Provident Financial Services Inc (PFS) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen. And welcome to the Provident Financial Services, Inc. First Quarter 2007 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, Mr. Pantozzi. You may begin.

Thank you, and good morning everyone.

Welcome to our First Quarter Earnings Call 2007. I'll 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 our recent 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; and by Chris Martin, our President and Chief Operating Officer to Provident Bank.

Hopefully everyone has had an opportunity to review our financial results, which were released yesterday morning in advance of our annual stockholders meeting.

During the first quarter of 2007, the inverted yield curve continued to put pressure on our net interest margin, as it has done for the past several quarters. We have sought to protect our share of a highly competitive market for those "deposits and loans," but because of the prevailing structure of interest rates deposit costs have continued to rise faster than asset yields.

This has been the main cause of a $6.1 million or a 14.1% decrease in net interest income compared to the late first quarter 2006, and a $1.3 million or a 3.3% decrease in comparison to the trailing quarter.

Some key elements of our response to this ongoing challenge have been a continued (to deleverage) our balance sheet, managing non-interest expenses and focusing on the origination of commercial loans without sacrificing asset quality. We have continued to pursue our strategy of retaining and growing commercial customer relationships. In the past several months, we've restructured our lending operations, and we've added talent to our commercial lending team as we gear up to be more competitive and effective in our marketplace.

Total outstanding loan balances declined $18.5 million in the first quarter. This is largely accounted for by reductions of $12.4 million in our residential mortgage portfolio, and $6.9 million in consumer loans. Our combined balances in commercial loans, commercial real estate, and construction loans held steady compared to year end 2006, although there were shifts within the component categories, as Linda will highlight shortly.

During the quarter, our time deposit and non-interest DDA balances increased, offset by a slight decline in savings account balances, and a $17 million decrease in interest bearing DDA balances, part of which is attributable to seasonal factors-- our government and (municipal) account relationships.

Expense management continued to be a strong point. And once again we can report reductions in nearly every major category of non-interest expense in comparison to the link period.

Concerns about asset quality in the overall banking industry have been receiving much attention lately. Our credit underwriting standards are high, and this has allowed us to report consistently strong quality in our loan portfolios. As of March 31, 2007 -- a ratio of non-performing loans to total loans to 20 basis points, non-performing assets to total assets (to the) 15 basis points, and our net charge-offs for the quarter were essentially zero.

We analyze our credit quality on a regular basis, and we anticipate no undue changes in our credit posture. We continued to buy back stock during the quarter with repurchases of 682,000 shares. This leaves approximately 2.5 million shares available for repurchase on the current board authorized program.

On April 1, we completed our acquisition of First Morris Bank & Trust, and we are in the process of integrating their operations into Provident Bank. We continue to anticipate that this transaction will be break-even to GAAP earnings per share in 2007 and accretive beginning in 2008.

I'll now turn it over to Linda for a detailed review of our financial results.

Thank you, Paul

Net income for the quarter ended March 31 were $10.8 million, a decrease of $2.6 million or 19.2%, compared to $13.4 million for the trailing quarter. Basic and diluted earnings per share were $0.18 in the first quarter, compared to $0.23 and $0.22, respectively, in the fourth quarter.

The impact of this sustained inverted and flat yield curve continues to adversely impact the net interest margin. The net interest margin decreased six basis points to 3.02% in the first quarter, from 3.08% in the fourth quarter. Net interest income decreased $1.3 million or 3.3%, to $37.3 million from $38.5 million at year end. The decline in net interest income is due to our near term strategy, de-leveraging the balance sheet in the current rate environment and narrowing spread.

The average yield on interest earning assets increased six basis points to 5.72% in the first quarter, compared to 5.66% in the trailing quarter. Average earning assets decreased $64.8 million or 1.3% from year end, primarily due to a decrease in average investments of $61.6 million or 4.9%. The average cost of interest bearing liabilities increased 15 basis points to 3.18% from 3.03% in the trailing quarter. The average cost of borrowed funds increased 31 basis points to 4.26%, compared to 3.95% in the trailing quarter, and average borrowed funds increased $823,000 in the current quarter.

