Fifth Third Bancorp (FITBI) 2002 Q3 法說會逐字稿

Welcome to the Fifth Third Bancorp third quarter 2002 earnings conference call. At this time, all participants are in the listen only mode. Following the presentation, we will conduct a question and answer session. If you have a question, please push star followed by the one on the touch tone phone. If anybody has any difficulties hearing the conference, please press star zero. I would like to remind everybody that this call is being recorded and will turn this over to where Brad Adams. Please go ahead, sir.

This conference call may contain certain forward looking statements about Fifth Third Bancorp pertaining to the financial conditions, results of operation, plans an objectives of the bang corps. These statements have certain risks and uncertainties. There are a number of factors that can cause it to differ from a historical performance and therse forward looking statements. At this time, I'll turn the call over to Mr. George Schaefer, president CEO of Fifth Third Bancorp.

Thank you for taking the time to listen in. Neal and I are going to keep things relatively brief this morning. We'll take just a couple of minutes to review what we feel are the highlights of the quarter and our prospects going forward. Then we'll quickly open it up for your questions. I'm sure that most you had a chance to take a look at our third quarter results that released earlier today. The bottom line was up 15%, checking account growth continues to be very good, and credit quality as well as loan growth were both very, very strong. From my perspective, the highlights were the quarter were number one, loan growth. Overall, loan growth was very strong out there with period and total loans and leases increasing by $2.2 billion over last quarter or 20% annualized. Retail installment lending continued to be very strong also with a 23% annualized link quarter increase. Commercial loans and increase increased by 19% sequentially annualized. This is the best level of demand that we have seen in the recent past. The second item is the continuation of strong deposit growth trends. Average interest checking balance increased 47%, and average demand deposits are up 20% over last year. Sequentially, transaction deposits are up 32% on an annualized basis. And the net number of accounts that we are opening continues to be as positive as it's been in any time in our history. We're opening 1.41 accounts for every one account that we close. This is a very good ratio in the industry. Next, we have very strong revenue and service income growth. Our net interest income was up 11% over last year. Showing some of the benefits of our deposit focus and our most recent emphasis on direct loans. Also, fee income was up 22% over last year, if you exclude the security gains. This is a pretty strong fee income growth. Number four, credit quality remains stable with charge offset 39 bases points and NPAs at 56 basis points. Accrual loans and leases are at $227 million on a 78 billion on a balance sheet at the end of the quarter. These are numbers they we're quite proud of and indicative of our hard work on the front end of the underwriting process. Also I'd like to point out that we have 8.4 billion in share holder's equity and we strengthening the balance sheet in terms of reducing prepayment risks. We took advantage of really strong loan growth in order to be proactive in terms of stabilizing spread revenue trends in the period ahead. We increased the quarterly dividend again this quarter. Our 26 cent dividend is 30% higher than the 20 cents we paid a year ago and 13% higher than last quarter's 23 cents. Our focus for the remainder of the year as we go through these unsettled times remains the same -- we want to sustain solid revenue deposit and loan growth in our retail and commercial businesses. I would like to point out that we have considerable market upside -- considerable market share upside in our footprint because we have only less than 10% of the deposits in the five states that we operate in. In Ohio, Kentucky, Indiana, Illinois and Michigan were somewhere roughly 8% of the depositors here, so we have tremendous upside . We have significant momentum building in our large markets, like Chicago, Detroit and Cleveland. Finally, expanding the contribution of the investment in electronic payment processing services, these are businesses that we're putting a lot more emphasis on and we think they're going to contribute much more to our overall business mix. Now, I'd like to turn I over to Neal to review some of our businesses and what we might look for in the future. Neal?

