Provident Financial Services Inc (PFS) 2008 Q4 法說會逐字稿

Hello and welcome to the Provident Financial Services, Inc., fourth-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 that this conference is being recorded.

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

Thank you and good morning, everyone. Welcome to our fourth-quarter 2008 earnings call. I will begin with our standard 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 all other releases and SEC filings, by accessing our website, providentnj.com, or by calling our investor relations area at 201-915-5344.

For today's presentation I'm joined by our Chief Financial Officer, Linda Niro, and by Chris Martin, our President and Chief Operating Officer. I want to begin with an overview of our operating results, after which I will ask Linda to take us through the financial results in more detail. I will then return with some concluding remarks before we open the call for questions.

As outlined in our news release earlier today, our earnings per share of $0.13 for the fourth quarter and $0.74 for the full year 2008 exceeded the results we posted at the same periods in 2007. However, the difficult economic environment did have a negative impact on our core operating results.

The fourth quarter was characterized by strong loan growth, particularly in the commercial mortgage and commercial and industrial categories. We continue to see loan demand, and we are making loans that meet our conservative credit quality standards and contribute to growth in net interest income. Approximately $2 million of the addition to the provision for loan losses was attributable to the growth in commercial loans outstanding.

Especially in these troubled economic times, two key elements that define the financial strength of banks such as ours are asset quality and capital adequacy, and I want to address these upfront. As to asset quality, the economic downturn that we are all experiencing continued to impact our loan portfolio, and we experienced an increase in nonperforming loans in the fourth quarter.

I want to emphasize, however, that a large part of that impact is attributable to two credits to a single developer who is experiencing difficulty completing the projects. During the quarter, these loans were placed on non-accrual status which resulted in a reduction in interest income and a 3 basis point reduction in our net interest margin. Approximately $2 million of the $8.5 million we provided for the loan loss reserve in the fourth quarter was attributable to these two loans.

The balance of our loan portfolio has continued to perform well given the current level of economic stress. We closely monitor loan delinquency trends. And while these have increased, they have so far shown no sign of presenting us with a material change.

Turning now to capital, as of December 31, 2008, our regulatory capital ratios continued to exceed all thresholds for us to be considered well capitalized. I am also pleased to report that while many other banks have announced a suspension or reduction of their cash dividend to stockholders, yesterday our Board of Directors declared a quarterly cash dividend of $0.11 per share, consistent with prior quarterly dividends.

We anticipate that our capital position will continue to support profitable growth. As a result, after careful consideration, we announced in November our determination not to participate in the capital purchase plan offered under the U.S. Treasury's Troubled Asset Relief Program.

These funds are designed to spur further lending efforts at participating banks; but it is our belief -- and I think our fourth-quarter loan growth bears this out -- that we can responsibly meet the loan demand within our markets without government assistance.

I will now turn it over to Linda for a detailed review of the financial results. Linda?

Thank you, Paul. During the quarter, total loans increased $148.6 million or 3.4%. The largest increase in the portfolio was in commercial loans, which increased $81.5 million during the fourth quarter. Commercial mortgage and multifamily loans increased $60.1 million. Construction loans increased $4.3 million. Residential mortgage loans increased $5.5 million. And consumer loans decreased $2.4 million sequentially.

Commercial loans as a percentage of total loans were 46.5% at December 31, compared to 44.7% of the portfolio at September 30, 2008.

For the year ended December 31, 2008, total loans increased $230.5 million or 5.4%. Within the commercial loan category, commercial mortgage loans increased $169.1 million or just about 20%. Commercial loans increased $41.1 million or 5.8%. And the multifamily loan portfolio increased $28 million or 41.4%.

Construction loans decreased $75.8 million to 24.5%. In addition, residential mortgages increased $87.4 million year-over-year. And consumer loans decreased $19.9 million.

The ongoing deterioration in the economy, the residual effects of subprime lending, and declines in real estate values continued to have an adverse impact on asset quality and the pace of sales for new construction projects in the fourth quarter.

Despite these adverse trends, there was significant lending demand, and increases in the commercial sector of the portfolio contributed to the increase in the quarterly provision for loan losses, in addition to an increase in nonperforming loans and credit downgrades.

The quarterly provision increased to $8.5 million for the quarter ended December 31, 2008, compared to $3.8 million in the third quarter.

Growth in the portfolio resulted in a $2 million increase in required reserves; and credit downgrades resulted in a $1.4 million increase.

Net charge-offs during the fourth quarter were $4.1 million compared to net charge-offs of $1.6 million in the third quarter. Total nonperforming assets, consisting of nonperforming loans and foreclosed assets, totaled $62.6 million or 95 basis points of total assets, compared to $38.8 million or 60 basis points of total assets at September 30.

