Provident Financial Services Inc (PFS) 2011 Q2 法說會逐字稿

Good morning, and welcome to the Provident Financial Services second quarter 2011 earnings conference call. (Operator Instructions)I would now like to turn the conference over to Leonard Gleason, Investor Relations Officer. Please go ahead, sir.

Thank you, Laura. Good morning, everyone and thank you for joining us for today's call. The presenters for our second quarter earnings call 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 second quarter results, I would ask that you please take note of our standard caution as to any forward-looking statements that may be 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 investor relations page on our website, www.providentnj.com, or by calling investor relations at 732-590-9300.

With that I am pleased to introduce our Chief Executive Officer, Chris Martin, who will offer an overview of our second quarter financial results. Chris?

Thank you, Len. Our second quarter results were gratifying, particularly in the face of the challenging economy, the uncertainty in Washington that continues to affect business owners and consumers alike. The CPO curve and continued shift in the mix of our assets and liabilities contributed to record quarter revenues. As a result many of our operating metrics improved during the quarter including return on assets, return on equity, earnings per share, and our net interest margin.

The expansion of our margin was primarily caused by reduced funding costs and deposits and borrowings, partially offset by declining asset yields as interest rates remain stubbornly low. Future improvements in the margin will hinge upon reductions in non-performing assets accompanied by further decreases in funding costs. Our deposits increased by an annualized 8.6% and core deposits now represent over 75% of total deposits.

Loan originations in the pipeline are above average in the commercial and multi-family area for us, and we continue to receive many inquiries from business prospects that are being neglected (inaudible - background noise) incumbent bank. affording us the opportunity to win their business with our relationship-building approach. Residential mortgage volumes have been lackluster, however, as consumers continue to struggle and the New Jersey fails to inspire near-term confidence.

Our recurring non-interest income remains stable and we look forward to these future improvement when we complete the acquisition of Beacon Trust Company early in the third quarter. The $302,000 other than temporary securities impairment charge recorded this quarter was related to an investment in a non-agency, mortgage-backed security that has continued to underperform versus the balance of that portfolio.

Non-interest expense rose in the quarter as advertising and non-performing asset-related expenses increased along with severance costs. The quarter also included costs related to the relocation of our administrative offices in April. Both of our former locations are in the process of being sold which should result in decreased operating expenses in the future.

Partially offsetting these increases our FDIC insurance expense decreased $600,000 versus the trailing quarter as a result of the change of the effective methodology which was effective April 1st. The provision for possible loan losses was $7.5 million during the quarter down from the $7.9 million in the trailing quarter.

Non-performing loans totaled $121 million at June 30th, up from $114 million last quarter, largely as a result of one loan that experienced the loss of a material tenant which stressed available cash flow to service the debt. That loan was current as of June 30th.

We continue to assess our credits conservatively, as the economy continues to exhibit signs of stress. And this morning we announced our normal cash dividend of $0.12 a share which represents an approximate pay out of about 50% and a yield of 3.46%. With that, I'll turn it over to Tom Lyons, who will provide further details on our second quarter. Tom?

Thank you, Chris, and good morning, everyone. Our net income for the second quarter was $14 million, or $0.25 per share, compared to $12.9 million or $0.23 per share for the first quarter of 2011.

The Company realized record net interest income as our net interest margin increased 2 basis points compared with the trailing quarter, to 3.53%. The increase in the margin was attributable to a four basis point reduction in the cost of interest-bearing liabilities, as our funding continues to shift to lower cost in core deposits. Core accounts, excluding all-prime deposits represented 76% of total deposits or 55% of assets at June 30th.

Also contributing to the improvement in the margin, the average securities yield increased 10 basis points, and average net loans outstanding increased $41 million or 3.8% annualized for the quarter. As the period ends June 30th, total loans were flat versus the trailing quarter at $4.5 million as net growth in CNI loans at $38.1 million, and multi-family mortgage loans of $15.7 million was matched by net reductions in residential mortgage, construction, and consumer loans.

Total commercial loans consisting of commercial real estate, construction and CNI loans increased to 57% of total loans as of June 30th. The Company provided $7.5 million for possible loan losses during the quarter as non-performing loans increased $7 million to $121 million or 2.72% of total loans at June 30th, from $115 million at March 31st.

