Provident Financial Services Inc (PFS) 2009 Q3 法說會逐字稿

Hello, and welcome to the Provident Financial Services Inc. third-quarter 2009 earnings conference call. All participants will be in listen-only mode for this event. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the call over to Chris Martin. Please go ahead, sir.

Good morning. Before we begin our discussion of our third-quarter 2009 results, we would like you to please take note of our standard caution as to any forward-looking statements that may be made during this call. The full disclaimer can be found on the text of our earnings release, and you can obtain a copy of that and all of our filings by accessing our website, providentnj.com, or by calling our Investor Relations area at 201-915-5344.

For today's presentation, I am joined by Tom Lyons, our Chief Financial Officer.

I will start with a review of our performance of the third quarter and the first nine months, highlighting some nonrecurring items and operating trends. Then Tom will take us through with some detail on the margin, earnings, asset quality, expense management and capital.

Overall, we [think] our performance in a very challenging environment was admirable, with net income of $8.7 million, or $0.15 per share, for the quarter. This included a loan loss provision of $6.5 million, while net charge-offs were down from the trailing quarter to $2.8 million. Earnings per share were up from the trailing quarter to $0.15 from $0.11. Results included $1.2 million in severance costs, previously disclosed in our SEC filings.

FDIC insurance expense increased $2.3 million from the third quarter of 2008. The increase was a result of the deposit growth and an increase in the assessment rate as the FDIC grapples with the cost of closing failing institutions throughout the country. Net interest income and the margin increased this quarter, as deposits and borrowings continue to reprice favorably.

The consumer continues to struggle, and with slow growth predicted and recessionary conditions prevailing, we are cautious about our quick recovery for the housing market. Credit quality is and has been our primary focus in today's economic environment. Nonperforming loans increased to $78.2 million, or 1.81% of total loans, with much of the increase coming from the addition of an $11.2 million senior participation interest in a $283 million Shared National Credit. Our SNC exposure totals $165 million, which is comprised of 13 loans with (inaudible) participants in the mid-Atlantic region. Our allowance for loan losses was $55.7 million at September 30, 2009, or 1.29% of total loans, compared with 1.05% at 12/31/08.

Year-to-date deposits have grown at an [unannualized] rate of 15.4% to 6.4 -- $648.9 million, as consumers cut discretionary spending and retrenched into retail deposits. We also experienced growth in commercial and municipal deposits. Given the environment, we expect core deposits to continue to grow. The challenge will continue to be how quickly and prudently these deposits can be deployed.

We have also continued our branch rationalization strategy by conveying a sub-performing location and deposits to a small community bank, and scheduling the closure of two other locations by the end of the year. Coinciding with these were the openings of our Clifton, Newark and Matawan locations, that are showing great promise, with the strong sponsors in those communities.

The Provident Bank continues to expand its Wealth Management Group. In the third quarter, we hired an investment management officer and an additional wealth advisor. Further, average annual fees earned improved by seven basis points during the quarter. We anticipate that we will continue to experience growth in assets under management and fee income as the impact of the dislocation and lack of personal attention continues in the investment advisory business.

Our capital position remains strong. At September 30, 2009, our Tier 1 leverage ratio was 8.10%, and our total risk-based capital was in excess of 13%. In addition, as we announced this morning, we have maintained our quarterly cash dividend to stockholders at the same level as previous quarters.

Tom will take us through the numbers in some detail. Tom?

Thank you, Chris. Net income for the third quarter of 2009 was $8.7 million, or $0.15 per share, compared to $6.3 million, or $0.11 a share, for the second quarter. Trailing quarter earnings were impacted by a special FDIC assessment of $3.1 million, which equated to $1.9 million net of tax, or $0.03 per share.

At September 30, 2009, tangible common equity to tangible assets was 8.1%, the Company's regulatory capital ratios remain strong, and the Company and the Bank continue to be well-capitalized.

During the quarter, total loans decreased $36 million. The largest decrease in the portfolio was in residential mortgage loans, which decreased $80 million during the third quarter due to sales payoffs and amortization. The company originated and sold $45 million of primarily 30-year fixed-rate residential mortgage loans during the quarter as part of its interest rate risk management process.

In addition, construction loans decreased $12 million during the third quarter and consumer loans decreased $5 million. Partially offsetting these decreases, commercial mortgage loans, including multi-family loans, increased $42 million, and commercial loans, consisting of middle-market business banking loans, increased $19 million during the third quarter. Commercial loans as a percentage of total loans increased to 50.9% at 9-30-09 compared to 49.4% at June 30th.

The ongoing deterioration in the economy, increases in unemployment, declines in real estate values and increases in foreclosure activity have continued to have an adverse impact on asset quality, with nonperforming loans increasing to $78.2 million at September 30 from $63.9 million at June 30 of '09.

The increase in nonperforming loans was largely attributable to the addition of an $11.2 million senior participation interest and a $283 million Shared National Credit. Proceeds from this construction loan facility are being used to convert an existing office building in New York City into a mixed-use residential condominium and hotel.

