Q3 2019 Earnings Call
Good morning, welcome to the Provident financial services Inc. third quarter earnings Conference call.
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I would now like to turn the conference over to London, Gleason Investor Relations Officer.
Please go ahead you Debbie.
Good morning, ladies and gentlemen, thanks for joining us today, the presenters for our third quarter earnings call or Chris Martin Chairman, President and CEO .
Online senior Executive Vice President and Chief Financial Officer.
Before beginning their review our financial results, Yes that you. Please take note of hours and the caution as any forward looking statements that maybe make journey coarser todays call Oh.
Oh full display what can be found in this morning's earnings release, which has been posted to the Investor Relations page on our website Providence got back.
Okay, well get to introduce Chris Martin who offer his perspective on the core Chris.
Oh, Thank you, let Matt good morning, everyone.
Probably its operating results were impacted by more than your question, which is being experienced by number of financial institutions and this lower interest rate environment.
[laughter] policy has been supporting continued expansion the economy tempering the impact of possible tariffs and geopolitical challenges.
Yeah, that's the balance sheet remains strong and noninterest bearing deposit growth in the third quarter helped to ameliorate the margin compression.
We have also reprice negotiated deposit rates, while being mindful of the overall business relationships, we have with these customers.
As Tom will detail core margin impact was not a severe compared to the trailing quarter as we experienced a recovery in Q2, which had a onetime positive impact on the market.
Earnings per share a pretty big Q3, and our annualized return on assets was 1.26% for the quarter, while our return on average tangible equity is 12.97%.
Morphing into Russia will be the headwind going into 2020. That's it appears that that's policy will continue to be more accommodating.
Rates have been volatile in the yield curve is flat and significantly over the past year.
That's always net interest income will be influenced by a number of factors, including loan growth pricing spreads the level of rate and the slope of the yield curve.
And because our loan portfolio leans towards a more adjustable at variable rate versus fixed will be impacted by lower yields.
We anticipate our net interest margin will decline by two to four basis points in the fourth quarter, given the impact of the September and possible October rate cuts.
Deposit pricing dynamics remain very competitive in our market awareness being less money market and special CD promotions.
Pricing discipline for deposits appears to have returned to our markets loan terms and conditions continue to be aggressive.
We continue to maintain our credit standards, it's at low pricing based on total return assessments.
As for loan growth commercial pay offs continued an elevated level with over half refinanced away and the remainder paid off from the sale of the collateral property.
The pipeline increased over the previous quarter, although we have to issue more term sheets to achieve openly levels.
The level of private equity and insurance company at GNC involvement has tempered our growth expectations. So we select those opportunities that meet our return hurdles and credit criteria.
And why do we don't see a recession on the horizon anytime soon we're being cautious in selected areas for new loan originations.
Credit quality has been on even as we analyze relationship it's no wonder showing strassmann, particularly industry sectors that will not performed well in mature business cycle.
Well Michael at some point the economy will experience a credit downturn, we remain disciplined in terms of our loan origination quality and our credit parameters, regardless of the competitive environment.
Charge offs were elevated during the quarter as we wrote off the commercial relationship that didn't fully reserved for in Q2.
We're not seeing systemic issues that materially change our conservative credit prospectus for the balance of 2019 or 2020.
That's very seasonal we're still me implementation phase and the ultimate effect will depend on the composition of our loan portfolio the portfolios credit quality and economic conditions at the time that adoption as well as any adjustments and alterations to our models methodology and other material assumptions.
We're not yet at a point, where we can disclose any impact to capital or reserve levels.
On the deposit from average non interest bearing deposits increased $56 million first with the trailing quarter accompanied by increases in average time deposits money market and broker deposits, partially offsetting decreases in average now checking and savings deposits.
Average borrowings increased in volume yeah costs were lower by five basis points. Despite the impact of the repo market dislocation in September which caused a material increase in rates for several days.
Core deposits represent 87.9% of total deposits as a quarter red.
Non interest income improved during the quarter, but the majority coming from fees on low level swap transactions and loan prepayment fees.
