Q4 2020 Provident Financial Services Inc Earnings Call
Good day and welcome to the Provident financial services incorporated fourth quarter earnings call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
Now I'd like to turn the conference over to Mr. Leonard Gleason. Please go ahead Sir.
Thank you Chuck.
Morning, Ladies and gentlemen, thank you for joining us for our fourth quarter earnings call. Today's presenters are Chris Martin Chairman and CEO, Tony Love of Zeta, President and Chief Operating Officer, Tom Lyons, Senior Executive Vice President and Chief Financial Officer.
Before beginning their review of our financial results. We 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 call. Our full disclaimer is contained in this morning's earnings release, which has been posted to the Investor Relations page on our website Provident Bank.
My pleasure to introduce Chris Martin, who will offer his perspective on our fourth quarter, Chris. Thank you Linda and good morning, Oh. Thank you for participating today, we sincerely hope that you and your families are healthy.
Our fourth quarter earnings were strong.
As we successfully completed our systems integration of SB one.
Both of our expense savings estimate of over 30% and came in under our projected one time merger related charges.
I would be extremely remiss, if I did not recognize the herculean effort by management and the staffs from both companies as they ably met the challenges presented during a pandemic.
The Provident was one of the only a few financial institutions that have announced and completed the transaction and converted systems during the tumultuous time in our country.
Fourth quarter earnings were strong at $40 6 million or 53 cents per share, including $3 $2 million in merger related charges.
Net interest income was up 22 per cent quarter over quarter.
Total assets at December 31, 2000, Twenty's stood at $12.9 billion, which resulted in an annualized return on average assets of 1.25 per cent for the quarter.
And then annualized return on average tangible equity of 14, 1%.
Included in total assets were $473 million of PPP loans, which will continue to be submitted to the SBA for forgiveness throughout Q2 of this year.
With only nominal GDP growth expected in Q2, we anticipate that loan growth will lag and businesses will rebound in the second half of 2000 of 'twenty one.
Credit line usage is down to 41, 6% at December 31, 2020 versus $55 seven per cent in 2019.
Another issue is the deleveraging of the consumer balances, which should begin to pick up once the vaccine is more widely distributed and people get back to more normalized behavior.
With low interest rates business clients with strong balance sheets, and cash flows are able to refinance and pay down their loans.
Competition for loan growth remains extreme.
And our loan pipeline is $1 $2 billion with $295 million approved awaiting closing.
And the 47 per cent pull through rate expected on the remainder.
Deposits for the year increased $2 $7 billion, including $1 76 billion acquired from SB one.
Core deposit growth continued throughout the year and representing the 88, 9% of total deposits at December 31.
Deposit trends remained favorable during the quarter.
And growth was robust and broad based supported by seasonal inflows and pandemic related customer behavior.
We ended the year with a loan to deposit ratio of 99, 8%.
And we continue to interact with our customers to further solidify deposit relationships.
We also anticipate that with additional governance stimulus deposits will increase or at least remain at these elevated levels and then begin to gradually be drawn down during the second half of 'twenty 'twenty one.
The bank also promotes of the products and services available through SB, one insurance, a new business line for us along with wealth management offerings through Beacon Trust to further expand our client relationships.
Despite the challenging interest rate environment, our core margin held up well during the quarter.
Non interest income was up $2.7 million versus the same quarter last year, which was primarily the result of $1.8 million contributed by our new fee revenue sourced from SB one insurance accompany.
Accompanied by an increase in the net gain of sale of residential mortgage loans of $757000.
In wealth management income increasing $561000.
These increases were partially offset by decreases in prepayment fees of $882000.
Non operating expenses increased $4 $8 million for the quarter, which included $3 $2 million of nonrecurring costs related to the acquisition of SB one.
Our operating expenses to average assets was 182 per cent for the quarter and our efficiency ratio was $54 one 2%.
We continue to enhance our digital and online and mobile banking platforms as client behavior has demonstrated a clear preference for these channels.
