Provident Financial Services Inc (PFS) 2011 Q4 法說會逐字稿

Good morning, and welcome to the Provident Financial Services Incorporated fourth-quarter 2011 earnings release and conference call webcast. All participants will be in listen-only mode. (Operator instructions). After today's presentation there will be an opportunity to ask questions. (Operator instructions). Please note this event is being recorded.

I would now like to turn the conference over to Leonard Gleason, Investor Relations. Please go ahead.

Thank you, Andrew, and good morning, everyone. Thank you for joining us this morning. The presenters for our fourth-quarter earnings call are Chris Martin, Chairman, President and CEO; and Tom Lyons, our Executive Vice President and CFO. Before turning the program over to them to discuss our financial results, I would ask that you please take note of our standard caution as to 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 of our SEC filings may be obtained by accessing the Investor Relations page on our website, www.providentnj.com, or by calling Investor Relations at 732-590-9300.

With that, I am pleased to introduce our Chief Executive Officer, Chris Martin, who offer an overview of our fourth-quarter financial results. Chris?

Thanks, Len, and good morning, everybody. Provident Financial Services achieved record net income and earnings per share for 2011 of $57.3 million and $1.01, respectively, driven primarily by improved net interest income. On a quarterly basis, the Company reported earnings of $0.26 a share compared to $0.21 for the fourth quarter of 2010, which represents an increase of 23.8%. This was accomplished in a very difficult economic and unsettled regulatory environment. And while we are proud of our results, we remain focused on assisting our customers who have been affected by the deep recession as we attempt to help them resolve their financial challenges.

Our return on average assets improved to 83 basis points for 2011, versus 73 basis points for 2010. Return on tangible equity for 2011 was 9.8%. Earnings for the quarter reflected margin compression that was slightly more than anticipated, as investment yields declined due to prepayments of mortgage-backed securities and related accelerated premium amortization. In addition, many loan customers sought lower rates as their loans came up for renewal, or sought accommodations in the form of rate reductions as the yield curve flattened and rates hit historic lows. With rates on deposits approaching their floors, we will attempt to increase our lending volumes to mitigate these reductions.

Our total organic loan growth of 5.5% for the year was obtained by increased loan originations of $1.5 billion, coupled with residential loan purchases of $79 million, with multifamily lending representing the bulk of our loan portfolio growth. Prepayments and refinances have slowed as of late, yet our pipeline has remained consistent, as large-bank competitors have been distracted by regulatory and political challenges, along with risk analyses of their capital levels, and have not been providing customers with a true high-touch banking relationship.

Total average loans and deposits grew year over year and linked quarter. Core deposit growth increased during 2011, up 11.9%, while total deposits were up 5.7% net, as we continued to allow the runoff of CDs. Core now represents 78.1% of total deposits, and our borrowings were down as this funding was replaced with less costly core deposits.

Our capital levels continue to be strong, and remain well in excess of regulatory requirements, as earnings growth has enabled us to build capital while still providing a solid cash dividend to our stockholders, one which has never decreased since going public in 2003.

We also purchased 348,000 shares during 2011, as we continue to view our stock is a solid investment. Credit quality remains a challenge, made even more tenuous by the delay in the New Jersey foreclosure process, which is now averaging over 2.5 years for many delinquent residential loans. Credit trends continue to show improvement, with net charge-offs in early-stage delinquencies down from 2010.

Now, Tom will discuss our margin and efficiency ratio in further detail, but we look forward to additional expense reductions with the disposition of our two former operating facilities in the fourth quarter, and the accompanying improvement in the collaboration that comes from our management staff being in one location. We will, however, continue to invest in people as we seek to add to our relationship teams in commercial lending and wealth divisions.

With that, Tom?

Thank you, Chris, and good morning, everyone. Our net income for the fourth quarter was $14.9 million, or $0.26 per share compared to $15.6 million, or $0.27 per share, for the third quarter of 2011. Net interest income after the provision for loan losses increased $950,000 compared with the trailing quarter, to $47.9 million. Improvements in credit quality and a related reduction of provisions for loan losses, combined with loan growth and the deployment of excess liquidity to offset the impact of the reduction in net interest margin. The net interest margin decreased 11 basis points compared to the trailing quarter to 3.39%, driven by a 45-basis-point reduction in the yield on AFS securities and 16-basis-point reduction in the yield on loans.

Yields on mortgage-backed securities fell during the quarter as prepayments resulted in accelerated premium amortization, and cash flows were reinvested at lower market rates. Loan yields also remained under pressure, as 10-year treasury rates dipped below 2%, and pricing competition for the best-quality credits intensified in the face of the muted economic growth. Partially offsetting the impact of reduced asset yields on net interest income, our average net loans outstanding increased by $114 million, or an annualized 10%, compared to the trailing quarter.

