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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 I'm pleased to introduce Chris Martin, who will offer his perspective on our third quarter.
Our third quarter earnings improved as the economy recovered in a measured way, with protocols in place allowing businesses to reopen safely and for consumers to return to a semblance of normalcy.
At the end of July, we were able to close on the SB One acquisition, which substantially increased both our balance sheet and earnings potential.
Earnings per share were $0.37, including merger-related expenses of $2 million recorded during the quarter compared with $0.22 in Q2.
Total assets at quarter end rose to $12.9 billion.
The impact of COVID declined substantially during the quarter and related loan deferral levels to 3.2% of loans as of October 16, as we have seen a significant reduction in the number of consumers and businesses requesting part persistence.
The allowance and the related provision reflects the ongoing impact of the COVID-19 pandemic on economic activity, including the hospitality, retail-related CRE and restaurant sectors.
It remains uncertain when and if additional economic stimulus will be provided or when a vaccine will be approved, which may impact the ultimate collectability of certain commercial loans where borrowers have requested multiple deferrals or forbearance.
And we have proactively downgraded our most vulnerable loans, and we continuously review credit quality loan by loan.
We still do not know if and when losses will materialize, but we believe the first half of 2021 will be telling absent government assistance to trouble businesses and consumers.
Now Tom will go over the loan payment deferrals in more detail, but suffice it to say, we have performed a deep dive analysis of full borrower requests for relief and are pleased that so many have recovered and resumed normal payments with approximately 2/3 of those remaining in deferral currently paying interest.
Our credit quality is performing in line with our expectations at this point.
And the key to credit risk management has always been staying consistent with our policies, underwriting discipline and conservative loan structures.
We have been and continue to be proactive at identifying potential credit issues and working problem lines to minimize losses.
And in the end, we believe we're going to continue to have a strong credit quality performance through this cycle.
As a result of our combination with SB One, the loan portfolio increased by $1.77 billion, further augmented by net organic growth for the quarter of $218 million on loan originations of $587 million.
The pipeline improved during the quarter and the volume of loan opportunities has increased.
Regarding the $475 million of PPP loans we held at September 30, like many banks, we anticipated that forgiveness might have started by now.
However, we see a lack of urgency from the SBA, and the program is still being politicized by Congress.
As a result, PPP loans will remain on our balance sheet longer than expected, which will modestly impact our margin.
The yield on PPP loans is approximately 2.75%, and we have about $8 million remaining in related deferred fees.
Deposits increased $2.46 billion, including $1.76 billion added from the SP One transaction.
Included with the SB One deposits were $577 million in CDs, which were adjusted to market rates on acquisition, adding four basis points to our margin this quarter.
Core deposits represent 88% of total deposits, and our total cost of deposits was 33 basis points, among the best in our market.
Overall, our favorable cost of deposits reflects our strong long-standing client relationships.
Borrowings increased with $201 million coming from SB One, while the cost of borrowings declined during the quarter.
Capital levels remain strong and exceed all regulatory requirements.
And with PFS currently trading at 87% of book value, we see the repurchase of our stock as an effective use of capital and a great return for long-term stockholders.
The net interest margin held up well this quarter, and our expected earning asset growth will support total net interest income.
But the effect of historically low long-term rates will continue to challenge our net interest margin.
Funding costs will move marginally lower as borrowings and CDs reprice at maturity, but this may not be sufficient to fully offset declines in asset yields.
And while we have negotiated interest rate floors on the sizable portion of our portfolio and the rates on loans in our portfolio have improved, loan yields on new originations remain lower than portfolio yields.
Additionally, our loan portfolio is approximately 57% adjustable rate and has repriced downward, putting further pressure on the margin.
But our continued disciplined management of deposit pricing has mitigated this impact.
With the SB One merger completed, noninterest income increased as SB One Insurance Agency income was incorporated into the P&L, and we are excited about the prospects for this business line, given our substantial customer base.
Fees on retail banking services rebounded during the quarter, and wealth management fees improved with the market rebound from COVID shutdowns.
Loan level swap income was also up for the quarter.
Reflecting the addition of two months' worth of SB One expenses, the increase was primarily in compensation expense, legal and consulting expenses and severance costs related to the transaction.
Operating expenses to average assets and efficiency ratios remain strong, and we look forward to a decrease in expenses upon converting SB One to our data systems in November.
With that, I'll ask Tom to give some more detail.
As Chris noted, our net income was $27.1 million or $0.37 per diluted share compared with $14.3 million or $0.22 per diluted share for the trailing quarter.
Earnings for the current quarter reflect the $15.5 million acquisition date provision for credit losses on nonpurchased credit deteriorated loans acquired from SB One, partially offset by the favorable impact of an improved economic forecast.
