Leonard Gleason - IR Chris Martin - Chairman, President and CEO Tom Lyons - EVP and CFO.

Mark Fitzgibbon - Sandler O'Neill David Bishop - Drexel Hamilton Rick Weiss - Boenning & Scattergood Collyn Gilbert - KBW Matthew Kelley - Sterne Agee.

Good morning, and welcome to the Provident Financial Services Incorporated Fourth Quarter 2014 Earnings Release 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..

Thank you, Gary. Good morning, ladies and gentlemen. Thank you for joining us on this great January morning. The presenters for our fourth quarter earnings call are, Chris Martin, Chairman, President and CEO; and Tom Lyons, Executive Vice President and CFO.

Before beginning their review of our financial results, we 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 disclaimer can be found in the text of this morning's earnings release, which may be obtained by accessing the Investor Relations page on our Web site, providentnj.com. Now I'm pleased to introduce Chris Martin, who will offer his perspective on our fourth quarter’s financial results.

Chris?.

Thanks, Len. Good morning everyone. We appreciate your participation on this call. Our fourth quarter results were strong with record levels of net interest income, net income, earnings per share and asset size which stands at 8.5 billion at December 31st.

We had solid loan growth, increased fee income and tight expense control in the fourth quarter, and as you may have noted in our earnings release, a 6.7% increase in our cash dividend.

We also had record core revenue and earnings for the fourth year in a row and we achieved a 1% return on average assets during the fourth quarter, which is a significant accomplishment given the current interest rate environment.

It was also a very busy quarter at Beacon Trust, with the October closing of a small wealth management acquisition in Suffolk County, Long Island with approximately $140 million in assets under management.

And our year-end announcement of the proposed acquisition of the MDE Group and Acertus Capital Management, an end-market high performing wealth asset management company located in Morristown, New Jersey with approximately 1.5 billion in AUM.

Combined, pro forma of Beacon Trust footings will total 2.5 billion in AUM and we are currently awaiting regulatory approval and anticipate a second quarter of 2015 closing. The acquisitive growth in Wealth Management is an integral part of our strategy to diversify our revenue stream.

Moving back to our fourth quarter performance, solid results were produced with controlled loan growth of 8% annualized, despite some large payoffs and fierce competition. The growth for the quarter was led by multi-family, CRE, residential mortgage and C&I loans.

And the environment remains challenging however as market rates have compressed and so are some of the credit parameters offered by our competition along with aggressive terms. But markets are improving and our client balance sheets support further growth in the future as our loan pipelines remain stout.

Funding for our loan growth has come from increased non-interest bearing deposits, which grew by $184 million in 2014 accompanied by increased borrowings to extend duration and mitigate future interest rate risk. Our core deposit represents 86% of total deposits at December 31, 2014. And the margin held up well during the quarter.

But with the current flattening in the yield curve, it is likely to come under pressure as asset on-rates are reduced and funding costs are near floor. Non-interest income improved with additional Wealth Management fees complemented by deposit fees from the Team Capital acquisition.

With regard to expenses, non-interest expense included the remaining transaction cost from Team Capital. And Tom will discuss those further. But be assured that we are working hard to manage our expenses as we build up our risk and analytics area as we approach 10 billion in total assets.

Our efficiency ratio for the quarter on a core basis was 55.7% and operating expenses to average assets were 1.96% for the same period. Asset quality continued to improve and net charge-offs for the quarter were 19 basis points of average loans. As the New Jersey and Pennsylvania economies improve slightly, so has delinquencies and loan risk ratings.

Provision expense of $1.3 million for the quarter was primarily due to the increased loan volume. Our capital continues to grow with our leverage ratio of 9.21% at December 31, providing us dry powder for organic growth, acquisitions, stock repurchases or increased cash dividends as we announced this morning.

But we will as always stay focused on accretive opportunities to enhance long-term value.

And before I hand off it to Tom I would like to recognize our staff and management for their efforts in attaining these record results and the positive work of the Provident Bank Foundation which has impacted communities throughout eastern Pennsylvania and New Jersey with over $19 million donated since its inception.

Tom?.

Thank you, Chris and good morning everyone. Our net income for the fourth quarter was $21.2 million compared with 19 million for the trailing quarter. Earnings per share were $0.34 compared with $0.30 for the trailing quarter. Earnings for the fourth quarter were reduced by $384,000 in final costs related to the Team Capital acquisition.

