Provident Financial Services Inc (PFS) 2009 Q2 法說會逐字稿

Hello and welcome to the Provident Financial Services Inc. 2009 second-quarter earnings conference call and webcast. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions)

Please note, this conference is being recorded. Now I would like to turn the conference over to Paul Pantozzi. Mr. Pantozzi, you may now begin.

Thank you and good morning. I will begin with our standard caution as to any forward-looking statements that may be made in the course of our discussion. The full disclaimer can be found in the text of our earnings release and you can obtain a copy of that as well as our press releases and SEC filings by accessing our website, providentnj.com, or by calling our investor relations area at 201-915-5334.

For today's presentation, I'm joined by our Chief Financial Officer, Linda Niro; and by Chris Martin, our President and Chief Operating Officer. I want to provide an overview of the quarter's highlights before I turn the call over to Linda for a detailed review. After that, I will return with some concluding remarks.

Apart from the FDIC special assessment that was imposed on all banks, our second quarter operating results were characterized by two main factors -- namely our continued efforts to maintain asset quality in the face of challenging economic conditions; and secondly, the excess liquidity on our balance sheet that has resulted primarily from an influx of deposits.

While the overall economy had begun to show some hints of recovery, the continuing upward trend in unemployment remains a major concern. With the loan portfolio currently comprised of an even split between commercial borrowers and consumers, we note that delinquency trends on the commercial side have improved while the trend in one to four family mortgages and consumer loans has incrementally deteriorated.

It is therefore difficult to predict whether we have seen the end of increases and distressed loans. I can ensure you, however, that we have remained diligent in monitoring and managing every credit and then providing appropriate reserves to cover potential loan losses.

Our net charge-offs were elevated in the quarter particularly because of one large credit. We recorded a loan loss provision of $5.8 million, the same amount as in the prior quarter. And by doing, so we maintained the allowance for loan losses at essentially the same levels of coverage relative to both non-performing loans [and to the] total portfolio as we reported at the end of the previous quarter.

Largely because of our diversified loan portfolio, conservative underwriting standards and proactive loss mitigation; we believe that was a well-equipped to manage our way through the current credit cycles. The other main characteristic of our quarterly performance was the continued strong growth in deposits, particularly core deposits.

This growth coupled with the fact that loan repayments continued to exceed loan growth greatly increased our liquidity position. We remain cautious in deploying these funds in order to mitigate long-term interest-rate risk.

One result of this has been a decrease of 14 basis points in our net interest margin as compared to the previous quarter. Naturally we view this situation as temporary since our loan pipeline remains strong and we continue to see loan demand from quality borrowers.

Finally, we have remained focused on structuring our retail branch network for maximum effectiveness and profitable growth. During the past quarter, we closed one underperforming branch and we continue to monitor all of our existing branches to assure they are contributing to earnings.

Later this week, we will open a new branch in Clifton which will mark our first entry into (inaudible) county. We have two additional new locations that will be coming online this quarter.

In concert with our branch rationalization efforts, these opportunities to penetrate new markets within our footprint will position us well for the months and years ahead. I will now turn the call over to Linda who will give us a runthrough of our financial results in detail.

Thank you Paul. Net income for the second quarter 2009 was $6.3 million or $0.11 per share compared to $8.9 million or $0.16 a share, excluding the non-cash goodwill impairment charge of $152.9 million or a $2.72 loss per share for the first quarter of 2009. Second-quarter earnings were impacted by the special FDIC assessment of $1.9 million net of [tax] or $0.03 a share.

At June 30, the tangible equity, the tangible assets ratio was a strong 8.13%. The Company's regulatory capital ratios remain strong and the Company and the bank continue to be well-capitalized.

During the quarter, total loans decreased $17.7 million. The largest decrease in the portfolio was in residential mortgage loans which decreased $54 million during the second quarter primarily due to payoffs and amortization. The Company also originated and sold $24.9 million of 30-year fixed-rate residential mortgage loans during the quarter.

In addition, consumer loans decreased $11.7 million during the second quarter. Partially offsetting these decreases, commercial loans consisting of middle market and business banking loans increased $22 million in the second quarter. Commercial mortgage loans increased $14.4 million and construction loans and multi-family loans increased $8.1 million and $4.2 million respectively.

Commercial loans as a percentage of total loans were 49.4% at June 30 compared to 48.1% at March 31, 2009 and 46.5% of the portfolio at December 31, 2008. The ongoing deterioration in the economy, increases in the unemployment rate, declines in real estate values and increases in foreclosures continue to have an adverse impact on asset quality.

However, non-performing loans were relatively stable, totaling $63.9 million at June 30 compared to $63.8 million at March 31. The provision for loan losses during the quarter was $5.8 million, unchanged from the trailing quarter. The allowance for loan losses was 1.19% of total loans at June 30 compared to 1.2% at March 31.

Net charge-offs during the second quarter were $6.2 million compared to net charge-offs of $1.2 million in the trailing quarter. Net charge-offs in the second quarter included $3 million related to an equipment lease financing company.

