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Provident Financial Services (NYSE:PFS)

Q3 2010 Earnings Call

October 29, 2010 10:00 a.m. ET

Executives

Christopher Martin – Chairman, President and CEO

Tom Lyons – SVP and CFO

Analysts

Rick Weiss – Janney Montgomery Scott

Steve Moss – Janney Montgomery Scott

Damon DelMonte - KBW

Matthew Kelley – Sterne, Agee and Leach

Collyn Gilbert – Stifel Nicolaus

Jake Seville – RBC Capital Markets

Mark Fitzgibbon – Sandler O’Neill & Partners

Operator

Good morning and welcome to the Provident Financial Services Third Quarter 2010 Earnings Conference Call. All participants will be in a listen-only mode. (Operator instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Leonard Gleason, Investor Relations Officer. Sir, please go ahead.

Leonard Gleason

Thank you, BJ, and good morning, everyone. Welcome to the Provident Financial Services Inc. Third Quarter Earnings Call. All our presenters this morning are Chris Martin, Chairman, President, and CEO, and Tom Lyons, our Senior Vice President, and CFO.

Before turning the program over them to discuss our third quarter 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 relation page on our web site www.providentnj.com or by calling our Investor Relations Department at 201-915-5344.

With that, it’s my pleasure to introduce our Chief Executive Officer Chris Martin, who will provide the highlights of our third quarter financial results, Chris.

Christopher Martin

Thank you, Len, good morning, everyone. Our third quarter operating results continue the steady trend of improved earnings in this difficult environment. Against the backdrop of high unemployment and under employment, increased regulation and a struggling New Jersey economy, our earnings totaled 13.5 million or $0.24 per share, which represented a 55.2% increase in our quarterly earnings from the same period last year.

Margin expansion increased modestly in the third quarter by 2 basis points to 3.50% with the main driver being reduced funding cost. During the quarter we increased our quarter deposits as a percent of total deposit to approximately 73% representing an increase of 183.2 million or 5.4% from December 31, 2009.

Time deposits declined by $177.8 million for 11.8% from the end of ‘09. However, to expand relationship for CD customers will continue, but we remain focused on building out our community banking model of increased core funding.

The average cost of deposits for the third quarter declined to 1.05% from 1.13% for the trailing quarter. Borrowings decreased 51.7 million or 5.4% to 904 million during the quarter, as access to liquidity was used to pay down some borrowing.

We have during the quarter continued to match on large CRE and multifamily loans to lock in spread, thereby extending duration in borrowings to offset deposits that may be subject to repricing, if and when rates rise.

Loans increased 17.5 million during the quarter but decreased 47.6 year to date or 1.1%, despite in-house organic originations totally 960 million for the 9 months ended September 30, 2010. We do not use brokers to originate loans, we cultivate relationships by using our centers of influence, our advisory council, and our relationship mangers to generate lead.

The loan mix continues to trend toward commercial loans but we will continue to meet the needs of our communities in terms of retail origination in consumer and mortgage lending. The company continues to sell the majority of its 30 year originations to the agency, to minimize interest rate risk.

Opportunities, although improving slightly, are challenging in our market due to conditions that disqualifies potential borrowers due to cash flow issues asset valuation and equity shortfalls.

We continue to seek out potential customers that need prudent credit underwriting standards. As evident, our pipeline continues to grow and our unfunded commitments total 824 million at September 30.

Asset quality still struggles, and was non-performing loans totally 103.5 million at September 30, 2010. Residential mortgage delinquencies remain an area of concern as the New Jersey foreclosure process is one of the most difficult in the country. Avoiding the foreclosure processing issues reported in the media, we maintained all of our loan files and we directly managed all of our foreclosure work.

Whenever possible, we attempt to assist our borrowers to minimize the cost to them, as well as to the bank. And until the employment picture and/or the real estate values improve in New Jersey and surrounding areas, this will be an issue we have to deal with for the foreseeable future.

Our provision of 8.6 million during the quarter was likewise reflective of the current economy and the increase of nonperformers. Net charges were 1.3 million in the quarter and the allowance now stands at 1.58% of total loans.

Our operating expense decreased 1.9 million or 5.3% for the quarter, and our efficiency ratio improved to 56.02% for the 3 month ended September 30, 2010 from 66.4% for the same period in 2009.

We will continue to work at further streamlining our operations by utilizing our new technologies and systems to enhance our automated processes. Tom Lyons, will provide you with some additional details on our financial results, Tom.

