Provident Financial Services Inc (PFS) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q4, 2003 Provident Financial Services Incorporated earnings conference call.

[OPERATOR INSTRUCTIONS].

It is now my pleasure to turn the presentation over to your host for today’s call Mr. Paul Pantozzi, Chairman and CEO. Please proceed sir.

Good morning, everyone. I'm joined this morning by Linda Niro, our CFO and Kevin Ward, our COO. We have a lot to talk about this morning so we'll get right to it starting with our fourth quarter performance.

Net earnings rose slightly compared to the year-ago quarter when we were still a mutual company and also compared to third quarter 2003. The downward trend in our net interest margin, which began in 2002 and basically persisted through third quarter '03 has begun to reverse itself.

This is primarily due to two factors. First a continuing slow-down in the speed with which our real estate secured loans and our mortgage-backed securities have been paying down, leading to a rise in our earning asset yields.

Second, our continuing focus on core deposit gathering has helped keep our cost of funds within acceptable levels. Meanwhile our operating expenses continue to increase, largely as a result of recognizing the cost stock-based benefit plans that were introduced in 2003. Our CFO Linda Niro will be saying more about expenses shortly.

The result for the quarter was earnings per share 15 cents on both basic and diluted shares. Earnings for the entire year 2003 were 31 cents, both basic and diluted share. Of course the biggest expense factor for the year has remained a one time contribution of $24 million to Provident Bank Foundation, this translated to $15.6 million net of tax.

In our first year as a public company we continue to execute our stated business model. By maintaining a diversified loan portfolio, by maintaining asset quality, by managing interest rate risk by expanding our retail franchise, we added five branches during the course of the year.

Our planned acquisition of First Sentinel Bank Corp. continues on schedule and we anticipate closing in the second quarter. This is clearly a major part of our plan to strategically deploy our capital. Also in the interest of capital management, I'm happy to report that our board has approved an increase in the quarterly dividend and has authorized our first stock repurchase program.

We intend to repurchase 5% of outstanding shares with no specific time limit. We will be a buyer of our own stock when it's in the best financial interest of Provident and its stockholders. Kevin Ward will talk more about the stock repurchase program a little later in this call. I'd like to turn it over to Linda Niro now to give us an overview of the financials.

Thank you. Good morning everyone. Net income for the fourth quarter of 2003 was $8.2 million. That's an increase of just about 4% over the fourth quarter of 2002 and resulted in basic and diluted EPS of 15 cents. Net income for the year-ended 2003 was $18.7 million, a decrease of 29.5% from the year ended 2002. This decrease was primarily due to our one-time contribution of $24 million to the Provident Bank Foundation in the first quarter of 2003.

Our net interest margin for the fourth quarter of 2003 was 3.41% that was a decrease of 32 basis points from the fourth quarter of 2002. However, on a linked quarter basis net interest margin improved 26 basis points. Factors contributing to the improvement in the net interest margin, earning assets improved 19 basis points and the cost of interest-bearing liabilities decreased 11 basis points.

Prepays slowed substantially during the quarter. They were down 45% in the residential loan portfolio and down 65% in the mortgage backed securities portfolio.

For the year, our net interest margin decreased 60 basis points to 3.35%. Net interest income for the quarter increased 5 million or 17.32% compared to the fourth quarter of 2002.

In comparison to the linked quarter, net interest income increased $3.2 million or just over 10%. For the year, net interest income increased $15.8 million or 14%.

Non-interest income in the fourth quarter was flat compared to 2002. For the year, there was a slight decrease in non-interest income of just over 1% compared to 2002.

Retail fees did increase $1.2 million or 8% for the year, while other income decreased $1.7 million or 43%, due predominantly to less loan sale activity during the course of 2003.

Non-interest expense for the fourth quarter was $28.8 million, an increase of 23% compared to the fourth quarter of 2002 and in the fourth quarter we did recognize stock-based benefit planned expense of $2.9 million, and we did not have those expenses in 2002.

Other operating expenses also increased due to one-time charges, some due to litigation settlement, forgeries, non-sufficient funds and prior year adjustments.

For the year-ended 2003, non-interest expense increased 37.7 million or 42.3%.

Again, the primary factors, the $24 million contribution to the charitable foundation and $6.3 million in stock-based compensation expense and an increase of $1.5 million in corporate insurance.

Looking at the balance sheet, total assets for the year increased 366 million or 9%. Total loans increased to 185 million or 9%. In the fourth quarter, loans increased 124.3 million, that's a 6% increase over the third quarter.

