Provident Financial Services Inc (PFS) 2005 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Provident Financial Services third quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce your host, Mr. Paul Pantozzi, chairman and chief executive officer of Provident Financial Services.

Thank you and good morning, everyone. Welcome to our third quarter 2005 earnings call. As always, I'll start by providing our standard caution as to forward-looking statements that may be made in the course of our discussion and the full disclaimer can be found on page 4 of our earnings announcement released earlier this morning or you can obtain a copy of that, as well as any of our releases and SEC filings, by accessing our Web site, providentnj.com, or by calling our investor relations area at 201-915-5344. For today's presentation, I am joined by our Chief Financial Officer, Linda Niro.

I can report that this quarter basic and diluted earnings per share of $0.23 was achieved with very little in the way of one-time events or adjustments, or what is frequently referred to as noise in the financial results. We accomplished this in large part by staying with three tactics that we've identified as necessary in the current flat yield curve environment, namely, minimizing net interest margin compression, actively managing operating expenses, and maintaining steady stock repurchase activity.

Net interest margin compressed in the third quarter to $3.31 from $3.34 in the prior quarter. This decrease was at the low end of what we anticipated, as stated in our last conference call. We've determined to remain competitive, but not overly aggressive, in our pricing and we're committed to managing interest rate risk. At the same time, we're well aware that our depositors are seeing some higher rate offerings in the marketplace. In late September we introduced a nine-month CD campaign with some attractive yields that brought in over $34 million as of September 30th. Of that, we estimate that about 80% is new money.

This wasn't enough to prevent a slight degree of net deposit outflows for the quarter, but we see properly priced time deposits as a better alternative to going back into the wholesale borrowing market. We have continued to reduce our borrowings and to fund the pay-offs of maturities and amortizations from our investment portfolio. Our loan balances were essentially flat quarter to quarter.

On the retail side, net pay-downs in residential first mortgages were largely offset by growth in consumer loans, mostly in the fixed rate home equities. Meanwhile, our pipeline for C&I and commercial real estate loans remain strong and we work hard to bring every commitment to the closing table as quickly as possible.

Some of our commercial real estate clients have been choosing to move their assets into cash in the current environment, with the result that payers have tended to outpace our very respectable level of originations. On the expense front, we continue to make progress in managing our overhead cost. In the past several months we've successfully renegotiated several of our technology services contracts, resulting in projected savings of just under $1 million annually and we have additional initiatives in this area that should cut their fruition before year end.

When you compare each major category of non-interest expense for this past quarter to the matching quarter in 2004, you find that each line item is at or below, in some categories significantly below, where it was last year. A number of factors impacted this result, including recognition in the third quarter '04 of integration costs from the First Sentinel acquisition. But it indicates a trend that we actively manage.

Capital management is, of course, a major part of our strategy for returning stockholder value. We continue to view our stock as a good investment and in the last quarter we bought back 1.0 million shares as part of our third Board authorized repurchase program. As long as the internal rate of return remains favorable, we intend to remain active in this regard. I'm pleased to report that the Board has approved an increase in our quarterly cash dividend to $0.09 per share. This is in line with our pay out ratio parameters and it represents our fifth increase in the 10 quarters since we began paying dividends.

I want to add a word about asset quality. We saw an improvement in this quarter in the ratio of non-performing assets to 11 basis points from 13 basis points at the end of the second quarter. We monitor asset quality very closely and while we are taking nothing for granted, we don't perceive any serious near term threats in this area due to our sound underlying practices and effective collection efforts.

With that, I'll turn the meeting over to Linda Niro who'll take us through the financial results in greater detail. Linda?

Okay. Thank you. Good morning. Net income for the third quarter increased $1.2 million, or 8.5%, to 14.9 million compared to the second quarter and basic and diluted earnings per share increased 10.8% to $0.23 a share. Total assets at September 30 were $6.2 billion, a decrease of $258 million, or 4%, from year-end. The decrease in total assets is primarily attributable to a $261 million, or 14%, decrease in the investment portfolio; an $118 million, or 10%, decrease in borrowings; and an $86 million, or 2%, decrease in total deposits.

Net loans year to date have decreased $26 million or just under 1%. Loan originations and purchase loans year to date were $951 million and purchase -- which are offset by repayments of $941 million and sales of $31.5 million. Year to date, the un-funded loan pipeline increased $63 million to 794 million in the third quarter, with the largest increase in construction loans, which were up $56 million, and commercial real-estate loans, which were up $14 million. Year to date commercial real estate loans, including multifamily and construction loans, decreased $13.6 million. Commercial loans increased $21 million and consumer loans increased $12.5 million.