As an example of we have seen an increase in Dell usage of 945% versus our previous person to person platform.
We will seek to optimize our expanded business model with the driver being ROI and customer relationship expansion supported by analytics.
And we consolidated three branch locations during the quarter and have another one planned later this quarter.
Our reserve released this quarter, primarily reflects moody's improving macroeconomic outlook, although I would note we did add appropriate qualitative adjustments for economic uncertainty at the pace and shape of the recovery is still evolving.
We're beginning to see the expected rise in non accrual loans and charge offs debt may already been reserved under for under our she sold metal methodology.
We are working with all of our clients to provide hardship assistance whenever possible and prudent.
If the vaccination in herd immunity can take hold we estimate that it would reduce the loss content within our loan portfolio.
And Tom will update the loan payment deferrals in more detail, but we have seen most of our clients come out of deferrals and refer returned to full P&I payments.
Our strong capital levels remain above well capitalized, which continue to support growth a solid cash dividend and an opportunity for stock repurchases that meet our internal return hurdles.
We repurchased one 3 million shares in 2020 at an average cost of $16 59 per share, which leaves PFS with only 262000 shares remaining in our existing program.
Yesterday, our board authorized the adoption of a new 5% repurchase program, which will commence upon the completion of the existing ones.
On the M&A front. Despite the fact that we just completed the SB one system conversion in November.
We remain open to those opportunities that expand our market and deliver solid returns to our stockholders.
We remain disciplined buyers in terms of the financial profile that fits our strategic objectives and culture and.
And we will assess fee based businesses along with the whole bank acquisitions.
The other are improving economic indicators in the fourth quarter, we continued to see an uneven recovery and upticks in Covid cases towards the end of the quarter negatively impacted the road to recovery.
Overall, our customers continue to be in a much stronger position than we would've anticipated when this crisis began.
However, unemployment levels in the market remained high inventory levels are lower than they were pre pandemic and the client confidence to invest in their business. The appears contingent upon the success of the vaccination distribution and the relaxation of government shutdowns.
Despite all of this we believe there is of great potential for expanding economic activity in the second half of the year, especially if there are significant stimulus package.
I'll, let Tom go into further details Tom.
Thank you, Chris and good morning, everyone.
As Chris noted our net income was $40 $6 million for 53 per diluted share compared with $27 1 million of 37 cents per diluted share for the trailing quarter.
Earnings for the current quarter included $6 $2 million of negative provisions for credit losses on loans and off balance sheet credit exposures, while the trailing quarter reflected provisions of $5 8 million.
Q4 represents the first full quarter of combined operations. Following the July 31st the acquisition of SB, One Bancorp for systems integration now complete and the bulk of expected cost saves now achieved.
The remaining non of nonrecurring merger of integration costs of $3 $2 million were recorded in the fourth quarter outperforming our expectations as disclosed at the transactions inception by about $800000 in helping tangible book value per share to recover and surpassed pre acquisition levels.
Yeah.
Core pretax pre provision earnings excluding provisions for credit losses on loans and commitments to extend credit merger related charges. In Covid response costs were $50 $1 million for pretax pre provision of ROA of 154%.
This compares favorably with $44 4 million or one point for 8% in the trailing quarter.
Our net interest margin expanded three basis points versus the trailing quarter as we reduced funding costs and grew noninterest bearing deposits, while earning asset yields held steady.
To combat margin compression, we continue to reprice deposit accounts downward and emphasize noninterest bearing deposit growth.
Including noninterest bearing deposits, our total cost of deposits fell to 31 basis points. This quarter from 33 basis points from the trailing quarter.
Noninterest bearing deposits averaged 2.38 billion of 24 per cent of total average deposits for the quarter.
This was an increase from 2.21 billion in the trailing quarter, reflecting a full quarter contribution from SB one.
Average borrowing levels decreased $82 million and the average cost of borrowed funds decreased three basis points versus the trailing quarter to 116%.