Decreases in non-performing construction loans of $9 million, residential mortgage loans of $4 million, and consumer loans of $1 million were more than offset by a $16 million increase in non-performing commercial mortgage loans, and a $4 million increase in non-performing commercial loans. The increase in non-performing commercial mortgages was primarily due to a $13.5 million loansecured by a mixed office and industrial building in Monmouth County, New Jersey which recently experienced the loss of a major tenant. This loan is current as to principle and interest, however, does not demonstrate adequate debt service coverage exclusive of its guarantor's support. The sponsor is currently working to secure replacement tenants.

The increase in non-performing commercial loans was primarily attributable to a $4.9 million loan to a company which performs construction materials hauling and demolition services. This loan is secured by accounts receivable, equipment and business assets with an estimated current loan-to value-ratio of 83%. Net charge-offs during the second quarter were $7.9 million or an annualized 72 basis points of average loans compared with net charge-offs of $3.9 million in the trailing quarter.

The allowance to loan losses to total loans was 1.62% at June 30th, compared to 1.63% at March 31st. The allowance to non-performing loans declined to 59.6% at June 30th from 63.5% at March 31st. As current appraisals indicate, sufficient collateral is securing additions to non-performing loans.

Total non-performing assets, consisting of non-performing loans and foreclosed assets, totaled $128.2 million, or 1.86% of total assets at June 30th, compared to $117 million at March 31st.

Foreclosed assets increased to $6.8 million at June 30th as residential foreclosures increased by 15 properties totalling $4 million versus the trailing quarter. On a positive note, our total delinquencies decreased $24 million compared with the trailing quarter to $112 million or 2.52% of the portfolio at June 30th. 30- to 89-day delinquencies decreased $22 million to $38 million or 0.85% of total loans at June 30th, from $60 million or 1.36% of loans at March 31st.

Non-interest income increased $871,000 compared to the trailing quarter to $8 million, as a result of increases in gains on loan sales and wealth management and deposit fees, partially offset by a $300,000 other than temporary impairment charge recognized on a private (inaudible) mortgage-backed security. Non-interest expense increased $582,000 versus the trailing quarter to $35.9 million as favorable variances from a non-recurring impairment charge recognized last quarter related to the relocation of the Company's administrative offices and reductions in FDIC insurance costs, were more than offset by increases in advertising, non-performing asset related costs and severance expense. The

Company recorded income tax expense of $4.8 million for the second quarter, compared with $4.4 million for the trailing quarter and our effective tax rate was stable at 25.6%.

At this point we would be happy to take your questions.

We will now begin the question-and-answer session. (Operator Instructions). The first question is from Mark Fitzgibbon of Sandler O'Neill & Partners.

Hey, guys, thanks for taking my question.

Guys it looks like the securities yields have been rising pretty steadily over the last couple of quarters about ten basis points a quarter. What is driving that? What kind of bonds are you buying? What sort of maturities?

Primarily 15-year agency mortgage-backed securities Mark, reduction in finance activity and slow down in premium amortization is what has been behind that.

And the backside would be CMO s that have an average life of about three year, so we're not going out on the curve too far.

Okay. Secondly, you had other income of about $1.1 million in the quarter. I know there are some loan sale fees in there. Could you just maybe break out what is in other income for us, Tom?

Sure, as you said it is mostly home sale fees that represented $1million, $1.1 million. Wealth management and non-deposit investment products were about $951,000, deposit-related fees were $4.4 million, about $200,000, $250,000 in loan-related fees and $200,000 in mortgage servicing. It's a big category.

Okay. Great. Thank you. And then what -- could you share with us, sort of your thought process for the NIM in the third quarter, where you think that might head?

I think the NIM is going to stay fairly stable for the next couple of quarters, Mark. I think we're going to hang around the 3.50% level, maybe a little bit above. We actually still have some favorable repricing coming on the liability side. There's about $360 thousand -- sorry, $360 million repricing in the third quarter, and another $213 million in Q4 with about 63 to 65 basis points of favorable reprice, and of course that's being matched by reductions on the earning assets side as well, but we think it will all conspire to keep us around the 3.50% level.

