Provident Financial Services Inc (PFS) 2011 Q3 法說會逐字稿

Good morning and welcome to the Provident Financial Services Incorporated third quarter 2011 earnings release conference call. (Operator instructions). I would now like to turn the conference over to Mr. Leonard Gleason, Investor Relations Officer. Mr. Gleason, please go ahead.

Thank you, Amy. Good morning, everyone. Thank you for joining us today. The presenters for our third quarter earnings call are Chris Martin, Chairman, President and CEO, and Tom Lyons, Executive Vice President and CFO.

Before turning the program over to them to discuss 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 review of our financial performance. 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 on our website, www.providentnj.com, or by calling Investor Relations at 732-590-9300. With that I would like to introduce our Chief Executive Officer, Chris Martin, who will offer an overview of our third quarter financial results. Chris?

Thank you, Len, and good morning everyone. Our third quarter results come with a sense of pride as the Company achieved both record per share earnings and record net income accompanied by modest increases in operating expenses. This was accomplished in the face of a difficult economy and a muted recovery and against the backdrop of regulatory challenges facing the banking industry.

Earnings of $15.6 million or $0.27 per share for the quarter represented an increase of 15.6% and 12.5% respectively quarter-to-quarter. Similar results were achieved for our year to date numbers. Our return on average assets improved to 90 basis points for the quarter from 79 basis points for the same quarter in 2010.

Continued organic growth in our loan portfolio was obtained by expanding and obtaining commercial relationships from larger in market competitors as our team of seasoned lenders meet and listen to the needs of our clients. With originations throughout our market totaling $1 billion for the first nine months of the year, we have been able to increase the portfolio by 3.5% despite the reduction in residential lending as refinancing takes place at historically low interest rates.

Growth has been focused in the multi family commercial and commercial mortgage areas, and our pipeline has remained consistent and our credit discipline remains intact. Funding via growth in core deposits continued with an increase of $296 million for the year to date representing an increase of 8.2%. Commercial and retail checking were the primary drivers of growth and the strategic run off of CDs, primarily single product customers, continued.

Our core deposits as a percent of total deposits continued its rise to 76.8% from 73.8% at the end of 2010. Our capital levels remain strong and the Board approved a cash dividend of $0.12 a share representing a payout ratio of 44.4% and a yield of approximately 3.6%. The Company continues to evaluate every opportunity to utilize our capitol prudently and with the banking sector out of favor, we were able to repurchase 220,000 shares of our common stock during the quarter with approximately 2 million shares remaining for purchase under our current authorization.

As Tom will discuss in more detail, our margin contracted 3 basis points in the quarter as we approach a floor in the level of rates paid to depositors accompanied by loan customers requesting modifications in the rate paid on loans all contributing to pressure on spread. With operation twist in effect we anticipate the curve will continue to flatten and produce little opportunity to leverage excess liquidity.

To combat the margin battle we closed on the Beacon Trust acquisition which brought us a team of very competent portfolio managers, analysts and support staff along with solid wealth relationships that will grow our non-interest income now and in the future.

Operating expenses and efficiency ratios, measures that will be more relevant in the future with increased regulation and controls, have been static approaching our near term goal of 55%. As the economy in New Jersey and nationwide struggles we are not immune to the difficulties being experienced by businesses and consumers, alike. Although early stage delinquencies have come down, our level of non-performing loans increased slightly by $4 million which is primarily attributable to a commercial mortgage that had previously been accruing [TDR].

We provided $7.5 million for possible loan losses in the quarter, which represented 123% of charge-offs. It should be noted that of our top ten criticized classified loans all are current. With that I'll turn it over to Tom who will review our results in greater detail. Tom?

Thank you, Chris, and good morning, everyone. Our net income for the third quarter was $15.6 million or $0.27 per share, compared to $14 million or $0.25 per share for the second quarter of 2011. The Company realized record net interest income as funding costs decreased and excess liquidity was deployed to fund loan originations and securities purchases.

Net interest margin decreased 3 basis points compared with the trailing quarter to 3.5% as compression and earning asset yields exceeded lower interest costs by 2 basis points. During the quarter funding continued to shift to lower cost and core deposits with core accounts, excluding all-time deposits, representing 77% of total deposits, or 56% of assets at September 30. Also contributing to the maintenance of the margin, average non-interest bearing deposits increased $25 million or 17% annualized to $606 million for the quarter ended September 30..

As of period end, total loans increased $114 million versus the trailing quarter to $4.6 billion as net growth in multi-family mortgages of $70 million, CRE loans of $34 million, construction loans of $24 million and C&I loans of $16 million was partially offset by decreases in residential mortgage loans of $27 million and consumer loans at $2 million. Total commercial loans consisting of commercial real estate, construction and C&I loans increased to 58% of total loans at September 30.

