Provident Financial Services Inc (PFS) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Quarter One 2005, 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. [OPERATOR INSTRUCTIONS] At this time I would like to hand the conference over to your host for today, Mr. Paul Pantozzi, Chairman and Chief Executive Officer, please proceed sir.

Good morning, everyone and welcome to our first quarter earnings call. I would like to start by providing our standard caution as to any forward-looking statements that may arise during our discussion. The cautionary language can be found in our SEC filings as well as on page 4 of our earnings announcement, released yesterday morning. You can also obtain copies of any of these on our website www.providentnj.com, or by calling our investor relations area at 201-915-5344.

For our presentation this morning I am joined by our CFO, Linda Niro. Now, I would like to get right into the presentation. Our operating results for the quarter continued to reflect positive benefits of our First Sentinel acquisition, with a 46% increase in net earnings compared to matching first quarter '04. Compared to the trailing quarter, those results are characterized by a great deal of consistency. Net interest margin remained unchanged quarter to quarter, at 3.38%. A 9 basis point rise in our cost of interest-bearing liabilities, was offset by a 7 basis point rise in the yield on earning assets.

Net pre-tax earnings were also unchanged at $21.958 million. Decreases in non-interest income were partly compensated by decreases in operating expense. Though there isn't a great deal of noise in this quarter's results, some of these decreases on both sides could be considered seasonal, and Linda will take us through more detail in a few minutes.

In fourth quarter '04 we had some extraordinary income tax events and adjustments, particularly when we reduced the valuation allowance against a deferred asset regarding our charitable foundation. Our first quarter '05 income tax expense rate of around 31% is a bit more normalized. We continued to perform very consistently in 2 measurements on which we place high importance. Our efficiency ratio this quarter was 58.83%, little changed from the 58.52% in the fourth quarter of '04. We certainly did not view even this slight up-tick as representing a trend. Although maintaining net interest margin in the current environment will require effort, we continue to make progress in expense management, as we realize the synergies from our acquisition, plus the major costs of Sarbanes-Oxley 404 compliance are behind us and we feel that we are very disciplined in view of potential cost increases.

Asset quality has certainly been a consistently strong point. Non-performing loans to total loans stood at 15 basis points at the end of the first quarter, compared to 17 basis points for the trailing quarter and 19 basis points for the year-ago quarter. Asset quality continues to be a plus in many institutions, but for us it is a long-standing and ongoing strategic initiative. With that degree of asset quality and since we had net recoveries in the quarter we made no further provisions in the first quarter. Our allowance coverage was 605%. So we believed no further provision was warranted.

In terms of deposits, loans, and overall assets we were also consistent this past quarter, which is also another way of saying growth was flat. Regarding deposits, we had some time deposit growth to the tune of $8 million, as we rationally priced up to stay competitive in the market. Core deposits had some deterioration, which we perceive is largely a shifting into higher rate time products. Our ratio of core deposits to total deposits is still above 65%, that's 65.4 versus 65.6 at the end of '04.

All in all we adopted a protective posture in the first quarter. I hardly need to remind anyone that in our market place the competition for those relationships is intense. We try to stay focused on retaining relationships that we have, that especially includes those relationships we acquired. We would rather not fall prey to the temptation of pricing irrationally, to build balances only for the short term.

As regards to total assets, we have stayed with our program of reducing borrowings, and reducing the proportion of the investment portfolio to total earning assets pretty much simultaneously as the assets paid down and borrowings came due. Keeping in mind too that we had some significant stock buyback activity in the quarter and this has had an impact on the balance sheet. Since the investment paydowns outpaced the borrowings coming due, we found ourselves at the quarter's end in a very liquid position, with over $236 million in cash and equivalents. This brings us to loans. Total loans decreased 8 tenths of a percent or $28.6 million due mostly to residential first mortgage paydowns.

We booked modest increases in C&I and multi-family loans in the quarter, and we saw growth in our Home equity loans and lines. We also kept up our indirect auto loan activity well within our guidelines. All in, this created a slight increase in our ratio of commercial type loans, 35.6% versus 35.4 at year-end '04. Our loan pipeline has remained favorable which is why I referenced liquidity. At the end of first quarter '05, we had just under $742 million in unused commitments, compared to $599 million at year-end '04. In short we have remained committed to profitable growth and we mean for it to be long-term rational, deliberate growth. We haven't chased loan pricing to the detriment of asset quality; we haven't chased deposit pricing to the detriment of long-term relationships.

