PFS
#Thank you, Phil.
Good morning, ladies and gentlemen, and thank you for joining us today.
The presenters for our second quarter earnings call are Chris <UNK>, Chairman, President and CEO; and Tom <UNK>, Executive Vice President and Chief Financial Officer.
Before beginning their review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today's call.
Our full disclaimer can be found in the text of this morning's earnings release, which has been posted to the Investor Relations page on our website, provident.
bank.
Now I'm pleased to introduce Chris <UNK>, who will offer his perspective on our second quarter's financial results.
Chris.
Thank you, <UNK>, and good morning, everyone.
Solid earnings performance continued in the second quarter, with record levels of revenue, net interest income, net income and earnings per share.
Our return on average assets for the quarter was 1.03% and return on average tangible equity was 11.33%.
This was accomplished despite a lack of material loan growth as prepayments of larger credits partially offset new loan originations.
Payoffs totaled nearly $213 million year-to-date, as some clients have sold properties or businesses to recognize gains.
The loan pipeline remained strong, however, at over $1.3 billion with C&I and CRE leading the way, and the committed rates on new loan production exceed the current portfolio yields.
Generally speaking, any fallout we've experienced from the pipeline has been to either the incumbent bank or to competitors who make overly aggressive loan pricing or credit structure offers.
We continue to be selective in the credits we pursue.
And as for the balance of 2017, we still anticipate low single-digit loan growth with corresponding deposit growth.
Average deposits increased slightly during the quarter, and we have, thus far, been able to maintain stable deposit rates, although we have been hearing from selected larger clients who see the Fed tightening is an opportunity to negotiate better returns.
There are deposit specials being offered by some of our competitors who appear to be addressing high loan-to-deposit ratios, and we continue to monitor the market and we'll defend our market share as necessary.
Our core deposit level remains at 90% at June 30, 2017, and our all-in cost of deposits was consistent with the trailing quarter at 28 basis points, just 3 basis points lower ---+ higher than the lowest set in 2015.
As always, we will continue to rationalize our branch network, back-office staffing and operations to keep our expenses as low as reasonable.
As discussed in last quarter's call, we have received multiple bids on the possible sale-leaseback of 12 of our own branch locations, and we're entering the due diligence phase of that transaction.
As we approach the regulatory threshold of $10 billion in assets that we expect to cross in 2018, we are meeting and discussing our status with regulators and our preparations are on schedule.
We will work all avenues to be part of the conversation in Washington to bring about the desired regulatory changes to Dodd-Frank for community banks.
However, the distraction in Congress from the White House may preclude any material changes in the near term.
Investing for the future, and our digital offerings continues, including mobile banking upgrades, an online banking upgrade and an exploration of widely accepted person-to-person digital payment options.
With the growing number of our transactions now being done electronically, we must persist in our investments to satisfy the ongoing evolution of customer needs and expectations.
We are also investing in a new loan pricing model, which we believe will result in an improved pricing and structure methodology for our relationship managers.
Our asset quality continued to improve during the quarter, with nonperforming assets to total assets at 48 basis points at June 30, 2017, versus 58 basis points for the same period in 2016.
Our capital base is strong, with tangible common equity at 9.46%, and we have the financial capacity, regulatory stature and desire to prudently leverage our capital and provide an attractive dividend to our shareholders.
On that note, the board has approved a 5% increase on our regular quarterly cash dividend to $0.20 per share.
While organic growth has always been our preferred leverage vehicle, M&A in both the wealth and whole bank areas also remains a focus.
The outlook is that businesses and consumers are becoming more confident in the future.
And notwithstanding the headlines from Washington and the partisanship in Congress, overall, we are bullish on the U.S. and our local economy and its potential for stronger growth.
With that, I'll hand it over to Tom for some more details.
Thank you, Chris, and good morning, everyone.
As Chris noted, our net income for the second quarter was a record $24.4 million compared with $23.5 million for the trailing quarter.
Earnings per share were $0.38 compared with $0.37 for the trailing quarter.
This was a $3 million or $0.04 per share increase compared with the second quarter of 2016.
Revenue has also set a record as net interest income reached a new quarterly high of $69 million.
While loan growth was subdued in large part due to accelerated loan payoffs, our net interest margin expanded 6 basis points versus the trailing quarter up to 3.17%.
The margin benefited from stable funding costs, favorable repricing of variable rate assets and higher new loan and investment origination rates.
Looking ahead, the loan pipeline remained strong and the pipeline rate has increased further, continuing to exceed our loan portfolio rate at 4.32%.
We anticipate modest additional expansion of the net interest margin throughout 2017.
