Jul 22, 2008
Executives
Bartley Parker - Investor Relations Robert New Jr. - President and CEO Brian Lilly - Chief Financial Officer Gary Guerrieri - Chief Credit Officer
Analyst
Jonathan Kapps - BMO Capital Markets Andy Stapp - B. Riley & Company David Darst - FTN Midwest Mac Hodgson - Suntrust Robinson Humphrey
Operator
Good afternoon ladies and gentlemen and thank you for standing by. Welcome to today's FNB Corporation Second Quarter 2008 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 the question. As a reminder, today's call is being recorded.
And now I will like to turn the conference over to Mr. Bartley Parker, Investor Relations.
Please go ahead sir.
Bartley Parker - Investor Relations
Thank you. Good morning everyone.
This conference call of FNB 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 FNB, as well as FNB management’s assumptions and beliefs relating to present or future trends or factors affecting the future performance of FNB 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 FNB or by other factors and developments beyond FNB’s control, including but 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 FNB is engaged; technological issues which may adversely affect FNB’s financial operations or customers; changes in the securities markets; or risk factors mentioned in FNB’s filings with the Securities and Exchange Commission.
FNB 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 FNB Corporation. Bob?
Robert New Jr. - President and CEO
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 FNB.
There are number of items that influenced our earnings, so let's get right into the results. Second quarter 2008 net income was $14.5 million or $0.17 per diluted share.
The results for the quarter include charges of $11.9 million pretax or $0.09 per share aftertax including a $6.4 million additional provision for a loan loss reserve and a $5.5 million charge for a major merger-related costs, 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.
$6.4 million additional provision falls into two buckets. The first bucket relates to Omega.
Omega 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 was behaving exactly as predicted it would in our due diligence.
The second bucket relates exclusively to Florida. We took action this quarter to build out a reserve 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 and 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 and recognition of our forecast for slow economic recovery.
This quarter we placed two Florida loans on non-accrual. 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 comprised 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 on to 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 them the current appraisals we have 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, key them well informed of our actions. We do these things to ensure we meet our own high standards for creating accuracy and profitable reserve allocation.
I want to spend 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.
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 a year ago. Our level of net charge offs too remains good.
Annualized net charge offs were 30 basis points of average loans for the quarter. Year to date, net charge offs are running at an annualized rate of 29 basis points of average loans.
Let's shift gears now and talk about what we are doing to grow and improve our franchise. On April 1st, we closed on our acquisition of Omega Financial.
Then over the Memorial Day weekend, we completed the systems conversion. This was an important transaction for us because the more robust markets of State College in Central Pennsylvania provided FNB with additional opportunities with sustained profitable growth.
Most of the 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 a $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 the 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 the three quarters of that growth came in our core checking products.
Continued development of our sales and service culture has improved to positive retention and help us attract more new business during the past four quarters. Succeeding and 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 am going to turn the call over to our Chief Financial Officer, Brian Lilly, to comment further on our second quarter performance. Brian?
Brian Lilly – Chief Financial Officer
Thank you, Bob, and good morning everyone. Let me start by pressing 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 and that realize from our merger with Omega. Finally, of course my comments 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 cost related to Omega.
The remaining penny was split between the acceleration of certain benefits for an executive retirement, a 500,000 pretax write down on the bank stock that was being to be other than temporarily impaired and the 400,000 pretax mark to market decline in a limited partnership invested in bank stocks. The bank stocks write down was recognized with the investment gains/losses line of 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 had approximately 8 million in equity investments within a cumulative gain in total.
Let me now turn to the balance sheet and make a few comments on our investment portfolio and 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 don’t hold any equity securities of these companies.
Also, I received several inquiries as to the 55 million in corporate debt holdings. These are the mezzanine tranche of bank pool trust-preferred investments, plus 14 million of individual bank trust-preferreds.
The pool investments and the individual holdings are rated 'A' or better by Moody's, 26.5 million rated B AA. They currently have an estimated marked value adjustment of 9 million aftertax, those recorded and 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 as you have noted the strengthening of the capital that we accomplished with the Omega merger, recall that we structured that all stock deals in order to take advantage Omega's strong capital position. Tangible equity, which was increased 41 basis points and ended the second quarter 5.21%.
The ratio was 5.35% ignoring the impact from the mark-to-market and accumulated other comprehensive income. Our regulatory capital ratios also benefited with Tier-1 leveraging 66 basis points to 8.17%.