One positive that we are seeing was a pretty substantial increase during the fourth quarter in loan production, commercial loans in all categories increased $90 million, consumer loans were up in excess of $24 million and residential loans increased $219 million.

We did decrease the mortgage warehouse portfolio; all loans outstanding declined 211 million during the quarter. Our allowance for loan loss at the end of the year was 92 basis points of the total loan portfolio compared to 1.02% at the end of 2002 and this reflects the continued excellent credit quality of the loan portfolio.

Non-performing loans to total loans was 27 basis points compared to 41 basis points at the end of 2002. Another factor contributing to the 92-basis point allowance is our temporary shift in retail loans in terms of the loan mix.

We have tilted back to 60/40 (indiscernible) versus the 48/52 mix at the end of 2002. Which reflects the sale of mortgage warehouse portfolio and the addition of residential and consumer loans to replace those loans.

Total deposits excluding conversion DDA account balances at year-end decreased $21.4 million compared to the prior year and core deposits, again, excluding the conversion account balance of $526 million, increased $97 million during the year and represents 65.4% of total deposits at year-end compared to 61.3% at the end of 2002.

Borrowed funds increased 413.2 million during the year and that represents several leverage transactions that were completed as well as our continuing matched funding program with commercial real estate loans.

Expenses certainly were high during the year even discounting the charitable contribution and we are focused on some expense management initiatives in 2004. Senior officers in the Company will not be receiving salary increases and other salary increases will be limited to a maximum of 3.5%.

We've made changes to our health and welfare benefits as a result of being able to re-negotiate the contract and employees are now, all employees are now required to pay a portion of the healthcare premium.

Our pension plan was frozen as of April 1, 2003, and other post-employment benefits were frozen at the end of 2002.

As a result of the freeze and other post employment benefits, we only pay those benefits to employees who had ten years of service at the end of 2002 and that eliminated 68% of the employees from receiving those benefits at that time.

Now, I'd like to turn the program over to Kevin Ward who will have several comments.

Thank you, Linda, and good morning everybody. As in each of our previous conference calls, one of my roles is to stress our ongoing commitment to asset quality. Linda has already touched on some of the numbers.

We think that 0.27% of loan non-performance to total loans is pretty outstanding asset quality and we've had that kind of performance for the last several quarters.

One of the things that Linda did mention is that our allowance for loan losses to total loans is now at 0.92%. That is indeed part of our strategy, as the retail component of our loan portfolio is tilted towards 60% of total loans. We've recognized that we have become slightly less risky in our portfolio and the 92 basis points is a reflection of that.

We validate that number every month actually, in recourse of our loan loss review and our provision for loan losses. So at the 60% number, 0.92, or 92 basis points makes great sense to us.

Linda also mentioned that we have exited the -- or de-emphasized the mortgage warehouse business so that we can focus more on commercial real estate and business loans. And right now at 60/40 we are significantly away from our target of 50/50 retail and commercial.

One of the things we will not do in trying to get back to that 50/50 level is compromise our commitment to asset quality. We realize that we're going to have to get back to 50/50. That is our strategy. We will do it prudently. We'll do it over time. We view it as a multi-year effort.

The commitment to asset quality has not been compromised by the fact that we have significant capital in the bank and have always reflected that by keeping our lending limits lower than the regulatory lending limits, just as a driver for our own prudence.

We've not changed our underwriting standards despite the fact that we realize we have to drive more commercial real estate construction loans and commercial and industrial loans. So all in all, all said, the asset quality continues to be very, very good in our organization and we continue our commitment to maintaining that asset quality.

On the stock repurchase front, we're very pleased that our board of directors authorized us to purchase up to 5% of the stock. Our analysis at any given time will focus on the then current stock price of our Company, prevailing market conditions, trading patterns in the stock, other capital management strategies that we have available to us and clearly the availability of the Safe Harbor Rule 10 B-18 and other legal considerations.

Our financial model for share repurchases will focus on the impact of the stock repurchases on earnings per share, accretion and tangible book value dilution. We recognize that in conducting our repurchase activity we will take into account the availability of the Safe Harbor afforded under 10 B 18.

Recent SEC amendments to the Safe Harbor rule limit the repurchase or activity of any issuer under the Safe Harbor after the announcement of an acquisition, until the consummation of the transaction, we have clearly on December 22nd made an announcement that we were acquiring First Sentinel Bancorp and that will bring all of those restrictions and limitations into play.

