Provident Financial Services, Inc

Good morning and welcome to the Providence Financial Services first quarter conference call. All participants will be in listen-only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then then one on your telephone keypad. To withdraw your question, please press Start and 2. Please note this event is being recorded. I would now like to turn the conference over to Mr. Leonard Gleason, SVP and IRO of Provident Financial Services. Please go ahead.

Thank you, Sabrina. Good morning, ladies and gentlemen. Thank you for joining us on our first quarter earnings call. Today's presenters are Chris Martin, Chairman, President, and CEO, and 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. Now it's my pleasure to introduce Chris Martin, who will offer his perspective on our first quarter.

Chris? Thank you, Len, and good morning. And we hope that you and your families are well and coping with this most unusual environment. First, I would like to applaud our employees who continue to provide exceptional service to our customers under difficult conditions. We have continued to deliver on our brand promise, commitment to the customer, while conducting our business in a safe and sound manner. I'm extremely proud of the way our team members from various disciplines have met the challenge from the onslaught of requests for Paycheck Protection Program loans. We have directly secured 820 PPP loans for a total of $378 million and also afforded customers the opportunity to apply through a FinTech option. This was a great team effort. Like most companies in our industry, our first quarter financial results were adversely impacted by the shutdown of our economy due to the pandemic and our adoption as of January 1 of CECL. We reported earnings of 23 cents per share with a core pre-tax, pre-provision return on average assets of 1.47% for the quarter, excluding $463,000 in merger-related professional fees. We announced our planned merger with SP1 Bank Corp in March and have already filed our applications with the bank's regulatory agencies. The integration teams from both banks have been meeting virtually and planning for an anticipated third quarter closing. Total assets at March 31st, 2020 increased to $10.1 billion as we finally crossed the $10 billion in asset threshold. Our outstanding loan balances at March 31st were $7.37 billion with loan originations of $355 million for the quarter. We believe our loan portfolio is solid, but there are some commercial customers in industries that have been hit hard by COVID-19. We are keeping a close eye on loan customers in the retail, hotel, and restaurant industries where our combined exposures were approximately $995 million, $234 million, and $65 million at March 31, 2020, respectively. The level of requests for deferrals of principal or P&I rose quickly after the economy shut down in mid-March. We required detailed documentation of the hardship before agreeing to any deferrals, none of which were granted for longer than 90 days. To date, we have processed and documented 363 payment deferral requests on commercial loans totaling $820 million in principal balances. These are loans to good customers and are, for the most part, secured by real estate and other business assets which should mitigate losses in the event a borrower cannot recover. Turning to our residential mortgage and consumer loan portfolio, we had approved hardship payment deferrals to 275 borrowers who have been impacted by job losses due to COVID-19 for loans totaling $69 million in principal balances. Regulators have encouraged banks to work with borrowers and have afforded greater flexibility In terms of being able to make payment referrals and modifications without triggering TDR accounting or other adverse consequences. On the funding side, deposit growth continued and our core deposits as a percentage of total deposits remained strong at over 90% while we priced down our cost of borrowings and extend their duration. We believe we still have the ability to incrementally lower costs over the next quarter on our core and time deposit accounts. Liquidity remains satisfactory, and there has been no deposit runoff, although growth from the PPP and stimulus checks will likely inflate balances in the near term. On the margin outlook, we expect to see some pressure over the next couple of quarters, primarily due to the timing and extent of changes in interest rates late in the first quarter. The rapid decline in rates to zero has impacted loan pricing, and we continue to require floors on many loans. A major impact to our earnings in Q1 was our adoption of CECL as of January 1. The $15.7 million provision for credit losses in the first quarter is a reflection of the negative economic outlook as impacted by the pandemic. We can expect that the economic forecast used in our CECL model will likely worsen in the second quarter. Non-interest income increased $4.8 million from the same period in 2019, with the T&L acquisition having been completed on April 1st, 2019 along with higher loan level swap fees in the current quarter. However, several fee items, income items will likely come under pressure due to the economic slowdown. Our wealth management fees, largely driven by assets under management, will likely decrease in the near term as asset values decline in the current market. Overdraft fees and interchange fee income may also continue to compress as consumers comply with shelter-in-place orders and limit their spending to essential services. On the expense side, there were costs related to the acquisition and executive severance expense recognized in the first quarter. 