PNC Financial Services Group Inc (PNC) 2006 Q4 法說會逐字稿

[Inaudible] ladies and gentlemen, and welcome to the Yardville National Bancorp's Fourth Quarter 2006 Earnings Conference Call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero 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, Chief Executive Officer of Yardville National Bancorp. Thank you. Mr. Ryan, you may now begin.

And thank you, and 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 of 2006 and for the full year.

With me today is Kevin Tylus, our President and 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 tomorrow on our website.

There will be brief prepared remarks regarding our financial performance this past quarter, and then we'll 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 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.

Yesterday, we reported a net loss for the fourth quarter of 8.7 million, or $0.79 per diluted share, and full-year earnings of 6.9 million, or $0.61 per diluted share. Today, we will discuss in detail several key factors behind our fourth quarter numbers that also affected our earnings for the full year of 2006.

The primary contributing factor to the fourth quarter loss was our balance sheet restructure. In addition, higher non-performing asset levels also impacted fourth quarter results. Besides those factors affecting our financial results, we will also discuss this morning the ongoing execution of our retail strategy, deposit growth, commercial loan growth, and net interest margin.

Let me begin with the balance sheet restructuring.

As you know, we took significant steps to strengthen our balance sheet at the end of the fourth quarter. We restructured a portion of our balance sheet in order to enhance the Company's net interest margin and to improve earnings in 2007 and beyond.

In addition, we reduced interest rate risk and strengthened our liquidity position. In broad terms, we sold lower-yielding securities and used the proceeds to retire higher fixed-rate federal home loan bank advances. The restructure consisted primarily of three actions -- one, we sold 295 million in securities, principally callable and non-callable agency bonds, with an average yield of 4.46%; we retired 320 million in federal home loan bank advances at an average rate of 5.84%; and we refinanced 100 million in federal home loan bank advances at an average rate of 5.59%, with FHL advances -- with FHLB advances at an average rate of 4.05%.

In summary, the restructure resulted in a charge to our fourth quarter earnings of approximately 12.9 million after tax, or $1.13 per diluted share. The balance sheet restructure is expected to produce enhancements to our net interest margin, return on assets, return on equity, and earnings per share in 2007.

The ongoing execution of our retail strategy and recent balance sheet restructure, we believe, positions the Company for better financial performance in the future. As we've said in the past, we see the retail strategy as a key to enhancing shareholder value.

Throughout 2006, we have opened new branches and have actively promoted our products and services throughout our entire branch network.

Today, Kevin will discuss the success we've experienced as the result of our retail initiatives. Kevin?

Thank you, Pat.

As part of our long-term retail strategic plan, we opened several branches during 2006 and actively promoted our Simply Better suite of products in order to garner new deposits and gain new customer relationships.

You have heard us consistently report for several quarters that our plan is to continue to enter new markets and to introduce our retail brand, our community banking philosophy, and deposit product line through YNB's expanded geographic footprint.

The main economic goal is to increase deposit market share by attracting lower-cost core deposits, as opposed to non-core deposit products that do not contribute to franchise value. This also helps to effectively manage our cost of funds, and we believe we are succeeding there.

Let us take a look at the results of this past year.

In 2006, YNB grew net deposits $30.6 million, or about 2%, but that does not tell the whole story. Net deposit growth included the run-off of more than $77 million in wholesale deposits, which are more expensive funding sources.

Led by our new bank offices, branch deposits themselves increased over $115 million in 2006.

In the fourth quarter of 2006, we opened two new branches, one in Woodbridge, Middlesex County and one in Skillman, Somerset County.

As an example of the immediate success of these efforts, the Woodbridge branch already has generated over $1.2 million in new deposits, with a 22% cross-sell ratio. Our customer services representatives have expanded new customer relationships by selling additional products and services.

The Skillman branch has experienced similar results, with $900,000 in deposits in their first three weeks.

We opened a total of five new bank branches in 2006. Our Cream Ridge and Ringoes branches, both in New Jersey, opened in the first and second quarters, and we opened our branch in Whitehouse Station, New Jersey in the third quarter.

In the first half of 2007, we plan to open three branches in Middlesex County and one in Mercer. Others in Middlesex, Hunterdon, and Mercer Counties have the potential to be opened in the second half of 2007 and early 2008.