Tom Lyons

Thank you, Chris, and good morning, everyone. Net income for the third quarter of 2010 was $13.5 million or $0.24 per share compared to 12.9 million or $0.23 per share for the second quarter of 2010.

Compared with the trailing quarter, third quarter results benefited from a $894,000 increase in net interest income, driven by reductions in the cost of funds as we continue to emphasize core deposit generation, and favorably reprice interest bearing liability.

At September 30, 2010, the ratio of tangible common equity to tangible assets increased 8.81%. The company’s regulatory capital ratios strengthened further, and the company and the bank continue to be well capitalized under current regulatory guidelines.

During the third quarter, total loans increased by another $17.5 million as net growth in the commercial lending category outpaced net reduction and retail loans. Commercial mortgage loans, including multifamily loans, increased $48 million while construction loans decreased 9 million and commercial loans consisting of middle market and business banking loans, decreased 5 million.

An $18 million decrease in residential mortgage loans during the quarter was partially offset by a $3 million increase in consumer loans, driven by growth and home equity loans and line

Total commercial loans consisting of commercial, real estate, construction and, C&I loans, increased to 54.3% of total loans to September 30, compared to 53.8% at June 30.

Nonperforming loans increased to $103.5 million at September 30, 2010 from 93.2 million at June 30. The increase in nonperforming loans is largely due to a $10.6 million increase in nonperforming commercial loans and a $1.1 million increase in nonperforming consumer loans.

The increase in nonperforming commercial loans was primarily contributable to the addition of $9.7 million relationship with the manufacturing entity, which is secured by real estate and business assets and which is current at the principal and interest at September 30.

Partially offsetting these increases, nonperforming multifamily loans decreased $1.2 million versus the trailing quarter as a result, the foreclosures to $62,000 at September 30. In addition, non-performing construction loans, decreased $427,000 compared with the trailing quarter due to repayments.

Provision for loan losses was $8.6 million for the quarter ended September 30, compared with $9 million for the trailing quarter. Net charge-offs during the third quarter were $1.3 million compared with net charge-offs of 6.5 million in the trailing quarter.

The allowance for loan losses increased to 1.58% of total loans at September 30 compared to 1.42% at June 30. Total amount performing assets consisting of non-performing loans in foreclosed assets, totaled $109.2 million or 1.61% of total assets at September 30 compared to 97.9 million or 1.43% of total assets at June 30.

Non-performing loans as a percentage of total loans were to 2.38% at September 30, compared to 2.15% at June 30.

Total delinquencies increased $123 million and was 2.82% of the portfolio September 30, compared to 106 million or 2.45% of the loan portfolio June 30.

30 to 89 day delinquencies increased to 41.7 million or 0.96% of loans at September 30, up from 33.2 million or 0.77% of loans at June 30. The increase in early-stage delinquencies occurred primarily in 30 to 59 days past due residential mortgage loans which increased $6.8 million versus the trailing quarter. In addition, 30 to 59 day past due consumer loans increased $1.3 million compared to the trailing quarter.

Our net interest margin increased 2 basis points to 3.4% during the quarter compared to 3.48% in the trailing quarter. The increase in the margin was due primarily to a decrease of 9 basis points and the average cost of interest bearing liabilities to 1.42% of the third quarter. The average cost of interest bearing deposits and borrowings decreased 8 and 12 basis points respectfully compared with the prior quarter.

Despite pressure on earning asset yields attributable to the sustained low rate environment and flattening of the yield curve, the company projects some continued net interest margin improvement in the fourth quarter of 2010, principally as a result of continued favorable repricing of interest bearing liabilities and further deployment of excess liquidity.

Our total deposits decreased $2 million during the third quarter of 2010. Time deposits decreased $47 million while core deposits, consisting of demand deposits accounts and savings accounts, increased 45 million. The company remains focused on creating and expanding core deposit relationships while strategically permitting the runoff of certain higher-cost single-service time deposits. At quarter end our core deposits as a percentage of total deposits were 72.9% compared to 71.9% at June 30.

Noninterest income was stable at approximately $8 million in both the third and second quarters of 2010. The income increased slightly compared with the trailing quarter and the company’s efforts to opt in frequent uses of overdraft protection, appeared to have been successful, as we experienced no reduction in related income as a result of the enactment of Regulation E.

Non-interest expense also remains stable versus the trailing quarter at $34 million as increases in compensation benefit expense were largely offset by reductions in advertising expense and intangible amortization.

