Provident Financial Services Inc (PFS) 2008 Q3 法說會逐字稿

Hello and welcome to the Provident Financial Services Inc. third-quarter 2008 earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Please note this conference is being recorded.

Now, I would like to turn the conference over to Mr. Paul Pantozzi.

Thank you and good morning, everyone. Welcome to our third-quarter 2008 earnings call. I will begin with our standard to caution as to any forward-looking statements that may be made in the course of our discussion. The full disclaimer can be found in the text of our earnings release and you can obtain a copy of that as well as our other releases and SEC filings by accessing our website, providentnj.com, or by calling our Investor Relations area at 201-915-5344.

With today's presentation, I am joined by our Chief Financial Officer, Linda Niro, and by Chris Martin, our President and Chief Operating Officer.

Net income for the quarter ended September 30, 2008, was $13.2 million, or $0.23 per share diluted share, as compared to $8.3 million, or $0.14 per share, for the third quarter 2007 and $10.4 million, or $0.18 a share, for the second quarter 2008. Each of the quarters I just cited had one-time charges that were particular to that quarter. In the quarter just ended other than temporary impairment charges of $869,000 net of tax were recognized on one debt security issued by Lehman Brothers Holdings Inc. and also on two equity holdings in accordance with Generally Accepted Accounting Principles.

In the third quarter of 2007, we recorded employee severance charges of $1.9 million net of tax and in the second quarter 2008, we recorded severance charges of $503,000 net of tax. I would like to emphasize, however, that our earnings performance in the most recent quarter was driven primarily by our ongoing focus on the fundamentals of our business, namely expansion of our net interest margin and management of non-interest expenses.

Linda will take us through the components of the net interest margin calculation. But regarding expenses, I would like to note that the ratio of non-interest expense to average assets for the past quarter was 1.98%. This represents a substantial decrease in the 2.11% reported for the trailing quarter and reflects our continuing efforts to effectively manage overhead costs.

With respect to our balance sheet, new loan production proceeded at a respectable pace in the third quarter with particular emphasis on residential mortgage loans. On the liability side, we continued to build demand deposit balances while other high-cost deposit categories declined. We have maintained the flexibility of fund loan growth with lower cost wholesale borrowings, and as a consequence, total borrowed funds at September 30, 2008, increased $103.8 million above the reported at June 30, 2008.

We have continued to monitor our asset quality. At September 30, 2008, the ratio of non-performing assets to total assets was 60 basis points as compared to 67 basis points at June 30, 2008. It bears repeating we did not originate or hold any subprime mortgages nor did we hold any collateralized debt obligations, trust preferred securities, or comment or preferred stock issued by Fannie Mae or Freddie Mac.

But as the events of the past several weeks have emphasized, we are in a period of great economic uncertainty and increases in both net charge-offs and loan loss provision were recorded in the third quarter in recognition of that fact. A further necessary safeguard in the face of uncertainty is maintaining a solid capital position, and as of September 30, 2008, we remain well-capitalized according to already regulatory standards.

With that, I would like to turn it over to Linda who will take us through the quarter's results in more detail.

Thank you, Paul. The net interest margin increased 17 basis points to 3.27% during the third quarter compared to 3.10% during the second quarter of 2008. The increase in the margin was due primarily to a decrease of 22 basis points in the average cost of deposits to 2.19% from 2.41% in the trailing quarter. The cost of borrowed funds also decreased 22 basis points sequentially resulting in an overall reduction in the cost of interest-bearing liabilities of 19 basis points to 2.55% from 2.74% in the trailing quarter.

The average yield on net loans increased two basis points to 5.78% from 5.76% and the average yield on investments decreased seven basis points to 4.59% from 4.66% on a linked-quarter basis. The average yield on interest earning assets was little changed at 5.51% compared to 5.5% in the trailing quarter.

Total investments decreased approximately $30 million during the third quarter to $1.23 billion and represented just over 19% of total assets at September 30, compared to 19.7% at June 30. The investment portfolio consists primarily of agency-guaranteed mortgage-backed securities and bank qualified municipal bonds. There are no preferred or trust preferred equities in the portfolio. The portfolio had a weighted average life of 4.8 years and a duration of 3.9 years at September 30.

