Provident Financial Services Inc (PFS) 2012 Q2 法說會逐字稿

Good morning and welcome to the Provident Financial Services second quarter 2012 earnings conference call and webcast. (Operator Instructions).

I would now like to turn the conference over to Leonard G. Gleason Investor Relations. Mr. Gleason, please go ahead.

Thank you, Pete. Good morning everyone. Thank you for joining us this morning. The presenters for our second quarter earnings call are Chris Martin, Chairman, President, and CEO, and Tom Lyon, Executive Vice President and CFO.

Before they begin our review of 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 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 would like to introduce our Chief Executive Officer, Chris Martin who will offer his overview of our second quarter financial results. Chris?

Thank you, Len. Good morning everybody. Strong financial results this quarter again reflect the consistency of our business strategy and the strength of our balance sheet.

While the pace of the economic recovery remains less than robust we believe we are positioned to take advantage of market opportunities with our commitment to building customer relationships. PFS's earnings improved over 14% from the same quarter last year to $16 million for the quarter, or $0.28 per share. And both our average loans and deposits increased year-over-year.

Our organic loan originations year-to-date totalled $766 million as we experienced quality loan demands in the second quarter in a very aggressive market where prospective borrowers regularly seek an average of four term sheets from competing lenders. Given the current rate environment and some improvement in the housing market we anticipate near-term loan production and the pipeline to remain strong. The loan portfolio is now over 60% commercial with the growth multi-family and commercial mortgages along with C&I loans.

Delinquent loan formation has declined and we continue to see steady improvement in our credit quality metrics, suggesting that the economy has begun to stabilize. The low rate environment has helped in some cases, but strengthening in consumer confidence and better job growth would make for a better scenario for further improving asset quality. Our net charge offs for the second quarter of 2012 were 44 basis points which is consistent with prior quarters. Our 30- and 60-day delinquency numbers have declined.

And looking forward into the third quarter we currently anticipate additional reductions in our non-performing loans and relatively stable net charge off levels. This is, of course, assuming that the New Jersey market does not deteriorate any further from here. Our biggest challenge, along with the entire financial industry is going to be the net interest margin compression. Extended low interest rates, slowing GDP, caution among businesses and increased regulation are affecting our industry. On the asset front, the challenge is the repricing of loans currently on the books coupled with new volumes coming in at lower yields.

Maintaining pricing discipline on loans currently in portfolios is paramount to sustaining our yield as competitive pressures have been apparent in our markets. We will attempt to balance loan growth while maintaining our credit parameters and limiting the extending of duration whenever possible. Downward deposit pricing opportunities are becoming limited and the growth of loan portfolios do not fully offset the floor in deposit pricing. We expect our net interest margin to remain under pressure as rates remain historically low for the foreseeable future.

On the expense front we consolidated four branch locations in the first half of 2012 which will result in reduced leasehold costs going forward. We particularly pursue ways to reduce costs as the rationalization of our branch and network change with the evolution of new technologies and delivery channels accompanied by ever-changing customer behavior.

We are also refocusing our attention on our operations processing to assure that productivity levels in each business unit reach optimal performance. Given our strong capital levels we do not anticipate any material impact on our well-capitalized position when the new Basel III rules are implemented. As the proposed rules are subject to comment and likely to change we have not as yet completed our evaluation. Whatever the final outcome of the rules we remain confident that our capital levels will exceed the new requirements.

Deploying excess capital to organically grow our loan portfolio is our best use of capital coupled with stock repurchases when appropriate. With our continued strong cash dividend that equates to a pay out ratio of approximately 45% we are building on our strong capital position to allow flexibility for possible M&A activity. We continue to review both the bank and wealth management space for accretive opportunities. We have the liquidity and the capital to advantage of the right deal at the right pricing structure.

With that I'll let Tom go through some of the details. Tom?