In terms of franchise expansion, we are cautious about overpaying for de novo real estate just as we are prudent in assessing any acquisition opportunity that might present itself. We think the news on the capital management front is good. At the end of first quarter, we had 2.2 million shares left to repurchase out of 3.7 million that the Board authorized in January. And the Board also authorized another increase in our quarterly cash dividend, which we believe is warranted by our earnings. With that, I'm going to turn it over to Linda for a more detailed review of the numbers.

Okay. Thank you. Net income for the first quarter of 2005 was $15 million, compared to $17.1 million in the fourth quarter of 2004. On a linked-quarter basis, pre tax income was $22 million for each of the quarters. Income tax expense in the first quarter of 2005 was $6.9 million, compared to $4.9 million in the fourth quarter of 2004. Again, income tax expense for the fourth quarter decreased approximately $2 million, as a result of reduction in the valuation allowance that was related to deferred tax asset that was created in connection with the charitable foundation.

Basic and diluted earnings per share were $0.22 for the quarter. Total assets was 6.4 billion at the end of the first quarter, a decrease in just over 1% from year end, primarily due to reductions in the investment portfolio. Total loans decreased less than 1% from year-end. The largest declines in the loan portfolio was $34 million in residential loan balances. Multi family loans and commercial and industrial loans each increased $1.3 million from year-end.

Commercial real estate decreased $6.1 million and construction loans decreased $2.4 million from year-end, with construction lending somewhat adversely impacted due to the harsh winter experienced during the first quarter.

Consumer loans outstanding increased approximately $12 million from year-end. Within that category, fixed rate home equity loans increased $5 million or 2% and indirect auto loans increase $5.1 million or 7% to $75.3 million. Home equity loans make up approximately 43% of the consumer portfolio and indirect auto make up about 14.3% of the portfolio.

Credit quality again continues to improve compared to year-end. All of our asset quality measures improved. The allowance for loan losses as a percentage of total loans improved to 92 basis points at March 31, 2005, compared to 91 basis points at year-end. During the quarter, we had net recovery with $71,000 and as a result of the continued improvement in the quality of the portfolio and net recoveries, the Company did not record a provision for loan losses.

Total Investments decreased $118 million during the quarter and have decreased to 28% of total assets compared to 30% at year-end. Core deposits were essentially flat to year-end, decreasing two-tenths of 1%, as depositors started to shift funds from low yielding savings accounts into more current rate time deposits. Within the core account categories savings deposits decreased $16 million while checking account products increased $9.3 million. The percentage of core deposits as a percentage of total fell slightly to 65.4%.

Total borrowings decreased approximately $57 million during the first quarter and borrowings as the percentage of assets has dropped to just under 18% from 18.5% at year-end. The margin held steady on a linked quarter basis with the spread declining 2 basis points. A lot of this decrease in the spread is related to an increase of approximately 20 basis points in the average yield of time deposits which increased 20 basis points during the quarter. The effect of rates repricing up and new deposits coming in at higher interest rates.

Non-interest income for the first quarter was $6.2 million compared to $6.6 million for the fourth quarter. Retail and other fee income decreased approximately $600,000 compared to the trailing quarter and other non-interest income increased approximately $300,000. Fees on retail checking accounts and retail deposits decreased approximately $144, 000 and fee income on equity fund investments decreased $339, 000 on a linked quarter basis. Within the retail fee category we are starting to see leveling off of fees related to overdraft protection products as customers begin to realize the impact of consistently overdrawing their accounts.

Total non-interest expense decreased $874,000 or 2.7% during the first quarter.Data processing expenses decreased $300,000 and advertising expense decreased $340,000 compared to the trailing quarter. Salary and benefit expenses increased $2.3 million to $17 million compared to salary and benefit expense of $14.7 million during the fourth quarter of 2004, and that reflects the one-time pension expense adjustment that was made during the fourth quarter.

Other operating expenses decreased $2.7 million to $4.5 million in the current quarter compared to $7.1 million in the fourth quarter of 2004.One-time expenses that were recorded in the fourth quarter include $500,000 in merger related expenses on a pretax basis and $400,000 in Sarbanes-Oxley implementation related expenses. Compared to the trailing quarter we also had reductions in consultant expenses of $600,000 and our other operating expenses related to supplies, attorneys’ fees and corporate insurance in aggregate decreased $600, 000. I will now turn the call back over to Paul.

With that we will open it up for questions.

[OPERATOR INSTRUCTIONS] Rick Weiss, Janney

Well you are running pretty hard just to kind of stay in the same place and I’m guessing that's due to the economy, interest rates and competition. Would you try to give a broad overview of what is going on with the New Jersey economy and also your take on the competition?

