Q1 2022 Provident Financial Services Inc Earnings Call
And good morning, everyone.
We are very pleased with Provident strong financial performance for the first quarter with earnings of 58 per share.
Our performance was driven by growth in our key business lines, resulting in the deployment of some of our excess liquidity and more desirable asset classes.
The growth and improved asset mix combined with an expanding net interest margin bolster net interest income, which drove the increase in quarterly revenue.
In addition improvements in credit metrics and the economic forecast supported a negative provision for the quarter.
This produced an annualized rate of return on average assets of one 3% and a return on average tangible equity of 14, 5% to 8%.
Our board approved a quarterly cash dividend of <unk> 24 per share.
During the quarter, we also repurchased approximately one 3 million shares of common stock at an average price of $23 36 per share.
Our capital position remains strong and comfortably exceeds well capitalized levels.
Our focus is to continue to build our best in class customer experience and grow all of our business lines, especially commercial lending.
Our commercial lending group continues to be very active and in the first quarter, we closed approximately $502 million of new loans, a 61% increase from the same quarter last year.
Prepayments for the quarter adjusted for PPP included certain anticipated pay offs, which offset some of our strong production.
Our line of credit utilization percentage increased 3% for the first quarter to 31%, but remains below our historical average of about 40%.
Our production continues to be robust. Consequently, we grew our commercial loan portfolio, excluding PPP at an annualized rate of eight 3%.
We had good pull through in our commercial loan pipeline during the first quarter, yet our gross pipeline remains healthy at approximately $1 4 billion.
The pull through adjusted pipeline, including loans pending closing is approximately $810 million and our expected pipeline rate increased 55 basis points from the last quarter to four 5%.
Despite a competitive market and rising interest rates, we continue to see vibrant lending activity.
We expect solid pull through our pipeline and the prepayments are normal we should have a strong strong loan growth throughout 2022.
Our core deposits remained stable and we continue to see growth our noninterest bearing deposits grew at an annualized rate of eight 7% this quarter and presently comprise about 25% of our total deposits.
The total cost of deposits for the quarter declined two basis points to 19 basis points and is amongst the best in our peer group.
We deployed excess liquidity into commercial loans and investments and continued to reduce our cost of funds, which helped drive a 70 basis points improvement.
Our net interest margin.
We anticipate the federal reserve will continue to hike interest rates in 2022.
Providence is moderately asset sensitive and we have a stable low cost deposit base. Therefore, we believe we are well positioned for rising interest rates.
Our fee based businesses are important to us SB, one insurance had a strong quarter with revenue, increasing 26, 4% compared to the same quarter last year.
Performance was driven largely by healthy organic growth a 37, 1% increase in contingent income and a retention ratio of 99, 8%.
Given the unfavorable conditions in the financial markets Beacon Trust experienced a decline in the market value of assets under management.
And as a result be income decreased 376004, 8% for the quarter as compared to the trailing quarter.
As we look forward our goal is to grow our business lines and further improve our asset mix.
We also expect that rising interest rates will continue to improve our margin, which when combined with our growth. We will have a positive impact on our net interest income in the upcoming quarters. In addition, we have a number of digital initiatives being implemented that will modernize certain business processes, improving efficiency and the customer and employee.
<unk>.
Lastly, our strong first quarter performance was due in large part to our talented colleagues commitment to our guiding principles and their continued pursuit of a high performing and innovative culture.
I want to thank them for their dedication, we look forward to growing our business and achieving more financial success built on our commitment to our employees customers communities and shareholders.
With that I'll turn the call over to Tom for his comments on our financial performance.
Thank you Tony and good morning, everyone.
As Tony noted our net income for the quarter was $44 million or <unk> 58 per diluted share compared with $37 3 million or <unk> 49 per share for the trailing quarter at $49 8 million or <unk> 63 per share for the first quarter of 2021.
Pre tax pre provision earnings for the quarter were $54 million or an annualized $1, 49% of average assets.