Thank you, George. I'm going to spend my time focused predominantly on line of business results, and that you a little bit about those trends. First of al in (inaudiable), as George higlighted, we're up 57% year over year, and that's with $21 million in revenue coming from USB. It's 32% excluding USB in our numbers and next quarter you'll have straight apples to apples comparison. Typically the fourth quarter is our strongest quarter as we benefit from strong volumes in that quarter. Probably the biggest thing we're heartened by is a well diversified customer base. We certainly recognize that a lot of our competors have been challenged in this area and we feel very gratified to have the customer base that we do. We had a couple of significant customer additions in the MPS business in the third quarter, including green point financial on the debit side, as well as Kinko's on the copy machine company. So we're quite happy with those numbers. Transaction volumes were up 28% annualized from last quarter, so we feel very good about the momentum on the MPS side. As I said, fourth quarter looks continued strong. On the investment adviser side were up 9% versus the third quarter of '01. We continue to focus on this area despite a difficult market. I'd say we have rolled out new product and we're benefiting from our partnership, both on -- with our retail platform and the commercial side to improve cross sells here dramatically. We also see a pipeline of new customer opportunities on the Khmerer side with 401(K) season well upon us. On the commercial side, commercial banking revenues were up 19% over last year. And unit sales here are probably the best we have seen in three years. We're gaining momentum on our deposit growth strategies, and the fee products side with deposit-based revenues up 38% across the commercial banking business. Lower rates obviously benefit us with the deposit side of the business, but we're seeing great unit sales out of the cash management area and all the other fee revenue sources. On the retail side as George said earlier, we've had very strong loan end deposit growth and feel very good about that business in this market with loan growth the strongest we have seen all year in deposit campaigns continue do focus on growing that piece of the business. On the mortgage side of the business, we are down 6% sequentially, and up 4% over last year. And if you look at it last year, we were winding down the east coast and west coast, old Kent mortgage company business and I would tell you that in the fourth quarter, we'll have apples to apples comparison. I'd also say mortgage banking represents only 8% of our fee revenue, and you'll see the breakdown of the revenue on the earnings release. Probably the biggest thing I'm pleased about on the mortgage banking side is despite a very aggressive lower interest rate environment, I think our hedging and our activity to manage our mortgage servicing rights has been very strong this past year. And so we're pleased that no surprises on that side of the business. If I can spend a moment on the balance sheet and the interest margin and the high trends real quickly. Net interest margin was down 16 bases points from last quarter. Driven by two things, obviously. Faster loan growth in the lower rate environment has some impact on our earnings a assets. Also, obviously, given the equity capital and our DBA income account growth we are inpacted the most by lower interest rates. The other thing I'd point out is we have a still 1 or 2 on the left side of the decimal point on some of our checking and savings accounts, so I think we still haven't hitten the floors that some folks have. Net interest income on a positive note is up 11%. Versus a year ago. We think that trend will continue going into the next couple of quarters. That kind of wraps up what I intended to cover. Predominantly, I would say as it relates to credit quality, the biggest thing we're pleased with the trends are quite stable. And as George said, I think we had 220 some odd million dollars in non-performers on a $44 billion balance sheet. General comments as it relates to the next several quarters, we continue to invest money to build out our franchise, as George said. Our focus in footprint has been adding offices and adding salespeople. I think that's going to continue as we look forward. I think we have better than 50 branches on the -- net new branches on the docket to grow in FITB. With that, I turn it over to questions and we'll be happy to answer any questions that you have.

Thank you. One moment, please. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star followed by the one on your touch tone phone. You will hear a three-tone nudging your request. Your questions will be posed in the order that they are received. If you'd like to decline from the process, please press star followed by two. Please ensure you lift the handset if you are on a speaker phone before you press any keys. One moment, please, for your first question. The first question comes from John Balkin Fox Pitt accounting.

Good morning, guys. Quick question with respect to the balance sheet. You had mentioned in the AK and then George, you talked of mitigating some of the prepayment risk in the portfolio. Can you let us know what actions you took in the quarter and then what can we expect in terms of leverageing the balance sheet in the margin going forward?

John this is Neal. A couple of things. I think if you look at the overall balance sheet in our comments that we put in the quarter, that we -- that we traded out of higher coupon mortgage securities within the investment portfolio. To mitigate some of the prepayment risks that we had there. I think our mortgage assets have come down pretty substantially, if you look year over year on the balance sheet. I think going forward if you look at the overall size of the balance sheet, at this point we're up to an 11.1 or 11.2% equity capital ratio. I don't think you'll see us leveraged dramatically or anything like that. Given the loan growth that we saw, I think we'll continue to be as proactive as we need to be to manage that mix more favorably toward the loan side.

