PNC Financial Services Group Inc (PNC) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Yardville National Bank fourth quarter earnings conference call. At this time, all participants are in a listen-only mode, and a brief question-and-answer session will follow the formal presentation. If you should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Patrick M. Ryan, President and Chief Executive Officer of Yardville National Bank.

Thank you. Good morning and welcome, everyone, to Yardville National Bancorp's earnings conference call. Today we will discuss YNB's operating results for the fourth quarter and full-year 2004. With me today is Steve Carman, our Chief Financial Officer. Today's teleconference is also being webcast live on our website, www.ynb.com. A replay of today's teleconference will be available later this afternoon on our website.

There will be brief prepared remarks regarding our financial performance this past quarter and year, and then we'll open the call up for any questions you may have. Before we begin, however, Steve will read our Safe Harbor statement. Stephen?

Thank you, Pat. The following discussions may contain forward-looking statements concerning the financial condition, results of operations, and business of Yardville National Bancorp. 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 reflected in our earnings release, we had a solid fourth quarter. Particularly considering the number of variables that impacted results. Net income increased to 4.7 million from the 199,000 earned in the fourth quarter of 2003. Diluted earnings per share for the quarter increased to $0.43 per diluted share compared to the $0.02 we earned for the same period in 2003.

On a linked quarter basis, net income declined 13 percent while net security gains were down 525,000 in the fourth quarter versus the third quarter. There were several other variables that also impacted the level of quarterly earnings. Net interest income on a linked quarter basis grew by 5.2 percent in the fourth quarter.

Let's take a quick look at the factors that have net negatively impacted the absolute level of quarterly earnings. The provision for loan losses was up 16.7 percent in the fourth quarter as we continued to aggressively manage problem credits previously discussed in our regulatory filings. Sarbanes-Oxley related expenses were approximately 500,000 higher on a linked quarter basis. In addition, there were a number of one-time or non-recurring items related to income on bank-owned life insurance, deferred compensation plans, and state taxes.

Looking back at the entire year, we achieved excellent results. We set several financial goals as we entered 2004. We believe that by leveraging our strength as a commercial business lender and lowering our cost of funds, that earnings would rebound after a subpar 2003. Our net interest margin target was to reach 3 percent by the end of 2004. In the fourth quarter, our tax equivalent margin increased to 2.97 percent, right about on target. By approaching the 3 percent goal, we were able to achieve significantly better financial performance.

For the entire year, our net interest margin increased 41 basis points to 2.83 percent. 2004 was a challenging yet rewarding year. Throughout the past year our focus was to continue to lower our cost of funds and grow interest income to elevate our net interest margin in addition to addressing asset quality issues associated with 3 problem credits identified in late 2003. In fact, we exceeded our targeted net income for 2004. For the entire year of 2004, net income increased 8.2 million to 18.5 million, a 79.7 percent gain from the 10.3 million reported in 2003.

Diluted earnings per share for the year increased 76.3 percent to $1.71 in 2004, from $0.97 in 2003. The driver on that performance was a 33 percent increase in net interest income. Partially offsetting that strong net interest income growth were increased non-interest expenses of 4.5 million and higher income tax expense due to our notably better financial performance.

During 2004, we discussed the importance of moving our retail strategy forward, lowering our cost of funds, and enhancing franchise value. Our cost of funds for 2004 was 2.85 percent, 6 basis points lower than where we finished in 2003, even though short-term interest rates increased 125 basis points during that time period. The biggest opportunity to improve our net interest margin continues to reside on the liability side of our balance sheet.

We have worked hard to develop lower cost core deposit products that will drive depositors to YNB. Simply Better checking has been that product. We have attracted over 2,900 net-new Simply Better checking accounts in 2004. Totally Simply Better balances at December 31st, 2004, exceeded 273 million. Although still an important funding source, certificates of deposit have become a much more manageable slice of our entire deposit base.

Led by growth in Simply Better checking balances, total deposits increased 326.2 million, or 22 percent, to 1.81 billion at December 31st. We are continuing to build on our successes by introducing our relationship banking philosophy and competitive deposit products to new markets and neighbors. In 2005 we have already introduced Simply Better savings. This competitively priced savings product was introduced when we recently opened our Mountainview branch in Mercer County. And now that product is being marketed throughout our branch network. In addition, we are aggressively looking at new branch opportunities to enhance the value of our franchise.