During the quarter, total loans increased $101 million or 2.4% sequentially. The largest increase in the portfolio was in residential mortgage loans, which increased $66.1 million. Commercial mortgage and multifamily loans increased $36 million, construction loans increased $6 million, consumer loans increased $5.3 million, while commercial loans decreased $13.6 million sequentially. Commercial loans as a percentage of total loans were 44.7% at September 30 compared to 45.1% of the portfolio at June 30.

The significant tightening of credit, the residual effects of subprime lending, and continued declines in real estate values continue to have an adverse impact on the pace of sales for new construction projects and asset quality. The factors that are contributing to the current uncertain economic environment, in addition to an increase in non-accrual loans, resulted in a provision for loan losses in the amount of $3.8 million in the third quarter.

Net charge-offs during the third quarter were $1.6 million compared to net charge-offs of $1.2 million in the second quarter. Total non-performing assets consisting of non-performing loans and foreclosed assets totaled $38.8 million or 0.6% of total assets compared to $42.6 million or 0.67% of total assets at June 30.

Non-performing loans decreased $1.4 million in the quarter. However, non-accrual loans increased $14.6 million in the third quarter to $35.3 million compared to $20.7 million in the second quarter. Balances at June 30 included a $16 million loan, which is greater than 90 days delinquent and still accruing, and that loan has since been brought current. Non-performing loans as a percentage of total loans was 81 basis points at September 30 compared to 86 basis points in the trailing quarter.

During the third quarter, the increase in non-accrual loans was due mainly to a construction loan in the amount of $9.8 million and a commercial mortgage loan in the amount of $1.6 million to the same borrower that were determined to be impaired during the quarter. Both of these loans are collateral dependent and there were no impairment charges required at September 30 due to sufficient collateral values.

Total delinquencies decreased to $45.6 million or 1.04% of the loan portfolio at September 30 from $60.7 million or 1.42% of the portfolio at June 30. Total deposits decreased $38.6 million or 0.9% during the third quarter of 2008. Increases of $36.3 million and demand deposit balances were offset by decreases in savings balances of $41.4 million and higher cost time deposit balances of $33.6 million. At the end of the third quarter, core deposit as a percentage of total deposits were 63.8% compared to 63.3% at the end of the second quarter.

Non-interest income in the third quarter of 2008 increased $1.1 million, or 17%, to $7.8 million from $6.7 million in the second quarter. Fee incomes increased $2.4 million, or 49%, due mainly to a $1.2 million increase in the market value of equity fund holdings compared to a decrease of $1.3 million in the trailing quarter. Partially offsetting the increase in fee income, the Company recognized net security losses of $966,000 during the third quarter compared with net gains of $305,000 in the trailing quarter.

The third-quarter net security losses included other than temporary impairment charges totaling $1.4 million pretax recorded on a debt security issued by Lehman Brothers and the common stock of two publicly traded financial institutions. Non-interest expense decreased $1.3 million, or 4%, to $32 million during the third quarter compared to $33.3 million in the trailing quarter.

The decrease in non-interest expense was due primarily to an $873,000 decrease in compensation and benefit expense. Total stock-based compensation expense decreased $800,000, or 35%, to $1.5 million in the third quarter compared to $2.3 million in the second quarter as a result of the conclusion of vesting of options and awards granted after the Company's 2003 IPO during the third quarter of 2008.

Income tax expense increased $114,000 to $4.2 million in the third quarter compared to $4.1 million in the trailing quarter. The effective tax rate was 24.2% for the third quarter of 2008 compared to 28.3% for the second quarter of 2008. The decrease in the effective tax rate was primarily due to the utilization of capital losses on securities transactions.

That concludes our outline of the third-quarter operating results. We would now like to turn the call back over to the operator for any questions you may have.

(Operator Instructions) Mark Fitzgibbon, Sandler, O'Neill and Partners.

First, I wondered -- and I apologize if you mentioned this because I hopped on the call a minute or two late -- but do you plan to participate in the Treasury's capital, voluntary capital purchase plan?

We have not made that determination yet, Mark. This is Paul. We are taking it under advisement and doing the analysis as we speak.

Okay. Then secondly, I noticed you had -- in your unfunded pipeline you had about $120 million of construction loans. Does it make sense to leave those unfunded given the market conditions? Or is -- are these real attractive loans that you feel like make a lot of sense to lend right now?

