Provident Financial Services Inc (PFS) 2007 Q3 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Provident Financial Services, Incorporated Third Quarter 2007 Earnings Conference Call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentations.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Paul M. Pantozzi, Chairman and CEO for Provident Financial Services, Incorporated. Thank you, sir. You may begin.

Thank you and good morning everyone. Welcome to our third quarter 2007 earnings call. I'll start by providing our standard caution as to any forward looking statements that may be made in the course of our discussion this morning. The full disclaimer can be found in the text of our earnings release and you can obtain a copy of that, as well as all of our releases and SEC filings by accessing our website providentnj.com or by calling our investor relations area at 201-915-5344.

For today's presentation, I'm joined by our Chief Financial Officer, Linda Niro and by Chris Martin our President and Chief Operating Officer.

Earnings per share for the third quarter of 2007 were $0.14 as compared to $0.22 for both the trailing quarter and the third quarter of 2006. As we outlined in our earnings release, operating results for each of these periods were impacted by a number of factors. The most significant factor within the quarter just ended was recognition of a one-time charge for the voluntary resignation program we announced in July.

This $1.9 million after-tax expense equated to $0.03 per share for the three and nine months ended September 30, 2007 and we believe that it will support our ongoing efforts to manage expense and create operating efficiencies going forward.

I would add here that the rest of our non-interest expenses for the quarter were in line with our expectations as we continue to build our commercial lending capabilities and to retain and grow the customer relationships we obtained through acquisition of First Morris. Earnings were also impacted by a decline in our net interest margin.

As everyone participating in this call is aware the Federal Reserve lowered the rate on overnight inter-bank borrowings on September 18th. We are cautiously optimistic that this signals a return to a more normalized interest rate environment. However, it has no positive impact on our third quarter earnings as deposits and borrowings continue to reprice higher and faster than our interest earning assets.

On the deposit front, it has been long our stated goal to maintain a strong ratio of core deposits to total deposits. At the end of the quarter that ratio was 60.6%. To help build core deposit relationships we have offered competitive rates on some of our interest-bearing demand products and this action has contributed to an increase in our interest costs during the quarter.

The complimentary strategy for achieving long term earnings growth has been to build our commercial lending relationships and we believe our third quarter loan growth demonstrates some success. Our commercial real estate and commercial construction portfolios grew approximately 5% in the quarter while commercial business loans grew by 4%.

I should add that we also experienced growth of approximately 2% in our residential mortgage portfolio. We attribute this partly to our long-standing reputation as a solid mortgage lender at a time of great turmoil and uncertainty in the housing market.

We also believe that our sound lending practices and careful monitoring of credit situations is reflected in our asset quality metrics. Linda will shortly take us through those in detail, but I think it bears repeating here that we had no subprime mortgages in our portfolio, nor any investments in our securities portfolio that are underpinned by those loans.

While the recent problems in the credit markets and slowdown in the housing sector may have far reaching implications for the economy we intend to maintain our conservative underwriting practices to minimize credit risk.

Regarding capital management we continue to view stock repurchases as important for returning long-term stockholder value. In the third quarter we repurchased 1.6 million of our shares bringing total repurchases to 4.8 million shares to date. To ensure that we remain active I am pleased to report the Board has authorized our seventh repurchase program for approximately 3.1 million shares. I will now turn it over to Linda for a more detailed review of the numbers.

Thank you, Paul. The net interest margin during the quarter decreased five basis points to 297 compared to 3.02 during the second quarter of 2007. The decrease in the margin was due to an increase of 10 basis points and the cost of interest-bearing deposits to 3.17%. This increase was due primarily to higher costs related to an increase in average interest-bearing demand deposit balances of $122.2 million and a decline of $132 million in lower costs average savings balances.

Net interest income for the quarter was $39.3 million, a decrease of $755,000 from $40 million in the second quarter of 2007. Decreases in average interest earning assets and higher average interest bearing demand deposit balances and borrowed funds contributed to the link quarter decline in net interest income.

Non-interest income decreased $6.1 million or 43.2% to $8.1 million in the third quarter compared to $14.2 million in the trailing quarter. The decrease was primarily due to a $5.9 million one-time gain on an insurance settlement that was recorded in the second quarter of 2007.

Fee income decreased $300,000 or 4.5% on a link quarter basis due to reductions in loan prepayment fees of $157,000 and $60,000 in late charges. Compared to the trailing quarter, retail fee income increased 1% and trust income increased 6.6%.

Non-interest expense increased $1.6 million or 4.6% to $35.7 million during the third quarter compared to $34.1 million in the second quarter of 2007. The increase in non-interest expense was due to $3.2 million in severance expense that was recorded in the third quarter in connection with the voluntary resignation program that was announced on July 27th.