The efficiency ratio improved to 56% for the third quarter of 2010 compared with 56.4% in the trailing quarter and the ratio of annualized operating expenses to average assets improved to 2% for the third quarter from 2.02% in the previous quarter.

The company recorded income tax expense of $4.7 million for the third quarter of 2010 compared with 4.2 million in the trailing quarter. Company’s effective tax rate increased 25.9% for the third quarter compared to 24.7% in the previous quarter, primarily as a result of the nonrecurring increase in tax exempt income from the benefit paid on the bank-owned life insurance policy in the prior quarter.

The company currently projects an effective tax rate of approximately 25% for the balance of 2010 based on current estimates of 2010 taxable income.

And with that we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, we will now begin the question-and-answer session. (Operator Instructions) At this time, we’ll take our first question from Rick Weiss from Janney, please go ahead.

Rick Weiss – Janney Montgomery Scott

Good morning. I was wondering if you could talk a little bit about loan growth, or Chris, when would you expect that to resume?

Christopher Martin

Well, though were seeing some [inaudible] signs of a little bit more activity, it’s still challenging out there. I think until the economy gets a little bit better footing, it’s going to be very slow. I think until the economy gets a little bit more traction. But we’re making every effort to get there, I just don’t think we’re going to have a heck of a lot of things going on. There’s not much demand, and there’s certainly -- a lot of people are still just trying to figure out where sales are going to come from, or their services are going to be utilized by consumers. So, we’re just trying to -- we’re plugging away as much as we can without dropping our credit hat.

Rick Weiss – Janney Montgomery Scott

Okay, are you seeing any loan growth from competitors, or how’s the competition been?

Christopher Martin

The competition has picked up a bit, the larger institutions, the big banks, have come back into the market where they were absent for a few years. Pricing pressures certainly are there from – like competitors in the community banking space, but competition’s always been there. It’s just, where do you compete, whether it be on rate, credit, or a value of collateral.

Rick Weiss – Janney Montgomery Scott

Okay, thanks for taking my questions.

Operator

Thank you, our next question comes from Steve Moss from Janney Montgomery Scott. Please go ahead.

Steve Moss – Janney Montgomery Scott

Good morning, guys, thanks for taking my call; just a couple of things here. First, you guys over provided by quite a bit this quarter relative to charge-offs. How should we think about things, how about coverage in the future quarters?

Tom Lyons

You know, I think resolution in non-performing assets is going to continue to be a focus. If there’s a potential that we could see some additional charge-offs in the fourth quarter, so the provision relative to the charge-offs it’s something to consider, but really our provisioning is based on the credit quality of the existing balance sheet. So, a lot depends on risk rating deterioration or whether things hold up at this point.

Steve Moss – Janney Montgomery Scott

Okay, and then you guys briefly mentioned about the deposit cost here, is there anything that will prevent you guys from dropping deposit rates much more?

Christopher Martin

Well, I think there’s still some opportunity, obviously some CDs that we’re either repricing and they’re running off, or – certainly borrowing’s that are coming due in the next few quarters are dropping a good amount, upwards of 200 basis points per borrowing. So we’re using it – we could also get more aggressive on that front, but as we mentioned in our comments, we want to make sure we’re positioning the balance sheet for when or if rates are going to get higher. If we can lock in spread by doing a match funding with those borrowings, we will continue to do that. So rather than getting shorter, we’re trying to be a little bit more structured in our approach.

Tom Lyons

I’ll comment a little bit on the numbers. I’ll give you some numbers on maturing funding over the next couple of quarters. We have about 367 million maturing in the fourth quarter. The improvement of the rollover rates would be about 90 basis points, and about 348 million coming off in the first quarter of ‘11 with a favorable reprice of about 75 basis points.

Steve Moss – Janney Montgomery Scott

Okay. And Chris, from your center of influence, what are your thoughts on M&A? You know, we’ve seen some activity here in the New York market and is it likely you saw in New Jersey sometime soon?

Christopher Martin

I think, it’s still has a little time to go. Everybody’s trying to figure out what’s going to happen on the regulatory front and the cost of the related to all the new rules, regs, and compliance issues that may come out of the Dodd-Frank Bill. And that will take a little time for people to settle in on – from a smaller community bank space. And then, I think though, there’ll be more conversations but I think we’re always looking at the opportunities, on the other hand, we don’t think they’re going to open the flood gate like some of our investor bank friends would it to be.