The average rate paid on time deposits increased 14 basis points to 4.37% compared to 4.23% at year end. And average time deposit balances decreased $3.4 million during the quarter. Average core deposits decreased $76.3 million or 3.3% in the first quarter to $2.2 billion from $2.3 billion in the trailing quarter.

Non-interest income was $7.7 million in the first quarter, a decrease of $1.3 million or 14.1%, compared to $9 million in the fourth quarter. This reduction was primarily due to gains on security sales of $1.2 million that were recorded in the fourth quarter. The income decreased $659,000 or 10.8% in the quarter due to the sale of $2.2 million in equity fund investments.

Other income increased $600,000 on a linked quarter basis, due to interest income received on a tax refund related to a prior acquisition.

Non-interest expense was $29.3 million in the first quarter, an increase of $1.3 million or 4.6%, compared to $28 million in the fourth quarter. Salary and employee benefit expense increased $2.1 million or 14.7% to $16.2 million in the first quarter, compared to $14.1 million in the fourth quarter. This increase is due to an increase of $602,000 in salary expense, and an increase of $564,000 in variable compensation expense, as a result of reduction in variable compensation accrual in the fourth quarter of $528,000.

Other compensation expense increased $295,000 from the fourth quarter due to several expense payments of $297,000 that were recorded in the first quarter. Payroll taxes increased $456,000 compared to the fourth quarter due to the reset of taxable income limits.

Other operating expenses decreased $831,000 in the first quarter primarily due to a $682,000 charge that was recorded in the fourth quarter related to the early extinguishment of subordinated debentures.

Total assets decreased $46.9 million or 0.8% to $5.7 billion at March 31. Total investments decreased $69.2 million or 5.7%. (Borrowed) funds decreased $26 million or 3%. Total loans decreased $18.5 million or 0.5%. And total deposits decreased $15.9 million or 0.4%.

During the first quarter, commercial real estate and multi-family loans increased $44.9 million, and commercial loans decreased $25.2 million, and construction loan balances decreased $18.7 million.

The unfunded loan pipeline decreased to $705.5 million turned $772.6 million at year end. Construction unfunded commitments decreased approximately $30 million. Commercial real estate unfunded commitments decreased $23.6 million. And commercial unfunded commitments decreased $12.6 million.

Asset quality remains good. Total non-performing loans were $7.6 million at March 31, compared to $7.5 million at year end. Non-performing loans as a percentage of total loans was 20 basis points in both periods. The allowance as a percentage of total loans increased slightly to 87 basis points at March 31 from 86 basis points at year end, on a provision of 300,000 during the quarter.

Net charge-offs were $56,000 for the three months ended March 31, compared to net recoveries of $137,000 in the trailing quarter.

Now we'd like to open it up for any questions.

Ladies and gentleman, at this time we will be conducting a question and answer session. (OPERATOR INSTRUCTIONS)

Our first question is from Mr. Mark Fitzgibbon from Sandler O'Neill. Mr. Fitzgibbon, please state your question.

Do you think the normalized tax rate of the company is about 30.5 to 31?

South to end -- south 31 would be a normalized tax rate.

Okay. Secondly, do you think the net interest margin has bottomed? Or if the yield curve stays the way it is, is it likely that we'll see a little bit more degradation in the margin?

I think, Mark, we'll see a little bit more compression, given no change in the yield curve. We're seeing stabilization in deposit costs and we're working our way down on the borrowing cost side.

And in terms of the securities portfolio, I guess it's down a little below 20% of assets now. Do you have target in mind? Are we likely to see that bottom at a certain level?

Yes, except 1% of that that's currently -- and again, after any change in the yield curve our new target would be about 16% to 18% of assets.

Okay. And then the last question I had was -- I wondered, you know, after the First Morris deal is done here, when do you think you'd be able to do another acquisition if it presented itself? How long before you'd sort of feel comfortable that you had First Morris fully integrated?

