Provident Financial Services Q3 2023 Earnings Call Transcript

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October 27, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services Inc. Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, There will be a question and answer session. If you would like to withdraw your question, again, press the star one. Thank you. Adriano Duarte, Investor Relations Officer, you may begin your conference.

Speaker 1

Thank you, Rob. Good morning, everyone, and thank you for joining us for our Q3 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 last night's earnings release, which has been posted to the Investor Relations page on our website providence.

Speaker 1

Bank. Now it's my pleasure to introduce Tony Labazada, who will offer his perspective on our Q3. Tony? Thank you, Adriano. Good morning, everyone, and welcome to the Provident Financial Services earnings call.

Speaker 1

The Q3 was marked by rising interest rates and persistent inflationary pressures. These conditions have presented substantial challenges to many in the banking sector. Against that backdrop, I'm pleased to report that Provident has demonstrated its resilience and agility, Delivering results that point towards the underlying strength of our operation and our commitment to responsible growth. Despite the difficult economic environment, Provident produced good financial results this quarter, which once again demonstrates the strength of the franchise and Talented Management team. As such, we reported earnings of $0.38 per share and annualized return on average assets of 0.81% And a return on average tangible equity of 9.47%.

Speaker 1

Excluding merger related charges, our Core pre tax pre provision return on average assets was 1.48%. At quarter end, our capital was strong And exceeded well capitalized levels. Tangible book value per share was $15.41 And our common tangible common equity ratio was solid at 8.54%. As such, Our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on November 24. Presently, our uninsured and uncollateralized deposits are $2,500,000,000 or approximately 25 percent of our total deposits.

Speaker 1

Our on balance sheet liquidity plus borrowing capacity is $3,600,000,000 or 144 percent of uninsured deposits. Our core deposits are a valuable component of our franchise. During the quarter, our average core deposits decreased $85,000,000 or 0 point 9%, which we attribute to normal business activities and customers seeking higher yielding investment alternatives in this environment. Our rising rate cycle to date deposit beta was approximately 29.5%, which we believe is among the best in the peer group And is reflective of the quality of our deposit base. Consequently, our total cost of deposits increased and in large part Drove our total cost of funds of 33 basis points to 2.04 percent, compressing our net interest margin 15 basis points to 2.96%.

Speaker 1

Our commercial lending team closed approximately $330,000,000 of new commercial loans during the Q3. Payoffs decreased 16% to about $94,000,000 as compared to the trailing quarter. Our credit metrics continue to be excellent in the Q3 and we are maintaining prudent underwriting standards, particularly in CRE lending. As part of our normal pre monitoring processes, we have performed targeted in-depth analysis to evaluate portfolio segments, concentrations in loan level risk. These enhanced evaluations of our portfolio have not indicated any meaningful deterioration despite difficulties in the wider market.

Speaker 1

Our line of credit utilization percentage decreased 1.9% in the 3rd quarter to 33%, remaining below our historical average of approximately 40%. As a result of the improved production and reduced prepayments, offset by a decreased line of credit utilization. Our commercial loans grew approximately $134,000,000 or 1.48 percent for the quarter. For the 9 months, we grew $296,000,000 or 4.9 percent, which is pacing at an annualized growth rate of about 6.5%. The pull through in our commercial loan pipeline during the Q3 was good And the gross pipeline remains strong at approximately $1,700,000,000 The pull through adjusted pipeline, including loans pending closing, is approximately $1,100,000,000 and our projected pipeline rate increased 39 basis points to 7.62%.

Speaker 1

We are encouraged by the strength and quality of our pipeline. In addition, payoffs have slowed and as a result, we expect to achieve our commercial lending growth targets for the remainder of 2023. Our fee based business has performed well. Despite a hardening insurance market, Provident Protection Plus had a strong Q3 with 63 percent organic growth, which resulted in an 11.9% increase in revenue and a 12.3% increase in operating profit as compared to the same quarter last year. Beacon Trust performed in line with expectations as conditions in the financial markets continue to remain volatile.

Speaker 1

Fee income remains stable despite the reduction in assets under management, Which was new in part to market conditions. Beacon's investment performance compares favorably to the applicable benchmarks. With respect to our previously announced merger with Lakeland Bancorp, we are continuing our engagement with the regulators And have complied with all information requested and now we await final approval of the merger. The companies have made significant progress in various integration initiatives through outstanding team works from both banks. While regulatory approval is not within our control, Preparations for our merger with Lakeland continues to progress as both companies eagerly await approval.

