Provident Financial Services Inc (PFS) 2022 Q2 法說會逐字稿

Good morning, and 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.

(Operator Instructions)

I would now like to hand the conference call over to our host, Adriano Duarte, 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 Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons. Before beginning the 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, provident.bank.

Now it's my pleasure to introduce Tony Labozzetta, who will offer his perspective on our second quarter. Tony?

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 our quarterly cash dividend of $0.24 per share. During the quarter, we also repurchased approximately 706,000 (sic) [760,000] shares of our common stock at an average price of $23 per share. Capital position remains strong and comfortably exceeds well capitalized levels.

We remain 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 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. 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 rate increased 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 1 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 point 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, fee 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 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 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. 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 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 totaled $162,000 on June 30.

Meanwhile, funding costs remained stable, with the average total cluster deposits increasing just 1 basis point to 20 basis points and the average cost of total interest-bearing liabilities up just 2 basis points to 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 3.17%.

The pull-through adjusted loan pipeline on 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-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-brokered deposit balances. Quarter end and quarterly average total deposits, however, were lower than the trailing quarter, primarily due to a shift of $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 nonperforming loan levels, total delinquencies, criticized and classified loans and related ratios again improved versus the trailing quarter. Nonperforming assets decreased to 36 basis points of total assets from 39 basis points on March 31. Excluding PPP loans, the allowance represented 79 basis points of loans unchanged from the trailing quarter end.

Noninterest income increased $784,000 versus the trailing quarter as increases in gains on loan sales, loan prepayment fees and benefit claims on bank loan 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 were 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 costs 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 plans. Approximately $800,000 of that $1.2 million was a cumulative 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 will be happy to respond to questions.

(Operator Instructions)

Our first question comes from the line of Mark Fitzgibbon of Piper Sandler.

Tony, I think you had mentioned the 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.

It increased about 5 percentage points from 31%, I think, to 36%. Historically, we've been running closer to the 40%, give or -- rise 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 $100 million to $120 million of additional outstandings associated with that. I could be off a little I'm doing that math at the top of my head. Maybe a little less than that.

Okay. Great. And then, Tom, I wonder if you could share with us maybe what was AUM? And what net flows look like?

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 than in Q1 in terms of AUM.

Mark, just a little follow-up there. Most of the AUM was valuation-driven. I think one of the 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.

And let me make a quick correction to actually just give you a change for the spot, on average, the change was $200,000. 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?

Looks like we have continued expansion, Mark. We've been modeling. It looks like [3.35% to 3.40%] kind of range. I think that's with some fairly conservative deposit beta assumptions in the back half of the year, too. Obviously, so far, it's been 1 basis point on the Fed hikes so far. But we take that up to about 40%, 37% all-in on deposits for the back half of the year, trying to get us to more like a 23% through the cycle.

Okay. So that's your assumption, 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, I wonder if you could share with us your thoughts on M&A. Is it possible the new 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 kinds of the acquisitions?

I'll take the last one first. I don't know if the price on the wealth management deals has gotten any more rational. I think -- I think that's probably constant. We still see activity there. In terms of the whole bank M&A -- a lot more noisy in the environment given the AOCI and potential recession or rein in [or not in one]. But I think the -- I characterize it if you had 2 good banks before, you're going to have 2 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 a 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 a good one. Mark?

Our next question comes from the line of Michael Perito of KBW. Please go ahead.

I wanted to start, I think I looked back last quarter on the fee side, I think you guys had talked about a $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 AUM of the investments. But I think we see a little bit of pickup in insurance over the next quarter or so. That should offset to a large degree.

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?

That's our projection, yes.

Cool. And then on the OpEx side, I think it was $62 million to $64 million. I appreciate the color on the stock-based comp and the $400,000 that's in the run rate. I guess the wildcards kind of the provision for unfunded commitments, but any kind of guess 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 at the last couple of quarters?

