FNB Corp (FNB) 2015 Q2 法說會逐字稿

Welcome to the F.N.B. Corporation Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Matt Lazzaro, Investor Relations. Mr. Lazzaro, please go ahead.

Thank you. Good morning, everyone, and welcome to our earnings call.

This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements. Please refer to the forward-looking statement disclosure contained in our earnings release, the related presentation materials, and our in our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until July 30, and a transcript and a webcast link will be posted to the Shareholder and Investor Relations section of our corporate website.

I will now turn the call over toe Vince Delie, President and Chief Executive Officer.

Good morning and welcome to our quarterly earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. I will provide highlights from the quarter and cover some strategic developments since our last call. Gary will review asset quality, and Vince will provide further detail on our financial results and an update to our guidance for the rest of the year. Vince will then open the call up for any questions.

We were very pleased with the quarter's results that again reflect double digit EPS expansion compared to the year-ago quarter. Operating net income available to common shareholders was a record $38.4 million and produces $0.22 per diluted share. This translates into a 107 basis-point return on average tangible assets and a 15% return on average tangible common equity.

The second quarter was marked by positive operating leverage, solid organic loan and deposit growth, and positive asset quality results. The quarter's record high total revenue of $165 million marked the 10th consecutive quarter of total revenue growth. We are extremely proud of this accomplishment and the team's ability to grow total revenue despite a continue low interest rate environment and the loss of interchange revenue that became effective beginning July 2013.

During the first half of 2015, we began to realize the increased benefit from the investments made in our fee-based business units with particular focus on trust and brokerage, mortgage banking, and capital markets.

We invested in these businesses to bolster and diversify our fee income sources in the face of new regulatory constraints on consumer banking fees and changing client behaviors. These investments have strengthened our overall revenue mix with fee income making up 24% of total revenue in the quarter.

Our bankers continue to build momentum by effectively cross-selling fee-based services and leveraging the increased number of opportunities from the expansion markets. Wealth management trends were strong with total revenue increasing 15% and assets under management increasing over $0.5 billion compared to the second quarter of 2014.

On a year-over-year basis, mortgage banking increased $1.6 million due to record origination volume in the second quarter. Total mortgage banking revenue through the first half of 2015 has already surpassed full year 2014 levels. The significant increase in mortgage revenue is a direct result of the new leadership put in place last year and the corresponding reorganization of the department. We expect mortgage banking to continue to be a meaningful contributor to our fee income stream and support our efforts to increase household penetration and cross-selling activity.

We're also seeing benefits from investments made in our capital markets activities, which includes syndications, international banking, and derivatives. With total capital market revenue increasing $1.3 million in the first half of 2015 compared to the year-ago period.

These investments in our fee-based businesses together with diligent expense management signify our continued focus on generating positive operating leverage. The first quarter efficiency ratio of 56% improved from 57.3% in the year-ago quarter and marked the 13th consecutive quarter with an efficiency ratio under 60%.

On a linked quarter basis, annualized average loan growth was solid at 9% and in line with our expectations. We have continually grown loans organically for 24 consecutive linked quarters, a period of six years.

Commercial loan growth was solid at 10% annualized with contributions from both our metro and community markets. At the end of June our commercial pipelines were near an all-time high with the majority of the opportunities coming from the metro markets.

The consumer loan portfolio organic growth was also solid at 8% with growth across all consumer loan segments. At the end of June, our consumer pipelines were slightly above prior quarter levels with the majority of opportunities also coming from the metro market. Total average deposit and repo growth was 7% annualized led by annualized average non-interest DDA growth of over 21%. The funding position increased slightly compared to the first quarter with the loan-to-deposit ratio, including customer repos, up 92%.

Now I'd like to focus on key strategic development since our last call. In May we announced the purchase of five branches from Bank of America as they exit the Central Pennsylvania market. We expect the transaction to close in September and are excited to enhance our market presence and leverage the new opportunities created in this region.

