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'd now like to turn the conference over to 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 Q1 earnings call. Today's presenters are Chairman and Chief Executive Officer, Chris Martin President and Chief Operating Officer, Tony LaVazetta and Senior Executive Vice President and Chief Financial Officer, Tom Lyons. 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 providence. Bank. With that, it's my pleasure to introduce Chris Martin, who will offer his perspective on our Q1. Chris?
Thanks, Len, and good morning, everyone. We appreciate your participation today. Our Q1 earnings were vastly improved from the same period last year when the pandemic's impact was first being felt. The economy has rebounded 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 included 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 2nd 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 the accompanying 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 result in increase in deposits alleviated the need for borrowing, which decreased during the quarter.
Our margin improved 6 basis points during the quarter and we envisioned core margin stability in the near term. Non interest income improved with the new revenue sources from SB 1 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. Operating expenses of $61,900,000 increased from the prior year largely due to the addition of compensation and occupancy expenses from SB 1. Non interest expense to average assets was 1.95 percent versus 2.13 percent for 2020.
FDIC insurance costs increased due to an increase in the assessment rate and increase in total assets and the prior year's results having benefited from a small bank assessment credit. We exceeded the cost saves we projected when we announced the SB-one acquisition and are enthusiastic about the combined company's potential to extract more costs and increase revenue. Our efficiency ratio was 56.19 percent. As for asset quality, the numbers continued to improve from the trailing quarter. Deferrals are down to $132,000,000 of which $123,500,000 are commercial loans and of that number approximately 96 percent are paying interest.
And Tom will go over this in more detail, but we are optimistic that as the economy opens up further and more people are vaccinated, results will continue to improve. At this time, I would like to ask Tony to add more color to the success of the combination along with strategic plans for Provident. Tony? 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 1 Bank. Our focus has 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 and 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 comprised in excess of 25% of our net income.
To remain relevant, we are concentrating on digital banking and the digital transformation of our business processes to streamline activities, reduce friction and make our customers journey through all of our channels simple, fast and easy. This will make us more efficient and improve the experience of our customers and employees. Mergers and acquisitions will continue to be part of our growth strategy for our bank, as well as for Beacon Trust and SB1 Insurance. Scale has become increasingly more important to offset reduced margins and cover the higher cost of investing for our future. We will remain steadfast in pursuing strategic deals and partnering with companies that have comparable cultures.
Shifting quickly to our markets, we see the light at the end of the COVID tunnel. Many sectors largely recovered or quickly improving as the economic shutdown loosens and we approach herd immunity. Those sectors that continue to exhibit pressure are office space, particularly in Manhattan and retail centers that don't have a grocery store anchor. Fortunately, Provident does not have a concentration of note in either of these sectors. Most banks are presently dealing with how to best utilize the excess liquidity on their balance sheet.
As a result, we are seeing increased competition, which includes more aggressive pricing and elongated interest only periods with higher leverage. At Provident, we remain firmly committed to our credit culture, not sacrificing structure or quality for quantity. Despite the heightened competition, we are seeing good activity within our lending team. This quarter, we originated or funded $526,000,000 of new loans, excluding line of credit advances and net PPP loan activity. This would have been a strong quarter for us if not for the high level of unanticipated loan payoffs that offset the growth.
The payoffs were due in large part to the sale of the underlying properties associated with the loan. At quarter end, our pipeline remains strong at approximately $1,300,000,000 and we are seeing a marginal improvement in the average rate in the pipeline. If we have a good pull through rate in our pipeline and see a reduction in prepayments, we should experience solid growth for the remainder of the year. With that, I'll turn the call over to Tom for his comments on our financial performance. Tom?
Thank you, Tony, and good morning, everyone. As noted earlier, our net income was $48,600,000 or $0.63 per diluted share compared with $40,600,000 or $0.53 per diluted share for the trailing quarter. Earnings for the current quarter were favorably impacted by $15,900,000 of negative provisions for credit losses on loans and off balance sheet credit exposures, while the trailing quarter reflected negative provisions of 6,200,000 dollars Core pre tax pre provision earnings excluding provisions for credit losses on loans and commitments to extend credit were $48,900,000 for a pre tax pre provision ROA of 1.52%. This is consistent with $50,100,000 or 1.54 percent in the trailing quarter, which also excluded merger related charges and COVID response costs. Our net interest margin expanded 6 basis points versus the trailing quarter to 3.10 percent as benefits from PPP loan forgiveness, reduced funding costs and a steeper yield curve were partially offset by lower yielding excess liquidity.
