Provident Financial Services Inc (PFS) 2005 Q2 法說會逐字稿

Welcome to Provident Financial Services, earnings conference call. At this time all lines are in a listen-only mode. We will be taking questions during the conference call. [OPERATOR INSTRUCTIONS]. At this time, I'll turn the call over to your host Mr. Paul Pantozzi, Chairman and Chief Executive Officer. Please go ahead sir.

Thank you. Good morning and welcome to our second quarter earnings call. As always I will start by providing our standard caution regarding any forward-looking statements, and the full disclaimer can be found on page 4 of our earnings announcement, which we released this morning. You can also obtain a copy of that as well as other releases and SEC filings by accessing our website providentnj.com, or calling our investor relations area at 201-915-5344. For today's presentation, I'm joined by our Chief Financial Officer Linda Niro.

Two weeks ago we marked the first anniversary of our First Sentinel acquisition. Time has really gone by rather quickly. It's been a very eventful year for us. For the quarter just ended, that transaction was a major contributor, to the 60% increase in our quarterly earnings compared to the same period last year. That said, most of my remarks will focus on our performance as compared to the trailing quarter. Two external factors have had an impact on our second quarter results. First the prevailing interest rate scenario, with it's flattening yield curve, and secondly the intensifying competitive environment, particularly regarding retail deposits. Our net interest margin compressed by four basis points to 3.34% from 3.38% in the first quarter. Total interest income was essentially unchanged from the prior quarter, but total interest expense was up nearly $1.1 million or 5% as market rates on deposits continued to tick up.

We chose to remain disciplined in our deposit pricing and to avoid chasing hot money in an environment where some depositors have again become highly rate conscious. This contributed to a decrease of about 1.4% in total deposits for the quarter. I'd like to add that during the quarter we outsourced the issuance of bank checks, and that means we gave up outstanding float in order to save on processing costs and to increase fee income. That float averaged in excess of $10 million and was reported in demand deposits.

Our customer DDA account balances showed a slight decrease in the quarter. And our ratio of core deposits to total deposits remained above 65%. On the asset side, despite the fact that competition for commercial real estate and C&I loans continued to intensify, we experienced respectable growth in our C&I and construction loan portfolios in the second quarter. Average earning assets did decrease a little over 1% compared to the trailing quarter. This is mostly a function of our securities portfolios paying down, and using the cash flow to reduce wholesale borrowings. Managing interest rate risk remains a high priority for us, as we strive to sustain our net interest margin.

Non-interest income showed an increase for the quarter as we stepped up our free collection efforts, particularly on the deposit side. We have also maintained our focus on expense management. The major development regarding non-interest expense was the successful completion of a voluntary resignation initiative, that was offered to several long time officers of the bank. This added $1.4 million in one time severance costs to our compensation expense for the quarter. We are in the process of folding the majority of these job functions and responsibilities into our existing workforce. So we estimate that replacement cost would be minimal, whereas the cost saves in salaries and benefits would be approximately $1.1 million on an annualized basis. We have several additional cost saving initiatives in the works, which I hope to be able to report after the third quarter. For now I can report that we've received approval from the New Jersey Department of Banking to close two of our under performing branches, one of whose deposits would be consolidated into a nearby branch. Although our analysis shows us that these closures will be revenue neutral, we will conserve the management energy needed to run two non-growth locations. Since we have several openings in our branch system, we will be able to fill those with the existing staff.

Turning to capital management, we were active buyers of our own stock during the quarter, having purchased 1.6 million shares. This took us close to completion of our second buyback program for about 3.7 million that the board authorized in January. We continue to view our stock as a very good investment. In line with that, our board yesterday authorized our third stock repurchase programs for 5% of currently outstanding shares or approximately 3.6 million shares. This program will commence once our current program is completed, which has about 683,000 shares remaining.

We've also stayed within our dividend payout ratio guidelines, and the board declared a cash dividend of $0.08 per share consistent with the prior quarter. Finally asset quality remained strong. We saw an up tick in the ratio of non-performing assets to 13 basis points up from 9 basis points at the end of the prior quarter. We booked a loan loss provision of $400,000 in recognition of this and the fact that we had net charge offs during the quarter. But our commitment to sound underwriting and active collection processes has continued to keep non-performers at a very respectable level.

With that I would like to turn it over to Linda to take us to some more specifics on the quarter's numbers.