We had record revenue that exceeded $114 million for the third consecutive quarter on the strength of record net interest income.
Our net interest margin increased seven basis points from the trailing quarter to $3 zero to 2% as interest bearing cash was deployed to fund higher yielding loans invest in higher yielding securities and borrowings were replaced with lower costing funds.
Income recognized from PPP loan forgiveness fell $700000 versus the trailing quarter to $1 1 million in remaining deferred PPP fees totaled $354000 at March 31.
Meanwhile, we drove funding costs down again as average deposits increase in average borrowings declined.
Average noninterest bearing deposits increased $26 million versus the trailing quarter and the total cost of deposits declined another two basis points to just 19 basis points.
Excluding the impact of PPP loans and purchase accounting adjustments. The core net interest margin increased 11 basis points in the trailing quarter to 295%.
The pull through adjusted loan pipeline at March 31 increased $134 million from the trailing quarter to $810 million, while the pipeline rate increased 55 basis points since last quarter to $4 one 5%.
Excluding PPP loans period end commercial loan totals increased $165 million or an annualized eight 3% versus December 31.
Loan growth occurred primarily in the CRE and C&I categories.
Net of runoff in the residential and consumer loan portfolios total loans, excluding PPP loans grew $147 million or an annualized six 2% for the quarter.
The allowance for credit losses on loans decreased $4 5 million for the quarter as a result of the $6 $4 million negative provision for credit losses on loans and $1 9 million and net recoveries.
Asset quality metrics, including nonperforming loan levels total delinquencies and criticized and classified loans and related ratios again improved versus the trailing quarter.
Nonperforming assets decreased to 39 basis points of total assets from 42 basis points at December 31.
Excluding PPP loans, the allowance represented 79 basis points of loans, a reduction from 85 basis points at the trailing quarter and as a result of a decrease in impaired credits and improvements in the economic forecast.
Noninterest income decreased by $106000 versus the trailing quarter as an increase in insurance agency income was more than offset by lower benefit claims on bank owned life insurance lower loan prepayment fees and other loan fees and lower wealth management fees as a result of a decrease in the market value of assets under management.
Excluding provisions for credit losses on commitments to extend credit for all periods operating expenses were an annualized one 9% of average assets for the current quarter compared with $1 eight 1% in the trailing quarter and $1, 95% for the first quarter of 2021.
The efficiency ratio was 56.0% to 5% for the first quarter of 2022, compared with 50, 474% in the trailing quarter and $56 one 9% for the first quarter of 2021.
Operating expenses are typically elevated in the first quarter as employer payroll tax limits reset and seasonal occupancy costs are incurred.
In the most recent quarter. There were also increases in stock based compensation data processing and advertising and promotions expense when compared with the first quarter of 2021.
Our effective tax rate declined to 25, 7% versus 28, 4% for the trailing quarter.
The trailing quarter included a discrete item for additional tax expense related to the apportionment of income subject to state income taxes. We are currently projecting an effective tax rate of approximately 25, 75% for the remainder of 2022.
That concludes our prepared remarks, we'd be happy to respond to questions.
Thank you we will now begin the Q&A if you'd like to ask a question you can press star one on the telephone keypad if at all.
So it's truly your question you May press star, let's see.
First question flips today comes from Mark Fitzgibbon from Piper Sandler molecule lineup.
Gentlemen, good morning.
Good morning, Mark how are you.
Terrific. Thank you.
I guess first question I had Tom could you share with us what what the impact of Accretable yield was this quarter and last quarter looks like.
The last quarter was seven basis points and six basis points in the current quarter Mark.
Okay, Great and then say it was five last quarter to quarter.
Okay great.
Yes.
And then secondly, what was the assets under management at the end of the quarter and what were the net flows.
At the end of the quarter $3 9 billion.
On average, we're only down $59000, the four point or point out three four for the average for the quarter.
So really market.
Valuation driving that we actually increased number of clients by seven over the course of the quarter.
