Provident Financial Services' CEO Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Provident Financial Services, Inc. (PFS)
by: SA Transcripts

Operator

Good morning and welcome to the Provident Financial Services, Inc. first quarter earnings release conference call and webcast. All participants will be on listen-only mode.

(Operator instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Mr. Leonard Gleason, Investor Relations. Mr. Gleason, please go ahead.

Leonard Gleason

Thank you, Keith. Good morning, ladies and gentlemen, and thank you for joining us today. The presenters for our first quarter earnings call are Chris Martin, Chairman, President and CEO, and Tom Lyons, our Executive Vice President and Chief Financial Officer.

Before they begin their review of 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 earnings call. 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, allow me to introduce our Chief Executive Officer, Chris Martin, who will offer his perspective on our first quarter financial results. Chris?

Chris Martin

Thanks, Len, and good morning. We are pleased with our earnings for the quarter and gratified by the 4 basis point expansion on net interest margins at 3.33% from Q4. Net income of $17.8 million or $0.31 per share represent consistent performance in the economy that remains stressed.

Our overall loan growth was tepid despite originations of $348 million. These volumes were offset somewhat by loan amortization and prepayments, accompanied by $17 million of payoffs of two performing substandard-rated share of national credits during the quarter.

Average loans, however, increased at a 4.7% annualized pace versus the trailing quarter to $4.9 billion, reflecting strong closing activity at the end of 2012. The sluggish rate of economic activity continues to dampen new loan demand and is accompanied by increased competition.

While our unfunded loan commitments and pipelines are holding up, they’re usually subject to some degree of seasonality this time of year, and pricing is tight and credit structures are loosening in our markets. Origination volumes for the upcoming quarters will depend on the strengthening housing market, improved business confidence, and a slowly improving regional economy.

Deposits decreased 2.8% during the quarter, which was anticipated, as expected outflows from certain customers for tax planning considerations were accompanied by CD maturities and seasonal outflows of municipal deposits. Our core deposits represent 83% of total deposits and the average growth of interest-bearing deposits declined to 44 basis points.

Our funds increased during the quarter as we took advantage of historically low volume rate and extended durations on longer-term Federal Home Loan Bank advances. Our capital position is solid and continues to grow. We announced an increase in our quarterly cash dividend of 7.7% to $0.14 a share, which equates to a yield of approximately 3.7%. Our payout ratio remains around 50%, which we believe provides a stable and consistent return to our stockholders. In addition, our repurchase authorization had 4.1 million shares remaining as of March 31st.

Our expenses were essentially flat for the quarter as we continue to effectively manage operating expenses while investing in revenue generation. We review our processes constantly to achieve further synergies and improvements.

Non-performing loan levels remained stubbornly static, as several large planned resolutions have extended longer than expected. We are hopeful that these will be brought to conclusion in the near future. Charge-offs of $1.8 million remained well below historical averages and we have not experienced any major issues to date due to Superstorm Sandy.

On the M&A front, we are confident with our balance sheet, footprint, and long-term growth prospects, and we are able and willing to look at accretive deals in or contiguous to our markets that have limited tangible book value solution. We continue to look at both bank and wealth management firms and we are positioned to take advantage of the right opportunities.

With that, I’ll let Tom take us through the financials. Tom?

Tom Lyons

Thank you, Chris, and good morning everyone. Our net income for the first quarter was $17.8 million or $0.31 per share, up from $16.7 million or $0.29 per share earnings for the fourth quarter of 2012. Net interest income decreased $312,000 compared with the trailing quarter to $54 million as a result of a shorter 90-day first quarter.

Average earning assets declined $46 million versus the trailing quarter, primarily due to an $82 million reduction in average securities available for sale, partially offset by a $58 million increase in average loans outstanding. The net interest margin increased 4 basis points for the first quarter to 3.33% as the yield on earning assets was unchanged and interest-bearing funding costs decreased 7 basis points.

The stability in the earning asset yield is attributable to reductions in excess liquidity and improvements in the yields on AFS securities. The increase in securities yields was mainly due to reduction in mortgage-backed securities prepayments and related premium amortization.

The average cost of interest-bearing deposits fell 6 basis points to 44 basis points, and the average cost of borrowings declined 4 basis points. The all-in cost of deposits including non-interest-bearing decreased 5 basis points to 38 basis points for the first quarter.

As a reminder, we report our core margin. We report loan prepayment fees and non-interest income and do not consider them in the margin calculation.

While average loans outstanding increased for the quarter, as of quarter end, total loans were essentially flat, increasing just 6 million year-to-date. We provided $1.5 million for home losses for the quarter, while net charge-offs are $1.8 million or an annualized 15 basis points of average loans. This is a decrease from a provision of $4 million in the trailing quarter. The trailing quarter included $1.5 million in addition provision allocated to possible loan losses associated with the lingering impact of Superstorm Sandy.

Non-performing loans were stable compared with December 31st, at $99 million, or 2.02% of total loans and classified loan levels showed continued improvement. The allowance for loan losses to total loans is unchanged from yearend at 1.43% while the allowance coverage of non-performing loans was also stable at 70.7% compared with 71.1% at December 31st.

