Q2 2022 Provident Financial Services Inc Earnings Call
Good morning.
Welcome to today's Provident Financial Services, Inc. Second quarter earnings release Conference call. My name is Candice and I will be your moderator for today's call.
All lines have been placed on mute during the presentation portion of our coal with the opportunity for a question and answer.
If you'd like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to hand, the conference call I thought twice atrial nice to work huh.
Head of Investor Relations.
Please go ahead.
Thank you Candice good morning, everyone and thank you for joining us for our second quarter earnings call. Today's presenters are president and CEO , Tony Hawk with better and senior Executive Vice President and Chief Financial Officer.
Before beginning their review of our financial results. We ask that you. Please take note of our standard caution as to any forward looking statements that may be made during the course of today's call are full disclaimer is contained in this mornings. 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 <unk>.
Many of US who will offer his perspective on our second quarter Tony Thank.
Thank you Adrianne and good morning, everyone.
Provident had strong financial performance for the second quarter.
Record revenue produced earnings of 53 per share.
Our performance was driven in large part by solid growth in commercial loans.
Growth combined with an expanding net interest margin.
Drove a five 2% increase in net interest income over the trailing quarter.
This resulted in an annualized rate of return on average assets of one 6%.
And our return on average tangible equity.
13, 82%.
Our board approved a quarterly cash dividend of <unk> 24 per share.
During the quarter, we also repurchased approximately 706000 shares of our common stock at an average price of $23 per share.
Capital position remains strong and comfortably exceed well capitalized levels.
We remain dedicated to fostering a best in class customer experience.
We will help build all of our business lines.
Actual lending continues to be our primary focus and in the second quarter, we closed approximately $821 million of new loans.
A 103% increase from the same quarter last year.
Our line of credit utilization percentage increased 5% in the second quarter to 36%.
Which is approaching our historical average of about 40%.
In addition, prepayments declined approximately 23% as compared to the first quarter.
As a result of our robust productivity and lower prepayments, we grew our commercial loan portfolio, excluding PPP at an annualized rate of 17, 3%.
We had good pull through in our commercial loan pipeline during the second quarter, Yes, we replenished our gross pipeline, which remains strong at approximately $1 4 billion.
The pull through adjusted pipeline, including including loans pending closing.
Its approximately $825 million and our projected pipeline rate increased 40, 84 basis points from the last quarter to $4, 99%.
Despite a competitive market and rising interest rates lending and business activity remains vibrant.
We expect substantial pull through in the pipeline and as such we expect to have strong loan growth for fiscal 2022.
Our core deposits remained stable and the total cost of deposits for the quarter increased one basis points to 20 basis points.
While our cost of funds remained stable, we deployed more liquidity into higher yielding commercial loans.
Which helped drive a 19 basis points improvement in our net interest margin.
Going forward, we expect more improvement in the net interest margin as we experienced the full benefit of the prior interest rate hikes and the commercial loan growth.
Which should also have a positive impact on our net interest income for the remainder of the year.
Our fee based businesses are an important component of our community banking model.
Robert and protection plus formerly SB, one insurance had a moderate increase in revenue of two 9% as compared to the same quarter last year. However on a year to date basis. They grew 21, 6% as compared to the prior year.
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 fee income decreased 442000, or five 9% for the quarter as compared to the trailing quarter.
As we look forward our goal is to build our business lines and doing so we remain mindful of the uncertainty in the marketplace and the potential risks that may arise.
Once more I want to thank the Providence team for their commitment and dedication their hard work and preparation was the catalyst that produced strong financial results for the second quarter.
We look forward to growing our business and creating value for our employees customers communities and shareholders with that I'll turn the call over to Tom for his comments on our financial performance, Tom. Thank you Tony and good morning, everyone.
As Tony noted our net income for the quarter was $39 2 million.
<unk> 53 per diluted share compared with $44 million were <unk> 58 per share for the trailing quarter and $44 8 million was <unk> 58 per share 58 cents per share for the second quarter of 2021.
