Provident Financial Services Inc (PFS) 2012 Q4 法說會逐字稿

Good morning, and welcome to the Provident Financial Services fourth-quarter 2012 conference call. 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 Officer. Please go ahead.

Good morning, ladies and gentlemen. Thank you for joining us on this first day of February. The presenters for our fourth quarter earnings call our Chris Martin, Chairman, President and CEO; and Tom Lyons, our Executive Vice President and Chief Financial Officer.

Before they begin their review our financial 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 call. Our full disclosure and disclaimer can be found in the text of this morning'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.

And with that, it is my pleasure to introduce our Chief Executive Officer, Chris Martin, who will offer his overview of our fourth-quarter financial results. Chris?

Thank you, Leonard, and good morning, everyone. Despite Superstorm Sandy, a divisive national election, and persistent partisanship in Washington, we ended 2012 with the best earnings performance in the Company's history, earning $1.18 per share, versus $1.01 for the prior year. The fourth-quarter results continued on an improving trend, to $16.7 million in net income, or $0.29 per share.

Return on assets was 94 basis points for 2012, versus 83 basis points for 2011. Balance sheet growth was modest, but I'm particularly pleased with the overall growth of the loan portfolio, which increased by 5.4% from the prior year-end. Further, net loan growth for the quarter was over 7% annualized, primarily driven by multifamily and commercial mortgage lending. And this was without the use of brokers.

And I would like to emphasize that we are continuing to maintain our credit underwriting discipline. The commercial loan portfolio has grown to 62.4% of total loans as of year-end, from 59.8% at December 31, 2011. With our healthcare lending and middle-market teams in place, we anticipate improved penetration in these markets in 2013.

Total deposits increased 5.3% for 2012, and core deposits increased $442 million or 11%, now representing 82.4% of deposits. More impressive has been the growth of non-interest-bearing deposits, which grew $168 million, or 24% during 2012. Our borrowings continue to decrease as leverage opportunities are not an appropriate use of capital at this time.

Speaking of capital, we provided our stockholders with a special dividend of $0.20 per share during the quarter, and today announced a quarterly cash dividend of $0.13. Our normalized payout ratio is still in the mid-40s. We also announced another 5% stock repurchase authorization during the quarter, which gives us 4.1 million shares remaining eligible for repurchase. Our capital is strong, and will support our growth well into the future.

Now Tom will discuss the margin in more detail, but suffice it to say that we are pleased with a decrease of only 2 basis points in the quarter. There's ongoing pressure on asset yields from the continued low rate environment. And we should also remind those on the call that we do not run prepayment penalties through the margin.

Our asset quality improved during the quarter and year ended December 31, 2012, as nonperforming loans were reduced to $99 million from $122.5 million for 2011.

At the same time, our charge-off levels have continued to decline. The provision for loan losses included $1.5 million related to Superstorm Sandy. We have yet to experience any major issues with our clients impacted by the storm, but we thought it prudent to provide for any disruption or unknowns that may affect our business and consumer customers.

Of 78 branches, we sustained damage to just 2, which required one branch to temporarily move its operations into a trailer. This branch came back online in early December. The extensive damage to this branch accounted for a large portion of the $624,000 in net expenses related to the storm.

On the efficiency front, our ratio for the quarter was 56.7%, which was better than the 57.9% for the same period last year. We had one-time expenses during the year primarily due to system and software conversions at Beacon. And we are pleased with the increase in fee income from our wealth management business, and have developed a private banking platform in Q4, with several clients already utilizing this service.

Regarding M&A, we continue to look for accretive opportunities in both the wealth and bank space in market or contiguous. There aren't many willing sellers out there at a price we deem prudent to enhance long-term shareholder value.

We just introduced mobile banking for clients on January 22nd, and this will enable our current and future customers to transact most of their routine banking, including check deposits, through their iPhone or Droid devices. We are also developing the technology to utilize tablets in a similar manner. Response to date has been positive, and we hope to expand on this delivery channel throughout the year.

On the regulatory front, Basel III was delayed, thankfully; and there are numerous new regulations yet to be implemented due to the Dodd-Frank and FASB. We will, as always, address them as they go into effect, and look to not materially increase our expenses to become fully compliant.

So, before Tom takes us into more detail, my outlook from an economic perspective is that the economy continues to move forward at a modest pace. We continue to view 2013 as an opportunity to increase revenue growth while expanding our customer relationships.