There will also be a period as a result of the acquisitions when we mail proxies to the stockholders until the stockholders approve the transaction, when we will be precluded from repurchasing shares under SEC regulations, Regulation M. We acknowledge that share repurchases are an important capital management tool for recently converted Company like ourselves and we expect to use it in conjunction with other effective capital management tools.

All of that being said, we do recognize the fact that we are going to have limited opportunities because of the acquisition over the next several months to acquire stock. But when it does make sense for the Company and for our stockholders, we will indeed be in the market purchasing stock. Thank you. We'd like to turn it over for questions at this point in the conference call.

[OPERATOR INSTRUCTIONS] We have a question from Rick Kraemer (ph) with Sandler.

Good morning.

Good morning, Rich.

I was wondering, two questions, first of all, can you give us an idea of a more normalized tax rate going forward? Into next year, I guess, maybe the next couple of quarters when they even post SSOI if possible?

We don't have any numbers post FSLA, but we expect it to stay pretty much where it is over the next two quarters.

Okay, and then secondly, I guess the advertising expense was up about 14.5% link quarter. Should we continue to expect to see higher than historical levels maybe in the near term as you guys continue to market your brand and grow the deposit franchise? Is that fair to say?

I think you will see some increases going forward in the first half of the year. We did less advertising than we did in the second half of 2003. So there is a commitment to advertising, supporting our brands and our products and our sales efforts.

OK. Great. That's it. Thank you.

And we have a question from Aaron Skloff, Private Investor.

Aaron Skloff with Skloff and Company. I want to congratulate you on the announcement of your share repurchase plan and wanted to ask a question about the competitive environment that you're seeing in your existing markets in New Jersey as well as the expected markets that you plan to acquire into, from my own perspective I see there appears to be a step-up of competition, including existing competitors moving into your markets as well as new competitors going into those markets?

Can you comment on that and how you expect that to impact the guidance that you previously provided and your comfortability with that guidance, please?

I'm not certain about the guidance that you're talking about. However, from a market standpoint, from a competitive standpoint, clearly the marketplace is changing. The nature of the players are changing, witness the recent announcement of Fleet being acquired and other in-state transactions, (inaudible) Bank taking the trust company.

I think in the next year and a half to two years the entire landscape of our marketplace is going to change yet again. This is going to afford us challenges certainly, but more opportunities as we continue to integrate the First Savings franchise, it gives us a broader net to cash within the marketplace and a very logical extension of who we are and where we reside currently, in view of the fact that First Savings has a commercial type look similar to ours.

We feel there will be tremendous opportunities to expand within that market, despite the competition.

Again, our experience has been, the larger the players get, the less effective they tend to become and fall-out does occur and opportunities are created for the remaining marketplace.

Thank you. And as it relates to guidance, maybe I'm referencing some of the numbers that we talked about in the last conference call in the acquisition or intended acquisition of First Centennial. If maybe I'm wrong on the guidance, could you tell us what is your expectations are for this calendar year, particularly starting with the first quarter, please?

Essentially on advice of counsel, we have been instructed not to provide guidance and really leave that role to the research analysts who follow the Company.

Thank you. I'll pass the call to the next questioner.

Sir, we have a question from Lori Hunsicker (ph) with FBR.

Hi good morning, its Lori Hunsicker and Ryan Kelly. Just a few quick things, if you could just comment generally, security gains have been a bit lumpy, if you could just comment on kind of how you look at earnings and maybe just to the extent that what you have modeled then assuming rates stay here for sort of the duration of '04?

Lori, could you just repeat that question at the beginning of it. You were talking about securities gains.

Securities gains, exactly. In other words, to what extent are you managing earnings, maybe that's kind of the wrong word, but to what extent are you modeled out in '04 if rates stay here in terms of securities gains?

Well, I can't comment going forward, however, our position with securities gains, we don't take them on a regular basis unless we feel there's a specific reason to do so with regard to the securities gains that we took last year they were due predominantly to sale of equities.

In particular, we did have a position in the United Trust that we sold. So a great deal of that gain that you see was the result of that sale. And we engage in balance sheet remixing from time to time. So some of that was due to some security sales, some bond sales in the fourth quarter, where we took some gains in order to get rid of mortgage-backed securities that we thought were particularly susceptible to interest rate risk if rates go up.

Perfect. Thanks, Linda. I guess maybe two of you could comment we're delighted to see the stock repurchase. In terms of when you can be in essentially it’s probably starting I guess Monday, through the proxy mailing, which would likely be the end of March, is that about right in terms of when the window is open?

