Provident Financial Services Inc (PFS) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Provident Financial Services quarterly earnings call. My name is Carlo and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host today for today's call, Mr. Paul Pantozzi, Chairman, CEO and President of Provident Financial Services. Please proceed, sir.

Thank you. Good morning, and welcome to our third quarter earnings conference call. I'm joined this morning by Kevin Ward, our Executive Vice President and Chief operating Officer, and by Linda Niro, our Senior Vice President and Chief Financial Officer.

The discussion may contain forward-looking statements, and our disclosure regarding such statements may be found in all of our financial filings with the Securities and Exchange Commission, including our third -quarter earnings release. Following our brief presentation, we would be happy to entertain any questions from the conference participants.

We are currently operating in accordance with our business plan, and are very much in sync with that plan. From a branch expansion standpoint, we have completed three branch acquisitions for the month of August and we've opened two other branches, one in June and one just this past October, early part of the month. We have several others under consideration, so we're very much in sync with that part of our plan.

Obviously, our top priorities continue to look for opportunities to expand within the marketplace. Management continues to assess opportunities, both on the de novo side as well as acquisition opportunities. In order to deliver on our brand promise, we continue to integrate our customer relationship management strategy throughout our organization; that is working quite well for us at this point in time, and it is fully integrated into the branch, system. And we anticipate having it fully integrated throughout operational areas by year-end.

At this point in time, I'm going to turn the conference over to Linda Niro for the financial presentation.

Good morning. I would like to give a brief overview of our operating results for the third quarter. Net income was $8.1 million, in comparison to $3.7 million for the quarter ended September 30th 2002. Prior-year results were adversely impacted by a charge-off related to a mortgage warehouse loan in the third quarter. For this year, our results from operations were reporting basic and diluted earnings per share of 14 cents. Net interest income for the quarter is $30.7 million, an increase of 1.8 million or up 6 percent from 28.9 million the same time last year. During the quarter, we did reclassify the way we report and account for accelerated premiums or discounts on mortgage-backed securities. In prior quarters, we did show them as a gain or loss on securities sales. And all prior periods in our statements and reference, the numbers have all been reclassified. Within the net interest income number, we are seeing reductions in premium amortization; in September, the premium is down 31 percent as are the prepayments from August. And currently in October, we are seeing a 50 percent reduction in premiums from the previous month.

Also in this quarter, in our net interest income number is our regular Federal Home Loan Bank dividend of 337,000. That represents the second quarter interest payment from the home loan bank. We do not accrue home loan bank dividend, and we account for it on a cash basis.

Interest income for the quarter decreased 1.1 million or 2.5 percent compared to the quarter ended September 30th, 2002. Our average yield on interest-earning assets decreased 168 basis points to 449 compared to 6.17 percent in the prior quarter last year. Compared to the linked quarter in June, net income was down 3.2 million. And the average yield on interest earning assets decreased 38 basis points. Interest expense for the quarter decreased 2.9 million or 18 percent compared to the quarter ended September 30th, 2002. Our average cost of interest bearing liabilities decreased 81 basis points to 1.76 percent compared to 2.57 percent last year. Compared to the linked quarter, interest expense was down 17 basis points.

Looking at the average balance sheet, average assets for the quarter ended September 30th, 2003 was $4.2 billion; that is an increase of 1.1 billion from the same time last year. Average investments over the past year have increased just about $800 million. Investments as a percent of total assets are 39 percent. Clearly, it is our intent over time to take some of these dollars, which are the result of the conversion proceeds, mainly, and redeploy them into loans. We have begun some of that. But over the past year, average loans have increased 77.1 million. So certainly, we do have a way to go in terms of redeploying those dollars.

September 30 loans compared to the previous quarter of June 30 -- total loans increased $86 million. We have experienced weak demand in the commercial real estate loans area for most of year. But we are seeing a pick-up recently. For the quarter September 30th compared to June, commercial real estate loans were up $6.4 million. Residential loans increased 107 million. Commercial loans were up $8.7 million. And mortgage warehouse loans decreased $26 million. That was the beginning of our decision to deemphasize mortgage warehouse lending; and most of those funds have been, and will continue to be redeployed into residential mortgage loans.

With regard to the commercial real estate pipeline, we are seeing improvement, as demand is picking up, and the pipeline has increased 108 million at the end of September compared to 72 million at the end of June.

Average core deposits increased 247.4 million or 17 percent at September 30th, 2003 compared to September 30th, 2002. Core deposits have increased to 64 percent of total deposits at the end of this quarter, up slightly from 63 percent at the end of June; that is an increase of $46 million or 2.7 percent.