This is Chris Martin, Mark. We do lend to our customers who have been with us a long time. They see opportunities, albeit it may be at cheaper levels, but then it may be outside of the New Jersey market out in Pennsylvania, primarily. Most of our loan documentation and our loans other than the ones that we have detailed in the Q would state that we are still following our customer. There are still some opportunities and I don't think we can cut back on the unfunded. We just have to watch as things progress and things are slow out there, but still performing.

Is it residential construction or commercial construction?

Residential and commercial, but more residential.

Okay, and I wonder if you could just give us a sense for how the 30- to 90-day delinquency trends are looking.

30 to 60 actually came down in the third quarter, Mark, to $21.2 million from just about $24 million in the second quarter.

Then last question, probably Linda, on the margin, obviously the trend was fabulous this quarter. Can you hold the margin at this level do you think?

We think we will still get a little bit more expansion in the fourth quarter, not 27 basis points. I think probably more five, five to seven.

Super. Thank you very much.

Matt Kelley, Sterne Agee.

The $1.2 million increase in the market value of equity holdings, maybe a little bit more detail there. Will that be recurring, was it a payout? A little more help there would be --.

Matt, could you repeat that. We missed the first part of that question, please.

Yes, in the fee income, the $1.2 million increase in the market value of equity holdings?

Right.

What was that?

That was -- we have equity funds that we hold at the holding company level and that is the change in the fair value of those funds. It's actually income that we earn, so it swung quarter-to-quarter.

So a couple hedge funds that were massively short and made the right call?

Let's hope so.

Got you. Okay, and then you had mentioned that the OTTI was $1.4 million on the Lehman security and two other common stocks. What were the gains that helped offset that?

Well, the $1.4 million was the total of all three of those.

Right.

Right, okay, and we had $442,000 in gains on securities sales of other equities that we sold in the quarter at a gain.

Other common equity?

Other common equities, yes.

Got it, okay. I missed those numbers on the stock-based compensation again. What was the total amount of the option vesting and restricted stock awards that will no longer be running through the P&L?

Well, all of them vested, so we went, I think, from 2.5 million in the second quarter -- let me just get those numbers for you. We were 2.3 million in the second quarter and 1.5 million in the third quarter. That was the decrease and probably going forward it will be about $1 million in the quarter.

Okay, so it will be a little bit more coming through?

Yes, because some of them -- the awards finished vesting in August and the options in July.

Got you, okay. Then just getting back to the TARP, what are the elements of the TARP that still need consideration? What would prevent you from participating at this point? We have had some time now to kind of review the details of the plan.

We were actually preparing for this call in our Board meeting yesterday, so we reviewed certain elements of it with our Board yesterday. And we will make that determination in the next week to 10 days.

Okay, all right. Thank you.

Rick Weiss, Janney Montgomery Scott.

I was wondering if you talked about the loan growth and why the growth came from residential mortgages? Are you seeing opportunities in the market?

We are. We are actually seeing some home buying activity. You know, I think some foreclosure data in New Jersey came out today that isn't very positive, but there is certainly still areas of this state where there is buying going on. It's slowing down. I don't think you are going to see that same level of activity in the fourth quarter.

Are they mostly jumbo mortgages?

No.

Okay, conformant?

Yes.

Second, with regard to fee income, it looks like it jumped up, was that deposit fees to the $7.3 million?

Again, it was change in the value of fees on equity funds that we hold.

Okay, I'm sorry. I thought that went into the other line. And finally, I guess, it's probably more of a Mark Fitzgibbons question, but with respect to the tax rate, what would be a good rate to use going forward?

Rick, we are still targeting a 27% effective tax rate through year-end.

Okay. Okay, 27% through year-end. Okay, thank you very much.

Jason O'Donnell, Boenning & Scattergood.

Good morning. Congratulations on a good reporter. Just had a couple of quick questions, back on the lending side, it looks to me like you are experiencing a pick up in origination activity in the most recent quarter. Is there -- are there any particular competitors that you feel you are competing more effectively with now than you have in the past?

Yes, this is Chris Martin again. Certainly, the Wachovia impact and maybe a more Sovereign coming up into the near term, are definitely not really paying attention to their customers and we are becoming maybe one of the choices where in the past we wouldn't have seen that. Also, securitization in some of the Wall Street liquidity events that were made by putting these into the securities are now gone, so that is opening up opportunities for us to establish relationships with people that really wouldn't have considered us or any other institution in the state. They were always going to the conduits, so those are the primary areas.

