Q3 2021 Provident Financial Services Inc Earnings Call
Good morning, and welcome to the Provident Financial services incorporated third quarter earnings call, all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to Adriana Duarte Investor Relations Officer. Please go ahead.
Thank you Anthony good morning, everyone and thank you for joining us for our third quarter earnings call. Today's presenters are chairman and CEO, Chris Martin President and Chief Operating Officer, Tony <unk>, Senior Executive Vice President and Chief Financial Officer, Tom Lyons.
Before beginning their review of our financial results. We ask that you. Please 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 Provident Bank now, it's my pleasure to introduce Chris Martin.
Who will offer his perspective on the third quarter Chris Thank.
Thank you Amy.
Provenance third quarter results were strong and we believe the business climate is promising as we look into Q4.
Earnings of $40 49.
In the quarter exceeded last year's results by 32%.
The performance was augmented by several factors, including an improving economy as it continues to climb out of Covid restraints better credit metrics and the achievement of earnings acceleration from the acquisition of SB one.
The quarter was marked by growth in net interest income and a strong return on average assets of $1 one 1%.
And return on average tangible equity of 12, 4%.
Based on their confidence in our earnings outlook, Our board approved an increase in our quarterly cash dividend to <unk> 24 per share representing an increase of four 3%.
During the quarter, we also repurchased approximately 630000 shares of our common stock at an average price of $22.04 per share.
Our capital position is strong and comfortably exceeds well capitalized levels.
As Tony and Tom will detail in their remarks, we are dealing with excess liquidity not unlike many other financial institutions.
We are diligently deployed a portion of that liquidity into securities, but obviously loan growth would be our preferred investment.
We anticipate the fed will commence tapering their quantitative easing purchases in the fourth quarter, which we hope will result in a steepening of the yield curve.
This always takes a while to make an impact but would signal a positive economic outlook.
A moderate amount of inflation would be positive for the bank.
With a fairly neutral interest rate risk position excess liquidity and stable low cost deposit funding, we continue to be well positioned to benefit from a rise in interest rates, while remaining well protected if rates remain low.
The focal point for Providence was our loan growth ex PPP, which contributed to increased net interest income and a strong quarter and loan pipeline, which reflects customer confidence and provides positive momentum for respectable growth going into the fourth quarter.
In terms of pricing the weighted average rate on our loan pipeline has increased reflecting movement in the treasury curve.
The market remains aggressive in our lenders faced competition on rates from banks and on structure from Nonbanks.
In spite of the challenging environment, we win deals because of our relentless focus on delivering a best in class customer experience.
Our core deposit growth continues to be strong in both the.
Consumer and commercial areas and our cost of deposits remains one of the best in our markets.
And we're also seeing growth in the wealth management insurance businesses, and we would expect that organic growth to continue.
Asset quality improved and charge offs were negligible as the economy continues to improve.
And core operating costs are well controlled as reflected in our adjusted noninterest expense to average asset ratio of 185%.
And an efficiency ratio of 54, 5% for the quarter.
I remain highly enthusiastic about the prospects within our markets and the drive and motivation of our banking teams will continue to spur growth enable us to continue to deliver long term shareholder value.
With that I'll ask Tony to add more context Tony.
Thanks, Chris.
Chris has given some highlights of our strong third quarter performance and Tom will give further details later in the presentation.
I would like to share with you thoughts about our performance of our key lines of business and areas of focus.
Based on certain trends that we're observing we believe the economic outlook for the fourth quarter and leading into 2022 looks promising.
This supports improved growth and.
And continued solid profitability for the remainder of the calendar year.
Our commercial lending group continues to demonstrate strong productivity in the third quarter, we closed $514 million of new loans, an increase of 29% from the prior quarter.
While prepayments adjusted for PPP are down from the prior quarter, they remained higher than we desire.
Of note nearly half of our commercial loan prepayments were driven by the sale of the underlying business or asset.
In addition, our line of credit utilization percentage remains roughly 28% compared to the historical average of approximately 40%.
Which equates to about $190 million in potential additional outstanding loan balances.
Nevertheless, our production exceeded the pressures of the current operating environment and as such we grew our commercial loan portfolio, excluding PPP at an annualized rate of nine 4%.
Notwithstanding our significant loan production and the fierce competition at quarter end, our pipeline remains robust at approximately $1 6 billion.
The pull through adjusted pipeline, including loans pending closing is approximately $1 billion.