The Company provided $7.5 million for loan losses equalling the trailing quarter and exceeding net charge offs which totaled $6.1 million or 55 basis points of average loans. Non-performing loans increased $4 million to $125 million or 2.74% of total loans at September 30, up from $121 million at June 30. Decreases in non-performing commercial loans of $2 million were more than offset by a $4 million increase in non-performing commercial mortgage loans and $1 million increases in both residential and consumer loans. The increase in non-performing commercial mortgages was primarily due to a $3.4 million loan secured by a hotel in Salem County, New Jersey.

The allowances for losses to total loans is 1.61% at September 30, compared to 1.62% at June 30, while the allowance to non-performing loans was 58.8% at September 30 compared with 59.6% at the end of the previous quarter.

Total non-performing assets consisting of non-performing loans and foreclosed assets totaled $132 million or 1.89% of total assets at September 30, compared to $128 million at June 30. Total delinquencies increase $10 million compared with the trailing quarter to $122 million or 2.68% of the portfolio at September 30. However, 30 to 89-day delinquencies decreased $1 million to $37 million or 0.81% at September 30, down from 0.85% of total loans at June 30.

Non-interest income increased $600,000 compared to the trailing quarter to $8.7 million as an $800,000 increase in fee income largely attributable to August 11 Beacon Trust acquisition. $600,000 in securities gains arising from the sale of low loan count arms securities with short-terms to reset and the non-recurrence of a $300,000 other than temporary impairment charge recognized in the previous quarter were more than offset a $1.1 million reduction in gains on loan sales.

Non-interest expense decreased $980,000 versus the trailing quarter to $35 million primarily as result of reduction to non-performing asset related costs and advertising expense. Non-interest expenses to average assets improved to 2.01% and the efficiency ratio was 55.39%.

The Company reported income tax expense of $5.1 million for the third quarter compared with $4.8 million for the trailing quarter and our effective tax rate declined to 24.6% for the third quarter of 2011 as a result of a reduction in evaluation of allowances against subsidiary company New Jersey net operating losses. The Company expects an increase in the effective tax rate to approximately 27.5% in future periods as a result of increased projections of taxable income.

And with that we would be happy to take your questions.

We will now begin the question-and-answer session. (Operator instructions). Our first question is from Mark Fitzgibbon from Sandler O'Neill & Partners. Please go ahead.

Good morning, gentlemen.

Good morning.

First question I had for you on a stand-alone basis what would you say Beacon's earnings impact was on the third quarter and does that number reflect all of the synergies that you expect from the transaction?

On a revenue line, Mark, it was about $750,000 in terms of net income. The effect was significantly less than that. The synergies are to be realized over the first quarter, first half of 2012 before it's fully accretive to the bottom line.

So it was a slight drag on earnings?

About flat. About break even.

Okay. And then secondly on your pipeline of roughly, I guess $794 million, could you give us a sense for what the average rate on that was?

Mark, again, we do have a little bit of -- some that's adjustable to prime in there, and/or LIBOR index loans, but I would think in the mid-to high 4s on the larger loans such as commercial real estate, multi-families as opposed to our C&I that would be in the mid-to high 5s into the 6 depending on the maturity level.

And then Tom, in terms of the margin outlook. It is going to be hard for everybody to keep up with the [DOW] and asset repricing. Should we expect some continued NIM compression in coming quarters?

Would expect that, Mark. Fairly minimal in the early stages. Next quarter we should stay pretty close to the 350 level, maybe 3 points. That will pick up a little bit in the first quarter of next year, maybe another 3 to 5. After that it gets a little more difficult to project because there are so many moving parts, but that's about as far out as I would like to go.

Okay. And could you give us an update on the pending sale of that headquarter building? Rough timing on when that is likely to occur?

Yes, Mark, we anticipate hopefully both buildings closing in the fourth quarter.

Okay. And then --

Fresh on that, Mark, that's about $90,000 per month in carrying costs associated with those buildings.

Okay. And lastly, you have come through this recession in good stead. You've got plenty of capital, clean credit, with a bunch of potential deals in your marketplace, are you guys getting more focused on acquisitions?

I didn't know that we lost focus, but certainly we have always been looking at opportunities and guarding the capital and making sure they are going to meet the metrics we want for any deal and certainly look at the quality of institution that we would be looking at. Not that we have shied away, but I think a few years ago, everybody was trying to hold on to capital and make sure. We're still going to watch that to make sure if we're growing organically maybe that's the best trade for us on the other side though we will look and try to be involved as much as we can without going a little bit too crazy on the level that some people are still asking for.