The fee rate remains about 77 basis points.
Okay.
And then Tom.
It sounds like the margin probably goes down a little bit in the short term as PPP income burns off and accrete.
Accretable yield.
<unk> declines so should we assume the reported margin will will kind of dipped down a little bit in <unk> and then start to build in the back half of the year.
No Mark I think we're actually going to see it continue to build into Q2, our PTP as I said only contributed two basis points. This quarter. It was about $28 million worth of principal left in just 354000 left in deferred fees. So that that noise will go away.
But we have a modestly asset sensitive balance sheet as we've discussed and we've currently modeling seven rate hikes over the course of the year 50 basis points in May and then 25 in June July August September and November and December . So our models are giving us a kind of a $3 12 to $3 15 for next quarter on the NIM getting.
Up into the low three <unk> by the end of the year.
Okay, Great and then I guess I was curious I didn't notice anything in the release about it or are you taking advantage of the consolidation around you and hiring some lenders from from other banks.
If so how many and how many might you consider this year. Thank you.
Yes, Mark.
The answer is yes on a number of fronts.
If I recall correctly.
Don't hold me to this number but I think we've hired about almost 19 new.
Our EMS this year not all of them from.
The disintermediation that has taken place, but we certainly see some activity.
And we've taken I guess, our share of it and perhaps some more.
In the New York area, as well in Westchester and Rockland too so and on the loan side I would say, yes, probably leave.
Growing our book I don't have a number off the top of my head, but I'm certain that there are certain advantages that we've taken in terms of loan productivity as well.
Thank you.
Okay got it.
Thank you.
Next question comes from Michael Perito from <unk>, Michael Your line is now open.
Thank you good morning, guys.
Mike.
Good morning.
I wanted to ask on the reserve.
We kind of think of the mechanics of that moving forward here I mean, it seems like the credit.
<unk> for you guys, it's pretty benign and strong.
Brian .
The seasonal front as we move through the year here, even if it doesn't prove to be true they will probably be some increase waiting for some more negative economic scenario. So is it fair to think especially with the low growth pipeline, where it is and everything I just said that the reserve here on a percentage basis will probably be closer to the low point.
Curious if you guys are growing private context, Rob that commentary as well.
Okay.
I would expect that we're close to the low point and as you said I think provisioning going forward will be largely driven by growth with maybe a slight tinge to some more pessimistic forecast if there were published in the.
A recessionary fears become reality.
But right now if you look at the most recent.
Look Tim Moody's for the economic forecast if you look at the April four at this and actually saw some further improvement in the baseline versus March so there's the potential for some additional smaller release I believe in the second quarter.
Okay.
Okay. That's helpful.
And then on the I apologize I missed this kind of jumping around over here, but on the operating expense side.
Any thoughts near term on on where the run rate might trend that and Anthony you mentioned.
Some digital investments you guys are making just curious if you guys could put that in context for us around the.
Kind of the rate of those investments is it accelerating is it could become a larger percentage of your opex moving forward. Just curious how you guys are thinking about that from a high level as well to the kind of near term Opex run rate.
Yeah.
I'll go first and then Tony Hunt camp, but I think in terms of an expense run rate for dollars. Excluding the provisions on the off balance sheet credit losses credit exposures I think we're probably in the $63 million to $64 million range for the next quarter and gets a little bit less certain as we move further out, but thats, probably a fair run rate to use.
My perspective on the digital investments that were pretty stable and there I think we're running if you look at as a percentage of revenue totalled DP expense runs in the seven three to the 8% range I don't see that changing materially.
I think they are embedded in the in the number that you've already yes.
Guidance on.
Nothing's draconian in there I think a lot is really to make us more efficient and perhaps.
Reduce the run rate as we go forward our handle more units of business with the same level of better efficiency. So.
I wouldn't characterize it as we should see a big boost in our expense spending as byproduct of the things I mentioned.
Got it and Tony are you willing to.
