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Text: 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.
Now it's my pleasure to introduce Chris Martin, who will offer his perspective on our fourth quarter.
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 the 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 31st, 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 31st, 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 31st.
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.
Non-interest income was up $2.7 million versus same quarter last year, which is primarily the result of $1.8 million contributed by our new fee revenue source from SB One Insurance, accompanied by an increase in the net gain on sale of residential mortgage loans of $757,000 and wealth management income increasing $561,000.
These increases were partially offset by decreases in prepayment fees of $882,000.
Non-operating expenses increased $4.8 million for the quarter, which included $3.2 million of non-recurring costs related to the acquisition of SB One.
Our operating expenses to average assets was 1.82% for the quarter and our efficiency ratio was 54.12%.
We continue to enhance our digital and online mobile banking platforms, as client behavior has demonstrated a clear preference for these channels.
As an example, we have seen an increase in daily usage of 945% versus our previous person-to-person platform.
We will seek to optimize our expanded business model, with the driver being ROI and customer relationship expansion supported by analytics.
And we consolidated three branch locations during the quarter and have another one planned later this quarter.
Our reserve release this quarter primarily reflects Moody's improving macroeconomic outlook.
Although I would note, we did add appropriate qualitative adjustments for economic uncertainty as the pace and shape of the recovery is still evolving.
We're beginning to see the expected rise in non-accrual loans and charge-offs that may already have been reserved under -- for under our CECL methodology.
We are working with all of our clients to provide hardship assistance whenever possible and prudent.
If the vaccination and herd immunity can take hold, we estimate that it would reduce the loss content within our loan portfolio.
And Tom will update the loan payment deferrals in more detail.
But we have seen most of our clients come out of deferrals and returned to full P&I payments.
Our strong capital levels remained above well capitalized, which continue to support growth, a solid cash dividend and an opportunity for stock repurchases that meet our internal return hurdles.
We repurchased 1.3 million shares in 2020 at an average cost of $16.59 per share, which leaves PFS with only 262,000 shares remaining in our existing program.
Yesterday, our Board authorized the adoption of a new 5% repurchase program, which will commence upon the completion of the existing one.
On the M&A front, despite the fact we just completed the SB One systems conversion in November, we remain open to those opportunities that expand our market and deliver solid returns to our stockholders.
We remain disciplined buyers in terms of the financial profile that fits our strategic objectives and culture.
And we will assess fee-based businesses along with whole bank acquisitions.
Though there were improving economic indicators in the fourth quarter, we continue to see an uneven recovery and upticks in COVID cases toward the end of the quarter, negatively impacted the road to recovery.
Overall, our customers continue to be in a much stronger position than we would have anticipated when this crisis began.
However, unemployment levels in the market remained high.
Inventory levels are lower than they were pre-pandemic and the client confidence to invest in their business appears contingent upon the success of the vaccination distribution and the relaxation of government shutdowns.
Despite all this, we believe there is a great potential for expanding economic activity in the second half of the year, especially if there is significant stimulus package.
I'll let Tom go into the further details.
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 31st 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.
Average borrowing levels decreased $82 million and the average cost of borrowed funds decreased 3 basis points versus the trailing quarter to 1.16%.
Quarter end loan totals increased $66 million versus the trailing quarter or an annualized 2.7%, reflecting growth in C&I, construction and consumer loans, partially offset by net reductions in CRE, multi-family and residential mortgage loans.
Loan originations, excluding line of credit advances totaled $868 million for the quarter.
The pipeline at December 31st decreased $138 million from the trailing quarter to $1.2 billion.
However, the pipeline rate increased 2 basis points since last quarter to 3.57% at December 31st.
Our provision for credit losses on loans was a benefit of $2.3 million for the current quarter, compared with an expense of $6.4 million in the trailing quarter.
We had annualized net charge-offs as a percentage of average loans of 10 basis points this quarter, compared with net recoveries of less than 1 basis point for the trailing quarter.
Non-performing assets increased to 71 basis points of total assets from 42 basis points at September 30th.
Excluding PPP loans, the allowance represented 1.09% of loans, compared with 1.16% in the trailing quarter.
While it may seem counter-intuitive to see the allowance coverage of the loan portfolio declined while non-performing loans increased, this demonstrates our stable expectations of loss content in the loans that have been moved to non-accrual, while life of loan loss expectations for the performing portfolio have improved as a result of advances and the pandemic response and improved economic forecasts.
The expected migration of certain credits to non-performing status is reflective of the protracted economic challenges faced by certain borrowers in a sub-optimal operating environment, constrained by pandemic response restrictions.
Where we could no longer confidently support and more likely than not expectation that all contractually due principal and interest payments would be made, we have classified these credits as non-accrual regardless of whether they are receiving short-term deferrals in accordance with the CARES Act.
Loans that have been or expected to be granted short-term COVID-19-related payment deferrals declined from their peak of $1.31 billion or 16.8% of loans to $207 million or 2.1% of loans.
This compares with $311 million or 3.2% of loans at September 30th.
This $207 million of loans consists of $9 million that are still in their initial deferral period; $51 million in the second 90-day deferral period; $121 million required additional deferrals and $26 million that have completed their initial deferral periods, but are expected to require ongoing assistance.
Included in this total are $49 million of loans secured by hotels with a pre-COVID weighted average LTV of 43%; $36 million of loans secured by retail properties with a pre-COVID weighted average LTV of 58%; $30 million of loans secured by multi-family properties, including $21 million that are student housing related with a pre-COVID weighted average LTV of 61%; $5 million of loans secured by restaurants with a pre-COVID weighted average LTV of 50%; and $30 million secured by residential mortgages with the balance comprised of diverse commercial loans.
Non-interest income decreased $268,000 versus the trailing quarter to $20 million as growth in loan and deposit fee income, bank-owned life insurance income and gains on loan sales was more than offset by a decline in net profit on loan level swaps, gains on sale of REO and a small reduction in wealth management income.
Excluding provisions for credit losses on commitments to extend credit, merger-related charges and COVID-related costs, non-interest expenses were an annualized 1.82% of average assets for the quarter, compared with 1.92% in the trailing quarter, as the benefits of greater scale and planned acquisition cost saves were achieved.
Our effective tax rate decreased to 23.3% from 25.5% for the trailing quarter as a result of an increased proportion of income coming from tax exempt sources in the current quarter.
We are currently projecting an effective tax rate of approximately 24% for 2021.
We'd be happy to respond to questions.

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q4 earnings per share $0.53.

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