Well the competition as you can appreciate is very intense. We’ve got the very large institutions in our marketplace. More locally we’ve got denovo institutions that continue to and claw to be successful in the smaller environment. The economy is still quite strong. People are still working away towards New Jersey. There is great deal of activity in the northern part of the state, and the southern part of the state is one of the fastest growing areas on the Eastern sea board, certainly in the state of New Jersey. So, it is very strong. I think there is an ongoing building boom especially locally. We have been involved with clients that have put projects on the back burner subsequent to 9/11 and those projects have been coming out of the ground in the last six to nine months. So, there is a great deal to be said for New Jersey, and you know we have been in the middle of it for many many years. We understand it. The issue is more the competition for not only the retail dollars but the commercial relationships as well.

So, is the building boom going on with commercial real estate as well as residential?

I would say in certain sectors, yes. It depends upon how you define a boom. I think there is a great deal taking place right here in the Northeast, whether it's the Gold Coast or the waterfront from Hudson County right up to the George Washington Bridge, there is a great deal of activity along that geographic boundary.

Great. One micro type of question. I guess with looking at your average loan yields, on little commercial loans, on a, looks like a sequential quarter, it went from 5.81 to 5.68, kind of wondering why they decreased when it looks like overall the interest rates have been going up?

Rick, we still have some lines out there, that have promotional rates out there from the commercial sector, and we also did have some higher rate loans pay off, so it's just a mixed bag within the quarter.

Going forward, do you expect that to start trending upwards, Lin?

We expect a pick up in construction certainly and in commercial lines, and as some of the promotional rates come off, they will reset in line more with the market.

Laurie Hunsicker, FBR.

Couple of things. I wondered if you guys could talk a little bit about your focus for core deposit growth and what we could expect to see that do in the next 12 months?

Laurie, we continue to focus on core deposits, our strategy hasn't changed. You will probably see a greater emphasis on checking account generation, but what's happening really is the reflection of changes in interest rates. With regard to funding the Company, we can attract and put time deposits on our books in many instances, 100 basis points less than looking to the wholesale market. So, some of it is the shift that's impacting the movement of core as a percentage of total deposits, but our focus is still very much with regard to core accounts, and predominantly checking. Again that shift out of savings into time is not unexpected.

And that really is in line with our relationship building philosophy. We need that checking account, get that in the door, and then build on as it can create more stickiness with the client.

Do you all have any target you could throw at us in terms of where you are expecting core deposit growth?

We are just expecting to keep that ratio in the 65% or above ratio.

Okay, and then what are you expecting for overall deposit growth?

We are expecting just some slight deposit growth. It is extremely competitive. So, I would say just thought, you know, a little bit more than we're doing. We just increased 1.4 million from year end. Clearly, we think we could do a little bit better than that.

And then I guess kind of along the same lines, First Sentinel has been closed for the last few quarters. Could you just give us an update in terms of what you are seeing as far as -- are we seeing an attrition or are we seeing a new accounts from where you are net of closing?

We actually have retained most of the balances, so we are looking to retain and then grow from that point. There has been very, very little outflow, I would say, you know, less than one half of 1%. So, we are looking to just keep the deposits we have and build within that market place.

And right out of the gate, the focus was and continues to be retention of the franchise obviously, but along with that expansion. So, it is a combination of two factors that we've been working with, retention of the franchise and expansion of our entire franchise as we go forward.

And then just quickly, with respect to your auto, yousaid it’s at $75.3 million, I had it in my notes from last quarter that you all had really kind of planned to cap it at 80 million, is that still the case?

That was a general guideline. We don't want to go above 20% of the portfolio and I think when we started with that 80 million, that was pre-First Sentinel, but we are actually starting to see some of those balances come down.

Okay, so you tell us the 20% is what we should use. And will you remind us under where we are in terms of FICO on that portfolio?

Yes, blended it's 765.

Okay. And then just one last question. Maybe you all could comment, I mean you were very aggressive in the buyback, which we loved, the stock was cheap at 18. So, I think it's relatively done here, 16.5. How aggressive you are may be and just generally once you finish this, what we can see sort on a going forward basis?

Again, we will be in there based on availability and price and our internal rate of return that we have established with regard to buying back Company stock as we get further into the program. Again that would go to the Board for their evaluation and approval of another plan or program.

Okay. And then in terms of sort of near term, there is nothing that blocks you out once you come off the [Inaudible] , there is nothing that blocks you out from the buyback window being wide open?

No.

Thank you all very much, nice quarter. I am sorry Linda, one more question. You had mentioned 500,000 in merger and integration expenses. Was that this quarter?