Thank you.

Thank you.

Our next question is from Mr. Damon DelMonte with KBW. Please go ahead.

Hey, good morning, guys. How are you?

Good morning, how are you?

Good morning.

Great, thanks. Chris, I was wondering if you could talk a little bit about the multi-family growth this quarter? Maybe what were some of the driving forces behind that and maybe what has changed from last quarter to this quarter for you guys to show the positive traction?

Well, I think these deals take a long time to close. This might have been stuff we're doing in the middle of the first, second quarter, and it just took a while to get all of the legal work done, they are in our market and they are organically driven. Certainly with rates going down, they are always coming back and forth in the way of renegotiating the rate as much as possible. We just happened to get a lot of these things closed. It took awhile.

So the delay is really just making sure we're doing all of the process, having everybody sign everything up. And I think everybody is watching rates and saying when is the time to pull the trigger.

The other thing I would add that goes back to Mark's earlier question about the margin outlook. A lot of those closings happen very close to the end of the period. I think if you look point to point, loans are up $114 million versus the trailing quarter, but the average balance of loans is only up about $20 million, so that will help us to maintain margins a little bit in the fourth quarter as well.

Great. And are you guys optimistic that you can continue the closings to allow for additional growth in the fourth quarter?

We are pretty confident of that, and I think the one thing we should be looking at -- this is our end market deals. We haven't gone out to a broker community to do our loans, and these are very, very high quality. So we're really comfortable with that growth.

And I'm sure as we move along as the sectors and people are looking at it more and more, our competitors are doing a lot of this, it will become so competitive at a point in the price and the price points will get so low that we'll have to be shifting our sights on other areas. So we're cognizant of the competitive factors that are coming into play in that market.

Tom, you mentioned that the tax rate for next quarter is expected to be around 27.5% is that correct?

That's correct.

And how about 2012? Along the same lines?

As of now that's what I'm thinking, yes.

That's all I have for now, thank you guys.

Thanks.

The next question is from Collyn Gilbert with Stifel Nicolaus. Please go ahead.

Thanks, good morning, guys.

Good morning.

Tom just a follow-up on Mark's question about Beacon. You mentioned the revenue contribution this quarter of $750,000. What about on the expense side?

As I said to Mark, it was about flat in terms of overall expenses. You'll see that pushed through on the comp line, a little bit on the occupancy side of things, some [BP] expenses.

I think we're going to -- Collyn, this is Chris. We're going to be spending a little bit of money just to get all of the systems in play to put our two companies together in the way of the right thing for the client, a little bit different statements, making sure we're telling the whole story and providing them with the extra value, which is the value we can bring to Beacon was to put on a few more systems to be able to generate more assets under management, and better reporting for our clients.

Okay. So if we think about it from the fourth quarter, and I forget, when in August did Beacon close?

August 11.

Okay. So roughly half of a quarter then of that -- if we annualize that revenue number? Is that too aggressive going into the fourth quarter?

It's about $1.35 billion a quarter.

But even though we didn't see that expense boost much during the third quarter, we should assume given what you guys are saying that we'll see more of that in the fourth quarter. Is that correct?

Again, consistent with what we saw in the third, so, yes.

Okay. Okay. And just on the non-performing loans, I think you said, Tom, that your top ten criticized are performing. But what about the overall bucket in general, the $132 million or so? How much of those are actually performing?

Included in that accrual we have $37.9 million that are less than 90 days, $33.8 million of that are current.

Okay. That's was all I had, thanks.

Thank you.

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

Hi, guys just a big picture question first. How do you feel about your ability to grow in credit trends today versus July when we spoke? Same, better worse on both of those fronts?

This is Chris. I feel a little bit better on the growth aspect. Just like anything else the relationships to get referrals which help us are tenders of influence that we have through our advisory counsel have been bringing more and more opportunities for us. Our relationship people are out there on the road. The larger institutions and some of the disconnect through say a Wells/Wachovia is creating opportunity for us.

And as these loans are coming for renewal they are looking for somebody to be able to talk to, and we're able to do that and we meet the needs. We're out there through our chief lending officer, myself, we're meeting with clients and I think they like having access to the quote, top. So I think we're going to look at growth -- we're a little more positive on it than we had been maybe in the past. That's easy considering where we were on the past.

And on credit? Just commentary there?

We have not really changed on credit. We're seeing deals, and we're competing accordingly that people are maybe giving a little more on the guarantee than we would or they are allowing some equity to flow out on some deals that we maybe would not do.

