Provident Financial Services Inc (PFS) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to Provident Financial Services Incorporated second quarter earnings conference call. My name is Rob. I will be your operator today. Throughout this conference you will be on listen-only, if you require assistance from an operator at anytime please key star then zero on your touch-tone phone and [inaudible] will be happy to help you. At this time I would like to turn the conference over to Mr. Paul Pantozzi. Mr. Pantozzi please go ahead sir.

Thank you Rob. Good morning and welcome to our very first earnings conference call. I am Paul Pantozzi, Chairman, CEO and President, Provident Financial Services Inc. and The Provident Bank. I am joined this morning by Kevin Ward, our Executive Vice President, Chief Operating Officer, and Linda Niro, our Senior Vice President and Chief Financial Officer.

As you are all aware Provident became a public company in January of this year. [Inaudible] the second quarter of 2003 represents our first full quarter of operations as a stock owned savings bank. The announcement of our second quarter operating results was released yesterday morning and the announcement said, our Board of Directors has declared a cash dividend of $0.05 per share for stockholders of record as of August 15, was released yesterday afternoon. This dividend represents a $0.01 or 25% increase over the dividend paid for the first quarter.

In between those two events we conducted our first annual stockholders meeting. Our discussion this morning will focus on the highlights of our second quarter earnings results. This discussion may contain forward-looking statements and that disclosure regarding such statements may be found in all of our financial filings with the Securities and Exchange Commission, including page seven of our second quarter release. Following our brief presentation, we will be happy to entertain questions from the conference participants.

Provident Financial issued an aggregate of 59.62m shares and contributed cash of 1.92m shares of its common stock to the Provident Bank's foundation, the charitable foundation established by the Provident Bank, that was on January 15 of this year. As a result of the converged and stock offering the company realized $586.2m in net proceeds, $293.1m distributed to The Provident Bank and $293.1m contained by the holding company.

Just to give you a brief profile of our company, as of June 30, 2003. We are $4.2b in assets, $2.7b in deposits, and $2b in loans. We operated 50 branches across 10 counties in Northern and Central New Jersey. We are a full-service bank and we have retail and commercial lending, online and telephone banking services, trust services and investment services. We operated mortgage companies' subsidiary and we have an interest in the Provident Insurance Company.

Our strength includes the traditional accrued [inaudible]. We have established since 1839, we are New Jersey's oldest bank. We are customer focused and we are determined to deliver hassle-free banking for busy people. Our employees are trained [inaudible] for customers care. We are 15th in deposit size out of a 181 FDI state insured New Jersey banks as of June 30.

Our mission is to consistently provide securities of value to our stockholders by achieving strong financial performance, to our customers by delivering high-quality financial solutions that help improve and enrich their lives, for our employees by maintaining a challenging and rewarding work environment, to our communities by committing our personal energies and financial resources and by exemplifying outstanding leadership. We will achieve this by holding ourselves at the highest standards of personal and professional integrity.

Our strategic initiatives include maintaining diversification of loan portfolio. We want to emphasize relationship banking and core deposit growth. We will maintain [inaudible] quality and we intend to improve proficiencies throughout the entire organization. We also are looking to extend our retail franchise. Currently we operate 50 branches as I said, we also got seven branches at Jersey City just about a month ago. We have a new branch scheduled to open in North Brunswick in this September. We also purchased three branches located in Howell, Jefferson and Rocky Hill from Sun National Bank. They are scheduled to open on or about August 8. We continue to explore other opportunities for expansion on the development side as well as the acquisition opportunities.

I would just like to give you brief overview of our performance in the second quarter. Provident Bank reported net income of $8.8m for the quarter ended June 30, an increase of $736,000 or 9.1% compared to net income of $8.1m for the quarter ended June 30, 2002. For the six months ended June 30, 2003 Provident Financial reported net income of $2.4m, a decrease of $12.6m or 84.1% compared to net income of $15m for the six months ended June 30, 2002. This reduction in net income in the six-month period is due to a one-time expense associated with the $15.6m net-tax contribution to the Provident Bank Foundation. Provident Financial reported basic EPS of $0.15 for the quarter ended June 30, 2003. A basic EPS of $0.02 for the six months as of June 30, 2003, which includes the result of operations from January 15, 2003. [Inaudible] conversion. I am going have Linda Niro, our Chief Financial Officer to take us through a little more detail on the financials.