This year we expect to open several branch offices. We will strengthen our presence in our home base of Mercer County by opening a branch in the demographically attractive market of Hopewell late in the first quarter. We will also be opening our second branch in Bucks County, Pennsylvania, along the Delaware River in Morrisville. The timing of branches previously discussed in Reddington, Hunterdon County and West Windsor, Mercer County are still unfolding. Attracting lower cost deposits in these new markets will assist in pushing our net interest margin higher in 2005.

Our primary interest income driver will continue to originate from our commercial loan portfolio. We understand to achieve projected 2005 results, we must take advantage of our strength as a commercial business lender. We experienced significant growth in our commercial loan portfolio in 2004. Commercial real estate and commercial and industrial loans represented the majority of our total loan portfolio at year-end 2004. Total loans grew 339.2 million or 23.5 percent in 2004, reaching 1.78 billion. Most important, during this strong growth period we have maintained our strict underwriting standards. We continue to see opportunities in our expanded marketplace to increase quality commercial loan relationships. Our new loan pipeline has continued to be active.

Commercial borrowers have embraced our philosophy of relationship banking, knowing they can sit down with a member of executive management and get timely responses to their needs. The commercial real estate market in New Jersey remains strong. As our legal lending limit has increased, we have attracted larger quality borrowers who desire a one-on-one relationship with their bank.

Throughout 2004 we have worked hard to enhance credit quality. On a linked quarter basis, non-performing assets increased modestly to $10 million, which is only 36 basis points of total assets. Throughout the year we have discussed 3 problem credits in our regulatory filings. One of those credits is now a completely off of our backs and the other 2 are in the process of being resolved and/or restructured. While we expect asset quality to continue to strengthen as we go through 2005, there's certainly no guarantee that will be the case.

Before we look forward to 2005 projections, I would like to note the impact of 2004's financial performance of Sarbanes-Oxley and other regulatory requirements. The hiring of additional staff, consultants, systems, and other professional fees we estimate have negatively impacted earnings by $750,000 to $1 million, or earnings per share performance by approximately $0.05 to $0.07.

At this time, Steve Carman will discuss our 2005 anticipated results. Stephen.

Thanks again, Pat. With the strong 2004 behind us, we are looking forward to continuing with those positive trends in 2005. As part of our ongoing efforts to keep the investment and analytical communities apprised of our financial expectations, we have again provided guidance for 2005 and we'll update this guidance throughout the year.

There are several assumptions underlying our projections. Our financial models reflect a gradually increasing interest rate environment, continued strong commercial loan growth, a modestly higher cost of funds, and a stable level of non-performing assets. With those assumptions in mind, we are projecting loan growth of 15 to 20 percent, which combined with a modestly higher cost of funds, should push our net interest margin to 3.20 percent by year-end 2005.

We believe the growth in net interest income will more than offset the increase in non-interest expenses due to the opening of additional branches and increased regulatory costs. This should translate to an efficiency ratio between 55 and 60 percent. Based on our financial analysis, we believe net income in 2005 should increase by 25 to 30 percent based off of 2004 earnings of 18.5 million. Pat, back to you.

Thank you for that update, Stephen. With the growth trends we have experienced and the growth expectations Steve just discussed, effective capital management is critical as YNB moves forward. The Board of Directors will continue to discuss strategic alternatives, which could include the raising of additional capital. Any new capital raised would support our branch growth strategy and provide the opportunity to explore potential acquisitions.

Last September I discussed the addition of Kevin Tylus to our executive management team. Since that time, we have reorganized our executive management team to position YNB for future success. Mr. Tylus was recently appointed as our Chief Operating Officer and will lead a senior management team in the development of products, technology, retail administration, market development, and strategic planning. As part of our new organizational structure, Tim Losch will take on the responsibility of Chief Market Development and Community Relations Officer, and will play a key role in developing business in our markets. We believe our senior and executive management team is now well positioned to explore any opportunity presented to us to enhance the value of this franchise.

YNB has continued its growth as a thriving independent community bank. We are certainly gratified with our 2004 financial performance and we look to continue our positive trends in 2005, the 80th anniversary of our founding and our 10th year as a publicly-traded company. We have remained committed to enhancing shareholder value, and we believe the positive financial trends we have established will result in achieving this goal.

At this time, I'd like to open the floor to any questions you may have, and Steve and I will be happy to answer them for you.

Thank you, sir. (Operator Instructions). Our first question is coming from Joe Fenech of Sandler O'Neill.

Hello?

Good morning, Joe.

Good morning, guys. In terms of credit, net charge-offs were up this quarter a little bit higher than we had expected. Now, would you classify these as more year-end cleanup-type issues relating to the 3 credits that you had spoken about in the past, or should we adjust our charge-off expectations going forward?

