Provident Financial Services, Inc.
Q4 2013 Earnings Call Transcript

Published: 31 Jan 2014

[Operator:]

Hello, and welcome to the Provident Financial Services Inc. Fourth Quarter 2013 Earnings release. All participants will be in a 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. Now, I would like to turn the conference over to Mr. Leonard Gleason, Investor Relations. Mr. Gleason, please go ahead.

[Leonard G. Gleason:]

Thank you, Keith. Good morning, ladies and gentlemen and thank you for taking the time to join us on this great winter 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 a review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that maybe 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 also be obtained by accessing the Investor Relations page on our website, www.providentnj.com. Now it is my pleasure to introduce our Chief Executive Officer, Chris Martin, who will offer his perspective on our fourth quarter and full year 2013 financial results. Chris?

[Christopher Martin:]

Thanks, Len, and good morning everyone. Our fourth quarter results produced strong core earnings of $0.30 a share or $17.4 million, including an OTTI charge of $434,000 on our private label mortgage-backed securities during the quarter. And the Board approved our regular cash dividend of $0.15 per share payable on February 28. Now, the quarter’s highlights include an annualized return on assets of 94 basis points and a return on tangible equity of 10.6%. Growth in the loan portfolio continued on an accelerated pace and was broad-based over CRE, multi-family and C&I loans. Pricing pressures continue to be a factor in our market, but competitive credit standards have not been exceedingly aggressive. We are acquiring business from other financial institutions through the efforts of our lenders and repose from our centers of influence, although the economy has not yet been strong enough to encourage much growth in the business of capital expenditures. Overall, loan pipeline is solid and we anticipate mid-single digit growth in 2014 as pay-offs have declined as rates increasing. Consumer lending volumes remain challenged as consumer confidence remains generally soft. Reported net interest margin showed signs of stabilization in the quarter declining only 2 basis points from the trailing quarter, as the company extended its liability slightly to manage interest rate risk. Average non-interest bearing deposit growth during the quarter was strong again. The anticipated modest improvement in the economy should help loan demand in the future, which should correlate into increased longer-term rates hopefully further stabilizing or improving the net interest margin. The momentum of improvement in asset quality continues through 2013 as non-performing loans declined by over 22% from December 2012. Delinquent loan levels have decreased combined with federal risk ratings on our portfolio. And as non-performing assets are resolved, there is a coinciding of reduction in credit costs. The improving housing markets have allowed this trend to continue and charge-offs remains low as problem assets are marked appropriately. Expense management has always been a focus appropriate and we have more on year-over-year on costs. While many financial institutions are announcing cost saving initiatives and novel programs to reduce expenses, we continuously evaluate our costs and the effectiveness of our branch network. We will be data testing our branch in the future in three locations in 2014, as technology and consumer preferences for self service has increased utilization of our electronic channels such as mobile banking and bill pay. These branches should facilitate a reduction in staff needs depending upon customers’ option levels. In December, we announced our agreement to acquire Team Capital and members of both companies are mutually energized about the combination and are working diligently toward a successful integration process. And they are a great team to work with so far. With the roll-out of our new logo and signage accompanying our celebration of 175 years of serving our customers and community, we are building on the momentum from 2013 and look forward to great things in the upcoming year. With that, I’ll turn it over to Tom for more details on our quarter. Tom?

[Thomas M. Lyons:]

Thank you, Chris and good morning everyone. Our net income for the fourth quarter was $17.4 million or $0.30 per share compared with trailing quarter earnings of $16.1 million or $0.28 per share. Trailing quarter earnings were impacted by a $3.2 million charge to income tax expense related to the write-off of a deferred tax asset risk throughout. Net interest income increased $382,000, compared with the trailing quarter to $55 million, as average loans outstanding grew by an annualized 7.2% or $90 million. Growth was led by multi-family commercial and commercial mortgage loans. In addition, average securities balances increased by $32 million and the yield on securities increased by 16 basis points. As cash flows were reinvested, more attractive market rates and mortgage-backed securities repayments and related premium amortization slowed. Our net interest margin however, declined 2 basis points to 3.26%. Loan yields decreased 6 basis points as origination rates remained below portfolio yields and interest bearing liability costs increased 2 basis points to 0.69%, as longer term borrowings were added to manage interest-rate risk. Hoping to mitigate margin compression and further manage interest-rate risk, average non-interest bearing deposits increased $41 million or 20% annualized for the quarter to $885 million. As you know, we quarterly report our core margin, we record loan prepayment fees and non-interest income and do not consider them in the margin calculation. As the quarter ends, total loans increased to $112 million or 8.8% annualized for the quarter to $5.2 billion. We provided $1.8 million for loan losses this quarter, an increase from $1.2 million in the trailing quarter, primarily as a result of continued loan growth. Credit metrics improved again with non-performing loans decreasing $5 million compared to September 30, $77 million or 1.48% 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 were $3.1 million or 25 basis points of average loans. The allowance for loan losses to total loans declined to 1.24% from 1.30% at September 30. However, the allowance coverage of non-performing loans increased to 84% from 81% at September 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 $7 million versus the trailing quarter to $82 million. And subsequent to quarter-end, we thus far sold two residential properties with a $494,000 book value and have another three residential properties and one mixed-use property with a combined book value of $1.5 million under contract. Non-interest income decreased $1.9 million compared to the trailing quarter, primarily as a result of $1.8 million reduction in loan prepayment fees and a $434,000 of net other-than-temporary impairment charge recognized on a private label mortgage-backed security, partially offset by an increase in gains on loan sales. Non-interest expense increased $1.1 million versus the trailing quarter to $37.5 million, primarily as a result of increased advertising expense and a $3,00,000 increase in NPA related expenses. In addition, they were seasonal increases in facilities, maintenance and provisional fees. Income tax expense was $7.8 million for the fourth quarter and our effective tax rate was 30.9%. We welcome now your questions at this point.

