Provident Financial Services' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.26.13 | About: Provident Financial (PFS)

Provident Financial Services, Inc. (NYSE:PFS)

Q3 2013 Earnings Conference Call

October 25, 2013 10:00 AM ET

Executives

Christopher Martin – Chairman, President and CEO

Thomas Lyons – EVP and CFO

Leonard Gleason – SVP and IR Officer

Analysts

Mark Fitzgibbon - Sandler O'Neill

Collyn Gilbert – KBW

Operator

Good morning everyone and welcome to the Provident Financial Services Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator instructions) After today's presentation, there will be an opportunity for you to ask questions. (Operator Instructions) Please also note today’s event is being recorded. I would now like to turn the conference call over to Mr. Leonard Gleason, Investor Relations Officer. Sir, please go ahead.

Leonard Gleason

Thank you, Jamie. Good morning, ladies and gentlemen. Thank you for joining us on this chilly autumn morning. The presenters for our third quarter earnings call are, Chris Martin, Chairman, President and CEO; and Tom Lyons, Executive Vice President and Chief Financial Officer.

Before we begin the 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. A copy of that notice may be obtained by accessing the Investor Relations page on our website, www.providentnj.com or by calling Investor Relations at 732-590-3900 (sic) (732-590-9300).

Now I will turn the call over to our Chief Executive Officer, Chris Martin, who will offer his perspective on our third quarter financial results. Chris?

Christopher Martin

Thanks, Len, and good morning everybody. Our third quarter results are a testament to our strategy of building relationships through the combined efforts of our retail deposit lending teams, augmented by strong operational support. Our core earnings of $0.34 per share continue the trend of excellent results in challenging times.

Results were aided by improving asset quality, the resolution of several problem credits and ongoing expense management. Against the backdrop of the looming debt filling impasse and the lingering lack of leadership in Washington, it is especially gratifying to deliver higher returns to our stockholders through an increase of our quarterly cash dividend of 7.1% to $0.15 per share.

Our net interest margin held up well during the quarter, declining by only 1 basis point to 3.28% and our return on average assets and tangible equity on a core basis were 1.06% and 12.04% respectively.

Commercial loan growth remained constant in the multi-family and commercial real estate areas and it was complemented by solid numbers in our Business Banking and Middle-Market divisions.

When interest rate ticks up, application volumes for residential mortgage loans and home equity lines declined as the refinance market slowed. Conversely, purchased money mortgages are beginning to increase as consumers evaluate the housing market with a bit more confidence.

We continued to experience repayments and have passed on some potential deals due to extremely aggressive pricing in credit and covenants concessions by other lenders. While our pipeline remains solid, we have seen some slowing over the last 45 days, which we attribute to the larger issues within our economy and lack of confidence in the recovery.

On the deposit front, our ongoing strategy of reducing the level and dependence of CDs continues, while growth in non-interest-bearing deposits was 26% annualized for the quarter, as we continue to expand the breadth and depth of our commercial relationships.

Core deposits now represents almost 84% of our total deposits and we have continued to position our balance sheet to take advantage of the current low rate environment, while managing our level of risk through great increases by using longer term discounted wholesale borrowings.

I am extremely pleased with our improving operational efficiency and expense management, as represented by an efficiency ratio of 55.5% and non-interest expense to average assets of 2% for the current quarter.

While rigorous expense management remains the core tenant, we will continue to invest in those business lines where we see a definable real return on the investment in people and systems.

As we build tangible capital, we continue to evaluate ways to increase stockholder returns to a disciplined approach to M&A including both whole bank and wealth management opportunities. With the ever increasing level of regulatory issues and challenges, we expect the market to heat up.

In the interim, we are pleased with our organic growth and in the absence of the right deal, we will continue to execute on our plans. The present economic and governmental uncertainties continue to challenge our business; however, I remain confident that we will meet our objectives and targets for the balance of 2013.

With that, Tom will take a deeper dive into our strong results. Tom?

Thomas Lyons

Thank you, Chris and good morning everyone. Our net income for the third quarter was $16.1 million, or $0.28 per share excluding the impact of a $3.2 million charge to income tax expense related to the previously disclosed write-off of the deferred tax asset. Core earnings were $19.3 million or $0.34 per share.

