PNC Financial Services Group Inc (PNC) 2005 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Yardville National Bancorp fourth quarter 2005 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for this afternoon, Mr. Patrick Ryan, Chief Executive Officer of Yardville National Bancorp. Thank you, Mr. Ryan, you may begin.

Thank you. Good afternoon and welcome everyone to Yardville National Bancorp's earnings conference call. Today, we will discuss YNB's operating results for the fourth quarter, full year 2005 and a look forward for 2006. With me today is Kevin Tylus, our Chief Operating Officer and 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, and then we will open the call 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 the 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. During 2005, we achieved solid financial results by improving our net interest margin through effective pricing of commercial loans and management of our cost of funds. Despite a number of challenges during 2005, YNB achieved double-digit growth in net income and diluted earnings-per-share.

For the full year, our net increased 2.4 million to 20.9 million, a 13% increase over the prior year's net income total. Diluted earnings per share for the full year increased 10.5% to $1.89 when compared with the prior year's $1.71.

In the fourth quarter, we aggressively addressed one problem credit previously identified in our third quarter 10-Q of 8.7 million that negatively impacted our fourth-quarter results. Net income and diluted earnings per share for the fourth quarter of 2005 were 4.3 million and $0.39, respectively, declines of 8.5% and 9.3% compared to the fourth quarter of 2004.

The fourth quarter provision for loan losses totaled 4.8 million, and increase of 2 million when compared to the same quarter in 2004 principally due to the deterioration of the single large commercial relationship previously mentioned.

We believe that our performance of 2005 demonstrates the success of our established strategic business plan for long-term growth. It is driven by our strength as a commercial business lender and the ongoing execution of YNB's retail strategy. As I have said recently, we continue to view the solid results of our dynamic retail strategy as a significant opportunity to drive net interest income and net income higher.

We recently opened two additional branches in the fourth quarter in Morrisville, Pennsylvania in neighboring Bucks County and the other Lawrence Township in Mercer County, New Jersey, in a prime location adjacent to the Route 1 corridor. In January, we opened our first office in rapidly growing Ocean County. But our retail success is not a factor of geography alone. We are making the most of these new locations with strong deposit products, special promotions and aggressive cross-selling, and these efforts have borne real fruit.

Total deposits at December 31, 2005 increased to 1.97 billion, or 8%, up from 1.8 million a year ago. Most important, however, is the contribution that generating lower-cost core deposits has made to the 17.7% increase in the net interest income in 2005 compared to 2004. Despite the difficulties presented by a flat yield curve, we have been able to maintain effective pricing of our commercial loans while carefully managing our cost of funds. As a result, we were able to move the tax equivalent net interest margin higher by 22 basis points to 3.05% for 2005 compared to 2.83% in 2004.

YNB's bread and butter has been and continues to be its commercial lending business. While the competitive and regulatory landscapes have at times been challenging, I would like to take a couple of minutes to discuss loan growth in 2005 and our commercial loan pipeline.

During 2005, we experienced a number of large paydowns and/or payoffs from our established borrowers. This activity to us is not unusual since these same customers bring back new projects or business opportunities. It does, however, impact the historical growth rates we have experienced over the last several years. Our commercial loan pipeline remains healthy with opportunities available for growing our loan portfolio further in 2006.

We finished 2005 with a solid gain in total loans of 10.7%, the portfolio reaching to 1.97 billion. On a linked-quarter basis, total loans were down slightly in the fourth quarter. Indicative of consistent commercial loan growth earlier in the quarter, however, average loans grew 3.5%, or about 67 million in the fourth quarter versus the third.

As our lending relationships have become larger, the impact of even one or two becoming nonperforming can negatively impact results as illustrated in 2005. Nonperforming assets increased to 18.6 million, or 0.63 of 1% of total assets at December 31, 2005, compared to 10 million, or 0.36 of 1% of total assets at the same date in 2004. The increase in nonperforming assets was due in large part to the 8.7 million commercial loan relationship that became nonperforming in the fourth quarter.

Accordingly YNB increased its provision for loan losses in the fourth quarter of 2005 in connection with the charge-off of 4.5 million associated with that loan. The allowance for loan losses at December 31, 2005 totaled 22.7 million, or 1.15% of total loans, and it covered 122% of total nonperforming loans.

We will continue to employ strict underwriting standards that enhance internal controls as we grow larger. We believe that we are on top of our portfolio and we expect asset quality improvement in 2006. Clearly, only time will tell if the measures we have taken will be effective, but we believe they will.

Most of you are aware that we are under a letter agreement with our primary federal regulator, the Office of the Controller of Currency. We have already taken many actions to address all of the articles in the agreement. Our interactions with our regulators continue to be positive and I'll now ask Kevin Tylus, our Chief Operating Officer, who has been our point person with the regulators, to give you an update not only on our progress under the agreement, but an update on our retail strategy as well. Kevin?

