Provident Financial Services Inc (PFS) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen. And welcome to the Provident Financial Services First Quarter 2006 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Mr. Paul Pantozzi, Chairman and Chief Executive Officer of Provident Financial Services.

Thank you, Mr. Pantozzi, you may begin.

Thank you. And good morning, everyone. Welcome to our first quarter 2006 Earnings Call.

I’ll start by providing our standard caution as to any forward-looking statements that may be made in the course of our discussion. And the full disclaimer can be found in the text of our earnings release. You can obtain a copy of that, as well as all of our releases and SEC filings, by accessing our website, providentnj.com, or calling our Investor Relations area at 201-915-5344.

Today’s presentation, I’m joined by our Chief Financial Officer, Linda Niro.

I believe everyone has had time to review our first quarter operating results which were released yesterday morning. We conducted our annual stockholder meeting yesterday, and so we scheduled this call for today. I’ll outline some of the highlights of our performance, and Linda will take us through the numbers in some detail.

Basic and diluted earnings per share for the quarter were $0.22 -- these results are the same as they were for the first quarter 2005 -- and down $0.1 from the trailing quarter. Lack of EPS growth is attributable to the persistent flat yield curve and its impact on net interest income. Whereas our total interest income of $69.6 million this quarter is up only slightly compared to both the match and trailing quarters, our total expense -- interest expense -- at $26.2 million represents a 20.3% increase above the level of first quarter 2005.

Also to maintain our loan-loss allowance at an acceptable level, we made a loan provision of $555,000 this quarter; as compared to no provision the prior-year quarter. These factors resulted in a decrease of $4.3 million, or 9.2% in net interest income after provision, compared to first quarter ‘05.

As we’ve been saying for several quarters now, we remain very disciplined in our pricing of both deposits and loans, realizing that this would work against balance sheet growth. Our goal has been to preserve our net interest margin, and we think we’ve had some success, as witnessed by a 4-basis point expansion in the margin to 3.31% compared to the trailing quarter. Reserving the margin will continue to be the focus of our efforts until we see a return to a more normalized yield curve.

To support our earnings performance, we continue to make progress in increasing non-interest income and managing non-interest expenses. Fee income is up nearly 24% the last year’s first quarter due to a variety of factors, including the outsourcing of our official check function and the conclusion of fee waivers on acquired deposit accounts, both of which took effect in the second quarter of ‘05. On the expense side, compensation costs are down compared to the prior-year quarter, due partly to reduced headcount. Data processing expenses decreased because of renegotiated vendor contracts. Despite these positive factors, our efficiency ratio ticked up to 59.56% because of a decreased level of net interest income.

These results held no surprises for us, because they’re consistent with the disciplined posture we’ve maintained for some time. We continue to pay down borrowings with cash flows from securities, and we continue to move our loan portfolio mix away from retail and toward commercial. The loan pipeline is strong. So is our asset quality. And we’re maintaining our credit underwriting standards and pricing discipline.

Our capital management activities have been consistent also. Stock buybacks have continued at a steady pace. And our board has authorized our fourth repurchase program to help ensure that going forward. The board has also approved an increase in its quarterly cash dividend, the sixth increase in three years, to $0.10 per share.

We continue to compete based on the quality of our products and service -- to a lesser extent, on price -- to preserve our market share. But until the interest-rate environment improves, we expect to pursue the disciplined short-term strategy I just outlined.

With that, I’ll ask Linda to review the further details of our first quarter performance.

Thank you, Paul. Good morning.

Net income for the first quarter of 2006 was $13.8 million, a decrease of $970,000, or just over 6.5% from the linked quarter. Basic and diluted earnings per share were $0.22, compared to $0.23 a share in the fourth quarter; a decline of 5.3%.

Total assets at March 31st were $5.95 billion, a decrease of $104 million, or just under 2% from year end. The decrease in assets is primarily the result of reductions in the investment portfolio and the wholesale borrowing. Total net loans were down slightly in the quarter, due mainly to reductions of $31.4 million in the residential mortgage portfolio.

