Provident Financial Services Inc (PFS) 2004 Q2 法說會逐字稿

Good day ladies and gentleman and welcome to the Q2 2004 Provident Financial Services Incorporated Earnings Conference Call. My name is Christy and I'll be your Coordinator today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer toward it is end of this conference call. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I will now turn the presentation over your host for today's call, Mr. Paul Pantozzi, Chairman and CEO. Please proceed sir.

Good morning and good morning everyone. Welcome to your second quarter '04 earnings conference call. I'd like you to keep in mind that our discussion today may contain some forward-looking statements. Our Safe Harbor regarding these can be found in our SEC filings as well as on page four of our earnings released earlier this morning. You can obtain copies of any of these by going to our web side providentnj.com or calling our Investor Relations area at 201-915-5344.

As in previous calls, I'm joined this morning by Kevin Ward, our Vice Chairman, and Linda Niro, our Senior Vice President and Chief Financial Officer. Also present this morning is our new President, Chris Martin.

I'm pleased to report we completed our acquisition of First Sentinel Bancorp on July 14, so I speak this morning as the CEO of a significantly larger company than we were as of June 30. Of necessity, however, we will confine our presentation to the companies financial condition and operating results as of second quarter.

Net earning for the quarter were 8.6 million or 16 cents for basic and diluted shares compared to 15 cents for basis share of the second quarter of 2003, and 19 cent for basis and diluted share for trailing quarter. Net interest income was 31.4 million, which represents a decrease of nearly 4% from same quarter last year and nearly 7% from the trailing quarter. All though interest rates have begun rising at a measured pace, our assets during the past quarter continue to re-price generally downward. This downward pressure was accelerated by the need to shorten asset maturities in preparation of of paying the cash portion of the First Sentinel merger consideration which amounted to 251.9 million. We also continued to make prudent loan loss provisions to maintain our allowance at acceptable levels even though our asset quality continues to be extremely strong. Our recurring non-interest income categories, particularly fees and retail deposit accounts, have continued to grow.

Operating expenses for the quarter were 26.1 million, down from the prior quarters 26.7 million level. Compared to the second quarter '03 expense level for 24.7 million, increases are largely attributable to stock and stock based compensation programs which were only put in place during second half of last year. Linda Niro will take us us through the components of operating results in a little more detail in a few minutes.

We have continued to grow the loan portfolios, the total net loan of 2.367 billion at June 30 represents $144 million or 61/2% increase above the year end 2003 balance. The majority of this growth is incurred in out commercial and industrial loan portfolio which experienced a $77 million or 31% increase during the first half of the year. Commercial real estate loans increased at a more modest pace of 16 million or 2.5%. Our consumer loan portfolio grew $49 million or 16.4% during this period as we continued to add indirect order loans in order to increase asset yields.

Our loan mix strategy is still to achieve a 50/50 mix of commercial to commercial real estate loans versus residential loans and commercial loans -- consumer loans. As of June 30, 2004, that ratio stood at 41.3% commercial and 58.7% retail as compared to 60.2% retail and 39.8% commercial at year-end 2003. The change is only incremental, but we continue to move in the desired direction.

Our complimentary balance sheet strategy is to maximize the proportion of core deposits, total deposits. All our deposit growth for first half is from positive growth in checking and saving accounts. As of June 30, core departments represented 66.1% of total deposits, compared to 65.4 at year end. Kevin Ward will speak to other aspects about balance sheet with particular emphasis on asset quality in a few minutes.

At it's meeting on Thursday July 22, the Board of Directors declared a payment of a quarterly cash dividend of 6 cents per common share, payable August 31 to stockholders of record as of August 13. While this does not it represent an amount per share increase above the previous quarter, it does represent a significant increase in the overall pay-out ratio since acquisition of First Sentinel has added over 18.5 million shares eligible to receive the dividend. I'm please to to state that the board also authorized and enhanced the stock repurchase program, which was originally announced in January of this year . The company is authorized to purchase up to an additional 927,000 shares for a total repurchase of 3.966 million shares, or approximately 5% of companies outstanding shares of common stock. There is no specific time limit for the completion of this program, however the constraints that were imposed upon us from that prevented our being active repurchasers while the merger was pending now no longer apply and wen tend to pursue this program in earnest, as market conditions permit.

