Provident Financial Services Q3 2024 Earnings Call Transcript

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October 30, 2024

There are 7 speakers on the call.

Operator

Thank you for standing by. I would like to welcome everyone to the Provident Financial Services Inc. 3rd Quarter Earnings Conference Call. I would now like to turn the call over to Adrian Duarte, the Investor Relations Officer. Please go ahead, sir.

Speaker 1

Thank you, Dustin. Good morning, everyone, and thank you for joining us for our Q3 earnings call. Today's presenters are President and CEO, Tony LaVazetta 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 question as to any forward looking statements that may be made during the course of today's call. Our full disclaimer is contained in yesterday evening'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 La Bozzetta, who will offer his perspective on the Q3. Tony?

Speaker 2

Thank you, Adriano, and welcome everyone to the Provident Financial Services earnings call. Before we discuss our quarterly results, I am pleased to announce that as of September 3, the conversion of Lakeland Bank's core system was completed and we are now operating as a fully united organization. Our cultures are combining well and we have successfully retained virtually all legacy Lakeland customers. We are grateful to all the team members whose hard work and diligent preparation allowed us to have a smooth systems integration. We are already seeing the benefits of the merger through cost savings, expansion in our margin and more revenue enhancement opportunities.

Speaker 2

And we are excited to carry this momentum into 2025. Moving on to our quarterly results. The Q3 was characterized by stronger than expected economic growth. The 1st interest rate cut in more than 4 years and an optimistic outlook for the banking sector despite weak loan demand and higher deposit costs. The Provident team achieved solid core profitability highlighted by core margin expansion, growth in the loan pipeline, significant contributions from our fee based businesses and improved operating efficiency.

Speaker 2

During the quarter, we reported net earnings of $46,400,000 or $0.36 per share on an annualized adjusted return on average assets of 0.95% and a return on average tangible equity of 14.53%. Our adjusted pre tax pre provision return on average assets was 1.48% for the 3rd quarter. As we move forward, we expect to continue to leverage synergies and further enhance earnings going into 2025. At quarter end, our capital was healthy and exceeded levels deemed to be well capitalized. Our tangible book value per share increased 4.5 percent to 13.66 percent and our tangible common equity ratio was 7.68% compared to 7.34% for the trailing quarter.

Speaker 2

As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on November 29. During the quarter, our average cost of total deposits increased 9 basis points to 2.36%. Our deposits grew by $22,000,000 this quarter largely in short term certificates of deposits. Our total cost of funds increased 6 basis points to 2.62% and remains favorable relative to our peer group. Overall, our net interest margin increased 10 basis points to 3.31 percent and we expect to see continued improvement over the next several quarters.

Speaker 2

During the Q3, our commercial lending team closed approximately $489,000,000 of new commercial loan. We experienced approximately $227,000,000 in loan payoffs, resulting in a net growth of about $39,000,000 This quarter's production consisted of 35% commercial real estate, 43% in commercial and industrial lending and 22% in specialty lending. Despite a slight deterioration in non performing loans, primarily due to 1 commercial real estate credit for which we anticipate a near term resolution with no expected loss, our credit quality remains strong for the Q3 as evidenced by our non performing loan ratio of 47 basis points. We do not see any systemic weakness in our loan portfolio and remain confident in our underwriting and portfolio management standards. This is further supported by lower levels of net charge offs relative to our peer group.

Speaker 2

We have seen an increase in our total loan pipeline, which grew during the Q3 to approximately 2,000,000,000 dollars The weighted average interest rate is 7.18 percent compared to 7.53% in the trailing quarter. The pull through adjusted pipeline, including loans pending closing, is approximately 1,200,000,000 dollars We are optimistic regarding the strength and quality of our pipeline. And as such, we expect good growth over the next two quarters. This quarter, Providence fee based businesses performed very well. Provident Protection Plus had 13% organic growth in the 3rd quarter as compared to the same quarter last year, which was the highest 3rd quarter growth rate in its history.

