Provident Financial Services Inc (PFS) 2011 Q1 法說會逐字稿

Good morning, and welcome to the Provident Financial Services, Inc. first quarter 2011 earnings conference call and web cast. (Operations Instructions). I would now like to turn the conference over to Leonard G. Gleason, Investor Relations Officer. Mr. Gleason, please go ahead.

Thank you, Keith, and good morning, everyone. Welcome to the Provident Financial Services, Inc. first quarter 2011 earnings call. Our presenters this morning are Chris Martin, Chairman, President and CEO and Tom Lyons our Executive Vice President and CFO.

Before turning the program over to them to discuss our first quarter results, I would ask that you please take note of our standard caution as to any forward-looking statement that maybe made during the course of today's review of our financial performance. Our full disclosure and disclaimer can be found in the text of today's earnings release. A copy of that notice and all of our SEC filings may be obtained by accessing the Investors Relations page on our website, www.providentnj.com, or by calling our Investor Relations area at 732-590-9300.

It is now my pleasure to introduce our Chief Executive Officer, Chris Martin, who will offer an overview of our first quarter financial results, Chris?

Thanks, Len. Good morning, everyone, and thanks for joining us on the call today. First quarter results were positive with a 15% increase in earnings per share from the same period last year. The Company continues to position its balance sheet and maintain its capital levels as the market and the economy have remained uncertain. We exceed all regulatory capital metrics and didn't require any government assistance during the financial crisis. As a result, unlike many of our peers, we didn't dilute our stock holders value by the issuance of more stock to repay TARP.

The 7 basis point expansion in our margin during the quarter to 3.51% it was obtained by further reductions in our funding costs. As we continue to experience decreases in the cost of wholesale borrowings and time deposits. While our core earnings remain strong, we recorded a $524,000 net of tax impairment on our loan center building which is being marketed for sale. Anticipated closing will be in the second half of 2011.

All of our bank's operations have now been consolidated into one lease location with roughly half the square footage. With the moves completed we'll now begin to realize the synergies and cost savings that coming from having our non-branch staff under one roof. Through the efforts of many of our employees the move was seamless to our customers and staff. While the move could have been a distraction, our team worked hard to stay focused on business and in this difficult market managed to grow both loans and core deposits.

Organic originations of loans were over $295 million while the size of the loan portfolio increased $43 million net. The pipeline is not as large as we would like, but that is a function of the difficult real estate and economic environments along with passing on many deals that failed to meet our credit parameters.

Total deposits were up during the quarter as the increase in core deposits of $38 million was partially offset by a decrease in time deposits. Core now represents 74.4% of deposits. We continue to use borrowings to increase the duration of our liability during the quarter with average maturities on new borrowings extending out five years to minimize interest rate risk.

As large money center banks attempts to rededicate themselves to small business and retail customers, we remain confident that our high touch personal service will continue to enable us to outperform their inconsistent approach to relationship banking.

We're committed to reducing our operating costs and finding efficiencies within our organization. Although our expenses increased slightly, our efficiency ratio improved to 58.3% from 59.1% for the same period in 2010. As I mentioned previously, we viewed our consolidation to one administrative location as another component of our strategy to deliver our relationship banking brand to customers in a cost-effective manner.

While Tom will go into greater detail regarding ethic quality on this call, we have been and remain cautious on the real estate market in the New York, New Jersey area as values remain under pressure and the inventory of properties continues to grow. The delays in the state's foreclosure process have put pressure on earnings and frustrated bankers. While deferring resolutions has hurt the economy.

We saw an increase in non-performing loans during the quarter as customers were affected by pressure on their businesses brought on by economic challenges and the effects of the prolonged real estate recession. Our allowance now stands at 1.63% of total loans compared to 1.36% for the same period in 2010. Charge-offs declined to $3.9 million for the quarter as compared to $10.8 million for the same period in 2010. And although we see signs of a bottom, the economy and its effect on small business remain a challenge. We attempt to work with our borrowers to provide options to their issues whenever possible.

We believe we can sustain our future earnings growth, and the Board approved an increase in the quarterly cash dividend of 9.1% to $0.12 per share. This results in payout of approximately 52% and a dividend yield of approximately 3.4%. With that I will let Tom go into more detail. Tom?