As of year end, total loans increased $85 million versus the trailing quarter to $4.7 billion, with net growth in multifamily mortgages of $67 million, C&I loans of $35 million, and CRE loans of $17 million, partially offset by a decrease in residential mortgage loans of $39 million.

Total commercial loans, consisting of commercial real estate, construction, and C&I loans, increased to 60% of total loans at December 31. During the quarter, our funding continued to shift to lower-costing core deposits, with core accounts excluding all-time deposits, representing 78% of total deposits or 57% of assets at December 31. Average non-interest-bearing deposits increased $74 million, or 49% annualized, to $680 million for the quarter ended December 31. As a result, the average rate paid on all deposit funding decreased 8 basis points to 63 basis points for the fourth quarter.

The Company provided $6 million for loan losses, exceeding our net charge-offs of $5.3 million, or 46 basis points of average loans. This compared with the provision of $7.5 million in the trailing quarter. Nonperforming loans decreased $3 million to $123 million, or 2.63% of total loans at December 31, from $125 million at September 30.

Total delinquencies decreased $9 million compared to the trailing quarter, to $113 million or 2.44% of the portfolio at December 31. while 30- to 89-day delinquencies decreased $1 million to $36 million, or 0.78% of total loans at December 31. The allowance for loan losses to total loans was 1.6% at December 31, down slightly from 1.61% at September 30, while the allowance for nonperforming loans was 60.7% at the end of the year, compared with 58.8% at September 30.

Total nonperforming assets, consisting of nonperforming loans and foreclosed assets, totaled $135 million or 1.91% of total assets at December 31, compared to $132 million at September 30. Foreclosed assets increased $5.9 million to $12.8 million, as the Company completed the foreclosure of an approved and improved land parcel zoned for residential development that is valued at $5.5 million.

Non-interest income was unchanged at $8.7 million compared to the trailing quarter, as a $700,000 increase in fee income, primarily attributable to the August 11 Beacon acquisition and commercial loan prepayment fees, was largely offset by a $600,000 reduction in security schemes. Within the other non-interest income category, the Company absorbed $319,000 in losses associated with the November sale of two former administrative facilities. Non-interest expense increased $1.3 million versus the trailing quarter to $36 million, primarily as a result of increases in advertising, consulting and nonperforming-asset-related costs. Annualized non-interest expense to average assets is worth 2.04% and the efficiency ratio was 57.85% for the quarter ended December 31.

The Company recorded income tax expense of $5.5 million for the fourth quarter compared to $5.1 million for the trailing quarter, and our effective tax rate increased to 27% from 24.6% for the third quarter of 2011. The Company realized a reduction in valuation allowances against subsidiary company New Jersey net operating losses in the trailing quarter. The Company currently projects an effective tax rate of approximately 27% in future periods.

With that, we would be happy to take your questions.

(Operator instructions) Jason O'Donnell, Boenning & Scattergood.

Tom, can you just break out what the OREO expense was this quarter? I apologize if I missed it.

Sure. For one point -- $1 million, Jason, even. $1.0 million. It was $781,000 in the trailing quarter.

Okay, great. And can you just -- do you happen to do with the impact was, if you could isolate it, of the accelerated premium amortization was on the NIM trend this quarter?

It was about 7 basis points on the margin.

And then it looks like operating expenses came in a little higher than I was projecting. Were there any one-time items in your expenses this quarter that I should be aware of, in M&A expense or anything else?

There was some additional cost around the closing of the Beacon acquisition. That was a couple hundred thousand dollars. We did have some additional costs around the remediation from Hurricane Irene, actually. We had some damage in our Denver office that was repaired, and some remediation of some files. That totaled about $220,000.

In addition, it would be disposition of the -- well, actually, that's in the other income section. I think we talked about that. We did realize a final loss on the sale of those two administrative facilities of about $319,000.

The final loss was how much? I'm sorry.

$319,000.

$319,000. Okay. Great, thanks a lot, guys.

Julienne Cassarino, Prospector Partners.

What were the TDRs, or renegotiated loan balance, at the end of the quarter?

Total TDRs were $63.1 million during the period.

And then, what was that last quarter? Was it -- was it $60 million? What was it last quarter?

Sorry, Julienne, I don't have the last quarter number in front of me. I think it was pretty close. I think it was in the high 50s.

Okay, great. And just to -- you were discussing about offsetting margin compressions with loan growth in 2012. And I was just wondering, big picture, what kind of loan growth do you need to offset margin compression from the current interest rate environment?

Well, we think the compression we felt by the premium amortizations was a little bit more dramatic. We see that slowing up. And we are looking at the portfolio to make sure that, with the HARP program, HARP 2 and other things going on -- and we have to watch what's going on in Washington to say, are they going to have some more plans to accelerate prepayments. We have to watch that very closely. We still have a little bit of recent availability on the deposits to go down a little more. So we see -- again, loan growth -- we are not pushing our credit [hat] by any stretch, but we are actually getting a lot more looks and opportunity than we had in the past. And the climate and the conversations are a little bit more positive with the economy.