Steve Moss – Janney Montgomery Scott

Okay, and if you guys aren’t getting much in terms of loan growth here, what are you guys looking on the investment security side?

Christopher Martin

I’m sorry, what was the question?

Steve Moss – Janney Montgomery Scott

If you guys aren’t getting much in terms of loan growth, what is your [inaudible] on the investment security set here?

Tom Lyons

Well, I think you saw some growth over the quarter. I think we’re up about 115 million if I remember correctly, quarter-to-quarter. Primarily agency mortgage speck, securities, low loan balance, relatively short duration, concern about extension and arising rate environment. I think we positioned our portfolio pretty conservatively, but it’s better than some of the alternatives. So we look to good structure and good cash flows and we’ll continue to do that.

Christopher Martin

I think on that side, that’s why we don’t have to be as aggressive in the deposit front because in this environment, if we don’t have the loan demands we don’t want to grow the investment book to be as big as it used to be in the balance sheet.

Steve Moss – Janney Montgomery Scott

Great. Thank you.

Christopher Martin

Thank you.

Operator

Our next question comes from Damon DelMonte from KBW.

Damon DelMonte - KBW

Hi. Good morning, guys. How are you?

Christopher Martin

Good morning.

Damon DelMonte - KBW

Tom, I think you mentioned that the performance with Reg E – related to Reg E was very strong this quarter. You didn’t have much of a drop off at all in the income. Do you think that’s sustainable going forward? Do you feel that you’ve – I guess, locked in or opted in everybody you need to?

Tom Lyons

We’re going to continue our efforts to pursue those that we haven’t, but I think it’s giving us some evidence that we’ve targeted the right people, that the most frequent users have adopted in and actually, September I think was our fourth largest month of income for the year and October to date looks pretty good too, so things seem to be holding up well.

Damon DelMonte - KBW

Okay, great. And then I think you mentioned that you expect a favorable trend for the margin in the coming quarter. Could you tell us what the margin was as of the last quarter of the month?

Christopher Martin

It was 350.

Damon DelMonte - KBW

Sorry, last month of the quarter I mean. Okay, 350, okay. That was for the – the month of September was 350?

Christopher Martin

That is correct.

Damon DelMonte - KBW

Okay. That’s all I had. Thank you.

Christopher Martin

Thank you.

Operator

Our next question comes from Matthew Kelley from Sterne, Agee and Leach. Please go ahead.

Matthew Kelley – Sterne, Agee and Leach

Hi, guys. I was wondering if you could talk about just kind of yields on series and C&I loans during the quarter, how that compared to 2Q and then what you’re seeing real time today, just how things have trended in terms of spreads over an index, or that matched-funding spread you referenced.

Christopher Martin

Well, certainly on the matched-funding spread, a couple of the things that we’ve actually gotten to 250 or 300 basis points on a couple of the deals and that’s, you know, matching up funding at 5 and 5 ½ years on something that has an average life of about the same from our standpoint.

In the way of spread, in the way of the multifamily you’re talking about 250 basis points over the tenure. Certainly if you’re going to the five year, it’s a little bit thinner at about 120. And in the commercial space, you’re talking upwards of 250 basis points over the applicable treasury and the 10 year and it certainly lessons your roll down the curve.

Matthew Kelley – Sterne, Agee and Leach

Okay. All right.

Christopher Martin

So rates are dropping and kind of we’re watching this very carefully, so we’re getting to a place that we’re at about the absolute rate even though the spread to treasury and all those types of items and LIBOR, we just don’t like the absolute level of those, so we’re kind of, you know, digging our heals in and keeping our floors in place.

Certainly competition is doing a little bit different than we would, but there’s a certain minimum that we think should be that business.

Matthew Kelley – Sterne, Agee and Leach

Okay. And what about in the C&I arena, what percentage are you able to get floors on those, you know, right out of the box, and where are those?

Christopher Martin

When you say – load to values are you talking?

Matthew Kelley – Sterne, Agee and Leach

Those spread on C&Is.

Christopher Martin

I think the spread is 75% of the other.

Matthew Kelley – Sterne, Agee and Leach

Okay. Got you. What about TDRs during the quarter? What was the TDR accruing restructured loans? It looks like it was about 2.8 million at the end of the second quarter.

Tom Lyons

Yeah, it was 2.8 million at the end of the third. We had one additional come on, I think it was different than the second.

Matthew Kelley – Sterne, Agee and Leach

Okay. Got you.

Tom Lyons

And $1.21 million restructuring done during the quarter.

