Fifth Third Bancorp (FITBO) 2004 Q3 法說會逐字稿

Good morning. My name is Amber, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Fifth Third third-quarter 2004 earnings conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you. I would now like to turn the call over to Brad Adams, Investor Relations Officer of Fifth Third Bancorp. Thank you, sir. You may now begin.

Good morning. Thank you for joining us. I'm here with Mark Graf, Chief Financial Officer and George Schaefer, Chief Executive Officer.

I'd like to remind you at the start here that this conference call may contain certain forward-looking statements about Fifth Third Bancorp pertaining to the financial conditions, results of operations, plans and objectives of the Bancorp. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance and these statements. Fifth Third undertakes no obligation to update these statements after the date of this call.

At this time, I'd like to turn the call over to George Schaefer, President and CEO of Fifth Third.

Good morning, everyone, and thanks for taking the time to listen in. I'll have a few comments this morning on what I feel are the highlights of the quarter, and Mark will review some of the business and balance sheet trends before we open it up for your questions. From my perspective, there were really four highlights of the quarter. They were deposit growth, our loan growth, our expense control, and improved credit quality. Let me expand a little bit.

We had very strong results on the deposit side this quarter with average transaction account balances up 1.6 billion or 15 percent on an annualized basis from last quarter. We continue to view deposits as our top priority as we close out this year and move towards 2005. We've put a lot of emphasis on all of our 1,005 offices and throughout the bank on gathering deposits, and we've always been pretty good at that, and the results are really starting to show here.

Secondly on loan growth, that remained very good in what is typically a seasonally difficult quarter. Overall period-end loan and lease balances increased by 1.4 billion. Commercial lending increased by 12 percent over the same period last year on a core basis, and consumer lending remained steady this quarter with a 6 percent growth on the same basis.

Next, expenses continue to be very well controlled. Noninterest expense declined 2 percent compared to last year and by over $20 million from last quarter on a core basis. You can read about some of the factors affecting those comparisons in some more detail in the release.

Our credit quality continued to improve this quarter also with losses declining by 18 million from last year. And I think you should note that our nonaccrual loans are down some $65 million from the prior year. Consumer credit has continued to be very well-behaved and we expect commercial losses to moderate around current levels. Overall nonaccruals should come down further as we continue to work through resolving some of these credits. But the absolute losses will probably bounce around current levels, which are well below our historical averages.

A couple of additional comments -- first, revenue growth is not where we would like it to be at this point. Some of that is due to some tough comparisons in mortgage banking, and more broadly, the interest rate environment in general. As most of you know, we have been taking a hard look at expenses, but this has not stopped us from investing broadly in the franchise. We're still hiring salespeople in all of our markets. I think so far this year, we've hired about 250 salespeople across all business lines. And we have our eyes out for another approximately 250 or 300 salespeople throughout all the markets and in all lines of business.

We are continuing to invest in new banking centers. In the third quarter, we've opened 17 new offices and we have plans for a similar number in the fourth quarter. I think this year, year-to-date, we've opened a net of about 53 new offices, and actually, we've opened 59 brand-new ones and have consolidated a few. The returns thus far on our de novo efforts have been exceptionally strong, and it continues to be our most attractive growth opportunity in the Midwest, where I think most of you know, we only have a 7 percent share here in our markets. But both the hiring of these salespeople and the expenses associated with opening these offices are pretty considerable.

We've announced an agreement to acquire First National Bancshares of Florida during this quarter, a $5.3 billion bank holding company, headquartered in Naples with offices in Tampa, Orlando, and along the West Coast of Florida. This transaction will expand our presence in Florida to more than 90 offices with over 6 billion in assets.

We believe these are the right markets for us in Florida. This acquisition provided us with an experienced management team and we believe that our affiliate model will make sure that over time, our Florida franchise will be a great deal larger in the future than when we bought it.

Other than that, we will continue building market share within each of our existing markets by opening more checking accounts and closing less, increasing our loan volumes and focusing on our fee businesses.

But I want to tell you that in each line of business in each of our 1,005 offices, and in each of our 17 affiliate banks, we remain really intensely focused on daily execution. That's been the key to our success historically, and we're really focused on that going forward. With that, I'd like to turn it over to Mark for some details.