In June we were able to complete a lift-out of a talented Pittsburgh insurance team including the successful negotiation to purchase their book of business. This strategic move will enhance our capabilities and support our current insurance offering. We expect these individuals to provide an immediate revenue impact and bring added depth and experience to our existing Pittsburgh team. These actions enhance our ability to move up market to serve larger commercial clients and achieve a market share commensurate with our expanded footprint.

Last week we launch our new website that included enhanced navigation, new account opening capabilities and a more intuitive user-friendly interface, which will provide a more streamlined experience for customers from a computer, tablet or mobile device. A key feature of this new website is the "Help Me Decide" tool, which walks customers through the process of choosing the most appropriate personal checking or savings product based on answers to simple questions about their situation, goals and banking preferences. We believe this is a large step towards further leveraging the investment made in eDelivery and better aligning customer preferences with our retail delivery channels.

In addition to our new website, another strong example of this strategy is the planned opening of the innovation banking center in State College, Pennsylvania, which we announced in May. Our goal is to seamlessly integrate the upgraded eDelivery platform into the physical branch channels to form one unique experience through an evolving clicks-to-bricks strategy.

We worked extensively with multiple focus groups and engaged them in the design of a center focused on providing a consultative financial experience and deepening relationships through enhanced cross-sell activities. The center will be open to accommodate account openings for Penn State University students during move-in weekend and is expected to be fully operational by early fall 2015.

Before turning the call over to Gary and Vince, I would like to thank our employees for another great team effort. F.N.B. was recently named among the best places to work by The Cleveland Plain Dealer. This is a testament to our employees and F.N.B.'s ability to integrate a cohesive culture across the entire company as we received the recognition just two years after our expansion into the Cleveland market. This recognition is an independent validation of the comments I made on the April call that our culture has been fully integrated company-wide and across all F.N.B. regions.

In summary, record total revenue, record net income, and 10% operating EPS growth are outstanding achievements. The second quarter results reflect the continued execution of F.N.B.'s proven and scalable business model. As a management team, we believe the organization is in the best position ever to leverage new prospects through our enhanced online capability and superior market position.

With that, I will turn the call over to Gary so he can share asset quality results.

Thank you, Vince, and good morning, everyone. The second quarter of 2015 marked another solid quarter of performance as our credit quality results for the period were stable to slightly improved and remain at consistently good levels (audio break).

Our performance for the quarter was marked by overall lower delinquency, stable NPL and OREO levels and a consistently good net charge-off level of 22 basis points annualized on a GAAP basis. I will now cover these topics with you in a little more detail as our first highlight the performance of our originated book of business followed by some commentary on our acquired portfolio.

Looking first at our originated portfolio, the level of NPLs and OREO at $108 million improved by 3 basis points to end June at 1.05%. Delinquency also remained at a solid level and was flat on a linked quarter basis at 86 basis points.

Net charge-offs totaled $5.8 million, or 23 basis points annualized, which is slightly better than our targeted levels for the period and remains in line with our performance over the last several quarters.

The originated provision at $8.7 million exceeded net charge-offs and covered loan growth for the quarter resulting in an ending originated reserve position at 1.21%. Overall, we remain very pleased with the continued solid and consistent performance of our core book of business.

Now shifting to our acquired portfolio, we ended the quarter with outstanding loans at just under $1.4 billion. Our performance for the period was highlighted by reduced delinquency levels and the resolution and exit of self-performing credits.

Total acquired delinquency was down nearly $5 million on a linked quarter basis ending June at $51 million with the improvement attributable to reduced levels within the 90-plus category. This favorable movement is reflective of the actions and effort put forth by our experienced team to proactively manage and resolve these underperforming credits. Our acquired provision for the quarter was minimal at $121,000 resulting in an ending reserve of $6.9 million.

In summery, our second quarter results for both our originated and acquired portfolios were stable and consistent, and the solid performance of our overall loan book continues to be a key driver of our high-quality earnings stream. We continue to reap the benefits of the ongoing investments we have made to maintain a robust holistic credit framework from which our teams can administer our core philosophies of diligently approving, monitoring, and managing credit across our entire footprint.

