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Provident Financial Services Inc  (NYSE:PFS)
Q1 2019 Earnings Call
April 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Provident Financial Services, Inc. First Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Len Gleason, Investor Relations Officer. Sir, please go ahead.

Leonard Gleason -- Senior Vice President & Investor Relations Officer

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

Before beginning the review of our financial results, we ask that you please take note of any 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'm pleased to introduce Chris Martin, who'll offer his perspective on our quarter. Chris?

Christopher Martin -- Chairman, President and Chief Executive Officer

Thanks, Len; and good morning, everybody. Provident's first quarter results were strong with net income of $30.9 million or $0.48 per share compared to $27.9 million or $0.43 for the same period last year. Assets grew primarily as a result of increased liquidity and the adoption of a new lease accounting standard. Loan volumes were reflected by continued payoffs accompanied by construction loans that converted to permanent status with the insurance companies or the agencies at aggressive rates.

Our pipeline remained solid as we continue to compete for the deals that meet our return and credit criteria. Competition continues to confound us as the risk-adjusted returns on certain C& I and CRE loans accompanied by covenant life and/or warm, IO or rate walk period are not commensurate with our loan pricing. And we're still anticipating low single-digit increases in loans. I'm happy to note that we now have a full complement of quality lenders in our Pennsylvania market, which should generate increased volumes.

Earnings (ph) for growth became a bit more challenging as we were forced to adjust to market sensitivities to interest rates, which impacted our cost of deposits. Our deposit beta was a bit lower than the trailing quarter. And with mixed signals coming from the Fed and the economy showing continued strength, the reality of operating in a flat yield curve environment will keep margins from expanding. We anticipate that the Fed will remain on the sidelines in 2019. And during that quarter, the curve inverted, which is never positive for bank earnings.

We remain cautiously optimistic on credit. We're currently not seeing any significant trends or industry concentrations that give us pause. Charges for the quarter were more within the norm for us. And criticized and classified credits are always top of mind as we work closely with our borrowers to remediate their issues yet protect our position.

Investments in people and technology continued in 2019 as we build out to meet the regulatory challenges that eventually going through the $10 billion asset threshold. The additional hiring has added breadth to our risk and compliance teams to address elevated regulatory expectations. We introduced foundation to our market, which is a small business credit loan process that is fully automated. Results to-date have exceeded our projections and at this time we do not portfolio any of these loans, we just collect fees.

We are also implementing an account opening solution to address the needs for online client modernization. Plans are in place to bring the new digital solution to Provident. And as with any new technology, controls must be in place to maintain client confidentiality and security. Our industry will continue to face pressure on expenses with the technology spend, but to remain competitive is the cost we have to incur and balance with our operating efficiency.

As I mentioned, we are spending time, effort and expense preparing for $10 billion and continuing our attempts to meet with and engage with our regulators and legislators to reduce the burden of Dodd-Frank. Our strong capital position provides us with the option to enhance long-term stockholder value, such as Beacon's acquisition of Tirschwell & Loewy, which closed on April 1st with approximately $750 million in assets under management. We have continued our pursuit of M&A focusing on potential opportunities within or contiguous to our markets with a solid deposit franchise. As always, we continue to hold to our metrics and will remain a disciplined acquirer.

With that, Tom will give you more color on our financial performance for the quarter. Tom?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

Thank you, Chris; and good morning, everyone. As Chris noted, net income increased 11% to $30.9 million or $0.48 per diluted share compared to $27.9 million or $0.43 per share for the first quarter of 2018. Current quarter revenue was $87 million as interest income and net interest income both exceeded prior year first quarter levels. Our net interest margin expanded 10 basis points versus the same period last year, but contracted 4 basis points versus the trailing quarter. Compared with the fourth quarter of 2018, our earning asset yields increased 1 basis point while the cost of interest-bearing liabilities increased 7 basis points.

Growth in earning asset yields was adversely impacted by declining treasury yields, tighter spreads and inversion in the short to midterm part of the curve, while funding cost reflected the lagging effect of the Fed rate hikes and competitive pressures.