Okay. Thank you. First, I will talk about net interest income and some of the changes from the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002. Net interest income for the quarter increased 21%. This is due mainly to increases in investment securities. Average investment balance during second quarter was up 123% compared to the second quarter of June 2002. The increase in investment securities is primarily due to the result of the receipt of conversion proceeds and a leverage growth strategy that was implemented late in the fourth quarter and completed early in the second quarter of this year. Net interest income at June 30, 2003 compared to the first quarter of this year was up 6.3%.

Looking at loan balances, average loan balances this quarter increased 3%. The average yield on interest earning assets in the quarter ended June 30, 2003 compared to June 30, 2002 decreased 133 basis points. High levels of refinance activity in loans u[inaudible] portfolio's in the mortgage-backed securities portfolio contributed to the decrease in yield on investment earning assets.

On the liability side, average core deposits increased 16.4% in the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002. During the same time period average borrowings increased 198% and average time deposits decreased 6.9%. The average cost of interest bearing liabilities during the same period decreased 69 basis points. Again, record low interest rates have allowed us to bring price down on our liabilities.

The net interest margin in the quarter ended June 30, 2003 decreased 52 basis points to 3.56% compared to 4.08% in June 30, 2002. Compared to the fourth quarter ended on March 31, 2003, our net interest margin improved 6 basis points from March 31, 2003. Looking at non-interest income, non-interest income for the quarter ended June 30, 2003 decreased 43% compared to the quarter ended June 30, 2002. Some factors that contributed to this decrease. In 2003, we have been recording losses on investment transactions associated with some prepayments on our mortgage-backed securities portfolio compared to the small gain that we recognized in 2002. With regard to other income, other income is down 64% in the quarter ended June 30, 2003 compared to 2002 and this is due to gains on loan sales, which were down this year. We have been selling fewer loans for the first six months for this year and our annual loan [inaudible] are down 55% compared to six months last year. Sale of other assets was also down from 2002, but we did have some sales from bank-owned property that we did not have this year.

In the non-interest expense category, non-interest expense is up 9.4% for the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002. For the six months non-interest expense was up 62% including the $24m charitable foundation contribution. Excluding foundation expenses, non-interest expense for the six months increased 8%.

Our efficiency ratio at the end of the quarter was 62% compared to the quarter ended June 30, 2002 when it was 65.12%. For the six months our efficiency ratio adjustment for the charitable foundation contribution was 61.86% compared to 66.45% in the six month period last year. Compared to the first quarter the efficiency ratio is slightly up, it was 61.71% at March 31, 2003.

Looking at balance sheet changes at June 30 compared to year end, total assets increased 6.8%. On the loan side, loan balances were down 1.2%, however we are seeing increases in the residential portfolio and in the commercial loan portfolio. Residential loans were up slightly, 2.6%. the volume is 58% greater than it was in 2002 at this time. Commercial loans also experienced an increase of 6.5%. On the investment side, total investments were up 17.5% at June 30 from year end and this primarily deleveraged growth strategy that has been in place.

[Inaudible] in other asset categories, there was an increase in other real estate owned of $1.8m related to commercial real estate property that's been on our books for over 14 years. It went in to non-performing status in August of 2002 and it went into ORE in June of this year.

Total deposits was down to 17.6% for the six months ended June 30, 2003 largely due to the conversion escrow account balances $[inaudible]m, that were in our balances at year end and used to purchase stocks during the conversion. Federal Home net borrowings increased over 111%, that was related to our leverage growth strategy.

Thank you Linda. At this time, I like to have Kevin Ward our Chief Operating Officer to talk about our loan portfolio and [inaudible].

Good morning. About five years ago or so, we made a determination that we were going to change our whole model from that of very much constricted (ph) model of one to four family residential lending and become much more diverse in our portfolio. To improve asset deals and to reduce exposure to interest rate risk. As of the year 2000, we are just slightly over 60% in the retail portfolio, which would have consisted of one to four family residential and consumer loans. At June 30 of this year, the mix was 48.85% retail, 51.15% commercial. The commercial is really defined as commercial real estate including multi-family lending and construction lending, fewer commercial and industrial lending, [inaudible] that we all know in our in our mortgage warehouse portfolio. The target that we have been pursuing is to be roughly 50-50 in that loan portfolio. We have affirmed that yet again and feel that, that is a portfolio mix that serves us well. We do not anticipate changing that full percentage. We have done some testing to see if there is any reward for taking on additional risk and at this point we do not find any additional reward for taking on risk.

