PNC Financial Services Group Inc (PNC) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to F&M Bancorp's quarterly conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question and answer session with our analysts, and instructions will follow at that time.

If anyone requires assistance during the call, please press star, then zero on your touch-tone keypad.

As a reminder, this conference call is being recorded.

Good morning, everyone.

This is Kaye Simmons, Chief Financial Officer.

Thank you all for participating on F&M Bancorp's fourth quarter conference call.

By now, you all should have received a copy of the press release.

If anyone still needs one, please call our Investor Relations office at 888-694-4170 and we'll fax you a copy immediately following the call.

With us on the line from management is Faye Cannon, President and CEO.

Faye will introduce the other members of F&M's management team.

Before we begin, however, we would like to remind you all that statements contained in this morning's conference call which are not historical facts are forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include but are not #limited to, factors discussed in documents filed by the corporation with the Securities and Exchange Commission from time to time.

We will begin the call with a brief update on the quarter, and then we will open up the line for questions.

And now, I will turn the call over to Faye Cannon.

Go ahead, Faye.

Thanks, Kaye, and good morning, everyone.

Welcome to our fourth quarter teleconference.

With me this morning are other members of our executive team -- Dave Staufer (ph), Senior Executive Vice President and Chief Operating Officer;

Kaye Simmons, who you just heard from, Executive Vice President and CFO;

Steve Hind (ph), EVP Sales and Marketing; and John Joback (ph), Senior Vice President and Chief Information Officer.

I would like to begin this morning by discussing some of the highlights of our performance for the fourth quarter of 2002.

Yesterday, we announced fourth quarter earnings of 58 cents per share, a 16% increase over the prior year.

Net income for the fourth quarter also rose 16% to $6.3 million.

Return on equity was 13.57%, and return on assets was 1.24%.

Our double-digit earnings growth was driven primarily by an 8% growth in revenue due to strong deposit and loan sales, prudent expense growth, and loan and credit losses.

Total average assets grew by 9% due to the resumption of loan growth, which was up 10%, and continuing growth in our deposit products, which were up 5% from last year.

Asset quality remained exceptionally strong in the fourth quarter, with only .12% of assets in nonperforming loans.

The allowance for credit losses was 13.7 million, or 1.05% of total loans, with annualized net charge-offs of only .14% of average loans outstanding.

As I stated in our earnings release, our double-digit earnings growth is the result of the diversity within and consistency of our business model, coupled with the outstanding efforts of our 700-plus team members to provide needs-based selling, exceptional service, and the consulting that helps our clients achieve their financial goals.

During the quarter, we made significant progress on technology-strategic initiatives, with tech imaging fully functioning and the selection of a new core processor system.

John Joback, our Chief Information Officer, will provide with you further details on this significant investment in our future in his comments during this Webcast.

My colleagues will provide more detail on key financial information and other strategic initiatives.

We'll follow that with a question and answer session with our analysts.

At this time, I will turn the meeting over to Dave Staufer.

Thank you.

Good morning.

This is Dave Staufer, and my responsibilities include the insurance, mortgage banking, and wealth management businesses.

I'll be focusing my comments on our non-interest income.

We continue to be pleased with our revenue momentum.

Reflecting the continued strength in the housing sector and low mortgage rates, our mortgage banking business had another strong quarter.

Mortgage origination and closing fees were up 114% over the prior year's quarter due to the strong growth in loans originated.

Net gains on sale of mortgage loans declined slightly from last year as a higher proportion of loans originated were held in our portfolio rather than sold to the secondary market.

Due to the ongoing strong mortgage refinancing activity, the residential mortgage portfolio increased 26% over the previous year's quarter.

Servicing fees, net of amortization, were down due to $199,000 impairment charge on the value of mortgage servicing rights in the fourth quarter.

This impairment resulted from the significantly higher prepayments of the service mortgage portfolio in the fourth quarter.

We continue to see momentum in this business line.

However, with the prospect of rate increases and the lack of supply in used home market, this momentum could moderate somewhat.