Earnings for the trailing quarter were more significantly impacted by costs related to the acquisition and related systems conversion totaling 2.2 million or $0.04 per share net of tax.

Net interest income increased by $349,000 compared with the trailing quarter to 63 million as average net loans outstanding increased by an annualized rate of 5% or 71 million more than offsetting the 3 basis point decrease in the average yield on loans to 4.27%.

The net interest margin benefited 5 basis points for the quarter as a result of the accretion of purchase accounting adjustments. Average securities balances decreased by $71 million. However yields increased by 3 basis points versus the trailing quarter as a result of a decrease in premium amortization on mortgage-backed securities.

The cost of interest bearing liabilities decreased 1 basis point as borrowing and deposit costs declined, with the combination of these factors resulting in a our net interest margin remaining unchanged versus the trailing quarter at 3.3%.

We provided $1.3 million for loan losses this quarter compared with 1.5 million in the prior quarter, as asset qualities metrics including weighted average, risk ratings and delinquencies continued to improve. Non-performing loans decreased 10 million from the trailing quarter to 54 million or 0.88% of total loans.

Net charge-offs for the quarter increased slightly to 2.8 million or an annualized 19 basis points of average loans. The allowance for loan losses to total loans decreased to 1.01% from 1.06% at September 30th. However the allowance coverage of non-performing loans increased to 115%.

Non-interest income increased $107,000 compared to the trailing quarter as the reduction in securities gains was more than offset by an increase in gains of loan sales.

Non-interest expense decreased $3.5 million versus the trailing quarter to 42.3 million, compensation and benefits decreased 2.7 million and included $400,000 in final costs related to Team Capital transitional employees compared with $922,000 of transitional severance and compensation expense recognized in the trailing quarter.

The current quarter reflects cost saves incrementally realized following the May 30th acquisition and Labor Day weekend systems conversion. An additional $251,000 in transaction costs were included in other non-interest expense categories this quarter, primarily data processing expense compared with 2.8 million in the trailing quarter.

Excluding these acquisition-related items our efficiency ratio was 55.7% and our annualized operating expenses to average assets were 1.96% for the fourth quarter of 2014. Income tax expense was 10 million compared with 7.9 million for the trailing quarter and our effective tax rate increased to 32% from 29.4%.

The increase was primarily a result of the $639,000 write-down of existing deferred tax assets due to the apportionment of income to Pennsylvania stemming from the Team Capital acquisition. We currently project an effective tax rate of 30.5% for 2015. That concludes our prepared remarks. We’d be happy to respond to questions..

Question-and:.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead..

First question I had is on expenses.

Tom I wondered if you could share with us sort of what you think run rate expenses will look like in the first quarter, is something similar to the 4Q number likely?.

I think a slight increase Mark probably $43 million to $44 million, yes the usual increase in payroll taxes and some compensation increase due to annual merit increases in the first quarter.

And as well there is a little bit of year-end adjustments around things like incentive accrual that were favorable in Q4 that will be expected to increase a little bit in Q1 of ’15..

And then starting to come back down again in 2Q from synergies as well as lower payroll tax et cetera?.

That's correct..

Okay.

Secondly the net interest margin held up a little bit better than you had predicted last quarter obviously we're in a tough yield curve environment, how are you thinking about the margin going forward excluding the purchase accounting adjustments which I know you detailed for us last quarter?.

Yes, well the purchase accounting adjustments are going to come in a little bit I think they are going to come down by about three basis points attributable to that next quarter and the rest of that -- I think the outperformance was due to a little bit better than expected performance on the funding side, we were able to re-price some borrowings favorably and we were able to hold the line outs in deposit pricing although that’s becoming more challenging as Chris noted in his opening remarks.

We're starting to see more competitive pricing on deposit products out there and we're probably going to have to start to do something more to defend our market share there.

So those are the challenges, the on-rates for new loans are in 9 to 10 basis points if you look at our pipeline and the new loan originations in Q4 we're back down about 9 to 10 basis points versus the trailing quarter. So we are looking at some pressure there..

Okay. And then lastly Chris you've been saying for a while that pricing on multi-family credits has gotten crazy.

So I guess I was surprised that you guys had such strong growth this quarter in multi-family has something changed there?.

