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Edited Transcript of PFS earnings conference call or presentation 26-Oct-18 2:00pm GMT

Q3 2018 Provident Financial Services Inc Earnings Call

Jersey City Nov 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Provident Financial Services Inc earnings conference call or presentation Friday, October 26, 2018 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. - SVP and IR Officer

* Thomas M. Lyons

Provident Financial Services, Inc. - Executive VP & CFO

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Conference Call Participants

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* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Mark Thomas Fitzgibbon

Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research

* Matthew M. Breese

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Russell Elliott Teasdale Gunther

D.A. Davidson & Co., Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Provident Financial Services, Inc.'s Third Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Leonard Gleason, Investor Relations Officer. Mr. Gleason, please go ahead.

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Leonard G. Gleason, Provident Financial Services, Inc. - SVP and IR Officer [2]

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Thank you, Anita. Good morning, ladies and gentlemen. Thank you for joining us. The presenters for our third quarter earnings call are Chris Martin, Chairman, President and CEO; and Tom Lyons, Executive Vice President and Chief Financial Officer of Provident.

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 can be found in the text of this morning's earnings release, which has been posted to the Investor Relations page on our website, provident.bank.

Now I'm pleased to introduce Chris Martin, who will offer his perspective on our third quarter results. Chris?

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

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Thanks, Len, and good morning, everyone. Our third quarter results included continued net interest margin expansion, record revenues and record earnings driven by higher yield on loans as the Federal Reserve continue to raise short-term interest rates.

We achieved record annualized returns on average assets and tangible equity of 1.45% and 15.47%, respectively, and we remain focused on future earnings growth, stable to improving credit quality and continued expense discipline.

The competition for quality loans remains fierce, and we continue to see credit structure and pricing in the market that is not commensurate with the risk and leverage we are comfortable with and we won't overreach for loan growth.

Loan payoffs this quarter exceeded those of the first part of the year and are driven by a number of factors such as competition from nonbank lenders, including private equity firms, as well as sales of businesses or real estate by our borrowers. We have confidence in the quality and strength of our loan pipeline and continue to seek C&I growth.

Core deposits were relatively stable as noninterest-bearing deposits grew at better than 9% annualized rate. Deposit growth on the margin has been a challenge as competition continues to ratchet up rates to fund outsized loan growth. And we have offered CD promotions on a selective basis since market rates are cheaper than overnight borrowings.

Expenses remain well controlled and operating efficiency improved. We are reassessing our operating processes and pursuing automation to reduce repetitive tasks and improve our basic operating infrastructure to gain efficiencies. We're also spending time in investing dollars on technological initiatives and new product development, including Zelle and a small business automated platform that will both likely be available early in 2019.

Regards to M&A, we continue to assess opportunities and have conversations, although nothing is currently actionable. We believe the challenges of enhanced regulatory oversight and required investment in technology will continue to impact smaller institutions' bottom lines and spur consolidation.

On the outlook for Q4 and 2019, the market is lining up for a December rate hike and for more rate hikes next year. The U.S. and regional economies are strong with low unemployment, stronger consumer spending, growing wages and improving confidence despite the political vitriol in Washington preceding the midterm elections. For the most part, our clients remain optimistic and have been experiencing better operating results.

With that, I'll turn it over to Tom for more detail.

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [4]

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Thank you, Chris, and good morning, everyone. Net income was a record $35.5 million for the third quarter of 2018 or $0.54 per diluted share compared with $19.2 million or $0.30 per share for the trailing quarter and $26.6 million or $0.41 per share for the third quarter of 2017.

Current quarter earnings were driven by record revenue of $91.7 million as interest income and net interest income both achieved record levels. Our net interest margin expanded 5 basis points versus the trailing quarter as our earning asset yield increased 10 basis points while the cost of interest-bearing liabilities increased 8 basis points.

Further helping the margin, noninterest-bearing deposits grew $33 million or an annualized 9.1% and average stockholders' equity increased $13 million for the quarter. Note that our reported margin is core with prepayment fees excluded and reported as noninterest income.

