Provident Financial Services Inc (PFS) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Provident Financial Services Incorporated first-quarter 2012 earnings conference call. All participants will be in listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Leonard Gleason, Investor Relations. Please go ahead, sir.

Thank you, Laura. Good morning, everyone, and thank you for joining us today. The presenters for our first quarter earnings call are -- Chris Martin, our Chairman, President, and CEO; and Tom Lyons, our Executive Vice President and Chief Financial Officer.

Before turning the program over to them to review our financial 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 earnings call. Our full disclosure and disclaimer can be found in the text of this morning'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'm pleased to introduce our Chief Executive Officer, Chris Martin, who will offer an overview of our first quarter results. Chris?

Thanks, Len. Good morning, everybody, and thank you for dialing in to hear more about our record earnings for the quarter. PFS's results for the quarter reflect our commitment to running our bank in a conservative and consistent manner. This, plus our collaborative efforts of our Sales and Lending team, have produced a 39% increase in earnings per share over the same period in 2011, to $0.32. Our return on average assets broke the 1% mark to 1.04%, and our return on average equity increased to 7.71%, whereas return on tangible equity was 12.34%. And the earnings for the quarter were probably impacted by an increase in average interest earning assets, combined with growth of core deposits, while the margin improved from the trailing quarter by 3 basis points. Our core deposits grew by $77.2 million, as time deposits strategically priced downward. Our net loan growth was modest in the first quarter, despite organic originations of $347 million.

While the pipeline has remained pretty consistent, we are experiencing increased competition from regional and money center banks that have become very aggressive in terms of structure, collateral evaluation, and rate. Our volume could have been increased, but this would require a change in our risk parameters, which have served us well through the great recession. Overall, the economic data has been mixed as of late, and the Fed is signaling no changes through at least 2014. We will not compromise our underwriting or credit standards and structure to achieve loan growth, and we'll continue to manage the level of interest rate risk and asset duration. And we selectively matched on larger, multi-family loan originations with Fair Home Loan bank borrowings to lock in the spread of matched duration, which mitigates any material interest rate risk for a portion of our originations.

Asset quality has improved, but the New Jersey foreclosure process is hampering any reasonable expedient resolution to residential delinquency levels. We are seeing some better financial results from our commercial clients, as 2011 was better than 2010, for most. While our OREO has increased, this represents progress, as assets are finally moving through the system towards final disposition. Our loss content has remained low, at an annualized 46 basis points of average loans. And this reflects our prudent underwriting standards, and the relative stability of our markets.

The capital levels remain strong. The increase in our cash dividend by 8.9%, announced yesterday, represents an approximate payout ratio of 47%, based on 12-month trailing earnings. And we repurchased 140,000 shares during the quarter, and continue to view our stock as a good investment. Finally, I would be remiss if I did not mention that our efficiency ratio improved to 54.5% from 58.3% for Q1 2011. We continue to view expense management as essential to improved earnings, while rates stay at or near zero levels.

With those quick comments, Tom is going to provide further information on our first quarter results.

Thank you, Chris, and good morning, everyone. Our net income for the first quarter was $18.4 million, or $0.32 per share, compared to $14.9 million, or $0.26 per share for the fourth quarter of 2011. Net interest income increased $926,000 compared with the trailing quarter, to a record $54.8 million. The net interest margin increased 3 basis points compared with the trailing quarter, to 3.42%, driven by a 9-basis point reduction [in the cost of interest bearing liabilities. In addition, increases in average earning assets, deployment] of excess liquidity, and an increase in securities yields combined to overcome pressure on loan yields. Average net loans outstanding increased by $56 million, or an annualized 5%, compared with the trailing quarter.

