PNC Financial Services Group Inc (PNC) 2004 Q3 法說會逐字稿

Thank you Mr. Ryan, you may begin.

And thank you. Good morning and welcome everyone to Yardville National Bank Corps. First ever Earnings Conference Call. Today we will discuss YANB's Third Quarter Operating Results. With me today is Steve Carman our Chief Financial Officer. Today's teleconference is also being webcast live on our website www.yanb.com. A replay of today's teleconference will be available later this afternoon on our website. There will be some brief remarks on our financial performance this past quarter and then we will open the call up for any questions you may have. Before we begin however Steve will read our Safe Harbor Statements. Stephen.

Thank you Pat. The following discussions may contain forward-looking statements concerning the financial conditions, results of operations in business of Yardville National Bank Corp. We caution that such statements are subject to a number of uncertainties and actual results could differ materially and therefore you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties are described in our SEC filings which are available on our website or from our investor relations department.

Thank you Steve. As we indicated in our earnings release, we continued our solid financial performance in the third quarter. Our net income increased 72.3% to $5.4 million from the $3.2 million earned in the third quarter of 2003. Diluted earnings per share for the quarter increased 66.7% to 50 cents per diluted share compared to the 30 cents we earned for the third quarter of last year. For the year to date comparison we also achieved excellent results as net income increased 36.4% to $13.8 million from the $10.1 million earned in the same period in 2003. Earnings per share in a diluted basis for the first nine months of 2004 increased 33.8% to $1.27 from the 95 cents per diluted share reported in the same nine months of the prior year.

As many of you know we viewed 2004 as an important year to show solid financial results. In 2003 we felt we could effectively deploy our new capital raised in our large December 2002 Secondary Public stock offering to enhance financial performance in 2004 and beyond and that is what we have done. Our major focus and priority in 2004 was to significantly improve our net interest margin. To do that we knew we needed to continue to take advantage of our strength as a commercial business lender and more importantly to effectively implement our retail strategy in order to lower our cost of funds.

We continue to experience significant growth in our commercial loan portfolio. Commercial real estate and commercial and industrial loans represented over 80% of our total loan portfolio at September 30th. Total loans grew $310.4 million or 22.3% over the same date a year ago reaching $1.7 billion. For the third quarter alone total loans grew $74 million and I want to point out that during this continued loan growth we have maintained our strict credit standards. Going forward we continue to see opportunities in our expanded marketplace to increase quality commercial loan relationships. Our new loan pipeline has continued to be strong. Commercial borrowers have embraced our philosophy of relationship banking knowing that they can sit down with a number of executive management and other senior officers and get timely responses to their credit needs. In fact we have now become the 116th largest CNI lender of all banks in the United States according to data available as of 3/31/2004.

The commercial real estate market in New Jersey remains vibrant and strong. As our legal lending limit has increased, we have attracted quality borrowers with larger loan needs who desire one on one relationship with their banker. Strong loan growth has been accompanied by enhanced credit quality. Non-performing assets decreased to $9.4 million which is only 34 basis points of 1% of total assets.

At a length quarter basis, non-performing assets decreased 2.4 million from June 30th. Throughout the year we have discussed three problem credits at our regulatory filings. We have aggressively added dollars $6.8 million to the allowance per loan loss reserve through September 30, 2004, and this has allowed us to keep our reserve coverage at an adequate 1.15% of total loans throughout the year. We believe that the issues related to these credits should soon be resolved either by charge up restructure or collection. We fully expect asset quality to continue to improve as we look ahead and believe our asset quality will strengthen through year end.

The biggest opportunity to improve our margin was on the liability side of our balance sheet. During 2002, more expense of time deposits or certificates of deposit represented over 50% of all deposits. By implementing our retail strategy to 2003 and 2004, we believe we could change the composition of our deposit base, attract lower cost deposits, reduce our cost of funds, and move our net interest margin higher. Our retail strategy involves strengthening our brand image, targeting future branch locations, and aggressively marketing new products and services.

At September 30, 2004, certificate self deposit represented approximately 36% of our deposit base and our simply better checking product was embraced not only in our new markets but in our core market of Mercer County as well. In 2004, we have opened over 2250 net new simply better accounts with over $156 million in balances.