We expect to maintain a core margin of approximately 3% as we continue to deploy excess liquidity into loans and securities, while we're pricing funding downward and continuing to emphasize non interest bearing deposit growth. Including non interest bearing deposits, our total cost of deposits fell to 30 basis points this quarter from 31 basis points in the trailing quarter. Average non interest bearing deposits were stable at $2,400,000,000 or 24 percent of total average deposits for the quarter. Average borrowing levels decreased $196,000,000 and the average cost of borrowed funds decreased 4 basis points versus the trailing quarter to 1.12%. Average loans increased slightly for the quarter, although quarter end loan totals decreased $19,000,000 versus the trailing quarter.
Loan originations excluding line of credit advances were strong at $539,000,000 for the quarter, including $190,000,000 of PPP II loans. Payoffs were elevated, however, including $177,000,000 of PPP I loan forgiveness. The loan pipeline at March 31 increased $73,000,000 from the trailing quarter to 1,300,000,000 dollars In addition, the pipeline rate increased 8 basis points since last quarter to 3.65 percent at March 31. Our provision for credit losses on loans was a benefit of $15,000,000 for the current quarter compared with a benefit of $2,300,000 in the trailing quarter. Asset quality metrics including non performing loan levels, early stage and total delinquencies, criticized and classified loans and the portfolio weighted average risk rating all improved versus the trailing quarter.
We had annualized net charge offs as a percentage of average loans of 4 basis points this quarter compared with 10 basis points for the trailing quarter. Non performing assets decreased to 65 basis points of total assets from 72 basis points at December 31. Excluding PPP loans, the allowance represented 0.92% of loans compared with 1.09% in the trailing quarter. Loans that have been granted short term COVID-nineteen related payment deferrals further declined from their peak of $1,300,000,000 or 16.8 percent of loans to $132,000,000 or 1.3 percent of loans. This compares with $207,000,000 or 2.1 percent of loans at December 31.
This $132,000,000 of loans consist of $300,000 that are still in their initial deferral period, dollars 47,000,000 in the 2nd 90 day deferral period and $85,000,000 that have received a 3rd deferral. Included in this total are $41,000,000 of loans secured by hotels, dollars 33,000,000 secured by multifamily properties including $20,000,000 that are student housing related, $9,000,000 of loans secured by retail properties, dollars 7,000,000 secured by restaurants and $9,000,000 secured by residential mortgages with the balance comprised of diverse commercial loans. Of the $123,000,000 of commercial loans and deferral, 96% are paying interest. Non interest income increased $1,200,000 versus the trailing quarter to $22,000,000 as growth in insurance agency income, loan and deposit fees, wealth management income and bank owned life insurance income was partially offset by reductions in net profits on loan level swaps and gains on loan sales. Excluding provisions for credit losses on commitments to extend credit and in the trailing quarter, merger related charges and COVID related costs, non interest expenses were an annualized 1.95 percent of average assets for the current quarter compared with 1.82% in the trailing quarter.
The increase in the Q1 of 2021 is primarily attributable to seasonal increases in occupancy costs, including snow removal and utilities, an increase in FDIC insurance due to our increased asset size and a change to large institution assessment rates and the annual reset of the employer share of payroll taxes. Our effective tax rate increased to 25.1 percent from 23.3 percent for the trailing quarter as a result of an increase in the proportion of income derived from taxable sources. We are currently projecting an effective tax rate of approximately 25% for the remainder of 2021. That concludes our prepared remarks. We'd be happy to respond to questions.
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.
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? Yes.
I think on a core basis Mark it's somewhere in the 301 to 305 range. PPP was about 8 basis points of benefit this quarter and the purchase accounting adjustments were about 5 basis points. The purchase accounting adjustments, so I don't really see the benefit of that disappearing because we're reprising the current market, which there's no indication that those funding rates are going to go up. So I think we're going to be in the 301 to 305 range on a core basis. Okay.