As of quarter-end, our total loans increased $5 million versus the trailing quarter, to $4.7 billion, with net growth in consumer loans, commercial real estate loans, multi-family mortgages, and construction loans partially offset by decreases in C&I loans and residential mortgage loans. Consumer loan growth consisted primarily of first lien home equity loans. Period-end CRE and commercial loan [puttings] were impacted by several large pre-payments that generated fees of $1.4 million during the quarter. As a point of clarification relative to some peers, the Company records loan pre-payment fees as fee income, and not as a component of interest income.

During the quarter, our funding continued to shift to lower-cost and core deposits, with core accounts, excluding all-time deposits, representing 79% of total deposits, or 58% of assets at March 31. As a result, the average rate paid on all deposit funding, including non-interest-bearing deposits, decreased 9 basis points to 54 basis points for the first quarter.

The Company provided $5 million for loan losses, while net charge-offs were $5.4 million. This is compared with the provision of $6 million in the trailing quarter. Non-performing loans decreased $2 million from December 31, to $120 million, or 2.58% of total loans at March 31. Our credit metrics improved again during the quarter, with total delinquencies, early-stage delinquencies, weighted average risk ratings, and classified loans levels all showing continued improvement.

The allowance for loan losses to total loans was 1.59% at March 31, compared to 1.6% at December 31, while the [RF] to non-performing loans was 61.5% at March 31, compared with 60.7% at December 31. Total non-performing assets, consisting of non-performing loans and foreclosed assets, totaled $135 million, or 1.89% of total assets at March 31, a slight improvement from year-end.

Foreclosed assets increased $1.6 million, to $14.4 million, as a result of the successful completion of a number of residential mortgage foreclosures. At present, $3.1 million of residential OREO properties are under contract for sale. And the Company also completed the sale of a $1.4 million commercial non-performing loan subsequent to quarter-end.

Non-interest income increased $4.1 million, compared to the trailing quarter, to $12.7 million. The Company recorded gains of $2.2 million on the sale of $45 million of mortgage-backed securities, subject to accelerated pre-payment risk under HARP 2.0. Our fee income increased $709,000 compared to the trailing quarter, as the previously discussed loan pre-payment fees, and increased wealth-management fees, more than offset the reductions in deposit fees. In addition, the Company realized other income of $568,000 in connection with the termination of its debit cards rewards program, and a $290,000 increase in gains on [loan] sales, compared with the trailing quarter.

Non-interest expense increased $582,000 versus the trailing quarter, to $37 million, as a result of increases in compensation and benefits expense, partially offset by reductions in advertising, occupancy, and consulting costs. The Company recorded income tax expense of $7.3 million for the first quarter, compared with $5.5 million for the trailing quarter, and our effective tax rate increased to 28.5%, from 27% for the fourth quarter of 2011.

With that, we would be happy to take your questions.

We will now begin the question-and-answer session. (Operator Instructions) Mark Fitzgibbon, Sandler O'Neill & Partners.

A couple of questions for you. First, are all the synergies from the Beacon Trust deal now in the numbers?

Mark, there's about -- we estimate about $250,000 of additional charges that will probably be recognized in the second quarter, including the integration of the systems. Other than that, the costs have been recognized and we are starting -- essentially, yes.

Then also, do you have any idea what the average rate on the loans in pipeline is? They have a bunch of different categories of loans there, but do you have a rough guesstimate of the average rate on those?

Originations for the first quarter have an overall average of about 4.36%, that is probably indicative of the pipeline rate.

Pretty much there, Mark, you have got the gamut of where you are putting multi-family on at, you know, could be $5 million to $10 million, even higher. But then you have certainly, the C&I credits that we do in our Business Banking unit and our medical lending practice that has gone through that area also. So they will be smaller in size.

In the other income bucket, it was about a $1.1 million. Is there any non-recurring items in that line this quarter?

Yes, $568,000 in connection with the termination of the debit cards rewards program.

And the lastly, Tom, maybe could you share with us your thoughts on the margin, looking ahead? Should we anticipate some additional compression from here?

