Provident Financial Services Inc (PFS) 2009 Q4 法說會逐字稿

Good morning, and welcome to the Provident Financial Services fourth quarter 2009 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the conference over to Mr. Chris Martin. Sir, please go ahead.

Good morning, everyone.

Before we begin our discussion on our fourth quarter and our year end 2009 results, please take note of our standard caution as to any forward-looking statements that may be made during this call. Full disclosure and disclaimer can be found in the text of our earnings release, and you can obtain a copy of that and all of our SEC filings by accessing our website at Providentnj.com, or by calling our Investor Relations department at (201) 915-5344.

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

With the economy in turmoil and unemployment reaching levels not seen since the 1930s, 2009 was a tough year by anyone's standards. This economic weakness continued to put pressure on the operating results of banks and other financial entities, and ours were no exception.

However, I want to emphasize upfront that here at Provident, we know our borrowers well, we monitor every credit, and we continually stress-test our loan portfolio and asset quality metrics to confirm the adequacy of our loan loss reserves and the strength of our capital position. This is the same type of in-depth analysis we use in determining not accepting government assistance in the form of TARP funds, with all their myriad complications. This turned out to be the right decision, as Provident continues to be well capitalized with tangible equity to tangible assets at 8.13%, and risk-based capital over 11%.

Turning to the highlights of our fourth quarter results, the loan loss provision for the quarter of $12.2 million reflects our assessment of problems and risks within the portfolio, as revenue streams in some business sectors slow down, and consumers continue to have difficulty finding jobs or are encumbered with debt burdens that can no longer be remedied by increasing home values. Until the economy improves, specifically here in New Jersey, we will remain cautious.

A note of cautious optimism can be found, however, in the fact that the rate of growth in our non-performing loans is slowing. We continue to work closely with our customers to provide meaningful long-term solutions to their cash-flow needs and challenges. The growth in our loan portfolio was constrained by the economy and asset valuations. Average loans remained the same from 2008, despite the $1.1 billion in loan originations in 2009. We have seen opportunities across all of our lending disciplines, but have remained true to our on conservative credit and pricing culture.

Another area of risk that we continually monitor is interest rate risk, which has understandably become a prevalent topic of discussion by regulators and economists. Provident continues to sell its 30-year mortgage loan production, and securitized $84 million to provide additional liquidity. The positive growth during 2009 was 15.9% for the year, and core deposits increased to 69.2% from 63.7% at the end of 2008. Our stability and history was augmented by a team of engaged bankers that focused on relationships, and not just pursuing high-price CD growth. Our franchise of [80] new branches, all in New Jersey, continues to provide lower-cost funds to support our lending initiatives.

As part of our long-term strategic direction, we maintained a business discipline for the ongoing assessment of our organization for excess capacity in under-performing areas. We closed two branch locations and consolidated the deposits into neighboring branches in the same market, and we also sold the deposits of another branch to another bank in a market which is not optimum for Provident. The return on these closures will be recaptured in less than 10 months.

While we remain circumspect on the strength of the economy and continuing difficulties facing consumers, we are encouraged by the improvement in our margin of 15 basis points in the quarter to 3.16%, while our net interest income before provision increased by $3.3 million or 7.3% for the quarter. Coinciding with the revenue improvement, compensation and employee benefits decreased 11.2% during the quarter, as severance charges were taken in Q3. Our wealth management group has continued to hire new seasoned investment advisors, and fee income continues to increase.

Finally, the Board has approved a cash dividend of $0.11 per share, which continues to provide a fair return to our shareholders in a very challenging environment, when many companies are reducing or eliminating theirs.

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

Thank you, Chris.

Net income for the fourth quarter of 2009 was $6.8 million or $0.12 per share compared to $8.7 million or $0.15 per share for the third quarter. Fourth quarter earnings were impacted by an increased loan loss provision, which totaled $12.2 million for the quarter. In addition, the company recognized $1.3 million in costs associated with the consolidation and pending sale of three branches and a bank-owned building.

At December 31st, 2009, tangible common equity to tangible assets was 8.13%. The Company's regulatory capital ratios remained strong, and the Company and the bank continue to be well capitalized. During the quarter, total loans increased $63 million. Commercial mortgage loans, including multifamily loans, increased $123 million, while commercial loans consisting of middle market and business banking loans increased $15 million. Partially offsetting these increases, residential mortgage loans decreased $33 million during the fourth quarter, due to sales payoffs and amortization.