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) At this time, we’ll pause momentarily to assemble our roster. And the first question comes from Mark Fitzgibbon with Sandler O’Neill & Partners.

[Mark T. Fitzgibbon:]

Hi guys, good morning.

[Christopher Martin:]

Good morning.

[Thomas M. Lyons:]

Good morning.

[Mark T. Fitzgibbon:]

I wondered if you could share with us – fees were down almost $2 million from the linked quarter. Was that a function of pre – lower prepayment penalty income or something else?

[Thomas M. Lyons:]

Our most entirely prepayment penalty income market is $1.8 million reduction quarter-to-quarter.

[Mark T. Fitzgibbon:]

Okay, great. And then secondly, the loan pipeline, I wondered if you could share with us if you have at your finger tips the average yield on that pipe?

[Thomas M. Lyons:]

I can tell you that the average origination rate were up 4% this quarter, so we are moving closer to the portfolio yields. Portfolio I think was 4.26% in the Q4. So we are up in low 4s on the pipeline.

[Mark T. Fitzgibbon:]

Okay. And then Tom, in the past, you had said that you thought NIM would sort of stabilize around 3.19, 3.20 in a quarter or so. Do you still have that view?

[Thomas M. Lyons:]

I think that’s still too early to guess.

[Mark T. Fitzgibbon:]

Okay. And then lastly, I guess for you Chris. Chris, you’ve always been pretty frugal from an expense standpoint. What drove the sequential quarter rise in operating expenses whether deal costs in there related to the Team acquisition or something else?

[Christopher Martin:]

Nothing related to the acquisition at all, Mark. Really, certainly, the new signage and the new logo, there was work behind the scenes to get that at a place which will be kicking out in this quarter, a 175-year having just a VIP event to celebrate that. That certainly is a big number. And as Tom said in his comments, a 300,000 in getting some of these asset quality issues settled out. So I would think that frugality and parsimonious aside, we will continue to work on all of our expense lines as you would expect.

[Mark T. Fitzgibbon:]

Thank you.

[Christopher Martin:]

Thanks Mark.

[Operator:]

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

[Collyn B. Gilbert:]

Thanks. Good morning, guys.

[Christopher Martin:]

Good morning.

[Collyn B. Gilbert:]

Just on the loan growth, so the multi-family was up really strong in this quarter. Is that sustainable? What’s your outlook for that minor business and then also what types of products or what types of structures are you putting on in that category?

[Christopher Martin:]

We do see continued growth in that area. The terms are really, we are doing five and seven year not – no longer doing 10 on 30s for the most part probably a year ago, right, and that market is still there. So we are shortening up on the initial set of fixed terms, and if we can swap it out we will try to – really, we see that market continuing doing pretty well. We are trying to be discerning, which are saying we are not in the boroughs of New York at all. This is all Pennsylvania and New Jersey.

[Collyn B. Gilbert:]

Okay, okay, that’s helpful. And Tom, you said that the origination rate right now is hovering or just broke about 4%. What’s the best yielding loan category you guys are seeing at this point?

[Thomas M. Lyons:]

Well, consumer loans, the best very well volume for us. The commercial mortgage rates are still probably the best theory.

[Collyn B. Gilbert:]

Okay. And then, just staying on the loan discussion, C&I that you put up this quarter that was also strong, was there certain timing of closing there or is that just reflective of kind of now starting to kick off some momentum?

[Thomas M. Lyons:]

I think some of that is momentum. We had some changes in our middle market group, but I guess a year ago and we’ve really seen things start to pick up, pipeline remains strong in that area. I think we talked at the last call about hoping to see some of that pull through an acceleration of that and it actually came to fruition. So we still feel good about that going forward.

[Christopher Martin:]

And we see that again with the new leadership and with the team that’s really on also on this having the right product set. The one thing about pricing is we are seeing definitely some impact and some aggressive pricing out there especially in the C&I world where you are looking at 200 over the treasury and that is pretty aggressive in this environment, so we are trying to be competitive but not really giving it all away.

[Collyn B. Gilbert:]

Okay, that’s helpful. And then just lastly, what was the structure of the borrowings that you put on this quarter, I know you said it was longer-term product and then also kind of what’s your outlook for how you are going to sum the balance sheet in the near-term?

