high. So we're very optimistic on what's going on up here. And I think there's some real good opportunity.

(OPERATOR INSTRUCTIONS). Damon DelMonte, KBW.

A quick question on credit quality. The net charge-offs this quarter were 27 basis points. Do you have a forecast or a target for full year?

Well, we did -- we stand by our guidance that we shared with you at the end of January, where we thought that just slightly above our actual for 2007, which was 29 basis points. But we're already slightly below that, so we're encouraged by that.

Okay, great. And now just with respect to some of the commercial growth you've seen, could you just kind of identify some of the projects that you're lending to?

Sure, Damon. This is Gary Roberts. On the commercial sector, primarily -- non-owner occupied and owner occupied commercial real estate; income-producing properties, all with strong cash flows and within policy margins. So that seems to be, at this point in time, where most of the activity is. C&I lending continues to be brisk. It represents about 40% of our -- is that right? Is it 40% or 50%?

It's about 40%.

40% of the portfolio. So, nothing outside of the norm.

Okay, great. And then just lastly, is there going to be any type of supplement published with any numbers on Omega with regard to their last quarter's results? Or is this something we have to wait for until the end of the second quarter?

You know, we hadn't contemplated issuing anything on an interim basis, Damon. We haven't done that in the past. So, (multiple speakers) [back in] the quarter.

Okay. All right. Thank you very much.

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

Could you provide an update on asset quality as it pertains to your indirect auto loans and Regency?

Well, I'll take those in pieces. Regency continues to perform very well, Andy. I think that we've shared with people on this call that our historical charge-off ratio being in the 4% and they were right on top of that for the first quarter. Their Regency delinquencies are consistent with where they've been in the past. And so we're not seeing any slippage there at all.

As it turns to the consumer, the indirect portfolio, delinquencies continue to track very consistent through the 2007 and 2006 level. So, we, like everybody else, we're looking for those cracks in the consumer and being active risk managers that we are. But so far, so good.

Okay, great. Would you happen to have the -- how did the 30 to 89 day delinquencies compare quarter to quarter?

30 to 89 --

Past dues.

I've got the total on the top of my head, but that particular category -- (multiple speakers). Yes, we'll take a look at that. We'll look for that in our detail, Andy, if you've got another question.

Sure. You may not have this, but just curious what the average loan to value ratio is for your Florida loans? Or if you could provide some color on that.

I think we addressed that in the -- I think in our fourth quarter call. And my recollection is that we are -- on some of our -- it varies, depending on the type of the loan. Certainly our policy would suggest that if we have operating properties, that the loan to values should be in that 80% or better range. And if it's land, it's 65% or better.

Currently, we're running an average of about 50% on land and about 62% on development and other real estate -- somewhere between 62% and 65%. So our LTVs are in a little better shape than even our policy suggests.

Okay. Could you give us some color on how Omega's asset quality fared during the quarter?

Certainly from -- well, we're getting our arms around that now. There's been nothing reported on it. I think I'd say that it's pretty consistent with what they included in their 10-K. And we'll be -- as normal process, we'll be absorbing that here. That [will leave] the normal 3-3 accounting principal will apply to a larger commercial and we'll get that washed through here in the second quarter.

Okay. That's it for me. My other questions have been asked.

Hey, Andy, just let me follow up on -- you asked a couple of components there. I'm looking at a 13 month trailing of our 30 to 60, 60 to 90 and 90-plus. And boy, there's just a strong consistency in our mortgage portfolio and our consumer loan portfolio.

Okay, great.

Charlie Smith, Fort Pitt Capital.

It looked like your balance sheet became a little more asset sensitive last year. What was the trend during the first quarter?

I would agree with you on that, but I -- we move in -- at a snail's pace, moderation. Our [own co-] policy is to maintain very close to neutral, but as you get to the lower range than we are right now, we don't mind being a little more asset sensitive and taking advantage of the swap programs and some of those that book some variable-rate assets. It seems like a good strategy to us, but always in moderation.

Okay. It doesn't appear like you guys have begun to benefit at all from the Fed funds rate cut. Is that something that we could reasonably expect or not?

You know, it's nice to see a sloping yield curve. But it certainly wasn't a benefit here in the way we got there in the first quarter. Managing the rates down on the deposits is the challenge in a competitive environment where a lot of banks and -- you know, you have NatCity and others in our market that are looking to grab deposits. So there's some higher rates out there. We're competitive and we're in the pack. And we continue to manage our deposit growth, consistent with our earning asset yield fees.

That said, I've always expected or hoped that there will be some sensibility here in the back half of the year that allows the margin to maybe expand. But right now, we're fighting to keep it flat.

Okay, so maybe you gave up a certain amount in terms of rate paid to competing NatCity, but you pick it up potentially on the asset side.

Yes. We're managing both sides very actively.

And we have no further questions at this time. I'd like to turn it back over to management for any additional or closing remarks.

Well, thank you again for joining us today. Just to remind everybody that a replay of the call will be available from 2:00 P.M. Eastern time today until midnight Eastern time on May 2, 2008. A transcript of the call will be posted to our shareholder Investor Relations section at the F.N.B. Corporation's website at www.fnbcorporation.com.

And that really concludes our call. We thank all of you for your time and your participation, and have a good weekend.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.