Provident Financial Services Inc (PFS) 2010 Q4 法說會逐字稿

Good morning. Welcome to the Provident Financial Services fourth-quarter 2010 earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Leonard Gleason, First Vice President, Investor Relations.

Good morning everyone. Welcome to the Provident Financial Services, Inc., fourth-quarter 2010 earnings conference call.

Our presenters this morning are Chris Martin, Chairman, President, CEO, and Tom Lyons, Senior Vice President and Chief Financial Officer. Before turning the program over to them to discuss our Q4 and full-year 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 review of our financial performance. Our full disclosure and disclaimer can be found in the text of today's earnings release; a copy of that notice and all our SEC filings may be obtained by accessing the investor relations page on our website at www.providentnj.com or by calling our investor relations department at 201-915-5344.

With that it is my pleasure to introduce our Chief Executive Officer, Chris Martin, who will offer an overview of our fourth-quarter and full-year financial results. Chris?

Thanks, Len. Good morning everyone and thanks for joining us today.

I am proud of our teams efforts and the results of the quarter and the year, particularly in light of the difficult economic environment that was marked by severe instability within our markets, persistently high unemployment, and declining real estate values. As in prior years, we've continued to focus on meeting the needs of our customers and building valuable relationships rather than just promoting products. Although credit trends have stabilized as of late in New Jersey, the foreclosure process remains burdened with delays which prevents us from resolving non-performing residential mortgages in a more timely manner.

A little detail about our performance in the fourth quarter, earnings per share were $0.21 after a nonrecurring impairment charge on a corporate administration building, the sale of which is in the process of negotiation. This resulted in a $904,000 write down or $0.02 per share net of tax. We anticipate moving our operations that are currently in three separate locations into one central facility to achieve additional synergies and better communication as we deploy upgraded technologies with their related operational efficiencies. We expect this relocation to take place at the end of Q1, 2011.

For the year operating earnings per share were up 60% from 2009 to $0.88 per share. Although our margin compressed 6 basis points during the fourth quarter, we anticipate it stabilizing in the upcoming quarter with downward pricing opportunities on our borrowings coming due along with the reduced amortization of premiums on mortgage-backed securities. As we've discussed in previous calls, our focus on expense management continues and is reflected in the improvement of our efficiency ratio, year-over-year.

After organic loan originations of $1.1 billion and residential mortgage loan purchases of $90 million, we finally experienced year-over-year loan growth, albeit small, of $25.6 million. Refinance activity in the residential loan portfolio has declined substantially as rates have increased and the yield curve has steepened. Net loans are up $65 million, quarter-over-quarter, which is also promising. We continue to seek out loan growth, but have not and will not compromise our credit standards to meet those of many of our competitors, and we remain mindful of the low interest rate environment that we are currently operating in. Our loan pipeline is strong, and we are optimistic that we will be able to close a greater percentage as rates begin to creep up.

On the funding side of the balance sheet, we have been successful in our growth of core deposits, which now measures 73.8% of total deposits. This has been accomplished by our excellent sales associates within our 81 branch locations who cultivate relationships and reduce single product customers, primarily CD depositors. In conjunction with this reduction in our reliances on CDs as a funding source, we have continued to reposition our borrowings to take advantage of lower long-term borrowing rates, match funding loan production whenever possible and repositioning short-term borrowings further out on the curve to rates that are lower than rates on maturing borrowings.

On asset quality, we are cautiously optimistic. Non-performing loans decreased $6.2 million during the quarter, largely due to chargeoffs, and now represent 2.21% of total loans, but delinquencies remain elevated. We provided $8.9 million for possible loan losses, primarily as a result of our quarterly review of classified loans, continued elevated levels of non-accrual loans, and internal downgrades during the quarter as validated by a independent loan review.

New Jersey unemployment levels remain high and depressed real estate values have slowed resolution of foreclosures. Until we receive updated 2010 financial statements for our commercial borrowers, we've downgraded certain credits, but are optimistic that their businesses and financial standing have improved during the year. Finally, the Board has approved an $0.11 cash dividend to stockholders which continues our history of paying a dividend since July 2003; unlike many of our peers we have never reduced or suspended our cash dividend.

With that as a backdrop I would like Tom to take us through the numbers. Tom?