We recently opened our 33rd branch in North Brunswick, Middlesex County this month. We believe the additional branches set to open this year will fill in keyholes within our existing market area and more importantly establish YNB in highly desirable new areas.

In most of these markets, we already have commercial lending relationships. These new branches allow us to properly service and expand this existing business and present an opportunity to develop our retail business there, as well.

The one in Central New Jersey County where we do not currently have branches is highly attractive Monmouth County, and we have various opportunities there for footprint expansion.

We are also working to expand our small business portfolio by generating new loans and establishing solid relationships.

We're giving our business development officers the necessary sales tools to cement those relationships by offering a new business money market product, a full business checking suite, and the opportunity to use remote deposit capabilities where checks can be scanned at the customers' own company location and electronically transmitted to the bank for immediate credit. These capabilities are complemented by our new small business lending team, which is now fully operational.

Our [Credit Scored Loan] product, geared to smaller, historically more profitable loans, is available this quarter. Also, our Remote Deposit Capture product is in test at two customer sites.

Now, to discuss additional factors in our 2006 performance is Steve Carman, our Chief Financial Officer. Steve?

Thanks, Kevin.

As Kevin just discussed, we view our retail strategy as an important component of enhancing profitability and increasing shareholder value. And while we've made considerable progress in attaining our retail strategic goals, 2006 has not been without its challenges.

One of those challenges was asset quality. Aside from the highly publicized [Kara] and Dwek loans, which in 2006 had only a minimal impact to our financial statements, we have experienced credit deterioration in certain problem credits. As a result, several credits were placed on [inaudible] status in December 2006, resulting in the increase in non-performing assets for the fourth quarter.

Non-performing assets increased to 29.5 million, compared to 20.3 million at September 30, 2006. We believe our allowance for loan losses to total loans, registering 1.12% at year-end, was appropriate in relation to our credit risk.

As has been the case for most banks, our net interest margin has been under pressure because of fierce competition for commercial loan assets and retail deposits.

As a result of the balance sheet restructure, our net interest margin on a tax-equivalent basis improved in the fourth quarter to 3.09%, which moved our margin for 2006 to 3.05%, the same level as 2005. We expect the full positive effects of the restructure will be realized in the first quarter of 2007.

While enhancing the net interest margin and improving our financial performance were clear objectives of the balance sheet restructure, our further goals were to reduce interest rate risk and enhance our liquidity profile, both achieved.

Just as important was our ability to maintain the appropriate regulatory capital ratios, which we were able to accomplish. As you're well aware, commercial loan growth has long been the vehicle for achieving our financial goals.

At this time, I'd like to turn the call back to Pat to discuss the commercial lending landscape. Pat?

Thank you, Stephen.

As we've discussed on prior calls, fierce competition for commercial loans continues to be a factor in our marketplace. Also, we continue to see accelerated loan pay-offs from existing customers, as we mentioned in last quarter's call. As a result, we did not see the net loan growth we anticipated in 2006.

However, our pipeline remains active and healthy. As you know, commercial loans form the lion's share of our total loan portfolio. While we have brought in a considerable amount of new commercial lending business with existing relationship [powers], this has only resulted in partially offsetting the previously noted pay-downs.

YNB's new markets have also provided additional loan opportunities over the past year. As a result, our net commercial loan growth, in total, remained the same at year-end 2006 as it was at the same date in 2005.

Excluding the effects of the balance sheet restructuring, in our last conference call, I noted that two of the critical factors to achieving our financial objectives for 2006 and going forward were reaching commercial loan projection and an improving asset quality profile.

The effects of flat commercial loan growth in 2006, higher deposit costs, and the increase in non-performing assets have impacted our anticipated net interest income improvement and hampered our progress in achieving our financial objectives. Improvements in loan growth and credit quality, along with increased lower-cost retail deposits, are key elements of our ability to meet our financial objectives in 2007.

While we are aware that many banks face similar changes with the inverted yield curve and a slower commercial and residential lending environment, YNB is not sitting back and playing the waiting game. Besides the retail and small business initiatives already discussed, we have, over the past year, hired several highly experienced lending and business development officers and relationship managers to generate new business and drive income higher.

Those of you who have followed YNB for some time are aware that we have operated effectively in this type of challenging environment in the past. And while past performance cannot guarantee future results, we plan to continue to use our relationship-based model to manage commercial loan growth in a very competitive market, and we intend to move our retail initiatives forward by opening new branches while offering new products and services in these new markets.