Total non-performing assets consisting of non-performing loans and foreclosed assets totaled $69.3 million or 1.04% compared to $68.5 million or 1.05% of total assets at March 31. Non-performing loans as a percentage of total loans were 1.47% at June 30 compared to 1.46% at March 31.

Total delinquencies decreased to $78.7 million or 1.81% of the portfolio at June 30 compared to $85.7 million or 1.96% of the loan portfolio at March 31. The net interest margin decreased 14 basis points to 296 during the second quarter compared 310 in the trailing quarter.

The decrease in the margin was due primarily to the decrease of 25 basis points in the average yield on interest-earning assets to 4.96% compared to 5.21% in the trailing quarter. The average yield on the investment portfolio decreased 67 basis points and the average yield on the loan portfolio decreased 4 basis points sequentially.

The decrease in the investment portfolio yield reflected the increase in low-yielding interest-bearing deposits and short-term investments resulting from deposit inflows. The Company continues to deploy this excess liquidity to fund loan originations, investment purchases and the repayment of maturing borrowings.

The cost of deposits decreased 13 basis points and the cost of borrowed funds increased 13 basis points sequentially, resulting in an overall reduction in the cost of interest-bearing liabilities of 12 basis points to 2.27% from 2.39% in the trailing quarter. As a result of the ongoing deployment of excess liquidity and continued favorable repricing of interest-bearing liabilities, the Company projects modest net interest margin growth in the third quarter between 5 and 6 basis points.

Total investments increased $253.2 million during the second quarter to $1.5 billion and represented 19.5% of total assets at June 30 compared to 18.8% at March 31. The investment portfolio consists primarily of agency guaranteed mortgage-backed securities and bank qualified municipal bonds.

The portfolio had a weighted average life of 3.6 years and a duration of 3.1 years at June 30. Total deposits increased $192.5 million or 4.3% during the second quarter.

Core deposits consisting of demand deposit accounts and savings accounts increased $187 million or 6.6% in the second quarter. Time deposits grew $5.6 million during the second quarter.

At the end of the quarter, core deposits as a percentage of total deposits were 64% compared to 62.6% in the trailing quarter. Total borrowed funds decreased $55 million to $1 billion at June 30 compared to $1.1 billion at March 31. Borrowed funds as a percentage of total assets were 15.4% at quarter end compared to 16.6% at the end of the first quarter.

Non-interest income was $8.9 million in the second quarter compared to $7 million in the trailing quarter. Fee income increased $1.2 million or 23.7% in the second quarter primarily due to an increase of $788,000 in income from the appreciation in the value of equity fund holdings and an increase of $162,000 in mutual fund and annuities sales income.

The Company reported $992,000 in net securities gains during the quarter compared with net gains of $187,000 in the trailing quarter. The Company also recognized net other than temporary impairment charges on securities of $563,000 related to the common stock of two publicly traded financial institutions and a $238,000 credit related impairment on a non-agency mortgage-backed security.

Non-interest expense excluding a goodwill impairment charge of $152.5 million recorded in the first quarter increased $4.9 million to $38.2 million during the second quarter. The increase in non-interest expense was due primarily to an increase in FDIC insurance expense of $5.5 million to $4.9 million for the quarter ended June 30 compared to $426,000 in the first quarter, with $3.1 million of the increase attributable to the special assessment imposed by the FDIC.

Other operating expense increased $1.1 million during the second quarter to $5.5 million from $4.3 million at March 31 due to $885,000 in expense associated with the dissolution of a real estate investment joint venture. Salary and employee benefit expense decreased $693,000 or 4% sequentially primarily due to a reduction of $717,000 in total compensation, largely as a result of $541,000 in severance expense recorded in the first quarter.

Income tax expense decreased $1.2 million to $1.7 million in the second quarter compared to $2.9 million in the trailing quarter. The effective tax rate was 21.5% for the second quarter compared to 24.7%, excluding the non-deductible goodwill impairment charge for the first quarter.

The reduction in the effective tax rate is attributable to a reduction in projected taxable income and a larger proportion of the Company's income being derived from tax-exempt sources. And with that, I'll turn it back over to Paul for further remarks.

Thank you Linda. It's important that I mention to you at this time that it's the last time I'll be speaking to you in my capacity as Chief Executive Officer and it is also the last time that Linda Niro will be addressing you as the Company's Chief Financial Officer. As we announced earlier this year, I'll be retiring at the end of August in accordance with our normal retirement policy.

I will however remain in the role of Chairman of the Board of Directors. Also, as we announced last week, Linda will be retired from the Company at the end of September. We we are both Provident veterans with Linda having 31 years and myself having 46 years working for this great Company.

I believe I can speak for both of us when I say that we have amassed a wealth of memories and friendships as we weathered the ups and downs of an ever-changing financial services landscape. More importantly, we feel that we are leaving behind a legacy of sound management and a strong banking franchise.

