Provident Financial Services Inc (PFS) 2021 Q1 法說會逐字稿

Good day, and welcome to the Provident Financial Services, Incorporated first quarter earnings call. (Operator Instructions) Please, note this event is being recorded.

I would now like to turn the conference over to Leonard Gleason, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Chuck. Good morning, ladies and gentlemen, and 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 Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons.

Before beginning our 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.

With that, it's my pleasure to introduce Chris Martin, who will offer his perspective on our first quarter. Chris?

Thanks, Len, 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 was first being felt. The economy has rebounded quickly via massive 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 $0.63 for the quarter as compared to $0.23 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%.

Loan growth was constrained as PPP loan forgiveness and prepayments offset meaningful production. Originations were robust, and we continue to support the PPP program in its 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 monies augmenting deposit growth. This added liquidity presents the accompanying challenge of where and how to invest the balances in an accretive manner while remaining sensitive to potential runoffs. And our core deposits are now 91% of total deposits. The resulting increase in deposits alleviated the need for borrowing, which decreased during the quarter.

Our margin improved 6 basis points during the quarter, and we envisioned core margin stability in the near term.

Noninterest income improved with the new revenue sources from SB One Insurance, increased wealth management income from Beacon Trust, and sadly, other bank-owned life insurance claim. Retail fees also added to these increases, along with lower prepayment fees and a net gain on the sale of residential mortgage loans.

Operating expenses of $61.9 million increased from the prior year, largely due to the addition of compensation and occupancy expenses from SB One. Noninterest expense to average assets was 1.95% versus 2.13% for 2020. FDIC insurance costs increased due to an increase in the assessment rate and increase in total assets, and the prior year's results having benefited from a small bank assessment credit. We exceeded the cost savings we projected when we announced the SB One acquisition and are enthusiastic about the combined company's potential to extract more costs and increase revenue. Our efficiency ratio was 56.19%.

As for asset quality, the numbers continued to improve from trailing quarter. Deferrals were down to $132 million, of which $123.5 million are commercial loans. And of that number, approximately 96% are paying interest. And Tom will go over this in more detail, but 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 that culminated in the recent company-wide rollout of our new core values, which we call our guiding principles. This successful rollout was 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. This involves building out certain segments of our 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 note, during the quarter, we consolidated our branch office in Clinton, New Jersey. We are also focused on building our nonspread income. In addition to further expanding our successful wealth management and insurance groups, we will evaluate other sources of revenue with a long-term goal of having nonspread income comprise 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 to streamline activities, reduce friction and make our customers' journey through all of our channels 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 and 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 deals and partnering with companies that have comparable cultures.

Shifting quickly to our markets. We see the light at the end of the COVID 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, are office space, particularly in Manhattan, and retail centers that don't have a grocery store anchor. Fortunately, Provident does not have a concentration of note in either of these sectors.

Most banks are presently dealing with 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. At Provident, we remain firmly committed to our credit culture, not sacrificing structure or quality for quantity.

Despite the heightened competition, we are seeing good activity within our lending team. This quarter, we originated or funded $526 million of new loans, excluding line of credit advances and net PPP 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 payoffs were due in large part to the sale of the underlying properties associated with the loan.

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 have a good pull-through rate in 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?

Thank you, Tony, and good morning, everyone.

As noted earlier, our net income was $48.6 million or $0.63 per diluted share compared with $40.6 million or $0.53 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, were $48.9 million for a pretax pre-provision ROA of 1.52%. This is consistent with $50.1 million or 1.54% in the trailing quarter, which also excluded merger-related charges and COVID response costs.

Our net interest margin expanded 6 basis points versus the trailing quarter to 3.10% as benefits from PPP loan forgiveness, reduced funding costs and steeper yield curve were partially offset by lower-yielding excess liquidity. We expect to maintain the 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 noninterest-bearing deposit growth.

Including noninterest-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% of total average deposits for the quarter. Average borrowing levels decreased $196 million, and the average cost of borrowed funds decreased 4 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 2 loans. Payoffs were elevated, however, including $177 million of PPP 1 loan forgiveness.

The loan pipeline at March 31 increased $73 million from the trailing quarter to $1.3 billion. In addition, the pipeline rate increased 8 basis point's since last quarter to 3.65% at March 31. Our provision for credit losses on loans was a benefit of $15 million for the current quarter compared with a 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, and the portfolio weighted average risk rating, all improved versus the trailing quarter.

We had annualized net charge-offs as a percentage of average loans of 4 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 at December 31. Excluding PPP loans, the allowance represented 0.92% of loans compared with 1.09% 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 1.3% of loans. This compares with $207 million or 2.1% of loans at December 31. This $132 million of loans consists of $300,000 that are still in their initial deferral period, $47 million in the second 90-day deferral period and $85 million that have received a third deferral.

