Good day, and welcome to the Provident Financial Services, Inc. fourth quarter and year-end earnings release. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Adriano Duarte of Investor Relations. Please go ahead, sir.
Thank you, Chuck. Good morning, everyone, and thank you for joining us for our fourth 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 the fourth quarter. Tony.
Thank you, Adriano, and good morning, everyone. Provident had strong financial performance for the fourth 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 per share. 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 fourth quarter, we closed over $663 million of new loans, an increase of 18.6% from the prior quarter. 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 fourth 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%. We had substantial pull-through in our commercial loan pipeline during the fourth quarter. However, as we move into 2022, our pipeline remains solid at approximately $1.05 billion. The pull-through adjusted pipeline, including loans pending closing, is approximately $641 million. 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. We continue to observe stable to improving market conditions. Consequently, our asset quality continues to improve. 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 comprise 24.6% of our total deposits. Our total cost of deposits for the quarter declined two basis points to 21 basis points and remains amongst the best in our peer group. 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 One Insurance, as they continue to build synergy with the bank. SB One Insurance grew revenue 23.5% 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. During this past year, we strove 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 Provident 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 and strengthen the synergies with the bank. 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?
Thank you, Tony, and good morning, everyone. As Tony noted, our net income for the quarter was $37.3 million or $0.49 per diluted share, consistent with the trailing quarter. Pre-tax, pre-provision earnings for the quarter were $52 million or an annualized 1.5% of average assets. Revenue exceeded $114 million for the second consecutive quarter on the strength of record interest and net interest income. Average earning assets increased $330 million over the trailing quarter, and the net interest margin increased 1 basis point to 2.95% despite elevated liquidity. Income recognized from PPP loan forgiveness fell $622,000 versus the trailing quarter to $1.8 million, and remaining deferred PPP fees totaled $1.5 million at December 31st.
Meanwhile, we drove our funding costs down again as average deposits increased and average borrowings declined. Average non-interest-bearing deposits increased $208 million 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 31 decreased $416 million from the trailing quarter to $641 million as loan closings were strong. Loan funding was 13% higher than the trailing quarter and 23% greater than in the fourth quarter of 2020.
The pipeline rate increased 20 basis points since last quarter to 3.6%, and we're seeing good origination activity and pipeline growth to start 2022. Excluding PPP loans, period end loan totals increased $106 million or an annualized 4.5% versus September 30th. Loan growth occurred primarily in the CRE and C&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 a $400,000 provision and $300,000 of net recoveries. 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 30th.
Excluding PPP loans, the allowance represented 0.85% of loans unchanged from the trailing quarter. Excluding a $3.4 million reduction in contingent consideration recorded in the trailing quarter related to the 2019 purchase of registered investment advisor Tirschwell & 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% of average assets for the current quarter, compared with 1.85% in the trailing quarter and 1.82% for the fourth quarter of 2020.
The efficiency ratio was 54.74% for the fourth quarter of 2021, compared with 54.51% in the trailing quarter and 54.12% for the fourth quarter 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 fourth quarter 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% for 2022. That concludes our prepared remarks. We would be happy to respond to questions.
We'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys. Good morning.
Good morning, Mark.
Hey, Tony. First I was wondering, Tom, could you share with us what the accretable yield for the last two quarters was?
Yeah. I think the impact on margin was about 7 basis points. Let me see. Purchase accounting is 7 basis points this quarter, 5 basis points last quarter.
Okay, great. Secondly, I wondered if you could help us think about the margin going forward.
Yeah. I think for the year, we're looking about probably $299- $303, $299-$305 kind of range on the top end, depending on what the Fed does.
That bakes in 3 rate increases this year?
Yeah, 1-3 is kind of the range when, you know, say in $299, if there's 1 increase and 3, would give us approximately a $303-$305 kind of number.
Okay. 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, you know, expense growth higher?
No. I mean, we're continuing to make investments in business which will give us returns. I'd say total all-in probably close to $260 million was what I think about for the year. Roughly $65 million a quarter. It's usually skewed a little bit heavier to the first part of the year because of the payroll tax reset and some seasonal costs around utilities and snow removal.
Okay. Tony, first off, congratulations on your new role. I know you have-
Thank you.
Some small shoes to fill. I mean, excuse me, big shoes. What are some of, I guess, your key priorities in your new role? What, you know, areas are you likely to focus most heavily on?
I think the thing that I'm most focused going into 2022 for us is, you know, making sure our business lines are all integrated and humming and getting the production that we need. You know, 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, you know, affect the outcome of our performance a little bit better. So those are some of the things that at a high level. Certainly we're looking at our fee-based businesses, both Beacon and Insurance, and trying 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.
Okay. I guess I'm also curious now that the integration is complete with SB One, how are you thinking about future acquisitions?
Well, I mean, I think, you know, Chris and I are always pretty aligned on this thought process. You know, 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. Certainly, you know, 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 One, and we would look to activities around M&A with them as well to scale up that business.
Thank you.
You're welcome.
The next question will come from Michael Perito with KBW. Please go ahead.
Hey, good morning. Thanks for taking my questions.
Good morning, Mike.
I wanted to start on the loan growth commentary. You know, 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-over-quarter and the prepayments seeming a little elevated, is it fair to think that, you know, 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 fourth quarter?
Mike, I think when we look at our focus tends to be more on the commercial side. You know, 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 screening committees. It's heightened. The expectation right now is that the pipeline will replenish rapidly. You know, we still have some good funding that we have to do on loans we closed at the end of the quarter.
We expect the first quarter 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. Our production activity is quite impressive in our commercial bank. I mean, if you look at this year, we closed nearly $2 billion of production. It's just the prepayments that have offset that. As that slows down, we're going to be a highly productive bank in terms of commercial loan growth.