Insurance income was $2.2 million in the fourth quarter '02 compared to $1.8 million in '01, a 20% increase.

A significant increase in insurance sales to our core bank customers and the benefit of increasing premiums drove our strong performance.

Corporations continue to experience significant price increases for the insurance they are carrying.

While we expect to see premiums increase for our current customers as a result of this, it's difficult for us to project what the impact will be on our revenues in the coming months.

The wealth management business is an area of strategic focus for us.

Fee income from our trust and brokerage business lines declined 16% from the prior year's quarter, but rebounded 73% from the previous quarter.

Third quarter trust revenues included a net reduction in fee income of approximately $360,000 to refund certain trust clients for #a billing error that resulted in overcharge to those accounts.

Year-to-date wealth management income declined 17% from the prior year, due primarily to market declines in assets under management.

For the fourth quarter, however, assets under management did increase by 3% from the third quarter of '02.

At this point, I will turn it over to Steve Hind.

Thank you, David.

I'm Steve Hind, and I'm responsible for the sales and marketing efforts of the company.

I'm going to focus #my comments on the sales efforts for the quarter.

We continue to sell more to our existing clients and attract new clients thanks to the efforts of our team members and their focus on cross-selling and providing superior customer service.

Many core product categories hit solid increases during the quarter, including loans, checking accounts, and savings accounts.

Specifically, average deposits of 1.57 billion for fourth quarter 2002 grew 76 million, or 5% since last year.

For full year 2002, average deposits increased 88 million, or 6% from the prior year.

Interest and non-interest checking, market rate, and other savings accounts grew in total 92 million, or 11% from last year's fourth quarter.

These results were driven by growth in primary account relationships with consumer and commercial clients.

And CD rates have declined over the last year, in line with overall market rates.

Our deposit clients have chosen to place their funds in our lower cost, more liquid deposit products.

Loans averaged 1.27 billion for fourth quarter 2002 and 1.202 billion for full year 2002, up 10% and 2% respectively compared with the same period in 2001.

Loan growth was driven by robust sales in commercial, commercial real estate, and residential mortgage loans.

The average balance of the commercial loan portfolio increased 23% over last year's fourth quarter, as commercial loan demand increased substantially in the second half of 2002.

Commercial real estate demand also rebounded in the second half of 2002, which resulted in a 17% increase in this portfolio compared to 2001 fourth quarter.

The strong gains in these loan categories were partially offset by an 11% reduction in consumer installment loans from the prior year's quarter.

This reduction was primarily in the indirect automobile portfolio.

This portfolio has been affected by the zero percent financing programs offered by the automobile captive finance companies.

One of the strategic initiatives that we undertook in the past year was the evolution of our consultative sales culture.

In the last six months, we rolled out a consultative sales that develops #and sharpens our associates' sales coaching, client prospect and (ph) relationship management skills, the disciplines and practices associated with these, as well.

We have developed tools and processes to help facilitate effective partnering across our team of companies so that we offer our clients the right products at the right time via the right delivery channels.

And with that, I'd like to turn the call over to John Joback.

Thank you, Steve.

Good morning.

My name is John Joback.

My responsibilities include information technology and operations functions within the bank.

I'd like to bring you up to date on a major technology initiative that we announced during the fourth quarter.

In December, we contracted with Orrin Technology (ph) to implement a comprehensive and integrated core processing and customer interaction solution to significantly improve our enterprise-wide efficiency.

We have reached a new phase in an enterprise, one that requires to us deliver more effectively to our customers on the front line while allowing us to improve the efficiency of the bank through improved back room and processing administration.

Our partnership with Orrin will align our robust sales culture with the overall delivery of a diverse range of services to improve our operational efficiency.

We will have enterprise-wide information and tools to proactively target new markets and enhance client retention and growth opportunities, streamline the process by which we deliver new services to scale to our customers.

I'll be happy to address any of your questions during the analysis question and answer session.

Now, I will turn the call over to our CFO, Kaye Simmons.

Thank you, John.

I'm going to focus my discussion on net interest margin, operating expenses, and credit quality.