These declines were partially offset by increases of $14.1 million in commercial real estate and multifamily loans, an increase of $9.6 million in construction loans and a $6.2 million increase in consumer loans.

The unfunded loan pipeline increased $73 million, or 10%, during the quarter. Unfunded commercial real estate commitments increased $21.6 million, and construction loan unfunded commitments increased $51.7 million.

Credit quality continues be stable compared to the trailing quarter. Nonperforming loans decreased $200,000, or 3.5%, to $5.8 million; compared to $6 million at year end. The provision for loan losses was $555,000 during the quarter, compared to $100,000 in the fourth quarter, as the portfolio continues to shift to a more commercial and construction-loan mix.

Net charge-offs were $631,000 during the quarter, compared to $741,000 in the trailing quarter. The investment portfolio decreased $79.4 million, or 5.3%, to $1.4 billion from $1.5 billion. At year end, investments as a percentage of total assets has declined to 23.8% at March 31st, compared to 24.7% at year end.

Total deposits increased $3.3 million during the first quarter. Time deposits increased $53.6 million, and core deposits decreased $50.3 million, as customers continue to shift into higher-yielding deposit products. Within the core deposit category, non-interest-bearing checking accounts increased $8.3 million, or 2% during the quarter.

Wholesale borrowings decreased $94.8 million, or 9.8%, to $875 million; compared to $970 million at year end. Wholesale borrowings as a percentage of total assets has declined to $14.7 million at the end of the quarter, compared to 16% at year end.

The net interest margin increased 4 basis points in the first quarter, to 3.31% from 3.27% at year end. This is due primarily to assets repricing faster than liabilities, as well as a decrease in average interest-bearing demand-deposit balances.

Non-interest income in the first quarter was $7.3 million, a decrease of $346,000 from the trailing quarter. This decrease was due primarily to reduction of other income. During the fourth quarter of 2005, we recorded a gain of $70,000 related to the sale of the branch property. And we recorded gains of $240,000 related to calls on Federal Home Loan Bank borrowings that were part of our acquisition. In the current quarter, we recorded gains of just $94,000 on Federal Home Loan Bank call.

Total non-interest expense increased $661,000, or 2.2%, on a linked-quarter basis. Salary and benefit expenses increased 12%, or $1.7 million, during the quarter. Within this category, compensation increased $400,000, or 4%, due primarily to annual salary increases which take effect on January 1. Incentive bonus accruals increased $640,000 compared to the fourth quarter, where we did not have an accrual, because we did not hit internal performance targets.

Payroll taxes increased in the first quarter $370,000. Again, that’s due to the annual reset in tax rates back up to the full amounts. And benefit expenses -- primarily other post-employment benefits -- increased $200,000.

Stock-based compensation expense was slightly increased, to $2.8 million in the current quarter, compared to $2.75 million in the trailing quarter.

Data processing expenses decreased $418,000 during the quarter, due primarily to the outsourcing of items processing and statement rendering. Other operating expenses decreased approximately $590,000, or 11%, in the current quarter. This is due primarily to reductions in consultant fees, audit-related fees, insurance expense and telephone expense.

Income tax expense for the first quarter decreased $618,000, or 9%, to $6.2 million; compared to $6.8 million in the fourth quarter. The effective tax rate for the quarter was 30.8% compared to 31.4% for the fourth quarter. Increases in municipal bond income favorably impacted our effective tax rate for the quarter.

And now, we’re like to open up the call to questions.

[Operator Instructions] Jared Shaw, with KBW.

Hi, good morning.

Morning.

[Good morning].

Just had a few questions for you.

Linda, could you go through again -- when you were talking about the loan growth, what did you see for commercial loan growth for the quarter? And if you could just comment on the outlook on that, more on the commercial -- the C&I side, versus the commercial real estate side?

We’re actually seeing the growth in commercial construction, predominantly. And in terms of the pipeline, commercial construction’s up $51.7 million; commercial real estate, up $21.6 million. So commercial loans were actually down slightly -- C&I -- traditional C&I in the quarter. So we’re seeing really all the plays in the construction lending side.

And then in terms of -- is that mostly residential construction, or --

It is. About 71%, 72% of our construction lending is residential; primarily large track single-family, as well as some high-rise residential in Hoboken and Jersey City.