Thank you, Chris. Good morning everyone.

Net income for the fourth quarter of 2010 was $12.1 million, or $0.21 per share, Compared to $13.5 million or $0.24 per share for the third quarter of 2010. Fourth quarter results were impacted by a $1.5 million impairment charge related to the anticipated sale and relocation of our administrative building in the first half of 2011. Net of tax, this impairment charge represented $0.02 per share. The Company expects to realize operational efficiencies and reductions in occupancy expense as a result of the consolidation of administrative functions that are currently housed in three separate locations. During the fourth quarter, total loans increased by a net of $65.2 million, as net growth in the commercial lending categories outpaced net reductions in retail loans.

Multifamily loans increased $81 million; commercial loans increased $14 million; commercial mortgage loans increased $6 million; and, consumer loans increased $1 million while residential mortgage loans decreased $28 million and construction loans decreased $9 million. Total commercial loans, consisting of commercial real estate, construction, and C&I loans increased to 55.6% of total loans at December 31, compared to 54.3% at September 30. Non-performing loans decreased $6.2 million to $97.3 million at December 31, 2010, from $103.5 million at September 30. Non-performing loans to total loans fell to 2.21% as December 31, from 2.38% at September 30. Non-performing asset formation has slowed for a second consecutive quarter. Additions to non-performing loans declined to $12 million for the fourth quarter from $19 million for the trailing quarter and $23 million for the second quarter of 2010.

Our provisions for loan losses was $8.9 million for the quarter ended December 31, compared with $8.6 million in the trailing quarter. Net charge offs during the fourth quarter were $8.9 million compared with net charge offs of $1.3 million in the trailing quarter. The increase in charge offs for the fourth quarter was expected in connection with the resolution of certain non-performing loans and was reflected in prior quarter reserve levels. The allowance for loan losses to total loans decreased slightly to 1.56% at December 31, compared to 1.58% September 30, 2010, while the allowance to non-performing loans increased to 70.7% at December 31, from 66.4% at September 30. Total non-performing assets consisting of non-performing loans and foreclosed assets totalled $100.1 million or 1.47% of total assets at December 31, compared to $109.2 million or 1.61% of total assets at September 30.

Total delinquencies were consistent with the trailing quarter at $124 million or 2.82% of the portfolio at December 31; 30 to 89 day delinquencies increased $7.9 million to $49.6 million or 1.12% of loans at December 31, up from $41.7 million or 0.96% of loans at September 30. Early stage delinquencies included one $4.3 million commercial mortgage loan, for which payments had been received, but were unapplied at December 31, while the terms of an extension were negotiated among participants in the shared national credit. This loan was subsequently extended and is now paid current.

Our net interest margin decreased 6 basis points to 3.44% during the fourth quarter, compared to 3.5% in the trailing quarter. The decrease in the margin was due primarily to decrease of 62 basis points in the average yield on securities available for sale to 2.56% for the fourth quarter. Volatile interest rates contributed to accelerated pre-payments on mortgage-backed securities and related premium amortization. The Company expects securities yields to stabilize and improve as reinvestment rates have increased and pre-payments have declined. Partially offsetting reduced earning asset yields, the average cost of interest bearing deposits and borrowings decreased 11 and 23 basis points, respectively, compared with the prior quarter.

Our total deposits decreased $27 million during the fourth quarter of 2010; timed deposits decreased $52 million, while core deposits, consisting of demand deposit accounts and savings accounts increased $25 million. At quarter end, our core deposits as a percentage of total deposits was 73.8% compared to 72.9% at September 30. Non-interest income was stable at $7.8 million in both the fourth and third quarters of 2010, providing further evidence that the Company's efforts to opt in frequent users of overdraft protection have been successful as we have experienced no reduction in related income as a result of regulatory changes impacting this product. Non-interest expense increased $1.9 million versus the trailing quarter to $36 million, as a result of the impairment charge on premises and equipment and costs related to the disposition of foreclosed assets.