Matthew Kelley – Sterne, Agee and Leach

Got it. And then what about –

Tom Lyons

It actually went up versus the previous rate, but we extended the terms, the amortization period changed, that loan has been current throughout, but they are having cash flow difficulties and we may [inaudible].

Matthew Kelley – Sterne, Agee and Leach

Okay. And there’s an exposure draft out there on some changes potentially on how banks account for TRDs or how they report them. Any thoughts on that?

Christopher Martin

It could expand, I guess, the number. I think a lot of people, including us, take a position that if there’s an immaterial modification in the cash flows, it’s not reportable to that restructuring, so that there could be some conditional loans disclosed.

Matthew Kelley – Sterne, Agee and Leach

Okay. Got you. And what about the tax rate for ’11?

Tom Lyons

I think around 25% is still our current estimate.

Christopher Martin

We’re in that process currently. I can give you more guidance on that maybe next time out. But the 25% seems to be reasonable for us. Unless you’re tell me, Matt, that you know something we don’t know that’s going on in Washington.

Tom Lyons

Well – yeah, what would bump it up potentially is earnings improvement. If we’re able to get at the quality improvement and generate more taxable income, you’ll see that rate bump up.

Matthew Kelley – Sterne, Agee and Leach

Got it. Thanks, guys.

Operator

Our next question comes from Collyn Gilbert from Stifel Nicholaus

Collyn Gilbert – Stifel Nicholaus

Thanks. Good morning, guys.

Christopher Meyer

Good morning.

Collyn Gilbert – Stifel Nicholaus

Chris, could you just talk a little bit about loan growth?

Christopher Meyer

Or lack of? We have, again for the last three years or so have been, you know, treading water. Not that we haven’t originated upwards of almost 1 billion in loans every year, but the cash flow is coming off those and we have a lot of construction loans that we’re paying down and, you know, not troubled and we still continue to see that.

Our portfolio, when they’re good quality, they can also refinance elsewhere, so that also accelerates some of the amortization and the cash flows. But our pipeline is getting a bit better than it has been in the past and I think it’s – when rates get this low, people have options. The people who are doing good things, so they can go to competitors and price one versus the other.

Again, as I mentioned in my comments, we don’t go to the broker network and we’re trying to do all this organically with our own as opposed to reaching in and buying paper. We could do that and increase loans, but we don’t think that increases core relationships or franchise value.

We always review that in our budget and strategic plans, but at this stage we think our pipeline is actually gotten to a good spot and it’s getting a little bit better as we’ve gotten our message out to the markets that we are relevant.

Collyn Gilbert – Stifel Nicholaus

Okay, that’s helpful. When you talked about competition, perhaps giving up on pricing, or when you kind of were talking about focusing on rate and maybe competition is it some of the smaller banks that are being a little more aggressive on competition, or the bigger banks, or people that are trying to break into a business line that they may not already be in?

Christopher Martin

It’s more of the larger banks I think are trying to make their end roads so I think they can lead with that and they can take it on the chin as opposed to some of the smaller banks. There will be – I think, of the mutual – specifically in our market, that are going to jump into that market because the residential mortgage area is flooded and they’re not seeing the volume in that area either. I think with the larger banks, again, they’re trying to hold onto their relationships that they’ve had in the past and we’ve been able to win some of the – even though they’re at the incumbent bank, people are frustrated because they don’t get any phone calls back and a whole different team is in place. So that’s helped us win some business.

Collyn Gilbert – Stifel Nicholaus

Okay. That’s really helpful. When you had talked about kind of extending some of the – or match funding from your larger loans, does that indicate that some of the loans that came in in this quarter were of larger size of the 17 ½ million that you saw? Maybe, I was just kind of curious what the average loan size was of that, or if you’re trying to, you know, go higher in actual loan commitments?

Tom Lyons

Well, I think we [inaudible] and obviously, we wouldn’t do match funding on loans that are 1 or $2 million. It wouldn’t be efficient for us. Some of these are multifamily deals that we’ve been able to match funds. That’s going to the 10 to $15 million range with again, the same credit parameters we’ve used in the past, and with people that we’ve done business with before. This isn’t just somebody off the street. And we continue to see that as very profitable business and certainly good for the balance sheet where we’re able to lock and load.

We’d love to see more of that business, but I think it’s when the larger competitors have come back in, they’re going to try to draw on that first.

Collyn Gilbert – Stifel Nicholaus

Got you. Okay, that’s very helpful. Thank you.

