Good morning, and welcome to the Provident Financial Services, Inc. third quarter earnings call. All participants will be in 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, Investor Relations Officer. Please go ahead.
Thank you, Anthony. Good morning, everyone, and thank you for joining us for our third quarter earnings call. Today's presenters are Chairman and CEO, Chris Martin, President and Chief Operating Officer, 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 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 Chris Martin, who will offer his perspective on the third quarter. Chris.
Thank you, AD. Provident's third quarter results were strong and we believe the business climate is promising as we look into Q4. Earnings of $0.49 in the quarter exceeded last year's results by 32%. Performance was augmented by several factors, including an improving economy as it continues to climb out of COVID restraints, better credit metrics, and the achievement of earnings acceleration from the acquisition of SB One. The quarter was marked by growth in net interest income and a strong return on average assets of 1.11% and return on average tangible equity of 12.04%. Based on their confidence in our earnings outlook, our board approved an increase in our quarterly cash dividend to $0.24 per share, representing an increase of 4.3%.
During the quarter, we also repurchased approximately 630,000 shares of our common stock at an average price of $22.04 per share. Our capital position is strong and comfortably exceeds well-capitalized levels. As Tony and Tom will detail in their remarks, we are dealing with excess liquidity, not unlike many other financial institutions. We have diligently deployed a portion of that liquidity into securities, but obviously loan growth would be our preferred investment. We anticipate the Fed will commence tapering their quantitative easing purchases in the fourth quarter, which we hope will result in a steepening of the yield curve. This always takes a while to make an impact, but would signal a positive economic outlook. A moderate amount of inflation would be positive for the bank.
With a fairly neutral interest rate, risk position, excess liquidity, and stable low-cost deposit funding, we continue to be well-positioned to benefit from a rise in interest rates while remaining well-protected if rates remain low. The focal point for Provident was our loan growth ex-PPP, which contributed to increased net interest income and our strong quarter end loan pipeline, which reflects customer confidence and provides positive momentum for respectable growth going into the fourth quarter. In terms of pricing, the weighted average rate on our loan pipeline has increased, reflecting movement in the Treasury curve. The market remains aggressive and our lenders face competition on rates from banks and on structure from non-banks. In spite of the challenging environment, we win deals because of our relentless focus on delivering a best-in-class customer experience.
Our core deposit growth continues to be strong in both the consumer and commercial areas, and our cost of deposit remains one of the best in our markets. We're also seeing growth in the wealth management insurance businesses, and we'd expect that organic growth to continue. Asset quality improved and charge-offs were negligible as the economy continues to improve. Core operating costs are well controlled as reflected in our adjusted non-interest expense to average asset ratio of 1.85% and an efficiency ratio of 54.5% for the quarter. I remain highly enthusiastic about the prospects within our markets and the drive and motivation of our banking teams will continue to spur growth and enable us to continue to deliver long-term shareholder value. With that, I'll ask Tony to add more context. Tony?
Thanks, Chris. Chris has given some highlights of our strong third quarter performance, and Tom will give further details later in the presentation. I would like to share with you thoughts about our performance of our key lines of business and areas of focus. Based on certain trends that we are observing, we believe the economic outlook for the fourth quarter and leading into 2022 looks promising. This supports improved growth and continued solid profitability for the remainder of the calendar year. Our commercial lending group continues to demonstrate strong productivity. In the third quarter, we closed $514 million of new loans, an increase of 29% from the prior quarter. While prepayments adjusted for PPP are down from the prior quarter, they remain higher than we desire.
Of note, nearly half of our commercial loan prepayments were driven by the sale of the underlying business or asset. In addition, our line of credit utilization percentage remains roughly 28% compared to the historical average of approximately 40%, which equates to about $190 million in potential additional outstanding loan balances. Nevertheless, our production exceeded the pressures of the current operating environment. As such, we grew our commercial loan portfolio, excluding PPP, at an annualized rate of 9.4%. Notwithstanding our significant loan production and the fierce competition at quarter end, our pipeline remains robust at approximately $1.6 billion. The pull-through adjusted pipeline, including loans pending closing, is approximately $1 billion. Of note, our expected pipeline rate increased 12 basis points from the last quarter.
