Provident Financial Services Q4 2021 Earnings Call Transcript

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January 28, 2022

Key Takeaways

  • Positive Sentiment: Provident reported Q4 EPS of $0.49, achieved a 1.08% ROAA and 12.04% ROTCE, declared a $0.24 dividend and repurchased 290K shares at $23.43.
  • Positive Sentiment: Commercial lending surged with $663 M of new loans (18.6% QoQ), a $1.05 B pipeline (50% pull-through), and a 7.1% annualized portfolio growth ex-PPP.
  • Positive Sentiment: Core deposits grew sharply, with non-interest bearing funds up 24.4% annualized, total deposit cost at 21 bps and Provident moderately asset-sensitive ahead of Fed rate hikes.
  • Positive Sentiment: Fee businesses gained momentum: SB 1 Insurance revenue rose 23.5% with a 99.8% retention rate, Beacon Trust AUM up 13.2% and revenue up 18.1% YoY.
  • Neutral Sentiment: Provident expects NIM of 2.99%–3.05% in 2022 assuming up to three Fed hikes, an effective tax rate near 25.75% and ~ $260 M of quarterly operating expenses.
AI Generated. May Contain Errors.
Earnings Conference Call
Provident Financial Services Q4 2021
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day, and welcome to the Provident Financial Services Incorporated 4th Quarter and Year End Earnings Release. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Adriana Duarte of Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Chuck. Good morning, everyone, and thank you for joining us for our Q4 earnings call. Today's presenters are President and CEO, Tony Lapazetta and Senior Executive Vice President and Chief Financial Officer, Tom Lyons. Before beginning the review of our financial results, we ask you that you please take note of our standard question 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.

Speaker 1

Bank. Now it's my pleasure to introduce Tony Labasada, who will offer his perspective on the Q4. Tony?

Speaker 2

Thank you, Adriano, and good morning, everyone. Provident had strong financial performance for the 4th quarter with earnings of $0.49 per share. Our performance was driven by growth in all of our key business lines, resulting in the deployment of some of our excess liquidity and increased average earning assets. That growth combined with improved credit metrics and a strong expansion in our fee based businesses drove the increase in quarterly revenue, which produced a solid annualized return on average assets of 1.08% and return on average tangible equity of 12.04%. Our Board approved quarterly cash dividend of $0.24 a share.

Speaker 2

During the quarter, we also repurchased approximately 290,000 shares of our common stock at an average price of $23.43 per share. Our capital position remains strong and comfortably exceeds well capitalized levels. Our focus continues to be on growing our business lines, especially commercial lending. Our commercial lending group continues to exhibit strong productivity. In the Q4, we closed over $663,000,000 of new loans, an increase of 18.6% from the prior quarter.

Speaker 2

Prepayments adjusted for PPP remain elevated and partially offset our strong production. Approximately 50% of our commercial loan prepayments were driven by the sale of the underlying asset or refinanced away at terms that were deemed unacceptable by us. In the 4th quarter, we saw a nominal increase in our line of credit utilization percentage to 28%, still below our historical average of approximately 40%. Our production continues to outpace the pressures of the current operating environment. As such, we grew our commercial loan portfolio excluding PPP at an annualized rate of 7.1%.

Speaker 2

We had substantial pull through in our commercial loan pipeline during the Q4. However, as we move into 2022, our pipeline remains solid at approximately $1,050,000,000 The pull through adjusted pipeline, including loans pending closing is approximately $641,000,000 The market continues to be very competitive and our team faces pressure on rates and structure from banks and non banks. Despite these challenges, we are seeing strong lending activity and with a focus on providing our clients the best in class customer experience, we are confident about our loan growth heading into 2022. Our expected pipeline rate increased 20 basis points from last quarter. We expect good pull through and if our prepayments are stable, we should have strong loan growth in the first quarter of 2022.

Speaker 2

We continue to observe stable to improving market conditions. Consequently, our asset quality continues to improve. And during the quarter, we actually experienced net recoveries to our allowance for credit losses. We had very good growth in our core deposits, particularly non interest bearing deposits, which grew at an annualized rate of 24.4% and presently comprised 24.6% of our total deposits. Our total deposits for the total cost of deposits for the quarter declined 2 basis points to 21 basis points and remains amongst the best in our peer group.