Thank you. Net income for the second quarter was $13.8 million, a decline of $1.3 million or 8.3% from the first quarter. Basic earnings per share were $0.21 and diluted earnings per share were $0.20 compared to basic and diluted earnings per share of $0.22 in the trailing quarter. A charge of $1.4 million or $815,000 after tax was recorded in the second quarter associated with the acceptance of the voluntary resignation initiative. The impact of this charge on earnings per share was $0.01. Total assets at June 30 were $6.3 billion, a decrease of $145 million or just over 2% from year-end.

The decline is due primarily to reductions in the investment portfolio, where proceeds were used to repay borrowings and repurchase Company stock. Total loans decreased less than 1% or $23.5 million from year-end due in part to the reclassification of mortgage loans held for sale. Compared to the first quarter commercial real estate loans which include multi-family loans declined $35 million or 5%. During the quarter prepayments were affected in part by several borrowers since they took advantage of the current real estate market and high values, sold their properties and prepaid their loans.

Commercial loans increased $23 million or 6.5% and construction loans increased $36 million or 19% compared to the trailing quarter. Consumer loans increased $9.3 million or 2% compared to the first quarter with direct fixed home equity loans increasing $14.3 million or 6.4%, while indirect auto loans decreased $5 million or 7% to $70.2 million. Average FICO scores for the indirect auto portfolio were 758 at June 30. Credit quality in the loan portfolio remains good. Non-performing loans increased to $7.3 million at June 30 compared to 5.6 million at March 31. The bulk of the increase in non-performing loans was an increase in residential non-performers of $1 million. Several of the loans totaling $200,000 have paid off since June 30 and generally the loans have low LTVs, so in terms of collateral, there is adequate collateral for all of those loans. Non-performing loans as a percentage of total loans increased to 20 basis points at June 30, compared to 15 basis points at March 31. Compared to the first quarter, the loan portfolio was flat, but there was growth within the portfolios. C&I loans and construction loans grew 6% and 19% respectively. A $400,000 provision was recorded in the second quarter compared to no provision in the first quarter. The allowance as a percentage of total loans was 91 basis points at June 30, compared to 92 basis points at March 31 and net charge offs, as a percentage of average loans were 4 basis points.

Total investments decreased $192 million, or 10% from year-end and have decreased to 27.2% of total assets from 29.5% at year-end. Core deposits have decreased $49 million or 1.8% from year-end, with the largest declines coming out of lower yielding passbook savings accounts. The percentage of core deposits to total deposits was 65.2% at June 30, compared to 65.4% at March 31 and 65.6% at year-end. Total borrowed funds decreased $66.3 million from year-end and have decreased to 17.5% of total assets from 18.1% at year-end. The net interest margin decreased 4 basis points to 3.34% from the first quarter and increased 6 basis points compared to the same quarter of last year. The yield on earning assets increased 4 basis points compared to the trailing quarter and the rate on interest bearing liabilities has increased 9 basis points.

Non-interest income increased $1.4 million or 22% to 7.6 million, compared to the first quarter. Fee income increased $1.5 million or 32%. Within this category, loan and miscellaneous retail fees increased just about $900,000 and retail deposit fees including overdraft fees increased $400,000 or 17%. During the quarter, the service charge waivers for the former First Savings customers were phased out and the overdraft checking program was introduced in the Middlesex County marketplace on May 1. Non-interest expense increased $1.9 million or just under 6% to $33.2 million in the second quarter. Salary and benefit expense increased 877,000 or 5% compared to the trailing quarter. Excluding the $1.4 million pre-tax charge for the voluntary resignation initiative, salary and benefit expense would have declined 3% sequentially.

Advertising expense increased just over $700,000 from the first quarter due in large part to the timing of a promotional deposit campaign and loan campaign. Again, excluding the VRI, operating expenses on a linked quarter basis would have increased 1.5%.

Now, I guess we'll open it up to questions.

[OPERATOR INSTRUCTIONS] Mark Fitzgibbon, Sandler O'Neill.

I wondered is it likely -- do you think that we will see much balance sheet growth during the remainder of this year? In that same vein, could you give us a sense for what the loan pipeline looks like today?