Speaker 1

As we look forward, we remain focused on growing and strengthening the fundamentals of our business. However, being disciplined And remaining committed to our responsible risk management principles is critical during these challenging times. While we await for regulatory approval, We expect to close and integrate the merger with Lakeland Bank in the near future, which we believe will create value for all of our stakeholders. Now I'll turn the call over to Tom for his comments on our financial performance. Tom?

Speaker 1

Thank you, Tony, and

Speaker 2

good morning, everyone. As Tony noted, our net income for the quarter was $28,500,000 or $0.38 per share compared with $32,000,000 or $0.43 per share for the trailing quarter and $43,400,000 or $0.58 per share for the Q3 of 2022. Transaction charges related to our pending merger with Lakeland Bancorp totaled $2,300,000 in the current quarter or approximately $0.03 per share $2,000,000 in the trailing quarter. Excluding these merger related charges, pre tax pre provision earnings for the current quarter were $52,200,000 or an annualized 1.48 percent of average assets. Revenue totaled $116,000,000 for the quarter compared with $118,000,000 for the trailing quarter and $138,000,000 for the Q3 of 2022.

Speaker 2

Please note prior year earnings for the Q3 of 2022 included an $8,600,000 gain on the Our net interest margin decreased 15 basis points from the trailing quarter to 2.96%. The yield on earning assets improved by 16 basis points versus the trailing quarter as floating and adjustable rate loans repriced favorably And new loan originations reflected higher market rates. This improvement in asset yields, however, was more than offset by an increase in interest bearing funding costs. Increased funding costs reflected current market conditions, which resulted in an increase in borrowings accompanied by a decrease in deposits. Certain non interest bearing balances also moved to our interest bearing insured cash sweep product in order to obtain increased deposit insurance.

Speaker 2

In addition, lower costing demand and savings balances shifted to higher costing time deposits. The average total cost of deposits increased 32 basis points from the trailing quarter to 1.74%. This brought our rising rate cycle to date beta to 29.5%. The average cost of total interest bearing liabilities increased 37 basis points in the trailing quarter to 2.50%. The prolonged inverted yield curve, ongoing deposit competition and an increase in the attractiveness of investment alternatives continue to impact funding costs.

Speaker 2

As a result, we expect to see some continued net interest margin compression for the balance of 2023 and currently project the margin will stabilize in Q4 at around 2.90 Period end total loans grew $137,000,000 driven by multifamily mortgage loan originations. Our pull through adjusted loan pipeline increased $75,000,000 from last quarter to $1,100,000,000 with a weighted average rate of 7.62% versus our current portfolio yield of 5.37%. Asset quality remains strong with non performing loans as a percentage of total loans falling to 37 basis points And both early stage and total delinquencies improving. Criticized and classified loans did increase slightly this quarter, but were still low at 1.7% of total loans. Net charge offs were $5,500,000 or an annualized 21 basis points of average loans this quarter, bringing year to date net charge offs to 9 basis points.

Speaker 2

The current quarter loss was driven by a single C and I loan impacted by a strategic business shift implemented by a primary customer. The provision for credit losses on loans increased $600,000 for the quarter to $11,000,000 primarily due to a weakened economic forecast within our CECL model. As a result, the allowance for credit losses on loans increased to 101 basis points of total loans at September 30 from 97 basis points at June 30. Non interest income remained steady, decreasing only $67,000 versus the trailing quarter. Excluding provisions for credit losses on commitments to extend credit and merger related charges, non interest expense was consistent with the trailing quarter at $63,300,000 representing an annualized 1.8% of average assets for the current quarter compared with 1.83% in the trailing quarter and 1.89 percent for the Q3 of 2022.

Speaker 2

The efficiency ratio was 54.81% for the Q3 of 2023 compared with 53.29 percent in the trailing quarter and 47.11 percent for the Q3 of 2022. Our effective tax rate declined to 23.7% this quarter as a result of a decrease in projected taxable income. We expect the 4th quarter effective tax rate of approximately 25.5%. That concludes our prepared remarks. We'd be happy to respond to questions.