Including the impairment charge, the efficiency ratio was 56.6% for the fourth quarter of 2010, compared to 56% in the trailing quarter, and the ratio of annualized operating expenses to average assets was 2% for the both fourth and third quarters of 2010. The Company recorded income tax expense of $3.8 million for the fourth quarter of 2010, compared with $4.7 million in the trailing quarter. The Company's effective tax rate decreased to 23.9% for the fourth quarter of 2010, compared with 25.9% in the previous quarter, primarily as a result of a reduction in taxable income, resulting from the impairment charge on premises and equipment. The Company currently projects an effective tax rate of approximately 26% for 2011.

With that we would be happy to take your questions.

We will now begin the question-and-answer session. (Operator Instructions)

The first question is from Mark Fitzgibbon of Sandler O'Neill.

Couple of questions for you. First, should we expect the provision to roughly approximate chargeoffs in coming quarters and do you think reserve building is largely done at this point?

I think so, Mark. Near term, the reserve building is probably done on comfortable as to 155 coverage to total loans, I think the 70% of non-performings is appropriate, so as -- I think the increase is there relative to the shift and mix as we go more commercial, but overall I would agree with what you said.

You had -- it looked like you had a strong pipeline of C&I credit. Is that concentrated in any particular type of borrower or type of business?

No. It's really -- we look at any type. We have our -- what our preferences would be, but we go across the gamut. We look at the borrower, the project, the financials and I think that's what we'd look at as more of just any type of class of business. We've done a pretty good job of making sure it stays diversified, and so we don't want to obligate to one sector or another.

Could you share with us your thoughts on the margin for the next quarter or couple of quarters.

Our models are showing a pretty stable margin over the next couple of quarters, Mark. Some of the earning asset pressures are abating a little bit. That said, of course, we have price competition on the lending side of things; at least on securities book, we are seeing some stabilization and we do continue to have some favorable pricing opportunities, set to borrowings, and time deposits over the next six months, so it looks pretty stable to us.

That $904,000 charge you are taking, where are you moving the headquarters and are you going to keep a branch at the headquarters building in Jersey City there?

We do not have a branch in the Jersey City building that's open to the public; that's just internal for the bank employees, but we are not closing any of our locations in Jersey City, which we have 5, but we will moving everybody to Metro Park which is right off of the parkway and turnpike off of exit 11 and very easily accessible to all our employees. We are going to be consolidating that , but our headquarters -- executive headquarters -- will still be based in Jersey City, downtown.

Okay.

Lastly, the M&A environment in the Northeast has really been heating up recently. I'm just wondering, do you guys -- are you likely to participate in some of that consolidation as a buyer?

We evaluate any opportunities that we either see or try to foster going forward. We have to be careful with where some of the multiples come out and, certainly, how is it going to benefit our shareholders and our franchise. But, we are always active out there. I don't think, when we haven't trafficked in the FDIC deals at this point I don't see us doing that in the near term, but we look at any opportunities as long as they are going to be accretive to our shareholder value.

Thank you.

The next question is from Dave Rochester of Credit Suisse.

Could you guys just quantify what that premium amortization was and what the impact was in this quarter and remind us what it was last quarter?

I think it was about 25 basis points on the amortization.

For this quarter?

That's correct.

Last quarter was at maybe in the 15 to 20 basis point range.

Yes. 15, 17 about there. Yes.

Okay.

Where are the securities reinvestment rates today? Are they about 2.25%, 2.5% right now?

We are north of that; we're closer to 3%.

So, I know you mentioned you think that securities yields will be stabilizing. Would you expect those could bounce back in the first quarter?

I think it's February is where we are going to see the late payments on the mortgage backs and we're still going to see some elevated pre-payments for the first month of the quarter, but February is our expectation. We're going to see some improvement.

Great.

In terms of pricing on multifamily and CRE, could you update where those loans are pricing today.

Pretty aggressively, Dave, we're looking -- we've seen them as low as 200 to the curve and certainly, we like a little bit more north of that. Competition is bringing that number down. I think the concern we have is also that structures are going out longer on a fixed-rate basis, so instead of things being at 5 or 10 year on a 20 year amortization, they are going to almost 15 year fixed over a 30 year amortization. It's not just the price, it's also the structure that we concern ourselves with.

Who is doing the longer dated stuff? Is that primarily insurance companies, or Fanny, Freddie? Who is doing that?

There are banks and thrifts out there all competing for that business.

Great.

One last one on the comp expense. That had declined a little bit this quarter, should we expect that as a run rate or should we see a little bit of a bounce back in the first quarter?