The Company originated and sold $2 million of 30-year fixed-rate residential mortgage loans during the quarter, as part of its interest rate risk management process. In addition, construction loans decreased $21 million during the fourth quarter, and consumer loans decreased $7 million. Total commercial loans as a percentage of total loans increased to 52.5% at December 31st, 2009, compared to 50.9% at September 30th.

The prolonged recession sustained high levels of unemployment, depressed real estate values and increases in foreclosures, continue to have an adverse impact on asset quality, with non-performing loans increasing to $84.5 million at December 31st from $78.2 million at September 30th. The increase in non-performing loans was largely attributable to an increase of $6.7 million in commercial loans and $6 million in residential mortgage loans. The majority of the increase in non-performing commercial loans was attributable to the addition of a $4.8 relationship with a consumer products distributor, and a $1.1 million relationship with an industrial supplies distributor.

Partially offsetting these increases, non-performing construction loans decreased $5.1 million during the quarter, as a result of the resolution of a $7.1 million loan through the sale of the note, and $644,000 in pay-downs received. One new construction loan totaling $2.6 million was added to the non-performing category during the quarter. This loan is secured by warehouse and office space that is approximately 80% complete. In addition, non-performing consumer loans decreased $1.1 million during the quarter.

The provision for loan losses during the quarter was $12.2 million up from $6.5 million in the trailing quarter. The allowance for loan losses was 1.39% of total loans at December 31st, compared to 1.29% at September 30th. Net charge-offs during the fourth quarter were $7.1 million compared to net charges of $2.8 million in the trailing quarter. Net charge-offs for the quarter were comprised of $2.5 million of consumer loans, $1.9 million of residential mortgage loans, $1.6 million of commercial loans, and $1.1 million of construction loans.

Total non-performing assets, consisting of non-performing loans and foreclosed assets, totaled $90.9 million dollars or 1.33% of total assets at December 31st, compared to $85.2 million or 1.25% of total assets at September 30th. Non-performing loans as a percentage of total loans were 1.93% at December 31st, compared to 1.81% at September 30th.

Total delinquencies increased to $103 million or 2.35% of the portfolio at year end, compared to $92.1 million or 2.13% of the loan portfolio at September 30th. 30-day to 89-day delinquencies increased to $46 million or 1.05% of loans at December 31st, from $34.2 million or 0.79% of loans at September 30th. Early-stage delinquencies increased in all loan categories except for residential mortgages, which decreased slightly.

The net interest margin increased 15 basis point to 3.16% during the fourth quarter, compared to 3.01% in the trailing quarter. The increase in the margin was due primarily to a decrease of 24 basis points in the average cost of interest-bearing liabilities to 1.83% for the fourth quarter. The average cost of interest-bearing deposits decreased 26 basis points, while the average cost of borrowings decreased to 24 basis points sequentially. The decrease in the cost of funds reflected declining market rates and favorable repricing of timed deposits. In addition, the Company continued to deploy liquidity from strong deposit inflows to fund loan originations, investment purchases and the repayment of maturing borrowings. As a result of the deployment of excess liquidity and continued favorable repricing of interest-bearing liabilities, the Company projects continued net interest margin improvement in the first quarter of 2010.

Total investments decreased $4 million during the fourth quarter to $1.7 billion, and represented 24.9% of total assets at December 31st. The investment portfolio consists primarily of agency-guaranteed mortgage-backed securities and bank-qualified municipal bonds. The portfolio had a weighted average life of 3.1 years and a duration of 2.8 years at December 31st, 2009. Total deposits increased $24 million during the fourth quarter of 2009, with core deposits consisting of demand deposit accounts and savings accounts increasing $135 million or 4.2%, while timed deposits decreased $111 million. At year end, core deposits as a percentage of total deposits were 69.2% compared to 66.8% in the trailing quarter. Total borrowed funds decreased $5 million to $999 million at December 31st as compared to September 30th, and borrowed funds as a percentage of total assets declined to 14.6% at year end. Non-interest income was $7 million in the fourth quarter compared to $8.6 million in the trailing quarter, as a result of reduced income from equity fund holdings and fewer gains on loan sales.

The company reported $24,000 in net securities gains during the fourth quarter as compared with net gains of $195,000 in the trailing quarter. The Company recognized net other than temporary impairment charges of $529,000 related to two private label mortgage-backed securities in the fourth quarter, compared with other than temporary impairment charges of $701,000 recognized in earnings from the trailing quarter.

