Provident Financial Services, Inc. (NYSE:PFS) Q2 2022 Earnings Conference Call July 29, 2022 10:00 AM ET
Company Participants
Adriano Duarte – Investor Relations
Tony Labozzetta – President and Chief Executive Officer
Tom Lyons – Senior Executive Vice President and Chief Financial Officer
Conference Call Participants
Mark Fitzgibbon – Piper Sandler
Michael Perito – KBW
Billy Young – RBC
Manuel Navas – DA Davidson
Operator
Good morning and welcome to today’s Provident Financial Services, Inc. Second Quarter Earnings Release Conference Call. My name is Candice and I’ll be your operator for today’s call. [Operator Instructions]
I will now like to hand the conference call over to your host, Adriano Duarte, Head of Investor Relations. Please go ahead.
Adriano Duarte
Thank you, Candice. Good morning, and thank you for joining us for our second quarter earnings call. Today’s presenters are President and CEO, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons.
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. Our full disclaimer is contained in this morning’s earnings release which has been posted to the Investor Relations page on our website www.provident.bank.
Now it’s my pleasure to introduce Tony Labozzetta, who will offer his perspective on our second quarter. Tony?
Tony Labozzetta
Thank you, Adriano. And good morning, everyone. Provident had strong financial performance for the second quarter, record revenue produced earnings of $0.53 per share. Our performance was driven in large part by solid growth in commercial loans. The growth combined with an expanding net interest margin drove a 5.2% increase in net interest income over the trailing quarter. This resulted in an annualized rate of return on average assets of 1.16% and a return on average tangible equity of 13.82%. Our Board approved their quarterly cash dividend of $0.24 per share. During the quarter, we also repurchase approximately 706,000 shares of our common stock at an average price of $23 per share. Capital position remains strong and comfortably exceeds well capitalized levels.
We’ve remained dedicated to fostering a best-in-class customer experience, which will help build all of our business lines. Commercial 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 a robust productivity and lower pre payments, 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, yet, we replenished our gross pipeline, which remains strong at approximately $1.4 billion. The pull through adjusted pipeline, including loans pending closing is approximately $825 million. And our projected pipeline rates increased 40 — at 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 long growth for fiscal 2022.
Our core deposits remain stable, and the total cost of deposits for the quarter increased one basis points to 20 basis points. While our cost of funds remain stable, we deployed more liquidity into higher yielding commercial loans, which helped drive an 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, Provident Protection Plus, formerly SB One Insurance had a moderate increase in revenue of 2.9% 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, the income decreased $442,000 or 5.9%, for the quarter as compared to the trailing quarter.
As we look forward, our goal is to build our business lines. In 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 Provident 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?
Tom Lyons
Thank you, Tony. Good morning, everyone. As Tony noted, our net income for the quarter was $39.2 million or $0.53 per diluted share, compared with $44 million or $0.58 per share for the trailing quarter, and $44.8 million or $0.58 per share for the second quarter of 2021. Pretax pre provision earnings for the quarter were $55.6 million or an annualized 1.65% of average assets. We achieved record revenue this quarter of $120 million on the strength of record net interest income. Our net interest margin increased 19 basis points in the trailing quarter to 3.21%, 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 repriced favorably and new loan originations reflected higher market rates
Income recognized from PPP loan forgiveness fell $900,000 versus the trailing quarter to $192,000 and remaining deferred PPP fees total $162,000 at June 30. Meanwhile, funding costs remain stable with the average total cost of deposits increasing just one basis point to 20 basis points, and the average cost of total interest bearing liabilities of just two basis points to 0.31%. Excluding the impact of PPP loans and purchase accounting adjustments, the core net interest margin increased to 22 basis points from the trailing quarter to 3.17%. The pull through adjusted loan pipeline at June 30 increased $15 million in the trailing quarter to $825 million, while the pipeline rate increased 84 basis points since last quarter to 4.99%. Excluding PPP loans period and 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-brokered deposit balances. Quarter end and quarterly average total deposits however, were lower than the trailing quarter primarily due to a shift to $360 million of brokered deposits to lower costing FHLB 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 $259,000 of net charge offs. Asset quality metrics, including non-performing loan levels, total delinquencies, criticized and classified loans and relatedly ratios, again improved versus the trailing quarter. Non-performing assets decreased the 36 basis points of total assets and 39 basis points at March 31. Excluding PPP loans the allowance represented 79 basis points of loans unchanged from the trailing quarter ends. Noninterest income increased $784,000 versus the trailing quarter as increases in gains on loan sales, loan prepayment fees and benefit claims on bank owned Life Insurance were partially offset by lower insurance agency income and wealth management fees.
