Provident Financial Services Inc (PFS) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Provident Financial Services Incorporated fourth quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Paul Pantozzi, Chairman and Chief Executive Officer of Provident Financial Services. Thank you, sir, you may now begin.

Good morning everyone. Welcome to our fourth quarter 2006 earnings call. I will start by providing our standard caution as to any forward-looking statements that may be made in 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. In today's presentation I am joined by our Chief Financial Officer, Linda Niro.

I would like to begin by highlighting some of the key aspects of our strategy and our performance for both the quarter and the year. Then I will turn it over to Linda, who will review the financial results in greater detail.

In the fourth quarter we witnessed a continuation of the economic and industry trends that have characterized several previous quarters. Namely, an inverted yield curve, intense competition, both loans and deposits, and continued migration of deposits into higher rate certificates. These factors resulted in increased pressure on our net interest margin. In response to these challenges we continued to focus on balance sheet repositioning, asset quality maintenance, and expense management as the right steps to maintain current earnings and to provide the foundation for future earnings growth.

Throughout 2006 we continued to emphasize the origination of commercial mortgages and commercial and industrial loans. In the past quarter commercial mortgages outstanding increased $42.9 million, or just under 6%, while commercial and industrial loans grew by $16.3 million, or 4%. For the full year 2006 these two categories combined increased by $174.2 million, or 14.5%.

As we have stated in the past, our ongoing strategy has been to shift our loan portfolio mix increasingly towards commercial credits and away from historical emphasis on residential mortgages. Consistent with that end as of year-end 2006, CRE, construction and commercial loans represented 41.3% of the loan portfolio, as compared to 37.5% at year-end 2005.

Complementing this asset strategy, we have made steady progress in reducing our securities portfolio and our wholesale borrowings. At December 31, 2006 securities represented 24.5% of net earning assets compared to 29.3% at year-end 2005. Meanwhile, borrowings including subordinated debentures were reduced by $155.6 million, or 15.6%, during 2006. All of these actions have remained fundamental to our ongoing management of interest rate risk.

We place equal emphasis on managing credit risk, and our asset quality continued to evidence that. Despite an uptick in non-performing assets during the fourth quarter, our ratio of NPAs to total assets was 14 basis points. That was substantially below the industry trend for banks within our region and banks of our asset size. Although we priced our loans offerings competitively within the fiercely competitive market, we have not compromised our underwriting standards in order to fuel loan growth. We intend to maintain that posture.

Growth in net interest income has been constrained as a result of the inverted yield curve. We have attempted to counter this with modest increases in noninterest income, but most importantly, by means of effective management of our noninterest expenses. Total noninterest expense of fourth quarter 2006 decreased 6.8% compared to the trailing quarter, and 5.1% as compared to the fourth quarter 2005. With the year 2006 total noninterest expense declined $5.9 million, or 4.8%, compared to the prior year. We achieved reductions in every major category of noninterest expense in 2006 as compared to 2005.

Regarding our capital management strategy, we repurchased 5.5 million shares of common stock in 2006. We have approximately 2.2 million shares available for repurchase of the most recent Board authorized program. We expect to remain in the stock buy back arena when we can be in the market, and to the extent that prudent financial management will permit.

Finally, regarding our planned acquisition of First Morris Bank & Trust, we remain hopeful that pending regulatory and First Morris stockholder approvals, this transaction will be completed in early April.

With that, I will turn it over to Linda.

Good morning. Net income for the quarter ended December 31, 2006 was $13.4 million, an increase of $400,000, or 3%, compared to net income of $13 million for the trailing quarter. Basic and diluted earnings per share were $0.23 and $0.22 in the fourth quarter compared to $0.22 in the trailing quarter.

Competitive loan and deposit pricing continued to adversely impact the net interest margin. The net interest margin decreased 9 basis points in the fourth quarter to 3.08% from 3.17% at September 30. Net interest income decreased $1.4 million, or 3.5%, to $38.5 million compared to just about $40 million in the trailing quarter. This decline is due primarily to the continued deleveraging of the balance sheet and increases in deposit interest expense. Interest income on a link quarter basis was flat, while interest expense increased $1.5 million, or 5%, compared to the trailing quarter.