Okay, great.

And then in terms of the provision -- the provision was less than charge-offs this quarter, but you’re still growing the commercial portion of the loan portfolio. Are you comfortable with the reserve level down here? Or in the future, should we expect to see the provision match charge-offs, at least?

Well, we are comfortable with the current provision and allowance based on many factors, including our view on risks that are inherent in our portfolio currently. As we -- if we continue to shift more towards commercial, the provision will reflect that. We did not have loan growth in the current quarter, yet we did provide -- we’re at a level that we’re comfortable with.

With regard to charge-offs, you know, we watch them. But they would not represent anything that’s still on our book, so we would not reserve for that.

And do you have an allowance for unfunded commitments included in the --

It’s part --

-- total allowance?

It’s part of our allowance.

OK.

Yes.

Let’s see -- and then in terms of the securities portfolio, as that’s been declining -- is that -- do you -- do you have a goal that you’d like to see that decline to as a percentage of assets?

I probably would expect it to possibly get between 20 and 22% by year end, assuming the yield curve stays flat. I think we’d expect to see investments continue to decline to hopefully fund some loan-growth, pay off borrowings or repurchase our stock.

And what’s the duration right now?

Duration is 3.7 years.

And then, if you get down to that 20% level, would you expect us to stay there, even if the yield curve improves? Or is this more of a temporary decline due to the yield curve?

I wouldn’t expect it to get back up to the levels that it was. We’re pretty comfortable between 20 and 22% of assets. The focus is on loan growth.

OK, great.

And then the tax rate this quarter -- since you’ve increased your municipal business, should we expect to see it stay in this range for the rest of the year?

I would still anticipate around a 32%. We look at it very closely every month, and then we do really thorough analysis on a quarterly basis. So I’d probably give you more color at June 30.

OK.

Then just finally, if you could give your thoughts on acquisitions at this point -- we’ve seen some activity in the New Jersey area. Are you considering looking at more deals? Or where are you -- where are your thoughts on that position [inaudible] --

We continue to look at opportunities as they come forward. And we’re certainly interested in expanding our franchise, as we continued to indicate in prior calls; whether that be through M&A or de novo. And we do have a couple of branches, new branches, pending as we speak.

Okay, great. Thank you very much [inaudible].

Thank you.

[Laurie Hunsicker, with Friedman Billings Ramsey].

Thanks.

Hi, good morning.

[Morning].

Can you just tell us what are your de novo branching strategies? How many [inaudible] --

Well, we continue to look for locations that are a logical extension of our current footprint, or fill-ins. And that might be anywhere from Bergen County down to Ocean County, because that’s our footprint, and we go a little due west from there.

Currently, we’ve got something coming out of the ground in Monmouth County, and we have two other locations pending, which I wouldn’t want to indicate at this point in time. But they are in other markets.

But they would all be for this year?

They would be coming out of the ground. They probably would not be on-line till early in the new year.

Okay. Okay, great.

And just go back to the charge-offs for a moment -- Linda, maybe -- can you give us a breakdown of where the charge-offs are coming from?

Predominantly, they’re coming from the consumer portfolio.

And that’s the auto and the marine?

It could be second mortgages, it’s unsecured personal loans, it’s combination of different types of loans -- I mean, within there, of course, would be auto, and any marine charge-offs.

Okay.

And can you just give us an update on both of those portfolios, what the FICO is? And maybe on the marine, just give us a little bit more color as to average loan size, and the LTD and how you look at that?

Well, the auto portfolio has actually been declining somewhat from quarter to quarter. And it’s just over 12% of the portfolio. The FICO scores have gone from around 740 -- that’s what they had been running previously -- to about 710, although we’re not -- we’re not seeing any deterioration in credit quality. It’s just an overall reduction, because our volume is down considerably. So we haven’t been as active in there.

Is your -- is your plan just to let that run off?

Right now, we’re just letting it run down. We’re not aggressively going after that paper.

Okay. Because I know at one point you had stated that you would cap it at 25% of the consumer, so --

If we thought it was a valuable part --

Okay.

