Truist Financial Corp (TFC) 2003 Q3 法說會逐字稿

Good afternoon. My name is

, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Republic Bank Shares third quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

The company advises that this presentation may contain certain forward-looking statements. These statements are not historical facts, but instead, represent the company's beliefs regarding future events, many of which by their nature are inherently uncertain and outside of the company's control.

It is possible that the company's actual results and financial conditions may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.

Thank you. You may begin your conference.

Great. Thank you. Welcome and good afternoon, this is Ken Coppedge, President and COO of Republic Bank. Thank you for your interest and participation in our conference call reviewing our third quarter results.

I know many of you were expecting to hear Bill Klich, our Chairman and CEO deliver this presentation, and I know Bill would dearly love to have joined us to be able to report on the continuing positive developments at the bank.

Unfortunately, Bill's father passed away on Monday and he is rightfully with his family. We certainly want to offer our sympathy to Bill and his family at this time.

I am joined here today in St. Petersburg by Bill Falzone, our Chief Financial Officer and other members of Republic Bank's Executive Management team.

Needless to say we had a very eventful quarter, with the good news being that all the events were generally very positive. We've very pleased with the continuing improvement that we are experiencing across every aspect of our business.

Before I turn the presentation over to Bill Falzone to get into the details, I'd like to highlight several areas of progress that have been a strategic focus for us over the past several quarters.

Over the past year, we've made a concerted effort to improve our asset quality and reduce our level of non-performing assets. In the second quarter we sold our largest single non-performing, the dreaded Delaware Hotel. And this quarter we were successful in exiting our next three largest non-performing assets.

I'm very happy to report that as of September 30th, our NAP's as a percent of total assets is down to .47%, while our allowance is now at over two times our remaining non-performing assets.

While it's always dangerous to brag about asset quality, if you compare Republic Banks loan quality at the end of the third quarter with our peer group of banks, for the first time in a number of years, you'll find that we compare very favorably by just about any measure.

It goes without saying that we really like this level of asset quality, and you can rest assured that we are diligently managing the quality of the remaining loan portfolio while keeping a very close eye on the overall credit approval process as we win new relationships for Republic Bank.

From a production perspective, we're experiencing strong growth in every line of business, again, continuing the positive trends we've established over the past several quarters.

We're very gratified that our customer value proposition of being a bank that's large enough to provide sophisticated financial solutions while still focusing on delivering an exceptional level of service that can only be delivered by a local community focus bank, has been very well received in the marketplace. Our production levels in our existing lines of business continue at a very strong pace.

But we're also out looking, continuing to look for additional opportunities to exploit across our market. One such area we've identified is in the area of small business market. We're in the process of expanding our business banking lending unit across our footprint to take advantage of the opportunities we see in this dynamic market segment.

In addition, this initiative gives us the opportunity to leverage our branch network of 71 branches in 17 of the most attractive counties in the state of Florida.

Finally just a quick update on the progress we're making in our marketing partnership as the official bank to the Tampa Bay Buccaneers. Even though we've only had two home games this year, we've generated over 500 new branded Buccaneer accounts, generating about $20 million in deposits.

I can't overemphasize the positive impact that this association with the World Champion Buccaneers has had on the bank. The recognition among our customers and our prospect base has been outstanding and our employees have rallied around this association as well.

Now I'd like to ask Bill Falzone, our Chief Financial Officer, to provide you with some detail on the third quarter financial performance, after which we welcome your comments and questions about our third quarter results.

Bill?

Thank you Ken. Ken, I'm going to address most of my financial comments to changes from the trailing quarter. There are also several unusual items in our results this quarter, which I'll try and isolate for the group as I go through the numbers.

Our earnings for the third quarter of 2003 were 4.9 million or 27 cents per share. There were a number of quarter-to-quarter changes that produced fluctuations in our earnings, which were clearly unusual in nature.

First, this quarter's results include a 3.75 million recovery from the claim we had been pursuing on our fidelity bond, which contributed 2.4 million or 18 cents per share to earnings.

Also during the quarter we recorded several charges related to ongoing litigation and to lease impairment on an unused building, which reduced earnings by five cents per share. Together those items contributed a net of 13 cents per share to third quarter's results.

For the trailing quarter, net income was 1.6 million or 13 cents per share, and you may recall that last quarter we recorded a $1.5 million loss on our former largest non-performing asset, the Delaware Hotel, which reduced per-share earnings by seven cents.

Turning to net interest income and the margin in this quarter, our net interest income was 18.3 million, and our net interest margin was 2.78%. Growth in average assets continued through the third quarter with earning assets growing by $61 million or 10% on an annualized basis. This growth was primarily in the average balance of our loan portfolio, which was up 59 million. Despite this solid growth and the income benefit from a larger pool of earning assets, there were two factors that caused net interest and net interest margin to decline on the trailing quarter basis.

Most of you are familiar with accounting standard number 150, which required us to reclassify the expense on our trust preferred stock, from the minority interest category to interest expense, beginning with the third quarter of 2003.

