Apr 18, 2008
Executives
Bartley Parker - Integrated Corporate Relations Steve Gurgovits - Chairman Bob New - President and CEO Brian Lilly - CFO Gary Roberts - President and CEO of First National Bank of Pennsylvania
Analysts
Mac Hodgson - SunTrust Robinson Humphrey David Darst - FTN Midwest Damon DelMonte - KBW Andy Stapp - Riley & Company Charlie Smith - Fort Pitt Capital
Operator
Good afternoon ladies and gentlemen, thank you for standing by and welcome to today's F.N.B. Corporation First Quarter 2008 Earnings 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.
Now, I'd like to turn the conference over to your host, Mr. Bartley Parker of Integrated Corporate Relations.
Please go ahead, sir.
Bartley Parker
Thank you, John. Good morning everyone.
This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contains forward-looking- statements, which are based on current expectations, estimates, forecasts, and projections about F.N.B.
As well as F.N.B management's assumptions and beliefs, relating to present or future trends or factors affecting the future performance of F.N.B. and the banking and financial services industry.
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 and 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 are not limited to: a significant increase in competitive pressures among financial institutions; changes in the interest rate environment that may reduce interest margins; changes in prepayment speeds, loan sale volumes, charge-offs and loan loss provisions; less favorable than expected general economic conditions; legislative or regulatory changes that may adversely affect the businesses 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 fillings 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's now my pleasure to turn the call over to Mr. Steve Gurgovits, Chairman of F.N.B.
Corporation. Steve?
Steve Gurgovits
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 1st, having been President and CEO left since January 15.
Bob has been diligently getting the [network] operation throughout Pennsylvania and Florida. And along with Brian and me, meeting with some of you at the Investor Conferences we have attended during the first quarter.
Going forward Bob would be leading our quarterly earnings calls. So, at this time I would like to turn the call over to him.
Bob?
Bob New
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 along side with 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 and seven components to 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 controlled 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 our filling our existing footprint with de novo branches or small acquisition which strategically compliments our existing network. Second, we continue to look to expand our existing footprint with opportunist acquisitions that add to shareholders 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 diluted 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 1st. 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 systems conversion to take place over the Memorial Day weekend. Also in February we announced the signing of the merger agreement with Iron and Glass Bancorp.
This transaction enhances our Pittsburg 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 lower execution risk transaction and we are progressing towards the 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 of peer performance with the return on tangible equity of 24%. These results in a difficult environment reflect the benefit of having 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 spot for us in the quarter is a 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 are good for the second quarter.
Also, in the first quarter we saw solid gains in fee income, then we had 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, some nonperforming assets and [best] is all remaining at very manageable levels. With that overview of the quarter in our operations today, let me turn the call over to Brain to provide some additional insight into our earnings.
Brain?
Brian Lilly - Chief Financial Officer
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 margins.
In addition, we experienced good credit quality and met our plan for expenses. As Bob mentioned, we are pleased with the 10% annualized link quarter commercial loan growth.
This growth is partially offset by seasonal run off in the direct installment portfolio and weaker automobile sales, which drove the decline in the indirect installment portfolio. In total average loan grew 4%, annualized compared to the prior quarter.
We have good momentum heading into the second quarter with our period and loan balances above our average balances. On the deposit side, we did experienced the normal seasonal outflow of the business deposits in the first quarter and saw a certain competitors become more aggressive with deposit promotions.
Managing deposit rate 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 one 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 under pressure, we had targeted to maintain the margin in the second quarter. Turning to non-interest income, seasonal increases, organic growth and a $700,000 gains 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 last year end results. The year-over-year decrease in insurance fees of $500,000 was entirely driven by lower contingency fees this year.
The link quarter increase in other non-interest income category reflects approximately $800,000 in swap fees. These fees are earned through an interest 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 account.
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 guides of a mid single-digit increase and a first quarter efficiency ratio closer to 60%.
We started the new year include 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 cost related to the Omega merger, the transition of the Corporation senior leadership, ended higher accrual expenses 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 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 cost.
Going forward we would expect expense level 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 drops to 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 in OREO increased just 1 basis point to 95 at quarter's end. The allowance to 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 have already shared with you several of the key financial components. Factoring in the changes to the interest rate outlook and 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.
Bob New
Thank you, Brian. Overall, we are encouraged by pickup 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 expansions, truly positions us well for the future. And in closing, we believe that our strategies coupled with our history of successful execution, our cautious avoidance of those risks and 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. And I will now ask the operator to poll the audience for questions.
Operator
Thank you. (Operator Instructions) We will take our first question with Mac Hodgson with SunTrust Robinson Humphrey.
Please go ahead.
Mac Hodgson - SunTrust Robinson Humphrey
Hey good Morning.
Steve Gurgovits
Hi, Mac.
Mac Hodgson - SunTrust Robinson Humphrey
I had just a couple of questions, may be first on the fee revenue. Brian, I think you mentioned $800,000 of the other revenue was due to the swap.
So I was just kind of curious if that's something you think is kind of sustainable going forward or if it's more of a one-time given the interest rate environment?
