Q2 2020 Provident Financial Services Inc Earnings Call
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Good morning, and welcome to the Provident Financial services Inc. second quarter earnings Conference call, all participants will be in listen only mode.
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After today's presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I'd like to turn the conference over to Mr., Leonard Gleason Investor Relations Officer. Please go ahead.
Thank you Gary good morning, ladies and gentlemen, thank you joining us for our second quarter earnings call. Today's presenters are Chris Martin Chairman, President and CEO and online senior Executive Vice President and Chief Financial Officer.
Before beginning their review of our financial results yesterday. Please take note of our standard caution as to any forward looking statements that may be made during the course of todays.
Oh full disclaimer is contained in this morning's earnings release, which has been posted to the Investor Relations page on our website comedy.
No I'm pleased to introduce Chris Martin who offer his perspective on our second quarter Chris.
Oh, Thanks, a lot and good morning, everyone.
As we begin the summary of our second quarter. It is our sincere hope that you in years are safe and healthy.
Second quarter earnings were impacted by coded as diesel that's the provision for loan losses expenditures related to providing safe environment for our customers employees took priority as we base our step back to office process and afforded our customer its full branch access.
On a positive yet related note we had expenses for the plan acquisition of SB 106 hundred $83000 during the quarter it looked to complete the closing tomorrow.
We remain comfortable with our capital structure, a balance sheet strength.
Our capital ratios continue to be strong given our visit Smith mix and risk management processes.
And do our capital and pretax pre provision earnings expectations expectations. The board approved a 23 cents cash dividend.
Net income for the quarter was $14.3 million or 22 cents per share.
Net interest margin decreased 23 basis points linked quarter to 2.97% as the impact of Laurie and higher cash balances, partially offset by lower deposit costs and above average growth in noninterest bearing deposits.
The impact of PPP loans on our margin was two basis points.
And we continue to experience a reduction in our all in cost of deposits to 41 basis points for the quarter ended June Thirtyth 2020 versus 62 basis points from the trailing quarter.
Borrowing costs also improved to 1.31% for 1.80 present in the trailing quarter.
The decrease in earning asset yields a 45 basis points linked quarter reflect bowling benchmark interest rates on adjustable rate loans, accompanied by modest growth in new originations at lower rates and the $403 million in PDP loans.
The PPP loans, we're assuming that approximately 75% to 80% will be forgiven. Once the government provides the vehicle and forms to complete this.
The impact on our net interest margin from the short end to the curve is now largely behind us, but historically low long term rates will continue to put pressure on asset yields as our loan and investment portfolio is repriced at lower coupon.
The loan pipeline remains robust at 1.3 billion and activity continues to provide us with growth potential as payoff that add during coated.
We're also placing interest rate floors on most of our commercial loans.
Residential mortgage originations have spike as rates historical lows and neighborhoods experienced an upsurge in activity with more individuals working from home and assembly into the new work environment, which we see as a continued as continuing well into the future.
Unlike some banks, we did not experience a high level of line draws during the course of economic shutdown as line usage remained at 36%.
We view this is indicative of the stability of our customer base and their assurance in our capacity to support their funding needs.
So Tom will go into more details on loan deferrals, but suffice it to save the initial phases 90 day deferral peaked at approximately $1.3 billion or 16.8% of the loan portfolio.
This has been reduced to $395 million or 5.1% of loans.
This includes second deferrals to date of $343 million.
The increase in deposits is difficult to parse as much of the growth can be attributed to PPP loans, along with stimulus checks from the government, but in any event significant growth in non interest bearing deposits helped reduce our funding costs.
Noninterest expense declined during the quarter due to decrease deposit related fees as much of our market was under the stay at home executive orders, which impacted debit card revenue due to reduced volumes.
Wealth management income was also affected by the market declines in the value of assets under management, which has since recovered.
On the non interest expense from the majority of the 5.6 million dollar increase was due to seasonal and the credit loss expense for off balance sheet credit exposure to $5.3 million in the quarter.
We also had increases data processing expenses related to our digital platform improvement along with transaction cost associated with the SB one acquisition.
Asset quality improved and we experienced net recoveries for the quarter.