I don't think there's anybody that's being reckless in our market necessarily. And the returns, people are very cognizant of where the flat yield curve is and where they want to grow, and nobody wants to buy investments that are yielding 1.5% for a five year life, so everybody is looking at loans as the opportunity. So you have to be careful that you don't fall into that trap of giving up that ghost of credit.

Got you. The multi family and commercial real estate production that you had. The $70 million, the $34 million, can you just talk about price and terms and how those compared between those two products?

Well, with the multi-family, we do -- usually it's ten-year, based on maybe a 25-year, but it will be adjusting in five years. And then it would adjust to the Treasury plus usually about 250. On the C&I side it's a little bit better. They always want to extend, and we're trying to keep it as short as possible. Everybody wants to lock in their term as quickly as possible.

Certainly cash flow lending has been our strength, and we have been looking at that and want to make sure it can be supported. So I think we're doing the right thing, Matt. I know some people are pushing out amortization. For some of the great clients, we would maybe look out to a thirty year, but it doesn't really affect the cash flow much at all. And that's on the multi-family space. So we're comfortable with that. We're dealing with people of institutional quality, so there's really -- they could have gone maybe even to Fannie Mae for their financing, but just don't won't to go through the hassles.

Right. And what is the lowest coupon you have done in the multi-family space in that five-year mixed rate, 25 AM type product?

I think we had one that was about 3.5% to 3.625%. Again, of a quality that we would not normally see -- I mean, just premier, solid as could be. Net worth of just hundreds of millions of dollars, and people we are familiar with and had been in the business for 30 years.

Right.

So a lot of experience. And that's -- the tradeoff sometimes, Matt, is you could do other deals, but you wouldn't feel confident. We'd rather say we know I'm going to get paid, we know it's going to perform. We'll take a little bit more interest rate risk, or a little tighter margin on those loans, versus going out there and trying to reach for smaller, but people we're not as comfortable with.

Got it. And lastly just on capital. What are you targeting as a minimal level of capital that you want to maintain, and how does that play into your decision on the buyback and how aggressive or caution you might be there?

Tom and I always have a difference of opinion, not to say that they're way off. But we've been in the 7.5 and the 8 range I think of bouncing it back and forth. We're continuing to generate more earnings and putting in to capital. We want to provide value to shareholders. From what we see, anywhere that range is a safe play. Regulators are looking at that area. They would love to see you at 12 for all of that -- their returns wouldn't be there.

So I think we're comfortable where we are right now, and we may lever up if we see the opportunities to do a little more aggressive. If we can definitely put out more loans, we'll do it. Our loan to deposit ratio is tweaked up a little bit, which is good. We're happy that's moving in the right direction. I don't think that we would take it down to a 6 number by any stretch. Tom, if you want to add more detail on that.

I actually agree with everything you said there, Chris. He looked surprised. I think we're in a good position to support additional growth, and we have opportunities to look at what the best alternatives are for deployment, so we have room to move.

Next, if I could just follow up on one, your decision and willingness to put on some sub-4% coupon type paper. I assume that's a direct response to Fed policy, and that's what has changed over the last 90 days, just a willingness to grow with maybe some lower cost -- a lower yielding type paper, lock in some longer maturity type stuff?

That would be -- that and also the fact that we were able to do -- through Federal Home Loan Bank we were able to do match funding on some of those, so we're still able to lock in a decent spread and not have to worry about that. It's not all going to be funded with core deposits, though it's the cheapest way to go.

We're trying to say even though we could probably make a little more spread by just funding it with core, we're going out on the curve, borrowing for five years, locking that in, knowing that inevitably rate will go up, and we want to at least protect some of our balance sheet and get some duration in our liabilities. So that's what we have been doing on the bigger deals.

And again, Matt, those extremely low -- or the lower end rate loans are really only in the lowest risk categories in terms of [bar] quality, as well as the fact that they're multi-family. Also a deposit relationship factors into the pricing as well, so if we're able to secure a significant balance, that will play a role in allowing us to minimize the price to the borrower.

Got it. Alright. Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Christopher Martin for any closing remarks.

Well, I guess with the fiscal policy and politics holding the economy hostage we foresee a difficult environment for our customers and for community banks like us. The level of regulatory scrutiny continues to burden the industry with no clear mandate on it as to its ultimate conclusion.

Nevertheless, we remain confident that we are managing our business effectively through a complex and difficult environment, one not seen since the great depression. Our customers experience true relationship banking with Provident, with personal interaction, engaged dialogue, and solutions that meet their financial needs and goals. All along, we continue to reach out to our customers in our communities, including those in need, maintaining our commitment to them, our employees and our shareholders.

So we thank you today for joining us on the call, and we hope you have a good day. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.