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 $14.9 million, or 23 cents for diluted share, compared with $30.9 million or $0.48 for diluted share for the first quarter of 2019 and $26 million or $0.40 for diluted share in the trailing quarter. Earnings for the current quarter were adversely impacted by elevated provisions for credit losses under the CECL standard and the recessionary economic forecast attributable to the COVID-19 pandemic. Free tax, free provision earnings were $36.4 million excluding $15.7 million in provisions for credit losses on loans and commitments to extend credit and $463,000 of professional fees related to the pending SB1 merger. This compares with $39.6 million in the trailing quarter, excluding expense recorded to increase the contingent liability related to the Tershwell and Lowy acquisitions, and $38.8 million for the first quarter of 2019. Our net interest margin contracted one basis point versus the trailing quarter and 20 basis points versus the same period last year, as declining market interest rates drove reductions in asset yields. To combat margin depression, we continue to reprice deposit accounts with negotiated exception rates and maturing time deposits. This deposit rate management coupled with a continued emphasis on attracting non-interest-bearing deposits resulted in a three basis point decrease in the total cluster deposits this quarter to 62 basis points. Non-interest-bearing deposits averaged $1.5 billion or 21% of total average deposits for the quarter. Average borrowing levels also decreased $31 million, and the average cost of borrowed funds decreased 18 basis points versus the trailing quarter. We will continue to thoughtfully manage liability costs as the rate environment evolves. Quarter-end loan totals increased $39 million, or 2.1% annualized from December 31st, as growth in C&I and residential mortgage loans was partially offset by net reductions in CRE, construction, consumer, and multifamily loans. Loan originations excluding line of credit advances totaled $355 million, a 21% increase versus the first quarter of 2019. The pipeline at March 31st increased to $1.3 billion from $906 million at the trailing quarter end. The pipeline rate has decreased 81 basis points since last quarter to 3.16% at March 31st. The lower pipeline rate reflects current market conditions and a decline in treasury rates. Our provision for credit losses on loans under CECL was $14.7 million for the current quarter, compared with $2.9 million under the incurred loss model in the trailing quarter. The adoption of CECL resulted in a $7.9 million increase in the allowance for credit losses on loans recognized through equity upon the January 1st adoption of the standard. The increase in the provision reflects model estimates for life of loan losses as impacted by the current severe economic forecast. Our annualized net charge-offs as a percentage of average loans were 16 basis points for the quarter and 26 basis points for the trailing quarter. Non-performing assets declined to 39 basis points of total assets from 44 basis points at year-end. The allowance for credit losses on loans to total loans increased to 1.02% from 76 basis points in the trailing quarter. Non-interest income decreased $734,000 versus the trailing quarter to $17 million. as increased swap fee income was more than offset by lower bank-owned life insurance benefits and loan prepayment fees. Including provisions for credit losses on commitments to extend credit and acquisition-related professional fees, non-interest expenses were an annualized 2.13% of average assets for the quarter. These core expenses increased $1.7 million versus the trailing quarter. This comparison excludes the $2.8 million expense recorded to increase the contingent liability related to the tertiary and lowly acquisitions from the trailing quarter. The increase in core expenses versus the trailing quarter is attributed to over $1 million of executive severance and normal first quarter increases in compensation and related payroll taxes. We did once again benefit from an FDIC insurance small bank assessment credit, resulting in no expense for the quarter. Our total remaining credit potentially realizable in future quarters is $267,000. Our effective tax rate increased to 26% from 23.6% for the trailing quarter as a result of a discrete item related to the vesting stock compensation. We're currently projecting an effective tax rate of approximately 25% for the second quarter and 24% for the balance of 2020. 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question is from Mark Fitzgibbons of Piper Sandler. Please go ahead.