We project good pull-through, and if prepayments are stable, we should meet or exceed our loan growth expectations for the remainder of the year. We continue to experience good growth in our core deposits, particularly non-interest-bearing demand, which grew at an annualized rate of 12% and presently comprise 24% of our total deposits. Our total cost of deposits for the quarter declined three basis points to 23 basis points and is among the best in our peer group. While we are in a rate and liquidity cycle that has driven margins lower throughout the industry, our growth and low-cost deposit franchise continue to drive value, which is demonstrated by our continued increase in net interest income. We continue to grow fee revenue largely through Beacon Trust and SB One Insurance.
Adjusting for non-recurring items related to the SB One merger, SB One Insurance increased its operating profit 10% from the same quarter last year, driven largely by a strong retention ratio of 96.4%. Beacon Trust also had good performance, with assets under management increasing approximately 17% to about $4 billion and revenue increasing 16% over the same quarter last year. As I have mentioned in the past, both Beacon Trust and SB One Insurance are value add for our clients and the bank. We are seeing increased opportunities and referrals among all of our lines of business, which make our growth prospects more exciting. Looking forward, our focus is to enhance our asset mix and deploy more of our excess liquidity, which should improve our margin and, more importantly, grow net interest income.
Our fee-based businesses are important to us, and we want to accelerate their growth and strengthen the synergies with the bank. Lastly, we have a number of initiatives that will modernize certain business processes that are aimed at reducing friction and improving the digital journey for our employees and customers. As we accomplish our goals, we will increase our franchise value and improve our total return to our 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. Our net income for the quarter was $37.3 million or $0.49 per diluted share, compared with $44.8 million or $0.58 per diluted share for the trailing quarter. Earnings for the current quarter included $2 million of provisions for credit losses on loans and off-balance sheet credit exposures, while the trailing quarter benefited from $8.7 million of net negative provisions. Pre-tax, pre-provision earnings were a quarterly record $52.1 million or an annualized 1.55% of average assets. Current period earnings featured record quarterly revenue, including record net interest income and non-interest income.
While we did experience modest net interest margin compression as a result of ongoing elevated liquidity, earnings on the $166 million increase in average interest earning assets partially offset the impact of declines in yields and lower PPP income. Income recognized from PPP loan forgiveness fell $402,000 versus the trailing quarter to $2.5 million, and remaining PPP deferred PPP fees totaled $3.2 million at September 30. Meanwhile, funding costs fell as average deposits increased and average borrowings declined. Average non-interest-bearing deposits increased $74 million versus the trailing quarter, and the total cost of deposits declined three basis points to just 23 basis points. Pull-through adjusted loan pipeline at September 30 was consistent with the trailing quarter at $1.1 billion, and the pipeline rate increased 12 basis points since last quarter to 3.4%.
Excluding PPP loans, period-end loan totals increased $153 million or an annualized 6.4% versus June 30. Loan growth occurred primarily in the CRE category. Our provision for credit losses on loans was $1 million for the current quarter, compared with a benefit of $10.7 million in the trailing quarter. Asset quality metrics, including non-performing loan levels, early stage and total delinquencies, criticized and classified loans and loan-related ratios improved versus the trailing quarter. We had net charge-offs of $1.9 million or an annualized 8 basis points of average loans this quarter. Non-performing assets decreased to 51 basis points of total assets from 62 basis points at June 30. Excluding PPP loans, the allowance represented 85.85% of loans, compared with 0.88% in the trailing quarter.
Non-interest income increased to $23.4 million, helped by income recognized from a $3.4 million reduction in contingent consideration related to the earn-out provisions of the 2019 purchase of registered investment advisor, Tirschwell & Loewy. We became subject to the interchange fee limitations of the Durbin Amendment this quarter, which reduced revenue by $1.1 million compared with the trailing quarter.
Including provisions for credit losses on commitments to extend credit and merger-related and COVID expenses in 2020, operating expenses were an annualized 1.85% of average assets for the current quarter, compared with 1.84% in the trailing quarter and 1.92% for the third quarter of 2020. The efficiency ratio was 54.51% for the third quarter of 2021, compared with 54.12% in the trailing quarter and 56.72% for the third quarter of 2020. Our effective tax rate was 25.7% versus 25.4% for the trailing quarter. We are currently projecting an effective tax rate of approximately 25% for the remainder of 2021. That concludes our prepared remarks. We'd be happy to respond to questions.