Pre tax pre provision earnings for the quarter were $55 $6 million or an annualized $1, 65% of average assets.
We achieved record revenue this quarter was $120 million.
That recognize interest income.
Our net interest margin increased 19 basis points in the trailing quarter.
The 321% as excess liquidity was deployed to fund loan growth.
The yield on earning assets improved by 20 basis points versus the trailing quarter as floating and adjustable rate loans re priced favorably in new loan originations reflected higher market rates.
Income recognized from PPP loan forgiveness settlement $100000 versus the trailing quarter to $192000 and remaining deferred ptc's totaled $162000 at June 30.
Meanwhile, funding costs remained stable with average total cost of deposits, increasing just one basis point to 20 basis points and the average cost of total interest bearing liabilities up just two basis points, 0.31%.
Excluding the impact of PPP loans and purchase accounting adjustments. The core net interest margin increased 22 basis points from the trailing quarter to three 7%.
The pull through adjusted loan pipeline at June 30 increased $15 million from the trailing quarter to $825 million, while the pipeline rate increased 84 basis points since last quarter to $4, 99%.
Excluding PPP loans period end commercial loan totals increased $351 million or an annualized 17, 3% versus March 31.
Net of runoff in the residential loan portfolio total loans, excluding PPP loans grew $342 million or an annualized 14, 2% for the quarter.
Regarding deposit funding, we continue to see stability in our non broker deposit balances floater ending quarterly average total deposits, however were lower than the trailing quarter, primarily due to a shift to $360 million of broker deposits the lower <unk> advances.
These are rolling 90 day instruments associated with liability swaps.
The allowance for credit losses on loans increased $2 7 million for the quarter as a result of a $3 million provision for credit losses on loans reduced by $259000 of net charge offs.
Asset quality metrics, including nonperforming loan levels total delinquencies and criticized and classified loans and related lease related ratios again improved versus the trailing quarter.
Nonperforming assets decreased to 36 basis points of total assets from 39 basis points at March 31.
Excluding PPP loans, the allowance represented 79 basis points of loans unchanged from the trailing quarter end.
Noninterest income increased $784000 versus the trailing quarter as increases in gains on loan sales loan prepayment fees in benefit claims on bank owned life insurance were partially offset by lower insurance agency income and wealth management fees.
Excluding provisions for credit losses on commitments to extend credit for all periods operating expenses when annualized $1, 92% of average assets for the current quarter compared with 190% in the trailing quarter and 184% for the second quarter of 2021.
The efficiency ratio was 50, 383% for the second quarter of 2002.
Compared with 56, 5% in the trailing quarter and $54 one 2% for the second quarter of 2021.
Current quarter expenses included an increase in stock based compensation costs of $1 $2 million versus the trailing quarter, reflecting the impact of strong actual and projected results over the performance measurement periods and expense associated with the company's long term incentive plan.
The $800000 of that $1 2 million was a cumulative catch up adjustment attributable to this estimate revision with the remaining $400000 to continue as part of our expense run rate.
Our effective tax rate increased to 26, 8% versus 25, 7% for the trailing quarter and.
And we are currently projecting an effective tax rate of approximately 26% for the remainder of 2022.
That concludes our prepared remarks, we'd be happy to respond to questions.
Thanks, Kim if you'd like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove your question. Please press star followed by two as a reminder, it has stopped falling by one to ask a question. If you are using a speakerphone. Please pick up your handset before.
You're asking a question.
Our first question comes from the line of.
<unk> six <unk> of Piper Sandler Your line is now open. Please go ahead.
Thank you and good morning.
Good morning, Mark.
Tony I think you had mentioned that commercial line utilization rates rose a bit this quarter I guess I'm curious from what to what and how does that compare to perhaps pre COVID-19 levels.
It increased about five percentage points from 31, I think 36.
Historically, we've been running closer to the 40.
