Q1 2021 Provident Financial Services Inc Earnings Call
Good day and welcome to the Provident financial services incorporated first 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 to ask a question you May Press Star then one.
All of your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to the Leonard Gleason Senior Vice President of Investor Relations. Please go ahead Sir.
Thank you Chuck good morning, ladies and gentlemen, thank you for joining us for our first quarter earnings call. Today's presenters are chairman and Chief Executive Officer, Chris Martin President and Chief Operating Officer, Tony Love of Zeta and senior Executive Vice President and Chief Financial Officer, Tom Lyons.
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 Dot bank with that it's my pleasure to introduce.
<unk>, Chris Martin, who will offer his perspective on our first quarter Chris.
Thanks, Glenn and good morning, everyone. We appreciate your participation today.
Our first quarter earnings were vastly improved from the same period last year when the pandemic impact of what's first being felt.
The economy is rebounding quickly BMS for stimulus by the government the success of the vaccine rollout and the tenacity and perseverance of both consumers and business owners to weather this unprecedented event.
Earnings per share were <unk> 63 for the quarter as compared to 23 cents for the same period in 2020.
And the primary drivers of the improvement included a negative provision due to the prospects of a strong GDP growth combined with the full impact of improved revenue from the SB one acquisition.
Annualized return on average assets was 1.51% and annualized return on average tangible equity was 16, 8%.
Okay.
Loan growth was constrained as PPP loan forgiveness, and prepayments offset meaningful production originations.
Originations were robust and we continue to support the PPP program in the second phase.
The loan pipeline is consistent with the trailing quarter and the previous year to date.
Yields on new originations are approaching portfolio yields so stabilization in asset yield is on the horizon.
And like most financial institutions, we are awash with liquidity due to the proceeds from stimulus checks and PPP money as augmenting deposit growth.
This added liquidity presents the the accompanying challenge of where and how to invest the balances in an accretive manner, while remaining sensitive to potential run off.
For our core deposits are now 91 per cent of total deposits.
The result in increase in deposits of alleviated the need for borrowing which decreased during the quarter.
Our margin improved six basis points during the quarter and we envision core margin stability in the near term.
Non interest income improved but the new revenue sources from SB, one insurance increased wealth management income from Beacon Trust and Sadly another bank owned life insurance claim.
The retail piece also added to these increases along with loan prepayment fees and a net gain on the sale of residential mortgage loans.
Operating expenses of $61 9 million increase from the prior year largely due to the addition of compensation and occupancy expenses from SB one now.
Noninterest expense to average assets was 195% versus 2.13 per cent for 2020.
FDIC insurance costs decrease increase excuse me due to an increase in the assessment rate an increase in total assets and the prior year's results having benefited from a small bank assessment credit.
We exceeded the cost saves we projected when we announced the SB one acquisition and are enthusiastic about the combined company's potential to extract more cost and increased revenue.
Our efficiency ratio was $56 one 9%.
As for asset quality numbers continue to improve from trailing quarter deferrals of down to 132 million of which of $123 $5 million of commercial loans and of that number approximately 96% are paying interest.
And Tom will go over this in more detail we are optimistic that as the economy opens up further and more people are vaccinated results will continue to improve.
At this time I would like to ask Tony to add more color to the success of the combination along with strategic plans for Provident, Tony Thanks, Chris and good morning, everyone.
Let me start by noting that we have achieved or exceeded our financial expectations with regard to the merger with SB One bank.
Our focus has shifted to cultural integration the culminated in the recent company wide rollout of our new core values, which we call our guiding principles. This.
The successful rollout with celebrated throughout our company and it has inspired and energized all of us about what we can accomplish together.
Presently we are all well along in the development of our new strategic plan.
Select tenants of our plan include enhanced focus on one of our core competencies commercial banking the.
This involves building out certain segments of our commercial the commercial book and reorganizing our group to promote better efficiency and credit administration, which will make it easier for us to expand into new markets, where we can compete and win.
We also want to build on our exceptional funding base and optimize our branch network of.
During the quarter, we consolidated our branch office in Clinton New Jersey.
