Good day, and welcome to the Provident Financial Services Incorporated Fourth 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. Please go ahead, sir.

Thank you, Chuck. Good morning, ladies and gentlemen. And thank you for joining us for our fourth quarter earnings call. Today's presenters are Chris Martin, Chairman and CEO; Tony Labozzetta, President and Chief Operating Officer; 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.

Thank you, Len, and good morning. Thank you for participating today. We sincerely hope that you and your families are healthy. Our fourth quarter earnings were strong, as we successfully completed our systems integration of SB One and met both our expense savings estimate of over 30% and came in under our projected one-time merger-related charges. I would be extremely remiss if I did not recognize the herculean effort by management and the staffs from both companies as they ably met the challenges presented during the pandemic. And Provident was one of only a few financial institutions that announced and completed the transaction and converted systems during this tumultuous time in our country. Fourth quarter earnings were strong at $40.6 million, or $0.53 per share, including $3.2 million in merger-related charges. Net interest income was up 22% quarter-over-quarter. Total assets at December 31, 2020, stood at $12.9 billion, which resulted in an annualized return on average assets of 1.25% for the quarter and an annualized return on average tangible equity of 14.1%. Included in total assets were $473 million in PPP loans, which will continue to be submitted to the SBA for forgiveness throughout Q2 of this year. With only nominal GDP growth expected in Q2, we anticipate that loan growth will lag and businesses will rebound in the second half of 2021. Credit line usage is down to 41.6% at December 31, 2020 versus 55.7% in 2019. Another issue is the deleveraging of consumer balances, which should begin to pick up once the vaccine is more widely distributed and people get back to more normalized behavior. With low interest rates, business clients with strong balance sheets and cash flows are able to refinance and/or pay down their loans. Competition for loan growth remains extreme and our loan pipeline is $1.2 billion, with $295 million approved awaiting closing, and a 47% pull-through rate expected on the remainder. Deposits for the year increased $2.7 billion, including $1.76 billion acquired from SB One. Core deposit growth continued throughout the year and represented 88.9% of total deposits at December 31. Deposit trends remained favorable during the quarter. And growth was robust and broad-based, supported by seasonal inflows and pandemic-related customer behavior. We ended the year with a loan-to-deposit ratio of 99.8%, and we continue to interact with our customers to further solidify deposit relationships. We also anticipate that with additional government stimulus, deposits will increase or at least remain at these elevated levels and then begin to gradually be drawn down during the second half of 2021. The bank also promotes the products and services available through SB One Insurance, a new fee business line for us, along with wealth management offerings through Beacon Trust, to further expand our client relationships. Despite the challenging interest rate environment, our core margin held up well during the quarter.

Thank you, Chris, and good morning, everyone. As Chris noted, our net income was $40.6 million, or $0.53 per diluted share, compared to $27.1 million, or $0.37 per diluted share for the trailing quarter. Earnings for the current quarter included $6.2 million of negative provisions for credit losses on loans and off-balance sheet credit exposures, while the trailing quarter reflected provisions of $5.8 million. Q4 represents the first full quarter of combined operations following the July 31 acquisition of SB One Bancorp, with systems integration now complete and the bulk of expected cost saves now achieved. The remaining non-recurring merger integration costs of $3.2 million were recorded in the fourth quarter, outperforming our expectations as disclosed at the transaction's inception by about $800,000, and helping tangible book value per share to recover and surpass pre-acquisition levels. Core pre-tax pre-provision earnings, excluding provisions for credit losses on loans and commitments to extend credit, merger-related charges and COVID response costs were $50.1 million for pre-tax pre-provision ROA of 1.54%. This compares favorably with $44.4 million, or 1.48% in the trailing quarter. Our net interest margin expanded 3 basis points versus the trailing quarter as we reduced funding costs and grew non-interest bearing deposits, while earning asset yields held steady. To combat margin compression, we continue to reprice deposit accounts downward and emphasized non-interest bearing deposit growth. Including non-interest bearing deposits, our total cost of deposits fell to 31 basis points this quarter from 33 basis points in the trailing quarter. Non-interest bearing deposits averaged $2.38 billion, or 24% of total average deposits for the quarter. This was an increase from $2.21 billion in the trailing quarter, reflecting a full quarter contribution from SB One.