Thank you, Chris and good morning everyone. Our net income for the second quarter was $16 million or $0.28 per sharecompared to $18.4 million or $0.32 per share for the first quarter of 2012. Net interest income decreased $259,000 compared with the trailing quarter to $54.6 millionas the net interest margin contracted three basis points to 3.39%.

Pressure on earning asset yields was mitigated by reductions in funding costs and growth in loans and non-interest bearing deposits. As of quarter end, our total loans increased $76 million or an annualized rate of 7% versus the trailing quarter to $4.7 billion with the overall loan yield for the quarter declining seven basis points compared to the trailing quarter to 4.76%.

During the quarter our funding continued to shift to lower costing core deposits with core accounts, excluding all time deposits, increasing to 80% of total deposits. Within core deposits, average non-interest bearing deposits increased by an annualized 12% to $689 million. As a result, the average rate paid on all deposit funding decreased 4 basis points to 50 basis points for the second quarter.

The Company provided $3.5 million for loan losses while net charge offs were $ 5.1 million. This is compared with a provision of $5 million in the trailing quarter. Non-performing loans decreased $5.1 million from March 31 to $115 million or 2.43% of total loans at June 30.

Our credit metrics improved again during the quarter with total delinquencies, early stage delinquencies, weighted average risk ratings, and classified loan levels all showing continued improvement.

The allowance for loan losses to total loans is 1.53% atJune 30th compared to 1.59% at March 31 while the allowance to non-performing loans was 62.8% at June 30 compared with 61.5% at March 31

Total non-performing assets consisting of non-performing loans and foreclosed assets decreased $6 million versus the trailing quarter to $129 million or 1.81% of total assets at June 30% Foreclosed assets decreased $500,000 to $13.9 million at June 30.

And subsequent to quarter end the Company resolved an additional $2.8 million of non-performing loansrealizing recoveries of previously charged off amounts totalling $1.4 million. At present $1.5 million of residential REO properties are under contract for sale.

Non-interest income decreased $3.4 million compared to the trailing quarter primarily due to reductions in gains on security salesand loan pre-payment fees, and the one time benefit realized on the termination of our debit cards rewards program in the previous quarter. Non-interest expense increased $965,000 versus the trailing quarter to $38 million as a result of increases in advertising, occupancy, and other expense.

Non-recurring expenses in the second quarter included $213,000 related to a contract termination in connection with Beacon Trust's systems integration and $142,000 related to branch consolidations completed during the quarter. The Company recorded income tax expense of $6.7 million for the second quarter compared with $7.3 million for the trailing quarter. And our effective tax rate increased to 29.4% from 28.5% for the trailing quarteras a result of increased projections of income from taxable sources.

With that we'd be happy to take your questions.

Thank you. At this time we will begin the question and answer session. (Operator Instructions). At this time we will pause momentarily to assemble our roster. First question comes from Mark Fitzgibbon from Sandler O'Neill

Hey guys, good morning.

Morning.

First on the margin, I know that you had said that you expect the margin to be under some pressure. Can you help us think about the magnitude of compression you're likely to see in the next quarter or two.

Sure Mark. We actually said we think we're going to continue to face pressure on the asset side, probably in the three to five basis point range over the next quarter or two.

Secondly could you share with us what the average rate on the pipeline is currently?

Yeah, Mark overall. This is Chris. We're looking at the multi-family, the spread is usually about 220, 275 over treasuries and the commercial real estate space, 260 to 320 over the treasuries, obviously treasuries being a pretty low base.

Okay and then with respect to provisioning you said that net charge offs you expect to be relatively stable in coming quarters. Do you think it's likely that you'll match charge offs?

Mark, I think there's the potential that we can continue to let some reserves roll out if asset quality improves. We had a pretty nice pickup in all the credit metrics this quarters. If that continues on that path I could see us not matching charge offs.

And lastly on acquisitions it sounded like you were a little more upbeat on the potential for acquisitions than you have been in the last few quarters. Are you seeing something in the marketplace is that -- seller price expectations getting more realistic, or more deals on the market, what's causing that optimism?