I think so, Mark. As we just discussed, there's a pipeline yield for current loan -- the [on] rates are lower than the portfolio rates, so we're going to continue to see some pressure on loan yields. Securities yields have stabilized somewhat, as you saw, they actually improved quarter-over-quarter as pre-payments slowed. We did sell that $45 million worth of mortgage-backs, and we reinvested some of those funds back in securities at lower current yields, but with more stable pre-payment projections.

That said, we continue to have the re-pricing opportunities. There is about $784 million worth of borrowings from CDs that mature over the next year. We see good growth in core deposits, in particular our Smart Checking products, which also has a low cost of funds. I think we will be able to maintain, probably, maybe 5 basis points of compression in the near-term.

Rick Weiss, Janney.

Can you -- it doesn't look like there is much mortgage-backing income. I was wondering if you could talk a little bit about your philosophy, how you feel about that line of business. Is it something, that maybe, you would like to go into, or reasons why you should stay away from it?

We would probably say what we are doing, we have an appetite for some of the loans, Rick, but we do look at every bit of interest rate risk that could come from that. We continue to sell the longer 30-year and the 30-year bi-weekly loans. Just to keep that in mind, that we don't want to be stuck if rates do go up in a couple years. Whenever they do, it will be pretty quickly, and we don't want to have those on our books.

We just haven't seen the need to go out and change our business line of how we get -- we accept what we get. We use a correspondent channel in a very small fashion, and we do the underwriting ourselves, besides them doing it. I think our appetite has definitely been more towards the commercial end of the business and we just sell to keep our risks at a certain level.

And when you're selling it, do you sell with release of servicing?

No, we keep the servicing.

Also, in terms of going forward, the provisioning charge-offs, would you think for modeling purposes, to generally keep them around the same level? Is that a good way of looking at it?

I think the recovery is going to be gradual. We have continued improvement. We have seen the trend over four quarters of improvements in early-stage delinquencies, weighted-average risk ratings, all the items we mentioned in the prepared comments. So, I suspect that the reserve will come down at a fairly slow pace as well.

Right, and then -- so as you do that. So, it is more or less matching though, I guess, at this point in the recovery?

I think we have come down, for example, 1 basis point per quarter for the last four quarters, in terms of coverage of allowance to total loans.

So, that just accounts for the loan growth, is what you're saying?

Correct.

Damon DelMonte, KBW.

So, Chris, really strong loan originations this quarter, unfortunately the net impact was just a modest increase to loans outstanding. Could you talk a little bit about what was driving the reduction from your current portfolio? Were they more maturities or payoffs, or what was the dynamic there?

Definitely we are getting payoffs. That is happening. And the -- certainly is a problem that we have to deal with everyday. It is not a question of just trying to get new originations. Every one of the borrowers that we have are usually of decent credit that, can go and are getting hit by four or five competitors with a lot more aggressive rate and or structure. So it takes a little bit of time and effort. And if pre-payment penalties have burned off over that period of time, it is tough to keep them.

So we are having to re-price those, in between where competition is and where we would like to be. We have a little bit of leverage there because they are with us already, they wouldn't incur any dramatic costs, as opposed to going outside when they have to do appraisals and phase ones, in the way environmental and other expenses. So that has worked out. Certainly we are having to be competitive on every front to keep our business around, much less get new.

Fluctuations and line-credit usage play a role in that balance outstanding as well.

Where do balances stand right now?

In terms of --?

What kind of balance are you looking at, then?

Like for lines of credit, what's the utilization rates right now that you are seeing?

Well, on a -- we're talking about [stacking those] the residential first, we're only getting about 43% usage on that, in the way of the home equity side of the business.

Okay, and how about the commercial side?

Kind of guessing, but I would think around 40% to maybe 45%.

I guess, Tom, with regards to expenses, I may have missed it in your prepared comments, were there any one-time items in expenses that we would need to back out for modeling purposes?