Thank you, Chris, and good morning, everyone. Net income for the first quarter of 2011 was $12.9 million or $0.23 per share compared to $12.1 million or $0.21 per share for the fourth quarter of 2010. The Company recognized impairment charges related to the anticipated sale and relocation of its administrative offices of $807,000 in the first quarter of 2011 and $1.5 million in the fourth quarter of 2010. Net of tax, these impairment charges represented $0.1 and $0. 2 per share for the current and trailing quarters respectively. The Company completed its consolidation of administrative offices to newly leased space in April and expects to realize operational efficiencies and reductions in occupancy expense in the future.

During the first quarter total loans increased by a net of $47.3 million as net growth in the commercial lending categories and residential mortgages loans outpaced net reductions in construction and retail mortgage loans. Marshal mortgage loans increased $25 million, multifamily loans increased $24 million, residential mortgage loans increased $23 million and commercial loans increased $4 million while construction loans decreased $20 million and consumer loans decreased $10 million.

Total commercial loans consisting of commercial real estate, construction and C&I loans increased to 55.8% of total loans at March 31, 2011 compared to 55.6% at December 31.

Non-performing loans increased $17.3 million to $114.6 million at March 31, 2011 up from $97.3 million December 31.

Non-performing loans to total loans grew to 2.57% at March 31 from 2.21% December 31. The increase in non-performing loans was primarily attributable to the addition of two loan relationships consisting of three loans.

The first is an $11.4 million commercial mortgage loan relationship cross- collateralized by first mortgages on a newly constructed 77,000-square foot office building and operating restaurant in Morris County, New Jersey with an estimated loan to value ratio of 85%. These loans are current, but were placed on non-accrual status as a result of not obtaining leasing target as required for the original construction loans to convert to amortizing permanent mortgages. These loans have been extended on an interest only basis to allow additional time to obtain leases.

The second loan is a $5.4 million commercial loan to an importer and distributor of home textiles that is secured by a first mortgage on a warehouse building in Middlesex County, New Jersey. This borrower suffered business reversals as a result of political unrest in Egypt and rising commodity prices and reserves have been established against this credit based on the estimated fair value of the collateral.

Our provision for loan losses was $7.9 million for the quarter ending March 31 compared with $8.9 million for the trailing quarter. Net charge-offs during the first quarter were $3.9 million compared with net charge-offs of $8.9 million in the trailing quarter. The allowance for loan losses to totals loans increased to 1.63% at March 31 from 1.56% at year end while the allowance to non-performing loans declined to 63.5% at March 31. From 70.7% at December 31.

Total non-performing assets consisting of non-performing loans and foreclosed assets totaled $117 million or 1.72% of total assets at December 31 (sic-see press release) compared to $100.1 million or 1.47% of total assets at December 31.

Total delinquencies increased $12 million compared with the trailing quarter to $136 million or 3.05% of the portfolio at March 31. 30 to 89-day delinquencies increased $10.8 million to $60.4 million or 1.36% of loans at March 31, 2011 from $49.6 million or 1.12% of loans at December 31.

Our net interest margin increased 7 basis points to 3.51% during the first quarter compared to 3.44% in the trailing quarter. The increase in the margin was due primarily to a decrease of 6 basis points in the cost of interest bearing liabilities with the cost of borrowing decreasing 22 basis points and the cost of deposits decreasing 2 basis points compared with the trailing quarter. The Company expects the net interest margin to remain relatively stable in the near-term.

Our total deposits increased $10 million during the first quart of 2010, time deposits decreased $28 million while core deposits consisting of demand deposit accounts and savings accounts increased $38 million. The Company remains focused on creating and expanding core deposit relationships while strategically committing the runoff of certain higher cost time deposits. At quarter end our core deposits as a percentage of total deposits was 74.4% compared with 73.8% at December 31.

Non-interest income decreased $595,000 compared to the trailing quarter at $7.2 million as a result of reductions in transaction based banking fees. Non-interest expense decreased $623,000 versus the trailing quarter to $35 million as a result of reductions and impairment charges on premises and equipment, advertising costs and costs related to the disposition of foreclosed assets partially offset by seasonal increases in compensation and benefits and occupancy expense.