Pretax pre-provision earnings also set a record of $45 million, an increase of approximately 15% when compared with both the trailing quarter and the third quarter of 2017. Performance versus the trailing quarter was further helped by a lower loan loss provision and year-over-year earnings also benefited from a lower tax rate, improving net income compared with the third quarter of 2017 by a total of 34%.

While growth was again constrained by a high rate of payoffs, net outflows on lines of credit and maintenance of credit and pricing discipline, loan originations were 34% better than the trailing quarter and 10% better than in the third quarter of 2017. The pipeline remained strong at $1.1 billion while the pipeline rate has increased 28 basis points since last quarter to 4.95%, exceeding the loan portfolio rate of 4.38%.

Based on our strong loan pipeline, 90% core and noninterest-bearing deposit funding and the variable rate nature of many of our assets, we anticipate a strong economy and additional Fed rate increases will contribute to further expansion of our net interest margin in the near term.

Further impacting our outstanding loans during the quarter, we made a decision to exit asset-based lending and sold the majority of the portfolio, resulting in a gain on sale of $257,000.

In a related transaction, we wrote down an impaired asset base loan to the value realizable in a discounted note sale, resulting in a charge-off of $6.3 million. The $1.3 million remaining balance of that impaired loan was included in nonaccruing loans at September 30 and sold after quarter-end with no further loss. This latter transaction resulted in a somewhat elevated annualized net charge-off rate of 32 basis points for the quarter.

Credit metrics on the remaining loan portfolio were strong with the weighted average risk rating improved and nonperforming assets declining to 36 basis points of total assets at quarter-end. The allowance for loan losses to total loans decreased to 75 basis points from 81 basis points at June 30, while the allowance as a percentage of nonaccrual loans increased to 185% from 180% at June 30 as a result of improved credit quality and the withdrawal from asset-based lending.

Noninterest income increased by $2.1 million versus the trailing quarter to $15.9 million as loan prepayment fees increased by $800,000, a benefit claim on bank-owned life insurance of $700,000 was realized, and gains on loan sales and loan level swap income, each increased by $400,000.

Noninterest expenses fell to an annualized 1.9% of average assets, contributing to a 51% efficiency ratio for the quarter. Expenses decreased by $2.1 million to $46.7 million versus the trailing quarter, primarily as a result of director stock compensation recognized in Q2 and lower occupancy, compensation and other expenses.

Our effective tax rate was consistent with the trailing quarter at 19.5%. We recently concluded a cost segregation study on certain capital improvements and will record a related reduction in income tax expense of $1.9 million in the fourth quarter of 2018. We continue to assess with our tax professionals the impact of the change in New Jersey Corporate Business Tax law that we discussed on our last earnings call.

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 today comes from Mark Fitzgibbon with Sandler O'Neill.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [2]

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It absolutely pains me to say it, but you had a pretty good quarter. I -- Tom, just to follow-up on your tax comments, I heard what you said about the $1.9 million in the fourth quarter. Previously, you had given guidance of 27% effective rate for 2019. Do you still feel that's the right level?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [3]

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That's a preliminary assessment and there's still a lot of ongoing review. We did discuss that last quarter. We are continuing to discuss with our tax compliance professionals as well as legal folks. There have been a number of technical changes, corrections that were published in the year -- early in the fourth quarter. There's the potential for additional technical changes to come through, so it's still under review.

But I figure the range is somewhere -- that's the -- kind of the high end of the range at 27% and the low end would be we get to maintain roughly around the 20% level.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [4]

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And then secondly on the margin, given the intense deposit competition in New Jersey, do you think the magnitude of the margin expansion that we could see in coming quarters is as significant as what we saw this quarter?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [5]

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I think it'll cut back from this. I'm looking at about 2 basis points a quarter for the next 3 or 4.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [6]

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Okay. And then it looked like there's obviously some seasonality in the fee line in the third quarter there. What do you think fees and expenses trends are likely to normalize at in the fourth quarter?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [7]

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So the volatile items on the income side were loan prepayment fees, which were up about $800,000 versus the trailing quarter at roughly $1.3 million. Wouldn't mind if that backed off a little bit and we got to retain a little bit more of the loan portfolio. Payoffs were an issue for us in terms of trying to grow the balance sheet.