Quarter end loan totals increased $66 million versus the trailing quarter or an annualized two 7% reflecting growth in C&I and construction and consumer loans, partially offset by net reductions in CRE multifamily and residential mortgage loans.
Loan originations excluding line of credit advances totaled $868 million for the quarter.
The pipeline at December 31 decreased $138 million from the trailing quarter. The $1 2 billion. However, the pipeline rate increased two basis points since last quarter to $3 five 7% at December 31st.
Our provision for credit losses on loans was the benefit of $2 3 million for the current quarter compared with an expense of $6 4 million in the trailing quarter.
We had annualized net charge offs as a percentage of average loans of 10 basis points this quarter compared with net recoveries of less than one basis point for the trailing quarter.
Nonperforming assets increased to 71 basis points of total assets from 42 basis points at September 30.
Excluding PPP loans, the allowance represented 1.09% of loans.
Compared with $1, one 6% in the trailing quarter.
While it may seem counterintuitive to see the allowance coverage of the loan portfolio declined while nonperforming loans increased this demonstrates our stable expectations of loss content in the loans that have been moved to non accrual while life of loan loss expectations for the performing portfolio have improved as a result of advances from the pandemic response, and an improved economic forecasts.
<unk>.
The expected migration of certain credit to nonperforming status is reflective of the protracted economic challenges faced by certain borrowers in suboptimal in the suboptimal operating environment constrained by pandemic response restrictions.
We could no longer confidently support of more likely than non expectation that all contractually due principal and interest payments would be made we have classified these credits as non accrual regardless of whether they are receiving short term deferrals in accordance with the cares Act.
Loans that have been or expect it to be granted short term COVID-19 related payment deferrals declined from their peak of 131 billion or 16, 8% of loans to $207 million or two 1% of laws.
This compares to the $311 million or three 2% of loans at September 30th.
This $207 million of loans consists of 9 million that are still in their initial deferral period $51 million in the second 90 day deferral period 121 million debt of required additional deferrals and 26 million that have completed their initial deferral periods, but are expected to require ongoing assistance.
Included in this total are $49 million of loan secured by hotels for the pre COVID-19 weighted average LTV of 43%.
36 million of loans secured by retail properties, where the pre COVID-19 weighted average LTV of 58%.
$30 million of loans secured by multifamily properties, including $21 million that our student housing related with the pre COVID-19 weighted average LTV of 61%.
$5 million of loans secured by restaurants with the pre weight pre COVID-19 pre COVID-19 excuse me weighted average LTV of 50%.
And $30 million secured by residential mortgages with the balance comprised of diverse commercial loans.
Noninterest income decreased 268000 versus the trailing quarter to $20 million as growth in loan and deposit fee income bank owned life insurance income and gains on loan sales was more than offset by a decline in net profit of loan level swaps gains on sale of Oreo and a small reduction in wealth management income.
Excluding provisions for credit losses on commitments to extend credit merger related charges and Covid related costs noninterest expenses were an annualized $1, 82% of average assets for the quarter compared with 192% in the trailing quarter as the benefits of greater scale and planned acquisition cost saves were achieved.
Our effective tax rate decreased to 23, 3% from 25 five per cent for the trailing quarter. As a result of an increased proportion of income coming from tax exempt sources in the current quarter.
We are currently projecting an effective tax rate of approximately 24% for 2021.
That concludes our prepared remarks, we'd be happy to respond to questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Mark of Fitzgibbons with Piper Sandler. Please go ahead.
Hey, guys good morning.
Good morning, good morning.
The next question I hadn't gone give us a sense, you've got quite a bit of excess liquidity on the balance sheet. How long does it take for you to deploy that well that I'll kind of go away in one Judy of bank or most of it.
We're doing our best Mark so hopefully through loan growth and find suitable investments I would estimate our excess liquidity of about $284 million at the end of the year.