Our total non-performing assets decreased $213,000 versus the trailing quarter to $111 million. And subsequent to quarter end, we’ve sold two residential properties for $317,000 and have another 12 properties with a book value of $2.5 million under contract.

Non-interest income decreased $2 million compared to the trailing quarter, primarily due to reductions in gains on security sales and a non-recurring gain realized on the sale of a bank loan parcel of land in the trailing quarter. Non-interest expense decreased $439,000 versus the trailing quarter to $36.9 million, as a result of non-recurring expenses related to Superstorm Sandy incurred in the previous quarter.

We recorded income tax expense of $7.6 million for the first quarter and our effective tax rate was 29.8%. We currently project an effective tax rate of approximately 30% for the remainder of 2013.

As we mentioned last quarter, please note that in addition to this 30% projected affected 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 a deferred tax asset related to non qualified stock options that were granted shortly after the company’s 2003 IPO.

These options have a strike prices 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.

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from Mark Fitzgibbon from Sandler O’Neill.

Mark Fitzgibbon – Sandler O’Neill

Hey Gentlemen.

Chris Martin

Good morning.

Mark Fitzgibbon – Sandler O’Neill

The first question I have for you is related to the asset yields. Your investment security yields went up by 5 basis points from the late quarter. I’m curious why that was and if there were any other sort of non-recurring items that affected asset yields this quarter that allowed them to be stable?

Tom Lyons

Nothing that I would consider non-recurring, Mark. I think the increase in securities yields was primarily due to reductions in repayments on mortgage back securities and related premium amortization, the duration portfolios is pretty constant. I think we extended just a little bit, we’re still less than four years, it’s about 3.8 years on total investment portfolio.

Mark Fitzgibbon – Sandler O’Neill

Okay. And so going forward, most banks that we see are seeing some asset yield pressure, I assume you feel as though you’re going to see that same kind of pressure and therefore, a little bit of compression in the margin?

Tom Lyons

Yes. I think if you look at the loan yield, we’re in about 6 basis points. That continues to be an issue, new on rates are in the high 3s, low 4s overall.

Mark Fitzgibbon – Sandler O’Neill

So would you be sort of thinking sort of 3 to 5 basis points? I think last quarter you said you thought the margin would be down sort of 2 to 3 basis points this quarter and if flipped up a little bit...

Tom Lyons

I think 3 to 5 is reasonable. We have about $700 million in maturing CBs and borrowings over the next year, that gives about 1 to 2 basis points of defense to us in terms of the re-pricing downward. And I guess the other potential offset to the compression of our loan yields is growth in non-interest bearing deposits and re-allocation, reshuffling the mix from investments to a higher yield in loans if that’s the source of the funding for that loan growth.

Mark Fitzgibbon – Sandler O’Neill

Okay. And then on the loan pipeline, I wondered, I apologize if I missed it, but did you mention the size of the pipeline and maybe where you bring in new commercial multi-family loans on?

Chris Martin

Yes, this is Chris. The loan pipeline is about 600 million and we have a little bit of that even more closing in the next 30 to 60 days. It’s starting to pick up, but not in the level that we certainly would love to see, but the economy, it’s coming out of its builds [ph] a little in New Jersey, unemployment is down a little. So hopefully, there’s a positive tone to it, but right now, about 600 million.

Mark Fitzgibbon – Sandler O’Neill

And the rates you’re seeing on the commercial multi-family side?

Chris Martin

Condition dependent. It’s in the high 3s, about 180 over the curve with about half a point in the way over P [ph], on the commercial real estate side, 200 to 250 over.

Mark Fitzgibbon – Sandler O’Neill

Okay. And then lastly, you mentioned that you’re sort of ready, willing and able to do acquisitions again. I wondered if there are any size parameters, you know, above which you wouldn’t go? And also, are you looking for any particular type of business or attribute of a potential target? Or you’re just looking for good financial transactions?

Chris Martin

I think we lead with a good financial transaction. Obviously as we said about you know, where it is in the market. Our drivers tend to be more commercial like, but that doesn’t stop from looking at others that might be again, have a little bit more consumer focus as long as we can make the numbers work.

And same in the wealth space. We certainly look at opportunities to augment the platform that we have at Beacon and to move on. But no, we’re not really, it really doesn’t matter, each one we look at it individually.

Mark Fitzgibbon – Sandler O’Neill

Thank you.

Tom Lyons

Thank you.

Chris Martin

Thanks.

Operator

Thank you. The next question comes from Travis Lan from KBW.

Travis Lan – KBW

Thanks. Good morning, guys.

Chris Martin

Good morning.

Tom Lyons

Good morning, Travis.

Travis Lan – KBW

Tom, just quickly, do you have the balance non-interest deposits in the quarter?

Tom Lyons

I do. Non-interest deposits were $793 million.

Travis Lan – KBW

All right. Thanks. And then Chris, just following up on Mark’s question, last question about M&A. How do you think about the potential for kind of relatively larger deals or even MOEs like what we saw with PBNY and Sterling? And do you think that’s something we could see more of in the market? Or just any thoughts on how you think about that.