Operator

Your first question today comes from the line of Mark Fitzgibbon from Piper Sandler. Your line is open.

Speaker 3

Hey, guys. Good morning. Happy Friday.

Speaker 1

Good morning, Dave. Good morning.

Speaker 3

Tom, just to clarify on the margin, I think you said you expected to stabilize around $290,000,000 in the 4th quarter. So you think at that point the margin will have bottomed?

Speaker 2

That's what our model is showing. It stays pretty stable at around $290,000,000 level over the course of the next 12 months, Mark.

Speaker 4

Okay.

Speaker 3

And then secondly, you mentioned in the press release A little bit about sort of triggering events and testing for goodwill impairment. Can you explain exactly what would What a triggering event would be, what the consideration would be that it would cause an interim goodwill impairment test?

Speaker 2

I think a lot of it, Mark, is relative performance to the group. If you see price to book multiples, vary materially or price Tangible book multiples that would indicate any kind of permanent impairment or permanent is a stronger word, but near term impairment in the valuation of the company. Okay.

Speaker 3

And then on credit, you guys were one of the few banks that showed a sequential quarter decline in problem loans, which is great. I guess I was curious, are there any areas that you're paying particular attention to aside from the obvious office loans that everybody talks about? Any areas that You're sort of watching carefully or pairing exposures or things of that nature.

Speaker 1

Mark, it's Tony. We've done I would say we've probably spent the better part of 6 to 9 months doing deep dives in all categories. I could comfortably state right now that there's not any segments that we're seeing that present any concern to us. In fact, the results show that there's no systemic pressure, I mean, in any of the segments. Obviously, you're familiar with that we don't have A lot of exposure in office, as we noted.

Speaker 1

But we're comfortable with the way our assets are classified at this time. Obviously, I always have to put the caveat, we don't know what recessions, we don't know if bankruptcies take place, things of that nature. What we're observing right now do not point to any sectors that we have a concern within our portfolio.

Speaker 2

The only additional thing I'd offer, Mark, is that Nonperforming asset formation this quarter was very small. It's about $2,500,000 and it's really attributable to $1,000,000 $3,000,000 loan that I'm very confident there's no loss content and it's a Technical maturity issue.

Speaker 3

Okay. And then last question, Tony, you've probably seen that several other banks They've recently sold their insurance agency businesses at fairly large gains. I wondered if you could Share with us your thoughts on the possibility of doing something like that whether it would make sense or not.

Speaker 1

Well, we look at all of our businesses with an annual frequency. I would say when it comes to insurance, it's such an integral part of our business the way it links with our commercial platform. The rate of growth, the value add that it provides to our customers that at this time, it's not in our consideration And it's probably one of our largest growing segments. So I think the combination of those things, just to turn it into a financial transaction, I think, will be a net Takeaway from our client experience and the rate of growth in our noninterest income. By the way, as We've spoken in the past, as many know, it is our objective to increase the percentage of non interest income as Percentage of total revenue.

Speaker 1

So that to us is an important piece of business that is not considered for sale right now. I think the

Speaker 2

profitability on that business for us, Mark, is pretty strong compared to some of the sales that I've seen. I think we get a net margin of about 26%. So that's really a business we want to continue to invest in and

Speaker 1

grow further with high growth prospects.

Speaker 3

Makes sense. Thank you.

Operator

Your next question comes from the line of Billy Young from RBC Capital Markets. Your line is open.

Speaker 4

Hey, good morning guys. How are you?

Speaker 2

Good morning, Billy.

Speaker 4

Hey. Just quickly on the Lakeland deal. If I recall correctly, I think the original deadline For the deal might be around year end. So has there been any discussions with Lakeland about possibly extending that merge deadline?

Speaker 1

The answer is yes. But we're hoping we don't have To go therapy, because we are as I mentioned in my talking points with relative to the merger, which I know is on everybody's mind, We have provided everything that the regulators need for them to finalize their decision. And at this point, we're waiting for their final decision. And we hope that we don't have to The in a state in December where we have to consider that. But to your question is, yes, we are talking about it and that's under consideration.