Nonperforming loans increased $23.8 million in the fourth quarter to $59.1 million, primarily as a result of two land improvement loans totaling $21.2 million that became impaired late in the fourth quarter. Nonperforming loans as a percentage of total loans increased to 1.31% at December 31, compared to 81 basis points in the trailing quarter.

Total delinquencies increased to $86.7 million or 1.92% of the loan portfolio at December 31, from $45.6 million or 1.04% of the portfolio at September 30.

The net interest margin decreased 7 basis points to 3.2% during the fourth quarter compared to 3.27% during the third quarter of 2008. The decrease in the margin was due primarily to a decrease of 15 basis points in the average yield on loans and a 9 basis point decrease in the average yield on investments.

The average yield on interest-earning assets decreased 13 basis points sequentially to 5.38% compared to 5.51% in the trailing quarter. The reversal of interest income on non-accrual loans in the fourth quarter adversely impacted the net interest margin by 3 basis points.

The cost of deposits decreased 5 basis points and the cost of borrowed funds decreased 17 basis points sequentially, resulting in an overall reduction in the cost of interest-bearing liabilities of 8 basis points to 2.47% from 2.55% in the trailing quarter.

Total investments decreased $19.3 million during the third quarter to $1.21 billion and represented 18.5% of total assets at December 31 compared to 19.1% at September 30.

The investment portfolio consists primarily of agency guaranteed mortgage backed securities and bank qualified municipal bonds. There are no preferred, trust preferred, or pooled trust preferred equities in the portfolio. The portfolio had a weighted average life of 3.42 years and a duration of 2.9 years at December 31, 2008.

Total deposits increased $90.5 million or 2.2% during the fourth quarter of 2008. Core deposits, consisting of demand deposit accounts and savings accounts, increased $56.7 million or 2.2% in the fourth quarter. Time deposits grew $33.8 million or 2.3% in the fourth quarter. At year-end, core deposits as a percentage of total deposits were 63.7%.

Non-interest income in the fourth quarter of 2008 decreased $791,000 or 10.2% to $7 million from $7.8 million in the third quarter of 2008. Fee income decreased $2.2 million due mainly to a $2 million decrease in the market value of equity fund holdings and a decrease of $138,000 in deposit fees.

Partially offsetting the decrease in fee income, the Company reported $83,000 in net securities gains during the fourth quarter, compared with net losses recorded of $966,000 in the trailing quarter. During the third quarter, net securities 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 increased $1.4 million or 4.5% to $33.4 million during the fourth quarter compared to $32 million in the trailing quarter. The increase in non-interest expense was due primarily to a $1.1 million increase in other operating expenses, as costs related to attorney fees and loan collection expense associated with foreclosed assets increased.

Compensation and benefit expense increased $411,000 or 2.5% in the fourth quarter due to an increase in the variable compensation accrual of $1.4 million, partially offset by a $727,000 decrease in stock-based compensation expense.

Income tax expense decreased $1.6 million to $2.6 million in the fourth quarter compared to $4.2 million in the trailing quarter. The effective tax rate was 26% for the fourth quarter of 2008, compared to 24.2% for the third quarter of 2008. The increase in the effective tax rate was primarily due to the utilization of capital losses on securities transactions in the third quarter.

With that, I would now like to turn it back over to Paul for his further comments.

Thank you, Linda. As everyone is aware, we are in the midst of a period of economic uncertainty that is unprecedented in modern times. However, because of our adherence to fundamentals of our business -- namely core deposit gathering, conservative loan underwriting, strong customer relationships, expense control, balance sheet management -- we believe that we can continue to grow profitably and compete successfully throughout this period.

In a few weeks, we will begin marking our 170th anniversary as a financial institution dedicated to serving the needs of our customers and communities. I would like to take this opportunity to thank our excellent management team and employees who have made this milestone possible.

With that, I would like to turn it back to the operator for any questions you might have.

(Operator Instructions) Rick Weiss, Janney.

Good morning. I was wondering if you could talk a little bit about the increases that you are seeing in the commercial loan demand. First, is that coming from C&I lending or commercial real estate?

Also, have you done anything in terms of changing your pricing, I suppose, or any kind of underwriting standards?

This is Chris, Rick. We have seen it from all sides. The commercial real estate is definitely slow, but the commercial has done very well. We are seeing a lot more opportunities, as other banks have not been focused on that; and we are getting a chance to meet with some very solid customers going forward.

