PFS
#Thank you, Rochelle.
Good morning, ladies and gentlemen.
Thank you for joining us today.
The presenters for our first quarter earnings call are Chris <UNK>, Chairman, President and CEO and Tom <UNK>, Executive Vice President and Chief Financial Officer.
Before beginning their review of all the 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 this morning's earnings release, which has been posted to the Investor Relations page on our website, provident.
bank.
Now I am pleased to introduce Chris <UNK> who will offer his perspective on our first quarter.
Chris.
Thanks, Lenny, and good morning, everybody.
Provident's quarter results were strong, as we had an improving margin and solid core earnings while asset quality declined slightly during the quarter.
Earnings per share were $0.43, up from $0.37 for the same period in 2017, on improved revenue and a larger average loan portfolio from strong originations during the fourth quarter of 2017, which was partially offset by increased interest costs on deposits and borrowings.
Performance metrics continued to improve with annualized return on average assets of 1.16%, and return on average tangible equity of 12.7%.
The margin improved by 5 basis points in the quarter to 3.30% as funding costs lag asset repricing.
As for growth, the level of payoffs in our loan portfolio offset new closing volumes during the quarter, which continued to exceed prior year levels.
We see credit and loan structures by some competitors continue to be covenant light and aggressive on terms and pricing, while we continue to maintain our discipline in book on those loans that meet our criteria, the pipeline remains robust and the yield exceeds the portfolio average.
Deposit growth during the quarter was muted, as competition has raised rates at an accelerated pace.
We successfully deployed the strategy to raise some CD rates below current borrowing levels.
Core deposits represent 90.2% of total deposits at March 31, 2018.
Noninterest income increased 6.8% compared to the same period in 2017, due primarily to commercial loan prepayment fee income, increased wealth management income and a small increase in retail deposit fee income.
Noninterest expense was controlled, as we continue to prepare for $10 billion.
Operating expense at average assets was 1.95%, and our efficiency ratio was 54.18%.
And we continue to invest in new technologies to build out our digital product offerings and planned offers (inaudible) late in the second quarter, along with improvements in our bill-pay service.
Asset quality experienced a blip in the quarter, as we downgraded a couple of C&I credits that were experiencing deterioration.
Overall charge-offs amounted to 17 basis points for the quarter.
Consistency on our underwriting is paramount and maintaining our disciplined asset pricing, duration and structure is extremely important.
The overall economic environment is positive with the tailwinds of tax reform and increasing interest rates.
On loan pricing, we remain focused on shorter duration and variable rate loans, and we still anticipate low- to mid-single-digit loan growth for 2018.
From an interest rate risk management perspective, we remain well balanced and are prepared for gradual rise in interest rates.
Deposit payments have been relatively consistent, and well below the levels we have modeled.
The Senate's proposed legislation that would provide some regulatory relief is now with the House where it is languishing amongst the parties in vitriol in Washington, we're very hopeful that will change.
Also, we continue to seek more clarification from New Jersey's Governor regarding his stance on creating a state bank.
I'll turn over to Tom now who will provide more detail on our quarter.
Tom.
Thank you, Chris, and good morning, everyone.
As Chris noted, net income was a record $27.9 million for the first quarter of 2018 or $0.43 per share compared with $19.5 million or $0.30 per share for the trailing quarter.
Average earning assets grew by $156 million, with average loans increasing $168 million or an annualized 9.4% on the strength of trailing quarter originations.
On a spot basis, loans decreased $35 million despite relatively strong originations, as payoffs were somewhat elevated and lighter credit activity resulted in net outflows.
Our net interest margin increased 5 basis points as the yield on earning assets increased 11 basis points.
The increase in average balance and margin drove a record quarterly revenue of $87 million, and record net interest income of $73 million.
Average deposits grew by $53 million, or 3.1% annualized.
Funding cost did increase this quarter, as selected commercial and municipal accounts repriced and the spread between borrowing costs and time deposits made CD funding more attractive.
As a result, we brought in over $50 million in a promotional 13-month CD, at 1.75%, below the Federal Home Loan Bank overnight borrowing rate of 2% at the end of the quarter.
Looking ahead, the loan pipeline increased to $1.3 billion, and the pipeline rate has increased 16 basis points since last quarter to 4.65%, exceeding the loan portfolio rate of 4.18%.
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 strengthened economy and additional fed rate increases will contribute to further expansion of our net interest margin throughout 2018.