Speaker 2

We anticipate that the Federal Reserve will commence hiking interest rates in 2022. Provident is moderately asset sensitive, and we have a stable low cost deposit base, which positions us well for rising interest rates, while protecting us in the event rates remain constant. We are enthusiastic about the momentum in our fee based businesses, Beacon Trust and SB 1 Insurance, as they continue to build synergy with the bank. SB 1 Insurance grew revenue 23.5 percent for the quarter compared to the same quarter last year, driven largely by strong organic growth and a retention ratio of 99.8%. Beacon Trust also had notable organic growth and solid performance with assets under management increasing approximately 13.2% and revenue increasing 18.1% over the same quarter last year.

Speaker 2

During this past year, we stroked to build for the future. We developed a strategic plan with a new vision and mission statement and we adopted new core values, which we call our guiding principles. This initiative will help ensure that we preserve what has made Providence special, while at the same time investing in our bank and our people to continue to build the value of our franchise. As we move into 2022, our aim is to grow earning assets and enhance our asset mix, which should improve our margin and optimize our net interest income. To further diversify our revenue sources, we will focus on growing our fee based businesses strengthen the synergies with the bank.

Speaker 2

We also have a number of digital initiatives that will modernize certain business processes. Lastly, I would like to thank our talented colleagues for their effort and dedication. I'm excited about their commitment to achieving the objectives in our plan, which will enable us to deliver long term shareholder value. With that, I'll turn the call over to Tom for his comments on our financial performance. Tom?

Speaker 3

Thank you, Tony, and good morning, everyone. As Tony noted, our net income for the quarter was $37,300,000 or $0.49 per diluted share, consistent with the trailing quarter. Pretax pre provision earnings for the quarter were $52,000,000 or an annualized 1.5 percent of average assets. Revenue exceeded $114,000,000 for the 2nd consecutive quarter on the strength of record interest and net interest income. Average earning assets increased $330,000,000 over the trailing quarter and the net interest margin increased 1 basis point to 2.95 percent despite elevated liquidity.

Speaker 3

Income recognized from PPP loan forgiveness fell $622,000 versus the trailing quarter to $1,800,000 and remaining deferred PPP fees totaled $1,500,000 at December 31. Meanwhile, we drove our funding costs down again as average deposits increased and average borrowings declined. Average non interest bearing deposits increased $208,000,000 versus the trailing quarter and the total cost of deposits declined another 2 basis points to just 21 basis points. Excluding the impact of PPP loans and purchase accounting adjustments, the core net interest margin decreased 2 basis points from the trailing quarter to 2.84%. The pull through adjusted loan pipeline at December 31st decreased $416,000,000 from the trailing quarter to $641,000,000 as loan closings were strong.

Speaker 3

Loan funding was 13% higher than the trailing quarter and 23% greater than in the Q4 of 2020. The pipeline rate increased 20 basis points since last quarter to 3.6 percent and we're seeing good origination activity and pipeline growth to start 2022. Excluding PPP loans, period end loan totals increased $106,000,000 or an annualized 4 point percent versus September 30. Loan growth occurred primarily in the CRE and C and I categories with total commercial loans growing at an annualized 7.1% pace this quarter. The allowance for credit losses on loans increased $700,000 for the quarter as a result of $400,000 provision and $300,000 of net recoveries.

Speaker 3

Asset quality metrics, including non performing loan levels, total delinquencies, criticized and classified loans and related ratios improved versus the trailing quarter. Non performing assets decreased to 42 basis points of total assets from 51 basis points at September 30. Excluding PPP loans, the allowance represented 0.85% of loans unchanged from the trailing quarter. Excluding a $3,400,000 reduction in contingent consideration reported in the trailing quarter related to the 2019 purchase of registered investment advisor, Tirschwell and Loewy, non interest income increased $700,000 as a result of increased gains on loan sales, prepayment fees and other loan fees, partially offset by a reduction in gains from the sale of REO. Excluding provisions for credit losses on commitments to extend credit for both periods and additionally in 2020, merger related and COVID expenses, operating expenses were an annualized 1.81 percent of average assets for the current quarter compared with 1.85% in the trailing quarter and 1.82% for the Q4 of 2020.

Speaker 3

The efficiency ratio was 54.74 percent for the Q4 of 2021 compared with 54.51 percent in the trailing quarter and 54.12% for the Q4 of 2020. Our effective tax rate was 28.4% versus 25.7% for the trailing quarter. Upon the filing of the 2020 state income tax returns in the Q4 of 2021, a discrete item for additional tax expense was recorded related to the apportionment of income subject to state income taxes. We are currently projecting an effective tax rate of approximately 25.75 percent for 2022. That concludes our prepared remarks.

