FNB Corp (FNB) 2008 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 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 Mr. Bartley Parker, Investor 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 often involve certain risks and uncertainties, and actual results may differ materially from historical performance or those that are expressed in or implied by this presentation as a result of future decisions by F.N.B. or by 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. Bob New, President and CEO of F.N.B. Corporation. Bob?

Thank you, Bartley. Good morning everyone, and thank you for joining our second quarter 2008 earnings conference call. With me today on the call is Brian Lilly, our Chief Financial Officer and other members of our Senior Leadership Team.

This has been an eventful quarter for F.N.B., and there are a number of items that influenced our earnings, so let's get right into the results.

The second quarter of 2008 net income was $14.5 million, or $0.17 per diluted share. The results for the quarter include charges of $11.9 million pre-tax, or $0.09 per share after tax, including a $6.4 million additional provision for a loan loss reserve, and a $5.5 million charge for a mega merger-related cost, Executive retirement, and charges due to lower bank stock values.

Brian will cover our operating results in more detail later in the call, but I want to take a few minutes to discuss credit quality and our decision to make an additional provision this quarter. The $6.4 million additional provision falls into two buckets; the first bucket relates to Omega. We made a one-time $1 million provision to align Omega's methodology for loan loss reserves with ours, given that our formula was slightly more conservative. Notwithstanding that adjustment, the Omega portfolio is behaving exactly as we had predicted it would in our due diligence.

The second bucket relates exclusively to Florida. We took action this quarter to build our reserves in light of the prolonged economic challenges facing the Florida economy. Of the $5.4 million provision, $2.2 million is related to one construction project where the bank is a $10 million participant in a $100 million loan on a luxury condominium construction project in Naples, Florida.

The other $3.2 million provision was allocated across the remaining Florida portfolio in recognition of our forecast for a slower economic recovery. This quarter, we placed two Florida loans on non-accrual, so let's talk for a moment about non-performing loans. Non-performing loans increased $28 million during the quarter to $62 million. Two Florida loans totaling $15.5 million comprise the bulk of this increase. One is the $10 million exposure to the condominium project in Naples that I discussed earlier. The other is a $5.5 million condominium project located in Treasure Island, Florida. The remaining increase is a result of bringing onto our books the non-performing loans that were part of the $1.1 billion Omega loan portfolio.

Before I leave the topic of Florida, let me remind you that we do an extensive loan-by-loan review each quarter of the entire loan portfolio in Florida. Our quarterly process requires that we meet with borrowers whose loans are coming due in the next six months. We review with them the current appraisals we've ordered on their projects, and confirm with them the actions that we will require at maturity.

Also each quarter, we initiate a communication with our regulators to keep them well informed of our actions. We do these things to ensure we meet our own high standards for grading accuracy and proper reserve allocation. Now, while I've spent a lot of time talking about Florida this morning, it's very important to remember that Florida only represents 5% of our total loan portfolio.

The Corporation's overall credit quality is good. Our Pennsylvania and Ohio franchise continues to perform exceptionally well, both our commercial portfolio and our consumer portfolio. In fact, our non-performing loans in the Pennsylvania and Ohio regions are essentially unchanged from the year-ago.

Our level of net chargeoffs remains good. Annualized net chargeoffs were 30 basis points of average loans for the quarter. Year-to-date, net chargeoffs are running at an annualized rate of 29 basis points of average loans.

Let's shift gears now and talk about what we're doing to grow and improve our franchise. On April 1, we closed on our acquisition of Omega Financial. Then it was the Memorial Day weekend, we completed the system's conversion. This was an important transaction for us because the more robust markets of State College and Central Pennsylvania provide F.N.B. with additional opportunities for sustained profitable growth.

Commercial loans grew organically at an 8% rate on a year-over-year basis. Our Commercial Group funded $464 million in the first half of 2008, and they finished their quarter slightly ahead of their mid-year production goals. Our Pittsburgh and Western Pennsylvania regions accounted for approximately half of the total commercial production. The remaining production was evenly spread among the other regions.

At quarter end, our pipeline remained healthy at the $1 billion level for the second consecutive quarter. Consumer loans grew 2.1% on a year-over-year basis, and combined with our commercial loan growth, the Corporation recorded a 4.4% increase in average loans over the same period last year.