Slow interest rates and low volatility, absent interruption by our representatives in Washington, will persist throughout the year. While we cannot control interest rates, we must remain conscious of their impact should things accelerate or reverse trend. We still expect to operate in a low rate environment for the foreseeable future. We believe our focus on building client relationships, increasing market share, and managing expenses should continue to support improved stockholder returns.

With that, I'll let Tom to go through the details. Tom?

Thank you, Chris, and good morning, everyone. Our net income for the fourth quarter was $16.7 million or $0.29 per share, up from $16.2 million or $0.28 per share for the third quarter of 2012. Net interest income increased $492,000, compared with the trailing quarter, to $54.2 million as the benefits of a 9.5% annualized increase in average loans outstanding and a 5 basis point reduction in funding costs more than offset 7 basis points of compression in earning asset yields.

The net interest margin remained resilient for the fourth quarter, contracting just 2 basis points, versus the trailing quarter, to 3.29%. As Chris noted, this is our core margin. We recorded loan prepayment fees and non-interest income and do not consider them in the margin calculation. Pressure on loan and investment yield was mitigated by a 4 basis point decline in the average cost of interest-bearing deposits to 50 basis points, and a 3 basis point reduction in the average cost of borrowings.

Funding composition also improved, with average non-interest-bearing deposits increasing $69 million versus the trailing quarter, while average borrowing and timed deposits decreased $57 million. The all-in cost of deposits, including non-interest-bearing, decreased 4 basis points, to 42 basis points for the fourth quarter.

As of quarter end, our total loans increased $86 million or an annualized 7%, versus the trailing quarter, to $4.9 billion; with the overall loan yield for the quarter declining 10 basis points to 4.58%.

We provided $4 million for loan losses for the quarter, while net charge-offs were $3.9 million, or an annualized 32 basis points of average loans. This is up from a provision of $3.5 million in the trailing quarter, and includes $1.5 million in additional provision allocated to possible loan losses associated with the lingering impact of Superstorm Sandy.

Nonperforming loans decreased $7 million from September 30 to $99 million, or 2.02% of total loans at December 31. Our credit metrics improved again during the quarter, with weighted average risk ratings and classified loan levels showing continued improvement.

The allowance for loan losses to total loans was 1.43% at December 31, compared to 1.46% at September 30; while the allowance coverage for nonperforming loans increased to 71.1% compared with 66.5% at September 30.

Our total nonperforming assets, consisting of nonperforming loans and foreclosed assets, decreased $8 million versus the trailing quarter to $111 million, or 1.53% of total assets. We experienced an increase in the pace of nonperforming asset resolutions, with net outflows increasing to $3.4 million from $2.4 million in the trailing quarter.

Foreclosed assets also declined to $12.5 million. And subsequent to quarter-end, we have sold five residential properties with a $731,000 book value. And another eight properties with a book value of $1.4 million are under contract.

Non-interest income increased $2 million compared to the trailing quarter, primarily due to increases in gains on securities sales. And non-interest expense increased $489,000 versus the trailing quarter to $37.4 million, as a result of nonrecurring expenses related to Superstorm Sandy.

We recorded income tax expense of $8 million for the fourth quarter, compared with $7 million for the trailing quarter. And our effective tax rate increase to 32.1% from 30.1% as a result of increased income from taxable sources.

We project an effective tax rate of approximately 30% for 2013. Please note that in addition to this 30% projected effective rate, the Company may incur additional income tax expense in the third quarter of 2013 of approximately $3.9 million. This represents the potential write-off of the deferred tax asset related to nonqualified stock options that were granted shortly after the Company's 2003 IPO.

These options have a strike price of $18.57, and are scheduled to expire in July. If they expire out of the money, the Company will not receive a tax benefit and the deferred tax asset will be charged to income tax expense.

That concludes our prepared remarks. At this point, we'd be happy to take your questions.

(Operator Instructions). Jason O'Donnell, Merion Capital.

Good morning, guys. Nice quarter. I just have a few modeling-related questions to ask. Tom, I'm wondering in terms of OREO expense this quarter, what was -- what was that figure this quarter versus last? And maybe you could break out, if you have them in front of you, what the gains on sale were (technical difficulty) valuation adjustments for the quarter that we should be thinking about. That would be helpful.

Sure. NPA-related expenses were pretty consistent throughout the year. In the last three quarters they were $1 million each quarter in 2012. In terms of valuation, we actually had a net gain of about $152,000 in Q4, and net losses for the full year of $75,000 on sales of REO and write-downs. So we're pretty accurate in our marks for the most part when we gain control of the property.