A broader question, you haven't really chased the multi-family lending business the way that some of your competitors have. And I know you do some of that business, but why haven't you done that where loan volumes have been soft, and it seems like everybody else is in that space?

We have been seeing some -- certainly we're not in the New York market, Mark, at all, so we know there is a lot more volume going on in New York than New Jersey, but we're starting to see more, and we're also seeing some (Inaudible) for the construction of multi-family projects coming on also. What we're seeing is, as we're taking out incumbent banks, its just takes a lot longer to get these things through attorney review, and that's just slowing down us getting that footage.

And the last question, I wonder if you could share with us the 30 to 89-day delinquencies.

They were down nicely, Mark. Let me just -- we had -- as of the quarter 30- to 59- were $44 million as of March, and they are down to $23 million.

That's 30 to 59?

Yes.

Okay. Great. Thank you.

Thank you.

The next question is from day Damon DelMonte from KBW.

Hi, good morning, guys how are you?

Good morning, Damon.

This question is more for Tom. I wonder if you could give us more perspective on the expense run rate going forward, and maybe some of the items that may not be repeatable. I think the other line was a little bit higher than we were looking for.

There were a couple of things there that we view as somewhat non-recurring. We had some severance charges, about $220,00. There was some transaction costs related to the pending acquisition of about $200,000 dollars, and we saw significant increase in non-performing asset-related expenses, attorney fees, there was a write-down on a (inaudible), and collection expense. We modeled that out to staying at somewhat elevated levels for the near term, but over all I think we're going to see non-interest expense around -- somewhere between $34.5 million, $34.75 per quarter for the next couple.

And how much was the asset-quality related expenses?

$627,000 in Q1, and it jumped up to about $1.2 million in Q2.

Okay. So we should keep some portion of that in the expense base going forward, right as you continue to deal with credit issues?

I think so, as we are working to get more aggressive on non-performing asset resolution, yes.

Okay.

We do have some savings coming our way with respect to the building. We have some carrying costs that will roll off, it's about $90,000 a month once the transaction's closed. It probably won't be until the middle of the fourth quarter, though. We have our normal step-down in tangible asset amortization that happens each July, so we see a little bit of reduction there.

Okay, great. I'm sorry if I missed this in your prepared comments but the increase in non-performing loans this quarter was what was the largest one?

It was a $13.5 million to a mixed industrial and office building down in Monmouth County. Loss of a major tenant. The loan is current, continues to perform, but the level of (inaudible) guarantor support warrants we think prudently moving it to non-accrual status. They are working actively to secure a replacement tenant.

Okay. That's all I had for now. Thanks.

(Multiple Speakers) Thank you.

Our next question is from Rick Weiss of Janney.

Good morning.

(Multiple Speakers) Good morning.

On a bigger picture, if you could talk a little bit about the consolidation and, you know, why isn't it happening just yet? It sounds like all of the banks are having a lot of problems, the economy is not very good, there is, as you know increased regulation. What is holding it back?

Well if you look at some of the companies that have been reporting to date, they have actually done fairly well in a tough environment. I think you'll probably -- as things progress and the regulatory environment changes, certainly when the OCS, now that it's completed and there'll be some change of heart I'm sure once the regulator has come in and looked at things. That will take a little bit of time because that doesn't cycle every six months. That will take a year or two to come through. I think everybody is waiting to see how bad it is going to be, and I think the economy is still struggling, we'll get people to start looking around a little bit more. Certainly shareholder activism might pick up if it doesn't.

I think it just -- some -- nothing -- with the investment bankers. I think they're a little ahead of it, but I think it will be -- it will happen, but it will probably be mid-to-late 2012 when we start to see it happen in earnest.

Okay. Thank you.

You're welcome.

Next we have a question from Matt Kelley of Sterne Agee.

Yeah, hi, guys. On the loan sale, the fee income item in other fee income of the $1.1 million, what types of loans are sold? Is that residential, or note sales?

This quarter was primarily SBA loans, Matt.

Okay. And the sustainability of that? That seems to be much higher than what we were seeing recently.

