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

Thank you, Chuck. Good morning, ladies and gentlemen, and thank you for joining us for our first quarter earnings call. Today's presenters are Chairman and Chief Executive Officer, Chris Martin; President and Chief Operating Officer, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons.

Thanks, Len, and good morning, everyone. We appreciate your participation today. Our first quarter earnings were vastly improved from the same period last year when the pandemic's impact was first being felt. The economy is rebounding quickly via massive stimulus by the government, the success of the vaccine rollout, and the tenacity and perseverance of both consumers and business owners to weather this unprecedented event. Earnings per share were $0.63 for the quarter as compared to $0.23 for the same period in 2020. And the primary drivers of the improvement include a negative provision due to the prospects of a strong GDP growth combined with the full impact of improved revenue from the SB One acquisition. Annualized return on average assets was 1.51% and annualized return on average tangible equity was 16.8%. Loan growth was constrained as PPP loan forgiveness and prepayments offset meaningful production. Originations were robust and we continue to support the PPP program in its second phase. The loan pipeline is consistent with the trailing quarter and the previous year-to-date. Yields on new originations are approaching portfolio yields, so stabilization in asset yields is on the horizon. And like most financial institutions, we are awash with liquidity due to the proceeds from stimulus checks and PPP monies augmenting deposit growth. This added liquidity presents to the company a challenge of where and how to invest the balances in an accretive manner while remaining sensitive to potential runoff. And our core deposits are now 91% of total deposits. The resultant increase in deposits alleviated the need for borrowing, which decreased during the quarter. Now, margin improved 6 basis points during the quarter. And we envision core margin stability in the near term. Non-interest income improved with the newest revenue sources from SB One Insurance, increased wealth management income from Beacon Trust and sadly another Bank-owned life insurance claim. Retail fees also added to these increases along with loan prepayment fees and a net gain on the sale of residential mortgage loans.

Thanks, Chris, and good morning, everyone. Let me start by noting that we have achieved or exceeded our financial expectations with regard to the merger with SB One Bank. Our focus is shifted to cultural integration that culminated in the recent company-wide rollout of our new core values, which we call our guiding principles. This successful rollout was celebrated throughout our company, and it has inspired and energized all of us about what we can accomplish together. Presently, we are all well along in the development of our new strategic plan. Select tenants of our plan include enhanced focus on one of our core competencies, commercial banking. This involves building out certain segments of our commercial book and reorganizing our group to promote better efficiency in credit administration, which will make it easier for us to expand into new markets where we can compete and win. We also want to build on our exceptional funding base and optimize our branch network. Of note, during the quarter, we consolidated our branch office in Clinton, New Jersey. We are also focused on building our non-spread income. In addition to further expanding our successful wealth management and insurance groups, we will evaluate other sources of revenue with a long-term goal of having non-spread income comprise in excess of 25% of our net income.

Thank you, Tony, and good morning, everyone. As noted earlier, our net income was $48.6 million, or $0.63 per diluted share, compared with $40.6 million or $0.53 per diluted share for the trailing quarter. Earnings for the current quarter were favorably impacted by $15.9 million of negative provisions for credit losses on loans and off balance sheet credit exposures, while the trailing quarter reflected negative provisions of $6.2 million.

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

Hey, guys, good morning.

Good morning.

Good morning.

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

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

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

$60 million is probably a reasonable number. I expect to see stock-based compensation elevate a little bit on ESOP plan, just because we've seen some improvement in the market price. That said, Mark, there were a couple items, as you noted that won't recur. The payroll tax reset trickles down over the next couple of quarters further. Obviously, snow removal we had in January and February was a bit elevated. We do manage those costs with fixed contracts. But there's a variable element to that as well. And we do have the larger facilities. I think part of the jump also was to switch to the large bank assessment rates now that we are 4 quarters over $10 billion. So that'll be a bit of an ongoing challenge.

Okay. And then, the insurance agency income was obviously strong, which I assume is because you'd get a lot of the renewals in the first quarter. Does that taper down a little bit in the second quarter and then more in the third quarter? Or do you see it sort of fall off in 2Q typically? Maybe it's a question for Tony.

Sure. Hi, Mark. The insurance income this quarter was really good. From one source, right, the commission-based income was high. Contingency-based income was not as high as it historically has been for the quarter, which is a good bad thing, because we're doing it on the normal business, because of obviously the last year was COVID year and premiums adjusted, so it wasn't a real solid market for contingency. It will, it does have cycles in the insurance. And I think the best way to look at it is to look at it over the same quarter last year, not on a link quarter basis. So you'll typically see the first quarter be strong, second - the third quarter tends to be a little lighter. And we ramp up again in the fourth quarter. That's been the history. But, again, George is building, so I expect all the quarters to kind of inch up.

Okay.