The Company recorded income tax expense of $4.4 million for the first quarter of 2011 compared with $3.8 million for the trailing quarter. The Company's effective tax rate increased to $25.5 million (sic-see press release)for the first quarter of 2011 compared with $23.9% for the previous quarterprimarily as a result of an increase in taxable income with a smaller proportion of the Company's income being derived from tax exempt sources. With that we would be happy to take your questions.

(Operator Instructions). Okay, and the first question comes from Mark Fitzgibbon of Sandler O'Neill.

Gentlemen.

Morning.

Good morning.

Couple of questions for you. First I wondered, Tom, maybe if you could share with us what the monthly net interest margins look like? Were they rising steady or fairly constant through the quarter?

Pretty stable. Down a little bit at the end of the quarter, Mark. We had the FHLB dividend that we recognized in the second quarter. That pushes it up a little mid-quarter. It was, I think, 346 for the last month of the quarter.

Ok. Could you talk a little bit about your rate sensitivity position? How the balance sheet looks today?

A little bit improved from year end. I think we were showing sensitivity on net interest income of about 4% up 200 basis points at the end the year. I think we're down about 25 to 30 basis points off that level as of March 31. As Chris mentioned in his remarks, we've been extending liabilities, new FHLB advances have be going on in the five-year-term, we're continuing to sell most or all of our 30-year production, adjustable rate originations as well as investments, so we're improving the position a bit.

Okay. And then could you help us maybe quantify the cost benefit in future quarters from the relocation?

Yes, it's not going to take place immediately, Mark. I'd expect occupancy to be about flat for the next quarter. It's going to depend on the closing of the two existing locations. There is still some reduced carrying costs associated with those, but overall, I'd say once everything is all said and done, it should be about $900,000 to $1 million a year in improvement.

Okay. I'm sorry you said that will happen late this year?

I think you are looking at the end of the second quarter. Early third quarter.

Okay. Then lastly, how are you thinking about the provision? I know it will depend on charge-offs but do you think it's going to hover in this general range for a while, or will it continue to come down?

I'm hoping we'll see some reductions, Mark. We've seen some signs of stability, weighted average risk rating has improved despite the fact that non-accrual loans have gone up. We've seen some upgrades on some pretty sizeable commercial real estate loans. In addition of the non-performing loans reported at quarter end, we have subsequently sold $6 million worth of notes with no additional losses. And again, within our non-performing loans we have about $30 million of current loans, I think $38 million, $39 million that are less than 90 days, so it's not like they're dead in the water. There is still some activity on those loans and we hope to see them cured.

Thank you.

Thank you.

Thank you. The next question comes from Damon DelMonte of KBW.

Hi. Good morning, guys. How are you?

Good. How are you?

Great, thanks. Tom, just to go back to the margin. I think you said that the end of March, the quarterly margin or the monthly margin was around 346?

That's correct.

Are we to assume then we could see some pressure going into the second quarter?

I think we're going to stay pretty close to the 350 level, Damon. We do have some favorable repricing still on the liability side both on deposit, and particularly, on the borrowings. We've about $99 million coming off in the second quarter. I think I got about 3 basis points of favorable margin impact if everything else were to stay flat.

And if I could add to that, Damon. Obviously the borrowings -- we could certainly expand the margin in the near-term by going shorter in the borrowing level, but we feel it's prudent to go out on the curve, as Tom mentioned, going to the five-year or longer category with home loan bank borrowings to extend the duration of liabilities. So even though, again, it may not expand, but we think we'll be prepared when and if rates go up.

Okay. That is helpful. Thank you. Then I guess in regards to non-interest income. Can you talk a little bit about your expectations for service fees and a rebounding off of this quarter's level?

Sure, I think the first quarter we take a little bit of a hit because of the number of days. There is some transaction based accounts. NSF fees, for example, fewer opportunities for fees, lower prepayment penalties in the first quarter, so I think we'll get back to something around the fourth quarter levels. First quarter of the year we usually see a little bit of a reduction.

Okay. That is all I have for now. Thank you very much.

Thank you.