Our allowance for credit losses, now stands at 1.11% of total loans from 0.76% at December 31 2019.
The provision in the quarter was significantly impacted by Moody's baseline economic forecast, including a negative shifts and the outlook for commercial real estate.
Closures to hotel retail restaurant and skilled nursing facilities are under heavy scrutiny.
At June Thirtyth through June 30 reported credit metrics remained remarkably stable given the ongoing level of economic stress as borrowers were aided by the impact of government stimulus and loan modification and deferral programs.
We envision continued pressure on credit as we anticipate the continuation of a challenging business environment due to the pandemic.
And we anticipate meeting all of our cost saves from the combination of SB, One bank loan, which closes tomorrow and all of that will provide to our customers in our employees, while also increasing long term growth and stockholder value.
Tom will provide more detail on our financial results Tom Thank you, Chris and good morning, everyone.
As Chris noted our reported net income was $14.3 million or 22 cents per diluted share compared to 24.4 million were 38 cents per diluted share for the second quarter, 2019, and 14.9 million or 23 cents per diluted share in the trailing quarter.
Earnings for the current quarter, where again adversely impacted by elevated provisions for credit losses under the seasonal standard and a recessionary economic forecast attributable to recorded 19 pandemic.
In addition, we incurred cost specific to our coal would response, including supplemental pay per customer facing employees de equipment and security costs and costs related to the upcoming merger with SB one.
Core pretax pre provision earnings were $35.9 million, excluding 16.2 million in provisions for credit losses on loans and commitments to extend credit 1 million of closing costs and 683000 professional fees related to the SD one merger.
This compares with 36.4 million in the trailing quarter, excluding provisions for credit losses, and merger related charges and 42.7 million for the second quarter 2019.
Our net interest margin contracted 23 basis points versus the trailing quarter and 45 basis points versus same period last year as declining market interest rates cash collateral pledged against that and money swaps excess liquidity and ppt loans or reduced lower earning asset yields.
The combat margin compression, we continue to reprice deposit accounts downward.
This deposit rate management, coupled with the continued emphasis on attracting noninterest bearing deposits resulted in the 21 basis point decrease in the total cost deposits this quarter to 41 basis points.
Noninterest bearing deposits averaged 1.8 billion were 25% total average deposits for the quarter. This was an increase from 1.5 billion in the trailing quarter sizable portion of that growth attributable to pbteen stimulus funding.
Noninterest bearing deposit levels remained elevated at 1.9 billion on June Thirtyth.
Average borrowing levels increased 92 million and the average cost of four funds decreased 49 basis points versus the trailing quarter to 1.31%.
We will continue to slightly manage liability clusters the rate environment evolves.
Order in loan totals increased $294 million versus the trailing quarter as growth in Cnine CRT multifamily residential mortgage loans was partially offset by net reductions in construction consumer loans.
The growth is largely driven by PDP loans, which totaled 400 million at June Thirtyth.
Loan originations excluding line of credit advances totaled 774 million for the quarter.
The pipeline at June Thirtyth was consistent with the trailing quarter at 1.3 billion pipeline rate has increased 26 basis points since last quarter to 3.43% at June Thirtyth.
Our provision for credit losses on loans was 10.9 million for the current quarter compared to 14.7 million and trailing quarter.
The decrease in provision reflects a significant reserve build required in the trailing four and Cecil model estimates for life of loan losses as impacted by the ongoing severe economic forecast.
We had annualized net recoveries as a percentage of average loans of one basis point this quarter compared with annualized net charge offs of 16 basis points for the trailing quarter.
Nonperforming assets declined to 37 basis points at total assets from 39 basis points at March 30 Onest.
The allowance for credit losses on loans to total loans increased 1.11% or 1.17%, excluding ppt loans from 1.02% in the trailing quarter.
Loans with short term Colby 19 payment deferrals declined from their peak of 1.31 billion or 16.8% of loans to $395 million were 5.1% of loans.
Johnson deferral consists of 52 million that are still in their initial deferral period, and another 343 million that have been or expected to be granted the second 90 day deferral.
Included in this total of $130 million as loans secured by hotels with a free Colby weighted average LTV of 53%.