We try not to talk about certainly any details on that, but certainly there's a different tone and conversations are increasing. That doesn't mean its going to change valuations and parameters regarding deals. But I think everybody is looking at the future is holding and reassessing their plans. So we think the market is probably going to get a little better in the future.

Thank you.

Thank you and the next question comes from Timur Braziler from KBW

Hi, good morning, guys.

Morning.

Could you please talk a little bit about the loan portfolio what are some of the trends you are seeing out there and it looks like most of the loan growth that was booked this quarter occurred towards the end the quarter. Maybe just talk originations by month.

Well it's been pretty consistent but we did have a lot of pickup towards the end of the quarter and the pipeline even now we're seeing a lot more flow than we had in the past and we're waiting on a few more opportunities than we had in the past. So we think we're competitive in the market. I think as things are rolling forward we're able to bring that relationship-type approach and win some deals from the larger banks, but it is very competitive and pricing is, especially in the multi-family space, getting very thin and so you have to be very careful how you go through that.

We don't have the originations by month here, but as you said the point-to-point growth was about 7% versus about 3% on average for the quarter.

Okay great, and in terms of the pipeline can you give us a breakout of what portion of it is within multi-family and what portion is within traditional commercial?

I think the -- one second I know I had the percentages broken out in the way of the commercial, in the way of the pipeline. We have about -- in the commercial real estate which we consider both multi-family and a commercial real estate, 34%; the middle market area about 25%, business banking about 27% which is smaller business loans. So predominantly almost all of our volume coming in is in the way of the commercial space.

Okay great and then lastly, circling back to expenses you mentioned that you had shuttered four branches in the quarter. What was the timing of those closings?

Towards the end of the quarter. It was four, so they were spread out, but we finished one at the very end there. We see some expense savings going forward, I think conservatively we could save about $600,00, $650,000 annually.

Also those four consolidations have increased our average branch size from $63 million to $67 million so it's just really -- and we've actually increased one of them when we closed those small in-store locations because it was a full-branch facility it has increased in deposits. So it's just saying that is the right approach as you look forward.

Okay and were there any one-time in nature charges relating to the branch closings in the second quarter?

Second quarter was $142,000. There were $20,000 in the first quarter.

Perfect. Thank you very much.

Thank you and the next question comes from Rick Weiss from Janney

Good morning

Good morning

It looks like a very straightforward quarter. Is there anything in the quarter that surprised you either positive or negative?

The margin held up a little better than I expected. I was looking for about five and we did fairly well there with the three basis points of compression.

Yes, I think -- Rick, it's Chris. I the loan volumes coming in. I didn't expect that, and that kind of gave us a little bit more optimism that maybe people are feeling a little more confident, absent the New Jersey unemployment rate going up. Hopefully that's more people going back to work. But no we think it's slow and steady and we're watching everything to make sure. And I think the second half of the year is going to be a challenge for all financial institutions.

Okay. Okay that's all I had. Thank you.

Thank you. The next question comes from Collyn Gilbert for Stifel Nicolaus.

Great, thanks. Good morning guys.

Morning

Chris, thanks for your leadership. You're doing a great job. I just had one quick housekeeping item. On the expense side, the increase in advertising, is that one time in nature?

You know it's an increase off of the trailing quarter which is pretty low. If you look back from last year we're actually lower than Q2 of 2011, so there's some seasonality to the advertising expense outlay, that's when we put most of our dollars out.

Okay then what drove -- was there anything specific in the other other expense line, that $6.6 million you posted this quarter?

Well there's a couple non-recurring items we talked about the $213,000 for the Beacon contract termination and $142,000 related to for some branch closures. NPA expense picked up a little bit as well. We had some losses on some REO sales this quarter. About $300,000 all in.

Great that's all I had. I'm sorry go ahead.

Certainly it's just not me it's this team. They really are very focused on doing everything the right way. On the marketing side we have spent a little more time and money in the Beacon acquisition and putting that out in a little bit better way to build that brand out so that's where a little bit more is coming from the marketing standpoint.