Net interest income on a tax equivalent basis was 20.4 million in the fourth quarter of 2002, up 11% from fourth quarter of last year.

The increase in net interest income was largely due to solid earning assets growth and core deposit growth, and increases in net interest margin from 4.19% a year ago to 4.24% in the fourth quarter of 2002.

The earning asset growth of 161 million included an increase of 111 million in the loan portfolio and 85 million in the securities portfolio.

The margin expansion in the fourth quarter reflected a combination of higher-yielding loans and lower cost core deposits in the mix of assets and liabilities, and the decline in short-term rates relative to longer term rates in the fourth quarter.

Average funding costs declined 105 basis points in the fourth quarter 2002, while average net asset yields declined 85 basis points.

Net interest income increased 6% annualized for the third quarter -- from the third quarter of 2002.

This increase is largely due to the resumption of loan growth, which was funded by core deposit growth.

Net interest margin declined 10 basis points on a linked quarter basis due to prepayments of mortgage loans and mortgage securities.

Now we'll move on to a discussion of our expenses.

Non-interest expense was 18.1 million in the fourth quarter of 2002, up 9% from the same period last year.

Non-interest expense for the full year of 2002 was 69.3 million, an increase of 6% from 2001.

The increase in expenses was primarily driven --were primarily associated with incentive compensation tied directly to Bancorp's revenue and #overall profitability performance, as #measured by *our team-based compensation programs and sales programs, as well as #increases in marketing and other research costs to support several strategic initiatives.

Moving on to asset quality, F&M Bancorp asset quality remains very strong throughout 2002.

Fourth quarter credit losses were only $387,000, or .12% of average loans outstanding on an annualized basis.

No provision for credit losses was made for the fourth quarter due to the #continued strong performance of our loan portfolio.

For the full year 2002, the provision of $1.3 million represented #approximately 83% of our net charge-offs.

Losses incurred in the fourth quarter were primarily in the consumer portfolio and were stable compared to previous quarters.

The loan portfolio is well diversified, split nearly equally between our consumer and commercial borrowers.

Non-performing assets as a percentage of assets stood at .12% at December 31, 2002, compared with .10% at December 31, 2001.

The allowance for credit losses of 13.7 million was 1.05% of total loans at December 31, 2002, compared with 1.20% of December 31, 2001, and 1.14% in September of this year, reflecting the quality of our loan portfolio.

And now we will move to the question and answer session with our analyst community.

We invite your questions at this time.

For our analysts listening in at this time, if you have a question, you will need to press the one key on your touch-tone phone, and you will hear a tone acknowledging your request.

Please identify your name and firm prior to asking your question.

Questions will be taken in the order they are received.

If your question has already been answered, you may remove yourself from the queue by pressing the pound key.

If you are on a speakerphone, pick up the handset by pressing the button.

One moment for the first question.

Our first question comes from Matthew Peak from Davenport.

Please proceed.

Good morning.

Good morning, Matthew.

I have a few questions for you here.

I guess the thing that stood out the most was the no provision in the quarter, and I guess, just trying to get an idea as to how to forecast that going forward, if you -- do you have kind of a targeted reserve as a percentage of loans that you're looking for?

It's kind of moved around a little bit, and right now it's around, what, 1.04% of total loans?

Matthew, this is Kaye Simmons.

It's actually at 1.05% of total loans right now.

We don't have a targeted percentage of allowance that we are trying to maintain.

We are required, under accounting rules, to maintain the allowance based on the current level of impaired loans in the portfolio today.

Now, we've looked at all of our factors that we take a look at to understand where we are in terms of credit quality, and our credit quality has improved, if you look at our overall portfolio, consistently throughout this year.

And it was because of this credit quality improvement that we really could not make a provision in the fourth quarter.

So the allowance will be where it needs to be to justify what impaired loans are in the portfolio at the time that we're actually reporting.

Okay.

What was the absolute number of non-performers?

Non-accrual loans and total loans, I believe, were about 2.9 million.

That's (ph) for the other real estate in non-performing.

Okay.