We also very focused on ongoing integration of the two banking companies. We intend to maintain the quality of customer experience throughout, while offering additional products and services designed to meet the needs of your customers, while adding to the relationship with Provident. This will be accomplished over on First Sentinel side with the same smiling faces. Everyone is out there selling as best they can, servicing their customers, and having a good time while doing it.

I'll now turn the discussion to Linda Niro.

Thank you. Both of my comments are going to address the second quarter results in comparison to our first quarter.

This decline in net income compared to first quarter was primarily due to decreases in interest income, non-interest income, and an increase in the provision for loan losses. Interest income on short term investments and investment securities in the second quarter decreased $2 million or 13% compared to the first quarter. Average balances on short term investments and investment securities decreased $52 million or 3%. At the end of June, average short term investments at the bank level were $145 million and $125 million at holding company's level. We ask if this increase in short term investments, liquid investments, contributed to a decrease of 12 basis points in net interest margin.

Principal pre-payments on a mortgage backed securities portfolio also increased again in the second quarter 49%. And the related premium amortization increased 48%. Again, the resulting increase in premium amortization over the first quarter contributed another 4 basis point decline in net interest margin. Loan pre-payments increased 42% in second quarter as compared to the first quarter.

Looking at non-interest income, non-interest income decreased 12.3% compared to first quarter and the first quarter we recorded $1.3 million from gain in loan sales compared to gains of just 25,000 in second quarter. Retail fee and commission income income or core deposit income increased 4.5% compared to first quarter. Excluding gains on securities and loan sales, non-interest income in the second quarter increased 7 7.6%.

Non-interest expense during second quarter decreased 2% compared to the first quarter. The largest decreases were in salary and benefit expenses, which decreased 2.3%, and other operating expenses, which decreased 9.8%.

Advertising and promotional expenses increased 17% in the second quarter. The increase in advertising expenses are related to increase advertising for small business loans and core deposit account advertising.

With regard to the second quarter of June 2004 and if we compare it to the second quarter of June 2003, the single biggest expense that we have during the 2004 quarter that we did not have in 2003, are expenses related to to stock based compensation in the amount of $2.2 million. Again, if you extracted those expenses compared to the prior year quarter, operating expenses would have decreased 3.2%.

Net loans in the second quarter increased 105 million or 5%. And core deposits and total deposits increased 60 million, or 3.4% and and 52 million, or 2% respectively.

Looking at the allowance in the provision for loan losses, the allowance for loan losses increased 300,000 to 20.9 million in second quarter. The allowance as a percentage of total loans was 88 basis points in June 30 compared to 91 basis points at March 31. The provision for loan losses in the second quarter was increased 450,000 to 1.05 million compared to 600,000 in in first quarter, due primarily to the growth in the loan portfolio. Net charge-offs for the second quarter increased 139,000 or 23% to 750,000, compared to 611,000 in first quarter.

Credit quality continues to be excellent. Nonperforming loans de declined to 3.9 million at June 30, or 17 basis points as a percentage total loans compared to 4.4 million or 19 basis points of total loans at March 31. Now I'd like to turn it over to Kevin Ward for a few comments.

Thank you and good morning.

Linda has referenced some of your asset quality in in her presentation. Before I get to asset quality I would look to stress a little bit the loan growth numbers that you have seen in this presentation. Loans grew 6.5% in in first half of the year. That would be a 13 and annualized growth rate. More importantly, they grow 5% over trailing quarter, from first quarter of 2004 to second quarter of 2004. Our pipeline continues to be a robust at this important.