Lead by the growth in the simply better checking balances our deposits increased $303.3 million or 20.6% to 1.78 billion at September 30th. We will continue to build on the success we have realized by introducing our relationship banking philosophy and competitive deposit products to new markets and neighborhoods. In fact at this time I note that we are the second largest market share in deposits in Mercer County at 15.65%. In 2005 we expect to open at least four additional branch offices. We will strengthen our presence in our home base of Mercer County by opening branches in the demographically attractive markets of Hope Well and West Windsor. We will also open our additional branch in our expanding northern region in Readington which is Hunterdon County and open a second branch in Bucks County, Pennsylvania which is right across the Delaware River from Down Town trend. Attracting lower cost deposits in these new markets should assist in pushing our net interest margins above the 3% level. Our net interest margin was 2.78% till September 30th, which represented 18.3% improvement in our net interest margin, up 2.35% just a year ago. We continue to make progress towards achieving our 3% net interest margin goal established earlier this year. Our net interest margin for the quarter ended September 30, 2004 reached 2.89%, up 13 basis points from the second quarter and we expect continued improvement in the fourth quarter.

With the anticipation of higher interest rates moving forward into 2005, our balance sheet is positioned to take advantage of a gradually higher interest rate environment. Floating rate loan assets represent approximately half of the loan portfolio. As rates move higher our asset and liability models show higher levels of net interest income. Over a 12 month period our models project net interest income should increase approximately 2% with a 200 basis points move higher.

The growth we have discussed today also has an impact on capital needs. The board and executive management is currently reviewing a number of possible capital raising alternatives should they be needed. We are reviewing financial models to determine the appropriate timing of any potential capital actions based on our various growth scenarios.

The expansion YANB has experienced also translates into a need for human capital. To that end we recently hired F. Kevin Tylus as Senior Executive Vice President and Chief Administrative Officer. By adding Kevin's strong managerial skill set to our current solid executive management team we are proactively addressing the need of a larger organization including detailed strategic planning. He will also provide the necessary administrative skills to help manage and guide our larger organization and will be a direct report to myself.

We have made a concerted effort during the third quarter to enhance our investor relations efforts. Today's initial earnings conference call reflects our commitment to this process. In addition we are continuing our program of meeting with institutional and other shareholders to discuss our story and prospects as we move forward. We will also be presenting at the Mid Atlantic 2004 Super Community Bank Conference on November 4th and 5th in Philadelphia and [inaudible] Financial Services Conference, November 10 to 12, 2004 in Palm Beach Gardens, Florida.

We remain focused on enhancing shareholder value and believe we have taken appropriate steps towards achieving our goals. To do that we need to continue to build on the financial performance we have experienced so far this year so that we can take advantage of our strengths and continue to move this bank forward. At this time I would like to open the floor to any questions that you may have and Steve and I will be happy to answer them for you, and I thank each and every one of you for joining us today.

Thank you. Ladies and gentlemen, we will now be conducting a question and question and answer session. If you would like to ask a question please press "*" "1" on your telephone keypad. A conformation tone will indicate your line is in the question queue. You may press "*" "2" if you would like to remove your questions from the queue. For participants using speaker equipment it maybe necessary to pick your handset before pressing the "*" key. One moment please while we poll for questions. Just a reminder to ask a question please press "*" "1". Our first question comes from Jeff Fenech with Sandler O'Neil. Please state your question.

Good morning guys.

Good morning Joseph.

I have got a few questions here for you. I guess first more generally on commercial loan pricing, you know, from banks are seen reporting so far, I guess specifically immediately south and north of your foot print, they have been noting some significant pricing pressure on the assets side, can you comment a little more what you are seeing specifically in your market in Central New Jersey there?

I will take that one please. Our pricing pressure has started to ease somewhat as rates have started to rise. We did, 6-12 months have a lot of pricing pressure on our five year fixed rate commercial mortgage product specifically but we are less price pressure sensitive if you will and that we have 50% approximately of our higher loan portfolio and floating rate loans and that somewhat eases the burden for us. But I will assure you that there is many, many banks very aggressively outdoing business in this marketplace so, I would believe that pricing pressure will continue especially on the fixed rate five year or ten year mortgage market side.