Non-interest expense increased $1.1 million to $37.1 million during the fourth quarter. The increase in non-interest expense was due primarily to a $1.5 million increase in FDIC insurance expense, and $1.3 million in costs associated with the consolidation and pending sale of three branch locations in a bank-owned building. These increases were partially offset by a $2 million decrease in compensation and benefit expense. The Company recognized $1.2 million in severance expense in the trailing quarter.

The Company recorded an income tax benefit of $395,000 in the fourth quarter, as a result of a required adjustment to the estimated tax liability. The lower than previously projected tax liability was due to reduced taxable income, as a result of the increased provision for loan losses and property disposition costs recorded in the fourth quarter. The Company projects an effective tax rate of approximately 24% for the first quarter of 2010, based on current estimates of 2010 taxable income.

With that, we'd be happy to respond to any questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Mark Fitzgibbon from Sandler O'Neil. Please go ahead.

Good morning. The first question I had for you, there was a fairly large linked quarter decline in fees, maybe a little over $1 million. What was it that drove that decline?

Good morning, Mark. The income and the fee volatility is largely attributable to earnings on those equity fund holdings that we've had in prior quarters as well. I should remark that we have liquidated those equity fund holdings as of the end of the year, and would expect a smoother fee income stream going forward. In addition, throughout the year NSF fees have been lower than in prior periods. I think people have been more careful with their money and watched their overdrafts. There's fewer occurrences given the difficult economic times.

Okay. And then, secondly, just sort of a broad credit characterization. If you had to make one, would you say that the credit situation of your markets is sort of getting better, getting worse, or stable?

I would think we're trying to see -- we're trying to get to a stabilization conclusion right now. New Jersey unemployment has tweaked up a bit above national average. We're seeing, again, the suffering in the economy is affecting, you know, sales in some of our, you know, business clients, so we're not looking very optimistic until we get some job growth, and I think that will be the trend for awhile.

Okay. And then are acquisitions, assisted or otherwise, in PFS's -- in the cards for PFS do you think for the next few quarters?

Well, we've always stated that we will look at any opportunities that are presented, but not in an aggressive manner. We think -- you know, there probably will be, but we want to be making sure that it fits our profile, it helps our shareholders and it helps the franchise. But we do look at anything that's presented and, you know, vet it through the team.

Okay. And last question, you guys have been attacking the expense structure for awhile, but it looks like your efficiency ratio is still somewhat higher than peers. Do you have a target in mind for that, for your efficiency ratio?

We always -- again, in the past, we have always said, "Oh, we'd like to get to 55, but you have to get to 60 first." And we think that's where we're going to. I think we had a lot of kind of one-offs for the year with severance charges, the unwinding of a venture that we had. So we're basically looking at next year trying to get to a number that it would be approximately 60%, 61%.

Terrific. Thank you.

Thank you.

Sure.

Our next question comes from Rick Weiss from Janney. Please go ahead.

Good morning, guys.

Good morning.

I guess the first question has to do with the provisioning versus the charge-off levels. The last couple of quarters, provisions were much higher than the charge-offs. What do you see going forward?

You know, it's a quarter by quarter -- good morning, Rick. It's a quarter by quarter analysis based on the asset quality and the balance sheet at this point in time, as well as where delinquency trends are heading. As Chris said, we remain cautious about overall asset quality picture in the State with unemployment where it is. And as I said in my earlier remarks, the early-stage delinquencies are really -- they are not declining yet. So I think it's reasonable to expect that we will continue to maintain the allowance at levels around this point.

Okay. And is there any more pressure that occurred maybe the last couple of years from either the SEC or auditors about loan loss reserve build, or has that gone away?

I think that's gone away pretty much. Everybody is on the same page. And also as long as your process has some documentation and support behind it, you support your provision. I would think that going forward, you'll still see -- again, charge-offs -- we'll try to cover if not exceed those to make sure we're ahead of game. And we're hoping -- I think they'll continue at a rate, as Tom said, that should be a little bit elevated until they all get through the system, but that's why you continue to provide, but we have been providing over the charge-off levels consistently.

Okay. And just turning to loan growth this quarter it really picked up for first time this year. Is this business you're taking away from others, and how has the loan pricing been?