You have normal merit increases and increased payroll withholding taxes in the first quarter, so generally the first quarter every year you see bounce up.

Great. Thanks, guys.

The next question is from Rick Weiss of Janney Montgomery Scott.

This actually Dave Poupard.

I was wondering if you could talk a little bit about loan growth. When I look at your balances, you ended the year higher. A lot of your New Jersey, New York competitors have been talking this quarter about ramping up on jumbo mortgages, multifamily lending, hiring more loan officers. I was just wondering if things are getting busier. Should we expect something similar from Provident?

There is more opportunities than we seen obviously the last couple of years. I don't know that we're going to be ultra aggressive, but we certainly would like to hit the market. We have a good reputation out there in being able to make local decisions, which helps.

We are sticking with our credit culture. We're not going to extend our terms too much. We are not going to give up on covenants that would be prudent, but we are seeing activity out there. Certainly we would love to see more. As the economy gets a little bit more stable, we will see a little bit more as to buying teams and doing that. We will always look to augment our team as we see fit and the opportunities there; we can steal some people, that would be great. On the other hand, we have a pretty good team in reaching out there right now and the referral network works out very well.

In terms of the deposit costs, you have some high deposit rate payers in your market. Is that going to prevent you guys from dropping deposit rates much more. Is the improvement we're seeing on funding side from borrowings refinancing?

Borrowings refinancing as well as I mentioned earlier, there still is some favorable repricing on the time deposit side. Whether that stays with us and reprices or in the case of single service CD customer, we have strategically allowed some of those to run off and replace that funding through lower cost core deposits or through wholesale funding; we could still see some benefit from that.

We are seeing our competitors out there starting to raise a little bit of the rates, but nothing that's going to be a ground swell to get us to be concerned.

Right.

How much of your borrowings are repricing this quarter?

First quarter, $136 million in borrowings repricing, weighted average rate of 250, second quarter about $99 million at 350.

Okay. Thank you very much.

The next question is from Matt Kelley of Sterne, Agee & Leach.

I was wondering if you might be able to just quantify the cost saves and just talk about expense levels and operating expense growth. Looks like you settled into $33 million, $34 million, a core run rate. What kind of growth should we be anticipating off of that $136 million, $135 million analyzed level?

All-in, we are looking around $34 million, $35 million a quarter for '11.

All right.

On the chargeoffs, can you give us an example of some of the credits that were written down or removed or charged off or sold? What were some of the haircuts and loss severity that you were experiencing?

A lot of the charge offs related to two credits, one commercial real estate loan, which was a land development in Delaware, that was about $4.2 million; the other was a commercial loan secured by business assets, medical practice, kind of things. That was about $1.9 million, so the charge offs were actually fairly substantial on those two. As I indicated in the remarks, though, those were anticipated and we are working to resolve the rest of the credits pursuing deficiencies and looking to sell some notes and some collateral.

Can you give us update on largest 2 or 3 current non-performing loans and where those are marked?

Well, in terms of where their marked, they're marked to the current collateral evaluations; in terms of the size, the largest is $5 million. I'm sorry, someone pointed out to me, we have a $9.4 million relationship that we talked about coming on last quarter that is in the non-accrual category. It is paying, I believe it's current. It is current.

Is that the shared national credit you referenced earlier?

No.

What's the story with that one?

A business cash flow is slow, the sales have gotten a little bit better. We are working on making sure that they are staying pretty close. We are not providing the working cash capital any longer. We are trying to keep that on a close leash. They have been current. I think the business has done a little bit better and hoping that 2011, when their business -- everybody else's business gets better, theirs is going along, but it's on a very, very short leash and until we get to a place we feel comfortable, we always do the more conservative look at that loan, so we have put that on non-accrual for that period of time.

Got you. Okay.

Going back to the land development loan that you charged off in the quarter, what us and the original value of that loan?

I think it was $8 or $9 million.

Got it, thank you.

Matt, within the non-accrual loans, we have about the $23 million worth of loans that are left in 90 days delinquent, several of those being current. I just wanted to point that out.

The next question is from Damon DelMonte of KBW.

