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Text: 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.
Now, it's my pleasure to introduce Chris Martin, who will offer his perspective on our second quarter.
We hope that you and your families are healthy.
Our second quarter results were solid and the trends remained generally positive.
Operating earnings were strong with net interest income, the highest it has ever been for Provident.
And in spite of strong loan originations, loan portfolio growth was challenged in the quarter, as sales continued to exceed our forecast.
The loan pipeline however is the largest we have ever had.
And we anticipate stronger originations in the second half of the year.
Economic outlook is promising, assuming continued success against COVID-19 and our business clients are optimistic for the future.
Long-term loan growth is highly correlated to economic growth and we believe economic conditions in our markets continue to improve and support an expansionary trajectory.
Also a positive is the consumer and their personal savings position, which will continue to support solid consumer spending in the future.
As businesses see demand increasing, it is anticipated that credit line usage, which is currently on the low side will increase.
However, risk remain as interest rates have been volatile.
And the recent downward shift in rates is putting pressure on net interest income and margin.
Deposit growth continued to be strong with substantial increases in non-interest bearing deposits.
The growth in deposits improves our capacity to fund loan growth in the second half of 2021.
We are executing a disciplined approach to leveraging the excess liquidity on our balance sheet.
Initially, in the investment portfolio to produce better returns and augment our margin.
The net interest margin reflected lower earning asset yields, given the low rate environment and spread pressures from lending competition, although improved funding mix and better deposit pricing are helping to mitigate these factors.
As the quality continued to improve during the quarter and loan payment deferrals are negligible, all of our credit ratios and indicators are positive this quarter.
Our primary non-interest revenue sources namely Beacon Trust and SB One insurance will continue to provide meaningful impact to lessen the pressure being experienced in our spread business.
We expect most fee revenue categories to grow modestly for the remainder of 2021.
And we will continue our methodical approach to managing operating costs.
Our focus will be holding the line on expenses and creating operating efficiencies without sacrificing our commitment to technology enhancements, to improve the customer experience and our competitive position.
We believe we can further improve our returns to stockholders through a combination of balance sheet growth, active management of our margin, continuing to rationalize our branch network and further leveraging operational efficiencies gained with the SB One acquisition accompanied by a continued execution on our regulatory, risk and controlled framework.
With that, I will ask Tony to add some more color.
I would like to take a few moments and share some thoughts with you on market conditions, business line performance and the areas of focus.
Based on the tenor of our conversations with customers, increased activity in our key business lines and improved nonperforming assets and a reduction to an immaterial amount in COVID-related loan deferrals, we believe the economic outlook for the second half of 2021 is promising.
This supports improved growth and continued strong profitability for the remainder of the calendar year.
Excluding PPP loans, our commercial lending group has paced at or better than planned with regard to production.
In the second quarter, we closed over $460 million of new loans, an increase of 57% from the prior quarter.
This solid production in part, it was offset in part by a decline in line of credit utilization of approximately $161 million over the average for fiscal 2020.
In addition, there is significant excess liquidity in the market.
As a result, the competition has been persistently more aggressive on pricing and structure.
We remain committed to maintaining our credit culture and not sacrificing structure of quality for volume, which contributed to an increased level of prepayments.
Consequently, we saw a net decrease in our commercial loan portfolio of about $49 million for the quarter.
Despite the competition, we are seeing good activity within our lending teams.
At quarter end, our pipeline remains strong at approximately $1.7 billion.
However, we are seeing a decline in the average interest rate in the pipeline, which can add pressure to our net interest margin.
We expect a good pull-through rate in our pipeline.
And if our prepayments normalize, we should experience solid growth for the remainder of the year.
Like many banks, we have seen strong growth in our deposits.
Nevertheless, I'd like to point out that the largest percentage of our growth is a non-interest-bearing demand deposits, which grew at an annualized rate of 17% and presently comprised 24% of our deposits.
Our total cost of those deposits is about 26 basis points and is among the best in our peer group.
We continue to grow our fee revenue, largely through Beacon Trust and SB One Insurance.
SB One Insurance had a strong second quarter with new business that resulted in a 60% increase from the same quarter last year.