Thank you, Pat. As most of you know, on August 31, 2005, our banking subsidiary, the Yardville National Bank, entered into an agreement with our primary federal regulator, the Office of the Controller of the Currency, or the OCC. The agreement sets forth certain understandings between the Bank and the OCC regarding, among other things, our administrative operations, capital levels and dividend payments.

We have also undertaken on our own initiative to further strengthen and enhance processes in the bank as we grow into a larger institution. That work is proceeding on schedule and as planned.

On November 4, 2005, as part of the OCC agreement to increase capital levels beyond levels that were considered well capitalized, we completed a private offering of our common stock to certain accredited investors, including members of our Board and some larger customers, to ensure capital requirements. Our current annual examination is currently in progress, interactions with the OCC have been cooperative and our perception is that we have made significant progress in complying with all aspects of the agreement.

Let me take just a few minutes now to update you on our retail strategy for 2006 and the future. YNB's retail network now includes 28 branches in a six-county area across central New Jersey and Bucks County, Pennsylvania. As Pat mentioned, in the fourth quarter of 2005, we opened two new branches in Mercer County, New Jersey and Bucks County, PA. Early this month, we opened our first branches in demographically attractive Ocean County, New Jersey. We're excited about our prospects for success in these markets.

Our current branch network includes 18 branches in Mercer County, eight in the counties of Hunterdon, Somerset, Middlesex, Burlington and Ocean candies in New Jersey and two in Bucks County, PA., directly across the Delaware River from Mercer County. Altogether, we anticipate opening five to seven branches per year over the next three years. Our Board of Directors has authorized some 14 new branch locations for us to pursue in the next several years.

Through this time of expansion, our branch efficiency and profitability has exceeded our expectations. YNB's $1.97 billion in deposits produces an average branch deposit size of about $70 million. We're gaining share in these markets and the markets themselves are growing.

Our branches in new markets have been widely accepted as illustrated by the deposits we're attracting. As an example, let's take a quick snapshot of our newest Bucks County branch in Morrisville, PA., which is currently in the middle of its grand opening. In the first 10 days, we have already opened $750,000 in promotional CDs and coupled with that with the cross-sell of $1.2 million in additional deposit balances. In effect, we attracted $1.8 million in new money in only 10 days.

Our well-trained and highly-motivated staff deserves the lion's share of the credit for this accomplishment, but our retail strategy extends beyond the physical location and sells training. We're now offering extended hours of branch operation to enhance customer convenience at many of our branches, including extended Saturday hours in certain key branch locations and some Sunday access.

Our retail strategy will continue to focus on four items. First, expanding our footprint into attractive new locations contiguous to our current marketplace; second, reinforcing our exciting brand image with advertising and public relations; third, introducing the products and enhanced services, and lastly, emphasizing relationship banking.

In 2006, we continue our successful execution of YNB's robust retail banking strategy, employing the coordinating elements of geographic expansion, state-of-the-art products and services, highly trained and incented branch personnel, consistent and targeted marketing campaigns and the technological wherewithal to deliver our brand of community banking to our customers. We think it's an unbeatable combination to provide franchise value to our shareholders. Pat, back to you.

Thank you, Kevin. With the current competitive and regulatory environments, we do not expect the commercial loan growth rates we have experienced in the past to occur in 2006. That said, let's briefly examine the competitive landscape. Banks and non-banks have offered attractive rates and/or terms on commercial real estate loans, not only to our established customers, but also to prospective new borrowers. Based on our relationship banking philosophy, we have kept most relationships and earned our share of new business. We have done so on our terms to achieve strategic and financial objectives. While this means we may see a slower rate of growth in commercial loans, we believe it is quite respectable given the current environment.

To address this unexpected slowing in commercial real estate loans this year, we have taken steps to broaden other aspects of our lending base by offering new products or further developing new markets like Middlesex County. We expect Middlesex County to be a very attractive growing commercial market for us and the development of that market will begin in earnest in 2006. We now have dedicated senior officers in Somerset and Middlesex Counties, as well as in our established markets of Mercer and Hunterdon. We're also working the Bucks County market hard to earn our share of the commercial lending business across the river.

At this time, I would like to ask our Chief Financial Officer, Steve Carman, to share our thoughts on YNB's financial protections for 2006. Stephen?

Thanks again, Pat. Every year's of financial protections involve some degree of challenges and uncertainties. This year's challenges include a flat Treasury yield curve and competition for deposits which could potentially affect the prices we paid for those funds.

There are several critical assumptions that underlie our financial protections for 2006. Our balance sheet is positioned to best perform in a slightly higher interest rate environment. Our models reflect a Fed funds rate reaching 4.75% by midyear and staying there for the rest of the year. We expect moderate commercial loan growth effectively priced in 2006 with an improving asset quality profile. Based on our wide array of deposit products and services, we expect to effectively manage our cost of funds. The combination of these two factors, we believe, will result in achieving net interest margin objectives.