Speaker 3

We would be happy to respond to questions.

Operator

And the first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Speaker 4

Hey guys, good morning.

Speaker 2

Good morning, Mark.

Speaker 4

Hey, Tony. First, I was wondering, Tom, could you share with us what the accretable yield for the last two quarters was?

Speaker 3

Yes. I think the impact on margin was about 7 basis points. Let me see, purchase accounting, so 7 basis points this quarter, 5 basis points last quarter. Okay, correct.

Speaker 4

And then secondly, I wondered if you could help us think about the margin going forward?

Speaker 3

Yes, I think for the year, we're looking about probably $2.99 to a $3.03, $3.05 kind of range on the top end depending on what the Fed does.

Speaker 4

And so that bakes in 3 rate increases this year?

Speaker 3

Yes, 1% to 3% is kind of the range when, say, in 2.99%, if there's one increase and 3% would give us approximately a 3 0.3% to 3 0.5% kind of number.

Operator

Okay.

Speaker 4

And then historically, you guys have been pretty disciplined on the expense front. Anything unusual coming down the pipe this year that's likely to nudge that expense growth higher?

Speaker 3

No. I mean, we're continuing to make investments in business, which will give us returns. But I'd say total all in, probably close to 260, was what I think about for the year. So roughly 65,000,000 a quarter, it's usually skewed a little bit heavier to the 1st part of the year because of the payroll tax reset and some seasonal costs around utilities and snow removal.

Speaker 4

Okay. And then Tony, first off, congratulations on your new role. I know you have some small shoes to fill. I mean, excuse me, big shoes. What are some of, I guess, your key priorities in your new role?

Speaker 4

What areas are you likely to focus most heavily on?

Speaker 2

I think the thing that I'm most focused going into 2022 for us is making sure our business lines are all integrated and humming and getting the production that we need, designing the organizational table, aligning all the executives, so we can move on into the future. I think we're also spending some good time on visualization analytics for our group that can give us better decisioning and affect the outcome of our performance a little bit better. So those are some of the things that at a high level and certainly we're looking at our fee based businesses, both Beacon and Insurance and try to scale them up so that they can maintain some relativity with the bank. I think I touched upon most of that. I think that's what's important for me for this year.

Speaker 4

Okay. Then I guess I'm also curious now that you've the integration is complete with SB 1, how are you thinking about future acquisitions?

Speaker 2

I mean, I think Chris and I are always pretty aligned on this thought process. Future acquisitions are always part of our, what I would call, strategic thought process. However, we're not doing them just for the sake of scale. I think we have a number of parameters around how we think about it in terms of culture first. We want to make sure that the culture fits within what we're doing and who we are so that we don't create too much disruption.

Speaker 2

But certainly, that's something that we will continually look at. In addition, we also, as I mentioned earlier, we're looking at our fee based businesses, both our wealth group, which is Beacon and insurance, which is SB 1. And we would look to activities around M and A with them as well to scale up that business.

Speaker 4

Thank you.

Speaker 2

You're welcome.

Operator

The next question will come from Michael Perito with KBW. Please go ahead.

Speaker 5

Hey, good morning. Thanks for taking my questions.

Speaker 2

Good morning, Mike.

Speaker 5

I wanted to start on the loan growth commentary. It seems like you guys still feel pretty good about the outlook. I'm just curious as we think about kind of the cadence of the year, I mean with the pipeline stepping down quarter on quarter and the prepayments seeming a little elevated, is it fair to think that the growth could kind of pick up as the year progresses in 2022? Or do you think that there's room to rebound pretty quickly off that 4% level annualized you guys put up in the 4th quarter?

Speaker 2

Mike, I think when we look at our focus tends to be more on the commercial side. And on an annualized basis, we were actually 7.1% there. And that's where a lot of our calories are being directed. That being said, I'm pretty optimistic and that's why I put the comments in our written statement. I'm seeing a tremendous amount of activity within our group when we discuss with the teams what's happening, the number of deals that are going through our deal screen committees, it's heightened.

Speaker 2

So the expectation right now is that the pipeline will replenish rapidly. We still have some good funding that we have to do on loans we closed at the end of the quarter. So we expect the Q1 to be a good growth quarter for us with the caveat of the unknown, which is if we see any prepayments that come through that we didn't expect, that would be the only constraint. But that our production activity is quite impressive in our commercial bank. I mean, if you look at this year, we closed nearly $2,000,000,000 of production.