Beacon Trust also had a very good quarter with assets under management increasing approximately 24% annualized and revenue being up 32% over the same quarter last year.
Both Beacon Trust and SB One Insurance continue to demonstrate value add to our clients and the bank and they integrate well with the other business lines in our organization.
Looking forward, our focus is to responsibly deploy our excess liquidity, predominantly into our commercial lending book, continue to build our fee-based businesses, enhance the experience of our employees and customers and maintain operational efficiency.
This will improve our earnings and total return to our shareholders.
Our net income for the quarter was $44.8 million or $0.58 per diluted share compared with $48.6 million or $0.63 per diluted share for the trailing quarter.
Earnings for the current quarter benefited from $8.7 million of net negative provisions for credit losses on loans and off balance sheet credit exposures, while the trailing quarter reflected negative provisions of $15.9 million.
Pre-tax pre-provision earnings were $51.4 million or an annualized 1.56% of average assets.
This is an improvement from $48.9 million or 1.52% of average assets in the trailing quarter as revenue increased quarterly -- to a quarterly record $112 million and operating expenses declined by $2 million.
Our net interest margin compressed 6 basis points versus the trailing quarter.
Excess liquidity increased despite an increase in average investments as average loans decreased in average deposits group.
Loan repayments remained elevated and included increased PPP loan forgiveness.
We expect to deploy much of this excess liquidity into loans and securities in the near term to improve the earning asset yield and increased interest income.
We were able to reduce the cost of interest-bearing liabilities by 5 basis points versus the trailing quarter through reductions in deposit costs.
Including non-interest bearing deposits, our total cost deposits fell to 26 basis points this quarter from 30 basis points in the trailing quarter.
Average non-interest bearing deposits increased to $100 million or an annualized 17% to $2.48 billion, or 24% of total average deposits for the quarter.
Average borrowing levels decreased $146 million as we shifted funding to lower costing brokered demand deposits.
We expect to maintain a relatively stable net interest margin as we continue to deploy excess liquidity into loans and securities, while managing funding costs and emphasizing non-interest bearing deposit growth.
The pull-through adjusted loan pipeline at June 30th increased $250 million in the trailing quarter to a record $1.1 billion.
However, the pipeline rate decreased 35 basis points since last quarter to 3.28% reflecting the current competitive rate environment.
Our provision for credit losses on loans was a benefit of $10.7 million for the current quarter compared with a benefit of $15 million in the trailing quarter.
The current quarter benefit was attributable to $6 million of net recoveries on previously charged off loans, improved asset quality, a favorable economic forecast and a decrease in loans outstanding.
Asset quality metrics including COVID-19 related deferrals, nonperforming loan levels, early stage and total delinquencies criticized and classified loans and all related ratios improved versus the trailing quarter.
We had annualized net recoveries as a percentage of average loans of 25 basis points this quarter compared with net charge-offs of 4 basis points for the trailing quarter.
Non-performing assets decreased to 62 basis points of total assets from 65 basis points at March 31st.
Excluding PPP loans, the allowance represented 88 basis points of loans compared with 92 basis points in the trailing quarter.
Loans granted short term COVID-19 related payment deferrals have declined from their peak of $1.3 billion to just over $7 million.
This compares with $132 million at December 31st.
All commercial loans in deferral are paying interest.
Non-interest income was stable versus the trailing quarter at $21 million, as increased loan prepayment fees and growth in wealth management insurance agency income were offset by decreased bank-owned life insurance income and reductions in net profits on loan level swaps and gains on loan sales.
Excluding provisions for credit losses and commitments to extend credit, operating expenses were an annualized 1.84% of average assets for the current quarter compared to 1.95% in the trailing quarter and 1.86% for the second quarter of 2020.
The efficiency ratio improved to 54.12% in the second quarter of 2021 from 56.19% in the trailing quarter and 57.35% in the second quarter of 2020.
Our effective tax rate was 25.4% versus 25.1% for the trailing quarter.
And we are currently projecting an effective tax rate of approximately 25% for the remainder of 2021.
We'd be happy to respond to questions.

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q2 earnings per share $0.58.

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