No, I don't think you need to adjust your charge-off expectations, Joe. I think that we've aggressively addressed specific credit quality issues, and specific customers. We don't see any trends on the negative side, if you will, Joe. It's strictly specific account relationships that we've been dealing with for the last, oh, 15, 18 months, if you will.

So, Pat, would you still say there's a more normalized charge-off rate is in that 20 to 25 basis point range that you talked about in the past? When will we start to see that?

That's my goal to achieve that in that range this year, Joseph.

Okay. And on the reserve, you're at 113 basis points. Are you comfortable at that level, or should we expect you to build that reserve? If you tend to build a reserve, where is your target there?

I see the opportunity to build that reserve back up to the 120, 125 level this year, Joe.

Okay.

That's certainly a goal that we've internally established for ourselves.

Thanks.

Thanks, Joe.

Our next question will be coming from Jennifer Thompson of Oppenheimer & Company.

Hi, good morning.

Good morning, Jen.

You mentioned at the end that there would be a possibility of a new capital rates for growth, et cetera. Now, in terms of the guidance you've given, is that excluding any potential capital raise or what is the guidance exactly based on?

Jen, first, the Board of Directors has asked us to draw up a number of alternatives that may or may not include capital raising. And we will be sitting down with the directors over the next 30 to 60 days to look at any potential capital raising opportunities. But there's been nothing definitive decided at this time.

Okay. So the guidance that you've given in terms of earnings growth would not include what might or might not happen on the capital raising front; is that correct?

That's correct, Jen.

Then in terms -- could you just remind what you expect in terms of branch buildout this year?

Our goal overall, Jen, is to look to get 4 to 5 additional branches up and operating this year. We're well on the way to have 2 of those done within the next 3 to 6 months, and another 2 will follow them very shortly. But that's our goal this year and our goal over the next 3 years is very similar. We're looking to try to do 4 to 5 branches each year over the next 3 years, Jen.

Okay. Final question. What's the percentage of -- if you know, approximately the percentage of floating rate loans as a percent of total loans on your books?

Yes. It's approximately 51 fixed, 49 floating. We are very close to being 50/50, but it's a little more fixed than floating at this time.

Great. Thanks very much.

Thank you, Jen.

(Operator Instructions). Our next question will be coming from Dave Bishop of Legg Mason.

Good morning, gentlemen.

Good morning.

Pat, I think you alluded to this about the fourth quarter had some noise there in terms of some one-time expense items, and it looks like the tax rate ticked up abnormally above our estimate. Can you comment on that, whether you can give us some guidance there in terms of what was non-recurring in nature?

A little noise there. I'd like Stephen to give you some specifics there. Stephen.

Dave, as it relates to the tax rate, we did have -- make some adjustments to our state tax expense based on our strong growth in earnings in the last 6 months, and we anticipate that our effective tax rate as we begin 2005 will be slightly over 30 percent. And if our earnings projection is correct, that will move higher throughout the course of 2005 reaching 30.5 percent, maybe a little bit higher than that.

Okay. Anything else in operating expenses in terms of Sarbanes-Oxley or consulting fees that were one-time in nature?

The Sarbanes-Oxley expenses that we incurred in the last quarter basically were due to consultants and some of the accruals with our auditor as far as the attestations cost, of course they'll stay with us. But I would estimate at this point about $250,000 to $300,000 would be non-recurring. We would not anticipate the same type of consulting effort that was required in 2004. Some of the other references Pat made to systems, additional staff, those will remain with us, Dave.

Got you.

We can clearly tell you that the Sarbanes-Oxley experience has been an expensive learning process and it's ongoing. Although we see it being somewhat less than next year, some of the costs will continue to go forward with us, Dave.

One final question in terms of the loan growth. Can you point to any specific SIC code or grouping there that you can -- one on the long strength than the other?

I can take that. We've had very strong loan growth and relationship response from large commercial customers in our Hunterdon and Somerset County marketplace, which is to the north of Mercer. We've been actively up there doing business for about 3 years. And especially the last year, 18 months, we continue to see very strong quality loan growth from those 2 particular markets.

Is that captured from competitors or --.

Yes, we've been very delighted with being able to acquire a couple of major relationships from 2 of our competitors up there.

Got you. Great. Thank you.

(Operator Instructions). Gentlemen, it appears there are no further questions at this time. Do you have any closing comments?

I believe we've given a full update and Steve has given us the earnings guidance for 2005. I believe we've addressed all the cogent germane points at this time. So if there isn't any other further questions, we thank everyone for their attendance, and everyone have a good day.

Thank you, sir. Ladies and gentlemen, at this time it does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.