Thank you and good morning. I wondered if you could start by giving us an update on asset flows in your wealth management business and what AUM was as of 1231 and 331.

Sure, Mark, it's Tom. The ending balance in AUM at 1231 was $3.4 billion. At March 31st, that had declined to $2.8 billion. We're not seeing much in the way of client losses, which are really market conditions driving that. In terms of average balances for the two quarters, which is what drives the fee income, it's about $3.3 billion in Q4, down to $3.2 billion in Q1. So we really saw the decrease in market value towards the end of the period. So if I think about it in terms of income at risk going forward, if we were to remain at the March 31st level as an average for Q2, we'd be about a million dollars lighter in terms of income in Q2. Okay.

And then secondly, of the 890 million of loans that you granted payment deferrals on this quarter, I was wondering what did the breakdown of that look like by category?

CRE loans are about 548 million. Multifamily is 37 million. Construction is about $18 million. C&I is about $217 million for a total commercial-type loan of $820 million. And then in the resident consumer, it's about $68 million, $69 million. Okay.

And then, Tom, I apologize if you mentioned this in your comments, but that $1 million charge that went through expenses for off-balance sheet credit exposure, could you just give us a little more detail on that?

Yeah, that's the reserve on commitments to extend credit that's required under CECL. So that runs through the managed expense section. It's akin to a provision for loan losses. That's why the total provision for credit losses is $15.7 million. But the piece that's attributable to increasing the allowance for loan losses really is just the $14.7. That's the difference. Okay.

And then your pipeline looks really strong at I think $1.3 billion. How much of that would you expect to actually close in, say, the second quarter?

We've got about a 52% pull-through rate. If you would pull-through adjust the rate on that pipeline, it actually picks up a little bit to 323. I think I quoted a 316 as the overall pipeline rate. Okay, great. Thank you. You're welcome.

The next question comes from Peter Kowalski with High Street Advisors. Please go ahead.

Hi Chris, Tom, how are you? How are you, Peter? I was a little disappointed, I wasn't able to, we weren't able to get together at the annual meeting, but hopefully next year things will be back to normal.

We would agree, virtual helps, but doesn't help, so.

Yeah. First question, cash dividend, I see, you know, you declared one for this quarter. Going forward, is the board committed to maintaining its cash dividend for shareholders like myself who rely on dividend income to pay the bills? It's kind of important.

Well, we certainly – I know our board looks at that as just part of our return for our shareholders in this environment with limited buyback opportunities. We look at that as something that's very important. Thank you very much.

Unfortunately, the timing of your SB1 acquisition was unfortunate. I guess six years ago was the last time you did a bank deal with Team Capital. The question I have, if this lockdown ends up being longer than it was expected to and the economy gets even weaker, In the merger agreement, is there a material adverse change clause that, you know, if SB's asset quality deteriorated significantly, that you can reevaluate the transaction?

If you do review the document, there is a material adverse impact in that document that's been filed. We envision this still as a very solid transaction, two strong companies getting together, and two like management teams and boards So I wouldn't see that as an issue. On the other hand, you have to watch and see. I think they released earnings yesterday, and we have not seen any asset quality changes that we would be worried about right now. To your point, things go on and go forward, but I think we're still in a good place. We look forward to this combination, but all antennae are up on both sides.

Okay. Thank you very much, guys.

Thank you.

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

Thank you, Sabrina. Our financial industry will be operating in a challenging environment for a while, as we're all susceptible to economic and emotional stress brought on by the pandemic. However, the strength of our capital base and balance sheet, along with the dedicated efforts of our office's employees, and our underlying culture will continue to be a differentiating factor over time. We thank you all for your continued confidence and support and look forward to better and brighter days ahead. Stay well and thank you very much.

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