We provided $1.7 million for loan losses this quarter, an increase from $1.5 million in the prior quarter.
Asset quality metrics improved further versus the trailing quarter, with nonaccruing loans decreasing $1.6 million to $38.9 million or 0.55% of total loans.
The amounts for loan losses to total loans was unchanged from the trailing quarter at 89 basis points at June 30.
Net charge-offs decreased slightly to $1 million on an annualized 6 basis points of average loans.
Noninterest income was $2.4 million greater than in the trailing quarter as loan prepayment fees were $1.2 million higher, income on bank-owned life insurance, including death benefits, was $1.1 million higher and wealth management income, including tax preparation fees, was $296,000 higher than in the trailing quarter.
These items were partially offset by reduced income on loan level swaps.
Noninterest expense increased by $1.2 million versus the trailing quarter to $46.1 million as increases attributable to the stock-based portion of annual directors' compensation, and REO write-down and legal costs more than offset seasonal rate reductions in occupancy expense and payroll taxes.
Expense management remained strong, however, with the efficiency ratio at 56.44% and annualized noninterest expenses to average assets at 1.99% for the quarter.
Income tax expense increased $2.1 million from the trailing quarter to $10.5 million, and our effective tax rate increased to 30% from 26.3%, as the change in accounting guidance related to the recognition of benefits from share-based transactions reduced our income tax expense by $1.2 million in the trailing quarter.
We currently project an effective tax rate of approximately 30% for the remainder of 2017.
And that concludes our prepared remarks.
We'd be happy to respond to questions.
Well, Tom will give you some detail on the pipeline, Mark.
But I certainly would think that we are seeing in that space that the incumbent comes back and it kind of low balls the idea that they don't want to lose that.
So we go down a path and we're in terms sheets, we agree, and then all of a sudden, there's an aggressive approach to keep the business.
So sometimes, we miss out on those.
So we go down a path of that process, and then all of a sudden, it doesn't come through.
And that's why we have to keep the pipeline very full because there is that runoff at the end of the day.
Tom, maybe the pipeline details.
Pretty much.
We have got a term sheet.
We have an indication that they're interested.
We're going down the pipeline.
It is the process.
It is not just a registered hope.
There is definitely paperwork and information being gathered and put together, and some of that is also all the way through the process of being underwritten and then closed.
And so, Mark, in the broad pipeline of $1.3 billion right, that's the gross pipeline subject to pull-through, we anticipate about a 56% pull-through of that total pipeline.
Within that, $251 million is approved to waiting closing, you've got about $1 billion in work in process.
Part of the routine, the slowness in the pickup in outstanding is a large piece the lending, more currently, has been in the construction arena.
So while you have loan originations, you don't see funding on day 1.
And as Chris mentioned, some of the competitive pressures, as you're working through the work in process, sometimes you see some fallout.
In addition, we've been doing less in the multi-family space for some time ---+ some period of time now as we've gotten more discerning, supply is starting to exceed demand in our opinion.
So those are the reasons why you see some limitations in growth.
Overall, I got a 4.32%, Mark, which is up in last quarter.
Last quarter, we finished with a 4.18%, and our actual on rates were 4.26%.
So even though I was concerned about where we were going to close those homes because of the volatility in the 7- and 10-year space, we actually did well for the quarter, which is why we saw the 6 basis points of margin expansion.
And the other thing, Mark, that we're seeing is people are extending their rate locks out of the 90% and even, sometimes, further to keep the business in place.
$2.3 billion.
It's been pretty steady and pretty flat.
Sure.
Preparation costs recognized this quarter were about $150,000.
We're looking at about another $500,000 to $600,000 for the back half of the year.
And then, anticipating crossing in the second quarter of 2010, providing another $0.5 million in the first part of the year.
And then we start to hit our run rate ---+ did I say (inaudible) I'm sorry, 2018.
And then we start to hit our run rate, which will be in the $6 million to $7 million a year range.
That's including Durbin of $2.8 million.
Not a whole lot of detail yet, <UNK>, because we're still working through the diligence stage, so I don't know what the ultimate proceeds will be.
I expect it to be fairly neutral.
I think we'll see some reduction perhaps in our lease cost as a result of, hopefully, a gain recognition that will be deferring use to reduce leasing costs going forward.
But I really can't give you a solid number at this point.
Seasonal stuff, for the most part, snow ice removal from the trailing quarter and utilities costs being lower.
It's typical from Q1 to Q2.
I think beyond rates were a little better than I expected, as I just as mentioned on the previous question.
We had a 4.18% pipeline, and we actually closed at 4.26%.
And funding has perhaps held up better than we thought when we're trying to forecast the margin.
We didn't move at all this quarter.