We expect that legacy to be continued by Chris Martin who will assume the title of CEO in addition to his current role as President and by Tom Lyons, our Senior Vice President, Chief Accounting Officer, who will assume the title of CFO effective upon Linda's departure. Chris and Tom both came to Provident as a result of a successful acquisition in 2004 and they have worked effectively together for several years.

I and the other members of our Board have every confidence that Chris, with the expert assistance of Tom and the rest of our executive leadership team, will guide Provident to new levels of excellence in the years ahead for the benefit of our employees, customers and stockholders. With that, I would like to open it up for questions from the group.

(Operator Instructions) Mark Fitzgibbons, Sandler O'Neill.

Actually this is Alex (inaudible). My first question is has the pace 30-year fixed-rate mortgage originations slowed since the end of the quarter or is that pipeline still pretty strong?

It's still fairly strong. I think we are still in a refi market, especially since 30-year rates have come down a little bit. We have not seen a significant decline.

Right, and then secondly, I'm not sure if you mentioned it earlier, but could you just share with us what the 30-89 day delinquencies looked like at quarter end and compared to March 31?

Yes, actually they are down about $11.1 million at June 30, $24 million compared to $35.2 million at the March 31 date.

Great, that's all my questions. Thank you.

Damon DelMonte, KBW.

Could you just give us a little color on the deposit growth? I know the demand accounts were very strong. Are you seeing new relationships bringing in the deposits or are current customers adding to their balances?

Yes, we are, and actually we are seeing new customers, new relationships and we are seeing significant deposit relationships coming in on the commercial side. So as we are establishing new commercial lending relationships, in many cases, we are getting a full deposit relationship as well.

Okay, great. And then with respect to the provision going forward, can you help us kind of think about the provision versus say the reserve level? Are you comfortable with where the reserve stands or would you expect to try to build that?

We are comfortable with where it is at this point in time, but again it's very dependent on our analysis of what we are seeing in the portfolio, portfolio growth, portfolio mix, where the trends in non-performers are going and the type of progress we're making credit. So for now, we are comfortable with it. If we see any deterioration, certainly we are prepared to provide adequately and appropriately for loan losses.

Okay, great. And then just lastly on the tax rate, is 25% still a good quarterly run rate?

Well we think actually 24 as an annual run rate would be a more appropriate level to use.

Thank you very much.

You're welcome.

Steve Moss, Janney Montgomery Scott.

I just want to start on the asset quality front as well. Where if any are you seeing some stresses in the loan portfolio?

We are actually seeing a little bit of an uptick in non-performers in the residential portfolio and that really is consistent with what is going on with unemployment in the state of New Jersey and certainly the surrounding area. So nothing alarming, but that is where we are actually seeing the greatest stress.

Okay and then with regard to the non-agency mortgage backs, obviously small OTTI. How much do you have in exposure there?

We have about $130 million in total. So it's a very small percentage of the entire investment portfolio. All but two of them are AAA securities. So we are not seeing -- I don't see any stress there either.

And the $130 million, is that amortized cost or fair value?

That's our amortized costs.

What is the fair value?

The fair value is probably about $120 million.

Thank you very much.

Theodore Kovaleff, Horowitz and Associates.

Just a question about the color of potential acquisitions in and around your area.

I don't believe there is any color to it right now, quite honestly. There's nothing that is so taking that would want us to jump into the fire at the moment. We continue to look for opportunities. That has been our position since we became a public company and we consider those that might make good sense for us. But at this time, we are actually not all that active.

No possibilities of any FDIC assistance or anything on that order?

We really haven't seen anything in market that interests us.

Matthew Breese, Stern Agee.

Quick question on the $1.6 million increase, how much of that was exactly from the increase in equity fund holdings?

$1.6 million increase in non-interest income?

Yes.

Virtually all of it or a vast majority of it. Hang on one second, we'll get that for you. Yes, about $800,000 in the quarter versus trailing quarter. Versus last year, it's about $2 million, $2.1 million.

$2.1 million. And then similarly, there's other income gain of $740,000 and you would attribute that to a gain on sale of loans and I'm just wondering, could you quantify that as well?

For six months versus last year?

For the quarter.

For the quarter, it's just the origination and sale of 30-year. And for the quarter, it is -- hang on one second. Hang on, we're just going to get it for you.

Okay.

$441,000 in the quarter.

Okay and then lastly, do you see any cost cuts coming in the coming quarters?

We're always focused on cost cuts. So to the extent that we can, we are constantly undergoing vendor contract evaluations. We are evaluating headcounts and we have had nonrecurring expenses in this quarter of almost $1 million that you're not going to see in the quarters going forward.

(Operator Instructions) Matthew Breese.

Sorry about the repeat, guys. Any outlook on interest income?

On interest income? We expect that to increase as we deploy again -- in this excess liquidity that we have, we have got a strong loan pipeline and we expect during the quarter that we will be able to deploy a significant amount of that into the loan portfolio.

At this time, we show no further questions. Mr. Pantozzi, do you have any closing remarks?

Yes, I would just like to thank everyone for their participation on this call and for your continued support and I'm sure Chris and Tom look forward to the next call sometime in October. We thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.