Earnings Call Transcript - PFS Q1 2021

Operator, Operator

Good day and welcome to the Provident Financial Services Incorporated First Quarter Earnings Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Leonard Gleason, Senior Vice President of Investor Relations. Please go ahead, sir.

Leonard Gleason, Senior Vice President of Investor Relations

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.

Christopher Martin, CEO

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's impact was first being felt. The economy is rebounding quickly due to 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 include a negative provision due to the prospects of 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 yields is on the horizon. 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 a challenge for the company regarding where and how to invest the balances in an accretive manner while remaining sensitive to potential runoff. Our core deposits are now 91% of total deposits. The resultant increase in deposits alleviated the need for borrowing, which decreased during the quarter. Now, margin improved 6 basis points during the quarter, and we envision core margin stability in the near term. Non-interest income improved with the newest revenue sources from SB One Insurance, increased wealth management income from Beacon Trust, and sadly another Bank-owned life insurance claim. Retail fees also added to these increases along with loan prepayment fees and a net gain on the sale of residential mortgage loans.

Anthony Labozzetta, President and COO

Thanks, Chris, and good morning, everyone. Let me start by noting that we have achieved or exceeded our financial expectations regarding 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 tenets of our plan include an 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 in 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 non-spread 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 non-spread income comprise in excess of 25% of our net income.

Thomas Lyons, CFO

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.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon, Analyst

Hey, guys, good morning.

Christopher Martin, CEO

Good morning.

Anthony Labozzetta, President and COO

Good morning.

Mark Fitzgibbon, Analyst

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

Thomas Lyons, CFO

Yeah, I think on a core basis, Mark, it's somewhere in the 3.01% to 3.05% range. PPP was about 8 basis points of benefit this quarter, and the purchase accounting adjustments are about 5 basis points. The purchase accounting adjustments won't really disappear, because we're re-pricing the current market, and there is no indication that those funding rates are going to go up, so I think we're going to be in the 3.01% to 3.05% range on a core basis.

Mark Fitzgibbon, Analyst

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

Thomas Lyons, CFO

$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 due to the switch to the large bank assessment rates now that we are four quarters over $10 billion. So that'll be a bit of an ongoing challenge.

Mark Fitzgibbon, Analyst

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.

Anthony Labozzetta, President and COO

Sure. Hi, 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 thing, because we're doing it on the normal business, due to obviously last year being a COVID year and premiums adjusting, so it wasn't a real solid market for contingency. It does have cycles in the insurance. The best way to look at it is to look at it over the same quarter last year, not on a link-quarter basis. You typically see the first quarter being strong; the second and third quarters tend to be a little lighter. 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 Fitzgibbon, Analyst

Okay.

Thomas Lyons, CFO

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

Mark Fitzgibbon, Analyst

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 ripe 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?

Christopher Martin, CEO

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 and have relationships. It all goes back to their boards, what they're thinking, and how they look at the market. We always like to be part of the conversation for those that make sense to our culture and how we run our business. If they would like to join up, we're certainly open to the idea. We also look at wealth in that vernacular also, because we are one of the few that 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.

Mark Fitzgibbon, Analyst

Thank you.

Operator, Operator

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

Steven Duong, Analyst

Hey, good morning, guys.

Christopher Martin, CEO

Good morning.

Steven Duong, Analyst

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 the full-year this year would be?

Thomas Lyons, CFO

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

Anthony Labozzetta, President and COO

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

Steven Duong, Analyst

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

Anthony Labozzetta, President and COO

Correct.

Steven Duong, Analyst

Okay, great. And then, just back on PPP, do you have the average balance for the PPP loans this quarter?

Thomas Lyons, CFO

Let's see, the total at the end of the period is $486 million, we were $473 million at the end of the year. I don't have an average in front of me, but, you can do a straight line there.

Christopher Martin, CEO

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

Steven Duong, Analyst

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

Thomas Lyons, CFO

Remaining fees are $7.2 million. Again, they were refueled with PPP2. Fees recognized during the quarter were $4 million.

Steven Duong, Analyst

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

Thomas Lyons, CFO

Yeah, over the next 12 months, it's about $1.4 billion, and there's probably about a 50 basis point pick up to the current low rates.

Steven Duong, Analyst

Is that the CDs or is that...

Thomas Lyons, CFO

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

Steven Duong, Analyst

Yeah, that'd be great if you have that.