Furthermore, this positive performance would not be possible without the strength and depth of our lending, credit and workout themes across the organization.

I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Thanks, Gary, and good morning, everyone. Today I will discuss the second quarter's operating performance and reaffirm our guidance for the remainder of the year.

Looking now at results for the second quarter, total average organic loan growth was a solid $249 million, or 8.8% annualized on a linked quarter basis due to growth in both the commercial and consumer portfolios. This loan growth comes despite increased competition as F.N.B. continues to benefit from the increased number of prospects in our metro markets of Pittsburgh, Cleveland, and Baltimore as well as solid results in our Pennsylvania community markets.

As you may recall from prior calls and as Gary mentioned earlier, expansion into these metro markets has enabled us to deliver sustainable high-quality loan growth while maintaining our underwriting standards.

On a linked quarter basis, average commercial growth totaled $151 million, or 9.6% annualized. The linked quarter growth in the consumer portfolio totaled $93 million led by organic growth in mortgage and indirect auto loans. Average growth in indirect auto loans was $30 million and continues to be a solid business for us across our footprint.

On a linked quarter basis, organic growth and total average deposits and customer repos totaled $217 million led by strong DDA growth and higher average savings balances. The growth in DDA balances of $140 million, or 21.2% annualized was due to solid organic growth and seasonally higher business account balances. Total growth in transaction deposits and customer repos total $229 million, or 9.4% annualized.

Additionally, we launched a new premium sweep deposit product in June that provides F.N.B. with more favorable treatment for FDIC insurance premiums relative to customer repos.

At the end of the quarter our funding position continued to strengthen as 79% of total deposits and customer repos were transaction based. From a total funding perspective, our relationship of loans to deposits and customer repos was stable at 92%.

Net interest income increased $1.9 million, or 1.5% reflecting solid organic loan growth and one more day in the quarter. Net interest income levels compared to the prior quarter included $1.7 million of benefit from accretable yield adjustments equal to the level of benefit realized in the first quarter. The core net interest margin narrowed 4 basis points to 3.39% reflective of the low interest rates and competitive environment for new loan originations.

Looking now at non-interest income and expense, core non-interest income was 24% of total revenue and, as Vince mentioned earlier, includes benefits from the previous investments made in several fee-based business units. These investments reflect the strategic focus to diversify our fee income stream and lessen our dependence on net interest income and consumer banking fees.

As you know, consumer banking fees continue to be an industry-wide focus having been impacted by regulatory constraints and evolving consumer behavior.

Core non-interest income increased $1.5 million, or 4.1%. Our mortgage business had a great quarter. Total mortgage revenues increased $700,000 driven by the record origination volume that I mentioned earlier.

Wealth management also had a great quarter as total wealth management revenue, which includes security commissions and trust income increased $800,000, or 10%, benefiting from the incremental lift in the Baltimore and Cleveland metro markets.

Insurance fee income declined due to normal seasonality from the timing of annual policy renewals and seasonal contingent fee revenue received during the first quarter.

Non-interest expense excluding acquisition costs increased $1.5 million including higher OREO expense, higher accruals for variable-based incentive compensation, and seasonally higher marketing costs. These items were partially offset by lower FDIC insurance expense and seasonally lower occupancy costs.

The second quarter efficiency ratio was 56.0% compared to 56.6% and 57.3% in the prior and year-ago quarters. We continue to generate positive operating leverage with disciplined focus on expenses through initiatives such as vendor relationship management and branch network rationalization.

This year we consolidated an additional five locations bringing the total number of locations consolidated since 2010 to 58, which represents nearly 20% of our total branch network.

Regarding income taxes, our overall effective tax rate for the quarter was in line with our expectations at 31%.

Regarding our outlook for 2015, as I mentioned earlier, we are reaffirming our prior guidance issued on the April call. As you will recall, at that time we updated our net interest margin guidance for revised market expectations of a delayed Fed interest rate move and a continue low interest rate environment.

