Provident Financial Services Inc (PFS) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen. And welcome to the Provident Financial Services, Incorporated Second Quarter 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. You may begin.

Thank you. And good morning, everyone. Welcome to our Second Quarter 2006 Earnings Call.

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

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

In the past quarter, our response to the challenges posed by a prolonged flat and now inverted yield curve has been to maintain the disciplined near-term strategy we’ve articulated in previous quarters. Our first priority has been to preserve our net interest margin. We continue to de-leverage our balance sheet by applying cash flows from our securities portfolio and pay down wholesale borrowings.

This further accelerated in the second quarter, as gains received from the call of Federal Home Loan Bank advances afforded us the opportunity to sell certain low-yielding securities and offset the resulting losses. Also, our ongoing efforts to increase the proportion of commercial real estate and C&I loan assets met with success.

Outstanding commercial real estate loans grew in the second quarter by $22.6 million, or 2.2%. And commercial and industrial loan balances grew $32.7 million, or 8.4%, resulting in a ratio of commercial loans to total loans of 39%, as compared to 38% at the end of the previous quarter.

These factors helped mitigate the effects of continued increases in interest expense on deposits, as customers continued to migrate from core-deposit products to higher-rate certificates. The end result was a 2-basis point expansion of our net interest margin to 3.33 in the second quarter, which followed a 4-basis point expansion experienced in the first quarter.

Our next priority has been management of overhead costs. Total non-interest expense in the second quarter was down slightly compared to the first quarter of 2006. But they decreased significantly in comparison to the second quarter 2005. This was due primarily to the voluntary resignation initiative we implemented in the second quarter 2005, which added $1.4 million in one-time compensation costs on a pretax basis.

We have also succeeded, however, in decreasing expenditures on a matching-quarter basis in every other major category. We continue to evaluate our company for additional expense-reduction opportunities.

Finally, we ended the quarter with a strong loan pipeline, excellent asset quality and prudently managed loan loss reserves.

Also, our share buyback activity was strong, with 2.9 million shares repurchased during the quarter. While market conditions may not permit the same level of activity in subsequent quarters, the board has helped our ability to be active by authorizing our fifth repurchase program of up to 5% of outstanding shares, or approximately 3.3 million shares. The board also approved the $0.10 second quarter dividend.

With that, I’ll ask Linda to take us through the financial details of the quarter, and we’ll take questions following her comments.

Thank you, Paul. Good morning.

Basic and diluted earnings per share for the first and second quarters was $0.22. Net income for the second quarter decreased $284,000, or 2%, to $13.5 million, compared to net income of $13.8 million in the trailing quarter. Total assets at June 30 were $5.86 billion, a decrease of $192 million or 3.2% from year end; and a decrease of $88.1 million, or 1.5%, from the trailing quarter. The decline in the balance sheet continues to be primarily the result of reductions in investment securities and wholesale borrowings.

Additionally, the company repurchased 2.9 million shares during the quarter, at a cost of $51.7 million. Total loans increased $40.6 million, or 1%, to $3.77 billion at June 30; compared to $3.73 billion at March 31. The strongest growth during the quarter was in commercial real estate loans, which increased $53.2 million, or 8%; followed by an increase of $32.7 million, or 8.4%, in commercial loans; and an increase of $22 million, or 4%, in consumer loans. Construction loans decreased $28.7 million, or just under 10%, during the quarter. The unfunded loan pipeline increased $22 million, or 3%, to $791.3 million at June 30; compared to $769.2 million at March 31st.

Again, growth is in the commercial area. Commercial loan commitments increased $30.2 million, and construction commitments increased $30.1 million during the quarter.

Credit quality improved slightly compared to the trailing quarter. Nonperforming loans were $5.7 million, or 15 basis points of total loans, at June 30; compared to $5.8 million, or 16 basis points at March 31st. Total investments decreased approximately $124 million or 8.5% at June 30, from $1.45 billion at March 31. As a percentage of total assets, investments have decreased to 22.6% at June 30 from 24.4% at March 31st.