As a result of additional costs and slow sales, this loan has been classified as nonaccrual. However, hotel construction is nearing completion, and the loan was current as to principal and interest at September 30, 2009. The Company estimates a loan-to-value ratio of approximately 77% on this credit.

The provision for loan losses during the quarter was $6.5 million, up from $5.8 million in the trailing quarter. The allowance for loan losses was 1.29% of total loans at September 30 compared with 1.19% at June 30, 2009.

Net charge-offs during the quarter were $2.8 million compared to net charge-offs of $6.2 million in the trailing quarter. Total nonperforming assets, consisting of nonperforming loans and foreclosed assets, totaled $85.2 million, or 1.25% of total assets, compared to $69.3 million, or 1.04% of total assets, at June 30. Nonperforming loans as a percentage of total loans were 1.81% at September 30 compared to 1.47% at June 30. Total delinquencies increased to $92.1 million, or 2.13% of the portfolio, at September 30 compared to $78.7 million, or 1.81% of the loan portfolio at June 30.

The net interest margin increased five basis points to 3.01% during the third quarter compared to 2.96% in the trailing quarter. The increase in the margin was due primarily to a decrease of 20 basis points in the average cost of interest-bearing liabilities to 2.07% for the third quarter.

The average cost of interest-bearing deposits decreased 20 basis points, while the average cost of borrowings decreased 10 basis points sequentially. The decrease in the cost of funds reflected declining market rates and favorable repricing of time deposits.

In addition, the Company continues to deploy liquidity from strong deposit inflows to fund loan originations, investment purchases and the repayment of maturing borrowings. As a result of the ongoing deployment of excess liquidity and continued favorable repricing of interest-bearing liabilities, the Company projects a net interest margin improvement in the fourth quarter in the range of five to seven basis points.

Total investments increased $197 million during the third quarter to $1.7 billion, and represented 25% of total assets at September 30 compared to 22.6% at June 30, 2009. The investment portfolio consists primarily of agency-guaranteed mortgage-backed securities and bank-qualified municipal bonds. The portfolio had a weighted-average life of 3.3 years and a duration of 2.9 years at September 30.

Total deposits increased $166 million, or 3.5%, during the third quarter of 2009. Core deposits, consisting of demand deposit accounts and savings accounts, increased $241 million or 8% in the third quarter. Conversely, time deposits decreased $76 million during the third quarter. At the end of the third quarter, core deposits as a percentage of total deposits were 66.8% compared to 64% in the trailing quarter.

Total borrowed funds decreased $23 million to $1 billion at September 30 as compared to June 30. Borrowed funds as a percentage of total assets declined to 14.7% at quarter-end compared to 15.4% at the end of the trailing quarter.

Non-interest income was $8.6 million in the third quarter compared to $8.9 million in the trailing quarter. Small increases in fee income, gains on loan sales and appreciation in the cash surrender value of bank-owned life insurance were offset by lower net gains on securities. The Company reported $195,000 in net securities gains during the third quarter compared with net gains of $992,000 in the trailing quarter.

The company also Recognize net other-than-temporary-impairment charges of $701,000 related to the common stock of three publicly traded financial institutions in the third quarter compared with other-than-temporary-impairment charges of $801,000 recognized in earnings in the trailing quarter.

Non-interest expense decreased [to] $2.2 million to $36 million during the third quarter. The decrease in non-interest expense was due primarily to the $3.1 million special assessment imposed by the FDIC in the trailing quarter. Other operating expense also decreased $842,000 during the third quarter to $5.7 million due to the recognition of non-recurring expense associated with the dissolution of a real estate joint venture in the trailing quarter.

Compensation and benefits expense increased $1.5 million or 8.8% sequentially, primarily due to $1.2 million in severance expense. Severance included previously disclosed costs associated with the retirements of two senior executives.

Finally, income tax expense increased $1 million to $2.8 million in the third quarter. The effective tax rate was 24.1% for the third quarter compared to 21.5% for the previous quarter. The Company projects an effective tax rate of approximately 24% for the fourth quarter of 2009.

And at this point, we would be happy to take any questions.

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

This is actually [Alex Tordal]. My first question is about the Shared National Credit portfolio, the $165 million in outstandings. Are those primarily commercial real estate loans?

There are about three commercial real estate loans. There are others that are different businesses -- some of the commercial loans. Each one is separate and distinct. They have been performing very well for us in the past. Tom has some more detail on it.

Let me find it.

And then how many of those commercial real estate loans in New York City? Is it just that one?

There are three in New York City.

And the one that went bad, was that a result of the recently completed SNC exam?

These were all -- the credits were reviewed. Three of them were reviewed. They all were labeled as substandard by the OCC. We analyzed them from a FAS 114 perspective, and as a going concern, they were all in good shape. I think one was a financial reporting covenant issue that had to be remedied, and the other was really just the fact of slowness going on, and that is what changed that rating.

The one that was moved to nonaccrual was related to slowness in sales and some cost overruns. But as we indicated in the earnings release, the hotel portion is completing -- nearing completion of construction. We should be able to see some revenues coming in from that. And in addition, some of the residential units have been converted to rentals, which helped to improve some of the cash flows also.