That accounting change specifically prohibited any prior period reclassification that would have provided for comparability. This change in reporting reduced net interest income on a comparable basis to the second quarter by $674,000 and also reduced net interest margin by nine basis points.

Also during the third quarter of 2003, mortgage securities pre payments increased rapidly, as borrowers rushed to refinance their loans when a decline in mortgage rates during the past year began to reverse. This factor accounted for $775,000 drop in net interest income and for ten basis points of the margin decline.

Together, these two factors reduced net interest income by $1.4 million and accounted for the entire 19 basis point decline in net interest margin. Mortgage securities pre payments are expected to lessen during the fourth quarter from their high point during the third quarter. In fact, we've seen a 31% decline in pre payments in the month of October, and further reductions in that rate of pre payment are expected throughout the quarter so we expect the pre payment effect to be less of a factor in the fourth quarter.

Elsewhere on the income statement, our non-interest income was $5.3 million for the third quarter, compared to $4.3 million for the trailing quarter. Gains on sales duly originated fixed rate loans were up $400,000, to $1.5 million for the quarter, and deposit service fees also increased. Also during the quarter, our loan service fee income includes a $600,000 recovery of the valuation allowance on loan servicing rights that we set aside early this year and late last year.

Non-interest expenses were $21.2 million for the third quarter this year, a $900,000 increase over the trailing quarter. The litigation accrual and the lease impairment charge that I referred to earlier accounted for $1.1 million of third quarter's expenses, while the $1.5 million loss in the hotel was included in last quarter's numbers. Other increases in the current quarter came from higher costs associated with loan production, increased advertising costs, including the Buccaneer sponsorship that Ken referred to, and adoption of expensing of stock options on a prospective basis.

The loan loss provision was a $5.4 million credit for the quarter and included the $3.75 million bond recovery mentioned earlier. Also we realized the number of other recoveries of reserves allocated to problem loans that were either sold or disposed of for amounts greater than the impairment on those loans. Our loan loss provision is directly related to the improvements made in acid quality during 2003. Since the end of 2002, non-performing assets are down by 66%, and our largest non-performing asset is now a $1.2 million commercial loan that is well secured.

This continuing positive trend in credit quality is further evidenced by the diminishing level past due loans in our portfolio. Loan delinquencies which include all loans that are 30 days or more past due are now down to less than $20 million, and our delinquency ratio stands at 1.2% of total loans, which is a record for this company.

On the balance sheet, loan growth in the third quarter was somewhat less than in prior quarter, largely from seasonal factors, but we still maintained our double-digit growth rate during the first nine months of the year. Total loans, including loans held for sale, grew at annualized rate of 11% during the first nine months of the year, with loan balances increasing $126 million.

That overall growth rate of 11% includes a 20% increase in our portfolio of Florida loans, which now comprises 92% of our portfolio. The portfolio of out of state loans continued to decline, in fact, declining 32% and is now at eight percent of the total portfolio. Loan production during the nine months was $945 million, with third quarter's production level at just under $300 million.

Our production level in 2003 is 74% higher than last year, with all lending units showing excellent growth. Commercial and commercial real estate loan production is up 78% over the same period last year, and consumer loan production is up 34%. Residential loan production is up 106%, with a major part of this increase coming from fixed rate loans during the 2003 refinance boom.

However we continue to produce a greater and greater amount of adjustable rate loans, which are retained for portfolio, and the growth in our adjustable rate loan production, is up 49% over the same period last year. Lastly, our stated book value per share at the end of September was $15.82, down from $16.13 at the end of June. The subordinated debt that was converted into equity in the third quarter was not diluted, since the conversion price was above book value, but the rampant decline of the bond market reduced the available for sale adjustment to the equity accounts, and is the reason for the book value decline. Jim, that concludes my financial comments.

Thank you, Bill, April we now would like to open the floor for any questions or comments on our third quarter performance.

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ariel

.

Hi guys, good quarter. Bill, I was wondering if you could just walk us through to sort of whittle down to a core number if you take the sort of credit to the provision of $5.3 million, which includes that $3.75 million credit, then from that subtract the

write-ups of $556,000?

That's correct.

And then you add back in the $550,000 in legal litigation?

And the lease impairment.

And, but that's $540,000, right?

Yes, that's correct.

Okay, and then you tax the fact that using sort of a 26% level?

Yes, our effective tax rate is about 37.5%.

Okay, 37.5, so basically we get to the core number which is 14ish or something?

Ariel, I think you have the items there, I believe that the calculation works out to a core number of about 2.4 or 2.5 on an after tax basis.

Okay. Yep.

All of the items. I believe that comes out at about 21 cents a share if we do it on that basis.

Okay, thank you.

Thank you, next question.

Your next question comes from the line of Jeff Davis.

Good afternoon.

Good afternoon.

Two part question and sort of following on Ariel's question, but my take is a little bit different as opposed to the numbers sort of go up and down, is from an earning power perspective, Bill, to get the company's earnings up, we've got to get the margin up. I assume I'm not off base there. In looking at your margin, do we not have some leverage and that the cost deference is still relatively high? And then secondly, in maybe allowing that your market has somewhat higher cost of funds.