We estimate that our total real estate capital ratio will exceed 12% at the end of the quarter. In addition, we have hedged some of the liquidity metrics with the combination of Omega.
We are extremely pleased with the balance sheet benefits of this merger. Now let me focus my remaining comments and some key items to other news 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 and Glass. We continue to see good opportunities for growing our loans, deposits and fee income.
The competitive environment has actually created more opportunities to take business from some larger banks in our footprint. With that said, we are confirming our guidance to organic mid single-digit annualized growth for loans, deposits and fee income.
Our net interest margin expanded 19 basis points on a linked-quarter basis to 3.92%. Approximately 16 basis points was realized with the merger with Omega.
Looking to the last two quarter, we are forecasting a consistent margin after considering the continued competitive pricing pressures for deposits and loans and the 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 natural and regional economic environment and in particular the Florida economy. In general, we are projecting the provision for loan losses of 4.5 to 5 million per quarter, which is consistent with the second quarter before the additional loans for Omega and Florida.
This is consistent with our prior guidance of a low 30 charge off ratio as well as company loan growth. As always, we will continue to monitor the Florida portfolio and take appropriate action.
In the second quarter, the operating expenses included over 6 million that will not recur in the third and fourth quarter. These expenses related to an executive retirement and the Omega merger costs.
In addition, at June 30, we have realized the significant portion of the operating efficiencies planned for the merger and accordingly will have a favorable impact for the remainder of the year. We are forecasting expenses in the range of 55 to 56 million per quarter.
This guides an efficiency ratio to a very good level of approximately 55%. I mentioned the guidance excluded the impact of the 300 million assets in Iron and Glass Bancorp.
As is our factors the transaction of this size we will be clearly 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 the slight EPS dilution for the last two quarters of 2008 plus about a penny in total and a slight decrease in our regulatory capital ratios as we settle the 45% cash portion of the consideration. Considering all of these factors the total earnings for the second half of the year is projected to be in the range of 54 to $0.58 per share.
Because of second quarter $0.17 included $0.09 of additional charges, this $0.26 plus approximately $0.02 from the Omega efficiencies provides a $0.28 quarterly run rate going into the back half of 2008. Bob, that concludes my comment.
Robert New Jr. - President and CEO
Thank you, Brian. Let me make a few comments on closing.
First the fact that we had to make an additional provision this quarter for our Florida portfolio is disappointing especially so given FNB'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 especially pleased to have been recognized the top Pennsylvania based bank in our 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 and 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 can now poll the audience for questions.
Operator
Thank you, gentlemen. (Operator instructions).
We will take our first question from Jonathan Kapps with BMO Capital Markets.
Jonathan Kapps
Hi, good morning guys.
Robert New
Good morning Jonathan.
Jonathan Kapps
Just a -- I want 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 is the second quarter? I know that you had that kind of charge?
Brian Lilly
Let me first clarify Jonathan that we did not have in the first quarter additional charge.
Jonathan Kapps
I am sorry. Maybe in the fourth quarter.
Brian Lilly
Okay.
Robert New
Jonathan, let me just kind of refer you back to process that we went through. We take look at this portfolio on a quarterly basis and we look out six months to all these loans that are coming due.
We have done what we consider to be as thorough a due diligence on that portfolio that we can possibly do. I will 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 have taken appropriate action to reserve against those loans that we have identified.
So again, I don’t know how to answer the question, but the certainty that you are searching for, all I can do is tell you that we feel pretty confident by our processes and we know where risk is.
Jonathan Kapps
Okay, definitely fair enough. Thank you very much.
Operator
Our next question will come from Andy Stapp with B. Riley & Company.
Andy Stapp
Yeah. Brian, you said you have got new reserves and if I understood you correct, not new reserve, new appraisals quarterly in Florida.
Is that correct?
Brian Lilly
We get new appraisals for loans as they come due. We get those appraisals in advance of the loans coming due so that we can take the appropriate action whether to right-sizing the loans, asking the customer move the loan, provide an additional security or letters of credit but we are on a pace now to make sure that appraisals are updated on an annual basis for these products.
Andy Stapp
Okay. And you just -- are you qualitatively assessing any change in the appraise value, is that what you are doing?
Robert New Jr
Absolutely, and we see appraisals that slip far enough, we are requiring borrowers to right size the loans.
Andy Stapp
Okay. And what is your overall loan-to-value ratio in Florida?
