Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Leonard Gleason - SVP, IR

Chris Martin - Chairman, President and CEO

Tom Lyons - EVP and CFO

Analysts

Mark Fitzgibbon - Sandler O'Neill

Jason O'Donnell - Merion Capital Group

Collyn Gilbert - KBW

Matthew Breeze - Sterne Agee

Provident Financial Services, Inc. (PFS) Team Capital Bank Acquisition Conference Call December 20, 2013 10:00 AM ET

Operator

Good morning and welcome to the Provident Financial Services Inc. Announces Acquisition of Team Capital Bank Conference Call and Webcast. All participants will be in listen-only mode. (Operator instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded.

Now, I would like to turn the conference over to Mr. Leonard Gleason of Invest Relations. Mr. Gleason, please go ahead.

Leonard Gleason

Thank you, Keith. Good morning ladies and gentlemen, thank you for joining us this morning. The presenters for our call today are Chris Martin, Chairman, President and CEO; and Tom Lyons, Executive Vice President and CFO. For those of you with Internet access, you may follow along today’s investor presentation by going to our website, www.providentnj.com, click on Investor Relations on the right and scroll down and click on Webcast.

Before we begin their overview of the merger transaction we announced earlier today, 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 is also contained in today’s investor presentation.

Now, I will turn the call over to our Chief Executive Officer, Chris Martin, who will offer his perspective on today’s acquisition announcement. Chris?

Chris Martin

Thank you, Len and good morning everyone. Yesterday, the Board of Directors of Provident Financial Services approved the acquisition of Team Capital Bank, headquartered in Bethlehem, Pennsylvania. Team Capital is a community bank that’s focused on servicing small and mid-sized businesses in each of its markets to 12 branch locations in Western New Jersey and Eastern Pennsylvania. At September 30, Team Capital had total assets of $949 million.

As we’ve discussed in the past, we view the Eastern Pennsylvania market as a growth area for the Provident model of relationship banking. And we recognized early on that the customer focus is an integral part of Team Capital’s business approach as well. Provident has already been lending in Team’s markets with great success with over 254 million in commercial real-estate loans currently outstanding in Pennsylvania.

With that I’d like to review some of the metrics of the deal.

So on Page 2, discussing the transactional rationale. Team Capital will enhance our New Jersey presence and will extend our branch footprint into Eastern Pennsylvania. As I mentioned, we already lend in these markets because of favorable demographics and competitive landscape. We believe that the risk adjusted loan rates in Team’s markets are often more attractive than those closer to the New York metropolitan area. And with larger bank less focused on these regions, we believe there are numerous opportunities for Provident.

Team Capital has been able to grow loans in excess of 10% annually since 2010, and we believe that our strong balance sheet and capital position will provide Team Capital’s lenders with the ability to accelerate growth. And we believe that there are additional wealth management opportunities as we extend into these effluent markets.

Team Capital is a high performing commercially oriented bank with solid asset quality. You could see some stats that we’ve highlighted around its profitability and asset quality. For a bank of less than a 1 billion, returns on common equity of about 10% would put in the top quartile nationally.

The loan portfolio is primarily commercial and well diversified. The deposit base is comprised of 25% non-interest bearing deposits with a total average cost of 40 basis points, which is particularly strong for a bank of its size, and the combination of higher yielding commercial loans with a low cost deposit base explains why Team Capital has a healthy net interest margin of 3.65%. We expect the transaction to be immediately accretive to our earnings in 2014 and expect 5% accretion to earnings in 2015 during the first full year and thereafter.

Meanwhile, tangible book value dilution is 3.5% with a modest earn-back of four years. We view it is the most conservative cross-over method to calculate the earn-back, combined with our retained earnings, we’ll recapture the tangible book value dilution per share within three quarters.

Turning to Page 3, which shows the pro forma branch franchise, as you can see, Team Capital’s branches are contiguous to ours and nicely extend our footprint westward into Eastern Pennsylvania. Despite being headquartered in Pennsylvania, 51% of Team Capital’s deposits and 7 of its 12 branches are in New Jersey. When combined, we’ll have 90 branches with just over $6 billion in deposits, of which 6% will be in Pennsylvania, and there is no branch overlap within 2 miles so we do not intend to close any branches.