Brian it's up and down, but just say on average about 40%.
And I think that might make up if I'm doing the math correctly.
Perhaps.
<unk> to $120 million of additional outstandings associated with that.
It will be off a little I'm doing that math at the top of my head.
Maybe maybe a little less than that.
Okay great.
Then Tom I Wonder if you could share with us maybe what.
<unk> AUM and what net flows look like.
Yeah, Mark AUM fell a bit this quarter as you'd expect with market conditions. So we came down from $3 9 billion at the end of March to $3 4 billion at the end of June on average for the quarter, it's about $538000 less than in Q2 than Q1 in terms of AUR.
Mark just a little follow up there most of the AUM was valuation driven and I think one of the bright spots in that in that world. There is a backpack.
The number of clients remains nice and stable in this environment and we haven't seen an outflow of clients. So it's really just more on the valuation side.
A quick correction to actually give you the change for the spot on average with the change was $200000.
But as Tony said that clients were flat and then work to continue to deepen those relationships.
Okay, and then Tom how are you thinking about the margin for the back half of the year.
It looks like we have continued expansion mark we've been modeling it looks like 335% to $3 40 kind of range.
I think thats, what some fairly conservative deposit beta assumptions in the back half of the year or two.
Obviously, so far it's been one basis point on their own.
Fedex so far.
But we took that up to about 40%, 37% all in on deposits for the back half of the year trying to get us to 23%.
Through the cycle.
Okay.
So that's your assumption of 23% deposit beta.
For the full cycle, which would imply more like a 37% in the second half of the year.
Okay, Great and then last question Tony.
Tony I'm wondering if you could share with us your.
On the M&A is it is it possible to do bank deals in this environment given the uncertainty out there.
And also any any thoughts on whether pricing has gotten a little more rational for wealth management kinds of acquisitions.
Well I'll take the last one first.
Don't know if the.
Price on the wealth management <unk> got any more rational I think.
I think thats probably constant.
We still see activity there in terms of a whole bank M&A.
A lot more noisy in the environment, given the OCI and potential.
Recession or ran when not in one.
But I think the.
I'd characterize it if you had two good banks before you're going to have to go banks now and post the deal.
I'm not sure most of the entire market, but I think.
From our perspective, these things don't should not get in a way of a good transaction if it's strategic in nature.
We just have to be.
It might change some of the some of the optics and how the world sees things because.
The impact on OCI et cetera, but a good transaction in my opinion is still a good one mark.
Yes.
Thank you.
Okay.
Thank you.
Our next question comes from the line of Michael trial of K B W.
<unk> is now open. Please go ahead.
Hey, guys. Good morning, Thanks for taking my questions.
Hey, Mike.
Hum.
I wanted to start I think.
Look back last quarter.
On the fee side I think you guys had talked about the $20 million to $21 million run rate been there for a few quarters in a row now just curious if there's any change there.
I heard you talk it seems like the AUM piece has been pretty steady, but just curious how you guys are thinking about that near term.
Yes, I think near term, we stay in that 20% to 21 kind of range I guess the downside risk there is the market value on the on the AUM of the.
The investments, but I think we see a little bit of pickup in insurance over the next quarter or so yes. This should offset to a large degree.
Right.
And so and so that would also imply I guess that some of the deposit fees have some lags here to continue activity seems to be.
<unk> maintained thus far in the third quarter.
That's our projection yes.
Cool.
And then on the Opex side I think it was.
63 to 64 million I appreciate the color on the stock based comp and the 400 K. That's in the run rate I guess the.
The wildcard is kind of a.
Provision for unfunded commitments, but but any kind of gas in terms of how that might track in the back half of the year do you think it's still safe to kind of conservatively be in that range.
You've been kind of below it the last couple of quarters.
Yes, we always pull the unfunded commitments provision out and say on a core basis. The operating expenses I still think we're going to run around $64 million the downside risk areas wage pressures a little bit in the back half of the year, but I think we can hold to the 64 level.