Thanks, George. I'll start on the balance sheet side and net interest income side as well. Third-quarter net interest income increased 4 percent on a fully taxable equivalent basis, and decreased $5 million linked quarter, despite very good growth in average earning assets. The net margin decreased by 12 basis points from last quarter, primarily due to spread compression of about 16 basis points. This compression is largely attributable to increases in rates being offered on transaction accounts, as earning asset yields were relatively steady on a linked-quarter basis. On an average basis and compared to last quarter, interest checking yield increased by 20 basis points, savings by 17, and money market by 28. We also terminated 2.2 billion in received fixed swaps during the quarter, and continue to reinvest cash flows from the securities portfolio into variable investments, which now represent 15 percent of the total portfolio.

On the asset side, consumer loan growth remained strong in the third quarter with about 1.8 billion of originations, and commercial loan growth moderated somewhat due to the seasonal factors we typically see in the latter part of the year. Overall, we remain pleased with the level of loan growth we've seen thus far.

Looking forward, as things stand right now, we expect to see net interest income trends continue in the mid single digit year-over-year range for the next couple of quarters. The scenario assumes asset growth at levels similar to recent periods, a little bit of modest margin contraction, and an environment with measured pace of interest rate increases and some reaction to those increases along the curve. That being said, we're still continuing to take an opportunistic approach. We're intently focused on NII growth. We're getting very strong balance sheet growth, and we've spent an awful lot of time this quarter driving the deposit side, so we're beginning to see great results, as George mentioned earlier. But we're not done. And obviously, driving deposits is the best action we can take. Given the challenging rate environment we've come through and concerns for '05, we're going to continue taking a very hard look.

On the credit quality front, net charge-offs as a percentage of average loans and leases were 40 basis points versus 43 basis points last quarter. NPAs now stand at 48 basis points with continued improvement expected in the near term at relatively good recovery rates. Overall credit trends, including greater than 90 days past due, have continued to improve in the first nine months of the year. As a result of these trends, rating trends within the commercial portfolio and macro trends on the consumer side, the reserve for credit losses was reduced by $27 million during the quarter. We will continue to evaluate these trends quarterly and maintain the reserve at levels appropriate to expected loss rates on the portfolio.

Moving quickly through some line of business detail -- in the commercial line, we're continuing to show great momentum in a number of markets on deposit growth strategies and fee product sales, with average demand deposits up considerably and good commercial loan growth relative to typical third-quarter performance.

The retail line -- we saw much improved trends on the deposit side and consistent performance on the lending side, as George referenced earlier.

In Fifth Third Processing Solutions, we were up 26 percent on a comparable basis year-over-year. Merchant revenue was down year-over-year but up about 27 percent, excluding the impact of sold contracts. EFT is up 24 percent year-over-year, showing the benefits from new customer revenue additions.

In the Investment Advisory line, revenues increased 4 percent year-over-year, with good results on the brokerage and institutional side, and despite some tough comparables and some tax-related and market-sensitive revenues on a linked-quarter basis. That concludes my comments, and at this point, we'd like to open it up to any questions those of you on the line may have.

(Operator Instructions). Your first question comes from Kevin St. Pierre of Sanford Bernstein.

Hello? Am I on now? Okay, I'm sorry; they hadn’t opened my mike. I was just wondering if you could comment on maybe the trends in September. If I look at the mid-quarter 8-K, we had 1.5 billion growth in transaction deposits, which you had said ended up at 1.6 billion. You also had expected an increase in average loans and leases in the high teens annualized rate, where it looks to be -- looks that it ended up at about 10 percent. I was wondering maybe if you could comment on September or other trends which impacted that.

Sure. I think August was a particularly strong quarter for us -- continues to be very, very strong. And obviously the -- or a pretty strong month rather. And obviously, the 8-K was based on what we were seeing in August at that point in time. I would tell you September, we did see a dip in transaction account balances early in the month, but by the end of the month, those were picking back up and showing very strong improvements again.

Okay, thank you.

Your next question comes from Mike Mayo of Prudential Securities.

Good morning. Could you give a little more color on the outlook for the margin, and what you're doing to improve your posturing toward higher interest rates? I know last quarter, you said you took a little more interest rate medicine or corrective actions. Where are you in that process? Are you in the second inning or ninth inning? Just where are you?