And then secondly on the security side, and I know we're focused on booking loans, but do we not have a little bit better reinvestment yields and what we've been dealing with and where the overall yield is on the securities portfolio? And if that's the case, assuming the Fed stays on the sideline through 2004, but the yield curves stays steep, do you we not get a little bit of margin recovery as we go through next year?

Yes we should

and if we kind of pick that apart, on the funds plus side, we will continue to see some benefit from repricing in our CD portfolio, although not as significant as we have seen over the first nine months of the year. There is still some room there for cost reduction.

I think that the, what we see from here to be the big improvement of the margin, will be the continued growth in the loan portfolio as well as what we are hearing from various houses projecting prepayments of very significant abatement of mortgage securities prepayments, which very adversely affected our margin during the quarter.

OK, so and so your thoughts about the margin as, if we're looking out two, three quarters.

I think that given the current shape of the yield curve, we're still going to be under margin pressure until that resolves itself, but there's no reason why the growth in the balance sheet and a less prepayment affect we can't begin seeing some gradual increases of margin as we go through 2004.

OK, and then if I could just do one follow-up along the same lines. What are the thoughts about, with regards to getting the institution, and I'm just going to pick a round number, because it's round, a one oh, ROA is that, I know, and you all have done a ton of heavy lifting, but you still have some to do. Is, I mean what are you thoughts? Is that an eight-quarter proposition, it's, you know, it's three-year proposition, or it's, you know, six quarters, if the Fed brought short rates up 75 dips and stopped?

Bill?

, I'm going to ...

And I'm asking from a general perspective, not a ...

I think that certainly we are, particularly in the margin, we are not where we need to be to get to that target that you just talked about.

OK, structurally?

We've got to see a more, a different slope in the yield curve in order to get there. We are seeing though, very good growth in the balance sheet and continued good production levels. So when the, when the yield curves becomes more favorable, there's no reason why we can't see margin growth and revenue growth begin to take off.

Again, I hesitate to give you a date on that, because I think a lot of us in the banking industry are hostage to the current yield curve environment?

Right, us too, us too, OK, that's fine, that's fine. You know it was a good quarter and I'm no in any way trying to take away from that. OK, thank you.

Great, thank you

.

Your next question comes from the line of

.

Good afternoon.

Afternoon

.

Bill you referred to a item in the margin, one of the two items affecting the margin in the third quarter being the accelerated amortization in MBS premiums, and I think you used a figure of 775,000 ...

That's correct

.

Two questions there. Can you, as you did with other items, can you compare the accelerated amortization in Q3 to that, which we would occurred in the June quarter, and can you give us a sense for the amount of remaining premium on the books at September 30th.

OK, let me answer the first question

, the $775,000 number that I gave you there was a the increase in premium amortization over the trailing quarter.

I see, OK. So that was not just some estimate of what was accelerated beyond say a normal level, but that is just the dollar change quarter to quarter.

yes.

I'm sorry. Thank you for clarifying that.

All right. As to the remaining amount of premium in the portfolio, we have tried in our investment strategy to purchase low premium securities. Right now we have on the books approximately $9 million remaining of premium on mortgage securities that we believe with a lower level of prepayments will not have that same amortization effect on a quarterly basis going forward.

So more a matter of just the normal $9 million amortized on the interest mapped out over the estimated life of those securities.

Yes. Certainly the duration of those bonds, based upon prepayments during the third quarter was very much shorter than it ought to be going forward.

OK. Can you give us an estimate of what that average duration would be?

I can't right now. But I'll get that number and see that it gets around.

Thank you, Bill.

The next question comes from the line of

.

Good afternoon, gentlemen. My question was on the net chargeoff. I noticed you had the $1.95 million in net chargeoffs related to your commercial real estate multi-family portfolio. Was that related to those three largest credits that you mentioned getting rid of in the quarter?

Yes, primarily it was. That reflects the sale of those non-performing assets that had been previously reserved against.

Got it. That's all I had. Thank you.

Great. Thank you for your question.

Your next question comes from the line of

.

Good afternoon guys.

Good afternoon, John.

Question relates to your outlook for securities gains going forward given the move in rates. Bill, where are you from an unrealized gains standpoint and what should we expect to be a normalized level of securities gains assuming rates remain stable in a current environment.

, given the -- right now our portfolio has a net unrealized loss in it after the change in the bond market during the third quarter. I would expect that gains on sale of securities will be very limited in the foreseeable future.

OK.

repricing over the next few quarters? I know that you said it was less of a source of benefit going forward, but do you have any specific numbers?

, excuse me. The first part of your question got cut off there. If you could repeat that please.

Yes, looking at the CD maturity schedule. I know you said that you expect less benefit going forward relative to the first nine months of the year, but do you have an updated schedule of CD maturities.

I don't right now,

, but we can get that information for you . pantel: OK, great. Thank you.

At this time, there are no further questions.

Great. I want to thank everyone for joining us this afternoon and appreciate your participation in our results. Thank you very much and have a great day.