Speaker 2

In addition, it had 16% organic growth year to date and its retention rate was 99% even as insurance rates continue to rise. Beacon Trust assets under management grew by 4% for the quarter to a record high of $4,200,000,000 which represents a 10% year to date growth. This growth was driven largely by good investment performance and as a result, fee income improved 9% as compared to the Q3 of 2023. As we move towards the end of the year, we are increasingly optimistic about the prospects for future performance as we anticipate a more favorable operating environment, growth in our business lines, continued revenue enhancement opportunities, strong credit quality and improving operating efficiency, which will help us deliver even more value to our customers, employees and stockholders. Now, I will turn the call over to Tom for his comments on our financial performance.

Speaker 2

Tom? Thank you, Tony,

Speaker 3

and good morning, everyone. As Tony noted, we reported net income of $46,400,000 or $0.36 per share for the quarter. Excluding charges related to our merger with Lakeland Bancorp, core earnings were $57,700,000 in the current quarter or $0.44 per share with a core ROA of 95 basis points. Further adjusting for the amortization of intangibles, our core return on average tangible equity was 14.53% for the quarter. Excluding merger related charges, pre tax pre provision earnings for the current quarter were $90,100,000 or an annualized 1.48 percent of average assets.

Speaker 3

Revenue increased to $210,600,000 for the quarter, reflecting our 1st full quarter combined with Lakeland and our net interest margin increased 10 basis points in the trailing quarter to 3.31%. For the quarter, our margin included 53 basis points of purchase accounting accretion. Excluding purchase accounting from both periods, our core margin expanded 4 basis points versus the trailing quarter to 2.78%. We project the NIM in the 3.3 percent to 3.35 percent range for the remainder of 2024, increasing to around 3.45% over the course of 2025. Our projections include 2 additional 25 basis point rate reductions in 2024 and another 3 rate cuts in 2025.

Speaker 3

Period end total loans were essentially flat for the quarter. Within the portfolio, C and I loans increased by $94,000,000 and multi family loans increased by $37,000,000 while construction loans decreased by $97,000,000 Our pull through adjusted loan pipeline at quarter end has increased to $1,200,000,000 with a weighted average rate of 7.24% versus our current portfolio yield of 6.21%. Deposits totaled $18,400,000,000 at September 30, consistent with the trailing quarter. Our loans to deposits ratio remained stable at 102%. The average cost of total deposits increased to 2.36% this quarter, reflecting a full period combined with Lakeland.

Speaker 3

We expect that this represents the cyclical peak in deposit costs. While metrics worsened slightly during the quarter, overall asset quality remained strong with non performing loans representing just 47 basis points of total loans, NPAs to assets at 41 basis points, total delinquencies at 56 basis points of loans and criticized and classified loans totaling 2.74 percent of loans. The increase in non performing loans this quarter was largely driven by $119,700,000 credit secured by an industrial property that has a current loan to value ratio of approximately 39%. There is an active near term resolution plan and we expect to incur no loss on this credit. Net charge offs were $6,800,000 or an annualized 14 basis points of average loans this quarter.

Speaker 3

Charge offs were primarily driven by 1 commercial credit, which carried a specific reserve of $4,400,000 at June 30. The remaining collateral securing this relationship is scheduled to be auctioned in November with full resolution expected in the Q4. The provision for loan losses increased to $9,600,000 this quarter, reflecting specific reserve requirements and some deterioration in the macroeconomic variables that drive our CECL estimate. This increased our coverage ratio to 1.02% of loans at September 30. Non interest income increased to $27,000,000 this quarter, reflecting the combined the Lakeland combination, strong performance from our wealth management and insurance agency subsidiaries and an increase in BOLI income.

Speaker 3

Non interest expenses excluding merger related charges were in line with our expectations at $120,000,000 with expenses to assets at 1.98% and the efficiency ratio at 57.2% for the quarter. We have currently realized the majority of our targeted merchant cost saves and we project non interest expenses of approximately $110,000,000 for the Q4 of 2024. We currently project our effective tax rate for the remainder 2024 2025 to approximate 29.5 percent. Regarding projected 2025 financial performance with fully phased in cost saves, we currently estimate 2025 return on average assets of approximately 1.15% and return on tangible equity of approximately 16%, with an operating expense ratio of approximately 1.8% and an efficiency ratio of approximately 52%. That concludes our prepared remarks.