I think our discipline fairly from a credit standpoint has been steadfast. We have shortened up on the term so it’d be might five or seven, we're not going out in 10 year and if possible we would do a swap transaction if we're going to do anything over that term.

So I guess the fact is that we're not winning anywhere near what we would like to bid on because of the pricing. There are some good deals out there some of them we are just not going to get to.

But I think we have kind of -- think where the returns are we're not going out too long in the term and I think being 150 over of the treasury is probably where we're going to be at a base..

The next question comes from David Bishop with Drexel Hamilton. Please go ahead..

Just curious in terms of what you're seeing in terms of the pipeline and maybe just the growth this quarter.

I don’t know if you can sort of bring sense at around sort of legacy Provident versus what you're seeing M&A out of the legacy Team Capital markets?.

Pretty consistent in terms of the mix David versus the trailing quarter, both within in the Provident portfolio as well as the Team Capital..

Okay. And then in terms of the outlook and use of capital obviously it increased the dividend.

How about just in terms of what you're seeing and thoughts on whole bank M&A are you seeing more books out there the quality of books and then potential for, the size of potential acquisitions you're contemplating?.

This is Chris, there is a not of lot of proliferation of books. I think the future is going to more of negotiated kind of transactions not particularly we’re in it we would never comment on that. So I think this is more building relationships and putting one-on-one together and not just storing the book out there on an option basis.

So I think it's going to be more selective than it was in the past. But I think that’s kind of where we're seeing, we’re not seeing a whole amount of books coming in and the conversations are still everybody assessing this market to flat yield curve and what is going to mean for their future same with us..

The next question comes from Rick Weiss with Boenning. Please go ahead..

Can you talk about I would say loan growth, how are you going to be funding the loan growth going forward if deposit pricing is getting competitive and you see that your loans to deposit ratios is starting to creep up a bit? Cash flow some securities or more borrowings?.

Those are both available to us as well as you said having to be a little bit more competitive on the deposit pricing side of things.

I mean our all in cost of deposits is 26 basis points for the quarter it's been one of our strengths and we think we've been rational and prudent in our deposit pricing but you have to do what you have to do sometimes to maintain market share. So that’s why I've said we're going to phase some margin pressures along with everyone else.

But we do have borrowing capacity certainly I think we're about 17%-18% assets now and we do have stable cash flows from our securities portfolio that are available to fund loan growth also..

So in essence Rick we could shrink the portfolio of investments if we thought that was the best alternative certainly home loan bank and other borrowings even though that throws the loan to deposit ratio up slightly higher.

I think you have to not be tented to put out really short duration high priced deposits knowing that you're extending out on the duration side on the loans, because we're not the only ones that are seeing the flat yield curve, commercial borrowers and even residential are saying hey there might an opportunity to refi with the rates absolutely as low as they are going.

So those conversations are starting to pick up too. So that automatically says compression..

I think the other area in terms of funding that could potentially help us Rick is what we saw over the last couple quarters is the transition with Team Capital and some run off of higher cost funds that should slow and then beyond that I think we have opportunity to increase our funding, our deposit gathering capabilities in those new Team Capital markets as we establish a greater presence.

We just completed a bunch of sales training with people, get our products set and more known, spend a little bit on advertising and hopefully start to draw some more deposits from those markets..

Okay and I guess as a follow-up, what is the duration of your securities portfolio?.

Just under four years about 3.8 years..

And my last question I guess in terms of the deposits it looks that it’s hard to read with the Team Capital but the deposit fees looks like it decreased a little bit linked-quarter, is that seasonal, is this a trend that’s going on in the industry do you think?.

Probably more industry trend than seasonal I think..

And I think that people aren’t going to be, again the overdraft everything well in the past people would let them continue to have overdrafts and that rule has tightened up. We never had a problem with it. Regulations have changed and they’re looking at it. So we’ve run always a very clean program with that.

But I think everybody has gotten to realizing that it’s very expensive to have to cover an overdraft at $35. So I think everybody is managing their assets and their balance sheets a little bit better..

And Rick if I could clarify real quick on the investments, the overall is 3.85 and the AFS is 3.45..

The next question comes from Collyn Gilbert with KBW. Please go ahead..

So, Tom after holding the reserves levels pretty flat throughout most of 2014, they dropped obviously in the fourth quarter.

