PNC Financial Services Group Inc (PNC) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Yardville National Bancorp's fourth quarter of 2006 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, Mr. Patrick M. Ryan, Chief Executive Officer of Yardville National Bancorp. Thank you, Mr. Ryan, you may begin.

And 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 first quarter of 2007. With me today is Kevin Tylus, our President and Chief Operating Officer, Steve Carman, our Chief Financial Officer, and Daniel O’Donnell, Executive Vice President and Corporate Counsel of the bank. 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 questions. 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 calling 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 filings with the Securities and Exchange Commission, which are available on our website or from our Investor Relations department.

Thank you, Steve. Yesterday we reported net income for the first quarter of $5.1 million or $0.45 per diluted share, a slight decrease from the $5.2 million or $0.46 per diluted share we reported for the same quarter of 2006. Our execution of YNB's retail strategy continues to be successful. Our deposits are up, and we saw a modest increase in commercial loans, as well. To look at all of these we'll begin by discussing several factors behind our first-quarter numbers. As we anticipated, our fourth-quarter balance sheet restructure helped improve both our net interest margin and our financial performance. The net interest margin on a tax equivalent basis reached 3.37% for the first quarter of 2007, a marked improvement from the 3.08% for the same period in 2006. Shortly, Kevin Tylus will discuss the progress we've made and the positive results we've seen in building our branch network. This afternoon I will discuss several other key areas that we expect to effect our performance for the remainder of 2007.

The banking environment we face today is a challenging one. As many financial institutions have experienced, the prolonged, inverted yield curve has negatively impacted our net interest income levels, and we believe that we will continue to experience pressure on achieving net interest income objectives, which is our primary source of revenue. We have, however, identified ways to address these challenges through our expanded retail network. Commercial loan growth has remained steady when comparing first-quarter 2007 results to the same period a year ago. Total loans were $2 billion at March 31, 2007. Total loan outstandings, led by commercial loans, increased $24 million in the first quarter of 2007 from year-end 2006. The level of growth is reflective of a number of factors, including the highly-competitive environment in which we currently operate. Large commercial loan payouts are also impacting our actual on-average commercial loan growth.

To address this challenging environment for commercial loans, we have expanded the markets in which we have a physical presence. We are focusing on generating new commercial business in new markets like Middlesex, Somerset, and Ocean Counties. We have also returned to our traditional roots by re-energizing our small business sector. We have developed and now offer state-of-the-art products and services for our small-business clients and we have bank offices specifically focused on serving that size customer. We also believe there is a clear opportunity to enhance our financial performance by improving loan quality. Nonperforming loans decreased to $26.1 million or 98 basis points of 1% of total assets at March 31, 2007, compared to $29.5 million, or 1.12% of total assets the previous quarter at December 31, 2006. Our allowance at March 31, 2007, totaled $24.7 million or 1.24% of total loans and covered 95.9% of our total nonperforming loans. This compared with $22.1 million or 1.12% at December 31, 2006, which covered 75.9% of total nonperforming loans. We will continue continue to aggressively address problem credits and will keep you posted on our efforts to improve asset quality during 2007. As I noted before, our retail banking strategy has already yielded significant benefits.

And at this time I would like to ask Kevin Tylus, our Chief Operating Officer, to discuss our retail initiatives with you. Kevin?

Thank you Pat. We believe that our retail strategy continues to position the Company for better financial performance in the future. As a result of this strategy, we have more effectively managed our cost of funds. In 2006, we opened five new branches and actively promoted our products and services throughout our entire branch network. We mounted a series of exciting promotions and actively marketed our brand. Our Simply Better suite of products supported by extensive grassroots marketing represents some of the innovative marketing initiatives that have proven to be successful in generating new business. Our branches open since 2004 -- December of 2004 have produced $146 million in deposits. On average these new branches bring in approximately $11.3 million in net new deposits to the bank each month.

In addition to working hard to draw customers in with special deposit promotions, we engage in vigorous cross selling of other bank products. Our cross-sale ratio with our opening promotions has been strong at approximately 20%. Cross selling additional bank products helps to cement a relationship and is, of course, one of the key goals behind our opening special rate promotions. Throughout our branch network we have actively promoted our Simply Better suite of products in order to attract new deposits and gain new retail relationships. Our Simply Better product group balances totaled $420.2 million at March 31, 2007. In all of our activities our main economic goal is to increase deposit market share and core deposits in order to better manage our cost of funds, and we believe we are making progress there. As Pat discussed earlier, we expect our efforts in the small business loan area to generate not only loans but lower-cost deposit balances, as well.