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

Hey, guys. Good morning. First question I have is on -- give us a sense, you've got quite a bit of excess liquidity on the balance sheet. How long does it take for you to deploy that? Will that all kind of go away in 1Q, do you think or most of it?

We're doing our best, Mark, hopefully through loan growth and find suitable investments. I would estimate our excess liquidity about $284 million at the end of the year. So it's an ongoing process, but we will continue to try and manage that down.

Yes. I would add to that, that we expect loan growth to be a little bit quicker and a little bit higher than we've been trailing. So between the combined banks that emerge, we expect to deploy that excess liquidity pretty quick throughout the year.

Okay. And then it looks like you've got about $1.1 billion of somewhat higher cost borrowings. I guess, I'm curious what the maturity schedule of those looks like and is there an opportunity to prepay some of them?

Tom is going to get the numbers. The opportunity to prepay is always there, but it doesn't make sense from an economic perspective at the time of the penalty . The earn back sometimes extents just as far as the duration of the borrowings. So, we look at that as, you make some decisions, you match up as much you can with your operations. But especially, with the home loan, bank dividend was very healthy, it doesn't -- it's one of our better yielding assets.

Yes, I would just agree. I'm not a big fan of prepaying borrowings with full-yield maintenance. I think it just takes a hit to equity in the current period to enhance our earnings going forward. But we wind up in the same place where you've lost income currently or equity. In terms of maturing funding overall, over the next four quarters, we have close to $1 billion coming off. A lot of it's in the CD portfolio. We'll get the right number here; yes, $1.088 billion total. And I guess the way that -- the weighted average rate currently is about 98 basis points. The pickups is much as -- is about 60 basis points, coming down like 36 basis points on the reprice. So each quarter there is like $364 million in Q1, $231 million in Q2, $143 million in Q3 and $170 million in Q4 of 2021, that's maturing time deposits. The borrowings rolling off are considerably less, but the CDs make up the bulk of what's going to be priced.

Okay. And then, Tom, excluding the impact of PPP, how are you thinking about the margin going forward?

A little bit better than last quarter, but not a lot. I think we've slowed down to around the 295% range. That's actually inclusive of PPP.

Okay. And then…

There is about $8.7 million in deferred fees. I'm sorry, Mark, about $8.7 million in deferred fees remaining on PPP currently.

$8.7 million?

That's correct.

Okay. And then on, as far as operating expenses go, can you kind of update us what's your thinking on expense outlook for, say 1Q and 2Q, as the synergy start to come through from the deal?

Yes, I think for the year, we're still around $240 million. And we are going to be a little bit -- skewed a little bit higher in the first part of the year because of the usual seasonal factors and utilities cost, payroll taxes. So maybe a little bit higher than $60 million in Q1 and then -- and floating down.

Okay. And then lastly, I guess, given your buyback announcement, does the buyback makes sense at current price levels? Or is it sort of intended to deal with any downdrafts in the market? Because it look like this most recent quarter, your average price was a fair bit like 15% lower than where the stock is today.

Yes. I think that's more the case with markets opportunistic. We kind of try to hug around the 1.2 times tangible book level that gives us the best return in terms of earn-back and alternate use of capital versus just trying to lever it up.

Thank you.

Thank you.

Thank you.

Our next question will come from Erik Zwick with Boenning and Scattergood. Please go ahead.

Hey. Good morning, guys. Tom, if I could just follow up on the margin commentary you just gave quickly, I just want to make sure I've got all the pieces right. I think you mentioned in your prepared remarks that the yields on the pipeline are about 3.75%, and that's pretty close to where the current yield in the book is. So it seem like there shouldn't be too much pressure there. You gave the outline of the maturing time deposits and those pricing lever. That seems like that should be a benefit. And then also the $8.7 million of deferred PPPs coming through. So just curious where the pressure is coming from in your outlook from the current fourth quarter level of the margin, down to that kind of $295 that you mentioned?

