Truist Financial Corp (TFC) 2004 Q3 法說會逐字稿

At this time I'd like to turn the conference over to your moderator, Mr. Ed Milligan.

Go ahead, please.

Good morning and welcome to the Main Street Banks third-quarter earnings call.

We'd like to call your attention to our special cautionary notice regarding forward-looking statements that you see.

Our agenda for today's call consists of a brief company overview an update on recent developments followed by a discussion of our third-quarter operating results.

We'll then entertain questions verbally or by e-mail and webcast at MainStreetBank.com.

As usual I am joined today by Sam Hay, our President and Chief Operating Officer, and by Bob McDermott, our Executive Vice President and Chief Financial Officer.

As far as a quick company overview, we believe that at Main Street we continue to be the market leader in community banking in Metro Atlanta.

The dynamic Atlanta market has three times the U.S. average population growth and as such we have a unique position combining high operating performance in a strong growth market.

We currently have 22 banking centers in 18 of Atlanta's most vibrant and fastest-growing communities with several more either under construction or in the planning stage and we'll be addressing those in a moment.

As of the end of the third-quarter we had total assets of $2.3 billion.

We have been traded on the NASDAQ national market system since 1997.

Our most recent reported price here as of October 15th was $29.66.

You can see our 52-week range and we're trading near the top of our range.

We have 20 million diluted shares outstanding.

Our market capitalization has increased to $575.7 million and our average daily trading volume of 32,000 shares has increased significantly over the past year.

Trailing 12 months (indiscernible) of 19.26 and total assets, as I said, of $2.3 billion.

We've continue to increase our visibility in the investment community with nine covering analysts having added three in the past year and you see those analysts listed here.

As far as recent developments are concerned, on September 8th we announced a planned management transition whereby Sam Hay will succeed me as CEO of the Company effective January 1, 2005.

This transition has been long planned and anticipated within our management succession plan and I look forward to continuing to serve as Chairman of the Board and supporting Sam and his team in any way that I can.

In other developments, Sam and I presented at the Keefe, Bruyette & Woods fifth annual Community Bank Investor Conference in New York in July.

We recently announced an approximately $50 million capital offering under the shelf registration that we filed last December.

The third quarter was a strong growth quarter for Main Street.

As you can see, we grew loans at 17 percent over the third quarter of 2003 and grew low-cost core deposits at 18 percent over the third quarter of 2003.

We recently opened a replacement banking center in Winder actually in September.

We closed our Lilburn banking center in early October consolidating it into our Tucker office and we're building three new and two replacement banking centers at the current time.

And in August of this year U.S.

Banker magazine ranked us 46 out of 250 banks in the $1 to $5.5 billion asset category as it relates to average ROE over the last 3 years.

As you've probably already seen in our earnings release earlier today, we announced net income of $8.3 million for the quarter, up 17 percent from 2003.

We reported diluted earnings per share of 41 cents versus 36 cents for 2003 which was an increase of 14 percent.

Likewise cash operating earnings per share were reported at 42 versus 37 cents in 2003, also a 14 percent increase.

Our asset quality remains strong and is actually improving and Bob and Sam will address that in a moment.

And as I've mentioned, we had strong loan and transaction deposit growth and Bob and Sam will have comments on that as well.

Well, now I'd like to turn it over to Bob McDermott who will present a more detailed discussion of our third-quarter performance.

Bob?

As you can see on slide 10, the graph at the top of the page illustrates the positive trend of operating income over the past five quarters.

As Ed iterated, the chart at the bottom of the page shows that our net income grew from $7.1 million in the third quarter of 2003 to $8.3 million this quarter for an increase of $1.2 million or 17 percent.

As you can see, operating income grew the same $1.2 million or 17 percent.

The only difference between the third-quarter 2003 and 2004 net income versus operating income is the impact of the amortization of intangible assets.

You can see our per-share data right under that, diluted earnings per share increased from the third quarter of 2003 from 36 cents to 41 cents this quarter.

That is a change of 5 cents or 14 percent.

You can see our operated diluted earnings per share changed the same amount, 5 cents or 14 percent.

The next slide shows our loans outstanding.

Again, if you focus at the graph at the top of the page you can see five consecutive quarters of period-end growth.

On a linked quarter basis, loans grew a very consistent $59 million or 15 percent annually.

The chart at the bottom of the page shows that loan outstandings for the third quarter of 2003 were $1,412,000,000.

Loans outstanding increased to $1,654,000,000 in the third quarter of this year.

As Ed said, that's a $242.6 million increase or 17 percent.