Just curious kind of what facilitated that and then how you’re thinking about the reserves levels going forward?.

It was really improvement in asset quality. I think we covered our new loan production appropriately but we had those improvements in weighted average risk rating, delinquencies, some significant resolutions. I think we’re down close to 30% in NPLs over the course of the year.

So that was really the driver of the balance sheet assessment as to what the appropriate level of allowance is. Going forward, I guess it could come a little bit lower, probably not that much. I kind of think of, if you had no credit deterioration and you were just covering new loan production, it’s probably between 1,900 basis points..

Okay.

So, the drop this quarter was kind of reflected perhaps on what you’d seen for the year, kind of rightsizing for where you were as you finished off the year more than anything?.

Yes. And I think we do that each quarter. I think it was the pace of resolution in the current quarter that drove that. I mentioned the charge-offs were up a little bit. But those were all considered and provided for. That was kind of coming to conclusion on some asset resolutions that drove that..

Okay, that’s helpful. And then how you guys thinking about obviously bringing on the wealth businesses, kind of the trajectory of fee income growth from here.

What are your targets there?.

Well, I think, we’ve always -- and we'd like it to be upper slope and to the right. But getting that number to be about 20% of our income would be something that would be a great goal for us.

But we want to make sure, like any of these things that we do, that we get them and all put together everybody works together, and get all the systems in place to achieve the efficiencies. So then the model doesn’t get taxed and we’re also able to absorb more as we move along.

So, I think it’ll be a little bit of that, a little pause here to make sure while we get it through the regulatory process. But I think our goal would be to get it to be at 20%..

Do you think Chris that that’s something that could happen like in the next, like 18-24 months? Or is this more of an aspirational goal?.

I might extend it out a little bit longer than that. But in our strategic plan it would certainly be within a three year timeframe..

Okay, that’s helpful.

And then just on just thinking about you guys crossing the $10 million asset mark, and all the planning that you need to do to go into that, when are you sort of from a budgetary strategic planning standpoint, when are you thinking you guys would cross that level?.

From an organic only perspective it would still be over three years out only because of all the lending we do of the portfolio churns, cash flows come, things move around a little bit. So, I think we have predicted that we’d be very close at the end of year three.

And that’s without another acquisition that we don’t want to ever say no to but we certainly are cognizant of the changes that will happen and the cost that it would bring to the Company.

We have spent not much in the way of hard dollars, some software we’re putting on to look at some stress getting ready for DFAS we brought on a person, we are probably going to bring on a few more to do more of the risk work which is probably prudent.

It doesn’t have an immediate return but it certainly allows you to manage your business a little bit better. But we’ve been doing it well without them. But I think it will be something that will develop over the next couple of years. We’re spending the time and effort. That’s something that’s really the cost, as well as the time..

Okay, that’s helpful. And then just one final question, Tom you mentioned that you’re seeing kind of coming into this quarter the on-rates of your loans drop 9 to 10 basis points.

Is that do you think that’s reflective of the drop that we’ve seen in the 10 year or is that still like a trailing affect? Just trying to -- because a lot of the banks so far have said which is stocking to me but they haven’t really seen a drop yet in the offering rates. So it’s interesting to hear that you guys say that you have.

So I am just trying to gauge the timing of that. Is that because your borrowers reacting more quickly or is that still sort of a lag effect perhaps of what the excursions were back in say November-December, when loans are being put on..

No I think our borrowers are reacting. We have seen some impact from that as well as again just the definitive pricing in the competitive environment driving spreads down further too..

The next question comes from Matthew Kelley with Sterne Agee. Please go ahead..

What was the Wealth Management revenue for the quarter and for the year?.

For the quarter it was $2.4 million and for the year $9.4 million..

Okay, got you. And so if we use 9.4 million on a 1.5 billion AUM, it’s roughly about 63 basis point ratio there.

How is that going to change with the MDE acquisition? Is that going to, should be about the same or higher or lower trying to understand the profitability of that business compared to what you have in place?.

I would say the same since it's slightly higher..

Okay, got you and then in terms of modeling the impact on capital, is it fair to look at the prices paid for Beacon is a decent proxy for cash and goodwill relative to AUM?.

Little bit higher than that..

A little bit higher..

Okay..