Included in this total are $41 million of loans secured by hotels, $33 million secured by multifamily properties, including $20 million that are student housing-related, $9 million of loans secured by retail properties, $7 million secured by restaurants and $9 million secured by residential mortgages, with the balance comprised of diverse commercial loans. Of the $123 million of commercial loans and deferral, 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 loan level 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-related costs, noninterest expenses were an annualized 1.95% of average assets for the current quarter compared with 1.82% in the trailing quarter.

The increase in the first quarter of 2021 is primarily attributable to seasonal increases in occupancy costs, including snow removal in utilities, an increase in FDIC insurance due to our increased asset size and the change to large institution assessment rates, and the annual reset of the employer share of payroll taxes.

Our effective tax rate increased to 25.1% from 23.3% for the trailing quarter as a result of an increase in the proportion of income derived from taxable sources. We are currently projecting an effective tax rate of approximately 25% for the remainder of 2021.

That concludes our prepared remarks. We'd be happy to respond to questions.

(Operator Instructions) And the first question will come from Mark Fitzgibbon with Piper Sandler.

I was curious, Tom, if you could break out for us the PPP fees and the purchase accounting adjustments that flowed through the margin this quarter and help us think about what the core NIM might look like in coming quarters.

Yes. I think on a core basis market, somewhere in the 3 01 to 3 05 range. PPP was about 8 basis points of benefit this quarter. And the purchasing accounting adjustments were about 5 basis points. The purchase accounting adjustments -- so I don't really see the benefit of that disappearing because we're repricing the current market, which is no indication that those funding rates are going to go up. So I think we're going to be 3 01 to 3 05 range on a core basis.

Okay. And then secondly, your expenses were a little bit high in 1Q, sounded like you had some nonrecurring items in there. Can you tighten your belt and get expenses back sub-$60 million per quarter going forward, do you think, Tom?

$60 million is probably a reasonable number. I expect to see stock-based compensation elevate a little bit on the ESOP plan just because we've seen some improvement in the market price. That said, Mark, there were a couple of items, as you noted, 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 large bank assessment rates, now that we're 4 quarters over $10 billion. So that will be a bit of an ongoing challenge.

Okay. And then the insurance agency income was obviously strong, which I assume is because you'd get a lot of the renewals in the first quarter. Does that taper down a little bit in the second quarter and then more in the third quarter? Or do you see it sort of fall off in 2Q typically? Maybe it's a question for Tony.

Sure. Mark, the insurance income this quarter was really good from one source, right? The commission-based income was high. Contingency-based income was not as high as it historically has been for the quarter, which is a good/bad thing because we're doing it on the normal business because of -- obviously, the last year was COVID year and premiums adjusted, so it wasn't a real solid market for contingency.

It will -- 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 when we ramp up again in the fourth quarter. That's been the history. But again George is building. So I expect all the quarters to kind of inch up.

Mark, one other item to note on the expense side of things. As Tony mentioned in his remarks, we did close the Clinton branch when it reaches the end of its lease term. It was an underperforming location. It was only about $19 million. We transferred those deposits about 10 miles away to Flemington. We've retained 97% of the customers.

But in terms of expense reduction, it's about $250,000 in saved expenses annually and about $262,000 in compensation that's, I guess, avoided, if you will, because we've been able to use those resources within the organizations that are having to make new hires.

Okay. And then the last question I had for you is, obviously, we've seen a lot of consolidation in the Northeast, maybe a little less so in New Jersey. It feels like New Jersey might be riped for consolidation given that you've got a lot of sort of midsized 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 accelerates in New Jersey? And is PFS likely to be involved in some of that?

Well, this is Chris. I think that we're always involved when invited. We -- certainly between Tony and myself know most everybody in the market have relationships. It all goes back to their boards, what they're thinking, how they look at the market. And so we always like to be part of the conversation for those that make 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'll also look at wealth in that vernacular also because we are one of the few to have that business and have done well with it. So we continue to look at Beacon Trust as maybe another vehicle where we can expand.

The next question will come from Steven Duong with RBC Capital Markets.

Just back on 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 would be?

I don't have the exact number for me, Steve. I think it was $8 million to $8.5 million.

That's correct. And our expectation for next year is roughly 18% to 20% increase on that.

Okay. So the 18% to 20% for 2021, is that right?

Correct.

Okay. Great. And then just back on PPP. Do you have the average balance for the PPP loans this quarter?