We have been taking business a little bit from others and, again, we did get some things to close in the fourth quarter, and that was just kind of a -- we really like to see the portfolio grow, but for the right reasons and at the right pricing. Our middle market and business banking group has done very well. Multifamily also has had some opportunities there.

Pricing is competitive. It always is in this market. So know what we're dealing with, we like to lend to people who can actually pay the money back. So we're pretty happy about that. And we'd like to see the growth continue. And with our core deposits continuing to grow, that does augment that to be able to put that money to work.

Okay. And finally, what would be a good tax rate to use going forward?

The estimate is still 24%, and that's based on projected taxable income for 2010.

Okay. Thank you very much.

Thank you.

Now our next question comes from Matthew Kelley from Sterne Agee & Leach. Please go ahead.

Hi, guys. It's Matt Kelley. Turning to the margin for a minute, you mentioned that you expect to see some additional improvements in the first quarter. What about throughout the remainder of the year? Maybe just talk about what you have for repricing on the $1.6 in CDs, $1 billion in deposits -- borrowings, and what those dynamics look like. If we were to stay within a flat rate environment, stable rate environment, what would you expect for margin trajectory in the back half of the year?

We don't really know what the second half of the year is going to encompass, obviously. Everybody is talking about rates increasing at some point in time, if the economy does get to rebound slightly. We are seeing a little bit of pressure, just slightly on some people reaching out a little bit to try and extend their liabilities by putting out some higher CD rates. So I think for the first, second quarter, we've modeled in and we've looked at things staying status quo. We're still growing our core by our commercial relationships, because we do get the operating accounts and everything related to those. So that's helping mitigate that. There's only so much more you can do on the core deposit repricing side, since you've been bringing it down more and more, but we do have some CD repricings in the first half of the year. That will still bring that number down.

How much matures in the first half?

I unfortunately seem to have misplaced that worksheet, Matt, but I think it's about $600 million.

Okay. And do you happen to remember the average cost of what's maturing?

Matt, we'll have to get back to you on that.

Okay. No worries. Can I just get that 30-day to 89-day past due number that you went through, Tom?

Sure. The total is 30-day to 89-day is $46 million at the end of the period; that's an $11.8 million increase quarter to quarter.

Okay. And what were the biggest movers in there? Looked like residential was $25 million at the end of the third quarter. Was it in there or was it in commercial buckets?

The consumer is the biggest piece, that's up $4.4 million. Commercial is up $3.1 million. Construction is up $2.6 million. Multifamily is up $1 million, commercial mortgage is up $1 million, and the residential is actually the one that's down a little bit, down $400,000

Got you. Don't mean to beat a dead horse on the tax rate, but did you mention for the first quarter of 24%? Or what are you seeing for the full year?

Yes.

Is it going to rise at that level or stay at that level?

The projection at this point -- what you do is you evaluate each quarter end based on your most current projection of future taxable income. So the expectation as of today is that the taxable income would result in a 24% rate for the full year of 2010.

Okay. Got it. Actually one last question. On your consumer fees, you know, once some of the regulatory reforms go into effect the back half of the year, what are you anticipating for, you know, declines in consumer fees before any offsets go into place, particularly for NSF fees?

Yeah. You know, that's a little bit difficult to estimate, because it's tough to gauge the customer behavior and who might opt in, and what the level of occurrences will be. But it could range from $1 million to 2.4 million, I'd say.

For the year?

Yes.

Okay. Got you. $1 million to $2.4 million?

Yes. What we're trying to do is -- obviously the amount of people that opt into the program will take a lot of time and effort, and you can never guarantee, no matter what, that people will opt in until maybe they get hit with something, and then they'll opt in maybe very quickly.

Okay. Thank you.

Our next question comes from Collyn Gilbert from Stifel Nicolaus. Please go ahead.

Thanks. Good morning, guys.

Good morning.

Just a follow-up to some other questions that have been asked. Was there any -- were there certain timing issues related to either, like, loan reviews or new appraisals that occurred toward the end of the year in the fourth quarter that maybe would have driven the net charge-offs or the provision higher?

Yes, a couple items. On the consumer side of things, some of the consumer loans in excess of 180 days delinquency, appraisals were received and charge-offs were taken as required by regulatory guidance. In addition, we did receive some appraisals that resulted in lower valuations on some of the commercial real estate and, therefore, the allowances were adjusted as appropriate.