Quarter-end loan totals decreased $27 million from December 31st as loan originations, while 5% better than the first quarter of 2018, so a typical seasonal decline, falling (ph) 35% versus the trailing quarter. This decline in originations versus the trailing quarter was partially offset by reduced loan payoffs.

The pipeline on March 31st has increased 21% versus year-end to $1.2 billion. However, the pipeline rate has decreased 15 basis points since last quarter to 4.79%. The lower pipeline rate reflects current market conditions and exceeds the loan portfolio rate of 4.51%.

Credit metrics on our loan portfolio remain strong with nonperforming assets declining to 27 basis points of total assets at quarter end. Provision for loan losses was $200,000 for the quarter, while annualized net charge-offs were just 2 basis points of average loans. As a result, the allowance for loan losses to total loans were stable at 77 basis points, while the allowance as a percentage of non-accrual loans increased to 223% from 216% at December 31st.

Non-interest income declined by $3.4 million versus the trailing quarter to $12.2 million. The decline was attributable to a $2.2 million nonrecurring gain on the sale of Visa Class B shares in the trailing quarter, as well as decreases in loan prepayment fees, loan level swap income, wealth management income and ATM and debit card income, partially offset by an increase in benefit claims on Bank-owned life insurance.

Non-interest expenses were an annualized 2.02% of average assets for the quarter. Expenses decreased by $944,000 to $48.4 million versus the trailing quarter, primarily as a result of decreased NPA-related consulting and other expenses.

Our effective tax rate increased to 19.9% for the quarter. The trailing quarter included a $1.9 million benefit recorded from a cost segregation study on certain capital improvements. We're currently projecting an effective tax rate of approximately 21% for the remainder of 2019.

That concludes our prepared remarks. We'd be happy to respond to questions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) And our first question today comes from Mark Fitzgibbon from Sandler O'Neill + Partners. Please go ahead with your question.

Mark Fitzgibbon -- Sandler O'Neill + Partners -- Analyst

Hey, guys. Good morning.

Christopher Martin -- Chairman, President and Chief Executive Officer

Good morning.

Mark Fitzgibbon -- Sandler O'Neill + Partners -- Analyst

I wonder if you can help us think about when we might see sort of a resumption of loan growth? And how long do you think it will -- you'd be willing to sort of hold the balance sheet below $10 billion, if you don't find a suitable acquisition?

Christopher Martin -- Chairman, President and Chief Executive Officer

This is Chris. I think that we're trying to be disciplined in the way we do our lending. And I think that's kind of -- that's the way we've always been. Block and tackle the credits that we want, our pull-through rates are still approximately 60% to 70% on the C&I deals that we'd like on the commercial real estate, about the similar level. But we're not concerned about going through from an organic perspective and something we're already prepared for and we've been spending money to get through that process. I think an acquisition would certainly accelerate that, but it still -- I think that we're in the right place. Loan volume, the pipeline is pretty strong. Payoff, we hope that will continue to slow but I think we have enough that we're projecting that will be -- the second quarter will have its fair share. Tom, I don't know if you want to add some color.

Thomas Lyons -- Executive Vice President and Chief Financial Officer

Yeah. The only thing I would add Mark is that, the 10.8 (ph) is kind of the bogie for balance through -- by the end of the year or third quarter. We don't feel that we can cross at least to that level organically. We would probably try to manage under, but other than that we're not trying to holdback.

Mark Fitzgibbon -- Sandler O'Neill + Partners -- Analyst

Okay. And then, now, that you've got a physical presence in New York City with the Tirschwell acquisition, can you see the company moving bankers into Manhattan?

Christopher Martin -- Chairman, President and Chief Executive Officer

Probably not in the near term. I think, as always, we will have to get all the technology and get everybody on the same systems. I think the only thing we do would be in a private banking capacity that we've done at Pekin in New Jersey, which is the clients have a need and they want to leverage some of their portfolio to do some kind of borrowing, we would deal in that context. But I do not see it doing any kind of banking in the city.