We will 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 will pause momentarily to assemble our roster. Our first question comes from Mark Fitzgibbon with Piper Sandler. You may go ahead.
Hey, guys. Good morning.
Morning.
Morning.
A couple questions around the margin. I guess, Tom, it looks like you have some room for CD and borrowing repricing down. What does the maturity schedule look like on those buckets?
Hey, Mark. On the deposit side, over the next 12 months, we have about $622 million maturing. The expected pickup in rates about 29 basis points. We also have $197 million worth of borrowings coming due over the next 12 months, and the pickup there is about 116 basis points. Again, all in, about $820 million worth of funding that's going to reprice over the next 12 months with about a 50 basis point pickup. Should be about three points on the margin.
Okay, great. Am I thinking about it the right way that you'd recognize most of the remaining PPP income in 4Q, that $3.2 million, and then after which the margin kind of drops down into sort of low-mid 2.90% range?
Yeah, that's our expectation. The core margin this quarter was 2.87%. That was down from 2.90% in June. We're down three basis points on a core basis, excluding PPP. We think the $3.2 million will largely be recognized in Q4 with a little bit of tail into the first quarter of 2022.
Okay. I guess I was curious, I saw the charge or the contingent consideration that you took back from Tirschwell & Loewy. What hurdle didn't they hit that caused that to be triggered?
Revenue retention. There were two components to the earn-out provisions, and one of them was retention of customers off of the base year. While market performance, they earned the revenue run rate piece. The revenue retention piece doesn't consider market performance in the intervening period, and they fell short on that. I think it says we structured the deal appropriately because we still got the returns we were looking for and paid the price that was appropriate for the business that we acquired.
Okay. Last question, I guess to Chris and Tony. It sounds like you guys are really upbeat on the prospects for your business. I guess I'm curious, what part of your business are you most excited about these days? Or maybe, you know, if you don't want to answer that, maybe you could share with us sort of which business you think has the greatest growth potential. Thank you.
No. Sure. I mean, you heard it both in Chris's tenor and mine. I think we're excited about all of them, but with varying degrees. First, I think we kind of alluded to the commercial bank, how the rate we're replenishing the pipeline, the level of closings. Our closings are over 70% higher than they were in the first quarter, which is what we've been pointing to. We're seeing the number of asset sales diminishing. So the expectation, although you can't really fully predict it, is that prepayments will continue to slow. Our production will continue to increase, and those two variables will show some good growth in that book.
We did skinny down the consumer side, which we're trying to change the asset mix. The asset mix shift and deploying the excess liquidity is gonna have a wonderful effect on our margin. I will tell you, the other dynamic that we're seeing is the interplay between all of our businesses as I mentioned. With the insurance company is working regularly with the commercial bank. We're seeing more referrals go to Beacon than we have. That's exciting because the businesses are doing this with a willingness. There's no force by me or Chris. I mean, it's really good to watch them play. I'm expecting all the non-fee based businesses to continue to grow and our commercial book to continue to expand. That should bode well for both net interest income, the margin and noninterest income.
Thank you.
Our next question comes from Michael Perito with KBW. You may go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Morning.
Morning.
I wanted to follow up on the NIM quickly. You guys were at the 287 core and you have the thee basis point pickup from the funding that gets you back up into that 2.90% range. You know, that part is pretty clear. I guess my follow-up question was more along the lines of the pipeline of the $1.6 billion loan pipeline. Just curious what the pricing, the incremental pricing has looked like as we move forward here and how that compares to some of the loans that it will be replacing on the back book?
Well, I mean, we did mention that the pipeline rate is higher, but it's still lower than our current book rate. As I mentioned, we're in this cycle where not only the liquidity is pushing the margin down, but the low interest rate environment. The way to make that up and preserve the margin is to make sure you have the growth that you need and change your asset mix by deploying the excess liquidity and more from securities and into loans.
Yeah. I think that's where we see us stabilizing and then hopefully improving margin over a little bit of time as we remix the balance sheet and see more loan growth absorb some of the current liquidity that was deployed partially, as Chris noted, into the investment securities portfolio. Still have a fair amount of work to do in terms of cash and short-term assets on the balance sheet.
Right. Helpful. Makes sense. Do you guys mind just walking us through how you think the bank's balance sheet is positioned for rates today? I mean, you know, obviously the funding has improved and the loan pipeline looks good and, you know, to the extent you guys can remix, that should help the NIM. You know, if we start to see short-term rates moving at some point next year, do you guys have any kind of expectation around, you know, how that might impact your NII performance?