We have seeing a lot more SBA-type deals coming in, which is good because we've added a couple of people to that line of business. So we're hitting the market a little bit more robustly than we had in the past when we only added one person. It will be choppy at times, but we do sell our 30-year conforming products still to the agencies, until the agencies stop doing something, we're not sure when that happens but for the SBA it will definitely be a little bit better run rate going forward.

Okay. And what should we expect with the addition of Beacon Trust on the fee income side and the expense side? What is the impact of that going to be? Anything additional?

On the revenue side we are looking at $0.5 million in Q3, and about $1.4 million in Q4.

And expenses?

The expenses were built in to that estimate I gave earlier about $34.5 million. I'm not sure I have it broken out what's attributable specifically to Beacon here.

Okay. What is your view on your ability to generate net loan growth and other pay-downs, than significant and originate (inaudible) challenged, but what do you think you can grow total loans at over the next 12 months? Or do you think they will be flat?

Are you talking about percentages, I assume, not dollars?

Yes, just percentages from $4.45 billion gross right now?

We're modeling in probably about a 2.5% growth rate. To say anything else would be -- we might be lucky to get that, because it is still struggling. New Jersey is having its own little issues, the commercial area retail has been struggling a little bit. Our pipeline is better than it has been for us over the last couple of years, and the mix is mostly commercial. We are certainly not seeing it on the resident side at all. And it's not like we're not out there trying to, but it's just not there, and I think those that are getting it, we congratulate them. We're just not seeing it in our markets.

Okay. Got you. Are we going to reserve building or reserve bleeding-type scenario over the next year? Things like the (inaudible) on the front end with past-dues, the 160 coverage on loans, 55%, 60% coverage on NPAs, is that going to be sustained or do you anticipate additional building of reserves?

Yeah, I agree with you, Matt, but we appear to be seeing some stabilization, of course I don't want to call a trend on one or two quarters. But the valuations appear to have stabilized somewhat. The delinquencies are down in the early stage side of things as we mentioned. We're hopeful that the provisioning will moderate a little bit and maybe we can release a little bit more going forward.

Okay. All right. Thank you.

The other thing today with the GDP numbers coming up and the economy starting to slow back down, that's where we'll being a little bit more constructive on this. Because if it's slowing down, consumers will get a little bit more nervous, and nothing is going to happen. So we're watching that as a backdrop.

Okay. Fair enough, thank you.

Thank you.

Next we have a question from Collyn Gilbert of Stifel Nicolaus

Thanks, good morning, guys. Thanks for taking Mark's and Rick's question. Just a question on the credit side of things, as we look -- NPA formation has steadily been increasing. Do you think that is a function of the late-cycle economic effects? It's interesting at this stage to see NPAs still reaching a peak, or hopefully a peak.

I think we look at this consistently and we look at all of the ones in the NPAs our top ten, and all are current. I think we do have maybe a more conservative outlook. Certainly when we look at our credit, and we're quick to put them on watch sub-standard just because of maybe -- even though like Tom referenced the $13 million loan, they are current and they are not saying they are not going to continue to go, but until they find a tenant, we just put it on that list pretty quickly, and it takes a lot to come off of that list, even though it is current. So I think that we don't see it happening dramatically going forward. Just happens to be once and they just show up, and you can't look back at your credit analysis to say it was an issue. We would say mostly it is the economy than it is certainly our credit review.

But to further Chris's comment we do have a significant amount of non-performing loans that are left to 90 days or current, about $40 million, $48 million worth of the non-performings are current.

I'm sorry, $48 million of the non-performings are current?

That's correct.

Okay. Okay. That's helpful. And then just to confirm, Tom, the expense levels that you gave us, I presume that assumes any potential cost savings from the new building, right?

There are still carrying costs and -- but yes. Yes.

Okay.

With respect to the relocation April 1st, the difference in the cost savings (inaudible) there's about $90,000 month in carrying costs until we liquidate -- until we complete the sale of the other facility.

Okay. That was all I had. Thanks.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Leonard Gleason for closing remarks.

Thank you everyone again for your participation in today's call and your questions, and we look forward to speaking to you at the end of the third quarter. Thank you and have a good weekend.

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