In addition, costs specific to our COVID response fell to $200,000 from $1 million in the trailing quarter.
These improvements were partially offset by merger-related costs that increased to $2 million in the current quarter from $683,000 in the trailing quarter.
Core pre-tax preprovision earnings, excluding provisions for credit losses on loans and commitments to extend credit, merger-related charges and COVID response costs were $44.4 million.
This compares favorably with $35.9 million in the trailing quarter.
Our net interest margin expanded four basis points versus the trailing quarter as we reduced funding costs and grew noninterest-bearing deposits, while earning asset yields stabilized and we deployed average excess liquidity.
To combat margin compression, we continue to reprice deposit accounts downward and emphasize noninterest-bearing deposit growth.
Including noninterest-bearing deposits, our total cost of deposits fell to 33 basis points this quarter from 41 basis points in the trailing quarter.
Noninterest-bearing deposits averaged $2.21 billion or 25% of total average deposits for the quarter, an increase from $1.85 billion in the trailing quarter, reflecting the SB One acquisition and organic growth.
Noninterest-bearing deposits totaled $2.38 billion at September 30, and average borrowing levels increased $43 million and the average cost of borrowed funds decreased 12 basis points versus the trailing quarter to 1.19%.
This rate reduction was partially offset by subordinated debentures acquired from SB One that had an average balance of $16.4 million at an average cost of 4.99% for the quarter.
Quarter end loan totals increased $2 billion versus the trailing quarter, reflecting $1.8 billion from the SB One acquisition and organic growth in CRE, construction, multifamily and C&I loans, partially offset by net reductions in consumer and residential mortgage loans.
Loan originations, excluding line of credit advances totaled $587 million for the quarter.
The pipeline at September 30 increased $71 million from the trailing quarter to $1.4 billion.
The pipeline rate increased 12 basis points since last quarter to 3.55% at September 30.
The increases in pipeline volume and rate reflect the acquisition of the SB One loan pipeline and are requiring higher spreads and floors.
Our provision for credit losses on loans was $6.4 million for the current quarter compared with $10.9 million in the trailing quarter.
This reflects a day one provision of $15.5 million for the acquired non-PCD loans partially offset by the impact of improvements in the economic forecast.
We had annualized net recoveries as a percentage of average loans of less than one basis point this quarter compared with annualized net recoveries of one basis point for the trailing quarter.
Nonperforming assets increased slightly to 42 basis points of total assets from 37 basis points at June 30.
Excluding PPP loans, the allowance represented 1.16% of loans compared with 1.17% in the trailing quarter.
The allowance for credit losses on loans included $13.6 million recorded as part of the amortized cost of PCD loans acquired from SB One.
Loans that have been or expected to be granted COVID-19-related payment deferrals or modifications declined from their peak of $1.31 billion or 16.8% of loans to $311 million or 3.2% of loans.
This $311 million of loans includes $48 million added through the SB One acquisition and consists of $27 million that are still in their initial deferral period, $85 million in the second 90-day deferral period and $199 million that have completed their initial deferral periods, but are expected to require ongoing assistance.
Included in this total are $92 million of loans secured by hotels with a pre-COVID weighted average LTV of 56%; $44 million of loans secured by retail properties with a pre-COVID weighted average LTV of 56%; $31 million of loans secured by restaurants with a pre-COVID weighted average LTV of 49%; $15 million secured by suburban office space with a pre-COVID weighted average LTV of 66%; and $43 million secured by residential mortgages, with the balance comprised of diverse commercial loans.
Noninterest income increased $6.3 million versus the trailing quarter to $21 million, as swap fee income increased $3.2 million.
The addition of SB One Insurance Agency contributed $1.7 million for the quarter.
And wealth management income increased $870,000 versus the trailing quarter.
In addition, deposit ATM and debit card income increased $750,000 for the quarter with the addition of SB One's customer base and the easing of pandemic-related consumer restrictions, partially offset by a decrease in bank loan life insurance benefits.
Excluding provisions for credit losses on commitments to extend credit, merger-related charges and COVID-related costs, noninterest expenses were an annualized 1.92% of average assets for the quarter compared with 1.86% in the trailing quarter.
These core expenses increased $9.7 million versus the trailing quarter, primarily due to the addition of SB One personnel, operations and facilities.
Our effective tax rate increased to 25.5% from 20.6% for the trailing quarter as a result of an improved forecasted taxable income in the current quarter.
We are currently projecting an effective tax rate of approximately 24% for the balance of 2020.
We'd be happy to respond to questions.

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compname announces third quarter earnings per share $0.37.
q3 earnings per share $0.37.

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