We're projecting our tax equivalent margin to modestly improve during 2006, averaging 3.10% for the year. Loan growth is expected to be in the 6 to 10% range. The efficiency ratio is projected to be relatively stable to 55%, which include our branch growth expenses. This does compare favorably to our peer group.

That all said, we expect net interest income growth of 8 to 10% and earnings-per-share growth of 5 to 8% in 2006. Should there be any questions regarding run rates for supporting our model, I would be happy to talk with you after this call to provide further guidance. Thanks. Pat, back to you.

With 2006 well underway, we're looking forward to successfully executing our 2006 business plan. As a growing company, we will continue to take the necessary steps to become more efficient and profitable. For the rest of this year and beyond it, we intend to move forward by continuing to exploit the market opportunities we enjoy in our niche as a community commercial banking institution. We remain 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 would like to open the floor to any questions you may have and Steve, Kevin and I will be happy to answer them for you.

(Operator Instructions). Joseph Fenech, Sandler O'Neill.

A few questions. First, Steve, the expense line came in much lower than I was expecting, particularly personnel costs. Could you talk about first, what was the driver this quarter in that moving lower? And then, secondly, most of the costs -- or maybe Kevin you could answer this -- to comply with the written agreement for the most part in the numbers at this point?

Thanks, Joe. Personnel costs were lower in the last quarter due to several factors. Assumptions related to the expense associated with a deferred compensation plan were overaccrued or overexpensed prior to the fourth quarter. Additionally, adjustments to executive and officer compensation, delayed timing of new branches and other staff hires also contributed to that lower expense.

On the second question, we believe at this time that the personnel costs for the regulatory related costs has all been accounted for.

So Steve, just back to what you said for a second. You said some of the costs related to new branches were delayed, so we will see that in the first quarter?

We did have the Ocean County branch. It just opened. So they will come periodically, depending on the timing of some of some of those branches, Joe.

Okay. And then credit, it looks like the main wild-card for '06 here is going to be on the provision line and you charged off close to 5 million this quarter. The total relationship that you talked about that was just under 9 million. So I guess the question is, do you anticipate any further losses associated with that commercial relationship? And Steve, can you maybe give us an idea of how you are thinking about the provision line here going forward.

We aggressively looked at that credit situation. As you know, we unfortunately or fortunately draw the post position with the OCC in the examination timeline each year, Joe. So we feel that it's to everyone's benefit to aggressively address any credit issues as we go into the next year. I think we have done that in this case. And I believe, Joe, that we have a real opportunity to see improving credit quality this year.

Joe, as it relates to -- as we take a look at the provision line, obviously, with some of the issues we had in the fourth quarter of this year, we'll have to go back to somewhat more traditional levels of net charge-offs. That is what is reflected in our model, somewhere between 25 and 30 basis points based on the growth expectations that I outlined for commercial loans.

Beginning in the first quarter, Steve, or are you working towards that over the course of the year?

Beginning in the first quarter.

And then lastly, Pat, tomorrow the consulting agreement between the bank and Larry Simon expires. Can you maybe talk in general terms about how you think things will unfold from here on that? Do you think maybe some sort of agreement can be forged similar to what we saw last year at this time? Or, do you think could things get a little contentious maybe over the next few months?

We did, from our point of view, Joe, work closely with Mr. Simon this past year under the consulting agreement. I think the question you ask certainly has to be answered from the other side, if you will, Joe. We believe there could be issues with dissident shareholders this year. And so we are planning to account for them and resolve them as we go forward. But the situation I believe is out of our hands. It's not to be initiated by us, Joseph.

Alright, thanks guys.

Adam Barkstrom, Stifel Nicolaus.

Hi, guys good afternoon. A couple of things. I wanted to follow up on the credit situation. I guess, I thought it was a fairly new credit. It looked like -- correct me if I'm wrong -- it looked like, the way it's written up in the press release, that the 8.7 million flowed into nonaccrual or nonperforming, and then 4.5 million of that was then charged off. So that credit went straight from current to roughly 50% loss. Am I thinking about that the right way?

Yes, you're right on, Adam. It has been a longtime customer. I believe they've been with us a good four or five or six years. It's a contractor, Adam. Unfortunately, they got involved with a job that expanded beyond their capabilities and it caused us to reassess the situation and aggressively resolve it with quick action, Adam.

So this particular borrower, have they ever been in a nonperforming status?

No. They, in fact in 2004, had a very profitable year, Adam, seven figures.

Any chance we might see some recovery on this?