We are also focused on building our non spread income. In addition to further expanding our successful wealth management and insurance groups. We will evaluate other sources of revenue with the long term goal of having non spread income comprised in excess of 25% of our net income.
To remain relevant we are concentrating on digital banking and the digital transformation of our business processes.
The streamline activities reduce friction and make our customers journey through all of our channel simple fast and easy this will make us more efficient and improve the experience of our customers and employees.
Mergers and acquisitions will continue to be part of our growth strategy for our bank as well as for Beacon Trust in SB one insurance.
Scale has become increasingly more important to offset reduced margins and cover the higher cost of investing for our future.
We will remain steadfast in pursuing strategic strategic deals and partnering with companies that have comparable cultures.
Shifting quickly to the to our markets, we see the light at the end of the COVID-19 tunnel, many sectors largely recovered or quickly improving as the economic shutdown loosens and we approach herd immunity.
Those sectors that continue to exhibit pressure, our office space, particularly in Manhattan, and retail centers that don't have <unk>.
Mostly store anchor Fortunately Provident does not have a concentration of note in the either of these sectors.
Most banks are presently dealing with the how to best utilize the excess liquidity on their balance sheet. As a result, we are seeing increased competition, which includes more aggressive pricing and elongated interest only periods with higher leverage.
We remain firmly committed to our credit culture, not sacrificing structure of quant quality for quantity.
Despite the heightened competition, we are seeing good activity within our lending team. This quarter. We originated are funded $526 million of new loans, excluding line of credit advances and net P. P. P loan activity.
This would have been a strong quarter for us if not for the high level of unanticipated loan payoffs that offset the growth the.
The payoffs were due in large part to the sale of the on the line properties associated with the loans at quarter end, our pipeline remains strong at approximately $1 3 billion and we are seeing a marginal improvement in the average rate in the pipeline. If we are of good pull through rate and our pipeline and see a reduction in prepayments.
We should experience solid growth for the remainder of the year with that I'll turn the call over to Tom for his comments on our financial performance Tom.
You, Tony and good morning, everyone.
As noted earlier, our net income was $48 $6 million of 63 cents per diluted share compared with $40 6 million or <unk> 53 per diluted share for the trailing quarter.
Earnings for the current quarter were favorably impacted by $15 $9 million of negative provisions for credit losses on loans and off balance sheet credit exposures, while the trailing quarter reflected negative provisions of $6 2 million.
Core pretax pre provision earnings excluding provisions for credit losses on loans and commitments to extend credit for $48 $9 million for of pretax pre provision of ROA of 152%. This is consistent with $50 1 million or $1, 54% in the trailing quarter, which also include excluded merger related charges in COVID-19 response.
Ross.
Our net interest margin expanded six basis points versus the trailing quarter to $3, one zero percent as benefits from PPP loan forgiveness reduced funding costs and the steeper yield curve were partially offset by lower yielding excess liquidity.
We expect to maintain of core margin of approximately 3% as we continue to deploy excess liquidity into loans and securities. While we're pricing funding downward and continuing to emphasize non interest bearing deposit growth.
Including non interest bearing deposits, our total cost of deposits fell to 30 basis points. This quarter from 31 basis points in the trailing quarter.
Average noninterest bearing deposits were stable at 2.4 billion or 24 percentage of total average deposits for the quarter.
Average borrowing levels decrease of $196 million and the average cost of borrowed funds decreased four basis points versus the trailing quarter to 1.12%.
Average loans increased slightly for the quarter, although quarter end loan totals decreased $19 million versus the trailing quarter.
Loan originations excluding line of credit advances were strong at $539 million for the quarter, including $190 million of PPP two loans payoffs.
Payoffs were elevated however, including 177 million of P. P. P. One loan forgiveness.
The loan pipeline at March 31st increased $73 million from the trailing quoted of $1 3 billion. In addition, the pipeline rate increased eight basis points since last quarter to 365% at March 31st.
Our provision for credit losses on loans was the benefit of $15 million for the current quarter compared with the benefit of $2 3 million in the trailing quarter.
Asset quality metrics, including nonperforming loan levels early stage and total delinquencies criticized and classified loans in the portfolio of weighted average risk rating all improved versus the trailing quarter.