Thank you. The next question comes from Jason O' Donnell from Boenning & Scattergood.

Good morning.

Good morning.

Good morning.

Just are circling back to the fees, Tom. Can you break out what is mortgage banking related versus deposit service fees in that fee income line?

Sure, deposit fees are about $2.5 million;ATM, debit cards about $1.2 million;loan-related fees are about $300,000; mortgage servicing fees about $250,000; wealth management about $800,000 all in. Then the rest is in various smaller categories .

Okay. Great. Then on the comp and benefits line. I apologize if I missed this, but how much in payroll taxes etc., should we expect to come out in the second quarter?

Well, I don't know if we quantified it.

We could say it would be less. I mean that would be an easy answer, right? We could probably dig into that a little bit deeper and try to get you a number.

Okay. Great. Then it looks like you are paying about $7.5 million in FDIC premiums on a run rate basis. Do you expect that to decline under the new assessment methodology in the second quarter?

We do. We think we're going to see an improvement of about $700,000 per quarter starting with quarter two.

Okay. Great. Thanks a lot, guys.

Thank you.

Thanks, Jason.

Thank you. The next question from Matthew Kelley from Sterne Agee.

Hi, I was wondering if you could just elaborate a little bit on the market for commercial lending. On the loans and deals that you are not getting, you are losing to competitors. Maybe if you could just talk about what are the typical reasons? Rate, term, the amount of money, LTV, just the underwriting of the customer. Give us a sense of why you are not getting the credits booked that you are having looks at and competing on.

Well, this is Chris. What we're having I'll try to take it by sector.

Commercial real estate, it's a lot of the ones we may be missing may be based on valuation and loan to values.

In the multifamily space it's definitely is the idea that it's just very competitive, and certainly, the terms that some are being offered, going out past ten years, up to 15 years on a 30-year amortization, something we just don't know that we can really compete with and the pricing is certainly been very tight in our market.

The middle market area has been very competitive, especially when you talk about the regional and even the money center players in that space. There are definitely things we can't do. Our pull through rates only about 20%. We're denying a lot more than we can because of the financial performance of the companies in the past couple of years have not been that strong. 2010 is showing promise, but right now, until those are completed and audited, it's tough to go in the middle market space.

Business banking we're winning our share in that area which is, again, revenue lines and loans under $10 million, but we like those relationships. The bigger banks are coming back into the market a little bit, and I would think that is just purely our view of the credit versus theirs. They're a little bit more aggressive over the fact that they have such a large balance sheet that it wouldn't impact them as much as us.

Okay. I know that is quite helpful. Maybe just talk about additional resolutions on the commercial side. What we can expect going forward there in terms of just ability to move some of these credits through and give us an update on timing for resolutions versus a couple of the larger ones that are still in the NPA bucket.

I can tell you the delays that are going on both sides, even the residential side. We're trying to get deeds and trying to get them filed and it just takes forever because of the backlog in the sheriff's office and the judicial process that is going on. So from a consumer aspect that is problematic.

On the commercial side, again, everybody is trying to play the game. We do have that $6 million that are coming off this month, so we're very happy about that. I think it's going to take a little bit longer, though we see some end in sight in some of these credits. Just not as fast as we would like.

Okay. On the note sale, the $6 million note sale, what was the collateral there? What was that written down? You said no additional loss, but what was the sale price relative to the original face value?

The one-note sale was just about $0.98 on the dollar, $0.97 on the dollar, if I remember the numbers. The other was the Refi. It was taking us out just about the same level where we had it on the books.

Is that commercial real estate type collateral?

Yes, yes.

Got it. Alright. Thank you.

Thank you.

Thank you. The next question comes from Rick Weiss of Janney.

Hey, guys.

Hey.

Hey, Rick.

It looks like you still have a lot of investment securities, cash, very liquid, very low loan to deposit ratio. Would you expect that situation to last for quite sometime still, Chris?