The average yield on interest-earning assets increased 5 basis points to 5.66% in the fourth quarter from 5.61% in the trailing quarter, while the average cost of interest-bearing liabilities increased 15 basis points to 3.03% from 2.88% in the third quarter.

Average loans as of December 31, increased $15.6 million to $3.73 billion compared to $3.72 billion at September 30. And average earning assets decreased $34.7 million. The decline in average earning assets was due primarily to a decrease in average investments of $62.6 million, or 4.8%.

Average time deposits increased $13.7 million in the fourth quarter, and the average rate paid on time deposits increased 26 basis points to 4.23% compared to 3.97% in the trailing quarter. Average core deposits decreased $23.1 million, or 1%, in the fourth quarter to $2.3 billion compared to $2.33 billion at September 30.

Noninterest income for the current quarter was $9 million, an increase of $664,000, or 8%, compared to $8.3 million in the trailing quarter. Fee income increased $400,000, or 7%, to $6.1 million for the quarter ended December 31, compared to $5.7 million in the trailing quarter, due to increases in loan prepayment fees and fee income on equity funds.

Total noninterest expense was $28 million for the quarter ended December 31 compared to $30.1 million in the trailing quarter. Salary and employee benefit expense decreased $2.7 million, or 16%, to $14.1 million for the fourth quarter compared to $16.8 million for the third quarter.

Total compensation decreased $2 million, or 16%, in the fourth quarter due to reductions in salary expense, incentive compensation accruals, and $800,000 in executive severance that was recorded in the third quarter.

Benefit expense decreased $592,000 as a result of reductions in medical benefit costs due to changes in plan design and participant contributions.

Total stock-based compensation decreased $106,000, or 4%, to $2.6 million in the fourth quarter compared to $2.7 million for the trailing quarter. Other operating expenses increased $778,000, or 17.4%, to $5.2 million for the quarter ended December 31, compared to $4.5 million at September 30. This increase was primarily attributable to a loss of $682,000 due to the recognition of unamortized bond issuance costs associated with the early redemption of subordinated debentures.

Total assets decreased $309.4 million, or 5%, to $5.74 billion at year-end 2006 compared to $6.1 billion at year-end 2005. Total investments decreased $322 million, or 21%. Borrowed funds, including subordinated debentures, decreased $155.6 million, or just about 16%. Total deposits decreased $95 million, or 2.4%. And total loans increased $44.5 million, or 1.2%.

Compared to the trailing quarter total loans increased $26 million, or 1%. During the fourth quarter commercial real estate loans increased $43 million, or 5.8%. Commercial loans increased $16.3 million, or 4%. And construction loans increased $4.4 million, or 1.6%. This activity was partially offset by a decrease of $40.6 million, or 2.4%, in residential mortgage loans.

The unfunded loan pipeline decreased to $772.6 million at December 31 from $805.9 million at September 30. During the quarter construction unfunded commitments decreased $31 million, and commercial unfunded commitments decreased $8.1 million. Commercial real estate unfunded commitments increased $8.5 million.

Total nonperforming loans were $7.5 million at year or, 20 basis points of total loans, compared to $6.8 million, or 18 basis points of total loans at September 30. And with that, we would like to turn it over for questions.

(OPERATOR INSTRUCTIONS). Mark Fitzgibbon, Sandler O'Neill.

First, I wondered if you could tell me where, Linda, in the income statement is the charge for the extinguishment of debt? I wasn't sure which line item that was in?

It is in other operating expenses. It is the last line.

Then secondly, could you update us on the timing of the closing of the First Morris deal and any restructuring that you might be doing in conjunction with that?

We are scheduled to close really at the end of the first quarter, probably like April 1. With regard to restructuring, they've got a pretty good mix of loans, so on the asset side the only thing we're doing is really just monitoring their activity. We are liquidating some securities. There are some odd lot cleanup going on. But that is really -- that is all that is going on with regard to any repositioning.

Then with respect to expenses, you guys have done a phenomenal job of driving down costs. I'm wondering how much lower do you think you might be able to drive those, if the yield curve stays this way?

We're going to continue with -- we always do more to focus on operating efficiencies, to combine operations where we can, look at anything that may be unprofitable or a drag on earnings.