We had annualized net charge offs as a percentage of average loans of four basis points this quarter compared with 10 basis points for the trailing quarter.
Nonperforming assets decreased to 65 basis points of total assets from 72 basis points of December 31st.
Excluding PPP loans, the allowance represented 92% of loans compared with 1.0 of 9% in the trailing quarter.
Loans that have been granted short term COVID-19 related payment deferrals further declined from their peak of $1 $3 billion or 16, 8% of loans to $132 million or one three per cent of laws.
This compares with 207 million of two 1% of loans at December 31st.
This $132 million of loans consists of 300000 that are still in their initial deferral period $47 million in the second 90 day deferral period and $85 million that have received the third deferral.
Included in this total of $41 million of loans secured by hotels 33 million secured by multifamily properties, including $20 million at our student housing related nine.
$9 million of loans secured by retail properties $7 million secured by of restaurants and $9 million secured by residential mortgages.
With the balance comprised of diverse commercial loans.
Of the $123 million of commercial loans in deferral of 96% are paying interest.
Noninterest income increased $1 $2 million versus the trailing quarter to $22 million as growth in insurance agency income loan and deposit fees wealth management income and bank owned life insurance income was partially offset by reductions in net profits on a low level of swaps and gains on loan sales.
Excluding provisions for credit losses on commitments to extend credit and in the trailing quarter merger related charges and COVID-19 related costs.
Noninterest expenses were an annualized $1 95 per cent of average assets for the current quarter compared with $1 eight 2% in the trailing quarter.
The increase in the first quarter of 2021 is primarily attributable to seasonal increases in occupancy costs, including snow removal and utilities and increase in FDIC insurance due to our increased asset size and it changed the large institution assessment rates and the annual reset of the employer of share of payroll taxes.
Our effective tax rate increased to 25, 1% from 23 three per cent for the trailing quarter as the result of an increase in the proportion of income derived from taxable sources.
We are currently projecting an effective tax rate of approximately <unk> 25 per cent for the remainder of 2021.
That concludes our prepared remarks, we'd be happy to respond to questions.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys good morning.
One of them.
I was curious.
Tom if you could break out for us the P. P. P fees in the purchased accounting adjustments that flow through the margin this quarter and help us think about what the core NIM might look like and in coming quarters.
Yeah, I think on a core basis market somewhere in the 301 to three O. Five range PPP was about eight basis points of benefit this quarter and the purchasing accounting adjustments of about five basis points. The parents purchase accounting adjustments. So I don't really see the benefit of that disappearing because you know we're repricing of the current market, which there's no indication that the those funding.
Rates are going to go up so I think we're going to be in the 301 to three of five range on the core basis.
Okay.
And then secondly, your expenses were a little bit high once you sounded like you had some nonrecurring items in there can you tighten your belt get it get expenses back sub 60 billion per quarter going forward do you think Tom.
The $60 million is probably a reasonable number I would expect to see stock based compensation elevate a little bit on the Aesop plant just because we've seen some improvement in the market price.
That said Mark there were a couple of items as you noted that that won't recur the payroll tax reset trickles down over the next couple of quarters further.
Obviously snow removal, we had in January and February was a bit elevated we do manage those costs with fixed contracts, but there's a variable element to that as well.
And we do have the larger facilities I think part of the jump also was the switch to the east of the large bank assessment rates now that were for quarters over $10 billion, so that'll be a bit of an ongoing challenge.
Okay and then the insurance agency income was obviously strong which I assume is because you would get a lot of the renewals in the first quarter.
Or does that taper down you know.
A little bit in the second quarter, and then more in the third quarter or do you see it sort of fall off into Q typically maybe it's a question for Tony.
Sure.
And Mark the.
The insurance income this quarter was really good.
From one source right the.
The Commission based income was high contingency based income was not as high as it historically has been for the quarter, which is of good bad thing because we're doing it on the normal business.
Because of obviously the last year was COVID-19 year and.
Premiums of Justice so it wasn't a real solid market for contingency.
Well it does have cycles in the insurance and I think the best way to look at it is to look at it over the same quarter last year not on a linked quarter basis. So you'll typically see the first quarter be strong second the.