Cool alright.
And then Tony just a question on a question on growth.
Obviously really strong line utilization pickups, good to see I mean do you what's the sense, you're getting from your customers as they look in the back half of the year I mean are they trying to.
Add some cash to the balance sheet and be conservative or is it more offensive.
Lending that youre seeing in terms of people trying to grow and fill their shelves and just curious about the dichotomy of that that you guys are saying.
I mean, the growth is coming across most of our markets. So we also.
Opened up a new regional office shot on long Island, which has produced about $150 million.
Which is embedded in that number.
The tenor of our clients is it's a little mixed I mean, I don't see clients are being cautious in the sense of what they are seeing but most of them are continuing with activity.
Sure.
Got to dinner with some launch.
They're all talking about transactions not in the sense of building cash or a war chest and looking at it any more of a normalized basis.
That's my characterization of it yes, I think activity was deferred for such a long period that even just trying to get back to normal results in some growth without trying to be overly optimistic about the.
The economic outlook, so at answering it in a way it's like I don't see that.
Cautions on what might be happening in the marketplace is why these customers are wanting to to the lending component.
And that's also a testament to the fact that our pipeline still remains strong and we're seeing a lot of activity still.
<unk>.
Helpful. And then just last follow up for me just in terms of competition on the lending side I mean.
As rates start to move higher.
On the.
The macro environment is pretty uncertain in funding costs for some of your peers are going up or the loan deposit ratio is moving up.
A few different things kind of tugging in different ways and I'm. Just curious if you can kind of noticed any change in the competitive environment for better for worse over the last 90 days or so as some of these these events are starting to take hold.
Now I'll probably with.
Characterize one thing that I've noticed and that is the number of loans refinancing for rate has diminished substantially most of the prepayments.
Bedded in our number are for the sale of the underlying assets. So.
That's probably the biggest thing that jumps out in terms.
Competition is still out there.
Do want to express one point since you mentioned it.
We had a pretty robust growth this quarter, but.
We've also because of the items that I mentioned, we're very mindful of what can take place we've sort of tightened the range in some areas as well so I just want to make sure that.
The folks on this call know that.
We're not buying whole in terms of we're very careful in what we're doing and we're paying attention to the environment.
It just that Theres, a lot of pent up growth that might be just coming our way.
And the expansion in our teams out there doing a good job.
Great.
Helpful color. Thanks for taking my questions guys have a good weekend.
Thanks, Mike and Egypt.
Thank Keith.
Our next question comes from the line of Billy Young of RBC Capital markets. Your line is now open. Please go ahead.
Hey, good morning, guys how are you.
Good morning, Bill good morning.
Just as a follow up too.
The prior question just on the any competition.
In a sense that any of the commercial activity you're seeing now is.
Maybe kind of a pull forward of activity.
For customers as well.
Our rates might go or.
Okay.
Get the sense that.
What you have in the pipeline what you have from clients is sustainable as we.
And this is I guess more of a comment on what the 2023 outlook might look like.
Going forward.
I don't see this pull forward I don't I don't see that I don't see pull forward either I'd say, the one aspect that might not have.
Extended legs as we are benefiting disruption in our marketplace that should settle out at some point in time, but we do have a couple of large transactions that have afforded us opportunities and.
That's a good point, so that disruption in the marketplace insurers.
Some of the banks like us are taking advantage of that.
We're getting I guess, our fair share of that.
With our focus being out there.
I would say probably the area that I would if I had to look forward and say what might slow down the construction space, obviously short term prime rates moving that might affect the inflationary cost all that stuff that might weigh in heavily on the construction side, which is an area that we probably saw our lightest outstandings.
This particular quarter, but on the other sectors I think theyre just moving quite strong.
Great. Thank you for that and my next question.
Just moving to the funding side.
Yes.
Yes.
I wanted to get a sense of kind of how you're approaching your funding strategy in the current environment for next few quarters.
