Transcript Fourth Quarter and Full Year 2014 Earnings Call January 22, 2015 Investor Relations 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, related presentation materials and 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 January 29 and a transcript and the Webcast link will be posted to the Shareholder and Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, President and Chief Executive Officer. Vince Delie, President and Chief Executive Officer Good morning and welcome to our earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri our Chief Credit Officer. I will be highlighting our operating performance and providing a strategic overview. Gary will review asset quality and Vince will provide further detail on our financial results, provide guidance for 2015 and then open the call up for any questions. Let s begin by looking at the quarter s operating results. We are very pleased with the continued highquality earnings and positive trends that we have accomplished. Operating net income available to
common shareholders reached another record-high at $36 million and resulted in $0.21 per diluted share. This translates into a 106 basis point return on average tangible assets and over a 14% return on average tangible common equity. Operating leverage reflects the successful execution of our organic and acquisition growth strategy, with strong year-over-year revenue growth of 15% and operating expenses well-controlled at an 11% increase. We continued to grow loans and deposits, manage the net interest margin and asset quality was once again excellent. Looking at loans, average organic loan growth was strong at an annualized rate of 10%, with positive results in the commercial and consumer portfolios. Our consistent ability to organically grow loans and drive market share differentiates FNB. Our earnings reflect proportionate provisioning for this new asset growth. In fact, we have consistently provided for growth, rather than relying on reserve release to enhance earnings. This will further highlight our higher earnings quality and superior performance as we enter a more normalized industry-wide credit environment. Organic growth in average transaction deposits and customer repos was 12%, led by 15% annualized growth in non-interest bearing deposits. We remain pleased with our funding position with a loan to deposit ratio, including customer repos, of 92%. Our organic results continue to significantly benefit from our #3 market share position in the Pittsburgh MSA, a market that remains our key driver. The recent expansion markets of Baltimore and Cleveland are also contributing at levels that exceed our original expectations and present tremendous opportunity as we continue to gain scale and market share, replicating our success in the Pittsburgh metro market. Now I will focus briefly on the year. 2014 was another transformational year for FNB. We are extremely proud of what the FNB team has accomplished and our strategic positioning going forward. Full year operating net income was a record $136 million and earnings per share was $0.80. As we have discussed throughout the year, we are pleased with these results, particularly in light of the negative earnings impact from regulatory items that are specific to FNB during this reporting period due to the timing of our growth beyond $10 billion in total assets. Please keep in mind that this timing was unique to FNB, with the Durbin Amendment impacting other applicable financial institutions over two years Page 2
earlier. On a combined basis, the Basel III-required capital raise and the Durbin revenue loss reduced net income by $16 million or $0.10 per share. On an adjusted basis, earnings per share would have increased 7%. On a positive note, as we begin 2015 these items are fully absorbed in the run-rate. Our earnings drivers and underlying fundamental operating performance were consistently strong throughout the year, enabling us to deliver record results. Total loans grew 18% and deposits and customer repos 11%, including the benefit of two acquisitions completed during the year. Loan production approached $4 billion and set another record high, nearly doubling since 2010. Total operating revenue grew $79 million, or 15%, and our efficiency ratio improved to 57% from 59%. These results are proof points of our diligent focus on growing revenue, controlling expenses and achieving operating efficiency as we execute our growth strategy. At the end of year, total assets are $16.1 billion, a 19% year-over-year increase as a result of strong organic growth and acquisitions. The organic component was over $1.5 billion or 60% of this total. The additional scale we have achieved benefits FNB and its shareholders. Our market positioning now includes a top position in three major metropolitan markets and provides us with meaningful scale and opportunities to continue to drive organic growth, both from a balance sheet and fee income perspective. On the regulatory front, our larger franchise allows us to continue to successfully navigate the complex and costly regulatory environment and effectively manage asset quality to our high standards. We have consistently invested in our enterprise-wide risk management infrastructure commensurate with our growth, absorbing significantly increased staffing and overall related expenses. Risk managementrelated staffing levels have increased 60% since 2008. On the talent front, our expanded presence and size strengthens our reputation as an employer of choice and benefits our continued ability to attract toptier talent. We also continue to proactively invest in technology for our clients, evidenced by our recent announcement that we will begin offering Apple Pay in the first quarter. Before turning the call over to Gary and Vince, I would like to congratulate and thank the entire FNB team for another great year. Record results were realized across many of our business lines and contributed to solid earnings and strong returns for our shareholders. In summary, we have achieved strong year-over revenue growth. FNB has also achieved consecutive Page 3