Deposits and Treasury management balances grew 2.3% year-over-year. We are especially pleased that three-quarters of that growth came in our core checking products. Continued development of our sales and service culture has improved deposit retention and helped us attract more new business during the past four quarters. Succeeding at building core transaction accounts allows us to price our deposit products more reasonably, without having to match some of the irrational pricing, we continue to see from some of our wounded competitors.

At this time, I'm going to turn the call over to our Chief Financial Officer, Brian Lilly, to comment further on our second quarter performance. Brian?

Thank you, Bob, and good morning, everyone. Let me start by touching on a few of the charges that Bob mentioned, then I will review a few investment portfolio items of recent interest, as well as the balance sheet strength that we realized from our merger with Omega. Then finally, I will focus my comments on some key items in our earnings report and how these will impact our guidance for the remainder of the year.

The quarter included $0.09 of charges, with $0.05 driven by the additional provision for loan losses that Bob reviewed. Another $0.03 was incurred with the typical merger costs related to Omega. The remaining $0.01 was split between the acceleration of certain benefits for an Executive retirement, a $500,000 pre-tax write down on a bank stock that was deemed to be other than temporarily impaired, and a $400,000 pre-tax mark-to-market decline in a limited partnership invested in bank stocks. The bank stock write down was recognized through the investment gains losses line on the income statement, but the limited partnership recognized through other non-interest income.

As we have shared with you in the past, we have very little remaining in the bank stock portfolio. At June 30, we have approximately $8 million in equity investments, with an accumulated gain in total.

Let me now turn to the balance sheet and make a few comments on our investment portfolio in capital. We have been very pleased with the performance of our investment portfolio. Our policies, risk management practices, and team have served us well. Fannie and Freddie have been in the news recently, but let me confirm that we do not hold any equity securities of these companies. Also, I have received several inquiries as to the $55 million in Corporation debt holdings. These are the mezzanine traunches of bank pool trust-preferred investments, plus $14 million of individual bank trust preferreds.

The pooled investments and the individual holdings are rated "A" or better by Moody's, with $6.5 million rated "B" "AA". They currently have an estimated market value adjustment of $9 million after tax, but is recorded in accumulated other comprehensive income. This amounts to approximately $0.75 on the dollar carrying value. These investments continue to perform without exception.

I am sure that you have noted the strengthening of the capital that we accomplished with the Omega merger, a call that we structured an all-stock deal in order to take advantage of Omega's strong capital position. The tangible equity ratio increased 41 basis points, and ended the second quarter 5.21%. The ratio was 5.35%, ignoring the impact from mark-to-market and accumulated other comprehensive other income.

Our regulatory capital ratio has also benefited, with Tier-1 leverage adding 66 basis points to 8.17%. We estimate that our total risk base capital ratio will exceed 12% at the end of the quarter. In addition, we enhanced several of our liquidity metrics through the combination with Omega. We are certainly pleased with the balance sheet benefits of this merger.

Now, let me focus my remaining comments on some key items in our earnings report, and how these will impact our guidance for the remainder of the year. Note that the following comments do not include the impact of Iron & Glass. We continue to see good opportunities for growing our loans, deposits, and fee income. The competitive environment has actually created more opportunity to take business from some larger banks in our footprint. With that said, we are confirming our guidance for organic, mid-single digit annualized growth for loans, deposits, and fee income. The net interest margin expanded 19 basis points on a linked quarterly basis to 3.92%. Approximately 16 basis points were realized through the merger with Omega. Looking to the last two quarters, we are forecasting a consistent margin after considering the continuing competitive pricing pressures for deposits and loans, and a yield curve similar to today.

Bob shared with you that we are very pleased with the credit metrics in our Pennsylvania and Ohio portfolios, including Regency, our consumer finance company. However, we continue to be cautious regarding the national and regional economic environment, and in particular the Florida economy. In general, we are projecting a provision for loan losses of $4.5 million to $5 million per quarter, which is consistent with the second quarter before the additional amounts for Omega and Florida. This is consistent with our prior guidance of a low-30s net chargeoff ratio, as well as covering loan growth. As always, we will continue to monitor the Florida portfolio and take appropriate actions. In the second quarter, the operating expenses include over $6 million that will not recur in the third and the fourth quarters. These expenses related to an Executive retirement and the Omega merger costs.