And our cost remain well contained with increases in comp and benefit costs, largely offset by decreased FDIC insurance expense in data processing costs.
Our efficiency ratio for the quarter at September Thirtyth, 2019 was 54.31% and annualized net interest expense to average assets was 1.99% for the same time period.
We continue to manage our expenses module that will be required by regulators to further build upon our risk and compliance areas as we approach $10 billion in assets.
We've also invested time and treasurer employing box to perform repetitive processes, along with operational decision, making improvements we're investing in our digital channels to upgrade the customer experience an ability to self serve along with enhanced access to alternate pena channels.
The behaviors continued to evolve and we must adapt to compete with a large money center banks and financial intermediaries.
That's for M&A, we have been involved but if you're not first you are last our disciplined approach to acquisitions has always been about the enhancement of the combined entity, including management culture and franchise value, while ensuring accretion to earnings and a reasonable earn back of the tangible book value dilution.
We invested in ourselves by repurchasing over 670000 shares of our stock this quarter during periods of market weakness.
We evaluate especially use of our capital on a daily basis and continue to selectively look at many deal opportunities.
We listen to and read our commercial clients in retail customers, who continue to see moderate demand.
No widespread issues related to trade uncertainty and interest rate movements, not the optimism reign Supreme but the core economy continues to perform above the expectations of men.
We feel our balance sheet is well positioned and we'll continue to grow within the limits of the economy and consumer confidence.
With that Tom will go over more details on the quarter Tom.
Thank you, Chris and good morning, everyone.
Our net income was $31.4 million or 49 cents per diluted share compared with 35.5 million or 54 cents per diluted share in the third quarter of 2018, and 24.4 million or 38 cents Leach <unk> per diluted share excuse me in the trailing quarter.
Current quarter revenue was consistent with last year's third quarter at $92 million, our net interest margin contracted 19 basis point versus the trailing quarter and 15 basis point versus the same period last year.
Recall that the trailing quarter margin was increased 10 basis points due to the recognition of 2.2 million in interest income from previously not accruing loans.
Excluding the impact that it would seem to this nonaccrual loan interest in the trailing quarter, our core margin, which also excludes lumpy payments these contract the nine basis points versus trailing quarter.
Combat this margin compression would be done repricing deposit accounts negotiated the exception rates is roughly 60 million reduced by 25 basis points effective August fares and another 300 million reduced by 25 basis points effective October 1st.
We will continue to manage liability cost as the rate environment evolves and competition becomes more rational.
In addition, we continue to emphasize the acquisition of noninterest bearing deposits, which grew 56 million on average are an annualized 15% versus the trailing quarter to $1.5 billion.
What are on loan totals decreased $27 million from June thirtyth as growth in CRM and construction loans has outpaced by net reductions in senile multifamily consumer and residential mortgage loans.
Well in originations excluding line of credit advances fell 56 million versus the trailing quarter 354 million and pay offs remained elevated 37 million more paying off in the current quoted in the trailing quarter.
The pipeline at September Thirtyth increased to 1.1 billion from 979 million at the trailing quarter in the pipeline. However has decreased 45 basis points since last quarter to 4.11%.
The lower pipeline reflects current market conditions in Atlanta Treasury rates.
We intend to manage the balance sheet through December 31st to stay below the 10 billion dollar asset threshold to avoid the durbin impact on interchange revenues in 2020.
Our provision for loan losses was $500000 for the core current quarter compared with nine and a half million in the trailing quarter last quarter's elevated provision is largely driven by $5.7 million credit to commercial contracted it was fully reserved the deterioration in that credit abuse dependent is off to the bar taking on larger projects slow payments from customers and apparent employee default Asia.
That balance was charged off in the current quarter driving our quarterly annualized net charge offs as a percentage of average loans to 33 basis points.
Overall credit metrics were stable this quarter nonperforming assets totaling 42 basis points of total assets at quarter end.