Brian Lilly
Well, certainly it is higher in the interest rate environment that we are in, but that interest rate environment continues. So, our team continues to work with larger customers in the second quarter of the year, probably as you go through the year.
But, the first quarter definitely was very strong. We had a very, a couple of real nice gains we're able to work out with our commercial customers.
Mac Hodgson - SunTrust Robinson Humphrey
Okay, great. And the $600,000 at Omega related expenses, would those be included just throughout the non-interest expense items, or would they be in one of the categories specifically?
Brian Lilly
They would primarily be in the other and in the salary and benefits. We deal with the pre-hiring people as we move some of the functions to our Hermitage area.
And, so that would come into the salary section. And just to clarify that it wasn't all $600,000 related to the Omega, we also had Bob's relocation expenses were part of that $600,000 too and that was one-time.
Mac Hodgson - SunTrust Robinson Humphrey
Okay, great. And, may be on the loan growth, there was great commercial loan growth in the quarter, I have seen that from other competitors in the market and some of their banks are speaking that lot of that loan growth being driven by the lack of the conduit market and the disruption in the capital markets.
So kind of smaller banks are able to pick up, may be borrowers that would normally have led to giving competitive reasons. And, I was just kind of curious, if that's something you would echo and if you are seeing a strong loan growth as a result of that?
Bob New
Mac, this is Bob. What we're saying 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 syndicating credits, where we don't have relationships with customers. So, our loan growth is coming from expanding our customer relationships and recruiting new customers.
Mac Hodgson - SunTrust Robinson Humphrey
Okay, great.
Brian Lilly
Mac, let just add me. We're little bit more bullish on that, particularly in our Western part of franchise with the disruption in that city and others, teams have put some really strong marketing programs together and when we think closer relationships are bringing in some great concept.
Bob New
The real growth came from the Pittsburgh in central regions and the central region is right here in Irwin and Johnstown where that city has stronger presence.
Mac Hodgson - Suntrust Robinson Humphrey
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 assuming there is no further deterioration there?
Bob New
Yeah, this is Bob. Let me give you an update on Florida.
We had a slight uptick in our outstandings. We grew out standings 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 ORE and put two loans still may be 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 look at about 80% of the portfolio.
I came away from that visit feeling fairly comfortable that we've done pretty fair job on our underwriting. There are good LTVs on project.
Most of them had guarantors. The risks were well documented.
We do a quarterly review of these credits. I am comfortable with our monitoring process and our action plans for every credit.
Having said that we still understand there is risk in Florida, but I believe we've got a pretty good handle on those risks and we feel like it's manageable.
Mac Hodgson - Suntrust Robinson Humphrey
Okay, great. That's it for me.
Thanks guys.
Operator
We will take our next question with David Darst with FTN Midwest. Please go ahead sir.
David Darst - FTN Midwest
Hi. Good morning.
Steve Gurgovits
Hi, David.
David Darst - FTN Midwest
Bob could you just touch on the growth of the [Florida] that you mentioned, you said you grew your outstanding by 4%?
Bob New
Yes, that's about $12 million. 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 end market transactions one was a C&I loan for a group of doctors and two others were commercial real estate loans that meet our underwriting for commercial real estate projects.
David Darst - FTN Midwest
Okay, then you made a reference to reducing your exposure to under 2%?
Bob New
The total exposure the total commitments in Florida reduced about 1.5% from quarter-to-quarter.
David Darst - FTN Midwest
Okay. How large is that ORE down there?
Brian Lilly
ORE or CRE.
Bob New
We have one project down there about a million dollars.
David Darst - FTN Midwest
Okay. Brian, could you give us an average share account, diluted share count to use for the second quarter?
Brian Lilly
I know but it's, I don't have. There is nothing unusual that's happened from the first quarter to the second.
David Darst - FTN Midwest
You mean considering Omega?
Brian Lilly
No, we didn't. I don't know, well of the top of my head.
I want to say about 86 million, but going to have to open that up.
David Darst - FTN Midwest
Okay. And then any other updates on Central Pennsylvania or the Pittsburgh market?
Gary Roberts
No, activity is brisk and our pipelines are strong. As a matter of fact we are at all time high, so we are very optimistic on what's going on, like there is some real good opportunity.
David Darst - FTN Midwest
Okay. Thanks.
Operator
(Operator instructions). We'll take our next question with Damon DelMonte with KBW.
Please go ahead, sir.
Damon DelMonte - KBW
Hi. Good morning guys.
How are you?
Steve Gurgovits
Good morning.
Damon DelMonte - KBW
Question on credit quality, the net charge off this quarter were 27 basis points. Do you have a forecast or a target for full year?
Brian Lilly
We stand by our guidance that we shared with you at the end of January. We got that just slightly above our actual for 2007 which was 29 basis points.
But we're already slightly below that, so we are encouraged by that.
Damon DelMonte - KBW
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 are lending to?
Gary Roberts
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 margin.
So, that seems to be -- at this point in time, where most of the activity. If CNI lending continues to be brisk it represents about 40% of the portfolio.
So, nothing outside of the norm.
Damon DelMonte - KBW
Okay, great. And, then just lastly, is there going to be any type of supplement published with any numbers on Omega, with regards to their last quarter's results, or is that something we have to wait for until the end of the second quarter?