Robert New Jr
The overall loan to value ratio is right at about 70% and it varies for different types of credits, but on an average we are running about 70%. That’s up for almost about 62% this time, I think at the end of the year.
Andy Stapp
Okay. I think its 56% at March 31?
Robert New Jr
Yeah, it would have been on our land portfolio.
Andy Stapp
Okay. And have you account for interest reserves that you are finding the interest into the borrow has the you know, sells properties and has the cash to service debt or do you [carper] periodic interest payments, just give me some color on that?
Robert New Jr
We do create interest reserves on these loans, on the very few construction projects they are build into the loan or all the other credits particularly the land loans, those cash reserve are put up by the customers. So it's not for loan proceeds.
Andy Stapp
Okay. So in other words, are you saying they would have to basically prepay the interest?
Robert New Jr
That’s correct.
Andy Stapp
Okay. Fair enough.
Thank you.
Operator
Your next question comes from David Darst with FTN Midwest.
David Darst
Good morning.
Brian F. Lilly
Hi, David.
Robert New Jr
Good morning Dave.
David Darst
Bob did you say that you are doing annual appraisals on the Florida properties?
Robert New Jr
We are doing on an average annual appraisal, 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.
David Darst
Okay. But is the market caused you to rethink that policy or maybe do this more frequently?
Robert New Jr
Again, all on the loans that we look at that are not income producing or at a minimum of an annual appraisal and we have about 25% of our portfolios in income producing properties.
David Darst
Okay. And, how many other participation do you have?
And how many other condo projects you are involved in?
Robert New Jr
We don’t have any other participation and any other condo projects other than ones, I listed.
Gary Guerrieri
Let me correct. We do have one.
Robert New Jr
You are listening to Gary Guerrieri, who is our Chief Credit Officer.
Gary Guerrieri
Good morning everyone. We do have a participation in another condo project and we have total of -- more of the condo projects in the portfolio at this point.
David Darst
Okay. That’s two participation in six condo projects that you are?
Robert New Jr
Yes.
David Darst
Can you just give us the total value of those?
Brian F. Lilly
The participation that we have from our condo perspective is approximately $7.5 million. The two condo projects that Bob refer to earlier are approximately $15.5 million and the remaining portfolio is 14 million.
David Darst
Okay. And [reassessing] that charge-offs the quarter, could you give us those?
Brian F. Lilly
We didn’t, but it was below 4% annualized, Dave, which as you know, is very good loan from them.
David Darst
Okay.
Brian F. Lilly
That continues to perform well.
David Darst
And then just on the margin. What did Omega add to the margin from basis points and what's your outlook for the margin?
Brian F. Lilly
Well it added 16 basis points of the 19 between, via the lending of their loans and deposits and the purchase accounting as the vehicle for the base and as I have said in my comments, we are looking for the margin to be consistent for the back half of the year.
David Darst
Okay. And then what would be the goodwill or core deposit amortization just for Omega?
Brian Lilly
The impact of the quarter -- I mean 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 hundred thousand to the expense for the second quarter.
David Darst
Okay. All right, great.
Thanks.
Operator
Your next question will come from Mac Hodgson with Suntrust Robinson Humphrey.
Robert New
Hey Mac.
Mac Hodgson
Hey good morning.
Brian Lilly'
Good morning Mac.
Mac Hodgson
I had a question on the tangible book value. I was expecting that 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 some color on that?
Brian Lilly
Sure. We had the same reconcilement when we share with you the expected tangible book value per share after the announcement of the Omega, we expected that to be around 4.80 and it's only at 4.58 and there is two items that reconcile that.
It is the change in the accumulated other comprehensive income primarily the marks of 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 are 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 would provide 21 to 5.35, very similar movement of the 12, 13, 14 cents related to the tangible book value per share.
Mac Hodgson
Okay, great. And then maybe just a question on the charges related to the equity investments.
Were those in, I mean, other income or that included?
Brian Lilly
Really there were two components of that. One was a individual stock that if we determined we had it in other than temporary impairment and that was shown in the investment securities gain/losses line.
Mac Hodgson
Okay.
Brian Lilly
And then limited partnership is the market value monthly for us and because of the limited stock price within the same quarter. That was the 400,000 pretax that hit other non interest income as you said.
Mac Hodgson
Okay, got you. Maybe just a couple of questions on Florida.
In addition to the -- or 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 in late last year that were added NPL too I believe, what was the balance of those?
I am just curious what the total NPAs are for the Florida portfolio?