Okay. Okay, great. And then in terms of the branch damages from Sandy, I guess it was $545,000. Do you all expect to recover that amount from your insurance provider for those damages outside of any coverage you have?

The total costs related to Sandy are a grand total of $624,000. I think the number you referred to is specific to one line item on the P&L where it was a relative change. But we had about $13,000 worth of lost income from some waived fees. And the rest of it was damages that occurred primarily to that one branch. That is net of what we expect to recover from insurance that we are able to substantiate this far. We could see probably another $200,000 possibly in Q1 of 2013 from insurance proceeds that has not been recorded yet.

Okay, so another $200,000, okay. And then in terms of the -- taking a step back here. In terms of the total operating expense run rate, Tom, I think you were thinking about the expense range in the $37 million area over the fourth quarter. And then heading into 2013, maybe it looks like it panned out here this quarter. What's your outlook, near-term, for total operating expenses? And then, are there any levers or other initiatives that we should be thinking about, or that you all are thinking about for, maybe, the first half of the year that could change the equation?

Yes, I think the run rate will probably stay around the $37 million to $38 million a quarter level, about $150 million for the full year.

And this is Chris. I think we always are looking at ways to be more efficient. And we still have -- we always think there is some dry powder somewhere. So we are looking at some of our operation areas to make sure that we are addressing the customer in the most effective way. And that usually relates to changes to some systems, utilizing them more effectively. And that is just something we constantly do.

Great. Thanks a lot, guys.

Timur Braziler, KBW.

Hi. Good morning, guys. Can we talk a little bit about the broader Sandy process that was deployed by Provident? Maybe talk about the number of total payment deferrals that were requested, and how your commercial client base has fared out through this storm.

This is Tom. I'll give you a little bit of information around the number of deferrals requested, and maybe turn it back to Chris to talk about the process a little bit. And very fortunately, very limited impact thus far on our customer base. We have a total of 13 borrowers that we've given some form of relief to, about $4.9 million. Eight of those residential, for $1.4 million; and five commercial, for $3.4 million.

This is Chris. In speaking to that, I think when the storm happened and the outreach started the second day, where we were talking to our large clients immediately -- I think we covered the first -- the top 100 in that first day and a half to find out. And then we just kept going further and further down.

We were fielding -- again, it was such as devastating storm in the way of power outages, people took a few weeks just to get back to a semblance of normalcy to see what their damages might be. But the outreach was going on and we were taking calls. We came out with a couple of programs to help people right out of the box, including a line of credit for people that just needed some money to stem the tide while they were still working on getting insurance proceeds.

And so that outreach continues to date. But we really haven't had much in the way of fallout in the way of people having problems, so the calls have not been dramatic at all.

Okay, great. My second question relates to the loan portfolio. There seems to be a little bit of a disconnect between period end loans and average balances. Was there heavy activity towards the latter portion of the quarter?

At the end of Q3 we saw some significant closings, which helped the average balance increase greater than the point-to-point for the fourth quarter. In terms of flow overall, though, I think we continue at a pretty strong pace. In January, you usually see a little bit of a slowdown, but I think we've carried some momentum into the start of the new year.

Okay. And I would you classify your pipeline at the end of the year, maybe versus at the end of the third quarter?

Pretty consistent, Timur, all the way through. And as Tom alluded to, we are surprised in January to have as much of this pipeline, because usually it catches in at the end of the year, and then you have a lull in between. I don't think it's weather-related. I think it's just the fact that we have had a positive stream out there, and it's been very consistent. So we're looking forward to the first quarter being pretty strong, relative to the other two quarters.

Okay, great. And then lastly, regarding the margin, is there further opportunities to lower the funding costs? Or are we starting to come near the bottom here?

If things continue to reprice favorably -- this is Tom again -- maturing funding, both CDs and borrowings, about $242 million in Q1; $200 million in Q2; $141 million in Q3; $117 million in Q4 of currently. We pick up probably 2 to 3 basis points of margin defense as a result of the favorable reprice.

And is that per quarter? Or is that on an aggregate basis?

Probably 1 to 2, on a quarter.

Okay, excellent. Thank you very much. Nice quarter.

Collyn Gilbert, Stifel Nicolaus.

Thanks. Good morning, guys. Just a question on your loan yield, primarily on the commercial side. You guys have done a great job of keeping that fairly stable. And, certainly, on a linked quarter basis, it held in there. Is it a function that you are finally seeing paydowns slow? Or are you getting better pricing in the market on your new originations? If you could give a little color around that, that would be helpful.