[Thomas M. Lyons:]

We put on $86 million, although 1.48% just under a four-year maturity on average. I think there is a size we have continue to try and manage the interest on risk, take it little off the table as we’ve seen margin improvement maybe reinvest, some of that type invites to lengthening liabilities. The emphasis continues to be deepening our commercial relationships in growing those non-interest bearing deposits as we solely had tremendous growth in that area again this quarter. I was looking back over three-year period it’s come out with 17% CAGR in non-interest bearing deposit growth. So it’s not a uplift, its continued good efforts to broaden and deepen those commercial relationships funding in those commercial deposits.

[Collyn B. Gilbert:]

Okay. Okay, that’s helpful. Great. Thanks guys.

[Christopher Martin:]

Thank you.

[Thomas M. Lyons:]

Thank you.

[Operator:]

Thank you. The next question comes from Rick Weiss with Janney.

[Richard D. Weiss:]

Good morning.

[Christopher Martin:]

Good morning.

[Richard D. Weiss:]

I just wanted to follow-up a little bit on Mark’s question with if it’s cost cutting and things like that. Chris, when you are talking about the branch network, it sounds like you are cutting some branches maybe or adding to technology. Is this kind of like a new kind of deposit item strategy?

[Christopher Martin:]

Well, taking the first one, we’ve always looked at branches. We are consolidating one more in the first quarter where it’s maybe not in the best location or that we – again the world is not going into branches as much as it used to, so branch traffic is down. I think it’s universally known that as people use electronic channels to do their basic business. We – the branch in the future, we’re using technology and looking at it from the smaller footprints, less staffing, more electronic, so when a person comes into the branch they can self serve as much as they want to, yet have somebody to speak to if there is some other to ask them for that. And that would involve certainly being able to teller prompt in a branch and talk to somebody at a different location to a screen as opposed to having all the people waiting in the branch itself. Transaction volumes are down across the board, so the need for having vast power networks that wait for business is diminished. From the expense side, as you would think that we are with the brand logo being changed, we are going to have a little bit of signage expense which is very exciting to a lot of our customers, and non-customers are seeing ourselves a little differently. They get back to see our signs, whereas in the past, they kind of meshed into the landscape. So we think visibility is also very helpful going forward.

[Richard D. Weiss:]

Okay. And when you say – would you expect like to have higher technology expense going forward. Is there going to be a need to upgrade the whole system? Is there anything major?

[Christopher Martin:]

No, this would not be a universal switching everybody over to this pipe because we have different markets. We are in some urban markets where it’s very transactional and that we don’t see changing, but there will certainly be other markets that we see the opportunity to embrace the technology. But it is not changing every single branch location to be one model, it really is branch and market specific. And any changes to it are capital improvements, so that the cost of that is spread over a period of time. So we wouldn’t see a dramatic impact for P&L in any one year.

[Richard D. Weiss:]

All right, I got it. So the existing systems that you have are generally like still you are….

[Christopher Martin:]

Pretty much yes, because our mobile banking and this would just be slightly different technology in the way of being able to handle transactions without having a lot of people behind where as machines will take that over. And being able to queue people up when they walk into the branch of the future, they will be able to ascertain what they want right out of the box.

[Richard D. Weiss:]

Got it. Okay, thank you very much.

[Christopher Martin:]

You’re welcome.

[Operator:]

The next question comes from Chris Jackson with Sterne Agee.

[Matthew Breese:]

Good morning, everybody. Thanks, I’m Matt Breese.

[Christopher Martin:]

Good morning, Matt.

[Matthew Breese:]

Just curious on the overall reserve, I was just curious the allowance is down year-over-year a little bit and I wanted to know where do you feel comfortable bringing the reserve down to?

[Thomas M. Lyons:]

Obviously, we are very dependent on the continued improvements in credit quality. I kind of tried the stress test in almost in an unrealistic fashion what would the low could be and instead if you took all this substandard loans and movements to your three category what would be the GVA requirement fee based on our historical losses and it gets you down to around 97 basis points. Obviously, I don’t expect that to happen. We are never going to clear all of our substandard credits now they have moved to a past, but it gives you some sense of the lower boundaries on that. So I think you can move closer to one – in the one-teens kind of range.

[Matthew Breese:]

Total loans.

[Christopher Martin:]

Very positive improvement.

[Matthew Breese:]

And that was the percentage of loans?

[Christopher Martin:]

Yes.

[Thomas M. Lyons:]

Yes.

[Matthew Breese:]

Okay. And then any changes to the date of close for the Team Capital acquisition?

[Christopher Martin:]

Right now we have the filings that are just going in for our regulators, so timing is not really changed much as do we know how that’s going on, so we are just finishing up those filings and to be continued.

[Matthew Breese:]

That’s all I had, thank you.

[Christopher Martin:]

Thank you.

[Operator:]

And as there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

[Christopher Martin:]

We appreciate your time and attention. And we are happy to be in New Jersey hosting the Super Bowl, and wish the weather will cooperate. And we appreciate your attention and we will talk to you next quarter. Thank you very much.

[Operator:]

Thank you. Conference is now concluded. Thanks for attending today’s presentation. You may now disconnect. Have a nice day.