Including severance expense, compensation and benefit expense increased $3.1 million to $20.8 million in the third quarter compared to $17.8 million in the second quarter. Excluding the severance expense, non-interest expense decreased $1.6 million or 4.8% compared to the trailing quarter.

During the third quarter total loans increased $117.8 million or 2.9% to $4.2 billion from $4.1 billion at June 30. Loan growth during the quarter was due mainly to increases of $40.8 million in commercial mortgage loans; a $23.2 million increase in commercial middle market loans; and an increase of $36.5 million in residential loans.

The unfunded loan pipeline increased to $817.3 million during the third quarter compared to $816.5 million in the second quarter. Unfunded commercial lines increased $32.5 million in the third quarter and unfunded commercial mortgages and residential mortgages decreased $15.1 million and $11.1 million, respectively.

Total deposits decreased $65.3 million or 1.5% during the third quarter. Increases of $63.7 million in demand deposit balances were more than offset by decreases in savings balances of $76 million and time deposit balances of $52.8 million.

Credit quality has remained stable in the current environment and we continue to maintain conservative underwriting standards. Net charge-offs during the third quarter were $473,000 compared to net charge-offs of $158,000 for the same period in 2006 and net recoveries of $61,000 during the second quarter of 2007. The provision for loan losses was $1.3 million in the third quarter compared to $100,000 in the third quarter of 2006 and $1.2 million in the second quarter of 2007.

The increase in the provision and the allowance for loan losses compared to the same period in 2006 is attributable to a year-over-year increase in non-performing loans, organic loan growth, and an increase in commercial loans acquired from First Morris Bank in the second quarter of 2007. Commercial loans have increased to 44% of the loan portfolio at September 30, compared to 40% at September 30, 2006.

Total non-performing assets consisting of non-performing loans and foreclosed assets totaled $11.6 million or 0.9% unchanged from the trailing quarter. As of September 30, loans past due 30 days or more were 69 basis points of the total loan portfolio, compared to 70 basis points at the end of the second quarter and 65 basis points at September 30, 2006.

Income tax expense decreased $3.2 million to $2.1 million in the third quarter compared to $5.3 million in the trailing quarter. The effective tax rate was 20.2% in the third quarter compared to 28% in the second quarter. The decrease in income tax expense and the effective tax rate was due to the decrease in pre-tax income of $8.6 million on a linked quarter basis. Tax exempt income represented the larger percentage of taxable income in the quarter resulting in a lower effective tax rate. With that, we'd like to open it up for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (OPERATOR INSTRUCTIONS). One moment please while we poll for questions.

Our first question comes from the line of Mark Fitzgibbon with Sandler O'Neill. Please proceed with your question.

Well, good morning and thank you for taking my question. First, I wondered Linda if you could share with us why deposit fees dropped so much from the second quarter to the third quarter. I think they were down like $300,000. Was there anything unusual in there or any changes in your fee structure or anything of that nature?

That really Mark was -- represented total fee income and within there the decrease was due mostly to a decrease quarter-to-quarter in loan prepayment fees and other fees related to loans. Deposit fees actually had a slight increase in the quarter of just about 1%.

Okay. And then secondly, what should we assume for a normalized tax rate? Is it around 29% going forward?

Normalized would be about 27%.

27%, okay. And then are you done with the voluntary retirement programs or is there the potential for more of those to go on over time?

Mark, this is Paul. We look at our operating expense -- our structure, our efficiencies and so on and really looked at that on an ongoing basis so we couldn't predict whether or not one might come down the road but it's an ongoing process so you never can tell. There may be another one in the future.

Have you set a target for the efficiency ratio long-term or short-term, Paul?

Well, some time ago we felt that we needed to drop down toward the 55% range and that's still our target.

Okay. And then the last question I had is you look like you have a fairly robust loan pipeline this quarter 800 and some odd million dollars and a big chunk of that was construction loans $256 million I believe. I'm wondering, of that $256 million is that mostly residential construction or commercial construction and are you guys sort of concerned about that space given what we're seeing sort of industry-wide with delinquencies in the construction space?

The majority of the construction portfolio Mark is either one to four family, multi-family, rental-type properties and what we're seeing is obviously a general slow down in sales. However, sales are still occurring. The interesting thing a lot of our construction loans are in -- are around urban centers and actually we're seeing a little bit better performance there the further away you get from the urban areas the slower the sales are and we do rigorous reviews of all of our construction loans monthly.

Thank you.

You're welcome.

Thank you. Our next question comes from the line of Collyn Gilbert with Stifel Nicolaus. Please proceed with your question.

Thanks. Good morning. Would you guys mind running through just the cost save assumptions again on First Morris?

[185%] cost saves. We're still -- we're on track for that. In fact, we really -- I think we talked about this last quarter. We did -- we're achieving those --?