Provide a little bit more detail about some of the things you are looking at all on that front or is it third party vendors is it more like operational organization on your side and making things more efficient that way or just love a little bit more color.
Yes, I mean, so we do it I might have mentioned this in the last call. We are putting up a new Oss system loan origination system in place, which is going to make us much more efficient in terms of not only how loans flow through our bank customers returning to the employee's experience on how we.
We handle credits, which in theory or in actuality, we should see an increase in productivity and the number of units that we handle we should see better reporting within our organization as well and.
So it really it really positions us better as we continue to get larger.
We're also looking at a new small business lending platform, which automates things a little bit better and gives us better analytics around those tools.
We're doing a lot of internal development in terms of the box that we used to.
Reduce a lot a lot of the mundane processes internally.
So we're all of these things are aimed at obviously improving the efficiency the customer and employee experience, which we believe all of these will improve upon and more productivity.
Did I Miss anything there in terms of <unk>.
No not at all actually I just wanted to correct an error that I made when I misspoke I was thinking about occupancy expense in terms of the percentage of cost to revenue, it's more about 5% on the it side.
Right.
Yeah.
Great.
And then just one last one from me and I'll step back just Tony on capital deployment.
Just.
Simple question just curious if you could provide us maybe some updated thoughts obviously the valuations on the banking sector pulled in here, but it sounds like.
Near term you guys have pretty good line of sight from trough performance. Just curious how you guys are thinking about the overall capital deployment as we kind of move into the balance of the year here.
I'll start first and I'll, let Tom like this is a conversation that we have almost periodically that balancing.
Us undervalued.
And being a good buyback versus the <unk>.
Growth plans that we have in deploying that so it's a continuing balancing act for us to make sure that we.
We could execute both of those right. So yeah, and I think thats why we target the 45% to 55% range for the regular recurring cash dividend because that gives us sufficient capital formation to support our current expectations of growth and we assess that periodically.
In terms of where we like to be too I think we've talked before about trying to work the TCE down to around eight 5%, we think thats a comfortable level.
And as Tony said, we never been in programmatic and our approach to buybacks, it's really been opportunistic and as you noted when we have a clearer view of our.
Our comfort level with earnings projections, we take advantage of market conditions.
Cool. Thank you guys very much appreciate you taking my questions.
Thank you.
Yes.
Thank you. Our next question comes from the young of RBC Your.
Your line is now open.
Hey, good morning, guys how are you.
Good morning Bill.
So just first question on maybe the loan growth outlook for the year.
It seems like loan growth is accelerating and it is good to see your pipelines are up from year end.
On the core it does seem like growth is tracking to you previously guided 5% to 6%.
And it also sounds like <unk>.
Prepayment activity was generally as expected.
I know in the past you've spoken to maybe some moderation in that payoff activity in the back half of the year do you still see some room for that to happen and if so.
How do you think about.
Potential lift the growth.
As we progress further in the year.
Maybe I'll give a long winded answer here because I think if.
If you look at our growth this quarter on the commercial loan side of about eight three annualized.
When you factor.
About $100 million roughly $98 million of loans that we.
Plan to exit which means these were things we wanted to happen. So we encourage these loans out of the bank when you.
If you adjust just for that.
Our growth rate for the quarter on an annualized basis would've exceeded 13%. So the messaging points that we've been giving everyone over the last 0.2 quarters is that we've we've ramped up things we've hired new people, we've got focus and we're seeing a lot of activity.
Obviously market conditions, which I'll mention in a moment.
That being said.
We still had some prepayments this quarter that offset we have $510 million of closings this quarter.
Probably I think close to $300 million was was paid off 100 as I mentioned was planned on our part and 200 close to 200 was not.
I would say new nearly 150 was refinanced elsewhere and then the rest of it was from sale of properties.
But if you look at our pipeline if you look at our organizational capacity. If you look at the activity that we're seeing today, it really bodes well for us, particularly.
As we look out into into the second quarter.