The pipeline rate, if I misspoke, it was 3.57%, not 3.75%.

Got you. Okay. That helps square that up. And then looking at the run rate for expenses headed into 2021, if I back out the -- I guess, about $3.2 million in merger-related expenses in 4Q that kind of gets into the mid-50s range or so, which was maybe a little lower than I had been expecting prior. Is that a good run rate heading into 2021? Or are there other factors and inflationary pressures that might kind of drive that higher? What are your expectations there?

Yes. I think it's more like 60 to 61 in the first part of the year per quarter, the normal increases, the payroll tax stuff that we talked about. But also you had an unusual reversal of the credit provisions on off-balance sheet commitments this quarter that was $3.9 million favorable. We wouldn't expect to see that recur.

Excellent. That's helpful. And then in terms of the newly authorized round of PPP loans, any expectations for what that might add to the balance sheet here in the first part of the year?

I think we're probably -- at this point, based on applications received, somewhere in the $175 million to the low $200 million range.

Great. Thanks. And last one and maybe for Chris or anyone who wants to weigh in. You mentioned, in 2021, you'll consider fee-based and whole bank opportunities as they arise and if there is a good fit. Just curious if you could remind us on, for your target size and any kind of geographic markets that you would look to expand into, if the appropriate opportunity presented itself?

Well, this is Chris. And I think, we always look at things that are in or contiguous. And if they can expand into really good markets that don't really destroy the franchise value of our company, we will look at them. They have to always meet the hurdles and be part of our culture size, matter. I mean, I don't know that we would do a $100 million company, not because it's bad. It's just the fact that the economies of scale aren't there. But I would say at $0.5 billion, it would be a start point, especially if you're looking out in Pennsylvania that has a bunch of smaller companies that maybe gives us some more scale and opportunity. And I think anything contiguous, which is always above Sussex County, up into Rockland, Orange County, Westchester, New York, surrounding maybe. And maybe we have a, with SB One, a little bit of a exposure and Queens doing very, very well. But that doesn't mean we're just going to go out on an expedition. We have to just look at opportunities and sometimes that could be organic versus buying businesses. On the wealth side, we can definitely expand that horizon a little bit more. And we also look at what our clients are. So, I hate to say that Florida has opportunity because there are people down there, but that's certainly been well bedded by a lot of institutions that are looking at that as an opportunity and the pricing has gotten a little bit skewed.

Great. Thanks for the color there. I appreciate you guys taking all my questions.

Thank you.

Thank you.

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

Good morning, guys. Just on -- first, just on the loan side. Can you just tell us what is going on with the commercial mortgage and the commercial loans and just the sequential changes in those portfolios?

Yes. The sequential change is little bit distorted from the systems conversion that happened in November, unfortunately. There were some reclassification entries that took place during the period. So it's a little bit challenging. Easier to look at the yields overall.

Got it. Okay. And I guess, what do you guys are generally expecting for the year? I know you're looking at more back weighted. Is just -- is there a general range that you're thinking about, excluding PPP?

Yes. From -- Steven, just from a growth rate, I think what we're seeing in the pipeline, there's a lot of robust activity. And unless things get a little unusual in terms of hyper competition and pricing and structure, we think we could be between that 4%, 4.5% and 6% as a good target for us. Again, we think we could be on the high end, if we don't see competitive pressures getting a little outrageous. But beyond that, the activity, given the circumstances that we're seeing in the marketplace with COVID, et cetera, is pretty healthy and our people are busy.

Got it. And that would really be geared more towards the second half, or are you thinking it's kind of even right now given where your pipelines are?

I would venture a strong guess that the second half will be better than the first half. But we are seeing how quickly we can pull those loans through the pipeline.