Okay, and that is mainly on the commercial side?

Yes.

Okay, and the other question I had was -- and I apologize if you broke this out in the beginning and I just missed it. On the severance charges that you took, if you could just break out for me, if you didn't already, what the charge was in the third quarter and whether or not you expect any additional severance charges related to the voluntary resignation program that you initiated last year?

No, we took all of the charges last year in the third quarter for that voluntary resignation program that was in effect.

Okay.

Second quarter '08 and those are complete. There is no further charges.

Okay, so there were no severance charges --?

In the third quarter?

For the third quarter?

No.

Okay, okay, great. Thanks very much.

Collyn Gilbert, Stifel Nicolaus.

Thanks. Good morning. Could you guys just go through a little bit more detail on what you are seeing in terms of credit trends? Where you are seeing weakness or where you are concerned within the segments of your portfolio or just kind of the general economic conditions in the market?

This is Chris, Collyn. I think we talked about it a little bit more. We are really comfortable with our balance sheet. We know our customers very well. We meet and talk to them personally. We can't control -- outside that spectrum, we can't control what is going on in the market. And I think that is kind of what we are watching and seeing, again, some evidence of some slowing out there. I don't think that we are going to be abstained from that.

The other side is a lot of it would be employment-related, especially in the one- to four-family. If unemployment continues to crop up, we are going to probably see some impact just like anybody else would. On the other side, we certainly have had some loans that we had classified that have -- either the loans have -- the notes have been bought by another customer or had paid off, so we think that if anything we are still in good position with our customers as we know them today.

Okay, so there is nothing more on the commercial side that you are seeing stress on, or that you have a heightened awareness of specifically?

Nothing new at this point in time.

Okay, okay and then could you just comment -- I know obviously, as you mentioned, you are evaluating the potential on the TARP, but more so your appetite for M&A. It seems as if we are going to be in a consolidating environment, and you guys certainly have tapped into that as a source of growth in the past. What is your view on M&A now as we look forward?

I think that we will continue to be very selective in anything that we might look at in the future.

And that is just because of the risk that might come with an institution, or --?

That is because of the risk profile that we operate within within this company and the consistency with which we do that.

Okay, okay, that was all. Thanks.

[Tim Braziler] of KBW.

Hello. Good morning. My question is regarding the provision, it's a little elevated from the past two quarters. Is this in regards to any particular credit or just general market trends?

It's based on our evaluation of our loan portfolio at September 30 and the fact that we did have a slight increase in non-accrual loans. We had growth in the portfolio in the quarter, and yes, due to general economic conditions and the uncertainty that goes along with the current environment that we operate in.

Okay, so going forward, we could expect to see a slightly elevated provision than the normalized run rate?

I don't think that would be unreasonable.

Okay, great. Second question is in regards to the operating expenses. Should we be expecting any kind of seasonality in the fourth quarter?

I don't think to any great degree. You know, there is always accrual true-ups in the fourth quarter, but I don't see anything much different in the fourth quarter than what you saw in the third.

Okay, perfect. Thank you very much.

Ross Haberman, Haberman Fund.

Morning. How are you? A question for, probably for Chris. Chris, do you much had any exposure to trust-preferreds either duressed or pooled?

None.

You don't? Okay, thank you.

Theodore Kovaleff, Granta Capital Group.

Thanks very much. Actually, all my questions have been taken care of. Congrats on the quarter, though.

Thank you.

Thank you.

(Operator Instructions) Matt Kelley, Sterne Agee.

Yes, just a follow-up on the tax rate. I know you said 27%, but what about if you think out longer-term? I mean, how long could some of those tax benefits allow you to have an all-in tax rate below 30%?

We have been really consistent with our effective tax rate. The only thing that would push it up, and I'm not really seeing it at this time, is that if our -- there is a change in our mix of pretax income. Right now, a greater proportion of it is in tax-exempt income. So I wasn't even really talking about the impact of the utilization of the capital losses that we were able to offset in the third quarter.

Okay, all right. So it's mostly the municipal type investments that are allowing you to have that rate in there?

That's correct, yes. Some of our tax-exempt income.

Okay, all right. Thank you.

We show no further questions at this time. I would like to turn the conference back over to Mr. Paul Pantozzi for any closing remarks.

We would like to thank you for joining us on this call. We look forward to hearing from you on our next call. Thanks very much.

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