As we reported, total deposits grew $87.2 million when comparing the first quarter of 2007 with the same period in 2006. With this result, we continued to replace generally more expensive wholesale funds with branch-generated deposits throughout our retail network. We opened one new branch in the first quarter of 2007 in Middlesex County and have two planned to open late second quarter; one in Lawrence in Mercer County, and the other in Cranberry, Middlesex County. We are currently assessing several additional branch locations designed to fill out the footprint within our existing market area, and more importantly, to establish YNB in highly desirable new areas. We believe these new branches will allow us to properly service and expand our existing customer business in these markets and will present an opportunity to develop new retail business there, as well.

We're also very excited about new deposit generation as a result of our small business initiatives. We now offer a new business money market product, a full business checking suite, and the opportunity to use remote deposit capabilities. That's where checks can be scanned at the customer's own company location, and a lot electronically transmitted to the bank for prompt credit. These capabilities are complemented by our new small business lending teams throughout our markets. The retail strategy is on track and achieving the desired goals, both economic and footprint related.

Steve Carman, our Chief Financial Officer, will now discuss other aspects of our financial position. Steve?

Thanks, Kevin. As you know, there's been considerable discussion throughout the banking industry on the impact of an inverted yield curve on net income income and margins. Both net interest income and margin levels remain under pressure, and there is little indication that there will be a pronounced change in the curve at any time soon. That said, the balance sheet restructure in the initiatives Pat and Kevin have discussed this afternoon will give us the best opportunity to enhance our performance in 2007. I'd like to take a minute to discuss our average balance sheet and income statement post restructuring. By reducing securities and borrowed funds, specifically Federal Home Loan Bank advances, we've improved our financial metrics. Our average securities portfolio declined $206.3 million in the first quarter versus the fourth quarter of 2006. The yield on the portfolio was 5.22% for the first quarter. Our investment portfolio performance compares favorably with our national peer group, both pre and post restructure.

In addition, the reduction of higher costs to Federal Home Loan Bank advances further improved our margin. Average borrowed funds declined $226.6 million in the first quarter of 2007 compared to the last quarter of 2006, with the cost of that money declining 73 basis points. We believe the balance sheet restructure achieved its primary objective of enhancing financial performance as well as reducing interest rate risk and strengthening liquidity. 2007 performance will substantially depend on our ability to grow our commercial loan portfolio, effectively manage our cost of funds, and improve asset quality. We will keep you posted on progress we expect to make as we go through the year, but we believe that the roadmap we've laid out today will give us the best opportunity to enhance our performance.

Thank you for your attention, now back to you, Pat.

Thank you, Stephen. Today we have discussed our progress against our objectives, as well as the critical factors which will likely impact our financial performance in 2007. To summarize, first, commercial loan growth has slowed based on the environment in which we currently compete. That is why you may continue to see a slower rate of commercial loan growth over the next several months. While we have selectively competed for certain credits, the combination of competitive terms and rates has limited interest income versus our expectations. To deal with this admitted challenging competitive environment, we have gone to our strength, putting more loan officers out in the field and re-energizing our small business lending function to attract additional clients and relationships to YNB.

Second, we continue to work hard to further improve our asset quality profile. Our goal is to return to strong credit quality that we have experienced in the past. We believe the strengthening of policies and procedures with the addition of a senior risk management officer will help us in this endeavor. Third, we need to continue to keep the net interest margin steady. We believe that our expanded branch network and active grassroots marketing efforts will help us in this effort by bringing in additional lower-cost savings and money market deposits. Fourth, we need to effectively price loans and deposits to generate the desired net interest income to help us meet profitability goals. Our loan pipeline remains active, with opportunities to establish new relationships in new markets. Our small business initiatives should provide us with the ability to move our commercial lending base higher.

We also continue to assess expense savings opportunities throughout the bank. When it makes sense we will take actions to lower corporate overhead. 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 we have confidence that we can do so in the future. We know what we have to do. We must remain focused on exporting our relationship-based model in order to grow loans and deposits. We intend to move our retail initiatives forward by opening new branches while offering new products and services in new markets. We believe the strategic steps we are taking are sound and will enhance YNB's franchise value and provide returns to you, the shareholder.