Total deposits increased $7.6 million in the second quarter. During the quarter, increases of $39.6 million in CDs, $6.5 million in money market accounts and $3.1 million in non-interest-bearing checking accounts were offset by a $31.6 million decrease in interest-bearing demands and a $10 million decrease in savings accounts. Customers continue to shift funds into higher-yielding CDs and money market accounts. And we expect this trend to continue through year end. Wholesale borrowings have decreased $53 million, or 6%, to $822.3 million at June 30, compared to $875.3 million at March 31. During the second quarter, $60 million in acquired Federal Home Bank advances were called. Wholesale borrowings as a percentage of total assets have declined to 14% at June 30 from just under 15% at March 31st. The net interest margin expanded 2 basis points to 3.33% for the quarter ended June 30, compared to 3.31% for the trailing quarter.

For the six months ended June 30, the margin was 3.33%, a decrease of 3 basis points, compared with the same period in 2005. Average earning assets have decreased $356 million year-over-year, with average investments decreasing $403 million, while average loan balances have increased $47.5 million.

Non-interest income for the current quarter and the trailing quarter was $7.3 million. During the quarter, we recorded net losses on securities sales of $1.1 million, primarily the result of a $1.6 million loss that was recognized from the sale of approximately $35 million in low-yielding mortgage-backed securities.

Other income in the second quarter increased $1.2 million to $1.4 million, due primarily to gains recognized on the calls acquired, Home Loan Bank advances resulting from the accelerated accretion of related purchase accounting adjustments.

Total non-interest expense was $29.9 million in the second quarter, compared to $30.2 million in the trailing quarter. Net occupancy expense decreased $360,000, or 7.5%, due to reductions in depreciation equipment and building maintenance expense. Salary and employee benefit expense decreased $283,000, or just under 2%, due primarily to reductions in payroll taxes and employee health insurance expense. Marketing and promotional expense increased $184,000, or just under 18%, during the quarter; and other operating expenses increased $112,000, or 2.5%.

Income tax expense for the second quarter was $6 million, compared to $6.2 million in the trailing quarter; a decrease of 3.3%. And the effective tax rate for the second quarter was 30.6% compared to 30.8% at March 31st.

And now, we’ll open it up to questions.

[Operator Instructions] Mark Fitzgibbon, with Sandler O'Neill.

Good morning. And thanks for taking my question.

Morning.

Morning.

First, Linda, I wondered if you could explain exactly what that increase in other income that was attributable to calls on FHLB advance -- I wasn’t sure exactly what that meant.

Those are the related purchased accounting adjustments, Mark, related to Federal Home Loan Bank advances that we acquired in the First Sentinel transaction. So they were reported -- there were discounts that were recorded at the time. As long as the [par owners] are out there, they offset the interest expense. But once they’re called, the remaining discount drops to the bottom line in the form of a gain.

Okay, that makes perfect sense, thank you.

Secondly, I’m wondering if -- you guys have really done a great job at holding your deposit costs down and protecting the margin. I’m wondering how long you think you can continue to maybe do that before you have to really start to ratchet up your deposit costs.

We’re seeing that now. I mean, it’s a highly competitive environment. We are seeing good loan activity. It looks like [we’re] going to see some good loan activity in this current quarter. And we recognize it’s a competitive environment, and that we are probably going to become a little bit more competitive, although we’ll continue to do it on a select basis, really targeting certain maturities and targeting relationship type pricing.

Okay.

And the last question I had was -- I wonder if you guys could sort of characterize the M&A discussions, if you will, that are going on out in the New York marketplace; as increasing, decreasing, or generally stable.

Well, I’m not privy to all the details relative to any M&A discussions in the marketplace, Mark. I think as the normal course of business, you talk to people when there’s an opportunity, and you evaluate a book when it gets presented to you. And that’s pretty much been our standard, as we’ve reported to you in prior quarters.

I guess I’m just wondering, anecdotally, if you guys -- and I’m asking other companies the same question -- are you seeing more companies that sort of feel like they’re hitting the earnings wall and are contemplating a sale, and therefore there’s just generally more discussion?