Clearly when we converted we received a lot of capital and could conceivably have changed some of our underwriting standards and our exposure standards. We did modestly increase our exposure standards. Currently on legal lending, where it is just over $81m, however our in-house policy for exposure to one borrower or one group rather is $50m and our individual borrowing limit is $25m. So you can see that we have continued to be conservative in our exposures. We also make same underwriting standards that we had prior to conversion. We do not anticipate taking on any significant risk; non-performing loans continue to be very low as a percentage of our total portfolio. At June 30, we had non-performing loans of $5.7m compared to [inaudible] on December 31, 2002 and $4.6m at June 30 2002.

Non-performing assets were $7.5m, a reflection of our loans as well as the assets as Linda Niro mentioned, went into ORE. At June 30, [inaudible] non-performing assets at June 30, 2002 of about $4.8m. Total non-performing loans as a percentage of total loans was 0.28% at June 30, 2003, 0.41% at December 31, 2002, and 0.24% June 2002. Our coverage ratio for non-performing loans was 375.97% at June 30, 2003 compared to 246.55% at December 31, 2002, and 474.56% at June 30, 2002. The allowance for loan loss as a percentage of total loans was 1.06% at June 30, 2003, 1.02% at December 31,2002 and 1.13% at June 30, 2002. We remain committed to maintaining our asset quality where it is, we believe that we continue to underwrite to ensure that that will occur and do not have any potential loans at this point that we foresee going bad. We have the loan portfolio folks do a monthly review of all of their outstandings in the Provident Early Warning System committee and we really do not anticipate any change in our loan quality at all, or in our asset quality. Thank you.

That concludes our presentation and we would like to now entertain questions that you might have.

Okay, thank you sir, ladies and gentlemen on the phone, if you wish to ask a question at this time, please key star then one on your touch-tone phone. All questions will be taken in the order in which they are received. Once again, if you would like to ask a question, simply key star, then one on your touch-tone phone. Sir, give me a moment while I gather your first question.

Okay.

Sir, your first question comes to you from Scott Valentin (ph) of FBR.

Good morning.

Good morning.

Congratulations on a successful conversion.

Thank you.

Could you give us a sense, maybe, of your plan for the excess capital? Obviously you are through the conversion process, came out with high levels of capital. Would it be possible, maybe, to rank in terms of the attractiveness, share repurchases, acquisitions, and leverage?

Okay. Then there are several parts there obviously, we -- in our filing, we indicated that there were four broad areas that we are interested in investing in. Number one, being expansion and at this point in time, we were on track to open five branches, new branches this year and we indicated in our filing that we will probably average three to four branches over the next three years. So, that's [inaudible] standpoint. We continue to look for opportunities to purchase branches with deposits, an example is three-branch acquisition from Sun National that I mentioned earlier.

We are also looking at opportunities that might be afforded with respect to acquisitions and of course that is a longer-term perspective and that requires continued analysis and we are in the middle of that type of process as we speak. We are also looking to expand and to upgrade any technology that we have in the organization that requires attention on immediate basis and for longer-term purposes as well. We do have the CRM strategy that is currently being implemented and we feel that's being totally integrated in the organization between now and year-end. I guess [inaudible] client development, management and staff. In terms of buybacks, that is an issue that may be considered in the future, we have not put that on the drawing board at this point in time, but will be considered at the appropriate time of presenting that.

Okay and with regard to leverage, I mean how do you view the current environment and I guess you are -- the attractiveness of leverage right now?

Hi Scott. This is Linda, how are you doing?

Good.

Right now, we are not continuing with any further leverage, looking into and seeing what happens regarding direction of interest rates that the yield curve [inaudible] down a little bit more re-evaluated but for now we are not continuing.

Okay. Thank you very much and congratulations.

Thank you.

Thanks.

Okay, thank you sir. Your next question is from Wayne Gaffen (ph) of Mendon Capital (ph) . Mr. Gaffen, your line is open, sir. Then we will go to Rob Haberman (ph) of Haberman Fox (ph) .

Good morning gentleman. How are you?

Good morning, fine. How are you?

Could you tell us how big the exposure is on the warehouse lending side and I just have one follow-up after that question?

We have 25 plants with [inaudible] of $290m as of day before yesterday. Our outstandings were 257 days. That's obviously indicative of the refinance market. Rates ticked up just slightly about a week ago and we saw a significant increase in the volume as a result of that moving.

Do you expect to expand that part of the portfolio?

I am sorry, I didn't get your question.

I am sorry; I am on a cell phone. Excuse me. Do you plan to expand that warehouse lending part of the portfolio much?