Mark Fitzgibbon -- Sandler O'Neill + Partners -- Analyst

Okay. And then on the margin, Tom, I know it was a touch softer than your guidance this quarter, how are you thinking about it looking ahead?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

Yeah. Based on current conditions, Mark, I think we're kind of in the flattish range for the remainder of the year unless competitive pressure eases a little bit on the funding side of things where we get to see a little pickup in the yield curve.

Mark Fitzgibbon -- Sandler O'Neill + Partners -- Analyst

I'm sorry.

Christopher Martin -- Chairman, President and Chief Executive Officer

Mark, adding to that I guess the GDP number came out at 3.2, which is much higher than expected. I'm sure there is reasons that they will come up with. I still think that Fed will be on hold for the foreseeable future. And so, we still think that flat is the case.

Mark Fitzgibbon -- Sandler O'Neill + Partners -- Analyst

Okay. And then you all were quite diligent on the expense management front this quarter. I'm curious, is that -- do you think this sort of the $48.5 million operating expense level is sustainable? Can you hold the expenses at that level for a bit?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

I'm still thinking $50 million to $51 million a quarter is kind of the range, might be a little lower, that's kind of a reasonable estimate.

Mark Fitzgibbon -- Sandler O'Neill + Partners -- Analyst

Thank you.

Christopher Martin -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Russell Gunther from Davidson. Please go ahead with your question.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Hey. Good morning, guys.

Christopher Martin -- Chairman, President and Chief Executive Officer

Good morning.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Circling back to the loan growth, could you help us by quantifying what the payoffs or paydowns were this quarter relative to last quarter?

Christopher Martin -- Chairman, President and Chief Executive Officer

Sure.

Thomas Lyons -- Executive Vice President and Chief Financial Officer

Sure. We had payoffs of $201 million versus $308 million last quarter. $173 million for the first quarter of 2018. So nice improvement versus the trailing quarter, but that's typical seasonal, a little bit higher than last year's first quarter.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Perfect. Thanks, Tom. And then with regards to the comments of the Pennsylvania market, I'm going to expect that to pick up and some new lenders hired there. Could you guys give us a little bit of color about kind of who you're bolted on? And what type of growth we could expect out of that area?

Christopher Martin -- Chairman, President and Chief Executive Officer

Well, I think, definitely in the Lehigh Valley area, we were suffering. We did not have the team in place that we'd like. Mostly, we would see it in the C&I space, where there's lot of things going on in the Valley. And certainly down in Wayne, Pennsylvania, the Philadelphia, outside of Philadelphia, we've had a group that's pretty well staffed there. We still add it a couple and adding couple of portfolio managers, so they can get beyond the road and meeting with clients. So the fact that we haven't had that, we certainly like the market, which is why we're there. So now hit the ground running. It always take a bit of time just to get everybody acclimated, but we're looking forward to the second, third quarter, a little pickup in that area.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

That's good to hear. I appreciate the color there. And then any updated thoughts on what the wealth deal would begin to contribute to fee income going forward?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

Yeah. I don't think we've changed our view. We're still looking at about $4.6 million in income. After expenses and taxes, I think it will net us about $1 million for the year 2019.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Okay, great. Thanks, Tom. And then I heard on the 21% update on the tax rate, does that still feel good? I mean, I know New Jersey has been pretty fluid over the past couple of quarters, but that assumes the -- kind of week (ph) status is good, any general commentary on New Jersey tax outlook?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

No. No change in status. So 20% to 21% is pretty much where we're coming out.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Great. Thank you, guys. That's it for me.

Operator

Our next question comes from Collyn Gilbert from KBW. Please go ahead with your question.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Thanks. Good morning, guys.

Christopher Martin -- Chairman, President and Chief Executive Officer

Good morning, Collyn.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Just to talk a little bit about the loan growth loan dynamic and what you guys saw this quarter. So the pickup in multifamily, what was sort of the structure of some of those loans? And then, in general, where are you -- what are the types of credits that you guys are adding? And I'm -- I guess I'm asking that, because just a pipeline yield of 4.79% just seems a little light. I understand where the curve has gone. But just trying to understand kind of appetite for multifamily, the pricing there, and then where you see kind of the growth and pricing migration from here?