Of note our expected pipeline rate increased 12 basis points from the last quarter.
We project good pull through and if prepayments are stable, we should meet or exceed our loan growth expectations for the remainder of the year.
We continue to experience good growth in our core deposits, particularly noninterest bearing demand.
Which grew at an annualized rate of 12%.
And presently comprised 24% of our total deposits.
Our total cost of deposits for the quarter declined three basis points to 23 basis points and is amongst the best in our peer group.
While we are in a raising liquidity cycle that has driven margins lowered throughout the industry our growth and low cost deposit franchise continued to drive value, which is demonstrated by our continued increase in net interest income.
We continue to grow fee revenue largely through Beacon Trust in SB one insurance.
Adjusting for nonrecurring items related to the SB one merger SB, one insurance increased its operating profit 10% from the same quarter last year, driven largely by a strong retention ratio of 96, 4%.
Beacon Trust also had good performance with assets under management, increasing approximately 17% to about $4 billion and revenue increasing 16% over the same quarter last year.
As I have mentioned in the past both Beacon Trust in SB, one insurance or value add for our clients and the bank.
We are seeing increased opportunities and referrals among all of our lines of business, which make our growth prospects more exciting.
Looking forward, our focus is to enhance our asset mix and deploy more of our excess liquidity, which should improve our margin and more importantly grow net interest income.
Our fee based businesses are important to us and we want to accelerate their growth and strengthen the synergies with the bank.
Lastly, we have a number of initiatives that will modernize certain business processes that are aimed at reducing friction and improving the digital journey for our employees and customers as we accomplish our goals, we will increase our franchise value and improve our total return to our shareholders with that I will turn the call over to Tom for his comments on our financial performance.
Tom.
Thank you Tony and good morning, everyone.
Our net income for the quarter was $37 3 million or <unk> 49 per diluted share compared with $44 8 million or <unk> 58 per diluted share for the trailing quarter.
Earnings for the current quarter included $2 million of provisions for credit losses on loans and off balance sheet credit exposures, while the trailing quarter benefited from $8 7 million of net negative provisions.
Pre tax pre provision earnings were a quarterly record $52 1 million or annualized 155% of average assets.
Current period earnings featured record quarterly revenue, including record net interest income and noninterest income.
While we did experienced modest net interest margin compression as a result of ongoing elevated liquidity.
Earnings on the $166 million increase in average interest, earning assets, partially offset the impact of declines in yields and lower PPP income.
Income recognized from PPP loan forgiveness fell $402000 versus the trailing quarter to $2 5 million and remaining PPP deferred PPP fees totaled $3 2 million at September 30.
Meanwhile, funding plus Val as average deposits increase in average borrowings declined.
Average noninterest bearing deposits increased $74 million versus the trailing quarter and the total cost of deposits declined three basis points to just 23 basis points.
Pull through adjusted loan pipeline at September 30 was consistent with the trailing quarter at $1 1 billion and the pipeline rate increased 12 basis points since last quarter to three 4%.
Excluding PPP loans period end loan totals increased $153 million.
Annualized six 4% versus June 30.
Loan growth occurred primarily in the CRE category.
Our provision for credit losses on loans was $1 million for the current quarter compared with a benefit of $10 7 million in the trailing quarter.
Asset quality metrics, including nonperforming loan levels early stage and total delinquencies criticized and classified loans and all related ratios improved versus the trailing quarter.
We had net charge offs of $1 $9 million or an annualized eight basis points of average loans this quarter.
Nonperforming assets decreased to 51 basis points of total assets from 62 basis points at June 30.
Excluding PPP loans, the allowance represented 80, 585% of loans compared with eight 8% in the trailing quarter.
Noninterest.
Net income increased to $23 4 million helped by income recognized from a $3 $4 million reduction in contingent consideration related to the earn out provisions of the 2019 purchase a registered investment advisor touch well in low <unk>.
We became subject to the interchange fee limitations of the Durbin Amendment, this quarter, which reduced revenue by $1 1 million compared with the trailing quarter.
Excluding provisions for credit losses on commitments to extend credit and merger related and Covid expenses in 2020 operating expenses were an annualized $1, 85% of average assets for the current quarter compared with $1 eight 4% in the trailing quarter and $1, 92% for the third quarter of 2020.
The efficiency ratio was $54 five 1% for the third quarter of 2021, compared with $54, one 2% in the trailing quarter and $56, 72% for the third quarter of 2020.