In addition, at June 30, we have realized a significant portion of the operating efficiencies planned for the merger, and accordingly will have a favorable impact on the remainder of the year. We are forecasting expenses in the range of $55 million to $56 million per quarter. This drives an efficiency ratio to a very good level of approximately 55%.

I mentioned the guidance excluded the impact of the $300 million asset, Iron & Glass Bancorp. As is our practice with transactions of this size, we will be closing and converting systems over the same weekend. We expect to issue 3 million shares and incur approximately $500,000 in merger-related costs in the third quarter. Consistent with our merger model, we are forecasting a slight EPS dilution for the last two quarters of 2008, less than $0.01 in total, and a slight decrease in our regulator capital ratios as we settle the 45% cash portion of the consideration.

Considering all these factors, the total earnings for the second half of the year is projected to be in the range of $0.54 to $0.58 per share. Recall that the second quarter's $0.17 included $0.09 of additional charges. This $0.26, plus approximately $0.02 benefit from the Omega efficiencies provides a $0.28 quarterly run rate going into the back half of 2008.

Bob, that concludes my comments.

Well thank you Brian. Let me make a few comments in closing. First, the fact that we had to make an additional provision this quarter for our Florida portfolio is disappointing, especially so given F.N.B.'s history of exceptional credit quality, and the outstanding performance of the much larger portfolios in the Northern franchise. It would be a shame to let this overshadow the progress that was made this quarter on a number of fronts.

During the quarter, our team put a tremendous amount of energy into making the partnership with Omega Financial a success. The fruits of their labor will truly benefit shareholders in the next two quarters, and in the years to come.

We also took action to increase our capital position and bolster our loan loss reserve, and our sales and service initiatives continue to produce improvement in customer retention and customer acquisition. And we are exceptionally pleased to have been recognized the top Pennsylvania-based bank in a recent customer satisfaction survey by JD Powers. We look forward to continuing our work during the next quarter to improve our performance, and also to the successful integration of Iron & Glass Bancorp in August, and in the shareholder vote next week.

And finally, we remain confident that our core strategies and capital position support the payment of our dividend, and as a result, the Board announced the payment of a cash dividend of $0.24 per share for the third quarter of 2008.

This concludes our formal remarks. Operator, you may now poll the audience for questions.

(OPERATOR INSTRUCTIONS).

Jonathan [Kapps], BMO Capital Markets.

Hi, good morning guys. Just wanted to know how confident you are in terms of the Florida portfolio that we won't see an additional extra provision going forward considering this was the second quarter in a row that you had that kind of charge.

Let me first clarify, Jonathan, that we did not have in the first quarter additional charge.

I'm sorry, it may have been from the fourth quarter.

Okay.

Jonathan, let me just kind of refer you back to the process that we went through. We take a look at this portfolio on a quarterly basis, and we look out six months at all of these loans that are coming due. We've done what we consider to be as thorough a due diligence on that portfolio as we can possibly do. I'll never say never when you talk about Florida right now because the economy continues to change. But I do believe that the discipline that we go through really does a great job of identifying where those issues are, and we think we've taken appropriate action to reserve against those loans that we've identified.

So again, I don't know bow to answer the question with the certainty that you're searching for. All I can do is tell you that we feel pretty confident about our processes and we know where the risk is.

Okay, definitely fair enough. Thank you very much.

Andy Stapp, B. Riley & Company.

You said you got new reserves if I understood you correctly -- or not new reserves -- new appraisals quarterly in Florida. Is that correct?

We get new appraisals for loans as they come due.

Okay.

We get those appraisals in advance of the loans coming due so that we can take the appropriate action, whether it's right-sizing the loan, asking the customer to move the loan, providing additional security, or letters of credit. But we're on a pace now to make sure that appraisals are updated on an annual basis for these credits.

Okay, and you just -- are you qualitatively assessing the, any change in the appraised value? Is that what you're doing?

Absolutely, and if we see appraisals that slip far enough, we're requiring borrowers to right-size the loans.

Okay, and what is your overall loan-to-value ratio in Florida?