We anticipate continued slight quarterly narrowing from the second quarter core margin of 3.39% for the last two quarters of 2015.

Earlier in June, we completed our first public disclosure of our DFAST stress testing results. We are very pleased with the results, which demonstrates the value of operating a lower-risk business model. All projected minimum capital ratios exceed the regulatory minimum thresholds as well as the well-capitalized thresholds.

These results are a proof point of the strength of F.N.B.'s enterprise risk management infrastructure and are consistent with our long-term investment thesis and capital management philosophy.

In summary, we are excited about the positive revenue and efficiency trends for the first half of 2015. With solid organic loan and deposit growth, a more diversified core fee income stream, positive operating leverage, and a number of strategic accomplishments. The strategy of expanding into new markets to generate sustained organic growth has proven to be key to our success, admit a challenging operating environment for the overall banking industry. We are confident in our team's ability to leverage these new opportunities as our expansion strategy continues to serve us well.

Now I would like to turn the call over to the operator for your questions.

(Operator Instructions) Casey Haire, Jefferies.

I guess I'll start off on the loan growth front. A decent quarter here; just wondering how the pipeline is shaping up, number one. Number two, how much -- if you could quantify how much came from out of Pennsylvania and your expansion markets. And then, three, C&I kind of decelerated. This is, I think, your weakest linked quarter in the last six months. Just curious what's causing that. Is it increased competition? Are people refi-ing away? Just some color there. Thank you.

Yes, okay. First of all, on the pipeline overall -- the pipeline is fairly consistent with the same period last year. So we range anywhere from $1.7 billion to $1.9 billion during this period. There is some seasonality in the pipeline but we're pretty satisfied with where we sit at the end of June from a pipeline perspective. So it's up there with some of the highest levels we've seen.

Secondly, we had a very strong quarter in production from the community groups. So we actually had some good growth in some of the more rural areas. So there was some good performance. And pipeline, the mix in the pipeline shifted slightly, so about two-thirds of that pipeline versus three-quarters in the prior quarter are coming from the metro markets. So it's not because the pipeline is strong, it's because the shift -- there's been a shift in demand.

In terms of C&I lending, this is a very competitive environment. There are credits that were marginal that we had told you before that we exited, so you have some of that going on. There are more aggressive lenders out there who are willing to take out some of the C&I credits that we are not necessarily worried about losing.

Secondly, we have had a number of larger credits where other capital sources were sourced, and we've had payoffs in those areas where the high-yield market or other types of avenues have opened up for these guys, and they've paid down their exposures.

So that's basically what made up the slower growth there. I would say if you looked at the pipeline, we still have about the same amount of opportunities in the C&I portfolio when you look at the relative dispersion of the pipeline.

But I would just add, Casey, just to clarify, if you look at the data sheets that we have in the press release, I mean, the C&I piece on an average balanced basis was 2.9% unannualized, so close to 12% if you annualize it. And on a spot basis, it's 2.3% or 9%, 9.5% on an annualized basis on a spot basis. So the C&I growth is still pretty good quarter-to-quarter.

No, understood, and thanks for that comprehensive answer. Just switching to expenses, it came in a little bit higher than I guess I expected. But you guys are still tracking very nicely towards that midyear guide. You did call out a couple of the drivers. I'm just wondering, in the back half of the year, can we see some leverage in some of these items? Maybe the variable comp or OREO or marketing? Just wondering what the back half of the expense run rate looks like versus the second quarter run rate?

Yes, I would say, just to comment on the expense guidance from April again that we're reaffirming was mid single-digit year-over-year growth. On the OREO side, that increase is really all related to one acquired property that we took an impairment charge on. So it's not significant but not something I expect to happen next quarter, second half of the year. I mean, OREO things tend to be lumpy, so the second quarter had a little bit of inflation in there just from that one item.