Third quarter always gets a little bit soft because it's the summer months.
And in.
Everybody is keeping an eye on what happens in the fourth quarter relative to the economic conditions do we see early onset of a downturn. So we're being very careful about how we look at the fourth quarter, but everything right now points to us.
Having some pretty solid loan growth.
The upcoming quarters.
And if you look at us relative to last year most of our growth happened in the second half versus this year. So a better dynamic we're having most of our growth in the first half and if it continues on it or really bode well for our net interest income.
So hopefully I gave some color there I know there is some some thoughts about what's happening in the marketplace.
I am talking to my teams and we're still seeing some strong activity.
And also on the C&I side today.
This quarter, we probably had 70% and decreased base about 30% in the C&I space, which is.
A better ratio than we've had here at provident for awhile So I.
Hopefully I gave you a good color and if I didn't answer all of it. Please give me a follow up.
No that was great. There is a lots of impact there.
And then separately my follow up it's Jeff.
Okay.
Hi.
Expenses.
It seems.
The margin performance this quarter was very strong and it seems like the outlook is.
Even stronger than what we were thinking three months ago.
As your margin and accelerated higher do you see.
Some opportunity there to maybe accelerate investment.
Business in some of your initiatives.
I don't think in a material fashion, just because of internal resource constraints. There is some flexibility there usually the flexibility is more on the discretion side to withhold some spending and as you said the favorable margin performance gives us the ability to continue full speed ahead, but I don't know that theres that much opportunity to pull additional expenses forward.
You also have.
Organizational capacity.
We have a number of projects underway to build for the future.
It's a matter of what we can handle so I don't think anything is constraining our thinking in terms of.
Just continuing to execute on our plan.
Great. Thank you very much I'll step back.
Thanks Bill.
Thank you as a reminder, if you would like to ask a question he compressed one on Nintendo <unk>.
Next question is from Erik Zwick of Boenning and Scattergood, Eric Your line is now open.
Thanks, Good morning, guys how are you.
Yeah.
Good morning, Eric.
First wondering just a bit of a follow up on the net interest margin Tom I. Appreciate the commentary you gave there kind of looking forward to.
<unk> wondering what that incorporates in terms of excess liquidity kind of curious how you would quantify your excess liquidity position and how you would expect that to be kind of deployed over the next few quarters and if that was factored into.
The guidance you provided earlier.
Yes, it's much less an excess liquidity story than an asset repricing story at display we've deployed the bulk if not all of the excess liquidity to last quarter. We do have good cash flows just off the investment portfolio returns about $30 million a month that will continue to reinvest into the rising rate environment.
And as you know we have a significant floating rate loan portfolio that'll be adjusting with the increases in LIBOR over the course of the next quarter as well.
Alright, thanks for the clarification, there and then just thinking about kind of the noninterest income in the fees and a number of banks have.
Recently, you kind of reconsidered, how they assess non sufficient fees overdraft charges things of that nature. Just curious how you guys feel about your assessment strategy today, and whether you would anticipate any changes.
We're comfortable right now it's something we continue to evaluate and we keep our eye on the marketplace. We think our processes are appropriate and fair to our customers. So.
So we don't see any immediate action there.
And I think we will continue to keep an eye on what's happening in the marketplace and reassess if we deem necessary.
Understood and then.
Tom maybe just sticking on the noninterest income from one quick follow up any thoughts on kind of the run rate going forward or if <unk> is a good kind of starting point or if there's other things to consider as we think about <unk> and beyond.
I think it's a pretty good starting point this volatile items in there around gains on loan sales, particularly in the SBA depends on the origination of what the current market gain on sale margins are prepayment fees are volatile.
<unk> income, obviously jumps around but the 2021 kind of range seems like a safe number to work off of as a core.
There are concerns about what the market performance does on the wealth management side of things, but I don't think that's a material detriment.
In the insurance business continues to look strong for us. So all in I would say, that's a safe number 20% to $21 million with hopefully some upside potential.