It’s a very difficult environment for everyone. I will tell you, in talking with people in a social environment, I think there may be a bit of frustration out there, given the current market. But that doesn’t necessarily mean they’re ready to develop an exist strategy. So maybe more frustration with what’s going on than anything.

Thank you very much.

Welcome.

[Rick Weiss, with Janney Montgomery].

Good morning.

Morning.

Morning.

Wonder if you talk a little bit just about the stock buybacks -- it looks like they increased this quarter -- kind of the reason why they increased, or any plans going forward that you can provide us.

It’s just our ability, Rick, to be able to get a hold of shares [there] -- more availability this quarter. And again, as part of our analysis, in terms of price, it made sense. And we also were able to find some blocks of our stock that were not available during the first quarter.

Okay.

And just in terms of [spot-on] purposes for the tax rate, what would be a decent number to use? It looked like it changed a little bit this quarter.

Yes. I use 31% for the remainder of the year.

31%?

Yes.

Okay, thank you.

You’re welcome.

[Laurie Hunsicker, with Friedman Billings Ramsey].

Yes, hi, good morning.

Morning.

Just wanted to echo Rick’s comments on buyback -- 2.9 million shares, wow. We were really psyched to see that.

[Okay], good.

Just wondered two things -- first, can you just talk a little bit about -- a little bit more about, I guess, your expense control in the quarter, and what you’re doing? And, I guess, can we expect this going forward?

[Our] expense control’s ongoing. We’re in the constant mode of evaluating all of our systems, our operations. Incrementally, we automate processes over time. And that sometimes results in reductions of staff. So you can see some of that in the headcount numbers. But most of it’s software-related, and contract-related.

What you’re going to see ongoing is this expense reduction sort of level out. Because we’re still comparing ourselves to the prior year. But if you look at the trailing quarter, it’s becoming a little bit less. So it’s not going to be as dramatic ongoing, on a linked-quarter basis.

Okay, great. That’s helpful.

And I guess, just kind of circling back to a question Mark asked earlier -- Paul, wonder if you could just comment a little bit more generally, in terms of M&A. In the past, you’ve said you would look for an acquisition in your footprint, or even heading west toward Pennsylvania -- somewhere in the range of $0.5 billion to $1 billion in assets. Is that still out there on the horizon? Or what are your thoughts?

Well, we’re open-minded about all opportunities. As a policy, we look at anything that comes down the pike to us. But yes, our priority, our preference would be to expand within the footprint, which is the State of New Jersey. But again, we wouldn’t dismiss any other opportunity that might come down the road.

Okay, including Pennsylvania. Is there any -- have you broadened out your geographic search at all? Or is it still in mainly New Jersey, maybe Pennsylvania?

It’s mainly New Jersey.

Okay, perfect. Thank you very much.

[Operator Instructions] Collyn Gilbert, with Ryan Beck.

Thanks, good morning.

Good morning.

Morning.

Linda, could you just talk a little bit about the strategy behind selling that $35 million in mortgage-backed securities? It just seems like a hefty loss to take on that small portfolio -- and then also, too, kind of where you see the securities portfolio going, and the overall mix of the balance sheet going, from here.

Right. When we analyzed it, Collyn, it was more beneficial to actually sell those securities -- offset it with that extraordinary gain on the -- or one-time gain on those advances. And it actually helped improve the margin by 1 basis point. They were really low-yielding securities. So puts us in a better position going forward to buy securities, and really improve the yield on the investment portfolio, and again reduce some of the overnight borrowings that we had on.

Right now, the investment portfolio, at 22% -- a little over 22% of total assets, is getting toward the low end. I would say our range is 20 to 25. But we’ll probably look to grow that portfolio over time.

Okay.

And then, if you could just comment, too, on sort of your outlook for the margin? [inaudible]

Yes. I would expect our margin’s going to compress between 3 to 5 basis points, due predominantly to the pressure on deposits and funding costs -- competitive pressure. And we don’t see any letup in the yield curve.

Okay.

Okay, thank you, that’s helpful.

Sure.

Thank you.

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

Thank you very much for participating in this call. We hope to see you on the next one.

Thank you very much.

Thank you. This concludes today’s Conference.

Thank you all for your participation. All parties may disconnect now.