Okay. Great, that's helpful. That's it. Thanks, guys.

Thank you, and the next question comes from Matthew Kelley of Sterne, Agee.

Hi guys. Good color on the pricing for the pipeline there. Wonder if you can quantify the terms? Are those starting to get a little longer as well? Are more people starting to look for the seven and ten year in multi-family and commercial real estate and what's your interest level in going out that far?

Certainly, Matt it is a quandary. You start looking at people wanting to go out ten year and I think I saw one deal that was under three in the way of a coupon. So I was a little put back on that But that certainly wasn't in the New Jersey market. But I know everybody would love to. We do like a 5-5 structure. We've maybe done some 7-3s.

If we did a ten year I think the treasure group would go through and say "How can we finance this" and lock it up because of the rate risk that brings on plus the idea of where these cap rates are, where they could go. Most of the deals that we do that are very thin have mostly very strong supporters and have been in this business a very long time. So they have very strong balance sheets. So as we go out and risk rate those loans we would look at a two and a three, risk rating verses a four and the spread would be different.

And what about the securities portfolio? What should we expect there going forward? It was down pretty good this quarter. Are you going to hold the line or could that shrink additionally in the back half of the year and into 2013?

Hopefully if loan demand continues the way it has at the end of Q2, we'll continue to shift the composition to loans. Certainly better yields for us.

Okay. All right so kind of keeping the balance seat around $7 billion then.

Really -- yeah the investment end is so, soft with some issues you don't know what you're buying. You worry about municipals every time you turn around. So I think the best thing is to go ahead and reposition the balance sheet in the way of more loans and less securities and if there was an opportunity to leverage we would.

Okay. Got you. And Chris, can you remind us of your thinking when you are looking at transactions what you think is reasonable and good for shareholders in terms of earn back on a stand-alone or a combined basis on tangible book dilution or earnings accretion, that trade-off there what you pick up on the earnings side versus what you give up on your book. How are you thinking about that today as you examine potential transactions?

I know that probably my team has heard it long and hard that the fact that tangible book dilution, anything over four-and-a-half years, unless its even a solid, solid company would be a place we don't want to go. So we can't and we won't. That earn back has to be within there, again on a stand alone basis. There's different ways to look at it.

Accretion. Yes, we want it to be accretive in at least the one year out. It's not just cost savings, it's synergy, it's putting people together, getting thebest of class on both sides. And I think there's still a bit (inaudible) spread between those who are looking to monetize or maybe partner up and what we're winning to pay. But we do look for anything that comes across our plate. We are out there. But the thing is nothing has come of that and we don't force the issue.

Your increased optimism that you might have a chance to do something on the deal front, what's the nature of the sellers? Are they healthy banks? Are they distressed opportunities? Are they deposit and branch opportunities, you know small banks that you know are just never going to get off the launch pad in terms of profitability? What's the nature of the types of transactions that you see in the marketplace?

We're not a damaged player, meaning if there's a lotta lotta work. I don't know that we'd end up--We would look at anything but the fact is when we get in there and we do diligence, what are we inheriting and by the way what are the risks if the market does turn backwards again? What are you buying and what are you going to get? We are more somebody that wants to partner along, that's had a very successful run, maybe they've just run out of powder. It's just harder with the regulatory costs coming in. So I think we look at more people who are doing fairly well. Don't have the size and skills to keep going and they want to partner up and ride the wave that we want to.

That's helpful thank you.

Thank you.

There are no more questions at the present time, so I would like to turn the call back over to management for any closing remarks.

We thank you everyone for being on the call. We feel we're building momentum with some of the new technologies for our clients including our planned roll-out of our mobile banking in early 2013, along with the private banking initiative that's already in progress. And with the myriad of challenges ahead of us and the industry, we remain confident in our quest to produce positive results for all of our shareholders, so we thank you for your time and appreciate your support.

Thank you. This concludes today's teleconference. You may now disconnect your phone lines. Thank for participating and have a nice day.