It's an ongoing process, but we will continue to try and manage that down yeah, I would add our Kodak debt.
We expect loan growth to be a little of it quicker than the or a little bit higher than Oh, we've been trailing so between the combined banks the emerged.
We expect to deploy that excess liquidity.
Pretty quick throughout the year.
Okay.
And then it looks like you've got about 1 billion one of somewhat higher cost borrowings I guess I'm curious what the maturity schedule of those looks like and is there an opportunity to prepay some of them.
Well as Tom is going to get the numbers of the opportunity of prepay is always there, but it doesn't make sense from an economic perspective, most of the time, but the penalty.
The earn back sometimes extend just as far as the.
For the duration of the borrowings so we'd look at that as you know.
You make some decisions you match up as much as you can with your operations.
Especially with the home loan bank dividend of very healthy it doesn't it's one of our better yielding assets.
Do you have a little bit of duration of yeah, I would just agree I'm not a big fan of prepaying borrowings with for yield maintenance I think it just takes the hit to equity in the current periods of did enhance earnings going forward, but you wind up in the in the same place for you you've lost income currently.
All of our equity.
In terms of maturing funding overall over the next four quarters, we have.
Close to $1 billion coming off of a lot of it is in the CD portfolio.
You can get the right number here of 1 billion or 88 total.
And I guess the weighted at the all the way the weighted average rate currently is about 98 basis points. The pickups as much as it's about 60 basis points coming down like 36 on the reprice.
Okay.
So each quarter, there's like $364 million in Q1 $231 million in Q2 hundred $43 million in Q3, and 170 million in Q4 of 'twenty. One that's maturing time deposits the borrowings rolling off of are considerably less but the but the the cd's makeup of the bulk of what is going to be priced.
Okay.
And then Tom excluding the impact of the PPP, how are you thinking about the margin.
Going forward.
A little bit better than last quarter, but not a lot I think we flow down to around the $2 95 per cent range.
That's actually inclusive of PPP.
Okay, and then there's about $8 7 million in deferred fees I'm, sorry, Martin $8 7 million deferred fees the remaining on ppb currently.
Eight seven.
That's correct.
Okay.
And then on as far as operating expenses go can you kind of update us what's your thinking non expense outlook for say <unk> as the synergies start to come through from the deal.
Yeah, I think for the year, we're still around $240 million, you're going to be a little bit skewed a little bit higher in the first part of the year because of the usual seasonal factors and utilities cost payroll taxes.
So maybe a little bit higher than $60 million in Q1 and floating debt.
Okay.
And then lastly, I guess given your buyback announcement does the buyback makes sense at current price levels or is it sort of intended to you know to deal with any downdraft in the market because it looked like this most recent quarter. Your average price was was a fair bit like 15% lower than where the stock is today.
Yes, I think that's more of the case for us Mark it's opportunistic.
Kind of trying to hunt around the one two times tangible book level that gives us the best return in terms of earn back end.
You know alternate use of capital versus just trying not to lever it up.
Thank you.
Thank you too.
Our next question will come from Erik Zwick with Boenning and Scattergood. Please go ahead.
Hey, good morning, guys.
Good morning.
Good morning.
Tom if I could just follow up on the the margin commentary.
<unk> quickly I just want to make sure I've got all the pieces right. I think you mentioned in your prepared remarks debt the yields on the pipeline or about $3 75 per cent and that's pretty close to where the the current yield in the book. So it doesn't seem like there should be too much pressure. There you gave the outline of the maturing time deposits and those pricing lower that seems like that should be of benefit.
Then also the $8 7 million of deferred P. B P fees coming through.
Where the pressure is coming from.
Outlook from the the current fourth quarter level of the margin down to that kind of 295.
Mentioned.
The pipeline rate of if I misspoke I was $3 57, net $3 75.
Got you Okay. That's helpful that help square that up.
And the.