We did have a BOLI claim, which is about $700,000. BOLI starting to kick up a little bit, though. Credit ratings are moving up as rates (technical difficulty) a little bit better income production there, too. Gains on loan sales were higher by about $400,000 versus the trailing quarter. A piece of that was the sale of the ABL portfolio. So I wouldn't expect that to recur. So you might see some reduction there.

And then we had good profit on swaps, which is just kind of quarter to quarter depending on customer preference and when the loans are closing. So that's a tough one to predict. But that was about $395,000 better than the trailing quarter.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [8]

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And then on expenses, on the...

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [9]

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On the expense side, I'm thinking like $47 million to $47.5 million for the fourth quarter. We came in lower than I expected for Q3. I think some of our estimates around the cost of seasonal implementation and some of the stress testing work we've been doing have been -- have proven to be a little bit conservative.

Occupancy also came in lower than I anticipated. I think there were more in the way of, believe it or not, snow and ice removal trailing costs in Q2 as well as some nonrecurring, non-capitalizable repairs and maintenance expenses that happened in Q2. So we saw more of a benefit there than I had anticipated.

And I think we also got a little bit more benefit in the comp line than I was thinking originally from the reduction in employer payroll taxes, as well as incentive stock compensation -- market being under pressure, incentive stock comp was lower on the stuff like the ESOP costs, which are dependent on the stock price.

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Operator [10]

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The next question comes from Collyn Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [11]

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So just starting on the loan outlook. You both alluded to it in your comments just about the level of paydowns that you're seeing. Can you give us any insight as to how you're thinking about growth as we go into '19?

Obviously, I know paydowns are going to be perhaps an unknown variable, but just for what you do know and what you are seeing, Chris, I know you mentioned the C&I pipeline is really strong, but just kind of give us a little bit of frame work as to what you're seeing out there in terms of potential loan demand?

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

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Well, I think we have opportunities and the demand is there. We don't see businesses expanding like you would think with this economy. I think everybody's playing it a little closer to the vest. They've also had improved balance sheets and cash on hand, so they can utilize their own cash versus borrowing. And certainly on the line usage, we're not seeing as much as we thought we would see.

The other side is all the areas with our commercial real estate and C&I groups were still getting a lot of looks. On the other hand, some of them are -- as we said in our comments, are at levels that we don't think are commensurate. And we're not going to deal with some heavy leverage lending that some may want.

But I think we're all kind of saying what the market is giving us with the pipeline is still pretty strong and solid. I think we continue to think we're doing the right process as opposed to reaching for growth. And so I think that payoff should abate in the future. I'm hoping and then, Tom, I'll yield to you on that.

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [13]

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No, I just thought we did see nice production growth that was 10% better than the year-ago third quarter, so -- and 34% better than it was in Q2. So it's the usual expected pick up towards the end of the year. Fourth quarter has traditionally been quite strong for us. So as you said, the wild card is what level of payoffs do we see, and that's really hard to predict at this point.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [14]

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Okay. Okay, that's helpful. And then, Tom, just in your NIM outlook there, just maybe 2 basis points or so of expansion over the next couple of quarters. What is going into that assumption? I mean, I presume obviously a gradual increase in funding costs and the betas, but is that assuming -- it's got to be assuming some balance sheet growth I'm guessing? Or just talk a little bit about maybe the drivers of how you're seeing that NIM being able to continue to expand?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [15]

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Yes. I don't know if it's much driven by growth although that is in there, but I think we're pretty modest in our growth assumptions as it is by the variable nature of the book. So short duration loan book is 2.3 years. It's about 60% floating and variable rate -- adjustable rate loans.

So it's the asset repricing more so than growth that drives the expansion, as well as I think our reasonable assumptions around the deposit betas, which are -- continue to run lower than most of the group given the quality of our deposit base.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [16]

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Okay. And then just in terms of what you're doing on the deposit side. Where you're seeing -- you're being more aggressive either in terms of rate or product to kind of get the growth? Or just how you're thinking about how you want to fund the balance sheet today and into the future?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [17]

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I guess the shift, we've seen in recent quarters, has been more of a customer preference for time deposits and a willingness on our part to compete for some of those because of the increase in rate on overnight borrowings. So we've done a 13-month promotion.

