Provident Financial Services Inc (PFS) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Quarter 12004 Provident Financial Services, Incorporated, Earnings Conference Call. My name is Amanda, and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during your call you require assistance, please key star followed by 0, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to the Chairman, CEO, and President, Mr. Paul Pantozzi. Please proceed, sir.

Thank you. Good morning, and welcome to our first quarter earnings call. Today's call, again I'm joined by our Chief Financial Officer, Linda Niro, and our Chief Operating Officer, Kevin Ward. We're very excited about the progress we've made this quarter but we also recognize we have many opportunities ahead of us.

We will discuss the key aspects of our first quarter 2004 performance and we'll begin with earnings per share data. I should also say that much of our discussion will focus on comparisons to the trailing quarter. That's essentially because earnings for our results for first quarter '03 were made unique by the one-time $24 million operating expense item which, net of tax, was $15.6 million, and that was to establish The Provident Bank Foundation. In addition, you'll recall that we did go public in the early part of 2003, so we did not have a full quarter of operations as a public company during that time.

First quarter '04 net income of $10.3 million translates to earnings of 19 cents for both basic and diluted share. I would also point out that net pretax gains of $1.7 million on loan sales and security sales contributed approximately 2 cents to the earnings per share numbers.

Our key drivers of core revenue continue to improve in the first quarter '04. Net interest margin rose nine basis points above the trailing quarter to 3.50%. Fee income categories, aside from any extraordinary gains, also grew.

Linda will be reviewing these in a little more detail later on. She'll also take us through the changes in our overall loan balances and composition that will reveal net growth in our C&I and commercial real-estate categories and decreases in our residential mortgage portfolio.

On a deposit front, deposits were basically flat for the quarter, but given the activity in the marketplace as we've seen it during the past quarter, folks moving back into the equities market and funds, flat for us does not necessarily considered a bad thing. Regarding non-interest expense, compensation and benefits expenses, compared to trailing quarter decreased 9%. Compensation decreased 3.7% compared to trailing quarter.

We'll also want to emphasize our ongoing commitment to asset quality, and Kevin's going to cover that in greater detail. We'll also give you a brief overview and update on our pending transaction with First Sentinel Bancorp.

I'll turn it over to Linda Niro at this point.

Thank you and good morning.

The improvement in net income for the first quarter compared to fourth quarter 2003 is primarily due to reduction in operating expenses and the increase in non-interest income. Operating expenses for the first quarter of 2004 were $26.7 million, compared to $28.8 million for the fourth quarter of 2003, a reduction of 7.5%. The largest decreases were in salary and benefit expenses and other operating expenses.

Salary and benefit expenses decreased $1.5 million, or 9%, compared to the linked quarter. Compensation expenses decreased 3.7%, primarily as a result of a reduction in full-time equivalent employees and the decision to freeze salaries late in the fourth quarter of 2003. Benefit expenses decreased $1.1 million or 18% compared to the linked quarter. Stock-based benefit expenses were 2.9 million for both quarters. Pension expense and other post-employment benefit expenses decreased $1 million from the fourth quarter of 2003. Other operating expenses decreased $1.1 million, or 18.7%, compared to the linked quarter. Loan administration expenses decreased 53%, consultant fees decreased 22%, and miscellaneous charges decreased 500,000, or 55%.

In the fourth quarter we had several large charge-offs related to prior year items, charge-offs associated with data conversions, as well as accrual for some legal fees.

Net interest income increased 1.5% to $34.4 million at March 31st, 2004, compared to $33.9 million for the quarter ended December 31st, 2003. Interest income increased just over 1% compared to the linked quarter. Mortgage-backed securities prepayments have decreased 30% compared to the linked quarter and the premium amortization expense associated with mortgage-backed securities decreased $455,000, or 35% compared to the prior quarter. Interest expense on borrowings and deposits was flat compared to the fourth quarter of 2003.

The net interest margin improved 9 basis points in the first quarter of 2004 to 3.5% from 3.41 at the end of the year 2003. The yield on average earning assets improved 12 basis points during the quarter and the average yield on loans improved 8 basis points.

Total loans during the first quarter increased $39 million, or just under 2%. Residential loans decreased $46.2 million as a result of $73 million in fixed rate loan sales during the quarter. The reduction in residential loan sales was part of our strategy to reduce interest rate risk, and it was predominantly 30-year fixed-rate residential mortgage loans.

The largest growth during the quarter was in commercial loans which increased $50 million, or 20%, construction loan balances increased $29.5 million, or 30%, and consumer loan balances increased $20.5 million or 7%. We continue to see an increase in loan demand. Our unfunded loan commitments at the end of the quarter have increased $108 million or 27% versus the prior quarter with the largest increases coming in commercial mortgages and construction loans.

The investment portfolio during the quarter declined $158.5 million or 9.5% from the trailing quarter. And again during the quarter we sold $81.5 million worth of mortgage-backed securities that were determined to perform poorly in a rising interest rate environment.