Mark, the loan pipeline is fairly strong. What we are seeing in the immediate month or so is certainly on the C&I side, about $30 million that we are expecting to close. We are expecting some growth certainly in the loan portfolio. Again, the pipeline is strong. It is just the time it takes for some of these loans to close and we expect that later in the third quarter. With regard to deposit growth, we have several initiatives underway for checking account promotions as well as possible CD promotion. So, while we don't expect outstanding growth, we are looking for some growth during the third quarter.

Okay, if the growth doesn't materialize the way you hope, would you contemplate being much more aggressive with the buyback program?

As we analyze the internal rate of return on our buyback, we will be as aggressive as we can in terms of our stock versus alternate investments.

Okay and then also it looks like fees were up a lot in the second quarter on a linked-quarter basis, was there anything unusual in there any unusual items?

As far as the loan fees, Mark, there are prepayment fees, so we did have some commercial real estate prepayments done in the quarter and just under $500,000 of that $900,000 that I mentioned was loan prepayment fees.

Laurie Hunsicker, FBR.

Linda, I was hoping, may be you could just give us a little more guidance in terms of margin and specifically I guess what you are seeing in terms of the deposit pricing pressure we hear. Deposit prices have been aggressive; if you could just comment on that and then may be, if you could just comment generally on what you are seeing in the New Jersey landscape in terms of M&A, M&A pricing, where you stand on being acquired or potentially looking to do acquisitions, what your thought is on that. Thanks.

Okay, well I will talk about the margin Laurie. Right now, we are looking at some further slight compression. On the deposit side, we are all clearly I think in competition with one another from the smaller independent banks to the largest of the large. So, we are trying to be selective offering overall competitive deposit rates and then selective in some of our promotional rates. Our focus is on our existing customer base, customer relationships and paying attention to retaining those customers and pricing them accordingly, so we are again, absent any significant growth on the asset side, we would expect some slight compression perhaps three to five basis points in the next quarter.

On the M&A side, we certainly have an open mind about any opportunities that might be presented to us. We continue to look to see where they reside or where we would like to be in the marketplace, you have seen a couple of transactions of late and there's a sense that perhaps some of the smaller de novo's of the late '90s may very well become available because of Sarbanes-Oxley pressures and those kinds of things and expenses associated with all of that, so we are keeping a very open mind, while we continue to attempt to grow organically within our own shop as well as look for some de novo locations to complement our existing system.

Okay and then in terms of, I know you all are not free and clear to sell at the moment, just that conversion rule has locked you up. So, what is your thought at some point in finding a merger partner or either a merger of equals or potentially joining up with a larger firm? Do have any kind of public stance on that.

Well our stance is that the first statement that you made isn't technically correct, because we didn't really have any three year protection, but we have contended right out of the gate since becoming a public Company that we want to grow our franchise. And then of course we really don't have control over someone coming and making an offer to the bank, that's something that the board would have to consider, but that's not really on our radar screen at this point in time.

Okay great. Thank you very much.

We will take our next question from Richard Weiss.

Good morning, Just to go back to competition; a lot of companies have been saying it has stepped up this quarter. Why do you think that is? Because the competitors have always been there.

I think it is the same complexion in the market place, but I think folks have gotten a lot more aggressive with special pricing on special deposit products and perhaps on the other side changing underwriting standards as they are going after loan products. So, I think it's the same players, but it's the manner in which they are managing their companies and the aggressiveness with which they operate within the market.

Are you concerned, I guess with the changed underwriting standards right now regarding asset quality?

Well, we're not concerned because we have not changed ours and we don't intend to and that's the discipline that we effected for quite some time. So, and the results bear that out. So that's not something that we're looking at and we will not look at.

Okay and with respect to I guess residential mortgage lending. Are you doing any kind of IO type of loans or negative Ams?

NO.

Good and in general how is the housing market and the commercial real estate markets in your market.

The housing markets are fairly strong. We are not seeing any slowdown in either housing prices or the ability to sell homes and of course mortgage rates have remained fairly low. Although the short end is going up the long end has not, so mortgage rates and mortgages are still fairly affordable.

And the commercial real estate side. How is that performing?

We have a number of borrowers that have track development taking place in various parts of the state and its still a situation where they can't build them fast enough because New Jersey is a very desirable state in which business would like to relocate as well as individuals and consumers. So we are seeing a great deal of that type of activity.

Collyn Gilbert from Ryan Beck.

Can you give us a little bit of color on the kind of growth that you have seen in running some of these promotional loan products that you have been doing at-- I know you had mentioned it last quarter on the small business and CNI front and, you know, what you are seeing from that?