I think I talked about it in previous quarters, that's holding a nice amount of dollars. We did another 13 months to targeted noncustomers and then we also did a 7-month customer appreciation day thing, which was a 1-day new money only that pulled in a lot of dollars as well.

So that's the, really, the strategic shift that we've actually implemented so far. We continue to review our product set and then obviously try to stay as close to the market and the customer as we can to defend our deposit base and obviously manage our costs as best we can.

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [18]

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Collyn, this is Chris. I think the other side of that is that the next few rate rises, I think it starts to become more material for people who have been sitting on the sidelines. And the -- vice versa on the -- some of our competitive brethren that are funding a lot of their loan production with money market instruments; as rates rise, they're going to have to continue to make those. Otherwise, they will run off to others. So I think that the next batch of deposit betas will be a little bit more accelerated than the previous.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [19]

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Okay. And then just curious, Tom, on the promotions that you mentioned, the 2 13-month and the 7-month, roughly how -- at what cost were you having to offer those promotions?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [20]

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The initial 13 was 1.75%. I think we went to 2.25% on the second one and the 7-month was at 2.05%.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [21]

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Okay. Still pretty low. Okay, good. And then just on the decision to exit the ABL business this quarter, can you just talk about sort of the decision around that? And then I know you obviously had loan sales this quarter, but any other flow through of impact from getting out of that business?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [22]

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I think it's one of the reasons why we saw the allowance level dip because it freed up some allowance once we decided to exit that business and sold off and obviously, unfortunately, some of the charge-offs related to that. That was a decision based on some personnel departures as well as some of the risk characteristics which we were no longer comfortable with.

The large charge-off that we saw in Q2 was an asset-based loan and we did suffer this impairment on a decision to go ahead and bite the bullet and exit one that was -- that we weren't comfortable with holding at this point in the cycle.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [23]

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Okay, okay. So no -- the expense -- any kind of related expense reduction on the operating side is already in the run rate?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [24]

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That's in the run rate, yes.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [25]

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Okay, okay. And then just one final question, sorry. Just decline in occupancy, that's been coming down for the last few quarters. What's driving that? I know you mentioned the snow removal, but that seems -- well, anyway...

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [26]

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Well, that was about $400,000, right? So it's from quarter-to-quarter, so that actually was like a couple hundred thousand dollars that still remained in Q2. That's not all of it, obviously, but it was a piece of it. And the other stuff, as I said, was some nonrecurring repair and maintenance items that were noncapitalizable. We did [prevail these] last year that had some impact as well, but that's kind of been filtering through.

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [27]

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And Collyn, going forward, obviously, we always do, I guess, say, we'll call it like required regentrification of the branches over every year, so there'll be a few branches that are online. And also, ATM machines with all the issues going on with skimmers and EMV and things that are going on.

So we're trying to protect ourselves by modernizing the equipment we have and/or replacing, which will be more sophisticated equipment to, one, help customers, but also ward off. Those are probably costs that will be ongoing but not material.

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [28]

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Yes, so that's a fair point and that balanced with the aging facilities also that have depreciation expense reducing.

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Operator [29]

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Next question comes from Matthew Breese with Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [30]

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A couple of just other questions. There was an article out there yesterday. One of the banks in your market, actually, the CEO noted that there's been some pressure by the auditors for banks to disclose some of this early CECL impacts in their 10-Ks. Are you seeing that at all? Or could we hear sooner than later what CECL could look like?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [31]

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I think there are requirements to disclose where you are in the process. You have to put information out as it becomes available. So we are working toward that process. We don't -- we're not prepared to disclose an estimate at this point, but we will be updating as to where we are in the process of adoption.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [32]

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Understood. And when throughout 2019 might we have some good idea of what the CECL impact from a dollar's perspective will be?