Then lastly, I guess with respect to the margin, could you share with us your outlook, assuming the curve holds the way it is, what we might see from the margin? And are you seeing easing on deposit pricing out there?

We have seen some stabilization on deposit pricing, although I continue to think that the margin will -- while we think it has slowed down, it will probably contract another 3 to 5 basis points in the first quarter.

(OPERATOR INSTRUCTIONS). Rick Weiss, Janney Montgomery Scott.

I was wondering if you can give a targeted level on your investment securities to total assets ratio?

I think we have said in the past 20 to 25%. We're pushing closer to 20. And I think we're probably going to get close to 20, certainly if the yield curve stays where it is inverted. It is just difficult at this moment to see any substantial increase in the investment portfolio.

I was thinking if you are going to run it down lower than 20% actually?

It is not really our goal, but it is possible.

Then I was wondering if you could talk a little bit about the compensation expense. It seems like the last couple of years it usually falls in the fourth quarter and then picks up again in the first. I was wondering if you could explain why that happens?

Right. Again, we did have some adjustment for variable compensation accrual. There is a number of elements. Employee compensation expense decreased. We are continuing to reduce headcount. Taxes were down. Stock-based compensation was down. We will adjust any of our post employment benefit plan expenses if need be during the quarter. The big piece again really was in compensation. If you remember in the third quarter we had the executive severance expense.

Right. But that wouldn't explain the whole decrease from like that $16.7 million down to $14.1 million. I guess if I cut to chase, could you give any sort of guidance in terms of compensation for 2007?

Probably a good runrate is $17 million to $18 million a quarter.

For salaries and benefits?

Yes. That is the whole thing.

Collyn Gilbert, Ryan Beck.

One of my questions was what Rick just asked on the salary and benefits line. So $17 million to $18 million runrate you think, Linda, on that?

Quarterly, yes.

You may have said this in your initial comment, and I apologize if you did. But can you just give a little bit more color on what occurred with the loan recovery this quarter, and just your outlook for credit, and what we can maybe see in that regard?

We actively focus on asset recovery and those types of initiatives. We have -- we just have an extra focus on it, and we're able to pull in some recoveries as we usually do. We have net recoveries in the residential real estate category, as well as commercial real estate.

That is going to probably be an ongoing strategy and result.

To collect, yes.

Anything in the pipeline? Are there certain sectors that you're staying away from or that you're cautious on? Are you starting to see some negative trends as it relates to credit?

We're not seeing any negative trends with credit quality, but we are seeing softening in the construction area. We are reducing our indirect auto, not that it is a big portion of the portfolio. It is about $55 million. But we have reduced any activities there. We're not going to see any increases in indirect auto.

As I said, construction is softening, mostly because builders were waiting for sales to catch up with the supply that is out there. We're just seeing a general slowdown.

And the reduction in the indirect, is a function of credit or volumes or --?

It is just an asset class that we decided isn't performing to the levels that we thought it would perform at, so we're just going away from it to more direct home equity.

Where did the indirect -- what was the size of the indirect portfolio at the end of the quarter?

The auto indirect?

Yes.

$55 million.

Do you anticipate writing that down to 0 or --?

Over time.

(OPERATOR INSTRUCTIONS). Joseph Leone, private investor.

Some of your competitors in New Jersey, the stock price has done better than Provident in the last year so, also trading at much higher levels of price to earnings and price to book. From a competitor analysis point of view, is there any reason for that from your perspective?

No.

I'm thinking [Carnie]. I'm thinking investors that even -- or [Carnie] as of yesterday.

Those are not similar organizations. Those happen to be an MHCs. We're a fully converted organization. That could be a contributing factor.

Laurie Hunsicker, Friedman, Billings, Ramsey.

I think most of my questions has had been answered. Just a couple of things. What is the FICO score, Linda, of your indirect auto?

701.

701. And as we look at sort of on a going forward basis, in terms of buybacks, obviously your buybacks slowed. Was that due to the quiet period associated with FMGE, and what could we expect for '07, or is there something else there that you're weighing?

Fourth quarter was just the function of availability really, just our ability to get our average daily trading volume. With regards to the first quarter and getting to First Morris, we plan on being in the market, but we will evaluate it as we go forward.

Do you have a quiet period associated with that?

We do.