The overall loan-to-value ratio is right at about 70%, and it varies per different types of credit, so but on an average, we're running about 70%. That's up from about 62% this time I think at the end of the year.

Okay, I think it was 56% at March 31.

That would have been on our land portfolio.

Okay, okay and how do you account for interest reserves? Do you fund the interest until the borrower has the, sells properties and has the cash to service debt, or do you require periodic interest payments? Just if you could give me some color on that.

We do create interest reserves on these loans. On a very few constructions projects, they are built into the loan. All of the other credits, particularly the land loans, those cash reserves are put up by the customer, so it's not part of the loan process.

Okay, so in other words they would, are you saying they would have to basically prepay the interest?

That's correct.

Okay fair enough. Thank you.

David Darst, FTN Midwest.

Good morning; Bob did you say that you're doing annual appraisals on the Florida properties?

We are doing, on an average, annual appraisals, yes. There are some properties that we do appraisals more frequently, and there are some that we do less frequently, depending on what kind of properties they are. Generally, our income-producing properties, we would not do an appraisal each year.

Okay, but has the market caused you to rethink that policy, or maybe do these more frequently?

Again, all of the loans that we look at that are not income-producing are at a minimum of an annual appraisal. And we have about 25% of our portfolio is in income-producing properties.

Okay, and how many other participations, and how many other condo projects are you involved in?

We don't have any other participations in any other condo projects, other than the ones I listed. Is that correct?

We do have one.

You're listening to Gary Guerrieri, who is our Chief Credit Officer.

Good morning everyone. We do have a participation in another condo project, and we have a total of four other condo projects in the portfolio at this point.

Okay, so that's two participations in six condo projects that you're --?

Yes.

Could you give us the total value of those?

The participation that we have from a condo perspective is approximately $7.5 million. The two condo projects that Bob referred to earlier are approximately $15.5 million, and the remaining portfolio is $14 million.

Okay, and then the Regency net chargeoffs for the quarter, did you give those?

We didn't, but it was below 4% annualized, David which as you know is a very good level for them.

Okay.

Continues to perform well.

And then, just on the margin, what did Omega add to the margin in basis points, and what's your outlook for the margins?

Well, it added 16 basis points of the 19 between the lending of their loans in the (inaudible) as of the April 1 date. And as I said in my comments, we're looking for the margin to be consistent for the back half of the year.

Okay, and then what would be the goodwill in core deposit amortization just for Omega?

The impact of the quarter -- I mean, there's a lot in the [vetting] that took place there on a schedule out now. It looks like for the estimate that we put in there, it was in the low-$100,000s of the expense for the second quarter.

Okay, all right, great, thanks.

Mac Hodgson, SunTrust, Robinson, Humphrey.

I had a question on the tangible book value. I was expecting it to increase a little bit this quarter with the Omega acquisition. Was it due to the kind of the unrealized losses on the securities portfolio? Brian, if you could just give us some color on that.

Sure, we had the same reconcilement when we shared with you the expected tangible book value per share after the announcement of Omega. We expected it to be around 480, and it's only up to 458. There's two items that reconcile that. It is the change in the accumulated other comprehensive income, primarily the marks and the trust preferred.

And the second piece of that is this quarter, we earned less. We reported $0.17 versus what we would have expected for the quarter back when we were looking ahead, and those two items reduced the equity component of that. If you take out the other comprehensive income, as I told you the ratio went from 521 to 535, you almost get a very similar movement of the $0.12, $0.13, $0.14 related to the tangible book value per share.

Okay great, and then maybe just a question on the charges related to the equity investments. Were those in other income, is that where that's included?

There were really, there were two components of that. One was an individual stock that if we determined we had it in other than temporary impairment, and that was shown in the investment security gain/losses line.

Okay.

And then the limited partnership is a mark-to-value monthly for us, and because of moving the stock prices in the second quarter, that was the $400,000 pre-tax that hit other non-interest income, as you said.

Okay, got you. Maybe just a couple of questions on Florida. In addition to the -- well, maybe first -- in addition to the $15.5 million in NPLs added this quarter, remind me again what the balance was. I know there were some loans, and late last year, they were added NPL too I believe. What was the balance of those? I'm just curious what the total kind of NPAs are for the Florida portfolio.