While our overall credit metrics remain favorable, we did see some deterioration in selected commercial credits this quarter, resulting in 17 basis points of net charge-offs to average loans, and a $5.4 million provision for loan losses, an increase from $1.9 million in the prior quarter.
The increase in the provision for loan losses and net ---+ and loan charge-offs for the first quarter of 2018 was largely due to a $15.4 million credit to a commercial borrower that on March 27, 2018 filed a Chapter 7 petition in bankruptcy for liquidation of assets.
The specific reserve of $2.5 million was established for this impaired loan, which is subject to ongoing review.
The allowance for loan losses to total loans increased 86 basis from 82 basis points at December 31.
Non-interest income was consistent with the trailing quarter at $13 million, while non-interest expenses remained well controlled on an annualized 1.95% of average assets, contributing to a 54% efficiency ratio for the quarter.
Expenses decreased by $1.2 million to $46.9 million versus the trailing quarter, primarily as a result of reduced consulting stock compensation, NPA related and advertising expenses, partially offset by increased occupancy and data processing costs.
First quarter results reflected the benefit of a lower corporate tax rate, while trailing quarter results reflected $4 million in additional tax expense related to the enactment of the 2017 Tax Cuts and Jobs Act.
As a result, our effective tax rate decreased to 19% for the first quarter from 45% in the trailing quarter.
We are currently projecting an effective tax rate of approximately 20% for the full year 2018.
That concludes our prepared remarks.
We'd be happy to respond to questions.
$2.3 billion, Mark.
Sure.
The total portfolio growth or growth initiatives that includes enhanced stress testing, some additional compliance adds, some data analytics work and some seasonal preparation.
The total for the year is about $4.6 million that's included in the budget.
We did about $480,000 in the first quarter of that, looking at about $1.4 million in the second quarter.
So Q2, I'm looking for expenses of about $48 million to $48.5 million.
The reason for the increase in the current quarter would be in addition to some step-up in these investment spends or the portion of our directors' compensation that's paid in the form of stock is done annually in the second quarter of each year, that's about $900,000.
So I'm looking for full year expenses around $195 million.
So we're still running at $2.8 million on the Durbin.
As far as the crossing, a lot depends on payoff activity.
I was expecting higher floatings at the end of the period this quarter.
Payoff activity was a little bit stronger than we expected.
The plan is to go full speed ahead unless we wind up very close at the end of the period, in which case we will manage under to save the extra year on Durbin.
I'll call it building materials importing wholesaling the building materials.
It seems to be very borrower-specific events this quarter, and I think I would say is indicative of a broader trend of deterioration.
I guess some of the volatility you would expect when you move to an 80% commercial loan kind of mix.
But, Mark, this is Chris.
Industry specific, it's not like okay, there was a whole host of these type of issues.
It's just an aberration of one business.
Yes.
Right now, that's ---+ this particular credit is the biggest challenge we see, which is why we highlighted that there may be some additional provisioning required given the late-breaking nature of the deterioration.
There is an ongoing review of the realizability of the collateral on that loan.
Other than that, things are pretty steady as she goes.
We're at 86 basis points on total loans.
I don't see us dramatically increasing that rate.
It's about 136% of non-accruing loans.
We're comfortable at those levels.
I appreciate the comments around expenses and $10 billion you mentioned in your prepared remarks, the potential for regulatory relief, obviously keeping an eye on that.
If it goes through as proposed, is there ---+ how would you quantify the benefit to you guys from a P&L perspective.
I think, this is Chris.
First and foremost, would be the DFAST no longer applicable, but we would certainly redo risk assessment, and we certainly look at our stress testing individually, but not prescribe to those enhanced potential standards.
So that would be helpful that we would not have to hire additional quantitative analysis staffing to counter that in Washington.
I think we guestimate that to be a savings, Tom will reaffirm it around $1 million may be just slightly under.
I can say I think about $1 million to $1.5 million even over what we were projecting for a run-rate, which was $6 million to $7 million inclusive of Durbin.
Got it .
Okay.
That's really helpful.
And then I heard you loud and clear on wanting to just run full steam ahead on the loan growth side of things, encouraging to see the pipe up from the rate and volume perspective.
If you just give us a little bit of color, in terms of what you would expect to pull through from a loan mix and perhaps geographic perspective.
Well from a loan mix, it's all sectors, I would think residential lending, it's New Jersey, there is not as many houses so that is a little tougher business to predict, as there are a lot of other institutions that are trying to gather volume there.
We're seeing our opportunities in all facets.
The challenges is to pull through, where we used to maybe pull through 65% to 70% on some of these loans.