All right. Got it. And then just one last one from me. Just -- once we get through this, where do you think your reserves will eventually gravitate towards?

I would guess high-90 to low 1% kind of coverage range, when I just think about what's typical charge-off activity. Our loan portfolio has about a four-year weighted average life. So, I'm trying to estimate life of loan losses in my own simple way, taking 25 basis points as a guess at normal charge-offs. I think our long-term average over the last five years. Again, very benign credit environment, it was about 16 basis points. So that kind of gives you the lower boundary. But I think the industry is more than the 25 basis points to 30 basis point kind of range for banks with our kind of composition.

Got it, all right. Appreciate the color. Thank you.

Thank you.

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

Good morning, guys. A quick follow-up on the loan growth commentary. Appreciate the thoughts that you guys shared. Within that target, could you guys talk a bit about the mix that you would expect to be driving that and any geographic concentrations or outsized contribution?

Sure. I mean, from a geographic concentration, I tend to point to the markets we serve, like our primary markets. In terms of the mix, we're seeing a lot. And from a pre-perspective, it's some multifamily medical office, small amount of retail and a lot of owner-occupied activity in industrial, the space that we're seeing and targeting to lend into. While we don't basically red line any categories, we're very careful in the spaces of our office, hospitality. There has to be a real strong enhanced underwriting component to that to attract us to go there..

Still a strong emphasis on C&I as well.

Yes. And we have a very strong emphasis on C&I, owner occupied as well in the 2021 year.

That's great. I appreciate the additional comments there. And then as you think about your fee businesses into 2021, could you talk about overall revenue projections there? I'm particularly curious on the insurance and wealth front.

I'm going to take insurance. You go?

Sure. Well, the insurance, we definitely had an increase of 17%. And last year, it's really done well. I'd yield to Tony because he ran the business at SB One. So, he is a little more familiar than we are at this level. So, Tony?

Yes. I mean, with insurance, it's -- I always use an anecdotal point. It could pretty much just check the box and give them 17% to 20% year-over-year growth. However, this year is going to be positively unusual. What that basically means is now that the insurance company has a much broader base to, obviously, sell those products and services. So, we're seeing a lot of good momentum. And I know George is pretty enthusiastic about the activity as we engage with the rest of the teams on the Provident side. And so, I think he can grow his business much faster than he has historically. But just for purposes of financial projections, let's just say, 17% to 20% year-over-year, but I think he could do better.

On the wealth side of things, lot depends on market conditions, obviously. But we did close the year at record levels in AUM up to $3.7 billion. Our typical fee rate or our last 12-month average fee rate is 77 basis points. So, we did just under $26 million in revenue for 2020. A lot of the same synergies that we are hoping to achieve with the insurance business are transferable to the wealth business, as well as we try to broaden and deepen those relationships. So the expectations are pretty positive.

Agreed.

That's great, guys. I appreciate the thoughts there. And then the last one for me is just a follow-up. Tom, you mentioned the expense item that you wouldn't expect to run rate. Could you just clarify what that was? I apologize if I missed it.

Sure. That's the provision for credit losses on off-balance sheet credit exposure, so the commitments to extend credit. Again, with the favorable economic forecast that we saw coming out of Moody's, we had a fairly significant decrease in that. We could see some additional decrease if conditions continue to improve. But I wouldn't expect to see anything of that magnitude.

And the magnitude was $3.9 million.

Yes, $3.9 million. It's broken out on the P&L as a separate line item.

Okay, perfect. All right, guys, that's it for me. Thanks very much.

Thanks, Russell.

Thank you, Russell.

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

Well, as we enter 2021, we are increasingly optimistic about our path to economic recovery as we expect to see the rollout of vaccines accelerate near-term, providing benefits in the back half of the year. But we will continue to monitor the landscape carefully. And we are confident that the strength of our franchise and the benefits of our merger with SB One positions us well. And we are excited about the tremendous opportunity, when the pandemic-related slowdown subsides. Thank you for your time today, and please continue to wear a mask.

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