But I can check on that.

Past dues?

That was both of those together.

Included?

Okay.

Right.

Okay.

The -- as far as the sales initiatives that you have been enacting for a while now, do you have any sort of idea as to how many products per household?

Yes.

We are -- this is Steve Hind.

Hi, Steve.

We are today at #2.242 services per household.

We're -- in terms of products per household, that's a higher number, but we look at services per household.

And that is only our primary banking customers.

It's not our trust and insurance and wealth management customers.

I assume that's moved up ...

Yes.

... in the past year?

Okay.

Do you know from where?

We really started tracking that this year.

Okay.

So I can't give you -- in terms of data that we're real comfortable with, but we're comfortable with the #2.242.

Okay.

This, I guess, partnership with Orrin, do you have some sort of a target #efficiency ratio going forward?

Is there a goal #that you have in mind that you can share?

Or do you have an idea that there's more cost saving or more revenue enhancement, where the efficiencies are going to be coming from?

Matthew, this is Faye.

What we're truly looking to do is to get more efficient, but also provide better service to clients.

The whole point of going with this enterprise solution is really to have our front-line people deliver more products more efficiently on the front line.

So from a targeted efficiency ratio, you know, we always want to go down, and we know where our peer group is, and we're working our way toward that.

Okay.

So it sounds like it's more from revenue enhancement?

It is a combination of revenue enhancement and efficiency.

Okay.

All right.

Thanks for bearing with me here.

That's okay.

Just a couple more.

That's all right.

The last new branch you opened was in Howard County.

Yes, Waverley Wood (ph).

In the third quarter?

Yes.

How is that branch doing?

Doing well.

Can you elaborate?

It's truly a financial marketplace ...

Yeah.

...

Matthew, and as you know, we have just started this over the course of the last couple of years.

Right.

And the whole point is really to bring the whole team of companies together there for client delivery.

In terms of their deposit growth, you know, it's growing there.

As you know, with any new branch, it takes a little bit of time to get that core deposit growth funded there in that particular branch.

But we are very pleased with the traffic.

We're very pleased with the products that we're delivering throughout our team of companies at that branch.

Okay.

Matthew, this is Dave Staufer.

Also, to reiterate about that particular branch, it #has been well accepted within the marketplace.

It was also the consolidation of another branch that we elected to close and relocate to a much more beneficial market area for us.

Right, okay.

And you said in the second half of the year there's substantial commercial loan demand -- picked up a lot.

Can you give me an idea as to kind of the typical size of these loans?

Yes.

Matthew, this is Steve Hind.

I will represent it this way.

You know, we really view our sweet spot with commercial loans and commercial real estate in the 500,000 to a couple million, and that's -- you know, that's really where these loans are.

We just -- I will be very candid.

As a result of some pretty good, disciplined sales routines, prospecting, as well as focus on current clients and the fact that we are in some markets that, you know, we're blessed with some good economic markets here, we saw, really, demand across a number of different areas and a number of different geographic regions that were all in that range of those size credits.

There wasn't, you know, one or two major credits that are in there.

It was really just a lot of our bread and butter business, and I would say just good, disciplined, proactive sales on our associates' parts.

Okay.

As for 2003, are you-all providing any guidance for earnings per share, or can you give any other sort of guidance regarding to margin or any information along those lines?

Matthew, this is Kaye.

As you know, we don't provide earnings guidance or forecast what 2003's going to be, as a general policy.

I think a lot of the market is going that way.

Right.

You know I got to try, though.

I know you got to try.

Great, you-all.

I appreciate it.

Thanks for taking my call.

Thank you, Matthew.

Thank you.

It appears there are no further questions.

Please continue with any closing comments.

I'd just like to thank everyone for joining us this morning.

We are particularly proud of our progress this quarter, and we will continue to stay focused on our core strategy, which is listening to our clients, understanding our needs, and delivering products and services as flawlessly as possible.

We truly appreciate your participation in this conference call.

Thank you, and have a good day.

That does conclude our conference for today.

You may all disconnect, and thank you for participating.