Moving on to Page 4 with the transaction overview; the merger consideration totals 122 million based on PFS’ closing price yesterday at $18.61. The consideration mix is 75% stock and 25% cash. We look forward to having John Pugliese, the Chairman of Team Capital join our Board of Directors, and of course the required approvals from regulatory agencies as necessary, as well as approval from Team Capital’s stockholders.

We have completed due diligence and found no issues of concern. We do intend to repay the preferred equity issued by Team Capital from the small business loan funding program with treasury. A termination fee of $5 million is in place, and we envision closing on the merger in the second quarter of 2014.

On Page 5, a brief overview of Team Capital. Team is a Pennsylvania state-chartered savings bank that historically has been organized by regional segments, Lehigh Valley, Bucks County and New Jersey. The table on the top right corner of the slide provides the summary of Team Capital’s financials as of the most recent quarter. At 949 million in assets, Team Capital will represent approximately 11% of the pro forma entity and the financial summary highlights, solid profitability with a return on average assets of 76 basis points, return on average common equity of 10.3%, accompanied by solid asset quality.

Moving to Page 6, this slide highlights the loan and deposit compositions on a standalone and on a pro forma basis as of September 30. Given the size of Team Capital relative to Provident, the pro forma loan and deposit compositions do not change materially. Highlighting Team Capital in the middle of the page, the loans are well diversified and commercially oriented with loan yields close to 5%, and as previously mentioned 25% of the deposits are non-interest bearing with total cost of deposits at 40 basis points, which is strong particularly for a bank of its size.

On Page 7, we’ve highlighted the Pennsylvania markets in which Team Capital operates. These Pennsylvania markets are attractive for a variety of reasons, including a lower cost of living and proximity to Philadelphia and New York, which is why many Fortune 500 companies have established its presence in the area.

The markets also have strong demographics with Lehigh Valley as the third most populous region in Pennsylvania, and its 2.4% projected population growth and 20.6% projected household income growth compared favorably to both the State of Pennsylvania and our current markets. Bucks County’s medium household income of approximately $74,000 also compares well to the aforementioned markets.

Overall, these are good demographic markets in which we like to operate. And given our experience in the area, these Pennsylvania markets are largely overlooked by the largest banks and offer superior lending opportunities.

Flipping to Page 8, we’ll review the financial impact of the merger. We believe the acquisition of Team Capital is financially attractive by all measures. We expect the transaction will close towards the end of Q2 2014 and estimate the transaction to be slightly accretive in 2014.

The transaction will be approximately 5% accretive starting in 2015 when cost savings are fully realized. The tangible book value dilution is approximately 3.5%, and we can certainly estimate earn-back in four years. The internal rate of return is over 15% which is nicely above our estimated cost of capital, and pro forma for the transaction or tangible common -- common ratio will be 8.7%.

As you would expect from PFS, all of our assumptions are conservative. Cost savings of 25% or 6 million are based on Team Capital’s core non-interest expense base. The credit mark of $9 million, which is 1.5% of loans or 100% of Team Capital’s reserves, the core deposit intangibles total $9 million which represent 1.5% of core deposits amortized over 10 years. It is also worth noting that while revenue synergies were identified, they were excluded from our financial analysis.

We additionally reviewed interest rates on securities, loans, deposits, and borrowings and concluded that rates were in line with current market rates and did not estimate any incremental interest rate marks. And as you can see at the bottom third of the page, pricing metrics are in line and compare favorably with proceeding transactions with price to tangible common equity of 1.8 times, price to net income of 17 to 19 times or 11 to 12 times, net income after adjusting for cost savings, and the core deposit premium of 9.3%.

So to summarize on Page 9, we believe this enhances our New Jersey franchise, enhances our opportunity to grow in Eastern Pennsylvania. The transaction brings us an experienced team of committed individuals joined together with a strong commercially oriented community bank with solid earnings metrics, and offers a financially attractive way to deploy our capital strategically with limited book value dilution and strong accretion to EPS.