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [33]

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Probably between the second and third quarter as we run models and then we verify them and I think that's when you'd probably see most of the impact. Unless we can certainly do some exercise with the regulators and in Washington to try to phase this out -- or phase this in over a 3-year period, which it's starting the conversation and obviously the large banks are leading that charge.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [34]

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Okay. All right. And then, Chris, I thought your M&A comment was interesting. You said nothing was actionable. And so I guess I was just hoping you could flesh it out a little bit more. I'm curious if you could describe the scope of the market for banks for sale right now. Is there an active market of banks for sale in your market? And could you frame for us as well the market of potential buyers, how is that all shaking out?

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [35]

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Well, first thing, I'll look over at my counsel, and he'll probably say, no. But I think the -- I think everybody is looking at things in the way of this has been a good market, a good economy. And if you're not getting the growth and/or the costs keep coming up, that there's certainly more conversations going on.

On the other hand, I think as people get comfortable with the reduction of tax rates, they feel that their runway is there and so that kind of mutes those conversations. When I say actionable, obviously, if we thought there was something, we would probably be involved right now, we have been not necessarily on the sidelines. We continue to see that as part of our capital management strategy and exercise that accordingly.

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Operator [36]

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The next question comes from Russell Gunther with D.A. Davidson.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [37]

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Just want to circle up on the paydowns again. Could you guys quantify sort of what that was this quarter? And how much above where you would traditionally expect to see in a more normal quarter at this point?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [38]

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Payoffs were about $235 million for Q3 compared to $227 million in Q3 of '17 and about $161 million in the trailing quarter.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [39]

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Okay, great. And then, I'm sorry if I missed this, but could -- the size of the ABL portfolio that you guys exited, what was that? Where does it stand today? And then maybe just a little history from you as to when you got into that and why you're getting out?

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [40]

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Sure. I'll give you the numbers and maybe Chris will want to touch on the history. But at the beginning of the year, the commitments were $181 million, outstanding was $142 million. At 9/30, we still have about $50 million committed and $40 million outstanding that we're working to wind down the rest of the way. The sale in the third quarter was about $25 million.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [41]

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Okay, great.

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [42]

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And then going back, the ABL, we bought a bit of the portfolio from another institution that was performing at a -- basically at par and then we got a team with it. And at that point, the -- so from 2015 to basically now, we just felt that it wasn't running as we thought it would. Performance wasn't there. And at that point, we said this is directional.

We also were not getting the growth that we anticipated with that. So when we parsed through the personnel and some of the issues, we finally said, this is not kind of -- we thought it would be a great opportunity, which on its face it was, but then it ended up being not necessarily the way we wanted to go. And to redeploy and get another team in and everything else, we felt the best thing to do was exit and to move on to the normal lending that you'd expect.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [43]

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All right. Great. And then just last one. On the M&A front, hearing that there's nothing immediately actionable, but big picture, does Pennsylvania make more sense to you for potential targets based on how the New Jersey tax code shakes out?

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [44]

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I think that we're not going to discriminate between the markets that we're in and anything contiguous. I think Pennsylvania has a lot more smaller institutions that have little -- the market shares that might be something that we would like to continue that conversation.

New Jersey is -- certainly, there's less institutions that kind of match up to what makes sense. So not to say, we're saying no to anything else, but we certainly look at both markets with an -- in an equal approach.

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Operator [45]

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The next question is a follow-up from Collyn Gunther -- Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [46]

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Russell just asked my question on the M&A interest versus PA versus New Jersey, so I'm all set. Thanks.

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [47]

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Thank you.

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Thomas M. Lyons, Provident Financial Services, Inc. - Executive VP & CFO [48]

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Thank you.

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Operator [49]

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

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Christopher P. Martin, Provident Financial Services, Inc. - Chairman, President & CEO [50]

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Well, thank you. And as we look past the midterms, which is no small feat, we see a solid economy with positive prospects. Rates should continue to rise slowly in lockstep with inflation, and we are at full employment, all positives, which we hope will carry the momentum as we prepare for 2019 and beyond. And we wish everybody a great fall season. Thank you very much.

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Operator [51]

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This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.