This is Chris. I would think that the pricing is still very competitive out there. We're not lowering -- we're not the lowest out there, but we certainly are seeing that pricing pressure. The backside is that prepayments have slowed down; though there are still maturing credits, or kinds that are rolling over, that we are expecting that bill will drop the other side as continuing the flow of new loans coming in to mitigate some of that. But it has definitely slowed over the last quarter, the number of calls and/or requests for recasting.

Okay, okay. And how are you guys seeing the pipeline break out as the year unfolds, between multifamily and CRE in terms of whether your own personal biases; where are you seeing the best returns. How are you thinking about balancing those two business lines?

Well, certainly, in the multifamily space, we do it ourselves, and it's mostly on New Jersey. The pricing is pretty tight -- 200 to 220 over the curve. We're trying to keep it within a 10-year and try not to go out to 30-year on the amortization, but that's where the market is. Very high quality loans, as you would expect us to do.

And the same with the CRE. Pricing has not been the issue; it's competition; it's in the ease of being able to close loans in an expedient manner and making it easy. And I think that's what's helping us to keep the flow coming in; not necessarily being the lowest rate.

So do you see the growth prospects equal between the two portfolios? Or is multifamily still stronger than CRE?

I think multifamily is a little bit stronger, by choice.

Okay. Okay, great. And then on the securities front, you obviously opportunistically took some gains this quarter. I would presume there's not a lot left take, perhaps, going forward? Or how do we -- should we think about this, the management of the securities portfolio?

It's kind of a continuous -- it's Tom again -- continual evaluation of managing the cash flows. We really sell securities not so much to book gains as to ensure stable cash flows. When we see things that we don't like the prepayment characteristics of, fortunately they were positive in terms of trading at a gain for us. And I think we sold about $57 million in principal and realized that $2 million in gains in Q4.

That's an ongoing evaluation. Sometimes services' behavior will change and they start to act more aggressively -- refi a product that's in a pool that we hold, and we'll move it out. So I can't really give you a good prediction. It's really dependent on market conditions.

Okay. That's fine. Thanks, guys. That's all I had.

Mark Fitzgibbon, Sandler O'Neill.

Good morning, gentlemen. Thank you for taking my question. Just to follow up on a point you made earlier, Tom, you were implying that the net interest margin would go up 1 to 2 basis points per quarter throughout the course of 2013. Am I reading that right?

No, I'm sorry if that wasn't clear. I meant to imply that we have a little bit of defense coming to us through the favorable repricing on liabilities, but we are still going to see pressure on asset yields. My best guest there would be probably looking at 2 to 3 basis points of pressure for the next quarter.

Okay, thank you. And then, secondly, could you detail for us what the 30- to 89-day delinquencies were in the quarter?

Yes, I can. They actually ticked up. If you go to the core report data, you'll see an increase in 60 days attributable to a technical maturity, which has since refinanced away. And so if you'd like, I can give you those statistics, excluding that mortgage.

Sure.

So, 30 to 89 in total, Mark, did you want?

Yes, that would be great.

Residential is $27.7 million; commercial mortgage, $2.2 million, ex- that loan I just referred to; commercial loans, $1.9 million; and consumer, about $6 million. So $37.8 million all-in; 30 to 89 days delinquent. It's like 2.12% of loans.

Okay. Also, I wondered if you could remind us of your plans for new branches and for branch consolidations during the course of 2013.

Mark, this is Chris. We had taken on -- we did consolidate four branches in 2012. We have a small branch in Newark, in Teachers Village, opening in probably the late third quarter of this year. It's a very small branch in the way of size, approximately 1100 to 1200 square feet. But has a core deposit base of non-interest-bearing deposits of over $20 million already. We have possibly one mini-branch coming online.

That is all we have in the way of new. Consolidations, going forward -- we evaluate, certainly, where we have leases that -- in locations that don't work. Some of those have go dark provisions, so we really can't close. But there will be a couple, probably, that will give notice in 2013 that we will probably be moving out of in 2014.

Thank you.

Matthew Kelley, Sterne, Agee.

Hi, guys. Just a point of clarification on the multifamily yields. That's 200 to 220 over the treasury curve, correct? That is still how that primarily priced off?

That is correct.

Okay, got you. And then can you talk a little bit about your healthcare lending group? Maybe give us a little sense of how big that is, and how many people, and the capacity, and where you see that going.

Yes, we have four people in that group. About a year and a half ago, we brought on somebody to run the group who had a lot of experience, which helped augment some of the things that we were trying to do. We also had to go through a change of discipline and pricing to be competitive in the market. It's a little different than multifamily and CRE. So we went through a loan policy review to make sure that we were meeting the needs of the market and yet meeting our return on equity hurdles.