I think that depended, Mark, on exactly what's happening in the transaction and how aggressive we'd become in that market. We're confident that we have a lot of opportunity out there. This is a great acquisition for us.

So the focus right now is on integration and business development and expansion. So that's the primary focus. We'll need to let that play out for a couple months before we get actively engaged.

Great. Thank you very much.

You're welcome

Thanks.

Our next question is from Ms. [Collyn Gilbert] with Stifel Nicholas.

Good morning, guys.

Good morning.

Could you just talk a little bit about the environment as it relates to some of the lending practices, and where you're seeing areas of strength, and what pipelines are looking good? And just kind of talk a little bit about that?

Well, the current environment is -- you can imagine it's slowed down a little bit with regard to construction and commercial real estate deals. The margin just has been slow compared to previous environments. And so we are seeing some activity in the commercial small business, commercial lines of credit. That tends to have remained fairly steady.

As Paul mentioned, we have augmented our team in the small business arena to really turbo charge that going forward, as part of our strategic plan. That's the area that we feel that we'll get our best bang for the buck.

Okay. Okay, great. And then just -- a housekeeping item -- was there any non-recurring items on the fee income side this quarter?

Other than the interest on the tax refund? No.

And what was the amount of that?

It was $897,531 (net of tax).

Okay. And then just lastly -- and if you mentioned this I apologize -- but the pick up in MPA is not big, but just that 300,000 -- maybe if you could just talk a little bit about the pick up, and then the overall portfolio if there's -- what's in there.

With regard to the provision--?

No, just the actual MPA levels. Do they not rise on a linked quarter basis?

They really didn't. It was less than 100,000.

Oh, okay.

Yes.

Okay.

It was like 7.5 million -- 7.6 million from 7.5.

Oh, okay.

Yes.

I must have been looking at a different number then. And given your reserve coverage in terms of relative to MPAs, do you feel comfortable with the actual reserve level?

Absolutely.

Okay. Okay, that was it. Thank you.

Okay.

Mr. Pantozzi, there are no further questions at this time.

Thank you very much for your participation. We look forward to our next quarter's call. Thank you.

I just received another question on the queue, Mr. Pantozzi. Would you like to--?

Yes.

Sure.

Our next question comes from the line Rick Weiss with Janney.

Thought I'd kicked it on one before. One of those days I guess. I just wondered if you'd talk a little bit more about the First Morris acquisition, and some of assumptions that you're using to say they've been -- it's breakeven to GAAP in 2007.

Well again, this goes back to our estimates in the way of cost saves. We had estimated 39% and we're very confident that we'll have that. We validated that already. We'll continue to look at that. It might be actually slightly better, but we still have a lot of things to work through.

We have not really put in any revenue enhancements in 2007, though we hope to get some. But I think our biggest challenge is just to retain and kind of marry the relationships across to Provident. We do have the -- almost entire management team that was there in place to really help us with that process.

Okay. Are you excluding one time merger costs in that number when you're saying it's breakeven?

Yes.

Yes.

Okay. And talk a little bit about any plans for de novo activities going forward?

We're looking at several locations throughout our marketplace. We in fact have one coming online in a few months up in Morris County, in addition to the acquisition. The others are in various stages of consideration. So we have about three or four in the pipeline that we're looking at, at the moment.

And Paul, has the inverted yield curve environment in the challenge of growing earnings -- is that affecting your idea to growing through de novos or slowing it down or doing anything?

Well, not necessarily, because we've been looking at our de novo policy and we've had one in place for a while. But as you may be aware the real estate market has gotten a little out of hand for branch locations because some institutions have gotten very aggressive on it. And we tend to want to be very selective when we'll pay up to a certain point, but we're not interested in dropping in a loss leader that, you know, folks will be questioning us on going forward. So we're somewhat disciplined in terms of what we'll look at and what we'll commit to.

Okay. Thank you.

Thanks.

There are no further questions in the queue at this time.

Hey, thank you very much. Once again, we look forward to the next call.

This concludes today's conference. Thank you for your participation.