linked-quarter revenue growth for eleven out of the past twelve quarters. We have very diligently managed expenses and realized acquisition-related cost savings, operating a larger organization more efficiently with a full year efficiency ratio of 57% and a fourth quarter ratio of 56%. Loan and deposit growth remained strong, benefitting from our established and expanded market presence. We have grown loans organically for 22 consecutive linked quarters, or 5 ½ years. Asset quality results were again excellent as we deploy consistent underwriting standards footprint wide. Our returns on tangible capital remain upper decile even as we operate with higher capital levels. In addition, we completed two acquisitions during the year, and most importantly, our shareholders benefitted with total return results for 2014 that rank FNB in the 85 th percentile relative to regional peers. These accomplishments are a testament to the dedication and tireless efforts of the entire team. As a management team, I would like to reiterate that we believe FNB s positioning to deliver long-term success is exceptional as we enter 2015. We have fully absorbed the earnings impact from significant regulatory-related items, our market position is stronger than ever and we have a proven ability to generate high-quality operating results. We look forward to sharing our progress throughout the coming year. With that, I will turn the call over to Gary so he can share asset quality results. Gary Guerrieri, Chief Credit Officer Thank you Vince and good morning everyone. Our credit quality results for the fourth quarter were very positive as we finished out 2014 well-positioned across all portfolios. We experienced continued good movement in our key asset quality metrics, with delinquency reaching the lowest level we have seen in the last several years, and problem asset levels continuing to trend favorably. Our overall loss performance on a GAAP basis was strong for the quarter at 17 basis points annualized, and 23 basis points for the year, both very low levels that further contributed to our positive results for 2014. I would like to now walk you through some of our performance results and our achievements, first on the originated book, followed by some commentary on the acquired portfolio. Looking first at our originated portfolio results for the quarter, we reduced our level of NPL's and Page 4
OREO by nearly $6 million, or by 12 basis points, to 1.13%. Delinquency trended in a similar manner, and was attributable to the reduced level of non-accrual credits. We ended December at 0.99%, marking our best performance over the last several years as we reached a level that we have not seen since before the economic downturn. Quarterly net charge-offs totaled $4.1 million, or 17 basis points annualized, and with these solid results, we closed out 2014 with originated net charge-offs of $21.0 million for the year, or 24 basis points, reflecting performance slightly better than our targeted levels. Originated provision, at $7.5 million, supported loan growth during the quarter, bringing the ending reserve position to 1.22%, which was down slightly on a linked-quarter basis due to the favorable credit quality trends that we have been experiencing. Shifting next to our acquired book, which now stands at $1.6 billion, we saw further positive movement in this portfolio during the quarter. Delinquency decreased by nearly $6 million to stand at just under $63 million at year-end. We also saw further reductions in the level of rated credits, which has continued to trend downward over the last couple of quarters as we have been successful in reducing the level of problem assets in the portfolio due to the efforts of our strong and experienced workout and credit teams. During the quarter, we provisioned $2.6 million into the acquired portfolio in support of our quarterly re-estimation. As of year-end, the acquired reserve now stands at $8.0 million. We ve recently received a few inquiries regarding our activity in the oil and gas space, and I'd now like to spend a moment on that with you. First and foremost, as communicated in the past, we have always taken a very conservative approach as it relates to energy lending due to the volatility in this sector. As it relates to portfolio risk, we have a robust concentration management program in place that allows us to proactively monitor and manage risk across all industries and other risk categories on a monthly basis. Specifically, in reference to the activity within our footprint in the Marcellus shale and energy space, our outstanding exposure remains very low at only 1.75% of our total loan portfolio at year-end, primarily centered in transportation, manufacturing, and service companies in the indirect supply chain. The majority of these customers support various industry segments outside of just the energy space, further diversifying their business risk. While today's price volatility could present challenges for the limited number of companies that operate in this space, we would expect that many borrowers across our region's manufacturing footprint should benefit from these lower energy costs. Page 5
In summary, as we reflect back on our 2014 performance, our credit quality results across both our originated and acquired portfolios were positive and consistent, marked by historically low delinquency, reduced problem loan levels, and solid loan loss performance. While we expected the portfolio to perform well during the year, we were able to resolve more problem assets than originally anticipated, which we attribute to our proactive approach to managing our portfolio, as well as the robust lending environment that provided borrowers additional refinancing opportunities with more aggressive lenders. The strong finish to the year would not have been possible without our dedicated and experienced team of banking professionals that carry out our core credit philosophy of prudent underwriting, strong risk management, and a consistent lending approach through the various business cycles. Looking ahead to 2015, we continue to be very pleased with the position, stability, and performance of our portfolios. I d now like to turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks. Vincent J. Calabrese, Jr., Chief Financial Officer Thanks Gary and good morning everyone. Today I will discuss the fourth quarter s operating performance and provide high-level guidance for 2015. Looking at the balance sheet, organic average loan growth momentum continued with average loans growing 10.3% annualized, driven by continued solid results in commercial lending and better-thanexpected growth in consumer lending. Commercial growth totaled a solid $93 million, or 6.0% annualized, and our commercial pipelines at quarter-end remained healthy and were near prior-quarter levels. The strong organic growth in the consumer portfolio was attributable to a combination of organic growth in consumer home equity loans of $93 million, reflecting better market penetration, and organic growth in indirect auto loans of $82 million, reflecting increased consumer demand throughout our footprint for auto loans. As Vince mentioned earlier, the fourth quarter s loan volume is a reflection of continued great success in the Pittsburgh metro market and the significantly increased number of prospects and attractive Page 6