Speaker 3

We'd be happy to respond to questions.

Operator

Thank Thank you. We will begin the question and answer session. And our first question comes from the line of Mark Fitzgibbon from Piper Sandler. Your line is open.

Speaker 2

Hey guys, it's Greg Zingoyan stepping in for Mark at

Speaker 4

the moment. How are you?

Speaker 5

Very good. Good morning, Greg. Very good. How are you?

Speaker 2

Good. First question, one of your competitors just announced it was selling a large pool of commercial real estate loans to drive their concentration down. Is this something that

Operator

you guys would also consider doing?

Speaker 2

No, it's not even in our discussions here. We don't have a lot of transactional accounts, relationship oriented institution. We like our book. There's no systemic deterioration in there. It's all within our concentration risk levels that meet our tolerances from a risk concentration risk perspective.

Speaker 2

So there's no business or strategic reason for us to entertain that at this time. Okay. And then lastly, what are your thoughts on a securities portfolio restructuring?

Speaker 3

Again, none anticipated at this time. We're happy with the quality content and performance of the securities portfolio as well.

Speaker 2

We did a minor reshipped our

Speaker 3

We did. When we bought Lakeland, as you know, it it's about $550,000,000 that we restructured out and paid down.

Speaker 1

And reinvested some of that.

Speaker 2

Awesome. Thanks, guys. I'll sit back to the queue.

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from the line of Billy Young from RBC Capital. Your line is open.

Speaker 4

Hey, good morning guys. How are you?

Speaker 2

Good, Billy. How are you?

Speaker 4

Doing well, doing well. Thank you. Just kind of looking at next year's margin guide, the 3.35% to 3.40%. Can you just maybe comment on what type of Fed rate actions you would need to see to kind of get to the upper end of that range? I guess the fall on to that is, does that matter?

Speaker 4

Or do you have enough natural repricing ability on the deposit book to kind of get there?

Speaker 3

Yes. But I think it's less about the Fed's actions. As we've discussed, we're pretty neutral in terms of interest rate risk and more about the repricing of the organic book. So I think we're looking at probably core margin expansion in the 3 to 5 basis points range per quarter over the course of the next several quarters. And that 54, 55 kind of purchase accounting that we saw this quarter is probably representative of the future subject to some volatility depending on the cash flows that underlie that depending on the loan prepayments.

Speaker 3

So I think we're moving towards like a $345,000,000 number or closer to the end of the year, the year 2025 to be

Speaker 2

Maybe you want to share the core margin movements, some of the betas that we had on our deposits that we worked a little bit better than what we thought. In terms of Some of your repricing with the Fed's rate moves?

Speaker 3

Yes. So again, a lot of what goes into the quality of the margin expansion is how effectively and aggressively we can manage deposit funding costs. Our stated rates are typically pretty low relative to the peer group. So that's the concern. There's not a lot of room for movement there.

Speaker 3

But there's a fair amount of exception pricing in the book as well as there is with most institutions. We're very successful in this first round and you'll see it effective with the October 1st rate of repricing some of those down about $2,300,000,000 worth of deposits at an average of about 37, 38 basis points reduction that we saw effective October 1. So again, that's what's going to influence our ability to outperform going forward is how effectively we're able

Speaker 2

to manage those funding costs. While retaining the deposit balances.

Speaker 4

Got it. Thank you for all that. Appreciate it. Just moving on to a different topic. Your updated expense guide is tracking a little higher than the $107,000,000 you previously guided to.

Speaker 4

So can you just maybe elaborate what areas you might be seeing incremental expense pressure? And I apologize if I missed this, but can you just kind of help clarify what you're kind of assuming in terms of the expense growth run rate target for next year?

Speaker 3

Yes. The 110, I think we talked about a 107 last quarter for Q4. Some of that's just a little bit of the timing on the realization of remaining cost saves from the merger. So that's what's given us a little bit more of a delay in fully realizing those benefits. For next year, I'm thinking the 1st couple of quarters at least will probably pick up a little bit from there.