Similar to the loan story, this page illustrates our deposit trends.

The graph at the top of page 12 shows five consecutive quarters of period end deposit growth.

Similarly on a linked quarter basis deposits grew a very consistent $64 million or 16 percent annually.

The chart at the bottom of the page shows our low-cost core increased year-over-year by $132 million or roughly 18 percent.

Time deposits in that same period increased $61 million or 9 percent.

And as Ed said, our overall total deposits increased $193 million or 13 percent.

Our net interest income on a tax equivalent basis you can see on the graph at the top of the page, again, steadily increased each of the last five quarters.

On a linked quarter basis between the second quarter of '04 and the third quarter of '04 our net interest income grew $589,000 or 11.5 percent annually.

The chart at the bottom of the page shows a very similar story.

Year-over-year our net interest income grew $2.1 million or 11 percent.

Our net interest margin declined from 4.55 percent in the third quarter of 2003 to 4.32 percent in the third quarter of 2004.

That's a 23 basis point decline or 5 percent.

The reduction in NIM year-over-year is primarily due to our asset yields decreasing from 6.35 percent to 6.12 percent or 23 basis points.

As Ed said, the third quarter was another quality quarter for Main Street on credit quality.

You can see our annualized net charge-offs for the quarter were 11 basis points, our nonperforming assets as a percentage of total assets was 26 basis points, and our reserve for loan losses for the period end was 1.47 percent.

You can see versus the second quarter of '04 our loan loss reserve increased 2 basis points and that was due to a slight increase in no specific reserves.

The next slide illustrates our trend in non interest income.

You can see that we've had very steady growth in our non interest income over the last five quarters.

On a linked quarter basis our fees are up $400,000 or an annualized 22 percent.

The chart at the bottom of the page shows our overall growth between the third quarter of 2003 and the third quarter of 2004 non-interest income increased $1.3 million or 20 percent.

You can see the largest part of that came from our insurance agency commissions that are up also 1.3 million or 108 percent -- and Sam's going to give you a little more detail on that in a moment.

Our mortgage income declined slightly, $300,000, or 27 percent and our income from SBA was at a record for us at $1.3 million or it was up $900,000 or 225 percent.

The graph at the top of page 16 shows our five quarter trends in operating expenses.

On a linked quarter basis you can see between the second quarter of this year and the third quarter our operating expenses actually declined $640,000.

The chart at the bottom of the page shows that in the third quarter of 2003 our overall operating expenses were $14.4 million and they increased to 15.5 million in the third quarter of this year.

That was a $1.1 million increase or 8 percent.

Again, the third quarter of last year, however, did not have the bank's Moneyhan, Hayes acquisition in it so a good portion of that increase was related to the acquisition.

The only other number I'd like to point out is the trend on all other expenses, and you can see all other expenses year-over-year actually declined $300,000 or 7 percent.

Now I would like to turn the rest of the presentation over to Sam Hay.

As you are accustomed to Main Street, whenever two or more are gathered we like to reiterate our performance objectives in addition to talking about our historical performance, too.

So first I'd like to reiterate those to you and then move on to some color about the third quarter.

Most of you will remember that our objectives include 1.60 percent return on tangible assets, 18 percent return on tangible equity, our previous guidance on earnings growth, EPS growth of 12 to 15 percent annually, we're targeting a dividend payout of roughly one-third of earnings.

We are reaching for a fee income ratio of 30 percent by the end of next year and, of course, our intention is to always maintain superior asset quality as it is the foundation for any good banking business.

Turning on to our strategic themes or guiding principles, we continue to work on solidifying our position which we believe is one of leadership in the community banking sector in the Atlanta area.

We intend to do that by continuing to focus on strong return on growth of loans and deposits with a much more limited acquisition strategy to complement our growth.

Turning to the third quarter in terms of giving you some color on the quarter, first I'd like to tell you a little bit about our banking operation from a sales and marketing perspective.

Obviously we are very pleased with the results in the third quarter on loan and deposit growth.

We continue to post strong double-digit growth levels on both sides of the ledger and are very happy not only with the help of the Atlanta market and what it has allowed us to do recently, but also the strength of our sales team and servicing team in growing the bank.

During the quarter you will see that we did consolidate our Winder banking center, an old, very dated facility, along with our Winder insurance office into a brand-new replica of our prototype.

We're very proud of that new facility and can tell you that it is the finest banking center in the Winder area.

We also closed our Lilburn banking center.

It was somewhat of a smaller facility and one that we could, we believed, easily service our customers from our Tucker location just a few miles away.