demographics in our two new metro markets of Baltimore and Cleveland. These new opportunities have enabled us to add meaningful banking relationships and strengthened our ability to achieve long-term sustainable organic growth. Average total deposits and customer repos increased $197 million, or 6.4% annualized, with organic growth in non-interest bearing deposits of $94 million or 14.6% annualized. Average transaction deposits and customer repos increased $286 million, or 12.0% annualized, reflecting solid growth in non-interest bearing commercial balances and seasonally higher customer repos. This growth in lowcost deposits further strengthened our funding mix, as 79% of total deposits and customer repos were transaction-based deposits at the end of the fourth quarter. From a total funding perspective, our relationship of loans to deposits and customer repos was 92% at year end. Net interest income grew $2.9 million, or 2.4%, driven by $690 million of average earning asset growth and our continued emphasis on growing low-cost deposits. Successful execution of this strategy was evident as we maintained a flat cost of funds compared to the prior quarter. Net interest income growth compared to the prior quarter was partially offset by a $2.1 million lower benefit from accretable yield adjustments. Our core net interest margin declined 3 basis points to 3.49%, in line with our prior guidance. As we have stated on previous calls, accretable yield adjustments may be lumpy on a quarterto-quarter basis. The slight movement in the core margin reflects the continuation of recent trends in the current interest rate and competitive environment. Overall, we are pleased with the full-year net interest margin of 3.59% given the challenging environment. This was in-line with our original expectations and was a result of the record organic loan and transaction deposit growth coupled with the execution of our comprehensive ALCO program. Turning to non-interest income and expense. Non-interest income in the fourth quarter included a onetime $2.7 million unanticipated gain from an overpayment related to a predecessor bank s acquisition of another bank prior to becoming part of FNB and is not included in our operating results. It is important to note that this gain of $2.7 million was essentially offset by a $1.1 million non run-rate increase in OREO expense following the disposition of non-strategic properties from acquired banks and $1.2 million related to the timing of non run-rate costs for professional services. The properties were sold as Page 7
part of our continuing efforts to manage expenses and improve our run-rate earnings. Excluding securities gains and the $2.7 million non-operating gain, core non-interest income was consistent with the prior quarter. The fourth quarter saw improved contributions from our mortgage banking business unit driven by increased origination volume. Full year 2014 results for Wealth Management represent continued success with total revenue increasing 10% compared to 2013, driven by organic sales growth, incremental lift from the recent expansion into Cleveland and Maryland, and improved market conditions. Non-interest expense, excluding merger and severance costs, increased $1.8 million, or 1.9%, reflecting the elevated levels of OREO expense and costs for professional services. Absent these expense items, core non-interest expense would have been down slightly compared to the prior quarter. Over the last four quarters, our efficiency ratio has trended positively reflecting our commitment to diligently manage expenses and create positive operating leverage. The fourth quarter efficiency ratio was 56.1%, improved from 56.7% and 57.8% in the prior and year-ago quarters. The most recent quarter represents the fourth consecutive quarter of an improved efficiency ratio, as well as the eleventh straight quarter with an efficiency ratio under 60%. I think you would agree that this is solid performance in managing the relationship of expenses to revenue. Regarding income taxes, our overall effective tax rate for the quarter was 30.3%, down from 30.8% in the prior quarter, primarily reflecting the $2.7 million one-time gain as a tax-preferred item, which lowered our effective tax rate. Turning now to our expectations for 2015. We are committed to leverage the investments and infrastructure we have built over recent years to drive meaningful growth in our expansion markets. We are expecting to achieve strong year-over-year organic total loan growth in the high single digits and total organic deposit and customer repos growth in the mid-to-high single digits. We expect the full-year net interest margin to narrow slightly from the fourth quarter core net interest margin of 3.49%, due to the expectation of a continued low-rate environment. I should comment that our forecast is built with an expectation for a modest increase in interest rates in the 2 nd half of the year. To the extent that does not occur, there will obviously be pressure on our margin forecast. In dollar Page 8
terms, net interest income is expected to increase from full year 2014 due mainly to the strong planned organic loan growth as well as the benefit from having a full year of BCSB and OBA. Looking at non-interest income and expense, we expect to achieve positive year-over-year operating leverage, as we now enter 2015 with the recent regulatory-imposed revenue constraints and necessary investments fully embedded in our 2014 run-rate. Full year core non-interest income is expected to grow in the mid-to-high single digits, and core non-interest expense is expected to increase in the midsingle digits. The provision for loan losses should continue to increase over recent 2014 levels in support of strong planned organic loan growth, with quarterly increases expected throughout 2015. The overall effective tax rate for 2015 is expected to be in the 31% range. In summary, we are pleased with our 2014 performance as our team accomplished meaningful organizational growth and successfully overcame significant challenges presented by a demanding operating environment. 2014 results were marked by strong revenue growth, further improved operational efficiency, positive year-over-year operating leverage, continued improvement in asset quality and solid returns to shareholders. On behalf of the executive management team, we would like to congratulate our employees on another great quarter and great year, and we feel the company is poised to drive results along a long-term sustainable growth trajectory. Now I would like to turn the call over to the operator for your questions. Page 9