Our effective tax rate was 25, 7% versus 25, 4% from the trailing quarter and 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.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Mark Fitzgibbon with Piper Sandler you May go ahead.
Hey, guys good morning.
Good morning, good morning.
Couple of questions around the margin I guess, Tom It looks like you have some room for CD and borrowing repricing down what is the maturity schedule look like on those buckets.
Hey, Mark.
On the deposit side over the next 12 months, we have about $622 million maturing.
The expected pickup in rates about 29 basis points.
We also have $197 million worth of borrowings coming due over the next 12 months and the pickup there is about 116 basis points. So again all in 808.
$820 million worth of funding that's going to reprice over the next 12 months with about a 50 basis point pickup should be about three points on the margin.
Okay great.
And then am I thinking about it the right way that you'd recognize most of the remaining PPP income in <unk> that $3 2 million and then after which the margin kind of drops down into sort of low mid.
<unk> hundred 90 range.
Yes, that's our expectation that core margin. This quarter was $2 87 that was down from $2 90 in June so we're in three basis points on a core basis, excluding PPP, but yes, we think the $3 2 million and largely be recognized in Q4 was a little bit of trailing into the first quarter 2002.
Okay, and then I guess I was curious I saw that charge or the contingent consideration that you took back from <unk> loewy.
What hurdle didn't they hit that caused that to be triggered.
Our revenue retention. So there was that there were two components to the earn out provisions and one of them was retention of customers off of the base year.
While market performance. They are they are in direct the revenue run rate piece. The revenue retention piece doesn't consider market performance in the intervening period and they fell short on that.
Well I think it says we structured the deal appropriately because we still got the returns we were looking for and paid the price it was appropriate for the business that we acquired.
Okay, and then last question.
Chris and Tony It sounds like you guys are really upbeat on the prospects for your business I guess I am curious what part of your business are you. Most excited about these days or where maybe.
If you don't want to answer that maybe you could share with us sort of which business do you think has the greatest greatest growth potential.
Thank you.
Sure I mean, you heard it both in Christmas tenor in mind.
I think we're excited about all of them, but with varying degrees first first I think we kind of alluded to the commercial bank.
The rate, we're replenishing the pipeline and the level of closings or closings or over 70% higher than they were in the first quarter, which is what we've been pointing to.
We're seeing the number of asset sales diminishing so the expectation although you can't.
Really fully predicted is that prepayments will continue to slow.
Our production will continue to increase and those two variables will show some good <unk>.
The net book.
We did skinny down the consumer side, which are trying to change the asset mix. So the asset mix shift and deploying the excess liquidity is going to have a wonderful effect on our margin, but I will tell you. The other dynamic that we're seeing is the the interplay between all of our businesses as I mentioned.
The insurance company is working regularly with the commercial bank, we're seeing more referrals go to Beacon then than we have so that's exciting because the businesses are doing this with a willingness theres no theres no forced by me or Chris I mean, it's really good to watch and play so I'm expecting all the non fee based businesses to continue to grow.
In our commercial book to continue to expand.
So that should bode well for both non net interest income margin and noninterest income.
Thank you.
Our next question comes from Michael peer to peer with BW you May go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Good morning.
Morning.
I wanted to follow up on the NIM quickly so.
Alright to $2 87 core and you have the three basis point pickup from the funding that gets you back up into that $2 90 range and then.
That part of it is pretty pretty clear I guess my follow up question was more along the sidelines at the pipeline of the $1 6 billion in loan pipeline just curious what the pricing the incremental pricing has looked like.
As we move forward here and how that compares to some of the loans that order would be replacing on the backlog.
Well I mean, we did mentioned that the pipeline right.
Is higher than what it is still lower than our current book rate.
So as I mentioned, we're in the cycle, where not only the liquidity is pushing the margin down but the.
Low low interest rate environment.
The way to make that often and preserve the margin has to have to make sure you have the growth that you need and changed your asset mix by deploying the excess liquidity.
More from securities and into loans, Yes, I think thats, where we see it stabilizing and then hopefully improving margin over a little bit of time as we remix the balance sheet and see more loan growth absorb some of the the current liquidity that was deployed.
Actually as Chris noted into the investment securities portfolio, but still have a fair amount of work to do in terms of cash and short term assets on the on the balance sheet.
Sure.