Excluding provisions for credit losses, our commitments to extend credit for all periods operating expenses when annualized 1.92% of average assets for the current quarter, compared with 1.90% in the trailing quarter, and 1.84% for the second quarter of 2021. The efficiency ratio was 53.83% for the second quarter of ‘22, compared with 56.05% in the trailing quarter, and 54.12% for the second quarter of 2021. Current quarter expenses included an increase in stock-based compensation cost of $1.2 million versus the trailing quarter, reflecting the impact of strong actual and projected results over the performance measurement periods on expense associated with the company’s long-term incentive plan. Approximately $800,000 of that $1.2 million was an accumulative catch up adjustment attributable to this estimate revision with the remaining $400,000 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 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.
Question-and-Answer Session
Operator
[Operator Instructions]
Our first question comes from the line of Mark Fitzgibbon of Piper Sandler.
Mark Fitzgibbon
Thank you and good morning. 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 levels?
Tony Labozzetta
It increased about five percentage points from 31 I think to 36. Historically, we’ve been running closer to the 40 given rise up and down but just say on average up 40%. And I think that might make up if I’m doing the math correctly, perhaps $100 million to $220 million with additional standings associated with that. I could be off a little and doing that math at the top of my head. Maybe a little less than that.
Mark Fitzgibbon
Okay, great. And then, Tom, I wonder if you could share with us maybe what was AUM and what net flows look like?
Tom Lyons
Yes, Mark, AUM fell a bit this quarter as you’d expect with market conditions, 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 $538,000 less in Q2 and Q1 in terms of AUM.
Tom Lyons
Mark, just a little follow up there, well, most of the AUM was valuation trip. And I think one of those little bright spots in that world is the fact that 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.
Tom Lyons
And let me make a quick correction, so I just gave you the change for the spot. But they on average the change was $200,000. But Tony said that clients were flat and work to continue to deepen those relationships.
Mark Fitzgibbon
Okay, and then Tom, how are you thinking about the margin for the back half of the year?
Tom Lyons
Looks like we have continued expansion, Mark. We’ve been modeling it looks like 335 to 340 kind of range. I think that’s what some fairly conservative deposit beta assumptions in the back half of the year to obviously, so far, it’s been one basis point on the FedEx so far, but we take that up to about 40%, 37% all-in-all deposits for the back half of the year trying to get us to more like a 23% through the cycle.
Mark Fitzgibbon
Okay, so that’s your assumption 23% deposit beta.
Tom Lyons
For the full cycle, which would imply more like a 37% in the second half of the year.
Mark Fitzgibbon
Okay, great. And then last question. Tony, I wondered if you could share with us your thoughts on M&A. Is it possible to do bank deals in this environment, given the uncertainty out there? And also, any thoughts on whether pricing has gotten a little more rational for wealth management types of acquisitions?
Tony Labozzetta
I’ll take the last one first. But I don’t know if the price on the wealth management yield has gotten any more rational, I think that’s probably constant. We still see activity there. And in terms of the whole bank M&A, a lot more noisy in the environment, given the AOCI and potential conflict, recession or rein one not in one. But I think, I characterize it if you had two good banks before, you’re going to have two good banks now, or and post the deal. So I’m not sure what it does to the entire market. But I think, from our perspective, these things don’t, should not get in the way of a good transaction. If it’s strategic in nature. We just have to be, it might change some of the optics and how the world sees things because the impact on AOCI, et cetera. But a good transaction in my opinion is still good one, Mark.