No, that was fourth quarter of '04. We had --

Okay, right. I didn't know if I had missed that, okay. I am sorry.

Matthew Kelley, Moors & Cabot.

I was wondering if you can give a little bit of update on the NII sensitivity at March 31 another year-end up a 100 was modestly negative in terms of the outlook and kind of how that pertains to margin expectations from here?

We can talk about what we have already published for the fourth quarter in terms of margin or decline in net interest income. There was around 5% decline, I would expect that we are going to look for pretty much the same thing during the first quarter. Again that is based on our model, I think realistically, it probably would be less than that because we are committed to overall keeping our cost of funds as low as possible, the key is going to be booking more current rate assets and getting those on the book.

Okay. So, would it be fair to say that we are getting close to an inflection point kind of in the margin trends, may be they will stabilize?

I think we may see some near-term slight compression in the margins.

Okay. And then just revisiting the retail deposit fees there. Are you expecting any bounce back at all? Is there any seasonal nature or is it just kind of system wide trends in terms of the way depositors are responding to, not wanting to pay those fees anymore?

Some of this seasonal within the first quarter, but we are just beginning the roll out of that product in the fformer First Savings branches. So, as that comes on line, we would expect to see that begin to trend up late during this quarter, mid to late in the quarter.

During the initial period, when the first Sentinel customers were coming on, did you waive fees on that customer base?

We did. We waived some fees.

Okay. And is that ---?

That will be coming to an end.

Jared Shaw, KBW.

Good morning. I guess the last question I had is on the salaries and benefits line. Is that a good level to use going forward for our modeling?

I would say 17 to 17.3 million probably would be a very good number to use.

Okay great, thank you.

Collyn Gilbert, Ryan Beck.

Thanks. Good morning guys. Just a follow-up, and this may have been in Laurie's question and I may have missed it. But, did you comment, Linda on what you think the achievability of that 8% loan growth goal is that you articulated last quarter?

We think that we will be able to pick up loan growth. Agian, first quarter is - even we look back at last year - was not too dissimilar from what we experienced during the first quarter of this year. We are already seeing some pick up in the month of April. So, we think we are going to be able to make it up during the course of the year.

Okay, great. And on the charge-off side, obviously, the recovery was strong this quarter but expectations of that charge-off line over the next few quarters?

Of course, it is very difficult to predict that. It depends on what happens within the portfolio, each and every month when we review it, but I would not expect net recoveries going forward. I think, we probably won't see the levels perhaps we saw last year. But, I think may be, 1 to 200,000 in net charge-offs might be a more normal number. Again, it just depends on what goes on within the portfolio and the credit.

Okay. Great. And then just finally, I think you all mentioned on the fourth quarter conference call that you are going to be looking at kind of doing an organizational assessment of the efficiency ratio and ways that perhaps you can cut additional cost or improve that. Has that occurred and if so what have you all found?

Well, that's an ongoing process, quite honestly and really began once we began the integration. The integration obviously, has been completed but the overall assessment continues and we are probably coming to the closure of some initiatives over the next 30 or 60 days, and we will have more information at that time. But it's favorable.

[OPERATOR INSTRUCTIONS] John Kline, Sandler O'Neill Partners.

Could you talk a little about the promotional rates on your commercial loans?

On the commercial lines?

Yes. I mean what kind of promotional rates are you offering?

They were rates that were in effect several months ago when rates were lower just for a 6-month period, so they really should all be coming off at this point in time. They were designed to generate interest really in small business and C & I type lending. So the rates are somewhat below market in the current environment.

Is that something you would typically do?

We do that from time to time depending on what we are seeing in terms of activity or as a way to generate interest and encourage new customers and a chance for new relationships.

Okay. When you offer promotional rates, what kind of discount do you offer, is that discount to prime, if you can quantify that?

Typically, they are discount to prime. Sometimes, it's flat to LIBOR as opposed to perhaps a spread.

Okay. And what's the duration of the promotion?

Again, 6 months is the maximum that we will put a promotional rate out there.

Are you continuing to offer those?

We are not offering them at this time.

Okay. And in terms of the efficiencies or costs, have you guys realized any cost savings as a result of the First Sentinel transactions?

Well, it's above the level that we originally forecasted, when the deal was announced.

Okay. And it would be helpful once you are finished with your assessment and if you could provide some details as to that -- how we could model going forward as we very much -- I very much look forward to seeing what kind of efficiency ratio you think you can get to going forward.

Okay.

And that does conclude your question and answer session.

Okay, thank you very much for joining us. So, we look forward to speaking with you in our next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation. Have a wonderful day.