Speaker 3

As you know, there's typically seasonal expenses, compensation increases, payroll taxes on the employer side and whatever weather related costs that come into play. So I'm thinking that something like a $112,000,000 to $115,000,000 for the Q1 or 2.

Speaker 4

Got it. Thanks. Thanks. And just my last question, I guess, is just to touch on your positive commentary on kind of loan pipelines. They do seem to be kind of gaining momentum here.

Speaker 4

So can you I guess, can you just just a broader comment, are you starting to see that inflection point in terms of underlying demand and client activity? We've talked about some of the macro headwinds that kind of plagued the industry for the last couple of quarters. Are you starting to see that inflect now that we're kind of getting some of that behind us? I know we have the election next week, but are you starting to see any change in sentiment here?

Speaker 2

Yes. That's a good question. There's a couple of things. I think we had a dynamic that affected Provident that is just outside of normal rates and market conditions. We had a merger integration happening.

Speaker 2

And as hard as you try, there's always going to be a little bit of a disruptive factor there. So it's hard to gauge what percentage that was. But suffice to say that as we got through the merger got approved, then we got through our conversion, the momentum picked up on both sides of the legacy organizations. And we are seeing a great deal of activity. The sentiment from the clients today is great that rates went down and is starting to trigger more activity.

Speaker 2

I think we're in a space now where people are being active with projects because the specter of rising rates isn't there. So they can say, okay, we don't have to worry about variable rates continuing to move and I can do this project over the short term and 3 years from now I can refinance it at a lower cost. So there's that settlement. There's also the discussions out there in certain industrial sectors that people are waiting for what happens with this election depending on policy changes and how it might affect their business. For Provident, we're also seeing a little bit of a pull down from the bigger banks.

Speaker 2

There's been a little disruption in the market and we're getting a lot more activity coming in from the top banks on down. So suffice to say that I think there's some guarded optimism out there. We do expect we see the pipeline building and a lot of activity. And as we're more focused now that the conversion is behind us, despite what the market is, I think we'll fare better. But if market conditions improve, we'll be I think we'll be able to exceed our normal projected loan growth.

Speaker 2

And I think the 4th quarter is looking nice right now for us, and we want to keep that momentum going into 2025.

Speaker 4

Great. Thank you guys for taking my questions.

Speaker 6

Thank you. Very good.

Operator

Thank you. Our next question comes from the line of Tim Sylvester from KBW. The line is open.

Speaker 5

Hey, good morning guys. Good morning, John. Hope you're doing well.

Speaker 2

We are. Thanks, you too.

Speaker 5

I have a follow-up on the margin outlook here. The purchase accounting accretion didn't move up much versus the previous quarter. And I'm kind of curious on what the dynamics were there. And I know there's a lot that kind of goes into the estimates and calculations for that. But could you kind of walk us through the why I guess it wasn't higher given the Q2 number?

Speaker 5

And then do you expect it to be stable over the near term instead of like kind of slowly moving down? How should we model that out?

Speaker 3

Yes. Tim, I think the primary driver was just the assumptions we were using around cash flows on the loans. So the prepayments on the loans came in lesser lower than expected. And I think that is a reasonable run rate to use going forward. I would keep it stable.

Speaker 3

I mean, ultimately, there'll be some decrease in that over time, but I don't see a dramatic decrease in the 1st year or so.

Speaker 2

I think it's important to point out that the core margin also improved. And that's without consideration for this rate cut and the benefits that we'll see in October. So the core operating margin, Tim, has improved and it's nothing more nothing further to look at it in that margin change than prepayment speeds that we anticipated. So in essence, if those speeds pick up as rates continue to come down, we could actually see it go higher than what Tom and AD are guiding to. But I think Tom's guidance is to just keep it stable because just it's the right thing to the right

Speaker 3

It's the appropriate baseline. Correct.

Speaker 5

Yes. No, that makes total sense. And then another quick one on the run rate for amortization expenses around $12,000,000 this quarter, is that a good run rate going forward? And also is that included in your ROTCE projection?

Speaker 3

It is added back to the ROTCE and it is a good run rate.

Speaker 4

Okay. Okay. That's helpful.