Pricing-wise, I think again the competition is really not as heavy. We are able to get a little bit better pricing than we have in the past, certainly adjusting for the risks in the market. So that helps certainly in a margin going forward.

Okay. Do you expect continued deteriorations in the area, especially as Wall Street layoffs seem to be occurring almost daily?

Well, again, if you're looking at the one to four, or are you talking about the reciprocal to the commercial?

It would probably be however it affects you the most.

Well, again, we didn't really lend to a lot of the Wall Street people on a one to four basis. Certainly assesses that they would utilize in the way of restaurants or strip centers or big-box stores will certainly be feeling the effects. I think that is going on throughout the economy.

But for the most part, as we talked about, it was more three of the larger loans that have been on our radar for a while. We're just trying to get them back into a performing status. Aside from that, not dramatic.

Okay. When it comes to the reserves, I think Paul said that $2 million or so, the addition to reserves was due to loan growth. Is there more of a sea change now with the auditors or SEC that you are seeing? That, hey, we should better reserve because things are getting worse? Are they lightening up in terms of unallocated reserves?

Rick, that is strictly related to, again, loan growth depending on the type of credit. So in the commercial sector it goes on our books; it is assigned a risk rating; and there is a reserve factor associated with that right out of the gate.

So we just wanted to give some color around why that $8.5 million provision was recorded. Again, $2 million of it was strictly due to new loans coming on the books.

Okay, so as you get going forward into '09, if the demand holds up, then you would expect to see kind of commensurate increases in the reserve?

You would, especially if it was in the commercial sector of the portfolio.

Okay, great. One final question, I guess. When it comes to fees and the non-interest income throughout this quarter.

Right.

I was wondering if you can give some color behind that.

Again, that is fees associated with equity fund holdings that we have. Essentially it is the decline in the value of those equity funds quarter-to-quarter.

Okay. The basic fees, such as like overdraft, is that holding up okay?

Again, they were down just a nominal amount. Some of that is due, believe it or not, to the economy. People not bouncing as many checks.

It could have a -- number of days in the month could have a factor. So there's a lot of different things that influence that. But it was just down a minor amount.

Okay, thank you very much.

Damon DelMonte, KBW.

Hi, good morning. How are you guys? With regards to the land improvement loans, $21 million, what is your additional exposure in that area?

We have reserved them fully to their current market value.

Okay, but how much in the way of land improvement loans do you still have on your books?

I don't have that number, Damon, offhand. It is not a huge amount.

Okay. Then with regards to the margin going forward, I know obviously part of the decrease this quarter had to do with the increase in the nonperforming loans. But how are you viewing the margin going forward given the timing of the last cut by the Fed?

Yes, now we would say it is maybe flat to down slightly. That is due in part -- the yield on earning assets is coming down a little bit faster than our ongoing ability to reduce funding costs. The amount of loans that we have tied to prime or LIBOR.

The average rate dropped significantly in the quarter, so with the Fed expected to leave rates there it will be some time before we can institute more acceptable floors on these loans as they mature during the year.

Okay. Then two quick things on expenses and the tax rate going forward, just for modeling purposes. The results we saw this quarter, are those decent baselines to go off of?

They are. It could be about $33.5 million, somewhat of a run rate going forward. Tax rate, we are projecting 27% effective tax rate for the year.

Okay, great. Thank you very much.

Mark Fitzgibbon, Sandler O'Neill.

Good morning. Actually this is Alex Twerdahl. Just follow up with Damon's question, the $33.5 million run rate for expenses, does that include increased FDIC premiums?

Yes, it does, of approximately $5 million.

Okay, so $5 million. Where else in expenses are you looking to sort of trim that out of?

We look everywhere to trim expenses. Absent the increase in FDIC expenses, we would project flat for the year; and that is really the one category we are just seeing an increase.

Okay. Then could you update us on any changes in your deposit gathering strategies? Are you seeing rates start to come down a little bit? Or has anything changed there?

It is still fairly competitive. Deposits are what everybody seems to be after. But our strategy continues to be competitively priced in the marketplace and certainly with an emphasis on business deposits and business gathering.

Great, thank you very much.

One other quick thing there, Alex, is regarding -- that's why we are focusing in on the commercial end of the business, is because it does bring in a good non-interest-bearing core base and then allows us to manage the growth of that portfolio by self-funding it as a percentage.

Great, thank you.

(Operator Instructions) At this time it appears we have no further questions.

Okay, if there are no further questions, we thank you for participating in this call. We look forward to hearing from you in the next quarter. Thank you.

Thank you. That does conclude today's conference. You may now disconnect.