Okay.

Also strong equity interest on behalf of the sponsors. A significant commitment of funds has been made by the sponsor of that credit.

Okay.

I should point out on that credit additionally, that is -- while it is nonaccrual, it is a cash basis recognition of income, which gives some indication of the probability of loss to principal. That is in accordance with the OCC's exam findings that we recognize. So that loan is current at September 30.

Okay. I'm sorry if I missed it earlier. Could you share with us what the 30-to-89-day past-dues were at the end of the quarter?

Yes. 30-to-89 was $34.2 million at the end of the quarter.

Okay, and that is up from $24 million last quarter?

Yes, $24.4 million last quarter, up about $9 million, primarily in the residential section.

Okay. And then Chris, could you just share with us the M&A environment in northern New Jersey? Has that started to thaw a little bit and are you guys looking at deals?

We don't ever shy away from looking at anything. Nothing has really fallen in anybody's laps at this stage. There is no FDIC items that we see in the horizon. Our -- kind of our approach has always been to look at something until it doesn't make any sense. But right now, we have not seen anything at this stage.

Great. That's all my questions for now. Thank you.

Jason O'Donnell, Boenning & Scattergood.

Good morning. A couple of questions. On the core deposit growth, it was obviously very strong this quarter. Can you just talk a little bit about your strategy for managing excess liquidity in this environment, and if there are any opportunities to reduce borrowings further in the fourth quarter?

Yes, we have quite a bit of maturities rolling off in the fourth quarter. Maturing CDs, about $496 million; maturing borrowings, about $47.4 million in the fourth quarter. So there is some opportunities there. We are repricing deposits to current market levels; there's potential for some runoff there, as we said, particularly on the time deposit side.

Pretty much across the boards we've seen deposit rates come down, which is part of the reason for the projected expansion of the margin in the fourth quarter. It is the reason, the main reason for the projected expansion.

Okay, great. And then in terms of the severance expenses for the third quarter, obviously up due to the retirement of executives, etc. I'm just wondering should we expect that severance cost line to come down sharply in the fourth quarter or are there more charges forthcoming?

I don't think around our team that we have any more senior executives that are leaving. That is something that I think was just with our retiring CEO and with our CFO also taking that package, they were substantial. We do not anticipate that in the future.

So just in terms of general cost-cutting initiatives, though, there is not going to be a big push in the fourth quarter in terms of reducing overhead in some areas?

Our directive as an organization is always to be more efficient. And I think that is something that we've talked about; it's been our strategic direction. So we will continue to look to that in the future. So we are very cost-conscious and we are going to continue to get further and further -- we want to get more efficient, and in this environment, that is an advantage to be that way.

Okay, great. Thank you.

Damon Delmonte, KBW.

Good morning, guys. Could you just give us a little color on the securities portfolio growth? I am sure that came from the liquidity generated with the deposit growth. But could you just give us some characteristics of some of those investments?

Sure. Primarily, agency mortgage-backed securities, some municipals. Overall, our portfolio of -- combining both the AFS and the HTM at market, it is about 61% in agency mortgage-backeds, it's about 14% in agency notes, 17% municipal.

Okay, great. Thanks. And what were your total debt restructurings this quarter, total TDRs?

We have two on the books.

You have two on the books, okay. And then could you just give us a little color, I guess, or remind us about the characteristics of your commercial real estate portfolio? Typically, what is the average loan-to-value, the average loan size and what is your average debt service coverage ratio?

Average loan size in the CRE portfolio is about $1.9 million. Service coverage on average -- 1.2?

1.3.

1.2 to 1.3.

Okay.

And I'm sorry, what was the other --?

Loan-to-value.

We usually do our commercial real estate deals anywhere from 65% to 70% loan-to-value. Maybe if the person has pristine credit and is a three-rated credit in our case, we may go up to 75%. But that would be about it.

Okay, great.

We also get personal guarantees. That is something that we've -- we have never dropped our credit hat in this process, and continue to -- we would love to put all this money to work that is coming in. The fact that we still want to stay with kind of the way we've always earned our business, which is good credit and good participants, so we sometimes will miss out on putting that money out to work.

Okay, great. That's helpful. Thank you. And then lastly, when was your last regulatory exam completed?

We completed our last exam in -- I think it was January of this past year with the State of New Jersey.

(multiple speakers) as of December '08; portions of it as of September of '09.

Okay, great. Thank you very much, guys.

Travis Lan, Stifel Nicolaus.

If you guys have it, could you give us a breakdown of your nonperformers by segment?

Just one second.

Residential mortgage loans were $22.6 million; commercial mortgage loans, $34.8 million; construction loans were $7.1 million; commercial loans were $5.9 million; and consumer loans were $7.8 million.

Perfect. Thanks.

Gentlemen, at this time there are no further questions. I would like to hand the call back over to you for any closing remarks.

Well, we thank you for taking the first call from the new senior management team here at Provident, and we look forward to talking to you at the end of the year. Thank you very much.

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