Nothing large. There is about $60,000 related to Beacon integration costs in the first quarter.

Okay, that's immaterial. Then lastly, with regards to the outstanding non-performing loans, what are a couple of the top credits there, and where do you stand in resolution process of those?

A number of the large credits -- it is interesting, it is tough to move that number because about $39 million worth of it is residential mortgages that are in some stage of foreclosure. And it is a very slow process, as you know. In addition, I think the top 10 nonperformings, probably five or six of them are current. There are vacancy issues, and we have prudently moved those to nonperforming status, recognizing the payments as principal reductions. But they are performing -- they are current credits.

The only thing we can do is just try to keep working with our clients, as opposed to trying to take a property. They are still engaged, so we just figure we just keep going forward with that and try to work with them. Hopefully the improving economy will help them get some of their vacancy challenges out of way and we can go back to a performing status. We just -- we move it there very quickly because we don't want to hide from the fact that it is having a little bit of a trouble.

To give you a number on that, Damon, the non-accrual loans incrued $41 million that are less than 90 days and about $35 million which are current.

Collyn Gilbert, Stifel Nicolaus.

Tom, first just a follow-up on the expense question that Damon just asked. So, the $20.5 million that we saw in comp expense this quarter, that is a good run rate going forward?

There will be some reduction, as there is every year, as payroll taxes reduce as people hit limits.

So there wasn't some seasonality related to those items in there?

Correct.

Do know roughly how much?

I want to say about $300,000.

Then, just another detail question. So you guys generated $1.4 million, you said, in pre-pay income this quarter. Do you know what that was in the fourth quarter?

I do. Only 19 -- I'm sorry, $660,000 for the full year last year, $19,000 in Q1 of '11. I don't have a breakout, I'm sorry, for the trailing quarter. About $700,000.

$700,000 for the trailing?

Yes. Q4 was about $700,000 versus the $1.4 million in Q1, as well. Also, I just wanted to comment on the pre-payment forms. We had one large pre-payment penalty on a loan, which we actually maintained the balance on. It was a sale of a property and we financed the new borrower, so we have maintained the footing, but we recognized significant prepayment penalty on that, about $800,000. That was the reason for the large fluctuation.

When was that loan originated? I mean the initial origination on that loan, that generated that $1.4 million in pre-pay?

It was about 2.5 to 3 three years ago.

Then just a few other minor questions before getting to some of the bigger picture stuff. So the $784 million that you guys are seeing, and the borrowings and CDs that are returning over the next year, do have a weighted average cost? Or a rough cost on that?

The favorable re-price is about 45 to 50 basis points, I would say.

Savings?

Yes, correct.

Then just a final question. So, Chris, you know you talk about competition increasing in the market area. How do you guys position yourself with that? Is it the type of thing where you observe market activity for a quarter or two, and then get back in? How do you -- how are you kind of thinking about this environment a little bit longer term and how you are going to position the balance sheet in just your overall business?

We have had a lot of conversations on that. We don't exit markets and make any calls, I'd say we are not that brilliant. We really look at the market and saying -- we take what it gives us. So we are out there, we are trying to generate business. We look at our return on equity model for any loan of substance, and make sure. And even the smaller loans, because of the absolute level where rates are, we get floors on a lot of our C&I credits. We do not just go to a spread over the curve.

We have been able to keep a lot of ours because of the relationships that are tight to our clients, and the fact that they are finding us to be very ready to handle anything that they want and get some quick answers. The competition has really been picking up from the large money center banks who have, I guess, refocused. They have gone through their stress tests, and now they are reconnecting with their clients.

So un-seating the incumbent has been a challenge. We had been winning those over the time because nobody was calling them back. It is a little more difficult now because somebody is. And we get -- of every that deal we put out there, in the term sheet, we probably have at least three or four that are coming right behind it. So, I guess, having loyalty is going to be a little bit tougher to do going forward. We are continuing to pound out and we are not making any calls.