Yes. We always pull the unfunded commitments provision out and say on our core basis, the operating expenses. I still think are going to run around $64 million, the downside risk there is wage pressures a little bit in the back half of the year. But I think we can hold to the $64 million level.

Cool. All right. Tony, just a question on growth. Obviously, really strong line utilization pickup is 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 the shelves. And just curious perhaps the dichotomy of that, that you guys are seeing?

I mean the growth is coming across most of our market, right? So we also have opened up a new regional office site on Long Island, which has produced about $150 million of growth, which is embedded in that number. The tenor of our clients is 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 up -- we've got 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.

Yes. I think activity was deferred for such a long period that even just trying to get back to normal results and some growth without trying to be overly optimistic about the economic outlook.

Yes. So answering it in a back way is, Mike, 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 an attestment to the fact that our pipeline still remains strong, and we're seeing a lot of activity still. So...

Helpful. And then just a 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-to-deposit ratio is moving up. Just there's a few different things kind of tugging in different ways. I'm just curious if you 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.

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 numbers are for the sale of the underlying assets. So that's probably the base thing that jumps out in terms. But competition is still out there. I do want to express 1 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 reins in some areas as well.

So I just want to make sure that the folks on this call know that we're not going whole in terms of -- we're very careful in what we're doing, and we're paying attention to the environment. It's just that there's 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.

Our next question comes from the line of Bill Young of RBC Capital Markets.

Just as a follow-up to the prior question just on the decomposition. Do you guys sense that any of the commercial activity you're seeing now is made kind of a pull-forward of activity for customers and where rates might go? Or do you kind of get the sense that what you have in the pipeline, what (inaudible) 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 see that.

Yes. 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 these opportunities.

That's a good point. So yes, that disruption in the marketplace, I'm sure is some of the banks like us are taking advantage of that, and we're getting, I guess, our fair share of 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 the construction space, obviously, short-term prime rates moving that might affect the inflationary costs or all that stuff that might weigh in heavily on the construction side, which is an area that we probably saw our lightest outstanding this particular quarter. But in the other sectors, I think they're just moving quite strong.

Great. 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 time for the next few quarters, particularly given your move of some of your broker deposits out into FHLB?

Yes, that's just whatever is the lower-cost alternative. We used to fund those rolling 90-day advances through -- those rolling 90-day liabilities through FHLB advances. Couple of quarters back, it was cheaper to go to brokered. The pricing has just moved us back to 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 expect to see flowing to the bank over the course of the next 3 to 6 months.

So I mean, 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.

Appreciate that. And my last question. It was nice to see you open a branch in a backyard in Roslyn 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 the long-term strategy and footprint from a brick-and-mortar perspective?

When you say New York, do you mean Manhattan or New York as a bigger New York?

I assume the New York Metro area and I guess, Long Island has an extension of that?

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 area is an area that we think is desirous for us to have more what I would call a regional expansion in. The way we're approaching the Roslyn, Manhasset area has been quite successful. And that formula if overlaid in other markets would bode well for our banks. So again, we're not going to be a branch-heavy strategy, but it's 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 et cetera.

(Operator Instructions)

So our final question comes from Manuel Navas of D.A. Davidson.

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 you kind of avoiding just in case there are some greater macro issues?

Sure. I think the -- for us, the tightening has been conversations throughout the year and -- but 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 comment. The areas that -- 2 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 rein in that and that's in those sectors. Those are the 2 that come to mind, the quickest.

And on balance for everything, it's maybe just looking at reducing the leverage in transactions, improving the sponsorship terms, 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, we're 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 pretty ongoing and you're still seeing pretty robust growth. Can both continue at -- can buyback continue with growth proceeding at this pace? Or is it just kind of ...

Yes, the second one, opportunistic. I think you see the buyback moderate given the strength in the asset formation. The pipeline is really strong. We much prefer to lever that capital and return it.

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.

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.

That concludes today's conference call. You may now disconnect your lines.