I would say, overall, the efficiency ratio, just under 55.99% this quarter, so we continue to make good progress as far as generating positive operating leverage and would look to continue that. I mean, that's a big focus for us, our ability to grow revenue and manage the expenses is key, and it's a key focus and it will continue to be. We recently consolidated an additional five branches we mentioned, so there's some benefit that will happen there. And the incentive comp is, at this time of the year, as you go forward, you see accruals there. So that's a function of how we're doing relative to our plan.

So I'd say there's still opportunity for positive operating leverage is what we're focusing on as we go forward.

Okay, thank you.

Preeti Dixit, JP Morgan.

Vince, the Bank of America balance is coming on in September. How should we think about how you plan to deploy the liquidity near term, maybe securities, and what you would be adding in terms of new yield?

Yes, we would -- I mean, in the short term we'd be just paying off borrowings and then we would use those funds to fund the loan growth that we expect encourage you to go forward. The exact utilization will be kind of in that direction, and we haven't firmed up exactly what we're going to do yet, but directionally, that's what we would end up doing. It's a nice source of deposits with the metro markets that we have and, at some point, you know, the economy really starts to lift off, the loan growths should even accelerate more, and having that deposit source of funding will be important as we go forward.

Yes, I would also add that in terms of modeling, there's a significant amount of opportunity for us from the lending perspective, particularly commercial, in the Lancaster market. We didn't have a presence there before. We have people on the periphery. We feel pretty good about our ability to deploy the liquidity in higher-yielding loan growth.

Okay, that's helpful. And then just shifting to the loan yields, what were new money loan yields this quarter? How did that compare to the prior quarter, maybe some color there?

Sure. If I look at the new loan yields for this quarter, we were around 360, about 10 basis points higher than first quarter levels. And if you look at it kind of relative to loans that were rolling off, were rolling off around 4. So losing about 40 basis points, kind of net, based on the mades and paids for the quarter. But the loan yields differential -- that was about 50 basis points last quarter. So the increased loan yield of 10 basis points reduces that kind of net number.

And with our interest-bearing liabilities really being flat at 41 basis points that they've been for the last -- on average, last six quarters, this is what causes the slight margin compression that you saw this quarter. But it's moving in the right direction with yields 10 basis points higher than last quarter.

Okay, that's helpful. Is that improvement because of mixed shift in the portfolio in terms of what you're originating or are you actually seeing maybe competitive pressure abate here a bit?

I think it depends on the asset class. I mean, in different segments you're seeing different levels of competition. So in certain portfolios, we've seen a little bit of margin expansion, in others it's still competitive. So it's kind of all over the board, but -- ?

I don't think it's lessened.

I don't think it's less competitive. I would say it depends on where the volumes come from in the quarter. So that has a slight impact.

The mix right?

The mix of loans that we're originating.

Okay, got it. And then, Vince, at the TCE ratio is sitting at 6.9% here as the growth is running kind of upper single digit on an annualized basis, can you talk about how comfortable you are taking that TCE ratio lower and then faster growth continues at this clip, how are you thinking about capital strategy here?

Sure, we've talked about the TCE ratio being comfortable in a range from 6.5% to 7%. Obviously, that ratio gets affected by rates moving up and down. It was a little higher at the end of the first quarter because rates had come down and it's at 6.93% here. So that range of 6.5% to 7% we're comfortable operating in. With the earnings that we're generating and retaining, there's plenty of capital there to support the organic loan growth that we're guiding to.

So very comfortable where we are and as we did the stress testings results that were published and very comfortable with the impact of the stress test on our -- all of our capital ratios and the projected minimums that we would have, kind of, worst-case numbers throughout the nine quarters or as I said in my remarks, above the minimums and above the well capitalized. So very comfortable with where the capital stack is right now.

(Operator Instructions) Frank Schiraldi, Sandler O'Neill.

Hey, guys, it's actually Rob Haderer filling in for Frank. I just wanted to ask quickly on the average non-interest bearing DDA growth. You mentioned there was some seasonally higher business account balances. I was just wondering if you'd quantify maybe how much of the growth was seasonal and then if there were any specific geographies where you saw that? I think you mentioned it was related to just new business accounts. I was wondering if there's any specific geographies you could highlight?