From a prepayment standpoint, do you think you pretty much took care of the major issue in terms of a higher coupon stuff this quarter?

Yeah, I would say if you look at what we do with the balance sheet, it's obviously always dynamic, but I think we're quite pleased with where we sit today. You obviously want to balance for rising and then falling interest rates.

Great.

The next comes from Fred Cummings, McDonald investments.

Good morning, Neal and George. A couple of questions, first on the loan growth this is clearly in contrast to what we are seeing from industry. Can you guys expand on, you know where this growth is coming from in terms of the way industry type -- where you're seeing this growth on a commercial side?

UnidentifiedSpeaker*: Yeah, on the commercial side, Fred, thing is coming from the pretty broad spectrum here. As you know, we've been pretty plain vanilla, CNI commercial lenders in the Midwest here. Our commercial leasing volumes continue to stay pretty strong. But it's across the broad spectrum. There isn't any one particular area, and it's coming out of -- it's coming out of our 16 different affiliate banks that we operate in. It's coming from everywhere, the Chicago, Cleveland has been particularly strong for us. The newer market the Detroits and Chicagos are very strong. In their loan -- their loan generations up there. It's not any one particular industry. I think part of the -- part of what we have done as we have kept our loan window opened and stayed very focused out in our affiliates and here in Cincinnati on growing the loan portfolios, with only 39 bases points of chargeoffs, we don't have 100% of the loan officers out collecting loans. We have 95% of them making loans. I think that's why you're seeing the big difference. Some of the competition spending a lot more time on the collection side and on the monitoring side than perhaps we are, Fred.

Okay. And then, secondly, when we look at the margin, Neal, it's uncertain as to what the fed might do, but assuming the fed were to cut interest rates here, another 25, 50 bases points, how might that impact you going for it?

Yeah. Obviously, the quarter margin has come down, there are two things I would point to.. The loan growth as I said all along will predict the margin as we go into 2003 and I think we certainly feel better than we we did last quarter, given the trends we're seeing on the commercial side, given the size of the retail portfolio. I think -- I think the other thing, Fred, is we still have the ability to lower rates. I don't think everybody does. We've, obviously, had aggressive checking and savings account growth rates. So I don't think our deposits are at floors.

And then lastly, as relates to the $82 million pretax charge, how confident are you that that's the high end of the range, George, and will this review be completed by the end of the year?

Yeah. This -- Neal, let me grab it, Fred. The $82 million charge was our estimate. It is an estimate. We continued to do a lot of work to go through that, but I would tell you that we've told everybody we'll be very transparent. We will tell you as we go along where any changes in that, and if it's material we'd be more more than happy to make sure that we release it before the quarter is over. I would say speed by which we get through it, we're reconstructing a period of time that at this point, Fred, I would say it's going to be aggressive to get through by the end of the year. But we certainly are working very quickly to try to get through it.

Okay. Thank you.

The next question comes from Betsy Grassy, Morgan Stanley.Please go ahead.

Thank you very much. A couple questions were asked, but on the one on the feline item in particular payment processing business, showing obviously as you mentioned strong growth. A couple of new only -- only a couple of new customers. I know you mentioned, there are many more beyond the ones you mentioned. But I was wondering how are you getting this kind of growth in this environment? I would expect that some of it's coming from price competition, given your efficiency levels that you have to compete with the rest of the business there. I'm just wondering if there's anything else besides that you want to highlight?

UnidentifiedCaller*: Yeah, Betsy, I don't know it's so much price competition as it's having the total product line here. We've got this back office this M vision, this automated back office processing. And a number of our merchant as well as EFT customers really like out there. And that has really enabled us to go out. The other thing we're doing right now is cross selling this product. So our national lending people and all of our markets are middle market lending officers are also selling these MPS products out there which gives us a greatly expanded sales force. When our regular customer lender is walking into a retailer, anybody that uses cards anywhere they're cross selling the product. We're finally starting to do that a lot more intelligently than we have done in the past out there. That's really hepd us. Just straight -- the straight cross selling part of the business. The other thing I think that we're noticing, we are getting the benefit of this double A deposit rating. A lot of corporate treasures these day, especially the retailers and financial institutions that we deal with are looking for strong double A rated places to put their deposits. You know, this is really a treasury function whereas where is my cash going to go, and having the AA-1 ratings and AA minus rates are helping us right now. People are concerned where their money -- where their money is going out there. So that's helped us quite a bit also. I think the number one reason is that technological advantage that we have in most of these products and our consistent customer service out there. We have been very good taking care of the customers in addition to the low cost situation that we have. Just because of our volumes. I think the numbers we're talking about this year are eight or nine billion different transactions out there, and again, we run the eight or nine billion transactions on the same customers that we're running our checking and savings accounts. Our new favorite product, the Christmas club account runs on those computers.