Then looking at the the run rate for expenses headed into 2021, and so if I back out the I guess about $3 2 million in merger related expenses in for Q that kind of gets into the mid fifty's range or so which was you know maybe a little lower than I had been expecting prior is that a good run rate heading into <unk>.
21 are there other factors in your guidance.
Mary pressures that that might kind of drive that higher what are your expectations. There. Yeah. I think it's more like 60 60 to 61 in the first part of the year per quarter.
The normal increases the payroll tax stuff that we talked about but also you had an unusual a reversal of the credit provisions on off balance sheet commitments. This quarter that was $3 $9 million favorable.
Wouldn't expect to see that recur.
Excellent that's helpful.
And then in terms of the the newly authorized.
Authorized round of PPP loans any expectations for.
What that might add to the balance sheet here in the first part of the year.
I think we're probably at this point based on applications, we received somewhere in the 175 to the low $200 million range.
Great Thanks, and in the last one in maybe for.
Chris or anyone who wants to win you mentioned you're in 'twenty 'twenty, one you'll consider fee based and the whole bank opportunities as they arise.
And if there's a good fit just curious if you could remind us on.
For your target size and any kind of geographic markets that you would look to expand into us if the appropriate opportunity presented itself.
Well this is Chris and I think.
We always look at things that are in or contiguous and if they can expand into really good markets that don't really destroy the franchise value of our.
Our company, we will look at them.
The always meet the hurdles and be part of our culture.
<unk> matter I mean, I don't know that we would do of $100 million company not because of its bad it just the fact of the economies of scale aren't there.
But I would say at the half the half of $1 billion. It would be the start point, especially if you're looking out in.
The Pennsylvania debt has a bunch of smaller companies that maybe gives us some more scale and opportunity.
I think anything of contiguous which is always above the Sussex county up into Rockland Orange County, Westchester, New York surrounding maybe and maybe we have with SB, one a little bit of exposure in queens doing very very well, but that the.
Doesn't mean, we're just going to go out of an expedition, we just look at opportunities and sometimes that could be organic versus buying businesses on the well side.
We can definitely expand the horizon of a little bit more.
We will also look at one of our clients are so I hate to say the Florida has the opportunity because there are people down there, but thats certainly been well vetted by a lot of institutions that are looking at that as an opportunity and the pricing has gotten a little bit of SKU.
Great. Thanks for the color there I appreciate you asking all of my questions.
Thank you.
The next question will come from Steven Duong with RBC capital markets. Please go ahead.
Hi, good morning, guys.
Good morning.
Just first just on the the loan side can you just tell us what was going on with the commercial mortgage and <unk> and the commercial loans of just the sequential changes in those portfolios.
Yeah, the sequential changes a little bit distorted from the systems conversion that happened in November Unfortunately, with some reclassification entries that took place during the period. So it's a little bit of a little bit challenging easier to look at the yields overall.
Got it okay.
And I guess yeah.
What are you guys are generally expecting for the year I know you're looking at more back weighted is just is there a general range that are you thinking bad excluding PPP.
Yeah from from.
Stephen the Shaw from a growth rate.
I think what we're seeing in the pipeline and there's a lot of robust activity.
And unless things get a little unusual in terms of hyper competition.
And pricing and structure, we think we could be between that for four and a half and six per se.
<unk> is a good target for US again, we think we can be on the high end, if we don't see competitive pressures getting a little outrageous, but beyond that.
The activity given the circumstances that we're we're seeing in the marketplace with Covid et cetera, it's pretty healthy and our people are busy.
Got it and that would really be geared more.
Towards the second half or do you just thinking its kind of even right now given where the pipelines are.
I would venture of strong guest that the second half will be better than the first half, but we're seeing how quickly we can pull those loans through the pipeline.
Alright got it and then just one last one for me just once we get through this where do you think your of reserves will eventually gravitate towards.
You know I would guess high 90 to the low 1% kind of coverage range of and I just think about what's typical charge off activity on our loan portfolio has about a four year weighted average life. So I'm trying to estimate life of loan losses in my own simple way taken of the 25 basis points as they as a guess at the normal charge offs.