Brian Lilly
We hadn't contemplated issuing anything on a interim basis but then we haven't done that in the past, so in the quarter.
Damon DelMonte - KBW
Okay, right. Thank you very much.
Brian Lilly
You're welcome.
Operator
(Operator Instructions) We will take our next question with Andy Stapp from Riley & Company. Please go ahead.
Andy Stapp - Riley & Company
Good morning.
Brian Lilly
Hi, Andy.
Andy Stapp - Riley & Company
Could you provide an update on asset quality as it pertains to your indirect dollar loans in your Regency?
Brian Lilly
We will take it in pieces Regency, Regency continue to perform very well, and I think that we've said with (inaudible) has called that our historical charge-offs ratio being in the 4% and they were around top of that for the first quarter. The Regency delinquencies are consistent with where they've been in the past.
And so, we are 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 levels and we like everybody else, we're looking for those cracks in the consumer and be an active risk managers that we are, but so far so good.
Andy Stapp - Riley & Company
Okay, great. Would you happen to have about the -- how did 30 to 89 day delinquencies compare quarter-to-quarter?
Brian Lilly
30 to 89.
Andy Stapp - Riley & Company
[Pass this].
Brian Lilly
I've got total in the [cost to my asset], that particular category. We'll take a look at that, we'll look for that in more detail.
And, if you got another question?
Andy Stapp - Riley & Company
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 write some color on that?
Steve Gurgovits
Okay. I think we addressed that I think in our fourth call and my recollection is that we are, some of our it varies depending on the type of the loans, certainly our policy would suggest that if we have operating properties, the larger values should be in the 80% or better range and if it's land at 65% or better.
Currently, we're running an average of about 50% on land it's going in about 62% on development and other real estate somewhere between 62% and 65%. So our LTVs are now little better shape that even our policy suggests.
Andy Stapp - Riley & Company
Okay. Could you give us some color on how Omega's asset quality fared during the quarter?
Bob New
Certainly, from we're working arms around that now. There has been nothing reported on it but I think I've stated that it's a pretty good system with what they included in their 10-K.
Andy Stapp - Riley & Company
Okay.
Bob New
And will be a I guess a normal process, we will be observing that here that will be the normal [3-3] accounting principle will apply to the larger commercial and we will get launch through here in the second quarter.
Andy Stapp - Riley & Company
Okay. That's it for me.
My other questions have been asked.
Bob New
Hey, Andy, let me follow-up on -- you have the couple of components there and I am looking at a 13-month trailing of our 30 to 60, 60 to 90 and 90 plus and [where they just] strong consistency in our mortgage portfolio and in our consumer loan portfolio?
Andy Stapp - Riley & Company
Okay, great.
Operator
And we'll take our next question with Charlie Smith from Fort Pitt Capital. Please go ahead.
Charlie Smith - Fort Pitt Capital
Good morning, guys.
Steve Gurgovits
Good morning, Charlie.
Charlie Smith - Fort Pitt Capital
It looks like your balance sheet became a little more asset sensitive last year. What was the trend during the first quarter?
Brian Lilly
I won't agree with you there, but we move in at snail pace moderation and our [out go] policy is to maintain very close to neutral. But as you get to the lower rates that we are right now, we don't mind to be a little more asset sensitive and taking advantage of the swap programs and some of those that books some variable rate asset seems like a good strategy to us but all within moderation.
Charlie Smith - Fort Pitt Capital
Okay. It doesn't appear like you guys have begun to benefit it all from the Fed funds rate cut.
Is that something that we could reasonably expect or not?
Brian Lilly
You know it's nice to see a slopping yield curve, but it certainly wasn't a benefit here and the way we got there in the first quarter.
Charlie Smith - Fort Pitt Capital
All right.
Brian Lilly
Managing the rates down on the deposits is the challenge in the competitive environment where a lot of banks, and you know you've [net city] and always in a market that are looking to grab deposit. So, there is some higher rates out there.
We are real competitive than we are in the pack, and we continue to manage our deposit growth consistent with our asset, where the asset is yield. That said, I have always expected our hope that there will be some sensibility here in the back half of the year that allows the margin to may be expand, but right now we are fighting to keep it flat.
Charlie Smith - Fort Pitt Capital
Okay. So, may be gave up a certain amount in terms of rate paid to competing [net city] but you pick it up on potentially on the asset side
Brian Lilly
Yeah, we are managing those sides very actively.
Charlie Smith - Fort Pitt Capital
Thanks.
Operator
And we've no further questions at this time. I would like to turn it back over to management for any additional or closing remarks.
Steve Gurgovits
Thank you again for joining us today. Just to remind everybody that the replay of the call will be available from 2 PM Eastern Time today until midnight Eastern Time on May 2nd 2008.
A transcript of the call will be posted to our shareholder Investor Relations section of F.N.B. Corporation's website as www.fnb.corporation.com.
And that really concludes our call. We thank all of you for your time and your participation and have a good weekend.
Operator
Once again ladies and gentlemen, this will conclude today's conference. We thank you for you participation.
You may now disconnect.