We're giving you a move of.
Some of your broker deposits.
<unk>.
Yes.
The.
That's just whenever it's a low cost alternative we used to fund those rolling 90 day advances to assay those rolling 90 day liabilities <unk> advances couple of quarters back. It was cheaper to go to brokered. The pricing has just moved this back to <unk>. So that's just a normal part of our wholesale funding strategy no real change there.
In terms of expectations around deposit growth deposit pipeline is quite strong the commercial loan growth bodes well for deposits. They tend to lag in the origination of a lending relationship and we have a fair amount that we expected to see flow into the bank over the course of the next three to six months.
So I don't think we're going to see outsized growth I don't think the industry is going to see outsized growth in deposits, but back to the more normal kind of 3% range wouldn't be unreasonable.
Thank you.
Take that last question.
Yes. It was nice to see you open a branch in my backyard and rosin in this past quarter.
Can you remind us of.
Any other near to medium term expansion plans you might have in the pipeline and maybe if there's any change in your thinking about how new York kind of fits into our long term strategy and footprint.
More of a perspective.
But when you say New York do you mean, Manhattan or in New York New York.
Bigger New York.
Yes.
I assume the New York Metro area.
I guess long island has an extension of that.
So I would I would as I mentioned in the past strategically.
Strategically our thought processes are more.
If you were to see Youll see us a little bit north of us which is.
Rockland Westchester is an area that we think is desires.
The greater affiliate area is an area that we think is desirous.
For us to have more what I would call a regional expansion.
The the way we are approaching the Roswell in Manhasset area has been quite successful.
And our formula.
All related in other markets would bode well for our bank so.
Again, we're not going to be a a branch heavy strategy, but its more of a regional lending office with an attached branch.
Our customers can can be served from.
Would've digital heavy strategy so.
Hopefully I gave you color on the markets that we think are desirable in addition to where we are presently.
So.
Yeah.
Thank you for taking my questions appreciate it.
Thanks Vivek.
Thank you.
If you'd like to ask a question. Please press star followed by one on your telephone keypad.
So our final question comes from Manuel <unk> of D. A Davidson. Your line is now open. Please go ahead.
Hey, good morning, you talked about tightening or being maybe a little bit more selective just because you've had such robust growth.
What where are you tightening and what are your kind of avoiding just in case there are some greater macro issues.
Sure.
I think the.
For us for tightening there has been conversations throughout the year and we're not in any way getting out of any sector saw make that comment upfront. It's the nature of how we would lend in that sector that is more of the appropriate comment.
Areas that tool that I can point to immediately would be hospitality and office space.
Really we would look at it with certain characteristics in order for us to be to be in that.
And that's in those sectors.
Those are the two that come to mind quickest.
And on on balance for everything it's maybe just looking at.
Reducing the leverage and transactions improving the sponsorship terms things.
Things of that nature, but we're getting to a level, where we feel comfortable that we're remaining very mindful of the possibilities that can take place.
And so therefore.
As as Provident Bank do we feel comfortable making these loans under these terms.
And with our new guidelines, we feel pretty good that we're approaching this.
With some sensibility.
I appreciate that.
The buyback is a pretty ongoing and you're still seeing pretty robust growth.
Can both.
<unk>.
Can buyback continues with growth proceeding at this pace.
Or is it just kind of I think you can see the bioplastic.
Yeah.
The second one opportunistic I think you'll see the buyback moderate given the strength in the asset formation that pipeline is really strong we much prefer to lever that capital and return it.
Got it that makes sense.
I appreciate the time.
Thank you.
Thank you.
Thank you so no additional questions waiting at this time I'd now like to hand over to the management team for closing remarks.
Thank you.
I'd like to thank everyone that was on this call.
It was good sharing our good performance of information and we look forward to the third quarter.
Getting back together and hopefully we'll have another good quarter to report.
Have a great day.
That concludes today's conference call you may now disconnect your lines.