Deposit growth for the first quarter was stable. The slight decline in the ratio of core deposits to total deposits, which ended the first quarter at 65.1% from 65.4% at year end was largely the result of internal transfers from savings account product into longer term CDs. Non-interest income for the first quarter totaled$ 7.7 million, an increase of $2.2 million from the quarter ended March 31st, 2003, and an increase of $1.2 million from the fourth quarter of 2003. Excluding the gains on the sale of fixed-rate residential mortgages during the quarter, non-interest income would have been flat compared to the linked quarter.

Fee income on retail accounts continues to increase and was $4.6 million during the first quarter of 2004, an increase of 14% over the year-ago quarter, and an increase of 8% over the trailing quarter.

Now I'd like to turn the call over to Kevin Ward who will discuss asset quality an give an update on the First Sentinel transaction.

Thank you, Linda, and good morning. I'm happy to report once again that our ongoing commitment to asset quality reveals itself in the numbers which we reported in our earnings release.

Our non-performing loans, total loans, were 19 basis points in the quarter ended March 31st, versus 27 basis points in the linked quarter. That's related to our placing back into performing status one of our commercial real-estate loans. We continue to be committed to our underwriting standards that have led to this asset quality. We also actively pursue loans early in the delinquency, so that while we've raised the sweet spot for the average size loan we would like to make we have done that without compromising our dedication to underwriting standards and to our posture on delinquency and collection.

The number that may be causing some attention for you is the allowance for loan losses to total loans at 91 basis points. That is part of an active management decision as the retail portion of our loan portfolio increased in the commercial portion decreased. We felt that we could afford to have that allowance decrease slightly at 91 basis points versus 92 basis points in the linked quarter. We will continue to actively monitor that allowance for loan loss percentage.

It is our goal to get back to a 50/50 retail and commercial portfolio, and we did have some success in that in the first quarter of the year. The retail loan portfolio was at 58.2% versus 60.2% in the linked quarter, so we made some good movement back towards our 50/50 target. But we will not do that by sacrificing our devotion to asset quality and the numbers you see, while very, very good on the 19 basis points we remain committed to that type of asset quality.

Our allowance for loan losses to nonperformers increased significantly in the first quarter. We are now at 470.56 versus 336.67 at December 31's quarter.

The other piece of good news aligned with our devotion to asset quality is that our unfunded commitments in the first quarter actually increased $108 million, with commercial construction going up significantly the commercial real-estate loans going up significantly and C&I loans essential remaining stable. The C&I unfunded commitments at this point are about $138 million, so we think we are very much on track to everything that we have promised the investment community regarding our devotion to asset quality.

I'd like to take just a few minutes to discuss the First Sentinel transaction and we are moving apace at this point. We anticipate that this transaction will consummate late second quarter, as we indicated in our announcement back in December. We have seen no surprises in the integration process at all. We think the integration process is moving apace.

As we've mentioned in the past we are keeping all of the First Savings branches open. We are looking to do the computer conversion in the third quarter of 2004. We feel that that will give us time to do the adequate training and familiarize all of the personnel with the systems that we will be putting into place.

We have looked at the cost saves which we announced in December in our call and have reviewed and validated those cost saves. We are prepared to deliver on the 20% number. The other numbers that we discussed in that announcement all look like they are achievable at this point.

I do have just one caution regarding the pro forma numbers that, if a question does come up, we're really not prepared to discuss any of the numbers in the S-4 until that document has been cleared by the SEC. So we ask that you hold off any questions regarding those numbers.

With that, we're ready to turn the call over to questions and answers.

Ladies and gentlemen, at this time if you wish to ask a question please press star followed by 1 on your touch-tone telephone. If your question has been answered or you wish to withdraw it, please key star followed by 2. Once again, ladies and gentlemen, that is star 1 to ask a question. And your first question comes from Jared Shaw of KBW.

Good morning.

Good morning, Jared.

Congratulations. Very good quarter.

Thank you.

I have just three questions for you. One, on the expenses, did you a good job, I think of, explaining that. Is that a good level now to use? You had mentioned the reduction in FTEs, and the slowdown in salaries. Is this a good base to project off of?

For compensation expense, yes, because it's -- the fourth quarter is more comparable to what we're going to look like -- well, at least going forward in the second quarter.

The fourth quarter or the first quarter?

The fourth quarter of 2003.

Yeah.

Yes, so the first quarter compared to the fourth quarter 2003, that's more comparable, so on a go-forward basis, our first quarter we should look pretty similar with regard to compensation expense in the second quarter.

Okay. Great. And then on the -- you had mentioned in the press release about your checking -- your NSF fees through your checking program. Did that start in fourth quarter?

That started in the -- late in the third quarter of 2003.

Okay. And then finally on the buyback, it seems like with the restriction -- the different blackout periods during the quarter that was a pretty good number for the buyback shares. Is that still a priority, I guess, once you're finished with the FS deal and can be back in the market?

You're not going to see us active in the market until after the transaction closes because of 10-B-18.

But after that you still like the buy-back?

We will be committed to the program we announced.

Great, thank you very much. Again, good quarter.

And your next question comes from Lori Hunsicker and Ryan Kelly with FBR.