But the paperless aspect of your service offering?

Very, very much so. Whether that's running the ATM's for American express all over the world or whether you're ordering something from Macy's.com, this back office automation is a very, very salable product.

Got it. Thanks.

The next question comes from Chris Mulmack, Suntrust Robinson Humphrey.

Yes, George and Neal, can you comment on the expense trends? I was pleased to see that they were so positive this quarter. Can they continue in the next quarter too?

Yeah, Chris, as you know, we have focused on the expense side. Even though a relative expenses are up a little bit, we're always willing to trade a dollar's worth of expense for a couple dollars worth of revenue out there. But I think one key thing we're focusing on right now the same automation that I spoke of on the MPS side, we have a whole team of the same programmers from our MPS area that are working on auto mating the bank's own back office. So we're doing a significant amount of trying to fully automate all of our back office procedures. All of our teller's statement of condition daily. We're just bringing that on line now to try to eliminate the paperwork. We still do some 22 million daily -- not daily, but annually we fill out 22 million debit and credit tickets that we're trying to fully automate now through the use of our screen. So we're doing back office process improvement, and a lot was stuff that we started with the old Kent acquisition and we saw a need to do some of this stuff. So we're continuing to work on that automation.

Yeah. I think you'll always see us during difficult times. You know, we have noticed that that's the time to invest for the future. And I think whether that's in hiring more salespeople or building branches, we think we will in 2003 effectively build a stand alone affiliate if you looked at it and you looked at the typical size of the affiliate, we're probably going to hire that number of people just in own own footprint.

Neal, as follow-up, will the timing of the rate finance closings sort of impact you a lot more positively in the fourth quarter than it did this quarter?

Yeah. I think -- you know, I would -- you know, couple things when you look at us versus competitors. Ours is not an outsize mortgage banking effort and I think that's a lot of hard work by a lot of people in the last 18 months to make sure that we have a stable mortgage banking business. I think as you look forward, it's a business that we think will grow in footprint, given the kind of activity that we see coming at us. So I think it's likely that you will see a double digit trend as we go into the fourth quarter.

Super. Thank, Neal.

The next question comes from William Wake, prudential securities. Please go ahead.

Hi, it's Mike Mayo. How are you doing?

Hi, Mike.

Just a little more on the margin. I know its been beaten to death What was the margin in September and where do you think it's going to go?

September is a 30-day month so if you look at sort of July, August, September, Mike, you have to balance it off. I would tell you our margin in the month of September adjusted for a 30-day month would have been -- or at a 31 day month versus the rest of the quarter would have been probably four or five bases points lower than what you see here. I think as you go into fourth quarter, you're going to see, you know, pretty stable to what you have here.

Okay. Just one point of clarification here from the press release. You said the sale of the high coupon mortgage backed securities added $89 million in gains. )) Correct. Then on page 3, you said there are $34 million of gains on the sale balance sheet securities from a portfolio established ahead against volatility related to the value mortgage servicing rates. Are those completely separate?

Yes.

Okay. Thank you.

The next question comes from Joel Stevens, Steffan Nicholas. Please go ahead.