Well, we have real estate, we have work in progress, we have receivables, equipment. We have all of the assets, we have the guarantees, Adam, but we felt because of the uncertain status and having to work with them to complete some of these jobs that we needed to very honestly put it in doubtful and that's [calls for] in most banking lingo a 50% action against it, Adam.

Let me just ask the question a different way. Do you feel comfortable that we won't see any further charge-offs with this particular credit?

I would clearly tell you, the worst is definitely behind us, Adam.

Gotcha. What -- I wanted to get some insight on deposit growth for the quarter. What -- you've talked about it -- I think average deposits were up, or was that average loans were up (MULTIPLE SPEAKERS)?

Deposits for the year were up 8%, Adam.

I was talking about linked-quarter.

Linked-quarter, I don't have that in front of me. Kevin or Steve, do we have that?

Be right with you, Adam.

I have the numbers here, if you want me to spit them out to you. Total deposits were down about 2% linked-quarter, and then on non-interest-bearing was down about -- down noticeably more on a linked-quarter basis. Are those seasonality issues, or do you expect deposit growth to ramp back up for the first quarter of '06?

One of the things we've done in the fourth quarter and are continuing to do is let some deposits, like Express Data and other higher-cost deposit funds, run off that are being replaced by the new branches and in core deposits Adam. So we are changing the mix, if you will, a little bit. At one time, Adam, three or four years ago, we had Express Data deposits as high as $150 million. And today, I looked at the number and they're down to almost $30 million. So we have really supplemented those type of deposits, what I would call national deposits, with local core deposits and we are continuing to do that. And in fact that will improve our cost of funds as we go forward as well.

So I hope that gives you a little better overview, Adam.

And we did have some seasonality drop in our interest rate DDA at the very end of December as well, Adam.

So you would expect to see that number rebound a little bit in the first quarter?

We would.

Last thing, tax rate. What's a good tax rate for next year?

Our effective tax rate, Adam, is running right around 32%.

That rate you just gave me is for the year, or for just fourth quarter?

I think, I would expect that rate is going to hold in throughout the course of 2006. It may trend a little bit higher than that. But I on average, it will be around 32%.

Okay great, thanks.

Jennifer Thompson, Oppenheimer & Co.

I was wondering if you could just give us a little more color on compliance costs. I know you said they were all-in, but can you give us sort of a sense of what the run rate is here? And do you expect at some point that trailing off, or is this sort of an ongoing expense that we should expect?

The comment about that I made earlier, we do believe that the great majority of compliance costs are factored in already. We do not anticipate any significant additional hiring. It's hard to say precisely what is compliance-related because we have undertaken over the past 1.5 years a substantial reassessment of processes and control environment to ensure that whether it has been identified by the regulator or by ourselves that we're operating the bank consistent with the size and complexity of the bank today. So we have taken on a considerable amount of costs overall. And as I say, we do believe that the great majority of that is already accounted for.

So that's a pretty good run rate going forward?

I think, if anything, you may see a slight down-tick. But, again, we don't anticipate any significant increase there.

Okay. And then can you give us anymore color on just how to think about expenses going into the first quarter since there were a few moving pieces that you guys talked about, not only compliance, but some other comp-related expenses? And the comment that in the press release, about 55% efficiency ratio -- is that something that should be consistent across the quarters in '06?

That's what we believe and we think the combination of the net interest income we expect to bring in in 2006, in addition to there are a number of various expense savings initiatives that have been initiated internally will keep that efficiency ratio right around the 55% level, even with the branch growth expenses in.

Okay. And then, I'm sorry if I missed this earlier, but did you -- excluding the one net charge-off in the quarter related to the one commercial loan; would you say that was a pretty good run rate charge-off ratio going into '06?

I believe Steve indicated to be consistent there, we're looking at 25 to 30 basis points annualized. Is that correct, Stephen?

Correct.

That's what you guys expect?

For 2006.

Okay, thank you.

(Operator Instructions). [Larry Seedman], a private investor.

I normally don't speak on conference calls, but since an issue came up and, Pat, you gave an answer, I just wanted to clarify one point which I have been consistent on from day one, in reference to the consulting agreement. It's my opinion that the Company did not in any manner, shape or form comply with the intent of the consulting agreement and that in reference to what I am planning to do, that will be decided very shortly. And depending on what happens, public disclosure of that will be made. So (indiscernible) clarify both sides of the point, and then I have one question for Steve. Steve, do you have any provision in there for a proxy contest in your expense numbers?

We are prepared for certain actions that could take place in 2006, yes.

Okay, thank you.

(Operator Instructions). Gentlemen, there appears to be no further questions from our participants.

Alright. I would like to thank everybody for attending our earnings call this afternoon and I certainly wish everyone a very good day. Thank you again.

Ladies and gentlemen, this concludes today's teleconference. We thank you for your participation and your time. You may now disconnect your lines.