We model fairly neutral, slightly asset sensitive. I think we're a little bit conservative in our deposit beta assumptions though. So I think we're more asset sensitive than we typically had in disclosures. We have an ongoing deposit study now to try and support some of those assumptions a little bit, or get a little more precise on some of those assumptions. So I mean, there's a fair amount, I think it's $2.6 billion in floating rate loans. A good chunk of that is tied to LIBOR. So if we see a rise in the short end, we should see benefit fairly immediately on a good chunk of that. And again, I think that the funding base is very stable and low cost, so I don't see us repricing up in any dramatic fashion.
You know, that's also helped by the amount of liquidity in the marketplace. There's really not a lot of competition on rates these days.
Got it. Helpful. Then just last from me and then I'll step back. Just on the expense line moving forward, you know, kind of a lot going on out there, particularly on the wage side and on, you know, personnel turnover. Just curious if maybe you could provide an update on kind of how you see? You know, that those dynamics impacting your business, but then also maybe, you know, just some near-term commentary on where we think kind of the core operating expense could trend, given some of the inflationary pressures out there? Thanks.
I'll comment on the near term first. You know, we saw expenses tick up a little bit in this quarter, largely related to an increase in incentive compensation accrual. I think we're gonna see that maintain going into the final quarter of the year at about the same level. Call it $61 million-$62 million, excluding the provisions for commitments on credit for losses on commitments. I think that's pretty much where we stabilize.
I think the part of the question was we've seen the labor force shift. I think our dynamic here is, we see some pretty good stability and also attracting good talent has not been an issue for us of late. I wouldn't suggest that we have a huge vacancy factor in our numbers.
Great. Good to hear. Thank you, guys. Appreciate it.
Just to add a little bit, it's also that when you have good quality people doing good things, they are,
Sometimes.
Role over by others, and so, you know, we deal with that as a balancing act all the time such as you know, you get good people coming in on the other end, some people move on to a different journey. So that's something else, you know, when you have quality people like to grab that when they can.
Our next question comes from Steven Duong with RBC Capital Markets. You may go ahead.
Hey, good morning, guys.
Good morning, Steve.
I guess maybe we could just get back to the interest sensitivity. Your beta assumptions, you said they were conservative, Tom. Can you share with us what your beta assumptions are and if there's a lag in it at all?
Yeah. On the interest-bearing deposits, it's close to 50% at this point. Inclusive of the non-interest bearing deposits, it's about 36%. If I look back at the last rising cycle, I think the total deposit cost was up about 19%. Interest bearing was about 24%. Again, I think there's some conservatism baked into those current assumptions.
Oh, wow.
Yeah.
Yeah. 36% and 50%. Wow. Okay. Were they lagged at all, or was that, you know, on the first 25 basis points you're applying the 36% and the 50%?
Don't think they're lagged, but the rate environment is ramped up over the period that they're applied to. If you look at our 10-Q disclosures.
Yeah. I guess the way I'm thinking about it is when I look back at your first quarter margin, you were at 3.20%. The second quarter, 2Q 2020, you dropped to 2.94% because of the rate cuts. I guess I'm just thinking, like, why wouldn't this process reverse? You know, which would make you fairly asset sensitive, you know, when rates rise and it doesn't seem to be reflected in your rate sensitivity tables in your 10-Q. It may just be because of your conservatism on your beta assumptions. Is that a fair assessment?
I think that's accurate, Steve.
Okay, great. I guess just on the loan growth, the commercial mortgage really rebounded fairly well. Can you just give us a sense, I know you mentioned about, you know, how much prepays, half of the prepays were driven by underlying business sales of some sort? How much, number wise, like how much did you guys originate and how much were prepaid this quarter versus last quarter?
I can tell you we originated about $514 million of loans. Not all funded, of course. Some of it needs to be funded. I think Tom can give you the funded number. But I would say our net growth was roughly $190 million-$200 million. Is that a fair assessment? You're looking at between amortization-
$153.
$153 net of PPP. You're looking at a still sizable prepayment number that's there. As I mentioned, it's roughly 50%. I don't know if that gave you the color, Steven, or do you want me to drill deeper into...