Helpful makes sense and then do you guys mind, just walking us through how you think the bank's balance sheet is positioned for for rates today. I mean, obviously the funding is has improved and the loan pipeline looks good and to the extent you guys can remix that should help the NIM, but if we start to see short term rates moving at some point next year.
You guys have any kind of expectation around how that might impact you.
And a high performance.
We model fairly neutral slightly asset sensitive.
I think we're a little bit conservative in our deposit beta assumptions that like so I think we are more asset sensitive than we've typically had in disclosures. We have an ongoing deposit study now to try and support some of those assumptions a little bit.
A little more precise on some of those assumptions.
So I mean, there's there's a fair amount I think its $2 6 billion in floating rate loans, a big chunk of that is tied to LIBOR.
So we see a rise in the short and we should see benefit fairly immediately on a good chunk of that.
<unk>.
And again I think that the funding base is very stable and low cost. So I don't see us re pricing up in any dramatic fashion.
Helped by the amount of liquidity in the marketplace, there's really not a lot of competition on rates. These days.
Got it helpful. And then just last for me and then I'll step back just on the on that.
The expense line moving forward kind of a lot going on out there, particularly on the on the wage side and personnel turnover and just curious if maybe.
You can provide an update on kind of how you how you see that those dynamics impacting your business, but then also maybe.
Just some near term commentary on where we think kind of the core operating expense could trend.
Given some of the inflationary pressures out there. Thanks.
I'll comment on the near term first.
We saw expenses pick up a little bit in this quarter largely related to it related to an increase in incentive compensation accruals I think we're going to see that maintain going into the final quarter of the year at about the same level, so call it $61 million to $62 million, excluding the provisions for commitments on credit.
Losses on commitments.
And that's pretty much where we stabilize I think I think the part of the question was we've seen the labor for shift I think our dynamic peers we.
We see some pretty good stability and also attracting good talent has not been an issue for us of late so.
I wouldn't suggest that we have a huge vacancy factor in our numbers.
Good to hear thank you guys.
Yes, Chris just to add a little bit it fell so that when you have good quality people doing good things they are sometimes wooed over by others and so we deal with that is the balancing act all the time such as you.
You get good people coming in on the OEM some people move on to a different journey.
Thats something else.
When you have quality people like to grab that when they can.
Yeah makes sense. Thank you guys appreciate it.
Yes.
Our next question comes from Steven Duong with RBC capital markets. You May go ahead.
Hey, good morning, guys.
Good morning, Dave.
I guess, maybe we can just get back to that.
Interest sensitivity.
Data such as you said they were conservative can.
Can you share with us what what are your beta assumptions and if there was there's a lag in it at all.
Yes.
On the interest bearing deposits, it's close to 50% at this point and inclusive of the noninterest bearing deposits about 36, but if I look back at the last rising cycle.
I think the total deposit cost was up about 19% on the interest bearing was about 24. So again I think there is some conservatism baked into those current assumptions.
Oh, Wow, yeah, $6, 50%, Okay, and where they've lagged at all or was that on the.
First 25 basis points youre applying to 36% in the 50%.
Don't think they're lagged, but the rate environment has ramped up over the period that they apply to.
If you look at our cash flows.
Yeah, Yeah, So I guess the way I'm thinking about is when I look back at your.
Your first quarter margin you were at $3 20.
The second quarter.
<unk> dropped to 294 because of the rate cuts and I guess I'm just thinking like why wouldn't this process reverse.
Which would make it fairly asset yes.
Fairly asset sensitive.
When rates rise and it doesn't seem to be reflected in your rate sensitivity tables in your <unk>.
10-Q, and so it may just be because.
Your conservatism on your beta assumptions is that a fair assessment.
I think that's accurate.
Okay great.
And then I guess just on the on the loan growth the commercial mortgage really rebounded fairly well can you just give us a sense I know you mentioned about how much pre pays half of the Pts were driven by underlying business sales of some sort.
How much number wise like how much did you guys originate and how much were prepaid this quarter versus last quarter.
So I can tell you we originated.
$514 million of loans not all funded of course some of it needs.
It needs to be funded I think Tom can give you the funded number.
But.
I would say.
Our net growth was roughly a $190 million to $200 million.
Does that is that a fair assessment, so youre looking at between amortization $1 53 at $1 15. The recent before net of PPP. So youre looking at a still a sizeable prepayment number that's there and.