With that, Tom and I will respond to any questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will begin the question-and-answer session. (Operator Instructions) And the first question comes from Mark Fitzgibbon of Sandler O'Neill.

Mark Fitzgibbon - Sandler O'Neill

I know Provident does a fair bit of lending in Pennsylvania already, how big would you say the loan portfolio that Provident has is in Pennsylvania today? And also I’m curious, how much better you think for example commercial real-estate spreads are in that market versus your core New Jersey footprint?

Chris Martin

The first part of it, as I mentioned a little bit, we have 254 million in the State of Pennsylvania in the way of commercial real-estate loans. We have probably a little less than maybe 10 million to 15 million in C&I loans meaning we didn’t have any boots on the ground there. This is really relationships from New Jersey that we’re moving out into Pennsylvania for a variety of reasons whether it’d be for building, for getting enhanced their portfolio, so they would go out to Pennsylvania, so we follow our clients out there. From the standpoint of spreads, Tom would talk about, it is a little certainly higher.

Tom Lyons

It’s about a quarter higher, we think Pennsylvania market.

Mark Fitzgibbon - Sandler O'Neill

And then secondly, could you talk about the timing of extracting the 25% cost saves?

Tom Lyons

It’s 75% in year one with the balance (inaudible), so it’s about 38% of the total in (inaudible).

Mark Fitzgibbon - Sandler O'Neill

And then next on credit diligence, I wondered if you could give us a sense for the credit diligence process that you went through, and maybe how many loan files you looked at, what percentage of the loan files, something like that?

Tom Lyons

Sure, we looked at about 80% of the criticized and classified loans, about 35% just under 35% of the total loan portfolio.

Mark Fitzgibbon - Sandler O'Neill

And then lastly, I know you didn’t include revenue enhancements in your projections but what areas do you foresee revenue enhancements coming from?

Chris Martin

Well, I think we certainly look at generating a little lower cost deposits in New Jersey than in Pennsylvania. And we also see our ability to get higher yielding loans in Pennsylvania, we see that already. Wealth management opportunity certainly, those are good counties in Pennsylvania but also in Hunterdon County where -- there we have some branches and we have obviously our beacon area in Morristown, it can translate all the way through, so wealth is -- we think we'll be augmented by this transaction also.

Tom Lyons

Just on the loan side, Mark, in addition to the higher yields, we think we have opportunities to increase the size of some of the lending obviously with our greater capital base.

Operator

Thank you. And the next question comes from Jason O'Donnell with Merion Capital Group.

Jason O'Donnell - Merion Capital Group

Just a couple of questions, and with respect to Team Capital, what were the motivating factors underlying the sale in your opinion?

Chris Martin

As we know compliance costs, regulatory costs are not going down by any stretch, so for a company of that size which is certainly not a small size but it's very difficult to go ahead and to put that burden on top of other. I think the ability to grow in capital would be another area that limited them to a degree, but I don't think that was going to stop them, they could certainly have raised more capital. Aside from that, I think the opportunity to be part of something bigger and have a lot more flexibility does play into it too.

Jason O'Donnell - Merion Capital Group

And then on the -- with respect to the impact on your capital metrics, just given that does move the needle a bit particularly on kind of TCE and the leverage ratio and so on, does this position you for a potential capital raise here, I mean is that something we should expect here over the next several months, you looked out or you feel like you are well positioned on the capital front pro forma?

Chris Martin

I think we're comfortable there, Jason. I don't see us putting us in a position where we need to raise any capital.

Jason O'Donnell - Merion Capital Group

And then my final question, I didn't see it maybe I just missed it in the slide deck. What is the estimated goodwill add for this transaction?

Chris Martin

About $46 million.

Operator

Thank you. And the next question comes from Collyn Gilbert with KBW.

Collyn Gilbert - KBW

So just the first question as you are looking at kind of this market, how are you thinking about leveraging the growth in this market? I mean you had mentioned that Team was kind of growing loans 10% a year. Do you sort of foresee that type of growth rate? Do you think you can scale that? Do you intend maybe to acquire more in this market? But just kind of if you could give us a little bit of color as to your growth plans?