The company MD -- well when we did Beacon it was losing a lot of money whereas MD is a very profitable organization..

Okay.

And then Chris how do you think about the earn back, I mean in bank M&A conversations that's where we talk about the merits of transactions, talk about generating capital to this business which diversifies your revenue but how do you think about your capital dilution versus earnings accretion here how does it compare in your view and the merits of these types of deals versus depository deals?.

Well I think we're looking at it's a longer certainly return than a bank deal. We look at bank deals trying to be -- we felt they are going out there when they are four years and now we're seeing some at five.

These are definitely longer but the returns are somewhat instantaneous and not worried about cost saves necessarily when we do these transactions.

On the other hand I don't think we're just going to keep being a transaction machine in this I think we look at it and how does it fit the organization, can we get our economies out of it and have it augment through our lending discipline, private banking that we provide I think these are things that work throughout our segments of our business..

Yes Matt and obviously what helps to offset or to accept a longer earn back of the book dilution is the fact there is no ongoing capital hold against because this is no asset, the assets are customer assets, so you didn’t fall short..

And separate subject on cost of funds and deposits. For banks and competitors in your marketplace that have a more pronounced need to raise deposits, what are you seeing for offerings out there for special deposit rates and promotional type activity throughout the New Jersey marketplace with some of your competitors.

And what does it take to really raise money in this market?.

We're seeing a lot -- this is Chris so we're seeing a lot of one and one in the quarter on the money market, not just community banks but certainly the regional players, even bigger ones and just people that are in New Jersey certainly on the East Coast.

There is a lot of people chasing the money I think it's always the challenge of managing to one ratio being loan to deposits it’s something that we, you can't manage just to one but I am sure it gets to a point where it's very-very it getting really high that they want to offset that.

And it's really tough to think that that money is going to be developing a relationship. And so we're trying to hold service as long as possible as Tom mentioned before in another question is protecting your market but there has got to be something else to try to restoring out a high rate that really is a CD.

And if we can fund it through borrowings and extend duration and be much less I will deal with the ratio being a little bit out of kilter for the good reasons of being better prepared if when and if rates ever go up..

And then Tom just for clarification in the model, what was the dollar amount of accretable yield income in the quarter which you recognized? It was 5 basis point impact to the margin is that what you said?.

That's correct..

Okay, got it..

I think it was 14 change if I remember the number correctly Matt..

The next question is a follow-up from David Bishop with Drexel Hamilton. Please go ahead..

Just a couple of follow-up questions, guys in terms of the low level interest rate swap transaction the income from that this quarter, to the extent that the pricing environment is getting a little bit more competitive there is that something that could remain elevated in terms of those types of transactions remaining a little bit more elevated in this pricing environment?.

Yes I think where rates are and where customers are looking especially some of our customers they are smaller loan balances and the sophistication of getting into a swap really wouldn't be worth their time and/or energy but I think it will be a little bit less going forward.

And that's kind of when we look back at them I think our mix has been pretty much 50-50 between fixed rate and variable in production. And sometimes the borrower says I would rather just go variable and don't worry about a swap..

And maybe just some commentary I know you noted on the pricing side, things are getting very competitive, but in something that -- irrationality any sort of examples you can give on in terms of structure what you are seeing out there that you are just stepping away from maybe on the multifamily commercial real estate.

What are you seeing in terms of that competitive environment stock pricing?.

Well we're certainly seeing in the multifamily space and again we, ours is organic we're not using brokers, so my reference is really on the fact that we are in New Jersey we're not doing projects in the borrows but we've seen some very-very tight deals in the way of 10 year fixed and probably only about 140 over the curve.

There have been some very aggressive cap rates and I think that's the concern that we would have. On the other hand, in the commercial world we're seeing people do things at 150 over treasury to 160 and these maybe one-offs and so we're not saying that that is the market.

And we have also seen construction lending pickup and that's been at LIBOR plus a spread of usually about 250 to 300. And we're seeing some people getting into the low even to 200 of LIBOR.

And in the C&I world I would think that we look at a full rated credit which is a good credit for us 3.75 and then some of them you get maybe prime plus a 0.5 to 0.75. There are many people that are doing the things at prime minus and that is kind of where we take a step back..

This concludes our question-and answer session and the conference call. Thank you for attending today's presentation. You may now disconnect..