124 million of loans secured by retail properties with the Prefilled weighted average LTV of 66% and 25 million of loan secured by restaurants with a pre globally weighted average LTV of 59%.
For the 912 million of loans that have concluded their deferral period 380 million have resumed regular contractual payments with the majority of the remainder expected to resume payments at their office first due date.
Noninterest income decreased 2.6 million versus the trailing quoted a $14 million as reductions in deposit and wealth fees, resulting from consumer restrictions from coping mitigation efforts.
Volatile asset values and lower swap fee income was partially offset by greater bank owned life insurance benefits and gains on sales of real estate owned.
Excluding provisions for credit losses on commitments to extend credit cobot related costs and acquisition related professional fees.
<unk> expenses were an annualized 1.86% average assets for the quarter.
These core expenses decreased 4.4 million versus the trailing quarter.
The decrease in core expenses versus the trailing quarter was primarily attributable to 1 million of executive severance and normal first quarter increases in compensation and related payroll taxes recognized in the trailing quarter and increased deferral of salary expense related to TPP loan originations in the current quarter.
This improvement was partially offset by increased FDIC insurance costs as the remaining 267000 small bank assessment credits is utilized in the current quarter.
Our effective tax rate decreased to 20.6% from 26% for the trailing quarter as a result of reduced forecasted taxable income the current quarter and an adverse discrete item related to the best in stock compensation in the trailing quarter.
We're currently projecting effective tax rate of approximately 23% for the balance of 2020.
That concludes our prepared remarks, we'd be happy to respond to questions.
We will now begin my question and answer session.
To ask a question you May Press Star then one on your Touchtone sound.
If you're using speakerphone, please pick up or handset before passing the keys to try your question. Please press Star then too.
This time, we'll pause momentarily to assemble our roster.
First question will come from Mark Fitzgibbon of Piper sampler.
It's John Navio long for Mark This morning, good morning, gentlemen.
Good morning.
I Wonder if we could just start by potentially giving us an update on asset flows in your wealth management business and just remind us what are you I'm wise as of March 31st and then as of the end of the most recent quarter.
Sure John.
At March 31st was $2.8 billion and at the end of June $3.2 billion. So we've recovered but on an average basis for the quarter.
Down about 100 million 3.2 billion to the average in Q1 versus.
I guess 2.2 billion to the average in Q1 versus 3.1 in Q2.
Got it got it and then the pipeline does look strong down just a touch quarter over quarter to 1.3 billion, how how much would you expect to close and in Threeq you I think you normally.
Looking at 50, Percentish sporty rate.
Yes, 58% is the expected pull through rate at or at a.
Great of about 3.43.
Going forward.
Okay fantastic.
And I appreciate the initial color on the margin, but I was hoping we could maybe dig a little bit deeper on the outlook specifically for the back half the year.
Given not only the closing of SB, one tomorrow, but also you know the blended PBC TPP fees through and I.
Just a lot of moving parts, if you could provide any clarity on how that be great.
Sure. So inclusive of the fee income I think ERP yields about 325, I believe that was discussed in the earnings release too. So that's assuming that the regular accretion if you're going to take the.
Accelerate the forgiveness and book more in Q3, and four which is the expectation I think about 75% is what we're projecting will be paid this year, obviously see the bump on that so the total fee income was less than half million dollars collected.
And we recorded about two and a half months worth of that was accreted into income on so about $480000 amongst the June half months in Q2.
Okay great.
And then I guess, just one last one on credit with the reserves as you mentioned now around 1.17% of total loans ex PDP do you feel comfortable with this moving forward or you can maybe could be conservative to build this a little bit higher over time I know, it's subject to so many different moving parts.
You know, it's it's largely model driven at this point I mean, there's little bit of flexibility in the qualitative factor assessment, and that's where you're trying to account for institution specific things are things that you think might be out layers of the model depending on what's happened in the world versus the last baseline forecast, but we're going to adhere to the process I'm comfortable with where we are I think.
He's brophy reserve level.
No I don't see a huge build unless you know in so much depends on the pandemic.
So smugly numbers as expected on T.D.D. employment numbers are looking a little bit week or so we'll have to see what comes.