Third quarter tends to be a little lighter and we ramp up again in the fourth quarter, that's been the history of.
But you know again, Georgia building, so I expect all of the quarters to kind of inch up.
Hey, Mark one other items on the expenses side of things of Tony mentioned in his remarks, we did close of the Clinton branch when it reached the end of its lease term. There was an underperforming location was only about $19 million. We transfer those deposits of about 10 miles away of the Flemington, We've retained 97 per cent of the customers.
But in terms of expense reduction, that's about $250000 and saved expenses annually and about $262000 in compensation. That's I guess avoided if you will because we've been able to use those resources within the organization instead of having to make new hires.
Okay and then the last question I had for you is obviously you've seen a lot of consolidation in the northeast maybe a little less so in new Jersey, It feels like New Jersey might be ripe for consolidation given that you've got a lot of sort of midsize banks that are looking to grow and scale seems to be more and more important I guess I'm curious do you think consolidation really.
<unk> in New Jersey, and is PFS likely to be involved in some of that.
Well this is Chris.
We're always involved when invited we certainly between Tony and myself know most everybody in the market of relationships at all of it goes back to their boards are what they are thinking of how they look at the in the market and so we always like to be part of the conversation for for those that makes sense to our culture.
And how we run our business and if they would like to join up we're certainly open to the idea and then we're also look at of wealth and that vernacular also because we are the one of the few that have that business and have done well with it. So we continue to look at Beacon Trust is maybe another vehicle, where we can expand.
Thank you.
The next question will come from Steven Duong with RBC capital markets. Please go ahead.
Hey, good morning, guys.
Good morning, just just back on the the insurance revenue do you by chance have what.
The full year revenue was last year and just so we can gauge what the expectation for a full year. This year this year would be.
I don't have the exact number of front of me, Steve, but I think it was $88 5 million, that's correct and our expectation for next year is roughly 18% to 20% increase on that.
Okay. So the 18 20 per cent for for 2021 is that right.
Alright.
Okay great.
And then just back on the P. P.
<unk> do you do you have the average balance of of the.
For the PPP loans this quarter.
Let's see the total at the end of periods for 86 were for 73 at the end of the year.
Don't have an average in front of me, but you can do the straight line there the.
Second state of the second batch is definitely of the smaller nature than the first.
Batch of PPP.
It's definitely not the average size of it's definitely smaller.
Okay.
And do you have the the dollar amount that was created in the quarter and how much in fees you have remaining.
Our remaining fees are of $7 2 million again they were.
Refueled I guess with PTP too.
Fees recognized during the quarter were $4 million.
Okay great.
And then.
The liquidity you guys talked about that I guess.
You know your borrowings and Cds I guess.
As the year progresses, and let's just assume that you have another quarter or two of you know.
Deposits coming in.
Are there opportunities to kind of let borrowings and Cds roll off and do you have just the maturities of those.
Yes, theres about a bit over the next 12 months, it's about 1 billion for and there's probably about a 50 basis point pick up.
For the card roll rate.
Is that the Cds or or is that the that's a combination of that's the combination of both the steep correct can give you of pieces. If you want the can find yes, that'd be great of each of you add that.
Sure.
Time deposits decreased 131.
Great.
Oh here we go.
Yes, Cds by quarter, Steve Our Oh I gave you the total for the next 12 months of.
Cds of 790 million borrowings of $622 million for a total of 1 billion for 11.
And as I said, it's about a 50 basis point favorable world.
That's the basis points, Okay, that's great.
And then just last one for me.
The swap income you expect a rebound in the income or should we expect this as the going run rate.
I think its the going run rate at least for the near term, Steve we've kind of moved away from swaps because of our interest rate risk position, we are asset sensitive the.
Of the steepness of the curve has made the swapping to the variable rate products less attractive for us. So we're taking the current the the.
The spread income rather than the fee income at this point and holding on the higher yielding assets.
Alright.
Yes, that's why the margin of sort of holding its own. So yeah. The combination as we saw the pipeline rate getting closer to the portfolio right and that's one of the reasons why that's happening.
And also we are continuing to reprice liabilities as we just talked about and in fact, we made some additional rate reductions on non maturity deposits in April.