The allowance for loan losses to total loans decreased to 79 basis points from 86 basis points and trailing quarter as a result, with the aforementioned charge off only reserve balance.
Noninterest income increased by 2.2 million versus the trailing quoted $18 million level swap income increased 1.8 million in loan prepayment fees increased 644000 versus the trailing quarter.
Non interest expenses when annualized 1.99% of average assets for the quarter expenses were flat at 49.7 million versus the trailing quarter helped by the recognition of the small bank assessment credit on FDIC insurance and 660000 for the quarter.
Our total remaining credit potentially realizable in future quarters is 1.8 million.
Our effective tax rate decreased to 24% and 26.5% trailing quarter by quite a tax rate was elevated resulted increase provisioning related to the publication of the technical bone and specifies the treatment real estate investment trusts in connection with combined reporting from New Jersey corporate business tax purposes.
We are currently projecting an effective tax rate of approximately 24% for the remainder of 2019 and thereafter.
That concludes our prepared remarks should be happy to respond to questions.
We will now begin the question and answer session. Please ask the question.
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This time, we will pause momentarily to assemble our roster.
The first question comes from Mark Fitzgibbon with Sandler O'neill and partners. Please go ahead.
Hey, guys Happy Friday.
You also.
Thanks.
Oh I'm, Tom just to clarify did you say that there was a million eight in remaining FDIC assessment credit.
That's correct, Okay Super and then secondly, I wondered if you could kind of break out some of the major items.
In the fee and other income lines from the linked quarter what were some of the big Delta is there.
Sure really just driven into categories Martins of all categories prepayment fees on loans were up 2 million and a half from 873000 in the trailing quarters. So that 644000 at it and then the big piece was in the profit on swaps $2.7 million for the current quarter versus 896000 in the trailing quarter. So a million eight of improvement there.
I know there volatile items, but how are you thinking about them for the fourth quarter. I mean are we might have looked good and each other income overall I'd say probably.
Seen $17 million is kind of the midpoint kind of range, where we expect going forward.
Okay.
And then you said you're going to keep the balance sheet under 10 billion for the rest of this year, which makes sense.
When you grow through it organically in the first quarter do you think.
Assuming you don't find an acquisition.
I do believe by the end of the first quarter, we should be there yet yeah. Mark. This is Chris we've modeled it looks like in the first quarter towards the end of that absent any no extreme level payoffs and we would go through and that first quarter timing of acquisitions. As you know serendipity, we don't know when that will happen and if there is anything that there would make sense.
Okay, and then I apologize if I Miss it but did you indicate how much a 25 basis point cut would mean to your margin.
I think I'd, just Chris covered and when he said probably two to four basis points in the back half of the year, that's expecting a cut next week and potentially one in theory.
Gotcha.
Great. Thank you.
Thank you.
The next question is from Russell Gunther with D.A. Davidson. Please go ahead.
Hey, good morning, guys.
Good morning.
Hi, Chris could you elaborate a little bit on.
What you're referring to in terms of sending a selective areas, where you become a little bit more cautious.
Sure. We certainly have looked at the the contractor area subcontractor. We are we had pulled back over the last several months and some of them are doing fine. We just don't think the exposure to make sense in this late business cycle.
And then also in the hospitality industry, specifically hotels watching that market a little bit. So the economy may sonos start to get a little struggle that's on air who want to be a heading up. So those are the two areas that we are pretty much a looking at the reducing out or keeping our exposure limited in the way of.
New originations.
Got it Okay. I appreciate your factor there and then I guess, the flip side and that obviously, it's been a bit in a challenging environment for growth it sounds like deal.
Again, you said cross organically in the first quarter and maybe just share a little bit about what the opportunities are in the long growth outlook being an asset class or geography.
Well, we're still seeing pretty good growth in the industrial space, especially in the warehouse area. That's the continued to grow.
We don't get a lot of the permanent on the multifamily construction deals that we've been doing.
So we try the agencies are giving up a lot more of interest only periods that we just don't think it's prudent and we'd all back to capacity.