We are about to open a replacement banking center in Conyers as well.

That center should open in the next few weeks.

And are very excited that it is going to be in probably the best landmarked location in the Conyers area as well as the nicest and probably largest banking facility in Conyers as well.

We're scheduled to open our midtown banking center in December of this year, that will be our first Peachtree Street location in Atlanta.

For those of you who are familiar with Atlanta, it's located in the Peachtree building right at 17th and Peachtree just across from Midtown Plaza.

We have begun construction of our new Galleria banking center that will open later next year and also are just in the early stages of starting construction on our Suwanee banking center as well in the northeastern corridor just outside the city.

We are still waiting on a master development to come together to replace our banking center in Marietta.

We have a functional facility now, but one that's somewhat dated and somewhat small and we're excited about the prospects in the next year or so of being able to come to market with our prototype facility in the Marietta area as well.

This past quarter we also have launched a companywide checking account campaign called Bank On It, and we're very excited about the new incentives, reward systems as well as motivation that this is bringing to our employee base and very pleased with the early signs of this effort as well.

Turning to our fee income results for the third quarter you will see that we had yet another strong quarter of fee income growth, up 20 percent on a year-to-year basis.

This was made up particularly by a strong quarter from our SBA group.

We're very pleased with our growth there as well as with the quality of the assets that we're putting on the books and the fee income and gains that we're able to take as we sell some SBA loans.

Even though securities brokerage is a small part of our business it is growing and you see that on a year-to-year basis revenues were up 51 percent in this area as our brokerage group continues to focus on higher net worth individuals as well as tailoring products to the entrepreneurial customer base that we have.

Our mortgage revenue was fairly steady or has been over the last few quarters even though it was down a good bit since last year.

We're pleased that we've been able to hold our own as we've had some volatility interest rates and are pleased to be able to do that.

From an insurance agency perspective we're very excited about our results.

You will see on an internal basis that our commission revenue was up 26 percent excluding the bank's Moneyhan, Hayes acquisition from January of this year.

Including that, as Bob mentioned, we were up over 100 percent on a year-to-year basis.

We're very pleased with our ability to grow insurance revenues at a rapid rate on an internal basis.

Our payroll service is continuing to add clients.

We're adding 10 new clients per month on average and now have a total of about 106 clients and are on plan from a client perspective with that business.

Our M&A activity is very limited as we have told you in the past.

We're not actively pursuing banking deals at present particularly because of our emphasis on internal growth.

We continue to be interested in insurance agency deals within our footprint.

And Mike mentioned to you that there are possibilities of purchasing individual books of business, insurance books of business, as well as enticing the owners of those books to join our team on an individual basis as well.

Profit improvement results are very exciting as well.

Under the leadership of our in-house resident consultant, Ellen Tarrow (ph) formerly with U.S.

Banking Alliance, we're pleased with the results of continuing to chip away at opportunities to improve our bottom line.

Just to update you on our efforts from the second quarter, we are still seeing positive results from combining the sales and service functions during the quarter and are very glad to have those two functions under common leadership within our banking platforms.

We also continue to leverage our new systems, the Jack Henry Silverlake system, both for improved reporting opportunities as well as for continued efficiencies in our cost structure as well.

As we have told you in the past, we are ahead of our flat FTE goal for 2004 and feel very good about the growth that we've been able to produce this year in light of the efficiencies that way also have gained.

And I can't say enough about how hard our team has worked and now productive they are being and are really improving their productivity too to produce these kind of results and really to do more with less.

As we mentioned earlier, we did consolidate the Lilburn banking center into our Tucker banking center, just another item in terms of finding opportunities to do things more efficiently.

We continue also to fine-tune our productivity models.

We at Main Street try to measure everything that we do or everything that is relevant in our business.

Ellen Tarrow and her group are always working on fine-tuning those models.

As we find that we do different kinds of business from our platform, we're finding these days that we need to also fine tune the assumptions of our models to make sure that we're giving our staff adequate support and resources as well as teammates to take care of our clients.

During the quarter, as Bob mentioned too, we had some good results in terms of operating expenses.

Other operating expenses down 7 percent on a year-to-year basis which we think is very positive relative to the growth that we are creating.

Operating expenses down 4 percent from the second quarter, of course that is largely due to the onetime charges that we had during the quarter.

And you'll also see that total operating expenses were up just under 8 percent on a year-to-year basis despite the 18 percent asset growth that we posted on a year-to-year basis.

We'd like to also update you on some staffing issues as well as our support functions.