Speaker 4

Understood. And just to touch on loan growth, can you just speak to the trends you're Being in multifamily, it's been a good source of growth for you recent quarters. Just to any extent what kind of yields you're pointing up on that? How attractive are the spreads for

Speaker 1

Let us look here. I think we're still probably in that 170 to over on the spreads. I would have to get back to you on that. That's what's coming to mind right now. At least the 170 to 200 range sense, right?

Speaker 1

That's correct. But I will tell you one of the things that like just as kind of give a little bit more insight into how we're thinking about lending. The Our business model, it's always been this, but it's more acute today that transactions are not in high favor. A lot of it is relational oriented where we're looking at deposit components, insurance components and other elements. As capital dollars become a little bit more, the availability of those dollars.

Speaker 1

So I I think when we're looking at the total profitability model that we run again, we put in we drop in there the deposits and everything else that goes with it. In general, the spread is, I would say, between $170,000,000 $190,000,000 I would say is a pretty good guess.

Speaker 4

Understood. And just want to and maybe lastly, just to touch on funding. I know you've said in the past, you're not particularly interested in being too aggressive on promotional activity and wholesale forces kind of make sense for you right now from a price perspective. But I guess as you kind of look down to budgeting for next year, you see Kind of any need to make any changes in terms of like core deposit gathering? Do you see a need maybe kind of The change in incentive structures for bankers to kind of lean into it a little bit or to make core deposit growth more a priority?

Speaker 4

Thanks.

Speaker 1

Well, I think you touched upon a number of things and all of that is within our thinking. But as a general direction in terms of how we're viewing funding today, It's still I would still characterize it as defensive in nature, right, which is we're paying if you look at our cost of deposits at 1.74 And our total cost of funds at 2.04. It's amongst some of the best in our peer group. So we're very cognizant not to damage that value. That being said, that's why we use a defensive approach right now in terms of trying to maintain deposits versus being aggressive and disintermediating and have incremental costs and damaging that.

Speaker 1

That being said, we still have to grow our business. And the way we're approaching that into the New Year is, yes, we have some targeted campaigns that we think we're not going to do that. We have one going on now, which is producing some decent results. But some of our small business platform is going to be a big focus for us as we go into 2024. Commercial C and I and some of the things that we're doing in that sector and targeted and also with compensating balances on some of the loans that we have now.

Speaker 1

There's a massive push from the entire organization. When I say from the entire organization, I mean from our wealth group, insurance group, our commercial bank, our retail On deposits, that's the number one driver in everybody's incentive plan as we move into 2024 because we all know that's the greatest challenge that we face these days.

Speaker 4

Thank you. I appreciate it. I'll step back.

Operator

Your next question comes from the line of Michael Perito from KBW. Your line is open.

Speaker 5

Hey, guys. Good morning. Thanks for taking my questions.

Speaker 2

Good morning,

Speaker 5

Apologize if I missed this, but are you guys able to give a little more incremental color on kind of where you're originating new Commercial loans today. And just broadly, Tony, what's the kind of both sides of the appetite for loan growth In the intermediate future here, I mean, I guess, our clients kind of receptive to the pricing raises. I'm sure you guys are putting it in Across the board and I guess from your perspective just with NIM stabilizing, the merger pending, what do you guys kind of feel like on loan growth that we should be thinking about?

Speaker 1

Mike, I would characterize that 4% to 6% would be a good target for you to consider in your modeling. I would say today, it's a very interesting environment. If we Untethered, our thinking, we could probably grow our loans about 15% given all the activity and volume that we're seeing. However, we're our underwriting metrics have tightened. The amount Of commitments that we're willing to put out there for constructions has tightened.

Speaker 1

Relational banking has become more acute. So transactional volume that might have been a filler in the past is not bold today. So if we're focusing our calories more on the relationship Tacoma's deposits. And that being said, we have declined some loans that It might have been acceptable from just from a lending perspective in the past because we're looking at it from a holistic approach. And that's the focus of our company today and I think that's important.

Speaker 1

But our appetite to answer your question, The way we're calculating it is that 4% to 6% given how we're approaching things today.

Speaker 5

Got it. And then do you guys have any and again, sorry if I missed it, if you provided already, but just any color on kind of where Incremental commercial loan yields are that you guys are getting on the books today?

Speaker 2

Yes. Last quarter, I think the average on I'm sorry, the average run rate last quarter is about 6.75%. I think we're seeing like more like 7.25% and 6.2%

Speaker 1

is the pipeline, but then you have to kind of Bring that down a little bit to reality. So I would say probably 7 to 7.25 is a good target range.