Those are two main areas I think that we have been focusing in on if there's opportunities in those spaces.
And the other than that retail a little bit and limited is like in self storage areas, but I think it we kind of look at every package on its own merits and how it's structured from a credit perspective.
Hey, good Okay got it and then switching gears quickly.
At least mentioned continued tech investments and as well as around compliance just give us a sense for kind of what the franchise investment relates to there and how that may impact the expense run rate going forward.
I can comment to the run rate I think I think we're going to take up a little bit in Q4.
Final simply Cecil implementation related costs.
So probably in the 50 to 15 and they have and arrange for Q4.
We expect to sustain that to a degree golf over I think we're going to be able to offset with some of the.
The the in house improvements efficiency improvements, we've made largely offset some of the increases in technology spend.
Yeah I think this is Chris again, we look at the we've been spending money and hiring people thinking of adapting to already being a 10 billion dollar company. The regulators are here and already work along with us to make sure that we were trying to adhere to everything they're expecting and at that point, we have hired in the risk area compliance.
Area certainly some scale so they're already in some of our numbers to begin with as Tom alluded to it can be a little bit more seasonal and and then perfecting a all these items and making sure. We're in a right place on the back end as I spoke to in my comments using a again some robotics to do some rudimentary.
Things that are being done with a lot of people were able to do the a better decisioning through our use of analytics and a high and those are there the expenses, we'd like to actually putting them because we think they're going to result in the operational efficiencies going forward.
Very helpful. Thank you guys I appreciate it.
Thank you.
Next question is from Collyn Gilbert with KBW. Please go ahead.
Thanks, Good morning, guys.
So Chris just back to that to the comment you made on on kind of loan growth an appetite along those lines of the pipeline at your <unk>. You've got currently and you indicated kind of a four point I think you said, 4.11% ammonia can you just talk about sort of it the mix of that the structure of that and.
And sort of how you see loan pricing trending as we kind of move into the next couple of quarters is afraid told where they are.
Sure I'll start on that not talking about the yield, but it's a it's pretty good mix all only like diversification. So you're talking about CRH approximately 345 million in the pipeline.
Our middle market about 218 million in the pipeline.
Business banking, meaning smaller type of see loan so 255 million.
Pennsylvania area, which has a blend of bulk of seelye areas of 176 million and then rising consumer approximately 100 million. So that adds up to about a billion billion won.
But the rate coming in is definitely lower if we look at continuing to originate variable rate loans, Tom maybe give some color on the rate of return.
Yeah again, we hope to our.
Return on equity targets Muse loan pricing mileage is very competitive out there and I think that's been one of the reasons why we've struggled a little bit maybe we're a little bit more disciplined and some other folks we will compete on price we always try to maintain structure, though so that's why you saw the loan yields come in at the on rates for the quarter, where for 22, that's down from 462 less last quarter.
So it's really reflecting current market conditions I think the tenure was down 66 basis points on average in the in the one month LIBOR was down I think 44.
Like that.
Okay. Okay are you seeing much I mean big variations among those loans segments as it relates to pricing I mean, where you kind of seeing your best pricing and where are you seamless and allow us pricing.
Oh in terms of just the highest yovanno consumer would be the highest in commercial real estate is probably the best after that in terms of return.
Guess middle market CRM, probably the best returns.
Okay. Okay, and then just in terms of the comment about the pull through rate has declined what Jim.
Maybe talk a little bit about what's what's driving that are what why that's the case.
Well, we're I certainly think doesn't our commercial real estate area. Most of time, if we've gone down a path on it term sheet, we pretty much baked it we're going to get at our clients know that they go down a path we're pretty competitive.
It's more on the see an eye space.
And it's not it's geographically indiscriminate, meaning, Pennsylvania, and New Jersey, there are levels in the scene I space that we just can't figure out how people would do a deal or just if for instance at and T.A. somebody was doing something at prime minus 65 basis points and ER with nonrecourse no covenants, we don't think.
Thats prudent.
I think many would.
But we think that our levels of trying to hold those people are undercutting them, a we try to stick to what makes sense.