Good morning, George and Neal. A great quarter. A couple of my questions have been answered. I guess the one is that your loan growth continued to be remain very, very healthy, and I guess, George, just give us your thoughts on obviously you've got to be taking market share, but give us your thought on the health of the markets you're on right now from a bigger picture perspective

Yeah. I think in all of the markets that we're in, there are some companies that are doing great. I mean ifyou look out here, you know, right where we're sitting, you have Proctor and Gamble who is doing very, very well. Our next biggest employer is General Electric aircraft engines and you know what's going on in that industry. So those are two ends of the spectrum. You've got healthcare what that's doing very well and if you go up to Cleveland and see some of the steel industry up there, you go to Youngstown and see what that looks like, that's like, you know that that's -- they're having trouble up there. But i think if you look at it here, we're in the heart of auto industry out here. This is the old rust belt so we're used to the booms and busts. But I was over the other day talking to the new president of Toyota north America, and quite honestly, they can't make the cars fast enough over there. Their business is extremely strong. We're also at the heart of Japanese autos. So autos seem to be going very well and you know what's going on in housing out here, and our marketing have been very strong. This is an extremely cheap place to live out here in the Midwest. So we're seeing as things tighten up, our growth in those two businesses has been very -- very, very positive. I think my basic economic indicator is employment. We at Fifth Third right now on a base of 20,000 are trying to hire 1,077 people and we're still paying a $500 bounty if one of our people brings a person in to work, a friend, we pay them a $500 bounty and this is in Detroit, in Toledo, In Evansville, and dayton, Ohio. We're paying this bounty. So generally, we're generally pretty optimistic out here. Now, it still does take a lot of hard work and hustle and sales. Where you can't get it by coming in at 11:00 and leaving at 2:00 and making a couple of E trades during the day. You have to go out and sell the checking accounts in Kroger's stores on Saturday and Sunday and Columbus day, all of of our stores were opened up out there and we were hustling product then. But we feel pretty optimistic about what's going on out here. Again, we have only 8% or so of the business. There's 92% of the fish out there that we haven't caught yet and we feel positive about that

Yeah George, I the joined a couple minutes late, so maybe you talked about it, but would you talk about the M & A front.

Yeah, on the M & A side, it has been unsettling out there. Like Neal mentioned, we've probably got 50 or 60 net new service offices that we're looking at between now and the end of next year. So we're going out and kind of building our own affiliate. We're in Chicago, we have 20 or 30 different branches that we're either bringing out of the ground or looking at right now. In Detroit, we're adding more offices and Cleveland, and Cleveland we're looking at those. Because, again, in those market, if you look at Cleveland, 4% share in Detroit, 2.5 or 2.6%, Chicago under 3% there. 50i689s just as easy for us to go build offices. We have the complete infrastructure out there. That's already built. And then I think you're going to see us doing some fill-in acquisitions as they might occur. We're excited about going into the Nashville market. We think that's going to be our 17th location to go in and we've always talked about in the future some time looking at the next tier of cities out there that --the Pittsburghs and the Charlestons, the Knoxvilles and St. Louis, those kind of markets that are the next concentric circle out from where we operate there. So we're continuing to be very conservative and -- in our approach, but we feel pretty good about our expansion.

Thank you for your question. We have time for one more call. The last question comes from Ken (inaudiable) from (inaudiable)

Good morning, Ken.

Ken (inaudiable): The comments you made in the press release about the non-recurring charge were somewhat brief. I found almost verbate frim the last press release, now that you have had a few weeks to try to dig into the frob, I wonder if you can give us more color on what the root of the problem might have been and what kind of items these were.

I think as we told people, it is within the investment portfolio for our own portfolio, Ken. And it is a time period that we're reconstructing that's about 300 days that we're trying to go through. And it is a process of reconstructing daily work and we run about 5,000 trades a month. And so we're in the process of doing that. We have hired outside help to us go through that. I would, Ken, it's too early at this point to give any further color on it. You know, I'm not optimistic or pessimistic as it relates to that at this point. But as we get through it, we will tell everyone.

Ken (inaudiable): But, Neal, do you feel that whatever was causing the problem is fixed and not likely to happen again?

Yeah. I'm quite confident on that side.

Yeah, we're extremely confident there, Ken. And I think one other point that's sometimes overlooked here in that portfolio at the end of the quarter there is a $526 million mark to market gain in that portfolio at the end of the quarter. Ken (inaudiable): Okay. Thank you.

All right.

This concludes our conference call. Thank you very much. Ladies and gentlemen this concludes the conference call for today. Thank you for participating and please disconect your lines.