Christopher Martin -- Chairman, President and Chief Executive Officer

Sure. This is Chris. First and foremost, some of that is construction. It's in our market and we follow our clients. It's all between there. We had a -- that's going to be a little bit probably lower rate just to basically the treasury and spread over that over LIBOR. And we've been doing some mini perms. Some of the permanent product we'd like to keep within the lot of that goes to the agencies of the insurance companies. So for the most part, that's the phase we're going to be in the commercial real estate area. Tom?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

Yeah. I'm looking at a pipeline improvement and also CRE is the biggest piece in terms of dollars. Rates come down from about 5.10% in the trailing quarter for 4.84%. So that's driving some of the decrease in the pipeline rate as well, again market conditions really.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Okay. That's helpful. And then Chris did I hear you say paydowns should slow, but did you say that maybe 2Q could have a higher level of paydown?

Christopher Martin -- Chairman, President and Chief Executive Officer

Yeah. We run out and we talk and there's definitely a little bit of a pickup in Q2 and those are ones that we are aware of. And some of them are ones that we don't mind them moving onto another bank -- so -- and/or another financial entity. So it's not all that all we really love to hold on to those. For the most part, there are some really good companies that have a couple of credits that we have a little fatigue and we want them to move on somewhere else. So sometimes it comes with serendipity. We like to loan some of them and they pay off very aggressive terms and/or IO periods that we just don't think is prudent. And so -- and then a couple that are lower-rated credits that we're actually happy they're moving on.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. That's helpful. And then Tom would you mind just giving us a breakdown of what the prepays were this quarter and then what they were again last quarters?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

Yup. Prepayment income was $393,000 this quarter versus $1.2 million last quarter. So a decline of about $800,000.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. And then do you have any for the year ago period?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

I do. $616,000 a year ago.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay.

Thomas Lyons -- Executive Vice President and Chief Financial Officer

The other noteworthy item in the income section there though and bottom lines was the swap fee income. That was a minus $460,000 and we haven't fairly worked (ph) CBA adjustment rates moving down compared with a $327,000 positive last quarter, so about again $800,000 decline. Bright note on that. We've got some nice swap fee income that's already been recorded in Q2 and have a couple of things in the pipeline. So we're looking for a nice pickup in Q2 on that.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. That's helpful. And then, Chris, just capital, obviously, you guys continue to build really strong levels, especially given the risk profile of the business. I know you guys obviously paid the special dividend. What -- how are you thinking about capital management going forward and prioritizing the usages of that? And do you have any target? What's that you want to get that TCE ratio down to in the near term?

Christopher Martin -- Chairman, President and Chief Executive Officer

I know Tom and I always have a very fun discussion on that. I think between 8 and 8.5 is where we'd like to be. Obviously, with CECL, it's not going to hurt to have a little bit of extra cushion just in case. But we don't see that is having a major impact. So we want to put the capital to work. We just think it should in the areas that make sense for shareholder value. So our payout ratio still about 45% to 55%. So with the space that we know that we're not going to have to worry about cutting back if the economies starts to struggle. So I think we have a lot -- enough capital to go ahead and invest in the future and/or use for acquisitions.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Would you see -- as you look at the landscape right now, do you think there is a greater opportunities within additional wealth fields relative to the bank deals?

Christopher Martin -- Chairman, President and Chief Executive Officer

I think it's about even. I mean, the wealth fields take a lot of effort. And, again, the principles of the other firms that have to get confidence that it's going to be a good investment for them in the long run and the bank deals -- there is not many banks that are available obviously through the shrinkage of the industry over the last 10 years. But I think we want to maintain the same discipline. I think the wealth deals, there's certainly a lot more firms out there than banks. That doesn't mean that they make most sense.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. And then just on the bank deal front, are there targets out there that you would be interested in and the issue may be boils down to price or their willingness to sell? Or they are just not targets that you even see out there that would fit your criteria?