Let's see, the total at the end-of-period is 4 86 million. We were 4 73 at the end of the year. I don't have an average in front of me, but you can do a straight-line there.

Yes. The second batch is definitely a smaller nature than the first batch of PPP. So it's definitely not the average size. It's definitely smaller.

Okay. And do you have the dollar amount that was accreted in the quarter? And how much in fees you have remaining?

Remaining fees are $7.2 million. Again, they were refueled, I guess, with PPP 2. Fees recognized during the quarter were $4 million.

Okay. Great. And then the liquidity, you guys talked about that. I guess your borrowings in CDs, I guess, as the year progresses, and let's just assume that you had another quarter or 2 of deposits coming in, are there opportunities to kind of let borrowings and CDs roll off? And do you have different maturities of those?

Yes. There's about -- over the next 12 months, it's about $1.004 billion, and there's probably about a 50 basis point pickup to the current loan rates.

Is that the CDs? Or is that...

That's a combination of both, Steve. I can give you pieces if you want. I can find them.

Yes, that would be great if you have that.

Sure. Time deposits decreased 1 31.

Here we go. Yes. CDs by quarter, Steve, are -- I'll give you total for the next 12 months. CDs are $790 million, borrowings of $622 million for a total of $1.411 billion. And as I said, it's about a 50 basis point favorable, overall.

50 basis points. Okay. That's great. And then just last one from me, the swap income. Do you expect a rebound in the fee income? Or should we expect this as the going run rate?

I think it's going one way, at least for the near term, Steve. We've kind of moved away from swaps because of our straight risk position. We are asset-sensitive. The steepness of the curve has made to swap into variable rate products less attractive for us.

So we're taking the current -- the spread income rather than the fee income at this point and holding on to the higher-yielding assets.

Steve -- yes, that's why the margin is sort of holding its own. So...

Yes. A combination is we saw the pipeline rate getting closer to the portfolio rate, and that's one of the reasons why that's happening. And also, we're continuing to reprice liabilities, as we just talked about. In fact, we made some additional rate reductions on nonmaturity deposits in April and negotiated rate instruments that should bring us another $2.6 million in savings on an annualized basis. So all that's kind of factored into our position that the margin is going to stabilize on a core basis around the 3 01 to 3 05 range.

Right. And did you say that 3 01 and 3 05 includes purchase accounting? Or does not include purchase accounting?

It does. Again, the position I'm taking is that the purchase accounting isn't going to roll off once it's gone because the liabilities are repricing downward to those levels.

The next question will come from Russell Gunther with D.A. Davidson.

So I appreciate the comments on the strategic plan you're 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 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 a percentage of our total book. Looking at our SBA lending, increasing our capacity around that. We reorganized our authority levels. The way we structure 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 exciting for us or potential would be the Westchester, Rockland, the Greater Philadelphia area, potentially more out on the island. So I think we're in a good position to expand there.

And I just touched upon some of the things that -- not all of it. So hopefully, that gives you a good thought process there, Russell.

Yes. No, that's great flavor. And then just another question. So you also mentioned here you're thinking about potential additional closures, and 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 another tenant of the plan to focus on digital transformation?

I think it's a little bit of both, if I can start, right? I think the digitalization of our process is certainly going to make us more efficient and get rid of a lot of mundane manual processes that tend to build up over time.

In terms of rationalizing our network, that's the consistent work in process, and we can extract some more costs there. We do expect to reshift some of those expenses into -- investing in our future, but that's in areas that are going to make more money for us, not -- so I would look at it as a reshift and some of it going to the bottom line. I can't give you an exact percentage at this time.

This concludes the question-and-answer session. I would like to turn the conference back over to Christopher Martin for any closing remarks.

There is actually one more question that just came through, and that question will come from Erik Zwick with Boenning and Scattergood.

Just a quick question maybe on your thoughts for organic loan growth and potential for net growth going forward. Got a healthy unfunded loan commitment, around $2 billion, and 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 remaining runoff from PPP as those loans are forgiven and pay down.

Yes. I'll start there and let my colleagues jump in. So based on -- our pipeline is pretty solid at this time, right, as we mentioned. The pull-through rates and getting loans for what we touch today is probably, I would say, 55%. 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% of that stock.

Given the math -- back of the neck in math, if we have the success in that same percentage pull-through, and we don't see the unanticipated prepayments, which sometimes are out of our control, we still -- I'd still project that we should be between 5% to 6% at the end of the year in our loan growth.

And that 5% to 6%, is that inclusive of the PPP loans running off as well?

I would say we're looking at it net.

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.

We'll go back again. We thank you for your time today and appreciate your continued confidence in PFS, and we hope you have a great weekend. Thank you very much.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.