Hey, Mark, one other item to note, on the expenses side of things that Tony mentioned in his remarks, so we did close with the Clinton branch, when it reached the end of its lease term. It was an underperforming location. It's only about $19 million. We transferred those deposits about 10 miles away to Flemington. We retained 97% of the customers. But in terms of expense reduction, it's about $250,000 in saved expenses annually, and about $262,000 in compensation, that's, I guess, avoided, if you will, because we've been able to use those resources within the organizations that are having to make new hires.

Okay. And then, the last question I had for you is, obviously, we've seen a lot of consolidation in the northeast, maybe a little less so in New Jersey. It feels like New Jersey might be ripe for consolidation, given that you've got a lot of sort of midsized banks that are looking to grow and scale seems to be more and more important. I guess, I'm curious, do you think consolidation really accelerates in New Jersey? And is PFS likely to be involved in some of that?

Well, this is Chris. I think that we're always involved when invited. We certainly, between Tony and myself, know most everybody in the market, have relationships. It all goes back to their Boards, what they're thinking, how they look at the market. And so, we always like to be part of the conversation for those that make sense to our culture, and how we run our business. And if they would like to join up, we're certainly open to the idea. And then, we also look at wealth in that vernacular also, because we are one of the few that have that business and have done well with it. So we continue to look at Beacon Trust as maybe another vehicle where we can expand.

Thank you.

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

Hey, good morning, guys.

Good morning.

Just back on the insurance revenue, do you by chance have what the full-year revenue was last year and just so we can gauge what the expectation for full-year this year would be?

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

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

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

Correct.

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

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

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

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

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

Okay, great. And then, the liquidity, you guys talked about that. I guess, your borrowings and CDs, I guess, as the year progresses, and let's just assume that you have another quarter or 2 of deposits coming in. Are there opportunities to kind of let borrowings and CDs roll-off and do you have just the maturities of those?

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

Is that the CDs or is that...

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

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

Sure.

Time deposits decreased 131.

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

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

I think it's the going-run rate at least for the near-term, Steve. We've kind of moved away from swaps, because of our interest rate risk position. We are asset sensitive. The steepness of the curve has made the swapping to the variable rate products less attractive for us. So we're taking the current - the spread income rather than the fee income at this point and holding on the higher yielding assets.

yeah, it's quite a margin, it's sort of holding its own so.

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

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

It does. Again, the position I'm taking is that the purchase accounting isn't going to roll-off once it's gone, because the liabilities are repricing downward to those levels.

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

Thank you.

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

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

Good morning.

Good morning. I appreciate the comments on the strategic plan you are ongoing at the moment. So, I was curious on the commercial banking tenet that you outlined talking about looking at entering different segments and potentially expanding into new markets. Is there any additional color you could provide at this time in terms of what you're contemplating there?

Sure, I'll give you some color around that. One of the things we're looking at is our C&I business. How do we expand - how we deepen that as a percentage of our total book? Looking at our SBA lending increasing our capacity around that, we reorganized our authority levels. The way we structured ourselves makes us more efficient, not only to get credits through the bank, but to expand it to new markets in the markets that we think are exciting for us or potential would be the Westchester Rockland, the Greater Philadelphia area, potentially more on the island. So I think we're in a good position to expand there. And I just touched upon some of the things that not all of it. So hopefully that gives you a good thought process there, Russell.

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

I think it's a little bit of both, if I can start, right. I think the digitalization of our process is certainly going to make us more efficient and get rid of a lot of mundane manual processes that tend to build up over time. In terms of rationalizing our network, that's the consistent work in process and we can extract some more costs there. We do expect to re-shift some of those expenses into our investing in our future. But that's in areas that are going to make more money for us, not - so I would look at it as a re-shift and some of it going to the bottom line. I can't give you an exact percentage at this time.

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

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Christopher Martin for any closing remarks - excuse me, there's actually 1 more question that just came through, and that question will come from Erik Zwick with Boenning & Scattergood. Please go ahead.

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

Good morning, Erik.

Just a quick question maybe on your thoughts for organic loan growth and potential for net growth going forward got the healthy unfunded loan commitments around $2 billion, and the loan pipeline was up quarter-over-quarter. So just curious how you think that might play out through the year and whether it might be enough to offset the remaining runoff from PPP as those loans are forgiven and paid down?

Yeah, I'll start there and then my colleagues jump in. So based on - our pipeline is pretty solid at this time, right, as we mentioned. The pull-through rates and getting loans for what we touch today is probably I would say 55%. That means every loan we look at, what we're losing to some of the - I hate to use this word, maybe some more rational structures that we see out there. So we're pulling through about 55% of that stock. Given the math, back of the napkin math, if we have good success in net same percentage pull through and we don't see the unanticipated prepayments, which sometimes are out of our control, we still - I still project that we should be between 5% to 6% at the end of the year in our loan growth.

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

I would say we're looking at it net.

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

Okay. You got it.

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

Well, as we will go back again, we thank you for your time today and appreciate your continued confidence in PFS, and we hope you have a great weekend. Thank you very much.

Thank you.

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