Operator
Our next question comes from the line of Michael Perito of KBW.
Michael Perito
Hey, guys, good morning. Thanks for taking my questions. I wanted to start I think I 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 seems like the AUM fee system pretty steady. But just curious how you guys are thinking about that near term.
Tom Lyons
I think near term, we stay in that $20 million to $21 million kind of range. I guess the downside risks there is the market value on the AUM of the investments, but I think we see a little bit of pickup insurance over the next quarter. So yes, it should offset to a large degree.
Michael Perito
And so that would also imply I guess that some of the deposit fees, have some legs here to continue, activity seems to be maintained thus far in the third quarter.
Tony Labozzetta
That’s our projection. Yes.
Michael Perito
Cool. And then on the OpEx side, I think it was $63 million to $64 million, appreciate the color on the stock-based comp and the 400-k that’s in the run rate. I guess the wildcards kind of the provision for unfunded commitments, but any kind of gaps 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? Even though you’ve been kind of below it the last couple quarters?
Tom Lyons
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 requires wage pressures a little bit in the back half for the year, but I think we can hold to the $64 million level.
Michael Perito
Cool. All right. And then, Tony, just quick 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 you’re seeing in terms of people trying to grow and fill those shelves? And I’m just curious about that dichotomy that you guys are saying.
Tony Labozzetta
I mean, the growth is coming, across most of our markets, right. So we also opened up a new regional office out on Long Island, which has produced about $150 million of growth, 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’re seeing, but most of them are continuing with activity. I mean, I go out to dinner with some, lunch. They’re all talking about transactions, not in the sense of building cash or a war chest. They’re looking at it in more of a normalized basis. That’s my characterization of it.
Tom Lyons
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 economic outlook.
Tony Labozzetta
Yes. So in answering it in a back way is like, I don’t see the cautions of what might be happening in the marketplace as why these customers are running to the lending component. And that’s also been a testament to the fact that our pipeline still remains strong. And we’re seeing a lot of activity still so.
Michael Perito
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, the macro environment is pretty uncertain, funding costs for some of your peers are going up, or loan deposit ratios moving up just there’s a few different things kind of tugging in different ways. I’m just curious if you’ve kind of noticed any change in the competitive environment, for better or for worse, over the last 90 days or so as some of these events have started to take hold.
Tony Labozzetta
No. I probably would characterize one thing that I’ve noticed, and that is the number of loans, refinancing for rate has diminished substantially, most of the prepayments embedded in our number are the sale of the underlying assets. So that’s probably the biggest thing that jumps out in terms. But competition is still out there. I 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 tighten the reins on in some areas as well. So I just want to make sure that the folks on this call know that we’re not dump holes in terms of, we’re very careful in what we’re doing. And we’re paying attention to the environment. It just that there’s a lot of pent-up growth that might be just coming our way. And the expansion and our teams out there doing a good job.
Operator
Our next question comes from the line of Billy Young of RBC.
Billy Young
Hey, good morning, guys. How are you? Just as a follow up to the prior question just not under any competition. Can you guys sense that any of the commercial activity you’re seeing now is maybe kind of a pull forward of activity, just for customers and wherever rates might go or do you kind of get the sense that what you have in the pipeline, what you’ve in for your clients is sustainable, as we and this is I get more of a comment on what the 2023 outlook might look like, going forward.
Tony Labozzetta
I don’t see this as a pull forward. I don’t that.
Tom Lyons
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 forex transactions that have afforded this opportunities.