Looking at our net interest margin, the net interest margin did decrease 82 basis points to 3.15 percent at the end of September compared to 3.97 for the same period last year. Compared to June 30th, net interest margin decreased 26 basis points to 3.15, from 3.41 percent.

Looking at non-interest income, non-interest income increased 1 million or 17 percent at the end of this quarter compared to the same quarter last year. Fee income on deposit accounts increased 700,000 or 19 percent. During the quarter, we did sell a piece of property that we've put into ORE at the end of June; it amounted to $1.8 million. We sold it, and we did recognize a gain on the sale of that property in the amount of $240,000.

Non-interest expense for the quarter increased 4.7 million or 23 percent to 25.7 million compared to the same period last year. The largest increase in that category was salary and benefit expense, which was up 2.8 million. During the quarter, we did record expenses related to stock compensation plans, that we did not have in the previous quarter, totaling $2.2 million; and other operating expenses were up approximately $700,000, and mostly related to mortgage servicing right (ph) amortization. Okay.

This is Kevin Ward. Before I talk about asset quality, I just wanted to briefly touch on our strategic decision to deemphasize our presence in the mortgage warehouse line of credit business. In the quarter, the third quarter, we did a review of all our lines of business to see how they fit with our core strategy of building relationships. And by building relationships, we mean both asset and the deposit sides of our relationships with our customers. We felt that mortgage warehousing did not fit within that core strategy. We, therefore, made a decision to deemphasize; that decision was made in the middle of the third quarter. And just yesterday, we entered into an agreement with Independent Community Bank to sell to them 19 of our lines of credit, with total commitments outstanding of about $207 million; total loans outstanding against those lines at this point are just slightly above $100 million. We anticipate that transaction will close in November of this year. As part of our decision to exit, to deemphasize, that line of business, we've already began to deploy some assets into residential mortgage. That is where we will deploy the balance of the assets. While that will, in the interim, skew us away from our goal of 50 percent retail and 50 percent commercial loans in our portfolio, we feel that that's a prudent move to make to put it into residential mortgages at this point.

We will be maintaining a significant relationship with one of our mortgage warehouse lenders, in which we funded through (ph) a custodial arrangement. While we are deemphasizing the business, we will still maintain some relationships where the asset and the deposit alignment support our customer relationship management strategy. We do not anticipate that there will be any significant impact to revenue or earnings as a result of the deemphasis of this line of business.

As to asset quality, while asset quality was flat for the second quarter, it continues to be dramatically a strong component of our performance. We had $5.8 million in nonperforms. As of 9/30, the percentage to total loans was 0.28 percent versus 0.64 percent a year ago at 9/30. So as you can see we've had some significant improvement in our asset quality year-over-year. Our allowance for loans losses for non-performing loans is 364.02 percent, which is an improvement over 9/30 last year, where it was 167.37, and year-end December 31, 2002 of 246.55. At the same time that we have seen an improvement in our asset quality, we still remain committed to having a significant allowance in non-performing loans. Our allowance of total loans at 9/30 was 1.01 percent, just slightly above our target of 1 percent loans -- allowed for loan losses to total loans.

More significantly, with changes that are taking place on the regulatory front, and FFIEC (ph) are percentage of unallocated to total loan loss reserve was about 15 percent, which is going to be a target going forward. We think that while this commitment to quality of asset may have slowed some of our loan growth, we believe that in the long-term, not chasing loan growth is a prudent way to deploy our assets, and we will continue to do so. We will grow our loans as our ability to not ease any of our credit standards allows us to do so. We will not ease the credit standards in order to drive loan growth. That is just not part of our core philosophy or core strategy. So, we're going to be tilted a little bit away from our 50/50 for a while. But it is our intention to dramatically move our assets back into the commercial side of the business. And really deemphasizing the mortgage warehouse business is going to allow us to devote more management time and focus and resources to growing our other commercial loan components. Thank you.

At this time, we will be happy to entertain any questions from our call participants.

(OPERATOR INSTRUCTIONS). Our first question is from Scott Valentin with FBR.

Good morning, everyone. Several questions, and then I will jump off and let someone else ask some questions. But first on the branch purchases, do you know what dollar amount of deposits were purchased? And what the breakdown was between CD and non-CD?

It was 19.6, was the total deposit amount. And CDs were approximately 40 percent.

Okay. So all three branches, I guess, that were purchased, totaled 19.6 million?

That's correct.