Trailing quarter earnings were $19.2 million or $0.34 per share, and included $1.5 million of income related to a claim on a bank-owned life insurance policy. Net interest income increased $586,000, compared with the trailing quarter to $54 million, as the impact of a 6 basis point reduction in average loan yields was more than offset by a 7.6% annualized increase in average loans outstanding and a 5 basis point improvement in securities yields.

The net interest margin declined 1 basis point to 3.28%, as the interest-bearing liability cost remains steady at 67 basis points.

Average non-interest-bearing deposits increased $37 million or 18.3% annualized for the quarter. As you may recall, we report our core margins. We recorded loan prepayment fees in non-interest income and do not consider them in the margin calculation.

As at quarter end, total loans increased $85 million or 6.8% annualized for the quarter to $5.1 billion. Growth was led by multi-family mortgage, multi-family construction and C&I lending. We provided $1.2 million for loan losses this quarter, an increase from $1 million in the trailing as a result of continued loan growth.

Credit metrics continued to improve with non-performing loans decreasing $7.3 million compared to June 30 to $81.6 million or 1.6% of total loans. And classified loan levels, early-stage delinquencies and weighted average risk ratings, all showing continued improvement.

Net charge-offs for the quarter declined $2.2 million or 18 basis points of average loans. The allowance for loan losses to total loans declined to 1.3% from 1.34% at June 30. However, the allowance coverage of non-performing loans increased to 81% from 75% at June 30, as a result of the aforementioned improvements in credit quality.

Our total non-performing assets consisting of non-performing loans and foreclosed assets decreased $13.7 million versus the trailing quarter to $88.9 million.

Non-performing asset resolutions discontinued with the completed sale of $5.5 million improved land parcel contributing to the third quarter decreased. Subsequent to quarter end, we thus far sold two residential properties with $727,000 book value and have another nine properties with a book value of $1.4 million under contract.

We also have contracts with sale of $450,000 commercial property and a $1.7 million non-performing loan that are expected to close in November.

Non-interest income decreased $907,000 compared to the trailing quarter, as increases in loan prepayment and deposit fees were more than offset by reductions in benefit claims on Bank-owned life insurance and reduced gains on securities and loan sales.

Non-interest expense decreased $1.3 million versus the trailing quarter to $36.5 million, primarily as a result of the timing of Director’s stock-based compensations recognized in the previous quarter and decreases in advertising, intangibles and amortization and FDIC insurance expense.

Income tax expense was $12 million for the third quarter and our effective tax rate was 42.7%. Third quarter tax expense included $3.2 million related to the write-off of a deferred tax asset in connection the expired non-qualified stock options that were granted shortly after the company’s 2003 IPO. Excluding this discrete item, our effective tax was 31.3%

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mark Fitzgibbon from Sandler O'Neill. Please go ahead with your question.

Mark Fitzgibbon - Sandler O'Neill

Very impressive quarter, guys. Thank you for taking my question. First, I was wondering if you could share with us how much prepayment penalty income was in the third quarter.

Christopher Martin

Yes, it was $2.6 million, Mark.

Mark Fitzgibbon - Sandler O'Neill

Okay. And then, secondly, Tom, I wondered if you could share with us your thoughts on the outlook for the margin, is it stabilized, do you think at this level, given the remixing you are doing or is it likely we’ll see a little bit more slippage?

Thomas Lyons

I think we are still seeing some pressure on the loan yields, which came at a little better than I initially projected for the current quarter. But I still look for 3% to 5% over the rest of the year. I think we stabilized around the 3.19%, 3.20% level.

Mark Fitzgibbon - Sandler O'Neill

Okay. And, do you have in off-hand the average rate on your, just over $1 billion pipeline as you have?

Thomas Lyons

On a blended basis, I’d say it’s probably about 3.9-ish.

Mark Fitzgibbon - Sandler O'Neill

3.9%? Okay, and then on cost, you guys have done a really good job at squeezing the expense line, is there much more room, do you think or expense savings likely to slow at this point?

Christopher Martin

This is, Chris. I think that we are always looking at cost. But it’s mostly looking at more operational efficiencies to meet client demands and our customer expectations. So, we are trying to balance that certainly with the regulatory climate getting a little bit more onerous is going to be a little bit tougher, but on the other hand, we still are looking at ways that we can go ahead and streamline our process to deliver products a lot better and more efficiently.