-- of the portfolio, we’d much prefer home equity -- either line of credit or fixed -- direct originations, so --

Okay.

-- yes. In marine loans -- in total, the portfolio’s about $113 million. That’s about 20% of the consumer portfolio. I don’t have the average loan size for you. I can probably get that to you off-line. But I would say, generally, they might be about $150,000. I think that’s probably a good average loan size for the marine portfolio.

Okay.

And when did you first get in that business?

Oh, boy. We’ve been in it --

1985.

-- probably 15 years -- 1985. Okay, so more than 15.

We were in it for a number of years, had some success with it and then elected to depart from it for a couple of years, and then went back into it about 15, 16 years ago.

Okay.

And then what are your plans as far as that portfolio? I mean, is this is a good level, right in here?

We’re -- again, we’re not aggressively growing this portfolio. And it typically grows maybe about $1 million to $2 million a quarter. We see steady originations.

OK. Great, okay.

And then, just going back to something Jared asked on the tax rate -- are you all impacted by the New Jersey REIT change?

Well, everybody will be next year, yes.

So that’s at 2007. So basically --

Yes.

-- we’re going to see your tax rate go up another two percentage points?

I don’t know about that, Laurie. There’s many factors that are taken into consideration when we calculate our effective tax rate, including all the permanent differences that we have. So we’re always looking to try and keep our tax rate probably right around where it is.

Okay. Great.

Thank you very much, Linda.

[Mark Fitzgibbon, with Sandler O'Neill].

Good morning. Most of my questions have been answered.

But I’m wondering, Paul -- if the yield curve were to stay flat for a long while, and balance sheet growth were to continue to be tough to come by -- I’m wondering if you might consider a significant increase in the dividend, or a dramatic acceleration in buyback activity.

I think we’d have to look at that. Assuming we experience what you just indicated, I’m not going to predict what we might decide six or nine months from now, of -- if you can give me your pinch from your crystal ball, I could talk with you off-line. But it just -- we’re not in a position to make that kind of projection.

Terrific.

And then -- and then lastly, Paul, I’m wondering, are you getting the sense from some of the smaller companies out there that they’re really beginning to hit the earnings wall, and there might be more acquisition opportunities for you folks?

I think we might be getting that sense indirectly.

OK. Thank you.

Not directly from those institutions, but folks who might talk to them. Yes.

Thank you.

[Rick Weiss, with Janney Montgomery Scott].

Good morning.

Good morning.

Morning, Rick.

I was wondering if you could talk about loan pricing competition, and whether you think that the current pricing reflects any sort of risk premium for potential credit losses.

We’ve stated in the past, and continue to maintain a very disciplined approach to that. We’re not chasing any product based upon pricing. We see some folks out there that are becoming very, very aggressive. And that’s their choice, but we don’t choose to go there. And so we’re, again, very disciplined in staying in touch with that pricing model and are not willing to go outside of it.

I guess -- I know you can’t name names, but could -- would the aggressive competitors be larger banks, or the real small ones?

Combination of both.

OK.

And I guess, what’s your projection for the net interest margins for the balance of this year, if you have one?

Right now, Rick, we really think it’s going to be flat.

Okay. Fair enough.

Thank you very much.

Okay.

[Operator Instructions] Ross Haberman, with the Haberman Fund.

Morning, gentlemen. How are you?

Good morning.

Fine.

Could you -- could you discuss if you’re seeing any weakness in any of your regional areas, either on the residential or the commercial-loan side?

Ms. Niro will address that.

Weakness in terms of [inaudible] --

[inaudible] sorry, valuations -- real estate type of valuations.

We are not, at this moment in time.

Neither on the residential nor the commercial?

No. No, we are not.

And what percentage of the -- of your construction business is spec today?

I don’t know that any of it is. All of our construction is either pre-leased or pretty much pre-sold.

Okay, thank you.

You’re welcome.

There are no further questions at this time. I will now turn the Conference back over to management to conclude.

Thank you very much. We appreciate your participation. We look forward to seeing you next time.

Thank you.

Thank you.

This concludes today’s Conference. Thank you all for your participation.