And once we put them into a term sheet, those numbers have been lowered down to 40% to 45% at best.
So there's a lot of people trying.
They're very competitive, a lot of aggressive deals at levels that we don't think are prudent for us, they may be for others.
So I don't think there is any category ---+ we kind of lightened up on multifamily for a period of time.
We don't use the broker community for that.
There is certain select borrowers that we will still work with for certain project.
Projects here are transit villages and the like.
I think we just ---+ we look at those that are very bankable, that's what we tried to do on all asset classes.
Tom, if you have any color.
I think I would add further that the competition in some of the credit standards appear to be relaxing further amongst some of our peers.
And I ---+ we're trying to holster a credit discipline here, which might limit our growth relative to some of the peers to a degree.
Fortunately, we're seeing favorable re-pricing, we have a good short-duration book of a lot of variable-rate assets.
So we're foregoing in volume, we're making up in rate currently.
Well, I certainly know that our customers ---+ we have a couple of new ones in the first quarter in the commercial real estate space, which is good to have a few new ones versus those that are still very well established with us.
In construction and industrial, everybody is trying to get it.
I think the fact the clients that we are able to meet, they know that we can close ease without a lot of issues.
The ones that we're missing out on are more the longer-term fixed-rate ones that some people are going aggressively out there at 10-year and 15-year fixed in the C&I space, which we won't go down that path.
I think that ---+ as you say, we do have, maybe, the right people in the right time.
We never wanted overstate our importance.
Somebody could probably underprice us or undercut us, but there may be one deal only.
It was underwritten at the end of '16, it was put on the books right in January of '17, viable business, everything was fine credit-wise.
Something took the turn to the worst that you wouldn't expect.
No.
No, it's the borrower that's challenged in their business.
I wouldn't say we're overextending because the asset book is relatively short.
So we're just trying to manage our interest rate risk.
So we're able to stay moderate on, I guess, on the funding length.
Prepayment fees were $616,000 versus $185,000 in the trailing quarter.
We are seeing more payoffs as people are aggressive, a lot of capital out there trying to be deployed aggressively.
So we're getting more payoffs, I know, in the first quarter.
We saw insurance companies coming back in to fill their bucket with some longer term or permanent loans that we normally don't get anyway from a construction to (inaudible).
And we're still seeing some payoff activity, and I think we always try to save as much as possible.
You don't want to lose the loans.
But if there is a level that we can't compete or doesn't hit our ROE hurdle that's reasonable and you kind of have to let it go.
We see some of our borrowers reducing debt as well and taking it ---+ putting in additional equity to reduce their debt.
We have March and Sept ---+ June and September.
Well, in Pennsylvania, when we acquired Team Capital, we definitely got in and there was an enhancement to the opportunities there in the way of 25 basis points.
We're making more headway there, we have hired a few new players in that market.
But we're seeing, again rationality and some aggressiveness in some of the smaller companies that are just, I guess, trying to put on assets at levels again, don't make sense to us.
I would contrast the opportunity certainly in the Lehigh Valley.
They are there, we gave a look, we're getting more looks of late, which is encouraging.
And down into the Bucks space in PA, that team has done a pretty good job.
And we just want to always maintain our focus where our growth can be in the Bucks area.
There is a lot of building going on with a lot of warehouse stuff going on even on a spec basis, which is a little scary sometimes.
So we think the PA has opportunities versus New Jersey.
We've always known New Jersey market fairly well.
So are we optimistic about our Pennsylvania expansion opportunities.
We will see if we can pull them through at the right levels.
Yes, one or the other.
Not to be glib but it, we don't ever preclude.
We just always look at the numbers that they make sense in the ---+ the partnership with somebody would be ---+ going to be beneficial to both institutions and the people and the customers.
That's what we love the opportunity.
I know in Pennsylvania, there is a bit more smaller institutions that are doing great work and have great market share that we'd love to have conversations with.
That's probably the way that the growth would be preferable versus just de novo and/or just hiring a couple of lending officers.
So we are always actively listening and talking to people on the ---+ and if there's an opportunity, we'd love to be part of it.
Nothing materially, you would expect after tax reform in the first quarter, everybody is kind of just hunkering down and seeing what that brings.
I think there's always the market rationale, it has to come in where people are expecting huge premiums, and no longer really I think available.
No.
I really couldn't give you any potential impact at this point.
Too early for us to give you any reliable estimate.
No.
Nothing, obviously that we're able to point to at all.
I think it's just ---+ people have conversations.
On the other hand, I think there's nothing that would have changed from quarter-to-quarter.