Well Collyn on the small businesses side we have not recently been running any promotional programs, so in the first quarter they were just winding down from the fourth quarter of last year. But we are still seeing good activity on the CNI side, you know, with our current market price, pricing that's in effect. Where we’ve been running some special pricing is on the home equity side and I think that's reflected in the growth in the fixed home equity portfolio that we have seen quarter to quarter and actually that's been steadily increasing over the past several quarters.

What are the terms of the home equity products that you're offering, the special promo?

I think, we have an introductory rate of 4.99% but that's a 5 year and then the rates obviously go up after that, but we see most of the activity in the 15 year sector.

Okay, and then in terms of, Paul, to your comment about expense growth and being able to articulate your expense saves I should say --- being able to articulate that better in the third quarter. What is keeping you from giving color now. Is it that there are initiatives that just aren't in place yet or what is -- why is it that we need to wait till the fourth quarter.

There are initiatives that are about to come to a close and there are several other initiatives that are not quite in place. So it wouldn't be practical for us to talk about them in detail.

Okay. Are they material would you say, I mean, similar to what you did on the early resignation initiatives?

We think they would be comparable or a little bit better.

Mark Fitzgibbon – Sandler O’Neill .

Just one quick follow up. I was curious, have you extracted at this point all the synergies you think from the First Sentinel deal and could you also comment on how much you think you might garner in expense saves from those two branch closings?

I think, we indicated that the cost save is pretty much neutral, but that we will be able to utilize some of those folks in several other locations in close proximity because we do have some openings, so there is really no significant benefit here. On the synergy side with First Sentinel, I think we have done a great job of putting two companies together. We continue to work diligently at growing relationships and expanding the commercial side of the business in that particular market place down in Middlesex County. So we're very happy with what we've done thus far, but we also recognize that there's no point in time where that process stops, it's a year in, but we continue to work at building the franchise and expanding relationships.

Ross Haberman – Haberman Fund

Could you talk about -- if you have mentioned anything about any new de novo branches which are expected 05 or 06?

We have not, what we indicated was that, we continue to look for locations, we've looked at a number of them over the last year, and are just finding that the real estate is rather expensive and not to our liking, given those costs. But we continue to look for opportunities to fill in, in various markets within the central Jersey region.

Or in terms of any other expansions if you care to, do you want to fill in North, South, East, West, what--?

We pretty much run North to South, so we have opportunities not only in the North, in the South but as well as the Central part of the state. So we are pretty flexible, and it will depend upon the value proposition and the other long-term opportunities associated with whatever expansion opportunity is presented. So we are quite flexible with respect to that area.

And just one follow up in terms of your loans-- loan making ability, are there any parts of the state that you are very uncomfortable with in terms of land or loan values now that your cutting back or changing your loan type of criteria, because of the appreciation?

I think the short answer is no to that. Because we do have clients that are in the southern part of the state, and Northern part the state, Western part of New Jersey, so we have not seen nor have we been confronted with a decision where we had to say no for the reasons that you are saying.

[OPERATOR INSTRUCTIONS] Damon DelMonte - KBW

I was wondering if you could just address the expected savings from the VRI, I think I missed that.

$1.1 million on an annualized basis.

Paul Lloyd of Snyder Capital.

I was just wondering if you could discuss the -- you mention the weakening in underwriting standards of some competitors, how that would play accross categories? different lending areas? is it commercial , consumer, mortgage?

Yes, most recently The Wall Street Journal talked about residential underwriting, and some of the very fancy products that might be out there, and there is some concern about long term impact. The other side of that on the commercial side its typically a pricing issue, and perhaps relaxing some covenants and some underwriting requirements in commercial real estate side.

Ken Sarnoff of Provident Financial.

You mentioned earlier about just getting back to the acquisition prospects, and I know you don't really have that on your radar screen, but as far as the three year lock up period, you said you were not -- that was not part of the plan with regard to Provident, can you explain -- I thought three year was pretty much across the board but apparently not, can you explain that?

That is OTS institutions, we were not an OTS shop.

Okay, so there is no timetable as far as from day one, when that could conceivably occur?

That’s correct.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. I would like to turn the call back over to the presenters for closing remarks.

Thank you very much for joining us on this call; we look forward to hearing from you in the next quarter. Thank you.

Ladies and gentlemen, thank you for joining on the call today, you may now disconnect.