We are pleased with the results of measuring our service quality and are in the process right now of updating our semi-annual mystery shopping and client survey process and want to thank our entire team for the efforts that they are putting forth to make sure that Main Street is providing world-class service to all of our clients and really to all of our constituents as well.

We're pleased with our progress on 404, the Sarbanes-Oxley implementation.

We are on schedule with our walk-through analysis being substantially complete and the testing of controls also well underway as well and we want to thank Gary (ph) Austin, our risk management head, and his entire team as well as the entire company and all of my teammates for their efforts on this major project.

We also during the quarter, completed some major initiatives from a compliance standpoint.

We completed our first companywide online compliance training program and are very pleased with those results not only in the professionalism of the package that is Internet based, but also in the actual pleasure that you can enjoy by walking through these modules on your own time frame, not having to spend a lot of road time driving around the metro area going to meetings.

And we're pleased with the results there.

We also implemented a new exception tracking and accountability process for compliance, too.

I want to thank all of my teammates for their efforts there and are pleased to tell you that we are very happy with the results of our compliance program.

We are now also implementing a signature -- electronic signature tablet imaging system that's part of Jack Henry and excited about the efficiency that that's going to give us on the front line, not just the efficiency adds but also quality of information to help us fight check fraud in particular.

During the quarter we added several new jobs to the support side of the organization to continue to support our growth and to give our employees the proper resources for handling our business.

We added two processing jobs and two quality control jobs to our loan operations area and also added one professional to our risk management audit area to focus particularly on exception reporting on an internal basis.

So you can see as we grow we're going our best to balance the support side of our organization to allow us to have the right measurement tools and the right controls.

From inadequately perspective we couldn't be happier. 11 basis points of charge offs of course is a very low number.

We're very pleased with that.

As you saw earlier in Bob's slides, we had a significant reduction in NPAs for the quarter as well and we're pleased to tell you that our asset quality trends continue to be positive too.

A few other items on the lower half of this slide that you are familiar with that we've reported to you in the past too.

And then last, our business pipeline.

We are somewhat constrained due to the announcement of our capital offering in being able to give you much guidance about the future of our business.

But we can tell you that we continue to be focused on the stable real estate sectors in our market.

We are maintaining our mix of owner occupied credits which we think is a real forte in our business particularly from an asset quality standpoint.

We're focusing heavily on growing checking balances, as we've said in the past, and have begun to mandate compensating balances on most loan relationships of any significant size.

And our fee income, as you can see, in the last couple of quarters has continued to show strong improvement as well.

With that I'd like to turn it back over to Ed Milligan for closing.

Thanks, Sam and Bob, for leading that discussion of our third-quarter operating performance.

We'll now be happy to entertain any questions you may have either verbally or by e-mail at webcast at MainStreetBank.com.

And I'll turn it back to our moderator for that.

(OPERATOR INSTRUCTIONS) Jennifer Demba, SunTrust Robinson Humphrey.

Good morning.

I was wondering if you could talk about the growth in SBA lending fees from second quarter to third quarter.

Do you think that run rate is sustainable going forward?

We would not want you to read a run rate into that because we did sell a few more loans than normal during the quarter.

We find ourselves with not only the opportunity, of course, to enjoy some gains and lock in some gains in that portfolio, but also with the need from time to time to review certain industry concentrations as well as, because of the growth of that sector and the positive trends there, as well as to make sure that that portfolio continues to be a proportional or nominal percentage of our portfolio.

Okay.

To ask a follow-up question, can you give us some details on your checking campaign and what the goals are?

We have not conveyed necessarily specific goals to our team.

What we have done with this campaign is generated a whole new set of reward systems to really motivate our people.

It is an internal campaign, one that is not being publicized externally.

Of course, as you know, with our lack of density in this Metro Atlanta market, which is, of course, so large, we do not believe that heavy media advertising is a wise use of our capital -- of our dollars.

And therefore work very diligently to motivate our people and to measure what we do and to reward our team for their efforts.

So, what we've created is sort of an add-on to our existing incentive systems.

Our existing incentives, of course, measure growth in all sorts of things but we've added on some really nice prizes which give our people the opportunity to sort of shop from a catalog for new checking accounts that they are able to book or to refer to our banking platform.

But no specific goals have been communicated to them.

This was sort of icing on the cake to further our objectives there.

Okay, thanks.

(OPERATOR INSTRUCTIONS) It appears there are no questions at this time.

Thank you.

With that we will just say thank you for joining us today.

Thank you for your continued interest in Main Street Banks and have a great day.

This concludes today's conference call, you may disconnect your lines.

Thank you for participating.