Speaker 5

Okay. And then just if we appreciate the update on the merger. If we just kind of Assume that the transaction goes forward. How should we be I just and you don't have to get too specific, because I'm sure you guys will Post close, but just wondering what kind of the investment roadmap looks like, if you can maybe give us an update, whether it's kind of on the technology or the And I mean, are there any areas where that we should be kind of mindful of as we think about expense growth kind of post merger for Provident?

Speaker 1

I would say we're going to get synergies post merger for a start and we'll deliver on our expectation on those synergies. But for us, planning for Provident and the future growth is, I would say, probably the greatest investment, which I don't think is anything that's going to be monumental is going to be investment in our technology as move forward, a new platform that's Going to be able to manage a commercial bank as we get into that $30,000,000,000 $35,000,000,000 even higher size. That's the next steps for us And a lot more on data, but that is already largely in the works now. I don't see a huge expense component on that. As we characterize it, there's going to be some rises in some areas and some declines in other areas.

Speaker 1

So it's how we allocate the spend More so than the incremental spend is the way we will look at it internally.

Speaker 5

Got it. Okay, guys. Thanks for taking my questions. Appreciate it. Have a good weekend.

Speaker 5

Thank you.

Operator

Your next question comes from the line of Manuel Nieves from D. A. Davidson. Your line is open.

Speaker 6

Hey, good morning. In the commentary on the NIM, you said your model is roughly pointing to stable across 2024. What do you kind of assume in terms of rates and deposit betas with that stability?

Speaker 2

Yes. There's 2 25 point decreases in the back half of 'twenty four there, I think in July September, if I remember correctly.

Speaker 6

You said increases? Decreases. Decreases, I got you.

Speaker 2

So we're not modeling any more rate hikes, 2 decreases in the back half of twenty twenty four.

Speaker 6

And total deposit base Still in like that 32 range?

Speaker 2

Yes. I think we bumped the expectation a little bit for through the cycle, maybe more like 35 37 is the expectation. I think it's fair given that the performance will lag a little bit behind what we were projecting this quarter.

Speaker 6

I'm sure you talked a little bit about the deposit initiatives and kind of the focus of the company. Should this be kind of the peak of the loan to deposit ratio at 100 Clive or is there comfort at this level? Just kind of talk about the loan to deposit ratio and its trend going forward.

Speaker 2

We're comfortable at this level given the overall liquidity posture of the bank. We have a low reliance on time deposits at this point. Overall, the alliance is on the wholesale funding in terms of percentage of earning assets, percentage of average assets is really just getting us back To a more traditional funding base, if you go back pre pandemic when we saw the surge in deposits throughout the industry as a result of stimulus. So we are not comfortable with wholesale funding, but obviously the lower cost alternative is always preferred. And as Tony mentioned, and we have Significant plans to try and grow the commercial deposit base.

Speaker 6

And I appreciate that. And just Do you have any extra color on the one commercial loan that drove net charge offs? I think you described it very briefly, but Just anything you could add there?

Speaker 2

Yes. My intention there was just to show that it was very much circumstances unique to that borrower, Nothing that I think you could read across to the Board of Portfolio. There was a fairly heavy reliance on a primary customer that had made some strategic Chips in their need for services, which impacted the revenue stream, and it was challenging to recover from. So based on current performance, we took the right path.

Speaker 6

Okay. I appreciate that. Thank you.

Speaker 5

Sure.

Operator

And we have a follow-up question from the line of Billy Young from RBC Capital Markets. Your line is open.

Speaker 4

Hey, guys. Just one quick follow-up and apologies if I missed this. Do you have what's your sense for where expenses might trend in 4th quarter.

Speaker 2

I think in the $64,000,000 to $65,000,000 range, Bill.

Speaker 4

6465. Perfect. Thank you very much.

Speaker 5

Thank you. Thanks, Bob.

Operator

And there are no further questions at this Chime, Mr. Tony Labozzetta. I turn the call back over to you for some closing remarks.

Speaker 1

Thank you. Thank you everyone for attending our call this quarter. We look forward to chatting with you throughout the quarter and getting back on next time. Have a nice day. Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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