Pretty much all my questions have been answered. One modeling question. You had mentioned your fees were up this quarter or flat this quarter on the non-interest income side. Are you expecting that trend to continue, absent any seasonality?

Yes, I think flat on the deposit side of things, we've seen improvement on the wealth management side, so I'm hoping to continue to see that growth. Nothing overly dramatic. From a modeling perspective, leaving them flat is probably safe.

Great. Everything else has been asked and answered, thank you.

The next question is from Brad Evans of Heartland Funds.

I was hoping if you could talk about your CRE mortgage portfolio on the loan side and just speak to the maturity profile of that portfolio over the next -- what do you have coming due for '11 and 2012?

Well, I think it's pretty consistent cash flow all the way through. We have -- everything rolls every five years, for the most part. We always look at cash flow and how that is managed and we model it accordingly. We haven't gone out on the curve. We are not really exposed to too much repricing and/or maturities in any one bucket or time.

With regard to a variable rate pricing, overall about 41% of the loan book is either variable rate or floating if that's helpful.

Could you speak to what you seen recently in terms of renewal of those credits? Any issues in terms of cash flows and align those particular loans?

Not much in the way of cash flow issues. Obviously, everybody had a little bit of slowdown, but for the certain with those loans they done okay. We have to go back and look at them; certainly some of the loan to values have come under a little bit of pressure, but nothing that gets us over a number that would get us to have to recast or modify it accordingly. We can't change the environment that we are in.

For the most part, we look at them pretty hard. We will look at the cash flows, we will estimate if we will get to a place. Other than that, our delinquency numbers are certainly not dramatic, but we are pretty critical of our own approach in the loan review to make sure we are not missing anything.

Okay.

Can you speak loan pipeline? How do you view it today versus 6 months ago and as a corollary, can you speak to -- sounds like the loan pipeline, at least for our more recent conversations, there was some consternation that the loan environment was still relatively weak, and it looks like it's picked up recently. A little bit of discussion perhaps of how that -- some linearity within the quarter? When did you start to see the loan production start to materialize?

I would think it would be over the last -- probably since July, August, we've seen a little bit more of it. It definitely was towards the end of the third and fourth quarter that volumes started to come in a little bit. We also were able to close a few more than we had in the past. We still have to look at it from a credit perspective.

We get a lot of those where we wouldn't -- even though it might be good to put the loan on the books, it didn't fit our parameters, so we would let it go, but we are seeing a lot more success in certain sectors such as our business banking area and certainly our multifamily commercial real estate. The middle market area is very competitive. Our pull-through is not as strong in that area. And for that reason, there are larger credits that of the bigger banks are coming back into the market. Instead of having 1 or 2 banks bidding on the business, there is 4 or 5. That gives a lot more opportunity to shop around. We try to put our best foot forward and not give in on our covenants.

One last question on the loan side. In teems of the general New Jersey economy, would you characterize your outlook of the economy as getting better at the margin or how do you view it today?

Well, I think anything was better than where it was a year or two ago. I think it has a little bit go. We would love to see unemployment trying to get anywhere. That's a national phenomenon, not just New Jersey. I think the business climate has gotten a little bit better.

Our governor in there trying to get a no nonsense approach is getting everybody to look at everything again and maybe make things less onerous in the way of our regulations. I would like to see our opportunities to get to our foreclosures at a lot more expedient manner, because right now it's an average of 22 months to get a property, and it doesn't show sign of getting any better. The longer that takes the worse this thing hangs on.

That's a great point. Lastly, you should be applauded for maintaining your dividend to this cycle, as you talked about, so it's a great benefit for shareholders. I'm just curious if you could talk to your current thinking in terms of payout ratio, how are you thinking about that today as we come out of the cycle?

Obviously, we are in the high 40s, low 50s right now. Certainly the Board looks at that as part of its looking at enhancing shareholder value, so it's always under watch to see when and if we see stability and we can say maybe we can look at an increase. We want to see a little bit more dust settle out before we probably consider that.

Okay. Congratulations, nice quarter.

Thank you.

Thank you, this concludes the question-and-answer session. I would like the turn the conference back over to Mr. Martin for any closing remarks.

Thank you everybody for your time, appreciate that, and we will talk to you next quarter. Have a great day.

Thank you, the conference has now concluded. You may disconnect your phone lines.