At the same time, we are working diligently to improve asset quality in the future to enhance our financial performance. We believe the strategic steps we have outlined this morning will position the bank for improved future performance, which we believe will enhance franchise and shareholder value.

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

Thank you, sir. [OPERATOR INSTRUCTIONS]

Our first question is from Jennifer Thompson with Oppenheimer. Please proceed with your question, ma'am.

Hi. Good morning, everyone.

Hi, Jen.

Question on the loan versus the pay-offs. Just can you give us a sense of how much the pay-downs have been affecting you? And is there any way to gauge if that pressure is going to let up any time soon? And what is the pipeline, if you can give us that?

Jen, this is Pat Ryan. Good morning. We did experience a higher level of pay-downs than normal in 2006, in fact, and many of our construction loans paid off, and our pay-downs exceeded $300 million last year.

That being said, even with the slower residential and commercial environment, we have many very substantial relationships that continue to be active with us, and I see the pipeline being active and healthy well into 2007, Jen. But the pay-downs are not impacting the overall loan growth, if you will, which is why we showed basically minimal growth in 2006.

Is there any -- was there any trend going into the latter part of the year or even into early '07 that gives you a sense that the pay-down pace is either getting worse or getting better?

Well, the commercial activity still seems to be fairly strong in our markets, Jen. The residential markets have slowed somewhat, but there are a number of residential builders actively looking for product and talking to us about possible projects this year.

Okay. In terms of the asset quality, can you give any color on the increase in the non-performers this quarter? Was there any general trend among the deterioration? And would you consider -- I mean you've seen the net charge-off ratio about the same for the past two quarters. Is that what you would consider sort of a normalized run rate going into '07?

Again, it's Pat speaking, Jen. I clearly would like to see that run rate diminish. While we certainly can't promise that, I believe that in this cautionary environment in today's economic world, if you will, that we took a very aggressive approach to address any issues and better position ourselves, we believe, for the loan portfolio in 2007.

I would also say this, Jen, that -- and I want to share this with everyone, the analysts, everyone on the call, and the numbers will be in our year-end financial report, and to all our shareholders -- that the delinquency numbers from 30 days out through MPAs are the same at 2005 as they were at 2006. So we've not seen any shift in our overall delinquency, Jen. I think it's really a more aggressive approach we've taken to this current environment and being more cautious, if you will.

Okay. Any general trend to the non-performing loan increase? Was it kind of across the board?

I would say that we had a number of customers that we've been working with for two or three years that even some of them were in the 30/60-day delinquency category, Jen, that we felt it was best to aggressively sit down and work with them to see how they and we could better work through 2007.

I would also tell you this, Jen, that the -- we are a collateral lending bank. We don't do credit card lending, and we're not into sub-prime, and we do very little unsecured lending. So being a well-collateralized bank, we feel that our allowance for loan loss is well positioned for any losses that we have to address.

And would you expect that reserve ratio to remain stable, or would you expect to build that as the cycle -- as the credit cycle matures?

I think as we've -- my opinion then maybe ahead of the curve here, Jen, I would like to see it stable as we go into this 2007 environment that we're working with.

Okay, great. Thank you.

Thank you. Our next question is from [Rob Clark] with [Seidman and Associates]. Please proceed with a question, sir.

Good morning.

Good morning, Rob.

Is the net interest margin of 3.09 a good run rate for 2007?

Well, at this time, Rob, due to a number of uncertainties regarding external factors, such as the competition for loans and deposits, inverted yield curve, well, we're not going to be providing 2007 guidance, but I would say that we would -- as I said in my remarks, that we haven't yet realized the full impact of our balance sheet restructure, and we would expect further margin improvement from where we finished the fourth quarter.

And do you have any goals for efficiency ratio or commercial loan growth for 2007?

Well, to only adjust the efficiency ratio [inaudible] efficiency ratio has historically been in the 55 to 60% level. That's certainly based on actions that we took in 2006 that kind of distorted that number, but that would be our target as we look going forward.

And for commercial loan growth?

Again, Rob -- Pat Ryan here -- we're staying active with our pipeline and looking to do all the good business from our current relationships and new borrowers in markets that we can. That would be my answer at this time, sir.

Thank you.

You're welcome.