A negotiated rate instruments that should bring us another $2 6 million in savings on an annualized basis. So all of that is kind of factored into our position that the margin is going to stabilize on a core basis around the 301 to $3 five range.
Right and did you say that that 301 of the three of five includes purchase accounting or or does not include purchase accounting.
It does again the position of taken as of the purchase accounting isn't kind of roll off once it's gone because of the liabilities of repricing downward for those levels.
Got it alright, I appreciate all the color and the thank you.
Thank you.
The next question will come from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good morning, guys.
Your comments good morning, I appreciate the comments on the strategic plan your ongoing.
At the moment. So I was curious on the commercial banking tenant that you outlined talking about looking at entering different segments and potentially expanding into new markets is there any additional color you could provide at this time in terms of what.
What you're contemplating there.
Sure.
I'll give you just some color around that.
One of the things we're looking at is our C&I business, how do we expand how we deepen that and as of kind of as a percentage of our total book.
Looking at all of our SBA lending increasing.
Our capacity around that.
We reorganized our authority levels the way, we structured ourselves makes us more efficient not only to get credits through the bank, but to expand it to new markets and the markets that we think are are exciting for us saar or potential would be the Westchester Rockland.
Greater Philadelphia area potentially more out on the island show.
We're in a good position to expand there and I just touched upon some of the things that that the not not all of it. So hopefully that gives you a good thought process there of Russell.
Yeah, No that's great flavor. Thank you Tony.
And then just the.
Another question. So you also.
Mentioned here thinking about potential additional closures and.
The prepared remarks also talked about exceeding the cost saves from the deal and the potential to extract more so.
Just curious as your thoughts as to what the opportunity set is to reduce the expense base going forward.
And are those initiatives that would drop to the bottom line or is that really to kind of self fund that other tenants of the plan the focus on digital transformation.
Well I think it's a little bit of a ball if I can start right I think the digitalization of our processes certainly going to make us more efficient and get rid of of a lot of mundane manual processes that tend to build up over time.
In terms of rationalizing our network.
The consistent work in process and we can attract some more costs. There we do expect to to re <unk>.
<unk> some of those expenses in charge of investing in our future, but that in areas that are going to make more money for us not.
So I would look at it as a reshaped and some of it going to the bottom line I can't give you an exact percentage at this time.
And that's also very helpful Guide the rest of my questions have been asked and answered. So thank you very much. Thank.
Thank you. Thank you.
This concludes the question and answer session I would like to turn the conference back over to Christopher Martin for any closing remarks.
Excuse me.
One more question that just came through and that question will come from Erik Zwick with Boenning and Scattergood. Please go ahead.
Hey, good morning, guys I made it right up the wire.
Good morning, Eric.
Just a quick question maybe on your thoughts for organic loan growth and potential for net growth going forward and you know got.
The healthy unfunded loan commitments of around 2 billion in the loan pipeline was up quarter over quarter. So just curious how you think that might.
Play out through the year and whether it might be enough to offset the the remaining runoff for them from P. P. P. As those loans are forgiven and paid down.
Yeah, I'll start there and let my colleagues jump in so based off of our pipeline is pretty solid at this time right is as we mentioned.
The the pull through rates and getting loans for what we touch today well.
Probably I would say 55 per cent that means every loan we look at.
What we're losing to some of the.
I hate to use this word maybe some more rational structures that we see out there. So we're pulling through about 55 per cent of basketball are given the math back of a napkin math, if we if we have good.
The success in that same percentage pull through.
We don't see the of unanticipated prepayments of.
But sometimes are out of our control.
We still I still project that we should be between 5% to 6% at the end of the year and our loan growth.
And that five years of fixtures that are inclusive of the P. P P loans running off as well.
I would say we're looking at it net.
Okay, great. Thanks, that's all I had today.
You got it.
This concludes our question and answer session and I would like to turn the conference back over to Christopher Martin for any closing remarks. Please go ahead Sir.
Oh, Ed will go back again, we thank you for your time today and appreciate your continued confidence in PFS and we don't be of a great weekend. Thank you very much.
The conference.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Goodbye.
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