I can offer a couple more. You know, in terms of outstanding balances, I know Tony spoke to production, which necessarily isn't funded immediately. Total originations, including renewals and new money on modifications, were $574 million this quarter. That's up from $550 million last quarter. The payoffs, including the PPP payoffs, dropped from $620 million last quarter to $422 million.
Okay. Got it. I guess right now you're at like a 50% payoff rate, let's say. Historically, where is it normally?
Q3 of 2020 was $277 million.
Okay. Wow. Okay. That's very helpful. I guess maybe just a last one for me, just on the insurance business. Tony, can you give us a sense of like, you know, how the insurance business performed this quarter? Did it come in as expected? What are you expecting in the fourth quarter?
As I've mentioned in the past, the insurance business has its lowest quarters. It's a very seasonal business. First quarter is predominantly the strongest, followed by the second. The third and the fourth tend to be more normalized. I think George Lista in the insurance company did a better job with retention this quarter. They had productivity, but we don't see a lot of productivity in the third quarter in terms of new policies being written, etc . The retention rate was high, and if I may explain it in 30 seconds, the retention rate is the rate at which we keep the business that we wrote in prior years. It was %96.4. That is extraordinarily high. If you're in the nineties, you're a high performer.
We usually target around 92%. When we keep the business through retention, we make more money in the subsequent year. I would say this has been an on pace quarter for George Lista and the insurance company. The fourth quarter, we expect him to certainly hit his budget and his team. Things are looking pretty good as we set up for the coming year, relative to loss rates and things like that. I don't wanna be predictive, but I'm confident in how we go into the first quarter, knock on wood.
Got it. Appreciate you guys taking my questions. Thank you.
Thanks, Steven.
Thank you.
Our next question comes from Russell Gunther with D.A. Davidson. You may go ahead.
Hey, good morning, guys.
Morning.
Morning.
I wanna follow up. You know, Chris, you mentioned the securities build in the quarter and get your guys' thoughts as to how you plan to manage the investment portfolio going forward, both as it relates to the overall size of the balance sheet and what's your portfolio like?
There is some additional liquidity, as we talked about, to be deployed. First choice would be to use that to fund loan growth, obviously. We have significant cash flows coming off the securities portfolio, so we can remix that into loans over time. The opportunity cost is too great to just wait in cash, so we are going ahead and investing those securities. Primarily pass-through mortgage-backed securities yields are around 150-ish kind of levels at this point.
That's great, Tom. Thank you. Just circling back briefly to the loan growth conversation. You know, you guys mentioned the pipelines and, if things pull through, you know, you would meet or exceed expectations. Can you just remind us of what those are? You know, where do you kind of set your hurdle from a overall organic growth perspective at PPP?
On our commercial loan growth, we're expecting roughly the 6% target that we aim at. We're feeling really good about the pipeline. That's why I mentioned in my notes that we should meet or exceed expectation, all depending on what happens with the prepays. We're feeling really good about the pipeline and the activity within it.
Okay, great. Then just a last one for me. You know, we've had some market dislocation over the past, you know, this year, larger players taking out smaller players. I'm just curious as to how you're approaching the M&A disruption in your footprint, both from a, you know, market share gain perspective or attempting to bring over some personnel?
This is Chris. I think we look at that as always it's advantageous to us in the short run because of the distraction of, you know, putting companies together and the entrance of new players and/or, you know, other people. You know, we wish them well as they go forward, but the fact is, I think it provides us with an opportunity to pick up some of that, where there's a miss and/or they're focused on other things. We always envision that timeframe is limited. You know, after a couple of years, they get their act together and come back full force. I think that's helped.
I think the other side of that, when we look at our competition of smaller institutions are trying to really put a lot of volume up, sometimes at levels and, things that we wouldn't do, and that adds to the competitive factors and pricing issues that we deal with. For the most part, I think there's a lot going on in our market. It'll be held off a little bit by Fed policy and waiting for those deals to be approved. We're kind of in a wait and hold, but we think there's gonna be an opportunity. On the other hand, we have participated with some of those players in the past, and we'll try to develop relationships with their ultimate successor.
Understood. Okay. Thank you all for taking my questions.
Thank you.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Christopher Martin for any closing remarks.
Well, we thank you for your time today, and I appreciate your continued confidence in PFS. We hope you have a great weekend and Happy Halloween.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.