At this time, I'd like to open the floor to questions, and Steve, Kevin, Dan and myself will try to answer them for you.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Robert Fulton with Mendon Capital. Please proceed with your question.

Good afternoon, gentlemen.

Good afternoon.

As we see it, I don't know exactly how much there is to get excited about. Expenses seem to continue to trend higher. Upon review there's a subsequent negative operating leverage. Core expenses were higher, core revenues were lower. Loan and deposit growth seems to be negative and stagnant. Fee-based income seems to be declining. And over the quarter you spent a ridiculous amount of money defending your growth strategy in a proxy battle against your largest shareholder. You know, to date we think investors have been pretty patient, to which I guess we summate by saying you continue to demonstrate you've lost your able to grow the bank organically. Therefore we think we need to consider alternative strategies, and I'd like you to comment on what studies you've done in that direction?

First I would say I'd have to correct you, sir, that number one, our loan and deposits have continued to show growth, not stagnate or decrease as you indicate. We are also actively --

Yes, I'm speaking on a core basis.

We are also actively enhancing the franchise value by taking our brand of banking to new markets and effectively lowering our cost of funds by core deposits vis-a-vis the more expensive national type of deposits that we maybe had more in the past. We also are currently looking at expense savings where we can effectively reduce our costs as these initiatives are being undertaken, sir. Thank you for your question.

Could you comment a little more on the money that you spent in the proxy battle? Are you anticipating spending that money in the future?

We do have in our budget funds available for a proxy contest if there is one, sir.

Thank you. Our next question comes from the line of Chris Buonafede with OZ Capital. Please proceed with your question.

Good afternoon. Question in a similar vein. Explain to me why the continual opening of branches is creating enhanced shareholder value and franchise value at the same time that we see the efficiency ratio at the bank rise from the low 50s to the mid 60s over the last two years?

That's a fair question, sir. What we looked at some years ago was the asset size of the bank versus the number of branches, and markets of our branches that we're in was, we felt, totally undersized and deficient. And we felt that a real opportunity was available to move to these additional markets to attract lower-cost core deposits in these markets and effectively lower our reliance on Federal Home Loan Bank borrowings or more expensive funds. So we feel we accomplished two missions, lowering the cost of funds, deleveraging the balance sheet, and also going to new markets to enhance the YNB franchise, sir.

If I -- if I look at the core deposits and if I take out all of the CDs and assume that demand now, MMA and savings are core, the core deposit balance at the end of the year of '06 was $1.13 billion. At the -- at the third quarter of '04, it was also $1.13 billion. So I'm having a hard time comprehending on what component of the core deposit equation has grown as a result of opening all the branches?

Well, the exact numbers you're quoting, sir, I don't have in front of me, but I'm looking to my financial folks here to get some guidance.

Well certainly , I would add that one of the things we've been able to do when you have those comparative numbers is to run off some of what we would call some wholesale funding sources. We've describe them in our regulatory filings like reserve funds or express [status] CDs, which are generally higher cost. And our goal are our retail strategy is to replace this -- this core money wi -- instead of these higher cost funds. And you also see when you take a look at our deposit base that we certainly consider part of our CD deposit base core money, because there will be shifts from our other Simply Better suite of products to CDs from time to time, based on the rate environment. Overall, as we take a look at overall deposit base we think we've made progress in generating a better mix of deposits since we started on this strategy.

And the last question, why hasn't the regulatory order been lifted?

This is Kevin Tylus, I'll answer that question. You may be aware that when a bank is under an agreement such as ours, it's typically a two-year process, often more. We've been under the agreement a little bit more than a year and a half. While I can't speak specifically -- and I think people are aware as to why not -- on most recent exam, in our opinion it was a successful exam. We're pleased to note that -- that most of the items that were requiring action on our part have been satisfied, and we feel that we're on track to come out of the agreement in the timeframe that we believed it would take us to come out of the agreement. And you heard Pat mention earlier, our ability to get more of the lending personnel back out onto the street, and that's largely because of investments that we made related to the exam on information -- on risk management and internal-control matters. And we feel that we've lifted the burden from -- from our business generators that may have existed in the past as a result of good -- good-quality action related to responding under the agreement.

Okay, thank you.

Thank you. At this time I would like to turn the floor back over to Mr. Ryan for any closing comments.

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

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.