Okay. That's helpful. And then, did you guys -- and if you did, I apologize. Tom, did you quantify what the impact was specifically to having liquidated those fund holdings in the fee line this quarter?

There's no impact on the income statement quarter-to-quarter, because those are mark-to-market an on ongoing basis through fee income, and they were liquidated right at the end of the year. So any impact would be felt in the subsequent quarter. Of course, it should be offset by the fact that those funds are now reinvested in other assets. We just changed that, that class, from the equity fund holdings to other earning asset types.

Okay. I misunderstood, then, I guess. In terms of -- when you were talking about why -- to Mark's initial question about why the fee line was lower this quarter from the third quarter, I thought --

That was because of the level of fee income that was recorded in the fourth quarter on those holdings prior to liquidation was less than in the third quarter.

Okay. And I was just curious as to what that specific amount was.

Oh. I don't have the exact number, but it was the bulk of the change.

Okay. Okay. I think that's -- that was all I had. Thank you.

Thank you.

Our next question comes from [Tamer Brajular] from KBW. Please go ahead.

Hi. Good morning, guys.

Good morning.

Can you disclose the amount of reserves that have been establishing that $4.8 million relationship with the distributor and the $1.5 million relationship with the industrial distributor?

Yes. The consumer distributor is a $400,000 reserve, and the industrial distributor -- I'm sorry. Let me take that back. The consumer distributor is at 50% reserve on that credit, and the industrial distributor has a $400,000 specific reserve.

Okay. Great. And then, for the $6 million of residential credits that moved into non-performing, how granular is that $6 million? How many loans comprise that?

One second. We're digging it up.

Sorry, we're going to have to get back to you on that, I don't have that information at my fingertips.

Okay. Are you guys planning any more branch closings during 2010?

We consistently evaluate our network. At this stage I think we've taken care of most of the ones that we wanted to that were really not hitting our targets, and so we were -- we constantly review that. We did, again, retire leases ahead of time that maybe had three or four years to go, and we did let staff go at the same time. So we look at that, you know, every year. That's looked at ahead of time to see what leases are coming, and -- or we were just a little more proactive on these because we wanted to remove that from our operations now, as opposed to waiting three years until the lease retired. But we do look at every location and have the line of business, the reporting line to make sure it's covering its breakeven, and we will continue to do that.

Okay. And then one final question. Sorry to keep harping on this fee income line, but with the reduction of the equity fund holding, will we see a good run rate for 2010, or should we see a slight increase next quarter?

The fee income is going to be at a lower level, but you should see an increase in the net interest income. As I said, it's a reallocation of those assets as to where the income is recognized, on the amount of fees and interest income.

Okay. Great. That's -- that's all I had.

Thank you.

Our next question comes from Jason O'Donnell from Boenning & Scattergood. Please go ahead.

Good morning. Most of my questions have been answered. Just a couple of quick ones here. Can you just give us an update on the size of the marine portfolio?

$85 million.

Okay. And can you tell us how much, if any, has been contributed to the non-performing and net charge-off levels?

Yes. Net charge-offs on marine in the quarter were $1.3 million.

Okay. Great. And also the other question I had was how much of your reserves is unallocated at the end of the year, and what does that look like versus the end of the prior quarter?

Fairly consistent quarter-to-quarter. It's about $3 million.

Great. Thanks a lot.

Thank you.

Our next question comes from Ross Haberman from the Haberman Fund. Please go ahead.

Hi, gentlemen. How are you?

Great.

Can you tell us, is there any more room on the deposit side for lower rates over the next quarter or two -- or have you basically hit the low point here?

There's a little room. It does come in the timed deposit area, which we've been doing, running that off. We have our product internally that's called our smart checking product, which allows people to get a little bit higher rates, but has a behavior attached to it. But do have a bit of CD -- I mean, CDs to run off and still reprice at, you know, a bit lower. We're also -- not just that, but we're looking at the borrowings, we were able to recash some borrows that are maybe -- have done in the past mid to high 4s, and could be repriced and gone out in the way of duration and be about 200 basis points less. So we still have opportunity there on the balance sheet.

Thank you.

Thank you.

(Operator Instructions)

We show no further questions at this time, so this concludes the question-and-answer session. I would like to turn the conference back over to Mr. Chris Martin for any closing remarks.

We appreciate your attention on this call. We hope that the economy can get some job growth and move forward in the first quarter, and we hopefully will talk to you then. Thank you very much.

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