Hi, good morning. Great quarter. We add few questions, just to follow up actually on one that Jared just asked regarding your buyback window. You all have the shareholder vote scheduled for June 23rd. Is it off the shareholder vote that your window opens again, and then when do you black out with respect to your second quarter earnings, or is it likely that, you know, by the time you start re-evaluating everything going back in it would be after your second quarter earnings sometime, like third week July?

It will be after the second quarter earnings because the shareholder vote will be contemporaneous with us having gone back into blackout period.

Got it. Then from the time that the shareholder vote actually goes -- or I should say the shareholder votes actually go through, how many days later would you all anticipate closing?

As soon as possible thereafter.

Okay. And then I just had two other questions. The gains that you all reported in mortgage-backed gains, sale of single family, we're thinking, but we've not sure, just based on your comments, it didn't all drop to the bottom line. You did mention that you did reduce some short-term borrowings and repositioned the balance sheet. I just wondered what those charges were and how much dropped to the bottom line?

We don't have any charges associated with it. It was the sale of longer term assets, or assets that were susceptible to interest rate risk and the borrowings that we reduced were overnight borrowings.

One last thing, Linda, maybe can you just give us an update your auto portfolio, $33 million, just remind us how big you want to grow that to, how that's being FICO scored, how you're looking at that?

We're looking over time to perhaps increase that to $80 million or 25% of the entire consumer portfolio. So right now it's just about 10% of the consumer portfolio. And FICO scores are --.

FICO scores are approximately 650, 750, in that range is where we're looking am

I'm sorry, is how much?

North of 650.

North of 650. So there is some subprime, then, in there.

No. Actually, my understanding of FICO is that at that level you're pretty much at A quality.

At six -- okay. H'mm. Okay. And from the extent of $80 million over time, over -- is that like a year over two years, or how --.

That would be during the course of this year into early next year. Depending on, you know, rates and production, and, again, where we see it as a percentage of the consumer portfolio.

Okay. Great. Thanks.

Ladies and gentlemen, as a reminder, it is star 1 to ask a question. And your next question comes from John Kline of Sandler O'Neill.

Good morning.

Good morning, John.

Question for you. I just wanted to try to drill down a little bit more on some of your balance sheet repositioning. Intuitively it makes sense that you'd become more asset sensitive, the or at least become neutral. What's your interest rate risk outlook at this -- at this point in -- as of quarter end?

John, we're currently still slightly liability sensitive but we've reduced -- we've reduced that level from the fourth quarter, and the reason for the sale, we are seeing increases in the commercial area, in residential ARM production, and those funds are available to be reinvested into more floating rate type loans on the commercial side or within the residential portfolio.

Uh-huh. Okay. In terms of the margin outlook, do you get a sense that because of the actions you've taken, margin goes up, down, or holds about the same kind of going into the next quarter?

If we're able to reinvest those funds into the commercial portfolio, and put a more floating rate loans, the margin should continue to expand slightly, and that's also based on the fact that we see the premium amortization continuing to decline.

Okay. And it was 450 for the quarter?

It was down 450.

Down 450.

Right, right.

How much was it?

The premium amortization was just over $800,000. For the quarter.

Okay. Great. And I mean, did you put more into fed funds relative to the --.

Yes.

-- to the fourth quarter?

Yes.

I see.

Fed funds are pretty -- up pretty substantially.

Okay. Great.

And just -- follow-up question on the loan growth, looks excellent on the commercial side. Kevin, you made a comment that you're looking at slightly larger credits. Could you, you know, talk about, number one, how you're able to garner more loan growth? Is it simply extending more credit to existing customers, or are you bringing new customers into the bank and how are you doing that?

John, it's effectively a combination of both. We are expanding relationships with existing customers, staying within our exposure guidelines on individual loans and group exposures, and also bringing on some new relationships. The way we bring the new relationships on is actually go out and have our relationship managers actively call on customers they may have known from prior institutions or customers that have been referred to us by our existing customers. That referral process has been very fertile ground for us. Satisfied customers referring additional customers to us.

Could you remind me again what your comfort level is in terms of absolute size?

Actually, the group exposures, as we've refined our risk management techniques, we've stratified our group exposure so that 1 and 2 credits have a different maximum group exposure and single loan limits and 3 exposures have a slightly lower, and on down the stratifications. But our internal guidelines for 1, then 2's is $50 million in total group exposure, so we keep our exposure significantly below what our legal lending limits are, just because that gives us a comfort zone versus any underwriting -- you know, any economic dislocations that may take place.

Okay. Is it safe to assume that there's not a whole lot of $50 million credits on your books, or relationships?

That's very safe to assume.

Okay. Great. Thanks a lot, guys.

I would just like to follow up to Lori's question regarding the auto portfolio. I did have somebody just go and do some checking for me, and the minimum FICO score is 660, and the average on the loans that we have booked to date is 727.

At this time there are no further questions.

Well, thank you very much for attending this call, and we look forward to hearing from you again in next quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's Quarter 1, 2004 Provident Financial Services, Incorporated, Earnings Conference Call. This concludes your program. Have a great day.