As I mentioned, it's roughly 50% I don't know if that gave you the color Stephen or do you want me to drill deeper into it.
I can offer a couple of more in terms of outstanding balances I know Tony spoke to production, which isn't necessarily a funded immediately but total originations, including renewals and new money on modifications were $574 million. This quarter, that's up from $5 50 last quarter and the payloads, including the PPP payoffs dropped from 620 million.
Last quarter to 422.
Okay got it.
So.
And I guess historically, so right now youre at like a 50%.
Pay offs right, let's say historically wears it normally.
Q3 of 2020 was $277 million.
Okay Wow okay.
Yes.
Helpful.
And then I guess, maybe just a last one for me just on the insurance business. Tony can you give us a sense of like how the insurance business performed this quarter to come in as to your expectations.
And what are you expecting in the fourth quarter.
So as I've mentioned in the past.
The insurance business has its.
Lois quarters, it's a very seasonal business first quarter is predominantly the strongest followed by the second or third into fourth tend to be more normalized.
I think George did a better job George Lister and the insurance company did a better job.
With retention this quarter, they had productivity, but we don't see a lot of productivity in the third quarter in terms of new policies being written et cetera. So the retention rate was high and if I may explain it in 30 seconds. The retention rate is the rate at which we keep the business that we wrote in prior years and.
It was $96 four that is extraordinary.
Ordinarily high if you are in the 90 is youre a high performer and we usually target around 92% when we keep the business through retention, we make more money in the subsequent year and so I would say this has been an on pace quarter for George not on for George Lister and the insurance company, but the fourth quarter.
We expect them to certainly hit his budget and his team and things.
Things are looking pretty good as we set up for the coming year.
Relative to loss rates and things like that so I don't want to be predictive, but I'm confident in how we go into the first quarter knock on wood.
Got it I appreciate you guys, taking my questions. Thank you.
Thanks, Steve Thank you.
Our next question comes from Russell Gunther with D. A Davidson you May go ahead.
Hey, good morning, guys.
Good morning, good morning.
I will now follow up Chris you mentioned the securities build in the quarter and get your guys thoughts as to how you plan to manage the investment portfolio going forward.
Both as it relates to the overall size of the balance sheet.
And what's your portfolio.
There is some additional as we talked about additional liquidity liquidity to be deployed.
First choice would be to use that to fund loan growth, obviously, but we have significant cash flows coming off the securities portfolio. So we can remix that into loans over time.
The opportunity cost is too great to just wait and cash. So we are going ahead and investing those securities primarily pass through mortgage backed securities yields are around 50 ish kind of levels at this point.
That's great. Thank you.
Just circling back to the loan growth conversation you guys mentioned the pipelines.
If things pull through you would meet or exceed expectations can you just remind us of what those are.
Where do you kind of set your hurdle from a overall organic growth perspective ex PPP.
So on our commercial loan growth, we're expecting roughly the 6% target that we aim at.
We're feeling really good about the pipeline that's why I mentioned in my notes that we should meet or exceed expectation all dependent on what happens with the prepays.
But we're feeling really good about the pipeline and the activity within it.
Okay, Great and then just last one for me.
We've had some market dislocation over the past.
This year larger players taken out smaller players I'm, just curious as to how youre approaching.
The M&A disruption in your footprint, both from a market share gain perspective or attempting to bring over some personnel.
Chris I think we look at that as always.
Contagious to us in the short run because of the distraction of putting companies together.
Entrants of new players <unk> other people.
We wish them well as they go forward, but the fact is I think it provides us with an opportunity to.
To pick up some of that where theres a miss <unk> theyre focused on other things, we always envision that that timeframe is limited after a couple of years. They get they are quasi act together and come back full force. So I think that's helped I think the other side of that and when we look at our competition.
And a smaller institutions are trying to really put a lot of volume up sometimes it levels.
Things that we wouldn't do.
That adds to the competitive factors and pricing issues that we deal with but for the most part.
I think there's a lot going on in our market.
It will be held off a little bit by fed policy and waiting for those deals to be approved.
In a wait and hold but we are.
We think there's going to be an opportunity on the other hand, we have participated with some of those players in the past and we will try to develop relationships with their ultimate successor.
Understood. Okay. Thank you all for taking my questions.
Thank you. Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Chris Martin for any closing remarks.
Well, we thank you for your time today and I. Appreciate your continued confidence in BFS. We hope you have a great weekend and happy Halloween.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.