Speaker 5

And then could you maybe provide just a quick review of what's the impact of more aggressive Fed cuts or less aggressive Fed cuts to your margin and NII outlook?

Speaker 3

I think you picked up a little bit on the margin because I think we will be able to be effective in the funding quest and there's a fair amount of

Speaker 2

let me see what the number is.

Speaker 6

We

Speaker 3

have $4,500,000,000 worth of maturing funding over the next 12 months at a rate of about 4.26. So to the extent we get to reprice that down, that will certainly help us quite a bit. Slope of the yield curve will help as well in terms of reinvesting those funds. So there's greater opportunities with more dramatic decreases. That said, we are fairly neutral from an interest rate risk perspective.

Speaker 3

So regardless, we should be just fine.

Speaker 6

Okay, perfect. Thank you, guys. Thank you.

Operator

Thank you. And our last question comes from the line of Manuel Abas from D. A. Davidson. Your line is open.

Speaker 6

Good morning. Hey, good morning. That's great about the deposit cost declines in October. Is that similar deposit beta is expected across 25, you're extending that out? And

Operator

has there

Speaker 6

been any pushback at the moment to those cuts?

Speaker 2

I think our team did an outstanding job prepping the customers. We didn't just do it and let the customers find out. There was a lot of outreach, a lot of communication and they were able to successfully get about 38 basis points or the 50 basis point cut. We've conditioned our customers on expectation as we move forward. There's always those relationships that produce a lot of value that you make accommodations for.

Speaker 2

But I think the team is along with the Treasury Group is doing a fine job of preparing in advance of rate cuts in terms of customer communication. So I really expect that we should get similar betas, but it's really hard to predict what the next how far. But I would say I'm pretty comfortable that it should be relatively close.

Speaker 3

Yes. And I could share what we're modeling, recognizing the timing of the maturing funding. So in our modeling for next year, we have weighted average interest sorry, weighted average beta on the interest bearing deposits of a little over 31% and on total deposits about 24%, so including the non interest bearing. So that also includes the CDs, again, repricing as they come to maturity.

Speaker 6

That's by year end next year,

Operator

the right top process?

Speaker 3

Yes, that's over the course of the year next year. Yes.

Speaker 6

Okay. I appreciate that clarity. And can you just speak to potential fee revenue synergies? You've talked about it a bit already, but just kind of now that the deal is closed, where could insurance, wealth management all kind of be stronger together than where it was before?

Speaker 2

That's a great question. I did mention that in my written notes, and we had a great deal of time. I will give you a lot of the factual or anecdotal information that we're seeing. Suffice to say that there's been a great reception across the 2 legacy organization in terms of the businesses that we contributed. For instance, we're seeing a lot of commercial activity going into our insurance from the legacy Lakeland side.

Speaker 2

We've actually had even our wealth business refer a commercial client over to our bank. We're seeing insurance refer the activity has picked up tremendously. And I think part of that is the excitement as we go in. I think we're just touching the beginning stages of what we do as a culture working on an integrated basis. But the storylines are there.

Speaker 2

In addition to how we're referring business across the channels, you also have what we mentioned earlier on a few calls ago that as a large organization, we're able to accommodate certain transactions that we were not. So I mean just this quarter alone, I can point to about 2 or 3 transaction that the legacy Provident couldn't have done unless we had the combined scale. And it gave us the capacity to do more treasury management business and other activity in insurance as a byproduct of that. So all of those are the revenue enhancement things that we refer to and just watching that customer experience that goes back and forth between the teams, it's pretty exciting for me. We just have to keep that momentum going.

Speaker 6

I appreciate that. Thanks for the color. Thanks for the commentary.

Speaker 2

Perfect.

Operator

Thank you. That now concludes our question and answer session. I will now turn the call over back to our CEO, Anthony LaVazetta for closing remarks.

Speaker 2

Well, thank you everyone for your questions and for joining the call. It has been a very productive and eventful quarter for us and we hope that you all have a great rest of the year and holiday season. We look forward to speaking to all of you in the New Year. Thank you very much.

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Earnings Conference Call
Provident Financial Services Q3 2024
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