And this loan growth is really coming from 3 separate areas: one, new relationships we are building from commercial loan and commercial real estate offices that we brought on board, two, referrals from our existing customer loan base and three, expansion of existing relationships. We see no reason to believe that the kind of loan growth we are currently experiencing will not continue based on our robust pipeline.

The quality, despite the fact that we have increased all all these relationships, remains good. Linda has given you all the numbers, but at 17 basis, 0.17 or 17 basis our non-performance total loans continues to be very good. While the allowance to total loans has gone down slightly, that is really part of the strategic review of our provision for loan losses. As the retail component of loans increased from our desired 50/50 to closer to 59/41, we felt we could indeed take that loan loss -- total allowance for loan loss down from our standard standard target of 1%. As we see those ratios shifting we will be diligent in monitoring our performance.

We as a company aggressively pursue delinquencies, I think some of that will be reflected in delinquency ratios. 32 90-day delinquencies at June 30, 2004, with just over $14 million or 0.61% of of portfolio. Compared to 14.7 or 0.72% of portfolio at June 30 '03. You can see we have a growing loan portfolio with a shrinking delinquency ratio associated with it. Again we attribute that to good underwriting practices and aggressive collection practices. That is what you view as part of your core business strategy.

The one one other thing I would look to point out to you is the coverage ratios in our provision. Despite the fact we've gone from 106 to total loan to 88 basis point to total loans, the coverage ratio at June 30, '04, was 524.84% of non-performing loans, compared to 375.97 at June 30 '03. You can see we are growing a loan portfolio, we've got delinquencies going down. We've got coverage for non-performers going up. Everything is moving in the direction that we desire as a company.

I know there will be questions about our acquisitions of First Sentinel. I have only one caution, and that caution is we will not talk about about pro forma numbers because we are updating the S-4, and until that has cleared the SEC, we are really not prepared to talk about pro formas.

With that we are ready to turn the call over for questions and answers.

Ladies and gentleman if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered or you wish to with draw your question, press star followed by two. Questions will be taken in the order they are received. Please press star one to begin. Please stand by for first question. First question comes from John Kline with Sandler O'Neill. Please proceed, sir.

Morning guys.

Morning, John.

Quick question kind of working through, Linda mentioned net charge-offs were about 750,000 but trying to do reconciliation, I was having a hard time coming up with that, I mean, just looking at net charge- offs at the plug estimate I was coming up with 1.35 million ,is there something under usual going on in there?

That is the six month number.

It's the six month number?

Yes.

What were net charge-offs for this quarter.

750,000.

Okay.

Yeah, actually six months number is 1 million 361.

How much, what is the total value value of equity issued to First Sentinel?

Number of shares, John?

Yeah, I know the number of shares but what was the price?

I don't have that number right with me John. I'll be happy to give you a call with that number. Should be 1.092 times the value of the shares at the closing or the average value of of shares on day before closing.

I can figure that out. You don't have a goodwill number yet?

No we don't.

Just last question, in terms of the margin, sounds like you guys did did pre-positioning to raise cash that really hurt the margin, any sense for, does the margin rebound from here on a stand alone basis? What is your thought?

Stand alone John, without if we didn't have First Sentinel in the picture.

You're not allowed to talk about that right?

Right, so just current company, again, I would see it rebounding because we certainly don't keep 200 million in liquid assets. We might have repositioned but we would have reinvested those funds, we weren't going to pay it out in cash. I don't see it rebounding to any great extent. But if we see short term interest rates, if the Fed increases rates again. We have, for example 77% of commercial loan portfolios adjustable rate. So we'd see some improvement with regard to repricing assets.

So what does 25 basis points on the in a tightening do for you guys, does it had a couple basis points?

Maybe a couple. That would be dependent on keeping our cost of funds fairly stable.

Great thank you.

Next question comes from Jared Shaw of K.B.W. Please proceed, sir.

Good morning. Actually just a follow up on John's question. You said, Linda, that if you did not do restructuring of cash, it would be 12 basis points to the margin. What that correct?