Our noninterest-bearing deposits, albeit small growth, there were still some growth there.
So I guess, looking forward, the pressure has been in selected pockets and we try to react to it selectively rather than repricing the book.
Overall, we're just not seeing that much pressure on the funding side.
Chris, do you agree with that.
I agree.
One thing that I think we are seeing, as I mentioned in my comments, was that the business people that have large balances see the material difference when you look at the rate of interest paid whereas a lot of our consumers don't see it as evident when you're having smaller balances, so we're talking pennies.
So I don't think that, that's going to happen until we get, again, like, maybe another Fed hike or 2.
So ---+ and on the other hand, we know we have to defend our market and our customers.
We do a lot of relationship type of pricing.
So we are not just leading with a special product that has a high CD.
We are just meeting with our customers when they have a conversation.
We give our relationship managers and our branch people the flexibility to, within our parameters, to make different rate adjustments.
And one thing on the operating expenses, I want to remember that we did close down and consolidate 2 locations in the first quarter.
So those cost savings are coming through also.
I don't have it broken it up by quarter in front of me, <UNK>.
It was about a little under $213 million for the year-to-date.
Going forward, I think we expect to see a little bit of a reduction from that level.
Yes.
I think ---+ <UNK>, this is Chris.
I know that ---+ as an interesting ---+ in less than a month, we had 3 of our middle market clients sold their businesses.
And so that's something you probably don't see very often as opposed to a commercial loan that was, again, somebody selling their property.
So I think that's evidence of that it's very tough to predict, and that's something we want to be involved in the conversation.
The one thing about one of the businesses is that they've sold out, and now we're going to be able to at least maybe offer them some of the opportunity to put their wealth to work at Beacon Trust.
And obviously, we'd rather hold the earning assets, but we do have prepayment protection on many of those loans.
And then, you saw how that contributed to the fee income side for us this quarter.
Again, to remind everybody, we do not include prepayments in the margin there in the fee income section.
We report it for margin.
Well, we certainly haven't been absent with a lot of things going across our desk in the way of seeing other people doing deals outside of the market.
We are always involved in having good conversations.
There are certain size institutions that wouldn't make sense to us at this stage.
But we consider this an opportunity for us to put our capital to work for the right opportunity at the ---+ a price that's fair to our shareholders, to their shareholders.
So I think there's definitely conversations on out there.
On the other hand, I think they're just that.
I think everybody's trying to look at what's going on and are there ---+ is there going to be tax reform, is there going to be regulatory release of some of the burdens that are going on there.
Some of that might be wishful thinking.
So we just ---+ we want to be involved.
We want people to like what we're doing and we would like what they're doing to make it accretive.
And certainly, earn back has to be within our parameters.
And that's also on the wealth space, where we see deals here and there, some of them match up, some of them don't.
We continue to be very disciplined in our approach.
I think we probably have to look at the balance sheet.
Is it a deposit type of franchise.
Is there excess capital.
How much of that loan-to-deposit is that of CRE.
How much of that has grown over the last few years.
So I think we would ---+ we look at all things and, obviously, we look at every bit of credit that's in there, and I would expect anybody would do the same thing to us.
For the most part, I don't think we say no to anything.
On the other hand, we want to make sure there's an asset generation capacity for either us or them and vice versa or funding that is beneficial to us and our shareholders in the long run.
Obviously, that scenario presents some challenges in terms of regulatory approval, given that we have a greater than 100% loan-to-deposit ratio and CRE concentration as well.
So you'd have to look at what the opportunities were and then remixing the balance sheet on any target that has those characteristics.
We're not going to hold onto the range just to stay under $10 billion.
We think that growth is important.
If we have to, we go through it organically.
We would ---+ I don't think that we would do a very dilutive deal just to get size and scale.
I think we would look at anything.
We will go over it.
We're pretty sure that everybody knows that we would continue to work on that opportunity to grow through it.
If there's an opportunity that is right and accretive, we would definitely look at it.
We are also getting into the time frame where it wouldn't ---+ by the time we close the deal, we'd be past that March time frame, and that certainly has ---+ helps us to defer some of the expenses going out to '19.
But we still stand ready to look at anything that makes sense.
And if not, we have to do it organically.
We can't stop and stay at $9.7 billion for the next 3 years and just tread water.
Well, thank you.
In closing, on behalf of all of us at Provident, I would like to extend our sympathies to the family of Kevin Ward, our former Vice Chairman, who passed away late June.
Kevin was well known to many of the analysts and investors who followed PFS since its inception, and he will be fondly remembered by all who knew him.
So we're wishing well to the family.
And we'd like to thank you for your interest in Provident and have a great day.