At this point in time, we are in maintenance mode, because by virtue of our clients growing, the portfolio in fact grows organically, if we have several clients that have grown over the last year, the year and half it was a result they come to us for increases at various times in their specific line.

And just one follow up question. Regarding the mortgage-backed premium, do you have much exposure in terms of premium on mortgage-back and if we see these low-rate environments through year-end, would we expect to see the types of security losses that we saw in the past quarter, given the pre pays on mortgage-backed?

We would expect to see our losses to be in line with what we have recorded so far. I don’t anticipate that they would be any greater than they are right now. So, we don't have any unusual exposure with regard to the premium on mortgage backed.

Similar to the $1.7m loss you saw in this quarter?

That's correct.

Okay. Thank you.

You are welcome.

You are welcome.

Okay, thank you sir, once again ladies and gentleman star one for any questions. Okay sir, we will take a question from Joseph Miyon (ph).

Hello are you there?

Yes.

Yes, we are.

Good morning and congratulations on your conversion also from me. I had a question about your efficiency ratio. There seems to be a pretty good correlation in the stock market between companies savings banks or hybrids like yourself that have relatively low efficiency ratio as in good stock performance. Your efficiency ratio at the moment is about at the average for your peers. There are a couple of competitors in your area that are much better and their stock has performed very well over the last couple of years. Is there any possibility or do you anticipate getting that ratio down significantly from where it is?

Yes. We are working on improving our efficiency ratio. It has improved primarily due to increases in revenues and net interest income and non-interest income. We are working on getting our operating expenses down and more in line with where they should be for a company of our size. So we expect that to improve over a time.

Okay. Thanks.

Okay. Thank you sir, your next question is from Rob Haberman .

Just one final question. The branches you bought from Sun, how much premium did you paid for those deposits please?

The premium for all deposits was approximately 6%. That number has not been finalized because it will be based on the deposits as of the closing date, but it would be, it is about 6% premium on all deposits.

Okay and just one final question regarding your ESOP and the buy back to fund that. Most banks historically have bought that back fairly quickly within the first week or two or three. I am curious why you decided to stretch it our over a number of months?

The trustee for the ESOP is in charge with the responsibility of buying back the stock and its strictly their decision, we have no input.

So it is a 100% their discretion and you guys have no input in terms of directing that?

That is correct, because the trustees are responsible for purchasing [inaudible] ESOP.

And can I ask you how much is left for that buy back today?

As of June 30, the ESOP reported 73% of the required stock.

Thank you and again the best of luck.

Thank you.

Thank you.

Thank you sir, your next question, Scott Valentin from FBR.

Another follow-up question. With regard to the compliance issue with the regulators has that been sufficiently resolved?

We have implemented numerous policy changes in addition to bringing in a new compliance officer about two and a half months ago. We are in the process of - basically revisiting the entire operations. With respect to the MOU that was mentioned, we did not need to adhere to MOU [inaudible] issues. In fact, the Board resolution was given to the FDI team and they just accepted that in lieu of the MOU. So, we are on our way to improving the efficiencies.

Okay and then with regard to loan portfolio, getting back to what Kevin was mentioning, I believe boat (ph) loans are fairly large size of the consumer portfolio. Can you talk about some of the underwriting criteria you use on those loans and the historical performance of those loans?

The historical performance of the loans is, to my recollection and I don't have the data in front of me, but I don't believe we have had a charge-off in the boat loan portfolio for at least five or six years and perhaps beyond that. We purchased our boat loans from boat lending dealers, but we underwrite them ourselves to our own criteria. The portfolio does extend after 15 years [inaudible] security, but the duration of the portfolio is probably closer to the 3-4 year range. And we have had tremendous asset quality inside the boat loan portfolio. It probably represents somewhere around a third of the entire consumer loan portfolio at this point.

And I guess that, that portfolio continues to grow?

Yes it does continue to grow, it is a very competitive environment, but it is growing very slowly because of the competitive nature and as a practice with an organization, we will not chase loans down when they reach the levels where we think it is irrational, we will keep our power dry and just stay liquid rather than chase the loans.

Okay very prudent, thank you very much.

Okay thank you, once again ladies and gentleman star one for any questions. If there are no further questions at this time, I'd like to turn the conference back over to Mr. Paul Pantozzi for any closing comments.

Thank you very much. At this time I would like to thank everyone for their participation. We look forward to communicating with you with our next quarter results and I thank you very much.

Okay thank you sir. Thank you very much ladies and gentleman. This brings your conference call to a close. Please feel free to disconnect your lines at any time.