Mark Fitzgibbon - Sandler O'Neill

Okay, and then lastly, Chris, you said earlier in the call that you’re confident that you’d meet your objectives and targets. What are those objectives and targets?

Christopher Martin

As you know, Mark, we do not give guidance but I think our run rate has been for the first three quarters certainly to be emulated in the fourth quarter.

Mark Fitzgibbon - Sandler O'Neill

Thank you.

Operator

And our next question comes from Collyn Gilbert from KBW. Please go ahead with your question

Collyn Gilbert – KBW

Thanks, good morning guys.

Christopher Martin

Good morning.

Collyn Gilbert – KBW

So, Tom, the prepay, you said it was $2.6 million in this quarter, what was it in the second quarter?

Thomas Lyons

$1.1 million.

Collyn Gilbert – KBW

Okay. And how are you thinking about that going forward? I mean, do you anticipate levels to stay elevated? I guess I am surprised that they’ve been as, as strong as they have so far this year.

Thomas Lyons

We were surprised as well given what we thought rates were going to do. Certainly so our refinance activities slow. The expectation is that they will reduce going forward.

Collyn Gilbert – KBW

Okay. And then how much was begin this quarter?

Thomas Lyons

Begin was running at about $2.1 million for the quarter.

Collyn Gilbert – KBW

And how about in the second quarter?

Thomas Lyons

Consistent, $2.1 million.

Collyn Gilbert – KBW

Okay. Okay and I know you gave some color on that 3.9 in terms of the pipeline yield. I guess it seems like your loan yield is staying a little bit better than peers, what’s driving that? Is it the structure on the multi-family that you are doing? Or is it, just maybe talk a little bit about the components of what’s keeping that loan yield up a little bit?

Thomas Lyons

Yes, I would not say that, to be our loan losses are certainly, we know what, our treasury group meets with our loan group to make sure that each one of our return on equity hurdles is being met and it certainly is the condition depending on where we would be able to finance aside of it.

We are never going to be the low cost guy out there. We know there are some of our competitors are trying to drive some volume, that's not what we do. On the other hand we don’t use brokers or maybe we are able to get a little bit better rate.

I think people realize our process has always been – there are no problems. They come in, they will get a quick know, or they get a very quick answer and they get through the process without it’s being very painstaking.

Collyn Gilbert – KBW

Okay. Okay, that’s helpful. And, what is left in – how big is your SNIK [ph] portfolio?

Christopher Martin

Well, that’s – not too big anymore. We had two payoffs.

Collyn Gilbert – KBW

Yes, and are you adding to that at all?

Christopher Martin

We did so one on this quarter so the total share is about $60 million if that were to all go out, so there is about $19.8 million outstanding currently.

Collyn Gilbert – KBW

Okay. And I presume you are getting a better or what’s the yield on that? Or even the credit that you put on this quarter?

Christopher Martin

I am sorry, Collyn, I don’t have the rate with me right now. I apologize for that.

Collyn Gilbert – KBW

Okay. Okay, that's fine and then just one final question, you guys, you’ve been, sort of utilizing borrowings to match fund, it seems some of the assets. Can you just talk about the terms and the rates that you are seeing there and kind of what that strategy mean or what we can sort of expect from a funding strategy going forward?

Thomas Lyons

During the course of this quarter, we put on $165 million in advances, weighted average rate of 1.85% and a maturity of 4.6 years. It’s sort of, as you said managing risk, gone a little bit long on the liabilities, looking at the pipeline of loans coming in and batch funding where we think it’s appropriate.

Collyn Gilbert – KBW

Okay. So, most of the multi-family product that you guys are putting on is mostly ten years product?

Christopher Martin

It’s, sure - that's a little bit in the last quarter, I guess, two quarters ago, it would have been ten, we are more of in the five and or seven with the three kicker afterwards. So, it’s seven and then three for a ten total.

Collyn Gilbert – KBW

Okay, okay. That's helpful. Thanks guys.

Christopher Martin

Thank you.

Operator

And at this time, I am showing no additional questions. I would like to turn the conference call back over to Mr. Martin for any closing remarks.

Christopher Martin

Well, we appreciate everybody’s attention to the call. We know we are pretty expedient in how we get through the questions and answers and we appreciate your support and we will talk to you next quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.

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