The total NPAs for the Florida portfolio at the end of the quarter were $26 million.

Okay, and that's the, that's the two loans added this quarter, plus two loans late last year?

It's about $11 million that we added last year in the fourth quarter.

Correct.

Okay, and maybe you'll remind us again, the total balances in Florida and just kind of the mix. I know it's been pretty consistent, but I'm just kind of curious to get an update there.

At this time, the total balance is approximately $288 million at the end of the quarter.

And we have, Mac, consistent with what we reported the last couple of quarters, although leaning more towards the other real estate, we have land of 46%, and that's split between the residential and the commercial, about half, with a little more weighting towards the commercial. And then our acquisition in developing loans are 13% of that balance. And the other real estate are income producing primarily, is 41%, and that's up from 38% last quarter and 36% at the end of the year.

Okay, I got you.

You can see that our, what we're booking, and the leaning towards the portfolio continues to move towards the income-producing.

Okay, and the, in addition to the $5.4 million and provision I guess set aside against that portfolio, was there other specific provision set aside last year, I imagine for those two loans? I'm just curious what the total reserve is for the Florida book.

For the two loans that we just put?

Well --.

In the fourth quarter last year, we did have a specific reserve of a couple million dollars that we set aside for that, for the $11 million that was put in, in the fourth quarter.

Got you, okay so maybe total reserves for Florida are in the $7.5 million range?

Well Mac, it actually would be more than that because in our methodology, we have pool reserves also as they move through their rating classification. It's not a number that we've thrown out there to be reconciled, but we feel, we've got a pretty good chunk against it, and we'll work through it as we go forward.

Okay, got you, and maybe just, Gary, just it's the last question, just speak about the activity in kind of your core Pennsylvania market, where you're seeing loan growth there. I mean, we've heard some other guys that there still seems to be to a certain extent absence of competition, some of the larger competitors. Are you picking up business from them, just some general comments on organic loan growth in PA?

As I said in my earlier comments, the loan growth is really evenly split around the State for us, really with the exception of our Pittsburgh market, which is seeing a little bit better growth than some of our other markets. Keep in mind that over the last two-and-a-half years, we've been putting together, I think we refer to it as an "All Star Team" there in the Pittsburgh market, and they're really starting to hit their stride, so we're seeing some more production coming out of that group.

We continue to see good business opportunities. Some of those are coming from some of the other banks that are re-trenching, but we've had an aggressive calling effort that's been in place now for over 18 months on those potential customers, and a lot of that is starting now to find its way into the bank. That whole process from start to finish, when you go out and call on a brand new prospect is somewhere between 6 months to 18 months, depending on who they are and where they are.

But again, we're very pleased with the breadth of the types of customers that we're bringing in and the diversity of the relationships. We're not seeing any specific concentrations. We're not spending a lot of time chasing residential development loans, so these are sound, solid business opportunities.

We're also seeing some opportunity in the Omega market. One of the things that was a real pleasing thing for us to see in our acquisition of Omega was there was not really a lull in their loan production during the cycle after we announced the merger, and we continue to gain some market share out there. So we're just seeing some good solid performance from our commercial lenders, and really in all the markets.

Okay great, that's helpful, thanks.

(OPERATOR INSTRUCTIONS).

Yes, just two additional questions. On your Florida income-producing properties, loans on those, have you seen any slippage in your rating classifications there?

Andy, we have not seen any slippage whatsoever. That portfolio is performing extremely well. And as we look out, we expect that to continue to do so.

So primarily, it's been in the, just in the condo market?

It's been in the residential-related projects, and the condo market.

Okay, and your indirect auto loan portfolio?

The indirect auto loan portfolio continues to perform extremely well. Delinquency levels are very, very solid there.

Okay great, thank you.

At this time, there are no further question. Gentlemen, I'll turn things back over to you for any additional or closing remarks.

Thank you once again for joining us today. As a reminder, a replay of the call will be available from 11:30 a.m. Eastern Time today until midnight Eastern Time on August 5. A transcript of the call will be posted on the shareholder and investor relations section of F.N.B. Corporation's website at www.fnbcorporation.com.

That concludes our call, and we thank you once again.

And that does conclude today's teleconference. Thank you all for joining. Have a wonderful day.