So an exact number? I don't have that handy at this point. More is always better, but we don't have that number.

All right, but you see loan growth from here picking up pace, generally?

Yes.

Okay. And who -- the big banks, they were -- you're getting multifamily business from them? Or where is the multifamily growth coming from?

Just, truly, relationships that we've had in the past. It's mostly in New Jersey and eastern Pennsylvania. Most of our clients that have gone out to eastern Pennsylvania; that's where there has been some growth. We don't traffic in the New York area, for the most part. And I think it's just the ease of relationship, the fact that they can get somebody on the phone quickly to give them a quick decision. And we are able to do that without having to go through an office in San Francisco or in Charlotte, North Carolina.

So these are not the brokered multifamily loans?

We do not do brokered multifamily loans at this stage. We do not. It's all organic.

Matthew Forgotson, Sandler O'Neill & Partners.

You mentioned that early-stage delinquent season in the quarter were down. I'm just wondering if you can put some numbers around that for this quarter and also for last quarter, if you would.

Sure, Matt. It's 0.78%, the 30- to 89-days for the current quarter, down from 0.81% of loans back in September; 0.85% in June; 1.36% in March. So we are showing a nice continuing trend of improvement there. I guess the other thing you can take some comfort is, is the weighted average risk rate in the portfolio has improved. Nonperforming asset formations declined for three consecutive quarters as well, on the net basis.

Okay, we don't call it a trend yet. It's just -- it's positive.

Okay. And just -- specifically with regards to how you guys are thinking about your reserve going forward -- this is the first quarter we've seen of nonperforming loan improvement in the last few quarters. Just wondering if you are continuing to build the reserve, or if you are targeting, in particular, a specific reserve coverage ratio.

There is quite a detailed analysis that lies behind it, but it generally results in coverage ratios (inaudible) around 155 to 160, based on current risk ratings. As you see economic improvement, of course that coverage ratio could come down. But that's the current thinking.

And then just finally, with regards to your multifamily lending, it's currently, I believe, 12% of gross loans or so. Are you managing that towards a specific target?

Like anything that we look at, we look at all asset classes in saying, where is the bucket? How much would we grow? We think it's still very stable. These are well-heeled owners of properties and acquirers of properties, so there are very deep balance sheets with solid guarantors, solid background. So we don't see anything dramatic there. We always watch to make sure our exposure does not get overloaded in any one bucket or sector.

Okay, and what's the pricing on those, generally speaking?

Well, it depends on who is behind it. But it's pretty thin. I think we look at it usually about 240 over. On the average, we may have some that are 230 over, and then we may have some that are 250. And we tried to get them to be a 10-year with a 5-year renew date or reprice date. So it would be 5 years, and then 250, 240 over the next 5-year adjustment.

Damon DelMonte, KBW.

I guess the first question is probably for Tom here. I just want to confirm -- so there was, like, three items in the non-interest expense categories that we could exclude. That was the OREO workout costs, and then the 220,000. So would a good run rate kind of going forward be somewhere in the, call it, 35-ish or so range?

That's about where I'm looking for, yes.

My other question is, Chris, could you provide us with an update on your thoughts on M&A? Obviously, you did the Beacon transaction last year. But I think the general consensus is that the market will start to see consolidation happen in the back half of 2012. We've seen from a lot of banks, just pressures on margins and challenges to maintain decent earnings. Kind of what your thoughts are, and what you are seeing in your region?

Well, we all would have thought it would have started to happen, also because of the regulatory cycle and changeover from OTS to the OCC. And regulators are coming down hard on all banks, which you would expect. So I think that will start to wear on some smaller firms. It wears on us, but not to the point that we are looking to exit. But we certainly think there will be opportunities. I think the buyer-seller is still not in the same thought process. And so that will take a little while to settle.

But as earnings flatten out and margins flatten, we think that it will pick up, especially with the Fed decisions that we are going to be in a hold pattern until at least 2014, maybe 2015. That's not going to make anybody's margin get any better, and certainly would add to their risk if they put on a lot of loans in this environment. So, yes, we would agree that the conversations are getting a little more -- they are a little more forward, but nothing imminent.

And what is a typical size bank you would look at? Do you have a range in how big or how small you would go?

No. We just look at any deal and say, what is it going to add to the combined entity? What kind of people you are getting from the organization? Because we want to make sure there might be some revenue attached, as just another expense consolidation play. And the markets that it's in -- are they relevant to us, and is it going to add value? So, no, we do not shut anything down because of size.

Collyn Gilbert, Stifel Nicolaus.