Christopher Martin

Thank you.

Operator

Our next question comes from Jake Seville from RBC Capital Markets. Please go ahead.

Jake Seville – RBC Capital Markets

Hey, guys. How are you?

Christopher Martin

Good.

Jake Seville from PBC Capital Markets

Can you provide us with any commentary about the dividend? Do you have a certain pay ratio you intend to target or have you given any consideration to potentially increasing the dividend?

Christopher Martin

Well, the Board certainly reviews the numbers and looks at the market, looks at the pay-out ratio. But I think back during when we did our IPO in 2004, we stated about a 40% pay-out ratio. And as we’ve looked at it, we evaluate the capital, we evaluate what’s going on in Washington with the Basel III, we’re being a little prudent looking at it and watching it, so it’s something we’ll consider.

We’re also considering what may happen in tax policy because if they change that to be taxed at ordinary income rates, we might have some other values to our shareholders. So we will continue to look at it on a quarterly basis with our board and evaluate accordingly.

Jake Seville – RBC Capital Markets

That makes sense. Thank you.

Operator

Our next question comes from Damon DelMonte from KBW. Please go ahead.

Damon DelMonte – KBW

Hey guys, just a quick follow-up question regarding your consumer portfolio. What are you seeing in the way of line usage in home equities, any pick up there?

Christopher Martin

A little bit of pick up, about 42%. It was 41.

Damon DelMonte – KBW

That would be a little. How about in the way of demand for new home equity loans or lines of credit?

Christopher Martin

It’s picked up a little bit and I think what we’re seeing is the loan to values are not astronomically outside of our parameters and I think we’re comfortable, and in fact, we go back to your last question. If it went up from 41 to 55, I might be a little concerned at what might be going on So we’re – we like it when it’s a little bit incremental as opposed to all at once.

Tom Lyons

We’ve seen some pick up during the quarter in the first lien home equity front, 40, 40% in change.

Damon DelMonte – KBW

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Mark Fitzgibbon from Sandler O’Neill. Please go ahead.

Mark Fitzgibbon – Sandler O’Neill & Partners

Thank you for taking my question. Chris, I was wondering, you know, with it being difficult to grow the balance sheet, why not use some of the excess capital to buy back stock?

Christopher Martin

Certainly, Mark, that’s evaluated all the time to say where’s our best use of capital. And being that we’ve seen the pipeline get a little bit stronger in there, and we’ve got a little bit more direction on where our capital regulations are going to go in the future, we’re able to look at that a little bit more objectively than in the past. I think everybody was a little bit concerned about where – what capital – what capital levels would have to be in the market at that time.

So we are continuing to look at that opportunity. On the other hand, we think we have some, you know, growth prospects in here that would probably be a better use of that.

Mark Fitzgibbon – Sandler O’Neill & Partners

Well, at these levels, do you think the stock is attractive?

Christopher Martin

I don’t make that call necessarily. I let the shareholders make that call. Does it have an IRR that’s better than maybe other opportunities, that’s at a trade off right now.

Mark Fitzgibbon – Sandler O’Neill & Partners

Okay. And then secondly, I was a little surprised, you guys seem to have a decent amount of construction loans in your pipeline. Given your concerns about the New Jersey economy, does it make a lot of sense to be booking those kinds of loans right now?

Christopher Martin

Well, these are not necessarily just New Jersey, they’re the Pennsylvania neighbors of ours. We’ve lent there before and they are on multifamily projects for the most part. These people have been in this business a long time that we’ve had recurring customers. So the – the apartments are going to be where things are going to go, I think, for the next three to five years and these have done very well in the near past that we’ve done with those – those customers in Pennsylvania and in New Jersey. So it’s people we’re familiar with that have very good balance sheets and aren’t over leveraged.

Mark Fitzgibbon – Sandler O’Neill & Partners

And then lastly, based on what you see with, you know, early stage delinquencies, do you feel like the provision is likely to hover in that sort of $8 ½ million range?

Christopher Martin

Yeah. That seems reasonable, Mark. I’m hopeful that things will improve, but we suffered some deterioration and risk ratings during the quarter, non-performings mostly do that one large loan. But that doesn’t impact our coverage ratios or our allocation of the allowance.

Mark Fitzgibbon – Sandler O’Neill & Partners

Okay. Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to our host, for any closing remarks.

Christopher Martin

Well, we thank you for your questions and appreciate you taking time to listen to the results of PFS. We look forward to speaking with you next quarter Have a great day.

Operator

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

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