So now we have four people, and we think that that's an area that's going to continue to grow in the future. So that's why we have beefed it up to that level. And then we become Lego approach; if it is going well, we will continue to add. But we would like to see, again, getting our name out there; making the connections; and then being able to address some of the medi centers that we have already been talking to for a while.

So is that lines of credit to groups of professionals? Or is it asset-based type lending? And how big is the group, in terms of total loan portfolio?

I'll go with the first part, Matt. It would be at -- to groups. And it could be real estate-related also. But, again, whether it be lines of credit as they are going to add more doctors, there could be equipment financing in there also. It certainly depends on each client and/or group.

We're seeing more of that happening certainly in the New Jersey market, where sole practitioners are just not going to be able to make it on their own because of the cost; whether it just be normal healthcare costs or Obamacare-related. So they are joining up together to try to get some economies of scale. That's where we have been looking at the opportunity going forward,. So there's certainly a variety of product mix in there, and you get substantial individuals, obviously, being doctors.

Got you, got you. Okay. And, Chris, just from a macro perspective, is there an upgrade compared to your commentary in October on the healthy economy, deal activity, investment activity, when you talk to clients on the economy in your markets? Or is it about the same or better?

I think everybody's got this -- I'm a half empty, but there are still cautious. They are still not seeing it in New Jersey, as you would expect. Our unemployment numbers are still high. We have a very high-tax state. Obviously we've gone through it with Sandy. That affected some business opportunities going forward.

And people are worried a little bit, is this economy going to hold? Do we have some problems? So, I think everybody is being very cautious. I think everybody in the market itself has been a little bit more positive. I can say that the restaurant traffic has been a little bit larger. So that tells you people are feeling a little bit better. People that at least have jobs are feeling good.

Absent that, I think there's still some caution out there, that people are little concerned about going out there and hiring more people, or investing in more CapEx. And we'd love to see that happen, where people start to add to their equipment. That means sales are looking better, and inventories are going to build up a little bit. But to date, we have yet to see a lot of that moving.

Got you. And last question, Tom, will the securities portfolio stay the same or grow a little bit from the $1.6 billion balance at year-end?

I think it's probably likely it will shrink a little bit unless we get better opportunities to leverage. And I think we'll continue to pay down borrowings, and shift those cash flows into loan growth.

Okay. Thank you.

Jake Civiello, RBC Capital Markets.

Good morning. Regarding CRE-multifamily loan pricing competition, are you guys seeing more large regional bank, or even money center players, coming down in loan size to provide competition?

I don't think we've seen a lot in the multifamily space that we traffic in, where the major money center banks are coming into there. But we certainly are competing with our community bank brethren, and maybe a little bit more of the regionals. So I think that they are always going to be there. Instead of two-deal sheets, there's four. Certainly in the C&I world, there's a lot more people getting involved in that. I think because a lot of people have CRE exposure limits that get regulators a little concerned, that they may be going into the C&I world a little bit to augment that. So, it's very competitive. On the other hand, we have to run our own pricing models to make sure it makes sense to us.

Sure, of course. Just one other question as well. Much of the discussion on the ramifications from Sandy has been rightfully focused on negative aspects for added cost. But are there opportunities that you've been able to identify? Perhaps the possibility of construction lending gains? Or has the market dislocation provided any opportunities?

Though it's early in the process, we do see -- we have a couple of clients that are very happy. Not necessarily the people that had devastation to their homes or their lives, but it's going to help their business because they are in the building supply business. And so that's going to improve their performance and, certainly, opportunities. With other people's sadness comes some success.

We're still seeing that the builders are going to do better. There's opportunities for contractors that might've been out of work for a long time. There might be an influx of people coming into New Jersey to get work. Certainly, I know that New Jersey wants to take care of its own. But we'll take any help we can get.

But I think it's going to help in a bad way. We don't want to see anybody get hurt or devastated. But rebuilding always comes with a little bit of improvement in employment.

Okay. Thanks for your thoughts.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Martin for any closing remarks.

Okay. Well, we thank you again for being on our call. We're pretty optimistic of all the opportunities for Provident, despite a slow New Jersey economy accompanied by a woefully elongated foreclosure process that ranks among the worst in the nation, and contributes to the lack of recovery being experienced. We remain pretty vigilant in increasing our returns and value to our stockholders. And we appreciate your time and support. Thank you.

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