We are being prudent when do structured deal where we are seeing large C&I credits getting done at 15-year fixed terms from larger banks, I'm not going to say who they are. That is something we would not do, and we will have to let that credit go away. And we are trying, instead of doing 10-year on some multi-family deals, we're forcing those issues to be 5 and 5, even though the customer wants, certainly, something else. But we are trying to coax him into that kind of operation and the opportunity.

So given those trends, do you -- would you anticipate kind of the long growth to fall a little bit shorter than where you put up -- what you put up last year?

Not too much shorter, I think the volume will -- we will make the volume target. I think it is just a question of keeping the portfolio, that's the other side of this. We don't want to just go out there and acquire and forget the ones that are on our books right now, because we have worked hard to get those. So, I think it is a combination of making sure your managing the relationships, and yet gathering more from your centers of influence. So I would think were still going to be -- well, we have to be in that certain level.

And then just finally on the M&A front. Anything change there? Do you -- is that an avenue that you guys see better opportunity to pursue in the future, or how are you thinking about that?

We try not to comment on M&A. Certainly chatter -- there are conversations out there, I think a lot of it is investment banking driven. Until we get a lot more regulations coming through from Dodd-Frank, and/or pressure from other things, we really are saying that -- we are out there, we look, we model. But nothing has come to fruition at this point. We certainly have enough -- we feel very strong -- very good about our capital levels, which give us flexibility. Something we have always looked at is we invest in ourselves or we invest in others. We are still going to make sure that, that decision is best for shareholders.

Matthew Kelley, Sterne Agee.

I was wondering, just on your appraisal process for classified and criticized, particularly collateral-dependent types of assets. During the first quarter what type of reduction did we see in values, as a result of re-appraisals for stuff that you have been lugging along for while?

You know, Matt, we re-appraise annually on the classified assets. And then collateral evaluations have pretty much stabilized over the last year.

Good. Then just on reserve coverage, were do you see that kind of stabilizing, around the $150, $160 level on total loans. Is that still the level you are comfortable with?

Of course it's a guess, but I think around $150 might be where we would get to ultimately, when things get to be a more normalized environment.

And what tax rate going forward?

28.5% is what we are projecting based on our current view of taxable income for the year.

If balance sheet growth is more modest, could we see an uptick in share repurchase activity as capital continues to build?

It's a balance, Matt, as we look at everything that we have. If we have opportunities to lend it out at good levels, we will continue to that. But we evaluate the buyback consistently and that is something we always look at. I don't think we want to say anything -- we have a lot of opportunities, but that is the best one for us to get capital back to shareholders, that is where we would do it.

That termination, the $568,000, what is that? Talk about just what you are seeing on deposit service fees and, maybe, just comment for a second on how you process transactions; high to low, low to high, and your view on that issue.

The termination fee is around the debit cards reward program that has been discontinued. We accrued a liability in connection with assumptions about people redeeming points. When we terminated the plan, the unused points were able to recapture and record the income on that recapture. I'm sorry, was the second part of the question?

How do you process transaction; high to low, low to high, sequential? That is something CFPB has been taking a look at?

They are sequential Matt.

This concludes our question-and-answer session, I would like to turn the conference back to Christopher Martin for any closing remarks.

We appreciate everybody on the call, but as we look ahead to the balance of 2012, there appear to be many challenges that could have a substantial impact on our economy including the problems in Europe, unrest in the Middle East, record deficit from the US, accompanied by a dysfunctional Congress and high unemployment levels, which threaten to derail an already -- a modest recovery. There remains little clear direction emanating from Washington, and we will have to navigate all of the anticipated regulatory changes with limited expectations of relief.

The Company, however, is excited about the challenges and meeting our competition head-on. We will continue to build profitable, mutually rewarding relationships with our customers, ultimately for the long term benefit of our stockholders. We appreciate your attention, and have a great day.