Thomas Lyons, CFO

Sure. Time deposits decreased 131. Here we go. Yeah, CDs by quarter, Steve are - or I give you the total for the next 12 months. CDs are $790 million; borrowings are $622 million for a total of $1.411 billion. As I said, it's about a 50 basis point favorable overall.

Steven Duong, Analyst

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

Thomas Lyons, CFO

I think it's 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 steepness of the curve has made swapping to the variable rate products less attractive for us. So we're taking the spread income rather than the fee income at this point and holding onto the higher yielding assets.

Anthony Labozzetta, President and COO

Yeah, the margin is holding its own.

Thomas Lyons, CFO

Yeah. The combination, as we saw, the pipeline rate getting closer to the portfolio rate is one of the reasons why that's happening. We're continuing to re-price liabilities as we just talked about. In fact, we made some additional rate reductions on non-maturity deposits in April and negotiated rate instruments that should bring another $2.6 million in savings on an annualized basis. All that's kind of factored into our position that the margin is going to stabilize on a core basis and around the 3.01% to 3.05% range.

Steven Duong, Analyst

Right. Did you say that that 3.01% to 3.05% includes purchase accounting or does not include purchase accounting?

Thomas Lyons, CFO

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.

Steven Duong, Analyst

Got it. All right. I appreciate all the color in there. Thank you.

Thomas Lyons, CFO

Thank you.

Operator, Operator

The next question will come from Russell Gunther with D.A. Davidson & Co. Please go ahead.

Russell Gunther, Analyst

Hey, good morning, guys. I appreciate your comments...

Anthony Labozzetta, President and COO

Good morning.

Russell Gunther, Analyst

Good morning. I appreciate the comments on the strategic plan you are ongoing at the moment. So, I was curious about the commercial banking tenet 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?

Anthony Labozzetta, President and COO

Sure, I'll give you 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 as a percentage of our total book? We're looking at 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 that we think are exciting for us or potentially would be the Westchester, Rockland, the Greater Philadelphia area, potentially more on the island. We're in a good position to expand there, and I just touched upon some of the things that not all of it. Hopefully that gives you a good thought process there, Russell.

Russell Gunther, Analyst

Yeah, that's great, thank you, Tony. And then just another question, you also mentioned here thinking about potential additional closures, and your prepared remarks also talked about exceeding the cost saves from the deal and the potential to extract more. Just curious as your thoughts as to what the opportunity set is to reduce the expense base going forward. Are those initiatives that would drop to the bottom line or is that really to self-fund that other tenet of the plan, the focus on digital transformation?

Anthony Labozzetta, President and COO

I think it's a little bit of both. 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 a consistent work in process, and we can extract some more costs there. We do expect to re-shift 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 re-shift and some of it going to the bottom line. I can't give you an exact percentage at this time.

Russell Gunther, Analyst

Yeah, that's also very helpful guys. The rest of my questions have been asked and answered. So thank you very much.

Anthony Labozzetta, President and COO

Thank you.

Operator, Operator

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, there's actually one more question that just came through, and that question will come from Erik Zwick with Boenning & Scattergood. Please go ahead.

Erik Zwick, Analyst

Hey, good morning, guys. I made it right at the wire.

Anthony Labozzetta, President and COO

Good morning, Erik.

Erik Zwick, Analyst

Just a quick question maybe on your thoughts for organic loan growth and potential for net growth going forward. I've got the healthy unfunded loan commitments around $2 billion, and the loan pipeline was up quarter-over-quarter. 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 paid down?

Anthony Labozzetta, President and COO

Yeah, I'll start there and then my colleagues will jump in. Our pipeline is pretty solid at this time. As we mentioned, the pull-through rates and getting loans for what we touch today is probably around 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. We're pulling through about 55% of that stock. Given the math, back-of-the-napkin math, if we have good success in net same percentage pull-through and we don't see the unanticipated prepayments, which sometimes are out of our control, I still project that we should be between 5% to 6% at the end of the year in our loan growth.

Erik Zwick, Analyst

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

Anthony Labozzetta, President and COO

I would say we're looking at it net.

Erik Zwick, Analyst

Okay, great. Thanks, Tony. That's all I had today.

Anthony Labozzetta, President and COO

Okay. You got it.

Operator, Operator

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

Christopher Martin, CEO

Well, as we will 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.

Anthony Labozzetta, President and COO

Thank you.

Operator, Operator

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