Okay. So are they --

-- all the expenses are in our numbers. They were at the end of the second quarter.

Okay. So you've -- we've realized all the cost saves already?

Right, yes.

Okay, okay. And then just kind of a follow-up to Mark's question on the construction portfolio not specifically related to that, but just in general are you seeing any deterioration in your watch list or increase in you know the 30 to 90 day bucket of delinquencies?

Actually, we're seeing -- we saw a minor uptick in 30 day, but it's in the residential and consumer portfolios not in the construction portfolios. So we continue to watch them, but we're not seeing anything significant. There may be some minor downgrades, but that's where we are. We're not seeing anything significant in the way of increased delinquencies.

Okay. And then Linda, can you just get a little bit more specific on the -- when you're talking about these urban centers to what areas you're speaking.

Hoboken, Jersey City predominately.

Okay great. And then finally, Paul maybe if you could just comment on the M&A environment and if you're -- if acquisitions are a top priority right now for you and kind of what you're seeing out there?

Well, we're always talking with folks and if there are opportunities that make good sense for our company then we'll pursue them. Right now, we want to make certain that we're on top of our asset quality, our credit underwriting. We're trying to be a little more aggressive on business development and watching our expense structure. So it's business as usual, but we're trying to get a little more aggressive on all fronts.

Are you seeing a change in the seller's expectations in the Jersey market from a pricing perspective?

We really haven't had that many detailed discussions where I could comment specifically on.

Okay. Okay, great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from the line of Damon Delmonte with KBW. Please proceed with your question.

Hi, good morning. I'm sorry if I missed commentary on this already, but could you just provide a little color on your provision this quarter on being at $1.3 million and charge-offs being less than $500,000?

Again, the increase in the provision is due primarily to growth in the loan portfolio and growth in the commercial portfolio in particular that's really what's driving that increase.

So is this quarter's provision a good run rate going forward then?

I think something very similar. We expect some continued loan growth and we're seeing again good growth in the commercial middle market predominately sector.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Rick Weiss with Janney. Please proceed with your question.

Actually most of my question has been answered. I just want to know what's your outlook for loan growth for 2008? What do you think it's going to be picking up compared to the last year and a half or so?

Based on the current environment Rick we're not -- we haven't put a number to it yet. I think you probably look at something a little bit less than we're experiencing this year.

I'm not counting First Morris. I mean organically.

Right.

It would still be less?

I think so. I mean I think it's pretty hard to -- you know I think it would be something less than 5%.

And just on -- What is the deposit pricing in your market areas like? Are people still being very aggressive on core deposits pricing?

They seem to be aggressive with regard to short-term CD pricing and then we are seeing some core deposit pricing that's aggressive in terms of high-end interest bearing checking or savings accounts.

Okay, thank you.

You're welcome.

Thank you. Our next question comes from the line of Matthew Kelley with Sterne, Agee & Leach Incorporated. Please proceed with your question.

Yes. On the securities portfolio I know it's been coming down for the last several quarters, five, six, seven quarters. I mean should we expect any reversal on a trend with the change in wholesale spread? Any thoughts of leverage going forward?

Obviously, you still have 8% or 9% capital and spreads have improved so if you can just talk about that and kind of what you're seeing for spreads and what it might take to consider the addition of securities in it instead of net reduction?

We think Mark that there will be an opportunity next year assuming the Fed keeps on their current track of lowering rates and get a little bit more steepness in the yield curve. It certainly would make sense for us to take a look at adding to the securities portfolio. We typically would like the target spread of a minimum 100 basis points. I don't think we're there yet, but it's something that we probably will stabilize and see some growth in the investment portfolio next year.

Okay. And from the commentary so far I mean it sounds like no material changes in your credit outlook. I mean are there any sub-markets or any particular products beyond the consumer bucket that you mentioned earlier that kind of cropped up this quarter relative to the discussion on last quarter's call?

Not at all. We're still maintaining -- we're very steady in terms of the credit quality and the quality of the loan portfolio and we're sticking to our business strategy of focusing on commercial middle markets, small business, and opportunities in other sectors when they arise.

Okay. And just one last thing to clarify in the expense level. It seems like that $32 million -- $33 million operating expense run rate is one of which to build upon now or are we going to expect some additional reductions as a result of the severance program in Q4 and in Q1 of next year.

You know $32 million certainly is a good run rate for the fourth quarter be it examining any and all operating efficiency opportunities that we have for next year. It's probably a good starting point Matt.

Okay. All right, thank you very much.

You're welcome.

Thank you. At this time, there are no further questions. I would like to turn the conference back over to management for closing comments.

We thank you for your participation and attention on this call and we look forward to hearing from you again. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.