Yes, I mean, it was pretty much across the board, and there is some seasonality in the DDA growth, particularly in the municipal segment. Truthfully, it's pretty scattered, so we're seeing some good opportunities roll in. In Pittsburgh we still have a pretty decent headwind -- or tailwind, I should say -- in Pittsburgh helping us with the deposit growth. I think given the scale that we have now, it's become a little easier for our team to obtain the deposit balances.

I think in the other markets, Cleveland, in particular, we've done pretty well. Baltimore has grown well, and we've also seen some good deposit growth out of some of the Central Pennsylvania markets that we're in. So it's been pretty good for us.

Brian Martin, FIG Partners.

Can you just give a little color on the new model look? I know you gave, kind of, reaffirmed things but just as far as how much maybe the rate of change, I guess. Are you sensing that the rate of change in the decline is beginning to narrow and maybe just the inflection point of when you start to see the margins stabilize and actually increase and just as it pertains to your expectations for a rate increase? I know they've been delayed but just how you guys -- what you're budgeting as far as rate increases and how it impacts the margin?

Sure. Well, with rates where they are remaining at these levels, as I commented on, we're still looking for, say, a couple of basis points of compression each of the next two quarters. Within that forecast, we have the first move from the Fed in September. I believe the Fed really wants to do something here, and our forecasts called for one in September and one in December. So you get the Fed funds of 75 by the end of the year.

I think that the inflection point, if you get a couple of -- if you get those two moves, the margin still goes down a little bit in the fourth quarter and then if we start to get on that path, going forward, then as you move into next year -- I mean, I'm not giving guidance for next year, but you're pretty close to bottoming here, anyway, at a couple of basis points a quarter. So that's kind of what we had locked in there as far as the rate forecast.

And as I mentioned earlier, the cost of interest-bearing liability has just flatlined at 41 basis points. So I think that as all of us will look forward to rates starting to move up, but I'd say we're pretty close to that inflection point.

Okay, and just from an asset sensitivity standpoint, how much -- what percent of your loan book is variable rate today?

From an asset sensitivity standpoint, 42% of our loans are tied to LIBOR or prime. And then, overall, it's 58% that are adjustable or variable, but the key item there is that 42%.

Yes, okay. And just, maybe, I know that accretion income is a bit lumpy but just, kind of, on annual basis, I guess there's a similar level of what you're seeing now, I guess, no reason to think a whole lot different in the second half of the year?

Yes, we talked about the guidance I gave last quarter, which still holds. We used to talk about a $500,000 to $750,000 a quarter is kind of what I would call normal accretion. It's probably more like $1 million. If we have some resolutions it's a little bit higher. It does move from quarter to quarter, but that million a quarter is kind of what I would consider the core level there.

Okay, all right. And maybe it's just an obvious answer, but just any change in the dialog on M&A or just kind of how you guys are thinking about that.

Well, we kind of say the same thing every quarter. I guess it would be the same answer, right? I don't expect us to change our strategy. I mean, we are active --

(cross talk)

Brian Martin: I guess I was just wondering if there's been more activity -- if you're seeing more activity from potential sellers as far as coming across your desk as opposed to a change in the strategy. I guess you guys, like I said, have been consistent on that.

Yes, I think it's been -- maybe in the beginning of the year, it was a little slow for one reason or another, but the pace of transactions that are out there, I think, has been pretty steady. So we haven't seen a change in the pace.

Thank you. As there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

Yes, I'd like to thank everybody for calling in. I know this is a busy time of the year for you guys, a busy time in the quarter, particularly, given all the earnings announcements that are out there. So I appreciate you participating in our call and, as I've said in my prepared comments, we are very excited about how we're positioned. We think that we have a great opportunity moving forward, and our team is executing as expected.

So thank you for calling in, and have a great day. Take care.

Thank you. Your conference has now concluded. Thank you for attending today's presentation. You may now disconnect.