I think our long term average over the last five years of good again very benign credit environment was about 16 basis points. So that kind of gives you the lower boundary.
But I think the industry is more in the 25 to 30 basis point of kind of range for banks with our kind of composition.
Got it appreciate the color. Thank you.
Yep.
The next question will come from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good morning guidance.
Good morning.
A quick follow up on the loan growth commentary I. Appreciate the thoughts that you guys shared within that target could you guys talk a bit about the mix that you would expect to be driving that and any.
Geographic concentrations are outsized contribution.
Sure I mean from a junior geographic concentration.
The point to the markets, we serve like our primary markets.
In terms of the mix, we're seeing a lot in it from a Cree perspective of its up some multifamily medical medical office, a small amount of retail.
And there are a lot of owner occupied of activity in industrial is the space that we're seeing in the targeting to lend into.
While we don't.
Basically red line any categories were very careful in the spaces of all.
Of office hospitality, there has to be of real strong enhanced underwriting component to that to attract this to go there still.
Still a strong emphasis on C&I.
Yes.
Have a very strong emphasis on C&I.
Owner occupied as well and the 2021.
That's great I appreciate the additional comments there and then.
How do you think about your fee businesses in the into 2021 could you talk about the overall revenue projections, there and particularly curious on the insurance and wealth grant.
I'm going to take insurance.
Sure all of the insurance.
Definitely out of an increase of 17% in the last year, it's really done well.
The yield to Tony because he ran the business at SB, one so he's a little more familiar than we are at this level. So Tony Yeah, I mean with the insurance itself I always Susan the anecdotal point, you can pretty much just check the box and give them 17 of 20% year over year of growth.
However, this year is going to be a.
Positively unusual what that basically means is now that the insurance company has a much broader base to.
Two.
Obviously sell those products and services. So we're seeing a lot of good momentum and I know George is pretty enthusiastic about the activity as we engage with the rest of the teams are now on the Provident side.
And so I think he can grow his business.
Much faster than he has historically bought.
Just for purposes of financial projections, just let's just say 17 of 20% year over year, but I think he could do better.
On the wealth side of things a lot depends on market conditions, obviously, but we did close the year at record levels of AUM up the $3 $7 billion.
The typical fee rate of our last 12 month average fee rate 77 basis points. So we did just under $26 million in revenue for 2020.
A lot of the same synergies that we are hoping to achieve with the insurance business are transferable to the wealth business as well as we tried to broaden and deepen those relationships. So the expectations are a pretty positive agreed.
That's great guidance I appreciate the thoughts there and then the last one for me is just the follow up.
Tom you mentioned the.
Hey expense item that you wouldn't expect to run rate could you just.
To clarify what that was I apologize I missed it.
Sure that's the provision for credit losses on off balance sheet credit exposure, so the commitments to extend credit.
Again with the favorable economic forecast that we saw coming out of Moody's we had a fairly significant decrease in that we could see some additional decrease if.
The conditions continue to improve but I wouldn't expect to see anything of that magnitude.
And the magnitude was 3.3 dollars nine three points of $1 million, it's broken out on the on the P&L for a separate line item.
Okay, perfect Alright, guys Thats it for me thanks very much.
Thanks for all of it give us.
This concludes our question and answer session I would like to turn the conference back over to Mr. Christopher Martin for any closing remarks. Please go ahead.
Well as we entered 2021, we are increasingly optimistic about our path to economic recovery as we expect to see the rollout of vaccines accelerate near term providing benefits in the back half of the year.
Well, we will continue to monitor the landscape carefully and we're confident that the strength of our franchise and the benefits of our merger with SB, one positions us well and we are excited about the tremendous opportunity when the pandemic related slowdown subsides.
Thank you for your time today and please continue to wear a mask.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Goodbye.
Okay.
Okay.
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Yes.