And then just one last one I guess, maybe a bigger picture question.
Since you've joined you've had a hand in kind of re emphasizing the importance of corporate culture with both regard to the employee and the customer experience.
Curious just on your thoughts today on your current positioning and initiatives from kind of that ESG perspective across the.
Franchise and in light of kind of proposals for.
Enhanced disclosure in some of your filings.
Those are a couple of questions in there I mean, the first one was.
I think about the employee and customer experience culture.
Say.
And I would look toward my colleagues in the room that maybe confirm but I think there is a lot of positives in that I see a lot of energy I see a lot of.
A lot of collegiality doesn't mean it didn't exist before we just enhanced it and I think the storyline is starting to.
Expand beyond Providence, where a number of people that are calling in and Thats. The testament by the resumes we're getting when we have openings the flow of activity in terms of talent that wants to join our bank. So a lot of those things or initial proof points out what we're doing is paying some dividends.
<unk>.
<unk> side, our counsel and.
And our group is looking at the disclosures I think.
We're studying what other institutions are doing and.
As we learn more about what needs to happen there.
We'll do the appropriate disclosures.
Meanwhile, from from our bank as a whole I would say, we're pretty we're pretty proud of what we look like in terms of organizational diversity and the things we.
We do have our our information our ratios that we work with.
With our with our head of HR.
Today. It feels good that doesn't mean is never more work to be done, but we feel pretty good about where we are as an organization.
Great. Thanks for taking my question today.
Yeah.
Thank you.
Final question for today comes from Russell Gunther from D. A Davidson Russell Your line is now open.
Hey, good morning, guys. Good morning, Russell just wanted to.
Hey.
A follow up on the margin discussion and time to glide path that you laid out could you give us a sense for what you are assuming from a deposit beta perspective in <unk>.
Maybe just characterize any migration from the first 100 basis points to the circa 100 basis points. How you guys would expect to perform.
Yeah.
The all in deposit beta is about 23%.
Interest bearing I think is closer to 31, if you back the Cds out because they kind of come in pieces, it's more like an $18 519 kind of range.
<unk>.
So that's what's built into the margin expectations currently.
Okay.
In terms of lag.
Potential for some upside there because we don't we don't really build a lagging.
Okay, Yes, you just kind of the words out of my mouth.
It sounded like you might be able to.
Outperform that in the earlier innings of rate hikes. So I appreciate the color there and then just last one for me.
We'll be back to the fee verticals. So I appreciate your thoughts on on the organic growth outlook, there, but any commentary in terms of your.
We're acquisitive appetite within wealth management or insurance.
Likelihood something could come to fruition.
Sure.
I think.
As we mentioned in the past we are.
Always looking to pursue situations.
Or both.
Cultural and strategic fit for us and all of those areas.
So well I mean, we continue to look at opportunities there the market is a little hot in terms of.
Competing against these private equity enterprises.
And the same thing on the insurance side.
But we're actively looking to <unk>.
Both of those businesses.
As well as we are in a bank side I mean, we all.
Obviously, there's things we can.
And I cannot say on these calls.
But suffice to say that both myself and our chairman Chris.
We're actively talking to our colleagues and seeing where opportunities exist for us to do some strategic partnerships I mean, I don't think thats, a shocking surprise I think thats something thats part of our normal course of business. So.
Hopefully that gave you that I know I didn't give you a lot of pointed color but.
Suffice to say, we look at opportunities.
That's very helpful and Tony and Tom. Thank you guys for the help that's it for me.
Thanks, Ross Thank you.
Thank you we have no further questions for today, so I'll hand back to Tony for any closing remarks.
Thank you.
We thank everybody for being on the call and asking some some good questions.
Once again, we look forward if there's any comments that people like to talk offline.
Further clarification, Tom and I are always available if not we look forward to talking to all of you throughout the second quarter and.
My best to all of you and have a great day.
Thank you for joining today's call you may now disconnect.