Speaker 2

It's just the prepayments that have offset that. And so as that slows down, we're going to be a highly productive bank in terms of commercial loan

Speaker 5

growth. That's good to hear. Thanks for that color. And then on the non interest income side, you kind of conceptually mentioned a few of your focuses around the insurance and wealth business. I was wondering if you guys could give a little bit more context around the financials around that.

Speaker 5

And as we look at the fee income run rate in the back half of 'twenty one, any thoughts about what are realistic growth ranges or where that could head for 2022? I

Speaker 3

can comment just on the historical results for wealth to start. AUM at the end of the period is about $4,200,000,000 Last 12 months fee rate runs about 77 basis points. Good profitability out of the business, net margins close to 30%, we're about 28% and change in terms of net margin, solid growth year over year in revenue, about 19.6% in revenue, net income from the fully allocated with tax effect and everything is about 17.2% better than last year. So strong performance for us in 2021.

Speaker 2

Sure. And I would add another color to the Beacon side, which is pretty strong year in new business production. The integration with the bank continues to build. I mean, they I think 10% of the new production that Beacon had was generated from referrals coming from the bank side. So we're seeing some good dynamics there.

Speaker 2

I think the only caution that I would put on Beacon is the broader market, what happens to valuations. But in terms of growing the business and its profitability, it's strong. And the only again, the only thing that can possibly be a negative is what happens to the broader market. With regards to SB 1 Insurance, they had a banner year. I think that we can continue to put that 15% to 20% growth on them for the upcoming year.

Speaker 2

They ended the Q4 very strong. Q1 tends to be one of their best performing quarters. So certainly, it's a seasonal type business. And I'm expecting, we're expecting that the insurance company will do well again in

Speaker 3

the Q1. One final metric on Beacon that I wanted to mention also, the year over year change in new clients was 74. So that bodes a little bit well for future growth too as you work to broaden that relationship over time. Generally, we can we're able to acquire additional assets as

Speaker 2

we add new clients. Exactly. And last comment I'll make on insurance, on the insurances, same with Beacon, they're seeing a high level or heightened level of activity in terms of referrals from the commercial and retail banks and etcetera. So I like that integrated approach to our business and we're seeing some good pickup there.

Speaker 5

That's helpful. And not to get too nitty gritty, but just on the BOLI line, it kind of jumped around a bit this past year. Any thoughts of where that could maybe settle a little bit more as we look to next year?

Speaker 3

Yes, difficult to predict because the volatile item there unfortunately is benefit claims.

Speaker 2

Yes, especially

Speaker 5

in the I guess maybe asking a little differently understanding it's a little difficult to predict, but did you kind of view the back half of 'twenty one as a little elevated relative to what you expected or just trying to get a little bit of a better sense of

Speaker 3

Yes, I think the first half of twenty twenty one was more representative of a run rate ex benefit claims.

Speaker 5

Got it. Perfect. And then just lastly, can you guys just rehash the appetite on repurchases here? You got a little bit of room left on the authorization. Just curious how you guys are thinking about it at the start of 2022?

Speaker 3

Pretty much the same methodology we've always applied. We look for entry points that give us a good return on our back on the tangible book dilution. So we were below $23.50 in the last quarter's purchases. That made sense for us at that point. That's something we analyze on a continuing basis.

Speaker 3

So we continue to be in that position. We stay opportunistic and we evaluate our price point regularly.

Speaker 5

Okay. Thank you, guys. Appreciate the color.

Speaker 6

Thanks, Mike.

Operator

The next question will come from Russell Gunther with D. A. Davidson. Please go ahead.

Speaker 7

Hey, good morning, guys. Good morning, Rob. I wanted to follow-up on the loan growth discussion, sounds very constructive. Wondering if you guys would be willing to bracket expectations for organic growth in 2022, Sounds like very much commercial weighted, but any additional color in terms of loan verticals or geographic contributions would be helpful as well.

Speaker 2

Sure. I would probably feel comfortable putting down that 5%, 6% growth as something that is very doable. Again, our productivity is high, so prepayments are at a much reduced level. That percentage could be much higher. But I'm comfortable based on the dynamics that I'm seeing now that 5%, 6% is a good thing to model.

Speaker 2

I didn't get that second part, Russell, of your question. You mind repeating it?