Right. Conservatively. That was based on about $150 million.

Did you when do that restructuring in the quarter, at the end of tell quarter?

Started at end of the first quarter.

Okay. And then, did you say that if you see a 25 basis point increase in rates, that it will actually benefit the margin.

Probably a couple -- one, two, three basis points, again based on stable cost of funds that would assume we were not bumping up our liabilities.

Overall, looking at on the first quarter 10-Q, it looks like you were liability sensitive, that's probably not a big difference from where we are now.

Right.

And then finally, if you could give a little more detail on the auto portfolio, what you are see anything terms of actual growth there and do you have a goal in terms of how large you want that to be. Is that a opportunistic portfolio for you?

The balances at June 30 for $49 million that is about 14% of consumer portfolio. What we have said is we view our limits as 25% as a consumer portfolio or up to $80 million. We view it as a short term asset play with better yield, certainly better yields than we are seeing in regard to home equity products, so that is where we currently are with regard to auto loans.

Great, thank you very much.

Next question comes from Lori Hunsicker with Friedman, Billings, Ramsey.

Good morning follow up on what John and Jared both asked in terms of margin. Kind of, I guess if we look in 2005, the deposit rates are clearly going a little bit higher. Can you give us forward direction in terms of when margin recovers to the level that it was last quarter.

No, I really can't, Lori. We're not looking out there, I mean, we are, but I can't comment on it.

Okay. Just a couple other things when do you expect to file your S-4.

On about 60 days.

Then your tax rate for this quarter was just a little bit lighter than it had previously been running, 29%. Should we be using 30, should be using 29.

I would use 30%.

With respect to the loan loss provision as you mentioned, you increased at 450,000 in quarter due to growth. Given that growth is going to continue, is this probably a pretty good run rate?

I would suggest much of that is going to be driven by the mix of tell growth that we see. As you know, late last year we shifted significantly towards retail to get out of mortgage warehousing business, and we have been modestly trying to re-improve that ratio of commercial to retail. Getting back to that 50/50% target of ours we said will be a several year endeavor. So as each quarter goes on, and each month actually, is how we review our loan loss provision. As we see any changes in volume mix, we'll be addressing that as a provision.

Okay, but there isn't any sort of aberration in this this quarter.

No.

And the one thing Jared asked about out of it, can you just update us, I think last quarter average score was 727 is that --

Approximately the same, because those are our our parameters that we are we are working within.

This is a direct portfolio.

Indirect.

Indirect.

Yes.

And then, just a couple more things. With respect to FSLA, can you just comment a little bit on the timing lag with respect to closing? Initially, I think that was targeted to close at the end of June.

Yes, Lori, the timing lag related to closing was solely on the dependent -- time dependencies on regulators. And the regulators took a little longer to approve the deal that we had built into our schedule.

Was there any reason?

No dramatic reason at all. They took their time many reviewing it discussing with us various issues related to safety and soundness and compliance all things that you think would be top of mind for them.

Anything in particular that came out of that that you had to do prior to closing.

Excuse me I'm sorry.

Was there anything that came out of those reviews that you had to do prior to actually closing.

No, the approvals and everything that we received were unconditional, there were no conditions attached at all.

And then the one time merger charges, we had those -- obviously running through the June quarter, but that will be in this next quarter, running at about $30 million, does that sound right.

That looks like a pretty good number number to us. It will be just plus or minus, but very modest from there

And then, one last question now that your buy-back window is open, which we are excited about. Can you comment on terms of how aggressive you will be.

We will be as aggressive as the market allows us to be.

Can you quantity that just a little more?

We won't just irrationally chase repurchase. It will be within parameters we set regarding accretion to earnings per share and dilution to tangible book value.

Can you just roughly share those parameters with us?

We are essentially looking for it to be modestly accretive, by modest we mean a few percentage points and modestly dilutive of tangible book value. We will be looking to expand the models we use very honestly as we become a more mature company.