That is when? Until --? Are you already in it?

No, no. It is probably round mid-February.

Just one last thing. I know people hit on credit. But just generally can you talk about your sort of going forward loan loss provision, and where we might see that run?

We evaluate our provision and the adequacy of the allowance every quarter. Again, it is going to depend on the risk ratings, the credit quality of the portfolio, growth, shift in the mix, what our nonaccrual looks like. Again, we focus on many factors. What I will say is if we have very strong growth in commercial real estate or C&I loans, most likely we will see the provision go up accordingly.

If we were to use like a $1 million annualized runrate for '07, assuming that we don't have any sort of melt down in credit, would that be a fair number?

I don't think it would be an unfair number.

(OPERATOR INSTRUCTIONS). Ross Haberman, Haberman Funds.

I got on a little bit late. I apologize. Could you go over the areas of the best loan demand and the least or worst loan demand by category, today what you're seeing?

We are seeing some pretty good demand in commercial real estate. Construction is softening a little. We are seeing good demand in the C&I sector, in loans that range between $1 million and $3 million.

Are you fully staffed on the commercial loan side, ore are you actively looking for more lenders in that category?

Yes, we continue to grow that particular area because our focus is to drive traditional revenue, and obviously you need people to do that. That is an ongoing process.

Have you hired any new lenders in the last six or nine months?

I'm sorry, what was that question?

Have you hired any new commercial lenders in the last six or nine months? Hello? I'm sorry. Did you hire any new commercial lenders in the last six or nine months?

The answer was yes, we have.

I'm sorry. I didn't hear it. I apologize. Thank you.

Matt Kelley, Sterne, Agee.

I was wondering if you can just talk about the tax rate? I remember last quarter on the conference call you had mentioned kind of in the 30% range for full year 2007. I just want to see if that is still the level you think is appropriate.

We're looking at 31%.

For the full year?

Yes.

Does it stay consistent throughout the year, is it going to ramp up throughout the year?

Again, it is going to depend on what our tax-exempt income looks like as a percentage of total income in terms of determining the tax rate. You may see it between 30 and 31% rolling on, but for an annual rate we're looking at 31%.

The [timing] of the securities portfolio, the total balances were down 21% in 2006. Do you think we will see another double-digit decline? Well the natural kind of cash flows in that portfolio permit that type of reduction?

We're not going to -- we're not looking for the same type of decline. No.

Single digit?

Yes, definitely.

Collyn Gilbert, Ryan Beck.

Just a quick follow-up on the salary and benefits comment. The $17 million to $18 million runrate, I guess I'm a little confused on how we get there, because it seems like while there were some items in this fourth quarter, it seemed like some of them at least were runrate items in terms of reductions. Were they not? Was a lot of what occurred here in the fourth quarter then sort of onetime and what --?

That's right. There are some onetime reductions. For example, adjustments that benefited accruals took place in the fourth quarter as we got closer to our year-end results. We trued up what the accruals should look like. So we start the clock over again.

If we tried to compare apples-to-apples, does that mean in '07 the salaries and benefits line is going to increase like 7 to 8%?

I think a little bit less than that.

That is just natural adding staff?

Hiring, merit increases and salaries, all that.

Rick Weiss, Janney Montgomery Scott.

I basically had the same question as Collyn about the salary runrate. Does that include First Morris?

The $18 million number would include First Morris. So $17 million is more Provident. And when you get to the $18 million that includes First Morris.

Joseph Leone, private investor.

Just to follow-up to the question I asked before. What competitor would you, or do you, compare your performance to? If it isn't the thrifts, smaller than you as they may be, that have holding company structures, is it some other competitors in the market that should be followed in that regard?

I think we're somewhat unique in the marketplace in that we are a fully converted organization, but we're also, as we have indicated, moving more towards commercial products and services. And that is representative on our balance sheet. It is difficult to just select someone out there within the state of New Jersey that might not be much larger than we are. But certainly from a competitive standpoint we recognize we can beat these folks over time. I guess Valley National could be considered one of the local institutions that we would compare ourselves to.

Ladies and gentlemen, at this time I would like to turn the floor back over to management for any additional or closing comments.

We have no closing comments, but we thank you very much for participating in this call. And we look forward to hearing from you. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.