All right. And then secondly, the MRT (ph), was improved, I guess, in July. Do have an expense amount for the quarter for the MRT?

Yes.

I guess while Linda is working on that, I'll ask another one. Do you have it already?

Yes, I have all this written right out. The MRT expense -- for the quarter was 639,000.

Okay. And then one final question. With the regard to the mortgage warehouse business, it makes sense strategically to I guess exit that business. How much revenue loss will there be from exiting that business? I assume it had some type of return; and also, will there be any cost saves?

We don't anticipate that there will be any revenue loss, because essentially the mortgage warehouse business is a prime-based business; and replacing it with residential mortgage assets is relatively revenue neutral to us. As to the reduction in any expenses, it is the intention of Independent Community Bank to offer positions to all of the employees in that department. It will by clearly their option whether they choose to go to work with Independent Community. It is our position that we'll offer our employees opportunities as they exist within our organization. We will not create any new positions. So we do anticipate that there may be some cost saves; those are yet to be determined since the agreement was only signed yesterday.

Okay. Thank you very much.

Our next question comes from Arthur Kareen (ph) with Kareen Associates.

Hi, everybody. Just a basic question. I didn't see you break down a per-share basis -- original book on offering versus the present books?

I guess the original book on offering versus the present -- we're trading at about -- at 9/30, we're trading at about 141 of books. The original book on offering, I do not know that we broke that out anywhere in our release.

What is your present book?

I'm sorry. Our present book -- 13.56.

Thank you, very much.

Our next question comes from Russ Haberman (ph) with Haberman Fund.

Good morning, gentlemen. How are you? Going back to one of Scott's questions on exiting the mortgage warehouse business, is that strictly a process of running off the loans? Or as you say, you're going to sell them, lock, stock and barrel to independents? And if it is a sale, will there be any gains and/or losses with that?

The sale is going to be all of the outstanding loans in the 19 lines of credit that we have agreed and the contract to sell to them -- they will purchase all of the loans in that. We will service them on an interim basis until they are funded out by the investors. There is a not material amount of money being paid for the acquisition of those customer relationships. It will have no meaningful impact on our revenue.

Could you give us a general flavor for how you're seeing loan demand on the residential -- the refi. and then the commercial side today, locally? And, if we do see flat to say up 100 basis points interest rate environment, what is a realistic expectation for net loan growth for the next say, six to 12 months?

With regard to the residential side, we're seeing, clearly, a little bit of a slowdown as rates have picked up. We still have a fair amount of loans to work through the pipeline. So there's still a substantial amount of loans coming on our books. We expect, actually, the market to move a little bit more towards them. ARMs (ph) market has been pretty much fixed rate. We are experiencing in New Jersey, the purchase market is still very strong. So we think we will -- saw substantial growth in the residential between now and year-end, and into next year. As we did see more purchase activity. But we are starting to see a slowdown in the refi. activity. On the commercial side, again, commercial real estate, we are experiencing just an increase in activity. -- more borrowers. Again, as of end of the quarter, we've seen an increase in the pipeline. And since then, we're just seeing more activity, a little bit more in multifamily that we have not seen during the course of this year. So we are starting to see a pick-up there, which is traditionally a very market here in New Jersey. But with regard to that area, we are seeing some pick-up.

Yes, and very honestly, we've done some realignment of the personnel inside our commercial real estate and commercial lending arena during this year, and are starting to see some lift out of relationships that they brought to us as part of their ongoing expertise in commercial real estate and commercial lending. We anticipate that will accelerate as we see our pipeline starting to grow. And essentially the pipeline grew $30 million in the third quarter, and we do see that accelerating somewhat. The New Jersey economy continues to be significantly strong in both the commercial real estate and commercial and industrial loan environment. We will take any opportunities that we see to begin to penetrate relationships that other organizations have been maintaining, and have some success in doing that in the past. But we will continue that focus. We do believe that there is significant opportunity still in the commercial real estate arena, and in the commercial and industrial loan arena. We think our new staff that is in place should begin to accelerate that for us.

Net-net, would I be too aggressive to assume you can grow your net loans 10 percent to 200 million for the coming year, given that scenario? Or would that be too aggressive an assumption?

Well, we really have been trying not to provide too much guidance up to this point, very honestly, because we trying to deploy our assets in a prudent manner rather than committing ourselves to growth (ph) numbers, and then perhaps compromising our philosophy on deployments in our underwriting standards.

Okay. Just one final question. With any of these brand sales, have you only bought basically the deposits and the real estate? And have any loans come along with them? And when you are looking at future ones, will you be looking for the loans as well?