Okay. And in an ideal situation, assuming your stock stays here or climbs slightly higher, could we expect to see, I realize your authorizations are 5% can you expect you, in line with some of the recently converted, to do maybe 15-20% a year or is that way too aggressive? Could we potentially expect to see you do 5% a quarter, or more like 5% a year.

I think you can expect we will be in the area of 5% a year. We indicated in the prospectus, we really raised the capital for the multiple purposes. Capital management was one of them, acquisition and expansion of our franchise was a primary driver and the more more capital we retire the less opportunity we have in that arena.

Okay, so 5% a year. Okay, that's it, thanks.

Next question is from Rick Wise, James Montgomery Scott.

Hi, guys. Question on the loan yields for this quarter. In particular, it looks like the commercial loan yields average was 4.38 for this quarter and I saw like for the six months it maybe going higher. What is going on in the commercial loan area.

A lot of that is related to commercial lines and lines of credit. So, as they go up during the quarter, the balances are high and they've been rapidly paying down so that is part of it. The other is again, the shift to more line of of credit type loans in the C&I sector as opposed to longer term, and those loans are tied, a fair amount of them are tied to LIBOR and a good portion are tied to prime, so they are a little bit lower yielding right now. So, that increase really help us out that much in the second quarter.

Right, now is this going to be new customers or existing.

Combination.

Combination.

Yeah.

So then I would expect, or we should expect that it would be increasing in the 3rd quarter after the 25 basis point rate increase, is that right.

Could you say that again.

I guess you would expect that yield to be picking up after the Feds raised in late June.

They reset -- anything tied to prime reset when the the prime rate changes as LIBOR increases those sets take place, it would depend on what is out standing, that higher rate.

Are you seeing good line usage now is that picking up since the economy is getting better.

We are seeing better line usage throughout our commercial customer base.

Just in general, for all the different categories of loans, what's pricing competition like these days? Are you finding it more competitive now from a pricing aspect. What is happening with that?

I think from a pricing aspect on the larger loans we typically have more rational pricers there. When we look at smaller loans, we see the entry of new smaller community bank competitors into the marketplace they are indeed doing some of their portfolio increases through the pricing venue, but on the larger commercial real estate credits. While there is a lot of competition out there everybody's been pricing pretty rationally.

Thank you very much.

Next question comes from Matthew Kelley of Moors and Cabot.

Hi, guys, just curious if you might be able to comment on the First Sentinel margin I know they'd shown sequential increases over last two quarters I am curious how the Q2 margin came in for them, relative to the, I think it was around 282 for the first quarter.

This is Chris Martin, Matt. I don't think we can put out those number because we are going to be filed. That would be kind of, one, misleading. I would say that they are really going to mirror what Provident has been doing at this point.

Just on the 5.8 million in in pre-tax cost anticipated in the deal presentation back in December I am curious how much of that will you anticipate closing over two quarters, Q3 and Q4.

We've actually validated all of cost savings, and because it's only, it's going to be slightly than less than half a year on the compensation and benefits, which is a significant component of total cost saves, that will reflect itself in the total number of '04 year, but '05 we expect to fully validate all of those numbers. We're anticipating our cost saves for full year '05 will at least mirror and possibly exceed what we talked about in our presentation.

But there is no way to quantify what percentage you anticipate in Q3 and Q4, out of the total 5.8?

Just using a rough sketch-nail of the fact that we're going to have almost six months, we're going to have five and a half months in, I would anticipate for the two quarters it should be somewhere in the range of 50- 60%.

Okay, thank you very much.

Next question comes from Colin Gilbur of Ryan Beck.

Good morning, guys. Question on the reserved in terms of it jumping around, I understand the composition changing a little bit here but, to account, I guess for the growth, number one, the excessive growth on the commercial side, going forward and then two, also the pick-up in the auto side which there is a higher risk percentage there, what's your -- do you see yourselves getting back to that 1%?