This is Chris I think on the deferral and we're going to be the second wave of this to say how much of this is.
Part of the endemic and how much of the businesses are going to continue to struggle, obviously opening up the the economy in New Jersey, we've been holding back a little bit for cone.
Protection, Pennsylvania the same.
So I think the third quarter, we'll start see who's going to be surviving who's going to be struggling and that'll probably add to the qualitative factors that we'll be looking at between Q3 in Q4.
We had some encouraging discussions and some good news in terms of the number of folks that have already returned to a regular payments status, but so much dependent on whether or not we remain in an open position and continue to do that.
Great. Thank you gentlemen, that's all I had.
Thank you.
The next question comes from Erik Zwick offending in Scattergood.
Good morning, guys.
Morning.
With the SB one transaction scheduled to close tomorrow are there any update you can share on the loan Mark and then see sourced she saw assumptions you plan to out to record relative to the original expectations.
Fortunately, Eric we're still in a lot of the throws of that and really aren't prepared to discuss any those assumptions at this point.
Okay, and then given that that's the one haven't released a you know two key results at this point I'm, assuming like most other banks, Dave likely I've seen a buildup of liquidity during the quarter.
I'm curious can you just provide any expectations for what the average earning assets in Threeq, you will look like kind of including the two months contribution from from anyone.
I think when you look at the we're talking about earning asset returns.
Yeah levels.
The average earning assets yeah, I think when you look at where they were.
The first quarter second quarter, I don't see a dramatic increase we're looking at maybe but.
And commercial loan growth around 6.7%, 6.9% annualized.
Their portfolio has held up fairly well prepayments have been not really that extreme Ah. So we're looking forward to two would be kind of contiguous to what we are.
Okay. Thanks, So that's the color there and then turning to the deferrals and I'm curious about does 130 million and hotels can you provide a mix of those hotels in terms of use kind of business versus leisure and then any updates you have on current current occupancy rates.
Well I think a of the those loans do we have that are certainly not levered my way of a loan to value a sort of the revpar is off on those there are several oh, we have a few hotels right in the Newark Airport area that have struggled because obviously business travel is down Oh, we hope that that will improve but.
The.
Are the governor shutting down most of the areas that you can travel to that will hold goes off a little bit they've been on the books for a one of them is right across from the hotels and on the books a long long time. So we think that they'll be get through this is just be a longer timeframe to recover it's really really a mix of business and a and leisure.
Folio and I'd say occupancy is or are averaging in the 30% to 50% range again pretty dispersed.
Yeah pretty pretty even mix between business and leisure then Tom.
Yep lease up yes.
Okay, Great and I'm, just kind of last one for me I'm curious if you can talk about your your strategy for dealing with the loans that at the ended the second affirming period I'm still may need some sort of accommodation and how you're thinking about that the treatment in terms of some non accrual or TDR accounting and I guess ultimately what that might imply for risk rating changes and then the calculations.
The loan loss provisions. So we've been you know risk rating loans appropriately from that from a level of maintaining scrutiny internally, but as it affects the risk rating or the allowance calculation. Those are really captured in the economic forecasts that deterioration until the point when they might become impaired and they get pulled out that individually.
We are looking at the pool of a second deferrals and trying to makes incessantly I would think might go to a potential TDR I mean, as you indicated they might not be able to come back to normalized status at the end of the broker.
Best guess, maybe $132 million that would be subject to some kind of TDR in longer term a resolution.
And just to make sure I understood that correctly, it seems like any potential risk rating migration youve accounted for already and makes the economic outlook. So even as we move into late Threeq and Fourq you.
You may not need a big adjustments to the provision so for some of those loans that yeah.
But that's the seasonal works the way it's supposed to that's the expectation I guess that will be back tested further if those loans become impaired and they get individually evaluated for impairment.
Great. Thanks for taking my questions.
Thank you.
The next question is from Russell Gunther of D.A. Davidson.
Hey, good morning, guys.
Good morning.
That's just a quick follow up on on the deferral question, the 5% give or take kind of pro forma number.
Do you have a sense for for what that could shake out when we when we fold in DSP, one deal kind of pro forma.
Percentage deferrals to the total loans.