Chris Martin

Sure, well we were -- as I think we have telegraphed in the past, it’s certainly a market that we like, and if our clients like it we figure we should be there. So being able to be out there with experienced team with the capacity to make larger loans, we think with our infrastructure and our systems, we'll be able to make sure that that happens. So because of our capital and our size and I think that they'll have a lot more flexibility that we can grow that market.

I think that we will -- our relationship type business will do very well in Pennsylvania, we also want to make sure that the team that's there in Pennsylvania stays in Pennsylvania. We know it to be a different market than New Jersey, and respectfully want to keep it that way. So we really like those markets, it is a better spread business than right here in the New York metropolitan area that as we know, over competitive, and we have seen that, so that's why we want to continue to go that way. We were going to go out there on a loan production office basis anyway this coming year, so strategically this is something we’ve been thinking about for a while.

Collyn Gilbert - KBW

And how are you guys thinking about kind of the opportunities in kind of your New Jersey market versus Pennsylvania market? I mean given the competitive landscape in New Jersey, are you -- if you sort of had to think about like future growth, how you would split it between kind of now let's say these two markets?

Chris Martin

Well I think we always look at the risk adjusted rate of return on anything that we can grow that makes sense for certainly earnings and for shareholders, so if the market is better in Pennsylvania, we will put more effort in that area, we think New Jersey still has a lot of potential. So I think we're just going to look at every opportunity in saying if we have growth aspects on both, we would go with both. Just like anything else, it’s very competitive in New Jersey and I think it's going to be be even more so. I think we’re trying to go that way because I think everyone else is going towards Manhattan. We think maybe this way is a little bit better for us and it applies being close to Manhattan.

Collyn Gilbert - KBW

And then just in terms of can you offer with it a negotiated deal or marketed deal or just kind of the timeline or the background on this at all?

Chris Martin

Well all I know is that we have known a few of the people that are on that Board, we have lent to one of their Board members and we’ve always stayed in touch on the other hand I know that it was competitive. So wasn't just negotiated.

Collyn Gilbert - KBW

And then just one final question, and if you have said this and I missed it I apologize but do you have, have you identified kind of what the management’s team structure would look like? Are you bringing some folks over from team are you giving them Board seats, I think you are giving them Board seats, but?

Chris Martin

We are giving a Board seat to their Chairman who is in New Jersey. We look forward to having him on our Board. We would plan on always keeping the Group intact, especially in Pennsylvania, but even in New Jersey the lending teams, we definitely want them, we always want quality people to add to our team. So I think it works well for everybody. Whereas we don't have a lot of consolidation, in fact we don’t have any to speak of so this is where everybody has an opportunity to grow together, which is why our cost saves are very conservative at the 25%. They've demonstrated their abilities very well in their own performance so we're excited to have them join the Group.

Operator

Thank you. And the next question comes from Matthew Breeze of Sterne Agee.

Matthew Breeze - Sterne Agee

What were the deal related fees the one-time merger costs?

Chris Martin

About 11 million after-tax, 18 million pre-tax.

Matthew Breeze - Sterne Agee

And that’s not the same as the restructuring charge?

Chris Martin

I'm sorry, I thought that's what you're asking, that was not a restructuring charge.

Matthew Breeze - Sterne Agee

And then, you guys do identify a credit mark, were there any interest rate marks associated with the deal?

Chris Martin

There were not.

Matthew Breeze - Sterne Agee

So as it relates to the margin, should we be thinking about that on just a simple weighted average approach or will there be any accounting, merger related accounting benefits to it?

Chris Martin

Yes, on a permanent basis we would say, simple weighted average approach makes sense.

Operator

(Operator Instructions) And there are no more questions or comments at the present time, so I would like to turn the call back over to management for any closing remarks.

Chris Martin

Well we appreciate it. We hope that everybody has a happy holiday. Rest assured that we’re going to be working very hard on this throughout the holiday. It's exciting time for Provident and for Team Capital, we look forward to hopefully ushering this through the regulatory entities and getting this done by Q2 and we welcome the Team Capital group to Provident. Thank you very much.

Operator

Thank you. That concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating and have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Provident Financial Services To Acquire Team Capital Bank (Transcript)
This Transcript
All Transcripts