Essentially, we have our own internal structure about how we go, when we're in clearly defined with but we anticipate we will be in in the next several days post this conference call. And we'll be in really much in line with the time line you painted for us. Subject to any regulatory things that are going on with us and the filings that we need to do. So we think we can be in until at least the early part of March. But that's again subject to any changing conditions that occur relating to the acquisition.

Got it. And then do you have, can you maybe tighten down a little bit the range in terms of the closing date, the targeted closing date for FSLA?

We're still pretty much committed to -- end of second quarter.

OK. And then I know this was asked before but I just wonder if we could get clarification again. The $30 million of one-time charges, how much of that is actually going to flow through, be actually expense or income statement? I was just a little bit unclear on that. I guess from the December conference call? Or is that still kind of up in the air?

We haven't exactly quantified the $30 million in restructuring charges yet. But it's our anticipation that the vast majority of that will be expensed in 2004.

It will be expensed. Okay. And then kind of maybe you can comment too, obviously your asset quality looks impeccable as does FSLA, your coverage is 92, like you said, they're running up at 105. Obviously they bring on more of a commercial mix.

Is there a thought that you would at some point over time try and take that to 105 or are we going to maybe start to see your provision level increase a little bit? Could you just go back and maybe address that?

Actually, what's going to happen, Lori, is with the -- when the closing does take place, FSLA is going to tilt us slightly more towards retail. At 930, they were at about 75% retail and 25% commercial as we measure it. So there will be a slight tilt to more retail, which will probably validate where we're standing in our policy on percentage of loan loss provision to total loans.

Okay. Or maybe I can ask a different question. As we kind of look back, and again, clearly, your charge-off history is excellent. But provisions aren't covering charge offs or at least they haven't the last two quarters.

Is that the right way to look at it or do you look at it more in terms of reserves to total loans or -- I mean at one point just going back even a couple quarters ago you were over 100 basis points to loans. Do you have a goal set like that or is that not how you look at it?

We really look at the reserve to total loans, in conjunction with looking at the quality of the portfolio and the review of any migration of loans. We see any sort of deterioration; we would increase the provision appropriately as modeled out.

Okay. And then just going back to a question that was already asked, obviously we're a little bit new to the Company, not completely new to New Jersey, but maybe you could just take us through kind of who your top competitors are in the loan and the deposit side as a combined Company, who you see being most aggressive in terms of pricing or just any other color you can provide, that would be really helpful.

Lori, I think the best way to handle that is probably for us to have a conversation with you after this conference call is over.

Okay. That's perfect. Great. Thanks. Nice quarter.

Sir, we have a question from Jared Shaw (ph) with KBW.

This is Gerard with KBW, good morning. I guess just a follow-up to Lori's question. On the allowance to total loans without, I guess without taking into effect the FSLA pending acquisition, if you got to a 50/50 mix that you're heading towards, you don't have a specific target for the reserve to total loan portfolio?

Yes, we do. Once we start trending it back more towards commercial, you'll see that ratio go up. Physically, we've been at 1% or higher and as our mix goes more towards commercial portfolio, again the reserve will increase.

Okay. Thank you.

We have a question from Joe Leone (ph), Private Investor.

Good morning. What's the bank doing to lower its efficiency ratio and shouldn't that be a higher objective than making acquisitions?

The efficiency ratio is a very high priority for us. Again, as I mentioned earlier, we have a number of expense initiatives that we put in place for this year. And our focus is on expense reduction, expense management as well as driving revenue. So the efficiency ratios, the three real drivers there. Our business model to grow loans and grow deposits and core deposits with support, revenue increases and we are committed to reducing expenses.

And also, Joe, very honestly, that was a core part of the entire acquisition consideration was the fact that First Savings, FSLA brings significant expense control management expertise to our mix and the very fact of the acquisition will drive our efficiency ratio down significantly from where it is.

Okay. Thanks.

Sir, we have a follow-up question from Rick Kraemer with Sandler.

Hi, just one more question. On the borrowing side of the balance sheet and I guess, according to – with the leverage strategy that you guys have on right now. Where is perhaps the threshold where you would feel comfortable or the kind of the top range, I guess where borrowing to assets that you would feel comfortable with at this time or in the next couple of quarters, let's say?

Our comfort level is below 20%.

Okay. Alright. Great. Thank you.

[OPERATOR INSTRUCTIONS] Sir, we have no further questions at this time.

We'd like to thank everyone for participating and we look forward to our next quarter. We're very excited about what the prospects of '04 does with respect to our pending acquisition and the market generally. So, thank you very much.