Within the consumer portfolio, indirect auto loans increased $1.3 million to $71.5 million and they represent 13% of the consumer portfolio. The average FICO scores for the indirect auto portfolio were 747 in the third quarter. Asset quality continues strong. Compared to the trailing quarter, non-performing loans decreased approximately $900,000 and non-performing loans as a percentage of total loans were 18 basis points at September 30 compared to 20 basis points at June 30. And non-performing assets as a percentage of total assets decreased to 11 basis points from 13 basis points. The allowance as a percentage of non-performing loans increased to 504% at September 30 from 454% in the second quarter.

Total investments decreased $266 million, or 14%, from year-end and have decreased to 26% of total assets from 29% at year-end. Total deposits have decreased $86 million, or 2%, from year-end. Demand deposit accounts have increased $26 million, or 2%. CDs have been flat, increasing less than 1%, and lower yielding savings accounts have decreased $120 million, or 8%, year to date. Year to date borrowed funds have decreased $118 million, or 10%, and have decreased to 17% of total assets compared to 18% at year-end.

The net interest margin decreased three basis points to 3.31% in the third quarter. The average yield on earning assets improved 10 basis points and the average cost of interest-bearing liabilities increased 16 basis points. Compared to the trailing quarter, non-interest income increased 3.5%, fee income increased $200,000 and gains on securities sales increased 144,000. Other incomes declined 105,000 compared to the prior quarter due to the recognition of losses on loan sales of 200,000 in the quarter compared to losses of 81,000 in the second quarter.

Total non-interest expense decreased $3.2 million, or approximately 10%, compared to the second quarter, salary and benefit expense decreased $2.7 million, or 15%. Salaries decreased -- or total compensation decreased $1.7 million, or 15%, due to the $1.4 million expense associated with the voluntary resignation initiative recorded in the second quarter. Benefit expenses decreased approximately $1 million, or 16%, compared to the second quarter due to reductions in employee insurance and payroll taxes.

Total stock-based compensation in the quarter declined slightly and was $2.8 million. Data processing expense decreased 3% from the prior quarter as a result of negotiated price reductions with certain vendors. Amortization of intangibles decreased 14% and advertising expenses decreased 26% compared to the trailing quarter.

Income tax expense increased $1.4 million, or 23.5%, compared to the second quarter and the effective tax rate increased to 33.6% from 31%. The increase in the effective tax rate in the third quarter was due to the vesting of restricted stock awards at a market price below the market value on the date of the grant. This resulted in a reversal of a previously recognized tax benefit. And now we'll turn it over to Ken for questions.

I think we'll move right along to the question and answer portion of our presentation this morning.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question will come from Rick Weiss from Janney Montgomery Scott.

Good morning.

Good morning.

Good morning.

A couple of questions. First, I was wondering if you could talk about the pricing regarding construction loans, if you can give some color on how do you price those?

Typically, those pricings are driven from LIBOR and in most cases they are negotiated on a case-by-case basis. We have significant relationships that have been with us varying time frames and, as a result, there is no standard pricing, if you will, regarding that product.

How is the pricing, I guess compared -- this quarter compared to, say, a year ago?

We're down, clearly down from --

It is down?

Yes.

Okay. And are there any prospects of it coming back up, in your opinion?

I'm not Alan Greenspan, but at this point in time it's sort of a wait and see game, Rick.

Okay. Got it. Let me turn to just on some of the cost savings. Do you have a target efficiency ratio?

Yes. Our target ratio is between 50 and 55%, recognizing that we're going to have to get to the mid-50s near term.

Okay. And that would be for next year, Linda?

Within the next 12 months.

And one final question, if I could. Just with regard to the tax rate, I'm sorry, the explanation, I just kind of got lost --

Sure.

-- with the recognition plans. And also, going forward, what would be a decent rate to use as a model?

Again, we recognized the expense for the restricted stock at a price that was higher than the market price at the actual date of the vesting. So where we had taken a tax benefit, we needed to reverse that. Unfortunately, in that circumstance, it's a P&L impact. And going forward, I think a good effective tax rate to use would be 32%.

Got it. Okay, thank you very much.

Sure.

Our next question is coming from Mark Fitzgibbon of Sandler O'Neill.

Good morning and thank you for taking my question.

Good morning.

Good morning.

First, I wondered, Paul, you had mentioned that there were some additional expense initiatives that we should see in the fourth quarter. Maybe if you could just talk about some of those and give us a sense for the magnitude of how much we might see in additional cost savings going forward?

Well, this stems from our ongoing assessment of our company, which we mentioned last year. We began evaluations earlier part of this year. You heard the VRI, you heard regarding the renegotiation of certain contracts, et cetera. They're all part and parcel of a total organizational assessment that's designed to make us more efficient, clearly, and at the same time reduce some overhead and costs.