I'm just looking at the again on official conversations in the way of they had in the first quarter first round of.
I will call a pandemic assistant program deferrals about being about 20% of the portfolio or looking at removing it was about 12% in the second go round there looking only about 2%.
On a second deferral at this stage are still some that are in within the first deferral a that they still have to evaluate so the numbers have come down dramatically from where they were and where we were also.
Okay, that's great Chris Thank you for that and then yeah.
What's the deal close anything you can share in terms of I heard you.
Loud and clear that you expect to get all the cost saves recognized but did you see is just remind us in terms of the timing of when you'd expect that recognition and then you know any thoughts around what a good pro forma expense run rate would be a when those are fully recognized.
Again, I think a with the cost saves a with an estimated 30% cost saves, though we we will exceed that we're very comfortable I think it was 80% of that on the balance in the following year and that's with both companies as we look at its not just has to be once it's also ours as we look at putting two good companies together.
And I think we've evaluated that I'm very comfortable where we are and the deal costs. The same thing coming in slightly under what we thought so that's a those are positive was going forward. If you remember that the the deal book and aggressive about 13 Nineth million expected cost saves up as the ones base and they run at about 3.8.
Million, a month as or as a run rate for their expenses of 33% off of that.
Great. Thank you both that's it for me.
Okay. Thank you.
The next question is from Stephens long of RBC capital markets.
Hi, good morning, guys.
Good morning.
Can you guys just go or just like the economic activity that you're seeing with reopening how materially has things improved in the past a couple of months.
[laughter].
Well I think first foremost go a lot of our clients Oh, we have the when you look at retail exposure a lot of them are anchored by grocery stores are essential play a central a businesses such as walmarts and the pharmacies.
At home depots and low to the anchors had been supporting some of the the other parts of the those centers, we don't do large box.
I've said, you know restaurants, if they can do outdoor dining I think everybody's getting that model or in line, it's difficult to get to the saturation in the number of customers you used to get what you're seeing that doing better I don't think it's the kind of feed of everything else.
So hotels I think we talk about that are being difficult. If nobody is traveling everybody kind of staying in place that's not going to help if we can open up the other areas of the United States to.
Slowing economy or the other side would be a kind of the the Jim's fitness and wellness areas have been closed by the governor and until that opens up those businesses will still struggling we hope that they are able to come back a those are those the the question marks that I have on upon as anything else in that regard I think you probably Chris thanks.
Great. Thanks, there and I'm just any idea on a latest rank collection numbers from your borrowers.
I don't have that number.
Oh I'm just trying to.
Checking a couple of things real quick here.
Hi.
That's helpful that one would Steve we ought to get back you on that one.
Sure sure no problem.
And I guess, the the Bulleit picked up this quarter should we expect it to kind of just track back down to where it was in the prior quarter.
Oh, yes that a bully event, there was one or somebody who passed that came into.
The process and I think it was.
In doing so security searches they found out that someone who would not with the bank for a long period of time found that they had passed so that kind of in this quarter. So boldly, we'll go back to minimal.
Hopefully nobodys, passing and so they have yet on that.
I'm sorry on the prior question is able to get a little information, they're running about 90% in terms of collections on the industrial multifamily.
Okay, Great. That's that's good to hear.
And then just last one for me, if we were too or going forward I guess strip out.
ER PPP impact, where do you think loan yields would kind of hover around.
So again, he I guess the quick way to do that with the DPP was about 400 million for the quarter, let's say.
Maybe 300 and June 30 million on average, perhaps and Eddie yields without to 35.
230 size great Alright appreciate the color. Thank you.
Thank you.
And this concludes our question and answer session Oh, now I turn the conference back over to Mr. Martin for any closing remarks.
Thank you very much and as we've been experiencing any economic recovery will not be smoothed, regardless of the political outcomes in November.
Most of the economy's Fortunately closed are beginning to open with supply chain issues, continuing the pace and level restrictions imposed by our political leaders of time seems out of touch that many industries will take years to recover and sadly some will never make it but we stand ready to assist our clients in any amount of that promotes growth you have to safety for you our stock.
Others, and we appreciate your attention stay well and stay safe. Thank you.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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