Chris Martin

Well, the one thing I could say selfishly is that the best part of the transaction of Sterling and Provident is the fact that they took the Sterling name which saves us from confusion out in the market, but I guess it all depends on what everybody’s future expectations are for their companies.

Are they going to be able to make it through with a flat yield, flat curve environment for a while with the rates where they are? We’ve been able to navigate this pretty well on our own, so there’s really no need for us to be looking at that.

But we always do the right thing if there was something for shareholders to be looking at. But right now, we’re really kind of excited about our balance sheet and our earnings potential three years of record earnings and we think that we could be a very good competitor in this market.

Travis Lan – KBW

So you guys have done obviously a great job to this point over the last three or four years, but just as we go forward, I mean obviously, NIM pressure is going to persist here. And what kind of offsets [ph] do you see? It doesn’t seem like there’s a whole lot to be done on the expense side, but there’s something on the fee side obviously, I know Beacon, what can you build out there? Or anything else that you could possibly be thinking about?

Chris Martin

Well I think, as you say in this time, you don’t want to have a very expensive hobbies, and I think it’s stick to what you know, manage that accordingly. We look at our, from the operating processes to be able to be ready when and if this market does turn and it gets a little bit more loan growth and business.

So I think in this stage, we do look at our operating expense and saying what else can we do to trim the numbers. Albeit, there’s not going to be monumental moves, it’s certainly something to make us a few more dollars here and there.

Tom Lyons

This is Tom. I think in the near term, there’s still some credit leverage to be exploited to. I think if credit metrics continue to improve we could see our allowance to total loans come down to the low 130s, non-performing asset related expenses, we expect to continue to decline as well. So that should hopefully augment earnings going forward.

Travis Lan – KBW

All right. Thank you very much.

Chris Martin

Thank you.

Operator

Thank you. And the next question comes from Matthew Kelley with Sterne Agee.

Matthew Kelley – Sterne Agee

Yes, hi guys.

Chris Martin

Good morning.

Matthew Kelley – Sterne Agee

We’ve heard from a couple of banks in your market place, just really noticing a change in structure on commercial loans particularly retail, industrial office, multi-family, those types of asset classes in customers looking for longer durations, longer terms and then all system loosening just structure, under writing, personal guarantees.

Can you just talk about what you’ve seen on that front over the last three to six months?

Chris Martin

Matt, I was just talking to our head of commercial real estate this morning. And I have heard about a 40-year amortization multi-family property interest only for three years in the mid fours with limited guarantee. So that tells you there’s some aggressive posturing out there and some aggressive credit structure. Matt, we don’t think that’s appropriate.

A little bit of the volume, but I can say that everybody is looking to try to mitigate the margin compression with growth. And sometimes, that exercise will make you do some different things that we wouldn’t do.

Matthew Kelley – Sterne Agee

Okay. And without naming names, what types of competitors are you seeing will be most aggressive on particularly extending term? Is it mega banks in your market place? Or community banks?

Chris Martin

More community banks than the mega banks.

Matthew Kelley – Sterne Agee

Okay. Got you. And then to be clear on loan pricing some of the numbers you referenced earlier in the pipeline, typically, your commercial real estate multi family, is that price of the treasury index or a LIBOR index? What type of an index and base are we talking about when you talk about 180 and 250 over the curve?

Chris Martin

It’s generally off to treasury’s comparable term.

Matthew Kelley – Sterne Agee

Okay. Okay. So on the multi, it sounds like you’re high 2s now?

Chris Martin

No. We’ve not done anything in the 2s at all. We hardly [ph] seen a heck of a lot in the 2s. The average origination in multi-family for the quarter was 360.

Matthew Kelley – Sterne Agee

Okay. Got you, got you. Okay, that’s all. Actually, one other question just on the pace of the securities portfolio decline, will that be continued? I mean what type of cash, give us a sense in the cash flows that are coming off there and what we might expect for the pace down 4% sequentially over the last two quarters. Is that going to continue?

Tom Lyons

Sure. First let me make a quick correction. I was just looking at the adjustable rates on the multi-family, over all markets in rotation [ph] is about 390 for the quarter. And then to the securities run offs, we’re seeing about 30 to 35 million a month generally. We structure our portfolio pretty carefully to try and ensure stable cash flows regardless of rate environment, and we’ve been pretty good about that. So that’s kind of where we expect it to run.

Matthew Kelley – Sterne Agee

Okay. Thank you.

Tom Lyons

Sure.

Operator

Thank you. As there are no more questions at the present time, I’d like to turn the call back over to management for any closing remarks.

Chris Martin

Okay. Well, thank you. Our high touch relationship with our customers continues to win us business referrals and repeat business. Our near term outlook is for slightly improving job in New Jersey, as rebuilding from Sandy, coupled with home price appreciations, provide a more positive attitude for the consumer. We will continue to deliver on our commitments to organically grow our business lines, pursue accretive acquisition opportunities, increase stockholder value through consistent earnings and performance, and we look forward to speaking to you next quarter.

Thank you very much.

Operator

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

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