If the returns are there will be involved as Tom alluded to pricing yes.
Structure no.
I think that some of the it's just not worth the return if you can get that growth the offset your NIM compression, but that will be short lived.
Got it okay. Okay. That's helpful. And then just flipping to the to the funding side [noise].
You know you guys indicated where you're starting to drop 'em pricing on 60 million in 300 million or deposits, but is there.
Is there more to do on that or how do you sort of how are you thinking about kind of the aggressiveness with what you're going to drop.
There is we're currently evaluating a November onest for another look.
There is about $700 million that has a local negotiated pricing and that's not including the municipal portfolio. So there's some opportunities to bring rate that.
Okay, just curious whats the blended rate on your municipal book right now on the deposits.
[noise], we don't have that call I think it's probably a little over one.
Okay. Okay.
All right. That's helpful. And then I guess, just lastly, Chris in your opening comments I'm just going to try to quote you. What you said, but on the M&A front. What did you say you said if not first your last.
I'm just curious what you meant by that Oh.
Okay basically if you don't you come in a close second you don't win anything by not getting a deal done.
So there is no second place.
Do you when a deal are you don't want to deal there's not many deals that you get called back in after the fact that okay. The.
Possible, a acquiring messes up and you get called back to the table, we have not seen that.
Long history.
So what I say, it's like we put in we think.
And and aggressive as makes sense, but they say what you were you were in second place that really isn't make you feel good.
Got it okay. So it's just that the the pricing on the first better is so good that there's there's just no.
Further.
Discussion among others as well.
Well I guess, the only goes back to what how the of the person that being maybe being a acquired looks at all the things are supposed to shareholder value culture management.
Positioning and the future because they're selling their their interest to another entity. We think we match up to a lot of those it just happens to be somebody is a little bit more aggressive in their assumptions and or have a lot more better cost saves that we don't.
To that point do you think do you do you think that the sellers are taking into consideration a lot of those qualitative factors that your that you're mentioning or do you think it is seems to be more of a have a quantitative decision.
I think quantitative has to be there, but I think qualitative is giving everybody an opportunity to say I'd I'd like a certain company or certain approach. So I think you have to have a good culture and a good management structure I don't think anybody just doing something from a math standpoint any longer.
Okay. Okay, and then just lastly, just Tom on the repurchases you guys, obviously button a nice like this quarter should we assume a similar level going forward or and then how do you want it how should we be thinking about that in 2020. Once you start to really kind of restart the growth engine again.
No really it's been market condition dependent we stepped in one of the market pricing that that had a bit we try to look at that at the tangible book value dilution versus the earnings accretion think about it in terms of creation or destruction of value using multiples on on a on an earnings basis on the tangible basis, and see where those normalized movies euro out as one way we look at it.
And then we look given the reasonableness test overall enterprise the tangible book, we paying back at and what the or that is on the service three transaction. So it really is market price dependent how much we step.
Okay.
Okay.
Okay I'll leave it there thanks guys.
Yeah.
The next question is from Stephen do Wong with RBC capital markets. Please go ahead.
Hey, good morning, guys.
Good morning, just so just going back to the M&A.
Do you make a comment just particularly in a wealth management space or the or banking space.
Well a comment for mostly in the bank space of late.
Got it okay great.
And then I appreciate the color.
Guide on the that NIM can you remind us what your deposit beta was in the last cycle in it and if you think it will behave similarly in this current cycle.
Tom It looked like they now I don't have my year to date with me because once we flipped the direction I Didnt printed out I'm trying to remember I think it was in the Thirtys, Steve but I think it back you look at Bay to walk through the through the rising cycle.
Okay, Great and then just lastly, just back on the capital crimes.
I guess, you've done special dividends before is there a preference between special dividends versus buybacks.
I think that's really just market price dependent yeah, Jerry makes the most sensible that.
Okay, great well, that's that's it for me everything else is had been answered I really appreciate thanks guys.
Thank you.
This concludes our question and answer session.
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