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Edited Transcript of PFS earnings conference call or presentation 30-Apr-20 2:00pm GMT

Q1 2020 Provident Financial Services Inc Earnings Call

Jersey City May 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Provident Financial Services Inc earnings conference call or presentation Thursday, April 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher P. Martin

Provident Financial Services, Inc. - Chairman, President & CEO

* Leonard G. Gleason

Provident Financial Services, Inc. - Senior VP & IR Officer

* Thomas M. Lyons

Provident Financial Services, Inc. - Senior EVP & CFO

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Conference Call Participants

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* Mark Thomas Fitzgibbon

Piper Sandler & Co., Research Division - MD & Head of FSG Research

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Presentation

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Operator [1]

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Good morning, and welcome to the Provident Financial Services First Quarter Earnings Conference Call. (Operator Instructions)

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.

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Leonard G. Gleason, Provident Financial Services, Inc. - Senior VP & IR Officer [2]

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Thank you, Sabrina. Good morning, ladies and gentlemen, and 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?

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [3]

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Thank you, Len. 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 request 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 to 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 $0.23 per share with a core pretax 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 SB One Bancorp in March and have already filed our applications with the bank regulatory agencies. The integration teams from both banks have been meeting virtually and planning for an anticipated third quarter closing. Total assets at March 31, 2020, increased to $10.1 billion as we finally crossed the $10 billion in asset threshold. Our outstanding loan balances at March 31 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 request for deferrals of principal or P&I rose quickly after the economy shut down in mid-March. We require 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 partial payment deferrals to 275 borrowers and 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 deferrals 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 price down our cost of borrowings and extend their duration. We believe we still have the ability to incrementally lower cost over the next quarter on our core and time deposit accounts. Liquidity remains satisfactory. And there have 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 0 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. Noninterest income increased $4.8 million from the same period in 2019, with the T&L acquisition having been completed on April 1, 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, they 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?

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Thomas M. Lyons, Provident Financial Services, Inc. - Senior EVP & CFO [4]

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Thank you, Chris, and good morning, everyone. As Chris noted, our reported net income was $14.9 million or $0.23 per diluted share compared with $30.9 million or $0.48 per diluted share for the first quarter of 2019 and $26 million or $0.40 per 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.

Pretax 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 SB One merger. This compares with $39.6 million in the trailing quarter, excluding expense recorded to increase the contingent liability related to the Tirschwell & Loewy acquisition and $38.8 million for the first quarter of 2019. Our net interest margin contracted 1 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 compression, 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 noninterest-bearing deposits, resulted in a 3 basis point decrease in the total cost of deposits this quarter to 62 basis points. Noninterest-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 31 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 31 increased to $1.3 billion from $906 million at the trailing quarter end. The pipeline rate has decreased 81 basis points this last quarter to 3.16% at March 31. The lower pipeline rate reflects current market conditions and the 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 1 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. Nonperforming 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.

Noninterest income decreased $734,000 versus the trailing quarter to $17 million as increased swap fee income was more than offset by lower bank loan life insurance benefits and loan prepayment fees. Including provisions for credit losses on commitments to extend credit and acquisition-related professional fees, noninterest 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 Tirschwell & Loewy acquisition from the trailing quarter. The increase in core expenses versus the trailing quarter was attributable 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 of 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question is from Mark Fitzgibbon of Piper Sandler.

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Mark Thomas Fitzgibbon, Piper Sandler & Co., Research Division - MD & Head of FSG Research [2]

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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 12/31 and 3/31?

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Thomas M. Lyons, Provident Financial Services, Inc. - Senior EVP & CFO [3]

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Sure. Mark, it's Tom. The ending balance in AUM at 12/31 was $3.4 billion at March 31, that had declined to $2.8 billion. We're not seeing much in the way of client losses. Those are really market conditions driving that. In terms of average balances for the 2 quarters, which is what drives the fee income is 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 31 level, that's an average for Q2, we'd be about $1 million lighter in terms of income in Q2.

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Mark Thomas Fitzgibbon, Piper Sandler & Co., Research Division - MD & Head of FSG Research [4]

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

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Thomas M. Lyons, Provident Financial Services, Inc. - Senior EVP & CFO [5]

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

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Mark Thomas Fitzgibbon, Piper Sandler & Co., Research Division - MD & Head of FSG Research [6]

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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?

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Thomas M. Lyons, Provident Financial Services, Inc. - Senior EVP & CFO [7]

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

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Mark Thomas Fitzgibbon, Piper Sandler & Co., Research Division - MD & Head of FSG Research [8]

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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?

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Thomas M. Lyons, Provident Financial Services, Inc. - Senior EVP & CFO [9]

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At 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 3.23%. I think I quoted the 3.16% is the overall pipeline rate.

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Operator [10]

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The next question comes from [Peter Kowalski] with [High Street Advisors].

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Unidentified Analyst, [11]

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First question, cash dividend. I see 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.

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [12]

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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 to our shareholders, and it's always evaluated quarter-to-quarter, but we're in a very strong capital position.

And again, with a review of our balance sheet, loans and the like, I would think that is stable. But obviously, quarter-to-quarter, we don't still know what happens next quarter. If we get things started again in the economy, it should bring more stability just to the messages by itself.

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Unidentified Shareholder, [13]

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Okay. And another question. Unfortunately, the timing of your SB One acquisition was unfortunate. I mean, it's been, I guess, about, I guess, 6 years ago, it was the last time you did a bank deal with Team Capital. Question I have, if this lockdown ends up being longer than it has, I think it's expected to and the economy gets even weaker. In the merger agreement, is there a material adverse change clause that if SB's asset quality deteriorated significantly that you can reevaluate the transaction?

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [14]

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If you do review the document, there is a material adverse impacts in that document that's been filed. We envision this still as a very solid transaction, 2 strong companies getting together and 2 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're -- they released earnings yesterday. And we did not see any asset quality changes that we would be worried about right now. To your point, things go on, go forward, but I think we're in a good place. We look forward to this combination. But all antenna are up on both sides.

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Operator [15]

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

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [16]

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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 offices 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. Thank you very much.

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Operator [17]

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