Again, Rick, as much as I have probably been told I'm wrong as much as right in the way of when rates are going to go up, I think there is a lot of pressure building, and we continue to try to seek out core deposits. I think there will be a period of time where rates will start to rise at which point we'll be challenged to maintain all those. But I think the relationships we establish with our clients, if they're going to move just because of rates, well that will put a little pressure on that area which is why we keep the portfolio very liquid. Because we would expect a little bit of runoff if rates run up and people start raising their rates in the competition, but we always have been very focused on keeping it shorter. We need the cash flow to fund the potential loan growth and we would love that to happen, to be able to be under a little more pressure and have the loan to deposit ratio go the other direction.

What is the duration of your securities available for sale for portfolio?

Pretty sure that is about 3.2 in the way of -- yes, 3.15, I think is the duration. The average life is about 3.2 .

Okay. In terms of the deposits or the demand and savings, are those in-flow coming in from individuals or businesses, municipalities, or a combination thereof?

The latter. We're getting definitely more from businesses. That is part of the change over the last few years. We require operating accounts to come from our business clients. We also have our corporate cash management group out there going back to relationships where we didn't have that, especially the commercial real estate groups, and saying we have a lot of the same products all of the large money centers banks have and they can at least approach it with us, certainly from an internet perspective. They can see their accounts, so we're able to go ahead and compete in that market.

We've also seen, Rick, growth in non-interest bearing year-over-year from like $523 million up to about $560 million on the retail side of things. The smart checking product has done well year-over-year at $349million to March versus $272 million at March of the last year, so those are some of the products that have done well for us.

Okay. Final question, if you could give some observations. What you are seeing in the M&A market, and how Provident fits in.

Well we always have our caveat is that we won't comment on any direct -- I think just from a high level basis -- there's a lot more conversations going on and obviously people are getting under pressure with loan volumes and everybody is fighting for their market space. It's going to be tougher for smaller institutions to absorb that plus other costs that are coming down the pike. And hear things are starting to percolate a little bit and Provident has always been looking at opportunities, but they have to fit our parameters.

Would those parameters be pretty much inside the New Jersey market area? Would you go into New York at all?

We only say that we'll look at deals certainly in contiguous markets. We've stated before that we're not necessarily looking at going into mid town Manhattan. We don't know that we could compete in the space, so anything in the surrounding area plus in-market.

Okay. Thank you.

Thank you.

Thank you. The next question comes from [Aaron Brann] of Stifel Nicolaus.

Good morning, that is Aaron Brann calling in for [Collin Gilbert]. Quick question. If you could repeat how much your multifamily loan balance has increased in the quarter?

Sure. Multifamily grew from $387 million to [1231] to $411 million at March 31.

Okay. Quick follow-up. You said that particular loan segment has become very competitive with some institutions offering 15-year terms. Could you possibly just talk about or elaborate on? Are you seeing new entrants, or what is the dynamic that is driving that?

Well, it's a competitive market and it has always been, so we always like to use that word as much as we don't want to. It's just what the market we deal with. What has happened is with the lack of residential mortgage volume coming out of, certainly, New Jersey and the surrounding areas, even people that weren't in the market are saying this seems like an area that we can go ahead and use our tools, our capital and grow. So what we're getting is new entrees into the market that may be not be pricing it correctly. And I think everybody is looking at this as asset class as very low risk. It certainly is in our case. The delinquencies are not there by any stretch, and they've held up very well. There is only so many of those, but I think that market will continue to grow. But I'm sure also the people going into that market and our competitors will also grow. So we're also looking at it, "Okay, if everybody is going in this direction we have to look elsewhere, besides", to get our flow and our capital out.

My final question. Is most of this funding for the existing stock of multifamily properties, or are you seeing new construction within that market?

There is not a lot of new construction in New Jersey, yet. Though we'd anticipate as things change in this economy, people realize maybe they don't want to own a house that may make up for the need in the market. I think also outside in the markets that are contiguous we're seeing growth, especially in eastern Pennsylvania. Some of our clients are out there doing a little bit of construction, but nothing that would accelerate our construction lending bucket either.

Well, thank you very much.

Thank you

Thank you. As there are no more questions at present, I would like to turn the call back over to management for any closing remarks.

Well, we thank you for participating in today's call. We always appreciate your support, and we'll look forward to talking to you in the next quarter.

Thank you. That does conclude today's teleconference. You may now disconnect your lines. Thank you for participating.