Chris, just trying to reconcile your comments on loan growth picking up. But, yet, it looked as if the unfunded commitments fell, quarter to quarter. Is that a timing issue? Or if you could just sort of clarify that point?

Well, I think you get that towards year-end. We kind of forced -- try to get some things closed in the year. We have a lot of the home equity deals. We just opened up a product that was no fees and very low level of loan to values, and only 40% usage on home equity. So we're getting a lot more opportunity through this product. I think we had over $100 million in applications come in. And that was in the timeframe in December where you usually don't get any volume. So we are still seeing flow on that area.

We are also seeing a little bit of purchased mortgage money as opposed to just refinance. So certain markets are doing better, such as Hoboken and Jersey City, where people who had been renting some of their units are now trying to sell them. There's an active market starting up. So that could bode well in the future. So I think we just -- you know, it's one of those things where, when you get towards the end of the year, people hunker down. And then they will come back in, maybe in the first part of -- the end of the first quarter.

Okay, that's helpful. And then just thinking about the repricing opportunities on the CD side -- so I think it was like 1.46% was your blended CD rate this quarter. It still seems pretty high, and certainly relative to the advertising on the web. How much further do you think you can go on lowering those rates?

Collyn, there's about $530 million that will reprice in the first six months of 2012, about 40 basis points pick up on the reprice.

Okay, just 40 basis points. And is that the biggest tranche that you have for the year?

Yes, it tails off a bit from there.

Matthew Kelley, Sterne Agee.

Getting back to your multifamily product there, just to clarify, the index that's priced off -- is that a 5-year CMT type of index? Treasury index?

Yes. For the most part, yes. We are not seeing much in the way of anybody -- everybody would love to do LIBOR, but we are using the Treasury.

So kind of low 3s, then, on coupons?

Mid-3s, 3.75, I don't think we have had anything at the mid-3s, really. There might have been one small deal. But the rest of been in the high 3s. And we try to get to the low 4s with floors.

And how much pricing and more conventional real estate -- office, retail, industrial, those products? What does the pipeline yield on those things?

The pipeline yield on the what, the commercial?

Yes, on the commercial real estate backed by office, retail, industrial, non-multifamily.

Well, the average rate through 2011 was about a 4.7 on commercial mortgages.

But on deals you are looking at now, what are you seeing?

We are still seeing around those numbers, maybe a little bit -- depending on the size and scope, might be a little lower. But they're still in the mid-to high 4s, about 300 over the curve, could go to 3.75.

And just in your own internal planning, with the Fed telling us they are on hold for the next couple years, a lot of liquidity in the system, a chase for yield -- where do you think those yields go when we are talking this time next year?

Well, how much lower can the 5-year ago, I guess, is the concern -- and even/or the 10-year? Because what will happen is, everybody's going to try to stretch themselves out and the oil markets will probably lead us to the 10-year. I don't know if they can go much lower, because we're kind of at a point where we are saying we can't put on things that 3 that are commercial properties. So we sort of have a base. And when people realize -- we talk to our customers, it's a relationship building practice, to say we are not going to go ahead at that rate because we are going to do a good job here, and maybe we can do something at the reset to make it, instead of being 300 over, maybe it will be 275.

I think what's going to happen the market will be that people are going to start putting caps on things so they can get volume in here. And yet the borrower will know that he has something else, to lock in something in the future.

Okay, and then just to be clear on the expense guidance there, the $35 million, kind of, core run rate this quarter, annualized to $140 million -- what about the cost saves on consolidating your buildings and going to one headquarters? Is that included in that number, or is that going to be a savings beyond that?

I think that's built in there, Matt, because that was about $90,000 a month. But we are, as Chris indicated, continuing to invest in the business as well.

And that includes the Beacon expenses also. So, that was an add-on that we didn't have in the past.

And so, off of that $140 million annualized base, what type of growth do you think we're looking at for the full year?

I'm sorry, I'm not sure if I understand that. Growth in what?

Will there be growth in that current annualized rate of $140 million? Or are you going to keep it flat around that level?

I think that's the full-year expectation.

Oh, it is full year? Okay.

(multiple speakers) Yes.

This concludes our question and answer session.

I would like to turn the conference back over to Christopher Martin, Chairman, President and CEO, for any closing remarks.

Well, again, looking at the broader economic horizon, we are seeing strong improvements in recent trends. And many of our commercial customers and clients have shown slightly improving financial results, albeit not great, but better. Unemployment and underemployment in our market have remained stubbornly high, and consumers similarly cautious. With a major election in 2012, we anticipate a year of indecision and lack of confidence accompanied by still-evolving regulatory challenges, as Dodd-Frank's rules and regulations are promulgated and likely make the economy and banking interesting in 2012.

Nonetheless, we see this environment as an opportunity to expand our commitment to our clients, customers and stockholders. So we thank you for your time. Have a great afternoon. And go Giants. Thank you.

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