Much of that will really be driven by what if loan mix looks like. As we start migrating back further and further towards that 50/50 number you will see us migrated back towards the 1% number.

Okay. Do you anticipate any, I guess you can't comment on that, in terms of First Sentinel's asset quality or special provisions, I guess you probably can't answer that.

We really can't answer that, the only thing I can say about asset quality is it was very good. They haven't had any loan loss provision or high charge-offs over a number of prior quarters.

Finally on deposit side, do you anticipate anticipate, sort of, in terms pricing the deposits, having to raise those. How has the market been, the competition competition been. Can you -- can you keep deposit costs down even with this 25 basis points rise and another potential rise in rates.

We expect there probably will be some increase in cost of deposits. Our philosophy has always been to pay somewhere towards the bottom of the upper quartile. We are not rate players, you will never see us out there with the best rates. We will do things like possibly looking at short term CD pricing to some extent. If there is any increases. We are not anticipating any major increases in core products such as savings but that is dependent on, to some degree the rest of the marketplace. We are not seeing any movement at all. I think most banks are going to certainly think a couple of times before they start raising those rates. We think we traditionally had very low cost of deposits and low cost of funds and that has continued to be our focus.

How about on the fee side? You guys have done a really great job in growing the services charge and deposits at least for the past couple of quarters. Is that a good run rate? Is there anything -- are you changing fee schedules at all or how is that number being fueled?

It's really being driven by increases in core deposit accounts, particularly demand deposit accounts, and that is key focus of our sales force out in the branch network as well as on the business side with regard to business BDA, and again part of the whole development of relationships. So, all branch goals and sales goals are are tied to increase in demand deposit accounts.

And then finally, Linda, you you mentioned on the - one of the questions, I think your question on the autos side, you said something about short term asset play, did are you mean short term in duration or strategy?

Duration.

Thank you very much that was it.

Your next question is from Ross Haberman with Haberman Funds.

How are you gentlemen and women? You guys were doing quite a bit of funding for Mortgage Warehouse Lending are you completely out of that now or do you have remnants and what is the status of that lending platform.

We are essentially out of that with the exception of one one business line we moved to commercial and industrial, it actually operates much more like a line of credit. We are a participant in a very large mortgage warehousing pool for the customer, but we do not do the servicing, we are a funding mechanism for it. We feel this is a long term customer who's always been very integral to our business. They carry significant deposits with us as well as being an active borrower, so that is the one exception we made in the mortgage warehouse business, and I said it operates much more like a line of credit than it does -- we don't see the paper flowing in and out and done by a third party as part of a trustee arrangement.

Just another question in terms of tell cost of deposits, what do you see there? Are you seeing pressure on either the CD side or the core deposits to raise rates quicker than you might other wise from either DeNovos or newly formed smaller shops.

To some extent where it is coming is on interest bearing, demand deposits, or money market accounts, or tiered savings products, where the rate bose up as your balance goes up. We're seeing with regard to the competition a lot of teaser rates on those types of products typically offered for new customers as opposed to existing customers. Not seeing a whole lot lot of competition on the CD side. But it is primarily in that money market, tiered savings type products. We are cautious with regard to increases in rates. Again, it is going to take a -- we are priced competitively, that is where we'll remain so we are not going to jump ahead of the crowd in terms of raising our rates.

No, I am not saying you're going to willfully do it, but I am trying to get a sense of if you are because of competition, going to basically be forced to do it or begin to lose deposits.

Again or strategy we focus on on quality, customer service, so that is our promise to our customers. Not the rate play. And we've been successful in growing quarter deposit accounts because because what we feel is is exceptional customer service. In terms of raising deposit rates, if we can do better in the wholesale market market possibly that is and alternative. As we look again, to expand relationships and focus on on quality service. I don't see us being forced to to raise rates.

Okay thank you.

Again that is star followed by one for my questions. You have no questions at this time.

Thank you very much.

Thank you very much for your participation ladies and gentleman we look forward to next quarter's call. Have a great summer.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day