I would say it's a game that continues to go on. As I noted in my comments, Mike, we did terminate about 2.2 billion in received fixed swaps during the quarter. That obviously provides considerable benefit in a rising rate environment. We continue to be intently focused on driving NII growth. The balance sheet growth is coming on. The real key is to drive the deposit side to make sure the profile continues to do what we want it to do. And as George noted and I noted, I think we're seeing some very, very strong results on the deposit front. And as you know, that's the best medicine we can implement, if you will. I'm not, unfortunately, able to control the level of market rates. But one of the things we can do is make sure we are pushing the right business levers and seeing the right activity coming through.

You said you expect modest margin contraction ahead? What are you thinking of?

That really depends on the overall level of rates, to be honest with you. I mean if you had said we'd see the rally in rates we saw over the last week or so, the last time we chatted on a conference call, I wouldn't have guessed that that would have happened. So I think it depends on what happens with market rates going forward. At the end of the day, I would say modest is the right way to look at it.

Okay. Thank you.

Your next question comes from David George of A.G. Edwards.

Good morning. A couple quick questions. I was wondering if you could comment first on just your loan pipeline as of the end of the quarter, how that stands, and then a couple other follow-ups. On the provision, do you guys -- and maybe you don't manage it this way -- but do you have a floor as it relates to the reserve to loans on a percentage basis? And I was just want to get a sense of how we should think about provision levels the next couple of quarters. And then as well, I want to get a sense of your pipeline or backlog at Fifth Third Processing. Thank you.

On the pipeline -- this is George -- for the commercial loan side, the quarter ended up pretty strong. And the backlog at the end of the third quarter was actually a little bit better than we thought at the end. And some of those transactions didn't close in the third quarter; some of them closed early in October. So the commercial pipeline really looks pretty good.

Our consumer direct loans and the loans we make through the branches have remained very strong. September was actually a pretty strong month there. Now obviously, our indirect auto business has slowed with the zero percent interest rates out there, and the captives work on that side. That slowed a little bit, so that's counter to that. And it seems like the captives are still putting out those low rates there, so that mitigates it somewhat on that side. Maybe I'll let Mark answer the next piece.

Sure. On the provision side, we historically have always and continue to perform a real comprehensive analysis every quarter, looking at the overall level of credit trends that we're seeing within the portfolio. And as we did that, went through that process this quarter, the credit trends are improving faster than we had expected, quite honestly, at this point in time. And that caused us to stay within our guidelines and take the $27 million. It's a pretty rigorous process.

At the end of the day, I think everybody on the call knows, there's a lot people who watch this and care about how this process works. And we try to adhere to it pretty religiously and really don't deviate from it.

I think our reserves -- I think if you look at those as a percent of nonperformers at the end of the quarter, are 279 percent. And I think at the end of last quarter, the peer group was about 233. So although we reduced the provision, we remain pretty well reserved.

Absolutely.

I just had a follow-up as well, guys, on Fifth Third Processing -- how your backlog of new business is there.

Fifth Third Processing is going extremely well. I think you've probably seen, we've hired a new fellow to run that for us -- Charles Drucker, who is doing a bang-up job. The pipeline is increasing and continues to be very, very strong. And in addition, we're heading into the fourth quarter here, which obviously, just from a seasonal basis, is traditionally the strongest quarter for FTPS.

And we've also brought another executive on, Donald Boating (ph), who came to us from Wells, who is really doing an excellent job on the merchant side of the business. And I think you're going to see some good results out of there.

Okay, guys. Thanks.

The next question is from Fred Cummings, KeyBanc Capital Markets.

Good morning. Can you touch on your buyback? I'm surprised you didn't buy back more shares this quarter, Mark. And kind of how you're thinking about repurchasing your stock on a good-forward basis?

Sure. Absolutely. I would say we continue to look at that opportunity on a regular basis, Fred. We're obviously matching it off a number of different variables, including profiles and everything. The key issue to keep in mind as you are looking at our buyback strategy and our capital levels is we will absolutely always target a AA profile. That's the intent of the organization, is to maintain a AA credit rating. I think right now, our AA peer group is somewhere around a 735 or 740 tangible common ratio, I think as a peer group average. And I think the right way to look at it is going forward, we will continue to be opportunistic; we'll continue to look at it. But we will always maintain that AA profile.