And then secondly, your expenses were a little bit high in 1Q, it sounds like you had some non recurring items in there. Can you tighten your belt and get expenses back sub $60,000,000 per quarter going forward do you think, Tom?
$60,000,000 is probably a reasonable number. I expect to see stock based compensation elevate a little bit on the East Ox plant just because we've seen some improvement in the market price. That said, Mark, there were a couple items as you noted that that won't recur. The payroll tax reset trickles down over the next couple of quarters further. Obviously snow removal we had in January 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're 4 quarters over $10,000,000,000 So that will be a bit of an ongoing challenge.
Okay. And then the insurance agency income was obviously strong, which I assume is because you get a lot of the renewals in the Q1. Does that taper down a little bit in the Q2 and then more in the Q3 or do you see it sort of fall off in 2Q typically? And maybe it's a question for Tony.
Sure. Hey, 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 linked quarter basis. So you'll typically see the Q1 be strong, second, The Q3 tends to be a little lighter and we ramp up again in the Q4. That's been the history. But again, Georgia is building, so I expect all the quarters to kind of inch up.
Hey, Mark, one other item to note on the expenses side of things. Tony mentioned in his remarks, we did close the Clinton branch when it reached the end of its lease term. It was an underperforming location. It was only about $19,000,000 We transfer those deposits about 10 miles away to Flemington. We've 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 right 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're 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 Stephen Duong with RBC Capital Markets. Please go ahead.
Hey, good morning guys.
Good morning.
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 a full year this year would be?
I don't have the exact number in front of me, Steve, but I think
it was $8,000,000 to $8,500,000 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 of the PPP loans this quarter?
Let's see, the total at the end of period is 4.86%. We were 4.73% at the end of the year. I don't have an average in front of me, but you can do a straight line there.
Yes. The second 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 $7,200,000 Again, they were refueled, I guess, with PPP2. Fees recognized during the quarter were $4,000,000 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 had 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?
Yes, there's about over the next 12 months, it's about $1,400,000,000 and there's probably about a 50 basis point pickup for the current roll 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 that.
Yes, that'd be great if you have that.
Sure. Time deposits decreased 131.
Where did I put that? Oh, here we go. Yes, CDs by quarter, Steve, are I'll give you the total for the next 12 months. CDs are $790,000,000 borrowings are $622,000,000 for a total of $1,411,000,000 And as I said, it's about a 50 basis point favorable roll.
50 basis points. Okay, that's great. And then just last one for 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.
That's important.
Yes, that's why the margin is sort of holding its own. So Yes,
a 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 replace 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 us another $2,600,000 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 301 to 305 range.
Right. And did you say that that 301 and 305 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 this. Thank you.
Thank you.
The next question will come from Russell Gunther with D. A. Davidson. Please go ahead.
Hey, good morning guys.
Good morning, morning.
I appreciate your comments. Good morning. I appreciate the comments on the strategic plan you're ongoing at the moment. So I was curious on the commercial banking tenant 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 and I business, how do we expand, how we deepen that and as a percentage of our total book, looking at our SBA lending increasing our capacity around that. We reorganize our authority levels. The way we structured ourselves makes us more efficient, not only to get credits through the bank, but to expand into new markets.
And the markets that we think are exciting for us or potential would be the Westchester Rockland, the Greater Philadelphia area, potentially more out 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.
Yes. No, that's great flavor. 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, has 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 tenant 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 a 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.
Yes. No, that's also very helpful, guys. The rest of my questions have been asked and answered. So thank you very much.
Thank you. 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 one more question that just came through. And that question will come from Eric Zwick with Boenning and Scattergood. Please go ahead.
Hey, good morning guys. I made it right at the wire.
Good morning, Eric.
Just a quick question maybe on your thoughts for organic loan growth and potential for net growth going forward. You've got a healthy unfunded loan commitment around $2,000,000,000 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 pay down?
Yes, I'll start there and then let 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 stuff.
Given the math, back of the napkin math, if we have good success in that 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. 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, Ed, we'll 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.