Tony Labozzetta
That’s a good point. So yes, that disruption in the marketplace ensures as some of the banks like us are taking advantage of that. And we’re getting I guess, our fair share that with our folks being out there. And I would say probably the area that I would if I had to look forward and say what might slow down is 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 latest outstanding this particular quarter, but on the other sectors, I think they’re just moving quite strong.
Billy Young
Right, thank you for that. And my next question, just moving to the funding side. Just kind of want to get a sense of kind of how you’re approaching your funding strategy in the current climate for next few quarters on particularly getting your move of some your broker deposits out into FHLB.
Tom Lyons
Yes, the SB, that’s just whatever it’s a lower cost alternative. We used to fund those rolling 90 day advances through FHA. Those rolling 90 day liabilities through FHLB advances. A couple of quarters back, it was cheaper to go to brokered. The pricing has just moved us back to the FHLB. 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 the origination of the lending relationship. And we have a fair amount that we expected to see flowing to the bank over the course of the next three to six months. So I mean, I don’t think we’re going to see outsize 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.
Billy Young
Thank you. Appreciate that. Last question, it was nice to see you open a branch in my backyard in Rosalind this past quarter. Could you remind us of any other near term, medium term expansion plans you might have in the pipeline? And maybe if there’s been any change in your thinking about how New York kind of fits into the long-term strategy and footprint from a brick-and-mortar perspective.
Tony Labozzetta
When you say New York, do you mean Manhattan or New York as bigger New York?
Billy Young
I get — I assume it’s the New York metro area. And I guess, Long Island as an extension of that.
Tony Labozzetta
I would, as I mentioned in the past strategically our thought processes are more you could, if you were to see you’ll see us a little bit north of us, which is that Rockland, Westchester is an area that we think is desirous, the greater Philly areas, an area that we think is desirous for us to have more of what I would call a regional expansion in. The way we’re approaching the Rosalind Manhasset area, it’s been quite successful. And our formula if overlaid in other markets would bode well for our bank. So again, we’re not going to be branch heavy strategy, but more of a regional lending office with an attached branch that our customers can be served from with a digital heavy strategy. So hopefully, I gave you color on the markets that we think are desirable, in addition to where we are presently and so.
Operator
[Operator Instructions]
So our final question comes from Manuel Navas of D. A. Davidson.
Manuel Navas
Hey, good morning. Are you talking about tightening or being maybe a little more selective just because you’ve had such robust growth? Where are you tightening? And what are you kind of avoiding just in case there are some greater macro issues.
Tony Labozzetta
Sure. I think for us, the tightening has been conversations throughout the year and we’re not in any way getting out of any sector. So I’ll make that comment upfront, it’s the nature of how we would lend in that sector that is more the appropriate common areas that two that I can point to immediately would be hospitality and office space. Probably, we would look at it with certain characteristics in order for us to be in that. And that’s in those sectors. Those are the two that come to mind the quickest. And then on balance for everything. It’s maybe just looking at reducing the leverage and transactions, improving the sponsorship terms, things of that nature. But we were getting to a level where we feel comfortable that we’re remaining very mindful of the possibilities that can take place. And so therefore, we as Provident Bank, do we feel comfortable making these laws under these terms? And with our new guidelines, we feel pretty good that we’re approaching this with some sensibility.
Manuel Navas
I appreciate that. The buyback is pretty ongoing, and you’re still seeing a pretty robust growth. Can both continue at, can buyback continue with growth proceeding at this pace? Or they’re just kind opportunistic?
Tom Lyons
Yes, the second one. Opportunistic. I think you see the buyback moderate given the strength in asset formation that pipeline is really strong. We’d much prefer to lever that capital than return it.
Operator
Thank you. As there are no additional questions waiting at this time. I’d now like to hand back over to the management team for closing remarks.
Tony Labozzetta
Thank you. We’d like to thank everyone that was on this call. It was good sharing our good performance and information. And we look forward to the third quarter and getting back together and hopefully we’ll have another good quarter to report. Have a great day.
Operator
That concludes today’s conference call. You may now disconnect your lines.
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