Your next question comes from Ed Najarian of Merrill Lynch.

Good morning. My questions were partially answered, but I was wondering if you could revisit the Electronic Payment Processing business, and in conjunction with that also, the investment advisory business. Both pieces of revenue were a little bit lighter, I think than expectations. And while the processing number, you know, from an underlying growth rate, was pretty strong, it was still sort of a decelerating trend a bit from prior-quarter growth rates. So I wonder if you could give any kind of an outlook of what you expect from a revenue growth standpoint in either of those two businesses. Thanks.

Sure, we can cover both for you. First of all on the FTPS side, I would say the third quarter is always, relatively speaking, seasonally low. And I think, you know, if you listen to the retailers and believe the retailers, the hurricanes affected some things as well; and retail sales is obviously what drives the credit card volumes in that piece of business. So it does tend to be seasonally weak. There were also some other factors, potentially, impacting retail sales also.

On the IA side of the shop, it's primarily been brokerage -- the slowdown in brokerage is what's impacting that, if you will. We're continuing to see very strong growth in the institutional and other areas of the business. Brokerage has just been a tough slog through the summer and third quarter here.

Okay. So we're to take away from that that if we feel that brokerage is sort of a seasonally weak business in the third quarter throughout the industry, and we look for that to come back, that we would expect better growth rates in the IA piece. And sort of a similar situation, both seasonally and from a hurricane standpoint on the processing fees?

I think that's absolutely correct.

Okay, thank you.

But I think those 26 percent up on a comparable basis for the processing business is a pretty good number. And we feel pretty good about that business going forward.

Your next question comes from Joe Stieven of Stifel Nicolaus.

Hi, guys. Most of my questions have been answered, so I'll follow it up with sort of the final one. You guys announced you're buying a small charter in Missouri. Can you just sort of talk about your expansion plans in that state? Thanks, guys. Good quarter.

Sure. This is George. We've got about 25 or 26 people right now over in St. Louis. And as you know, Missouri opted out of the interstate banking thing, so we had to buy a charter to open a branch there. Typically, we would have just built bricks and mortar. But our loan volumes, our fee businesses, our international business, a number of the products that we're in have been doing very well over in that St. Louis market. So we're going to open some offices over there, and continue to expand into that market. Like I said, we have 25 or 26 people there right now. We continue to hire over in St. Louis, and we like that.

We're doing the same thing also over in Pittsburgh. But as you know, that St. Louis is a pretty good town. They've got a good baseball team over there too.

We've heard that! Thanks, guys. Good quarter.

Your next question is from Gary Townsend of FBR.

Good morning, fellows. The questions have been answered. Thank you.

Your next question is from Vivek Juneja of J.P. Morgan.

Hi. Mark, a follow-up for you and your capital comment -- if you mentioned that AA banks are around a tangible common of 745, should we expect that that's where you're headed to, since your capital ratios have been coming down consistently quarter after quarter?

Absolutely not. The thought process, Vivek, is we will definitely maintain a AA profile. That's the peer group average. I don't think we've ever targeted being average in much of anything around here. And I think on the capital level, you can assume the same.

That being the case, there are certain factors that affects those levels from time to time, that may impact us. But we will always maintain that AA profile.

Thanks.

Your next question is from Dennis Laplante, Keefe Bruyette & Woods.

Thank you. Mark, could you comment on exactly after all of the actions that you've taken this quarter related to asset liability, where you stand for given change in rates, say 100 basis point up, or whatever dynamics you want to provide.

Again, Dennis, I think what I'd say is it just depends so much on the overall level of the shape of the curve, on the overall of our short rates versus long rates -- any number of different things. Suffice it to say, the actions we've taken have significantly improved our profile. And we're continuing to focus on the business actions that can drive the performance we need to see going forward as a company, as opposed to sitting around spending a lot of time worrying about the direction of interest rates.

Thank you.

(Operator Instructions). At this time, there are no further questions.

Thank you all for listening in this morning. Since we no longer have any questions in the queue, I guess everybody's fairly busy. We'll let you get back to work. Thank you for your time.

Thank you.

This concludes today's Fifth Third third-quarter 2004 earnings conference. You may now disconnect.