Much of that will depend on the structure of the deal itself. In this deal, there were no loans other than loans associated with the deposit relationships, such as pass book (ph) loans which transferred over. Ideally, it would be nice to get a deposit and loan mix. But typically most of the deposit sales that are taking place are purely deposits for cash, not deposits and loans. And at the size we're talking about here, $19.6 million for three branches, it is really not a material transaction for either of the parties in terms of deposits acquired. We were looking more at the opportunity presented to us by filling in part of our marketplace and growing the existing branches that we acquired, where it was an out-of-marketplace presence for the people we purchased from.

Could this Fleet, Bank of America deal, if they shed branches, present better opportunities?

Right now, Bank of America is stating that they are not going to reduce their branches in New Jersey at all. We honestly anticipate that once they start applying their profitability model to those branches, there may be some opportunity. We actually believe that the fallout from some consolidation, be it well-handled or not, there are customers who have just been through a lot consolidation in New Jersey, and are very leery of the consequences of consolidation. So we do see that as some opportunity in the real estate and commercial and industrial loan arena as well.

Okay. Thank you. And best of luck.

Our next question comes from Matt Kelley with Moors & Cabot.

Hi. I've come a little late, I don't know if you covered it in the opening comments. But I was wondering if you can give a little commentary just about the margins and where you see that kind of bottoming out here, leveling out, if we were to stay in a flat rate environment from here over the next couple of months, quarters.

I think that if rates were to at least stay where they are, with the deceleration in prepayment activity and the reduction in premium amortization, that in and of itself should bring some improvement to the margin, or at the very least, stabilize it. And as rates have picked up, we've been able to put some more assets on the books at a little bit higher yield than we were earlier in the year.

Okay. And then on the provision lien, is that kind of a good run rate going forward in light of your confidence on the asset quality side?

Well, we expect, with credit quality where it is, our target is 1 percent -- provision would equal 1 percent of total loans.

Okay. Fair enough. One quick one. On the multifamily space, I know you're trying to compete outside of the broker network and try to generate some direct relationships with customers in your market. I am just wondering if you can give an update on how that is going?

We are beginning to see some very modest lift in that. The multifamily arena is a very difficult one, because very honestly, it's priced real tight to the treasury curve (ph), and at times, gets almost to the point where it doesn't make a lot of sense. But we are starting to see some lift out of one or two relationships that we're really beginning to build upon and expand upon. So we anticipate you will see modest growth in our multifamily portfolio over the next few months.

Okay. Great. And, how many shares did you guys repurchase during the quarter?

We repurchased between the stock award plan and with the ESOP purchase, about 2.2 million shares.

Okay. Great. Thank you, very much.

Our next question comes from Gerry Cronin with Sandler O'Neill Asset Management.

Good morning. Could you tell me what the ESOP was in the third quarter versus what it was in the second quarter?

ESOP expense for this quarter was 785,000. And it was pretty much the same amount in the second quarter; it was slightly less, about 750.

Okay. So the balance of the 2 million that you quoted would have been incurred in the first quarter?

For the nine months number?

Yes.

Yes.

And secondly, just back to your comment on the mortgage warehouse -- you said is a prime-based business. So I am assuming today, you're probably earning about 4 percent on those loans. If you reinvest them back into residential loans, wouldn't you actually have a yield pick-up?

Well essentially, we are going to have a period of time where we deployed some of it into residential. But some of it is going to sit in cash, very honestly. So it's going to be sitting at a fed funds rate.

Okay, fair enough. And could you just comment on what the premium amortization, the MBS (ph) premium amortization was in the second and first quarters? I know it was part of securities gains; I don't know if that loss is -- I don't know if that was the total amount?

Right. It was 1.7 million in the second quarter; and in the first quarter, it was just under 500,000.

Okay. And lastly, if I may, on the tax rate -- it was a little bit lower than last quarter -- just curious why and whether or not the 30 percent is a good run rate going forward.

That is a fairly good rate due to the contributions to the charitable foundation. We do get a tax benefit from that.

Okay. Very good. Thank you.

Our next question comes from Scott Valentin with FBR.

just a follow-up question -- with regard to expenses, one of the comments made during the last conference call was a goal to reduce the expenses. And granted, you had the MRP this quarter, which increased expenses. But still I'm backing into roughly 2 percent expense growth from the second quarter to the third quarter, which would be about 8 percent annualized. Could you comment on some of the concrete things you've done to help reduce the expenses going forward? Some of the plans you have to help reduce expenses?