Okay and then I guess secondly, thanks for that Pat, intangible capital in the low 5% range, you made a brief comment as to reviewing alternatives, currently with the board. I guess based on your projections internally or what you are seeing now into next year, how would you handicap the need to potentially raise capital specifically over the next twelve months?

Well, we are currently under going the budget process but along with that we are doing our strategic planning and I have talked to the board at depth about the direction of the bank and which course we collectively decide to go will determine the capital needs. I can tell you Joe that we do have one model that shows that if we continue to grow our assets at the pace we have this year or slightly less, we could form that from retain earnings but we do see a larger opportunity potentially to look at reaching out into other markets and then if the board decided we should go in that direction, look at other capital alternatives.

Okay, so based on your internal projections were retained earning of I guess through next year, you wouldn't see the need to raise capital borrowings, say if you were to do an acquisition or something like that?

That would clearly make us focus on additional capital needs, something in the acquisition model what clearly bring additional capital needs to the fore front if again the bank decided to go in that direction.

Okay and I guess finally this quarter you provided an excess of charge offs, as given the loan growth that you had, you noted that credit should continue to improve here, charge offs, I guess are running around 33 basis points, what would be a normalized charge off rate for you guys and when would you expect to get there, and also follow up on that, how should we think about a potential run rate for the provision going forward?

The -- our -- over the past 10 years our normalized charge off rates have really been in the 15-20 basis points. So we are running somewhat higher than that this year and again principally due to the three credits that we discussed in our regulatory filings. What you see for charge off through the first nine months, I think you will see a typical number for the fourth quarter and then as we project out at this time, some improvement on that, Joseph.

Okay, and then just thinking about the provision going forward, would you think you have the opportunity, just until how you are thinking about the provision going forward considering the run rate, say charge offs around 25 basis points or so?

Yes, we would see some opportunity to not have to provide as aggressively as we did this year.

Okay.

If in fact we can continue to loose our MPA's and resolve these problem credits.

Okay, thanks guys.

Thanks Jeff.

Our next question comes from Ross Haberman (phonetic) with Haberman Funds (phonetic), please state your question.

How are you gentlemen, nice quarter.

Thank you very much.

I have got a quick question regarding competition. In any of your markets is it picking up either from the larger and/or the smaller banks and if so either what product lines or what locations are you seeing sort of the stiffest competition today?

Pat Ryan again. On the retail consumer side we do see some community banks and commerce and also a couple of savings banks being good competition on the retail consumer, basically the deposit side. On the commercial loan side we have really established a reputation as being a premier commercial, real estate, and commercial and industrial lender and we have a very strong pipeline that continues to grow and opportunities continue to come our way. Our challenge over the years has really been on the funding side and that’s why we really instituted the retail banking strategy to go out into additional markets, broaden our deposit customer base, and use the pressure on the liability side because we continue to and always have had strong asset growth.

We really have more than enough activity to keep us very busy, well out into the future on the asset side.

And just historically how long has it taken you to breakeven on to [inaudible] out of the branches?

That’s a good question. I differ somewhat in most, I believe a branch operating cost is $350,000 a year and I believe you have to get a branch up to 35 if not $40 million to be at least at break even because today unlike when I started in banking back in the 60s, every thing is interest bearing and the interest cost, I believe make that $35-40 million deposit bogie. The number -- we are very fortunate in the sense that our branches reduced substantial deposits on average, our branches all in are in excess of $80 million, on average per branch so, we have done very well. Once we get a branch up and operating, part of our problem has been the approval process, going through different communities to get branches open and operating. Once we do we have seen a very strong response from that customer deposit base there.

Thank you.

Ladies and gentlemen, just a reminder if you would like to ask a question at this time please press "*" "1" on your telephone keypad. One moment while we poll for questions. There are no further questions at this time. I will now turn the conference over to your host to conclude.

Thank you. And I wish to thank all of our participants at this time. We appreciate your interest in the bank and again as we said in our brief remarks, we will be out presenting the bank at different banking conferences. We have made that commitment to our investors and we will certainly make sure that we honor that commitment that we continue to get our information as current as possible to you on a timely basis. Stephen anything to add at this time.

Nothing to add, sir.

Thank you for attending the conference and being interested in Yardville National Bank.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. All parities may disconnect now.