Christopher Martin -- Chairman, President and Chief Executive Officer

Part A of that would be, yes, there are people that we would be interested in. B and C are always up in the air. I think expectations and people aligning with you, making sure there is the culture fit, making sure there is a value to their shareholders and to our shareholders are always where the negotiations stops/starts, and I think that's kind of where we are in today's environment.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Do you see any type of catalysts that could get those sellers to change or you as a buyer to change, or just facilitate more activity?

Christopher Martin -- Chairman, President and Chief Executive Officer

Nothing that I see on the horizon at all. I don't see any regulatory issues that would make everybody start to run for the doors. And much worst, do I see any alleviating of the regulation. So I think everybody has gotten through the tax benefits, dealing with what's going on certainly in Washington has got everybody just kind of saying, OK, hold serve. If their business is generating the right value for shareholders, there's no reason for them to exit. On the other hand, we think that we have performed very well and our current state is really good, and we think we have a great team and culture.

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. All right. Like that all. Thanks, guys.

Christopher Martin -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Matthew Breese from Piper Jaffray. Please go ahead with your question.

Matthew Breese -- Piper Jaffray Companies -- Analyst

Good morning.

Christopher Martin -- Chairman, President and Chief Executive Officer

Good morning.

Matthew Breese -- Piper Jaffray Companies -- Analyst

Just following up on Collyns' capital management question, given the excess capital, given the safety of the balance sheet, might we see you use the buyback a little bit more aggressively going forward?

Thomas Lyons -- Executive Vice President and Chief Financial Officer

It remains an alternative for us stemming on the start price. I think we did about $13 million in the fourth quarter when we saw pressure.

Matthew Breese -- Piper Jaffray Companies -- Analyst

Okay. And then touching on deposit cost dynamics, a number of your competitors had commented that it seems like competition had leveled of over the course of the quarter. I'm just curious your thoughts there if that was your experience as well?

Christopher Martin -- Chairman, President and Chief Executive Officer

It started out the quarter that way, but I don't think it finished the quarter that way necessarily. I'm kind of hopeful that as we continue to see pressure across the industry on the asset side of things, people become a little more cautious about some of the levels they price deposits at. So we've had to -- we need to do to maintain our deposit base and trying to acquire new funding.

Matthew Breese -- Piper Jaffray Companies -- Analyst

Okay. And then just on -- Chris you mentioned CECL, you mentioned that you didn't expect the big impact there, could you give us any additional color on what we might see on day one?

Christopher Martin -- Chairman, President and Chief Executive Officer

We really aren't going to be able to give color. We're still running our model. We're on the first pass, we'll be doing another pass in making sure all of the metrics and all of the -- everything is in place, certainly qualitatively and quantitatively analysis being done. The first flush has just been that you would think that the duration of the portfolio being shorter. We don't have a credit card portfolio to worry about at all. So I think it's just our 50,000 foot (ph) look, it's really not draconian as some others might be. Well, that's definitely better color compared to third quarter as we move into that process.

Matthew Breese -- Piper Jaffray Companies -- Analyst

Understood. Okay. That's all I had. Appreciate the color.

Christopher Martin -- Chairman, President and Chief Executive Officer

Thank you.

Operator

And, ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Mr. Martin for any closing remarks.

Christopher Martin -- Chairman, President and Chief Executive Officer

We again appreciate your time and your interest in Provident, and we look forward to speaking to you next quarter. Have a great day.

Operator

Ladies and gentlemen, that does conclude today's presentation. We do thank you for joining. You may now disconnect your lines.

Duration: 25 minutes

Call participants:

Leonard Gleason -- Senior Vice President & Investor Relations Officer

Christopher Martin -- Chairman, President and Chief Executive Officer

Thomas Lyons -- Executive Vice President and Chief Financial Officer

Mark Fitzgibbon -- Sandler O'Neill + Partners -- Analyst

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Collyn Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Matthew Breese -- Piper Jaffray Companies -- Analyst

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