Speaker 7

Just any anticipated change in terms of the mix, the drivers of that 5% to 6% or any pockets of strength within the footprint to call out?

Speaker 2

Yes, I think if you look at this year, most a lot of our production, we did about 30% 31% in C and I loans, which is a little higher than where we were pacing. So I expect the C and I side to continue to see a little higher growth. In terms of the Cree space, we like that industrial. We're seeing a lot of activity there, some multi, things of that nature. Geographically, I think we're still in the markets that we historically observed.

Speaker 2

And from time to time, we'll follow our clients outside of our markets in order to serve them.

Speaker 7

Thanks for that. And then just a follow-up, Tom, in terms of the margin guidance, appreciate the rate expectations in there. What do you guys assume in terms of deposit betas within that rate hike scenario?

Speaker 3

Yes, I think Russell, in my call, I mentioned last time we were conducting deposit study and reevaluating some of the assumptions around that. We have brought those betas down. I think all in on a weighted average basis, it's more like 23% at this point in our model, which is more consistent with what we saw during the last rate rising cycle.

Speaker 7

Okay, great. Thanks for that, Tom. And then just last one for me is on expenses that kind of think about thinking about a 65,000,000 dollars average for the year per quarter, a little bit of a step up from the current run rate, obviously inflationary pressures, but any additional color in terms of what's driving the step up in terms of your outlook for 2022?

Speaker 3

There are some business investments in there, some system things, we got new loan origination system that's there's some contract costs on, small business lending platform enhancements that we're doing. So there's a number of IT related items that are taking some of that cost that we think will give us a nice return over time.

Speaker 7

Great. Thanks so much for the help.

Speaker 4

Have a

Speaker 5

good one.

Speaker 2

Thanks, Russell.

Operator

The next question will come from Erik Zwick with Boenning and Scattergood. Please go ahead.

Speaker 6

Hey, good morning guys.

Speaker 3

Good morning. Good morning.

Speaker 6

Tom, maybe just first a follow-up on your commentary there that you've kind of lowered the expected deposit betas for the cycle compared to your previous modeling. I'm curious how much of an impact does that have on your interest rate sensitivity tables that you show in your 10 Q, if you have those numbers? Yes. Maybe just say for like a plus 100 basis point increase.

Speaker 3

Yes. Net income ramped up 100 basis point, the percentage change favorable from the base case is about 4.4%.

Speaker 6

4%. Great. That's helpful. Thank you. And then thinking about the loans in the pipeline today, I guess, first curious, do you have the average weighted yield of loans originated in 4Q?

Speaker 6

And then I guess, is the pipeline yield similar to that level as well?

Speaker 3

Almost exactly. We're right about 3.60% in both cases.

Speaker 6

That was 3.60?

Speaker 3

Yes, 3.6%, 3.60%.

Speaker 6

Great. Thank you. And then let's see what else. Any thoughts on the effective tax rate in 2022? I think you're around what 26% in 2021?

Speaker 3

Yes, I think we're looking at 25.75% for 2022. We see a little bit of a bump up from that change in apportionment with the acquisition last year that we saw reflected in Q4. So some of that persists, but we do have some tax planning strategies we put into play. I think lower taxable income relative to this year is going to make the proportion of tax exempt items a little bit less and therefore that drives up the rate the effective rate a little bit as well. So 25.75%.

Speaker 6

Perfect. Thanks. And then last one for me. If I look at the investment securities portfolio today, about $2,500,000,000 or so, about 19% of total assets. Just curious how you think about that today, if you're comfortable with that level and should we see it grow commensurate with loans and kind of hold that percentage level or if you'd look to make any changes one way or the other?

Speaker 3

Really a liquidity deployment play, less than desire to maintain an investment portfolio at that level. If we had adequate loan growth, we certainly could shift funding. That said, we do still have excess liquidity on the balance sheet. We think on average, we could deploy about another $200,000,000 So it'll be done in a mix of loans and investments. And then that investment portfolio throws up about $35,000,000 a month in new cash flow.

Speaker 3

So we can shift the mix to loans and use that for funding over time as well.

Speaker 6

Great. Thanks for taking my questions today.

Speaker 2

Thank you. Thank you, Eric.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Tony Lobosetta for any closing remarks. Please go ahead.

Speaker 2

Thank you. I would like to thank everyone for joining us on the call, and we look forward to talking to many of you throughout the year. If you're on the East Coast, stay safe in the snowstorm. And thank you very much, and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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