That's good. Good to hear. Thanks for that color. 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 just give a little bit more context around the financials around that. As we look at the fee income run rate in the back half of 2021, you know, any thoughts about, you know, what are realistic growth ranges or where that could head for 2022?
I can comment just on the historical results for wealth to start. AUM at the end of the period is about $4.2 billion. The last 12 months fee rate runs about 77 basis points. Good profitability out of the business. Net margin's close to 30%. We're about 28% and change in terms of net margin. Solid growth year-over-year in revenue, about 19.6% revenue. Net income from the, you know, fully allocated with the tax effect and everything's about 17.2% better than last year. Strong performance for us in 2021.
Sure. I would add another color to the Beacon side, which is, you know, 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. 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. The only thing that can possibly be a negative is what happens to the broader market. With regards to SB One Insurance, they had a banner year.
I think that we can continue to put that 15%-20% growth on them for the upcoming year. They ended the fourth quarter very strong. First quarter tends to be one of their best performing quarters. Certainly, because it's a seasonal type business. I'm expecting, we're expecting that the insurance company will do well again in the first quarter.
One final metric on Beacon that I wanted to mention also. The year-over-year change in new clients was 74. That bodes a little bit well for future growth too, as you work to deepen that relationship over time. Generally, we're able to acquire additional assets as we add new clients.
Exactly. Last comment I'll make on insurance is the 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 et cetera. I like that integrated approach to our business, and we're seeing some good pickup there.
That's helpful. 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?
Yeah. Difficult to predict because the volatile item there unfortunately is benefit claims.
Yeah, especially in 2021.
I guess maybe asking it a little differently, understanding it's a little difficult to predict. Did you kind of view the back half of 2021 as a little elevated relative to what you expected? Or just trying to get a little bit of a better sense of.
Yeah. I think the first half of 2021 was more representative of a run rate ex benefit claims.
Got it. Perfect. 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.
Pretty much the same methodology we've always applied. We look for entry points that give us a good return on earn back on the tangible book dilution. You know, 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. We continue to be in that position. We stay opportunistic, and we evaluate our price point regularly.
Okay. Thank you, guys. Appreciate the color.
Thanks, Mikey.
Thanks.
The next question will come from Russell Gunther with D.A. Davidson. Please go ahead.
Hey, good morning, guys.
Morning, Russell.
I wanted to follow up on the, you know, loan growth discussion. Sounds very constructive. I'm wondering if you guys would, you know, be willing to bracket expectations for organic growth in 2022. It sounds like very much commercially weighted. But any, you know, additional color in terms of loan verticals or geographic contributions would be helpful as well.
Sure. I would probably feel comfortable putting down that 5%-6% growth, you know, as something that is very doable. Again, our productivity's high, so prepayments, you know, are at a much reduced level. That percentage could be much higher. I'm comfortable based on the dynamics that I'm seeing now that 5%-6% is a good thing to model. I didn't get that second part, Russell, of your question. You mind repeating it?
Just any anticipated change in terms of the mix, the drivers of that 5%-6% or any pockets of strength within the footprint to call out?
Yeah. I think if you look at this year, most—a lot of our production, we did about 30%, 31% in C&I loans, which is a little higher than where we were pacing. I expect the C&I side to continue to see a little higher growth. In terms of the CRE space, we like that industrial. We're seeing a lot of activity there. Some multifamily things of that nature. Geographically, I think we're still in the markets that we historically have served. From time to time, we'll follow our clients outside of our markets in order to serve them.
Thanks for that. Just to follow up, Tom, in terms of the margin guidance, I appreciate the rate expectations in there. What do you guys assume in terms of deposit betas within that rate hike scenario?
Yeah. I think, Russell, you might recall 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.
Okay. Great. Thanks for that, Tom. Then just last one for me is on expenses thinking about a $65 million average for the year per quarter. A little bit of a step up from the current run rate, obviously inflationary pressures. Any additional color in terms of what's driving the step up in terms of your outlook for 2022?
There are some business investments in there, some system things. We got a new loan origination system. There's some contract costs on. Small business lending platform enhancements that we're doing. 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.
Great. Guys, thanks so much for the help. Have a good one.
Thanks.
Thanks, Russell.
The next question will come from Erik Zwick with Boenning & Scattergood. Please go ahead.
Hey, good morning, guys.
Morning.
Morning.
Tom, maybe just first I'll follow up on your commentary there that you've kind of lowered the expected deposit betas for this 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 available.
Yeah.
Maybe just say for like a +100 basis points increase.
Yep. Net income ramped up 100 basis points. The percentage change favorable from the base case is about 4.4%.
4.4%. Great. That's helpful. Thank you. Thinking about the loans and the pipeline today, I guess. First, I'm curious, do you have the average weighted yield of loans originated in 4Q? I guess is the pipeline yield similar to that level as well?
Almost exactly. We're right about 360 in both cases.
That was 360?
Yeah, 3.6%. 360.
Great. Thank you. Any thoughts on the effective tax rate in 2022? I think you're around 26% in 2021.
Yeah, 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. Some of that persists, but we did have some tax planning strategies we put into play. I think lower taxable income relative to this year is gonna 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. 25.75%.
Perfect. Thanks. Last one for me. As I look at the investment securities portfolio today, about $2.5 billion 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?
Really a liquidity deployment play less than the 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 million. It'll be done in a mix of loans and investments. That investment portfolio throws up about $35 million a month in new cash flow, so we can shift the mix to loans and use that for funding over time as well.
Great. Thanks for taking my questions today.
Thank you.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Tony Labozzetta for any closing remarks. Please go ahead.
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. Thank you very much, and have a great day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.