Brian Lilly
The total NPAs for the Florida portfolio at the end of the quarter were $26 million.
Mac Hodgson
Okay. And that’s the two loans added this quarter plus two loans late last year?
Brian Lilly
It's about 11 million that we added last year in the fourth quarter.
Mac Hodgson
Okay. And maybe remind us again the total balances in Florida and just kind of the mix?
I know it's been pretty consistent but I am just kind of curious to get an update there?
Robert New
At this point, the total balance is approximately $288 million at the end of the quarter.
Brian Lilly
And we have, Mac, consistent with what we reported 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 commercial about half but little more weighting towards the commercial and then our acquisitions in developing loans are 13% of that balance and the other real estate or income producing primarily is 41% and that's up from 38 last quarter and 36% at the end of the year.
Mac Hodgson
Okay.
Brian Lilly
And the leaning towards the portfolio continues to move towards the income producing.
Mac Hodgson
Okay. And in addition to the 5.4 million in provision, I guess setting aside that portfolio was there other specific provisions set aside last year?
I imagine to those two loans, I am just curious what the total reserve is for the Florida book?
Brian Lilly
The two loans that we just put?
Mac Hodgson
Well…
Brian Lilly
In the fourth quarter last year we did have a specific reserve of up a $1 million that we set aside. So there is $11 million that we have put in the fourth quarter.
Mac Hodgson
Got you. So maybe total reserves for Florida are in the $7.5 million range?
Brian Lilly
Mac, it's actually more of that because in our methodology we have pool reserves also as they move through their rating classification. It's not a number that we have thrown out there to be reconciled but we have got a pretty good chunk against and we will work through those as we go forward.
Mac Hodgson
Okay, got you. Gary, just it's the curious last question just speak about the activity in kind of your core Pennsylvania market, where you are seeing loan growth there.
I mean we have heard some other guys but there still seems to be to a certain extent absence of competition from some of the larger competitors and are you thinking on business turndown, just some general comments on organic growth NPA?
Gary Guerrieri
As I said in my earlier comments, the loan growth is really evenly split around the State for us with the exception really of our Pittsburgh market, which is seeing a little bit better growth in some of the our markets. Keep in mind that over the last two and a half years we have been putting together I think that we have referred to as an all star team there in the Pittsburgh market and they are really starting to hit their strides.
So we are 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 retrenching but we have had an aggressive calling effort that’s been in place for over 18 months on those potential customers and a lot of that is starting now to find its way into the bank that will process from start to finish when you go out and call on a brand new prospect is somewhere between six months to 18 months depending on who they are and where they are. But again we are very pleased with the breadth of the types of customers that we are bringing and the diversity of the relationships.
We are not seeing any specific concentrations. We are not spending a lot of time chasing residential development loans.
So these are sound solid business opportunities. We are 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 the Omega was there was not really a low in their loan production during the cycle after we announced the merger and we continue to gain some market share out there. So now we are just seeing some good solid performance from our commercial lenders and really in all the markets.
Mac Hodgson
Okay, great. That’s helpful.
Thanks.
Operator
(Operator instructions). At this time, we will take a follow up from B.
Riley & Company with Andy Stapp.
Andy Stapp
Yeah, just two additional questions. On your Florida income producing properties loans on those, have you seen any slippage in your rating classifications there?
Robert New
Andy, we have not seen any slippage whatsoever. That portfolio is performing extremely well.
As we look out, we expect that to continue to do so.
Andy Stapp
So primarily it's been in the condo market?
Robert New
It's been into residential related projects and the condo market.
Andy Stapp
Okay. And your indirect auto loan portfolio?
Robert New
Andy, our auto loan portfolio continues to perform extremely well. Our delinquency levels are very very solid there.
Andy Stapp
Okay, great. Thank you.
Operator
At this time, there are no further questions. Gentlemen, I will turn things back over to you for any additional or closing remarks.
Bartley Parker
Thank you once again for joining us today. As a reminder, a replay of the call will be available from 11:30 Eastern Time today until midnight Eastern Time on August the 5th.
A transcript of the call will the posted on the shareholder and will be available from 11:30 Eastern Time today until midnight Eastern Time on August the 5th. A transcript of the call will the posted on the shareholder and Investor Relation section of FNB Corporation's website at www.fnbcorporation.com.
That concludes our call and we thank you once again.
Operator
And that does conclude today's teleconference. Thank you all for joining.
Have a wonderful day.