We didn't apply a target to this, Mark, because it really encompasses the entire organization, but incrementally we feel we're making progress quarter to quarter -- $1.4 million in the last quarter, just about $1 million this quarter, and we're not going to project exactly what those numbers might look like by year end, but we know they'll be favorable. And that process won't just end at year-end '05. It'll continue into '06 as well.

Okay. And then secondly, it sounds like out there in the New York marketplace there's a tremendous amount of deposit competition right now and I wondered if you could maybe talk about the kinds of products that you all are pushing to try and keep deposit costs down?

Well, there's certainly a lot of competition. Right now we have on the retail side a nine-month CD promotion that's been extremely successful. And on the business side we are also running a small business checking promotion, low-end small business, and we've had success with that. We've seen 6% growth in the current quarter compared to midyear. So those are two deposit promotions that are actively going on, along with some retail checking promotions that are ongoing as part of our core deposit strategy.

Okay. And then lastly, I wonder, given the -- sort of the intense competition for both assets and liabilities out there in the marketplace today whether you think M&A activity in this market's going to really heat up a lot and whether you all have opportunities to do acquisitions?

I think we look at those opportunities as they are presented or as they are created, Mark. And we're hopeful that something might come down the pike. But heated, I don't know how to measure that. You've seen recent transactions. I think they've been more selective than heated, but time will tell. I think we need to continue to do what we're doing, make certain that we stay with the basics -- fundamentals of our company. We don't chase deposit product or loan product by meeting top of the market pricing. That's been part of our discipline.

So we do what we do well and we look to improve on what we do and make certain that we hold on to our customers, recognizing the competition. I think there'll be additional consolidation, but again, it'll take some time to unfold. We may see more activity in this area in '06 based upon what we're seeing in the marketplace.

Great. Thank you very much.

You're welcome.

Our next question is coming from Theodore Kovalis (ph) of Sky Capital.

Yes, a question with regard to the effect of the switch of outsourcing the check processing and what sort of an impact did that have on the net interest margin?

It really didn't have much in the way of an effect on the net interest margin. Our non-interest bearing checking balances actually increased over the prior quarter. But the positive on that is the additional fee income that we're getting from that outsourcing.

Yes, but during the time that you're processing it, don't you have the float?

No.

The float doesn't count in?

No. That's why we outsource the operations.

Well, who has the float, then -- while you're processing it, between the time you've got it and it's presented to the next -- the other bank?

There's balances with the vendor and we're paid --

No, no, no. I meant prior to, prior to the change.

Oh, we had the float prior to the change.

Right. Yes, and I'm asking what the effect on the net interest margin of the change to where you do not have the float with the new system -- what that change had on the interest margin?

Again, I don't believe it had any change on our margins because those balances resided with non-interest bearing checking and again, those balances have actually increased over the prior quarter. Compression is coming in with the resetting and repricing upward very sharply in interest-bearing checking account products, CD products and, to a lesser extent, borrowings. I hope that answers your question. Our margin only compressed three basis points.

Right, I'm aware of that and I'm glad of that. But maybe I can give you a call later on.

Okay.

Our next question is coming from Matthew Kelley of Moors & Cabot.

Yes, hi. Nice job on the expense reductions during the quarter. I was wondering if you can just give us the numbers on the option expense and MRP expense in the first two quarters of the year just so we can kind of compare that. I know that you had you mentioned it was $2.8 million in this quarter.

Sure, Matt. Let's see. First quarter options expense -- actually it was the same for the first and second quarter, $892,000. And restricted stock again was the same amount first and second quarter, $1.3 million. And just to give you a comparative, in the third quarter, option expense 859,000, and the restricted stock expense 1,263,000.

Okay, great. And then just kind of looking at reserve levels, I remember in previous conversations kind of a comfort level around 90 basis points on total loans in terms of coverage. And if you look at your last six quarters, you've been floating right around that number and now we're just one basis point below it. But I mean, is that still the level that going forward, in an ideal world, where you could convince your accountants and the SEC of what you'd like to do - do that to maintain?

It is, Matt. Again, the loan portfolio has been essentially flat or slightly lower quarter to quarter. There's been no real change in the mix and we've seen improvements in asset quality. So I think as the portfolio grows -- begins to grow and we fund some of the loans that are out there in the pipeline, you may see that number increase. But again, it's based on what we see in the portfolio now and current credit quality.

Okay. Thanks a lot.

Sure.

(OPERATOR INSTRUCTIONS). It appears there are no further questions at this time. Do you have any closing comments?

Thank you very much for participating in this call. We look forward to seeing you or hearing from you and we'll talk to you next quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's teleconference. You may disconnect your lines at this time and have a wonderful day.

Thank you.