Well, clearly, we have some expenses this year that are a little bit overlapping with regards to employee benefits. Some things that we won't see next year would be some other benefit expenses related to pension and other post-retirement benefits. We are doing efficiency reviews right now, so we are looking to improve some back-office operations. We're looking for opportunities; if we can outsource, we will do that. So, basically, we're doing some internal reviews to cut down on expenses wherever possible. Everything is up, quite frankly, for review. And we're trying to reduce that somewhat through attrition, so that, you know, we only have people in place that we truly need other than specialty positions. Without commenting too much on where we think we're going with that, we do have a lot of reviews in place that we're undergoing. And we do have a commitment to keep expenses under control. We do have two years and two quarterly comparisons that are a little bit different because of some extraordinary expenses. Yet when you pull out the contributions, we're not that bad. But we are undergoing some significant reviews of operations.

Okay. And other question, as far security levels, the levels of your securities as a percentage of total assets -- is there a goal you have in mind? And you plan to keep the same level as a percentage of assets?

No. We'd like to get it down into the mid to low 30s. That is traditionally where we've been. Again, it's just because of the conversion proceeds. And of course some of it is due to some leveraged transactions that we completed earlier in the year. But until we can get that cash redeployed into loans, it will remain high. We're working our way down. It did decrease slightly from the prior quarter, when we were 41 percent. So we are having a slow but steady redeployment into loans.

Okay. And I assume you're picking up some margin when you do that, going from low-yielding securities to higher-yielding loans?

Yes.

Okay. Great. Thank you, very much.

Our next question comes from Gerry Cronin with Sandler O'Neill Asset Management.

Thank you, with a follow-up. On the stock options expense this quarter, I'm just curious, would that be a pretty good run rate to use going forward?

Remember that is from the award date -- so we don't have a full quarter of the expense in there. That goes from the July 17 date.

Okay. Because there was two expenses, you said. There was the stock option expense and the stock award expense, correct?

Right, right.

Okay.

Both of them from the award date.

Okay. So both of those levels should be up slightly?

They will be up. Right, yes. Two-and-a-half months and 1.5 months worth of expense in there as opposed to three, four months.

Okay. And percentage (ph) of the ESOP (ph) shares you (ph) have (ph) acquired now?

We've acquired 95 percent.

Okay. And lastly, say, I'm not trying to pin you guys on a number. I'm just curious directionally. On the margin, if you use the $3.7 million number, that's about 37, 38 basis points of margin decline.

Correct.

Okay. If you say that that is going to -- or has been basically cut in half in the month of October, it's down 50 percent -- the monthly run rate is down 50 percent. That would mean fairly material; again, directionally, that would mean fairly material margin improvement, going into the fourth quarter. So I'm just curious. Are there other offsets you guys are seeing that would prevent that from happening?

Not at the current time.

Okay. Thanks, again.

Our next question comes from Aaron Skloff (ph) with Skloff & Company.

Good morning, guys -- two questions. One is, at what price level does the Company get very aggressive about share buybacks, whether that be post the one-year anniversary or otherwise? And the second question is, having miss the first probably two minutes of the introductory comments -- so please excuse me if the question has already been answered -- what is the plan for dividend increases, and over what period of time to potentially increase the dividend rate equivalent to other banks of this size?

As to the stock buyback, we really are at the point where we are reviewing at what price levels we will buying (indiscernible) stock; we've not come to any firm numbers on that. Clearly, we can't even begin to do any of that until January of next year. So that is under review. We are conscious of the affect that does have on tangible book value. And so we will be watching that. We have not to come to any numbers. As to dividend policy, dividend policy is essentially a quarterly review by the management with recommendations to the board. We have not firmly settled in on any ratios at this point.

And while you are regulated as it relates to the buyback to a significant degree, on the dividend policy, it seems as if we began a process of increasing the dividend; maybe some had the expectation that we would accelerate the rate of increase of the dividend. What have been the reasons as to not accelerate, or at least increase, on the same nominal basis, the increases that we've already seen? What have been the reasons not to do so?

I think, essentially, it's, like I said, a quarterly review. And that quarterly review takes into consideration our capital management plan and our earnings levels. And earnings were essentially flat; while they were up, they were not up significantly. They were basically flat quarter-to-quarter. And when reviewing the dividend policy, we determined that the dividend should remain flat quarter-to-quarter.

Thank you.

At this time, we have no further questions.

I would like to thank you for participating in this call. We look forward to our next one in January. Thank you, very much.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect your lines. Good day.