Thank you. Our next question is from [Larry Seidman] with Seidman and Associates. Please proceed with your question, sir.

Good morning.

Larry.

Good morning, Larry.

You guys have used, all three of you, the term "increased shareholder value." Over the past -- and correct me if I'm wrong in anything I say here, okay? -- in the past approximately 18 months, you were subject to a supervisory agreement. Most people on this call don't know that the Board of Directors of this bank has been held to be in breach of their fiduciary duty by a superior court judge [the Sade] County, New Jersey. You've increased your non-performings. Steve Carman made an off-the-cuff comment that it really wasn't material, the Dwek and [Kara homes]. Steve, I think $2.5 million is pretty material. Your earnings are down so that the last time you earned $0.36 a share was the first quarter of '04. Your reserve didn't cover your write-offs. Your efficiency ratio I'd compute to be around 62%, so you're out of the 55 to 60% category.

Can you tell me how that is increasing shareholder value? And the stock today is down $1.15, $1.16. Can some of you comment? That's my first question on how you're working to increase shareholder value.

First, Larry -- Pat here -- I'd like to answer regarding pending litigation. We have no comment on that, sir.

It wasn't pending, Pat. It's an actual hearing reported from the bench that you -- your Board breaches fiduciary duty. If any analyst wants a copy of that, I'll provide it to them. So don't say pending litigation, Pat. That's from a judge's mouth in front of your lawyer. If he hasn't reported that to you, then I'll send you a copy of the hearing, okay? But that's a fact, Pat. But go ahead, Pat.

All I will say to that, Mr. Seidman, is that the appeal is pending and we have no further comment, sir.

Larry, it's Kevin. On the topic of the supervisory action that you referenced, I'm happy to update those on the call today that we believe we continue to make very solid progress, are working very collaboratively with both the OCC and the Federal Reserve Bank. We've had a number of measuring sticks along the way since August 31 of 2005, and every time that the OCC has had the opportunity to look in at YNB, they have been supportive. By that, I mean that they have not restricted our ability to do business, they've approved all of our new branch applications, and they approved the dividend payment each quarter.

It's not possible to know when we may come out of the formal agreement. That's not something we can control, but we believe that we are making very substantial progress and have received indications of positive progress. [Inaudible] update for the group on the --

Kevin?

While you're updating on that, why don't you update on how your retail strategy is doing so well in that in looking at your numbers, your non-interest -- your deposits -- non-interest deposits are down. So you're opening these branches, and your non-interest-bearing deposits are going down.

Larry, Pat here. I think the math is quite simple, sir. In today's economic environment, unlike the past two or three years, with the interest rates rising, corporate depositors have been moving their money into interest-bearing money market accounts, Larry. I mean that's the bottom line, sir.

Well, Pat, can you comment then on the $0.36? And if I'm wrong, the last time you earned $0.36 was back in the first quarter of '04. Do you feel that that is working to increase shareholder value?

Larry, I believe the net result was primarily an impact of the restructure that we undertook in the fourth quarter, sir.

With all due respect, Pat, I took out the restructuring. $0.36 is your number in your press release, the third paragraph, which says that that's without the restructuring, you would have earned $0.36, Pat. So how is that increasing value when you're going back almost three years in earnings? Explain that, Pat.

Larry, how many questions do you have this morning, sir?

Well, why don't you answer this one?

Well, Larry, I think we've answered a number of them, sir.

Then I'll just ask my last question, and I'll let somebody else take over.

My question is you received a bonus, you, Kevin, a few other people. How can you justify taking a bonus with these pitiful results? Instead of taking a bonus, you guys should be giving money back to the Company. And can you tell us what performance standards you used to receive those bonuses?

Larry, we had nothing to do with the Salary Compensation Committee. It's an independent Directors' committee, vetted by the full Board, sir. We have nothing to do with it, and I would only say that we've continued to enhance shareholder value here, and that was a decision made by the Board, not involved with any of us, sir.

You have a funny way of doing it, Pat. I'll turn it over to somebody else.

Thank you. Gentlemen, there are no further questions.

Okay. Thank you very much, ladies and gentlemen. At this time, we conclude today's teleconference. We appreciate your interest in YNB and look forward to talking with you again in the next quarterly call. Thank you very much.

Thank you, gentlemen. This concludes today's conference call. Thank you all for your participation. You may disconnect your lines at this time, and have a wonderful day.