Provident Financial Services Q1 2024 Earnings Call Transcript

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April 19, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by. My name is Alex. I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services Incorporated First Quarter 20 24 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. I would now like to turn the call over to Adriano Duarte, Investor Relations Officer. Please go ahead.

Speaker 1

Thank you, Alex. Good morning, everyone, and thank you for joining us for our Q1 earnings call. Today's presenters are President and CEO, Tony LaVazetta and Senior Executive Vice President and Chief Financial Officer, Tom Lyons. 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 is contained in yesterday evening's earnings release, which has been posted to the Investor Relations page on our website provident.

Speaker 1

Bank. Now it's my pleasure to introduce Tony Labuseta, who will offer his perspective on the Q1. Tony?

Speaker 2

Thank you, Adriano. Good morning, everyone, Welcome to the Provident Financial Services earnings call. Before I go on to discuss the results for the quarter, I am delighted to say that as of the 11th April, we have received all regulatory approvals to complete our merger with Lakeland Bancorp. We are grateful for the efforts of the members of our team and the Lakeland team who worked tirelessly to achieve this milestone and who continue to work diligently to plan for the merger and integration of our 2 exceptional banks. We expect to complete the merger this quarter, probably following the subordinated debt raise that is a condition to close.

Speaker 2

This merger will bring together 2 high performing institutions with like minded cultures and unwavering commitment to the employee and customer experience and a dedication to excellence. The scale and strong financial performance of our combined organizations will allow us to better invest in our future, compete for market share in the highly attractive and densely populated New Jersey, New York and Pennsylvania markets and serve our customers and communities while creating value for our shareholders. It will further aid us in attracting and retaining top talent and providing even better technological solutions for our customers and employees. We expect that Providence 2 fee based business lines, Insurance and Wealth Management will augment the product the broad product and service offerings available to the Lakeland Bank customers. Provident will also bring its strength in treasury management, while Lakeland brings its capabilities in healthcare and asset based lending to our combined institutions.

Speaker 2

Both institutions have talented management teams and boards and important past experience navigating mergers and whose joint skill sets will bring even greater strength to our combined talent pool. Moving on to our quarterly results. The Q1 was characterized by continued economic growth, stubbornly high interest rates and persistently difficult environment for the banking sector. Thanks to the efforts of the Provident team, our customer centric culture and robust risk management, we have performed very well. Provident produced strong financial results this quarter, which once again demonstrates the strength and discipline of our management team.

Speaker 2

We reported earnings of $0.43 per share and annualized return on average assets of 0.92% and a return on average tangible equity of 10.4%. Excluding merger related charges, our pre tax pre provision return on average assets was 1.28 percent for the Q1. At quarter end, our capital was strong and exceeded levels deemed to be well capitalized. Tangible book value per share remained steady at $16.30 and our tangible common equity ratio improved to 9.05%. As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on May 31.

Speaker 2

During the quarter, our average deposits excluding brokered deposits increased approximately 3% annualized as compared to the trailing quarter. And our total cost of deposits was impressive at 2.07%. The total cost of funds grew 9 basis points to 2.32%, which compressed our net interest margin 5 basis points. Our commercial lending team closed approximately $275,000,000 of commercial loans during the Q1. As expected, commercial loan payoffs increased $77,000,000 to $173,000,000 when compared to the trailing quarter.

Speaker 2

Our credit metrics continued to improve in the Q1 and the economic forecast in our CECL model modestly improved, resulting in a reduced provision for credit losses. We continue to maintain prudent underwriting and portfolio management standards, particularly in our CRE lending portfolio. Furthermore, our CRE portfolio is comprised of well diversified exposure levels concentrated within favorable asset classes. Overall, our total commercial loan portfolio remained relatively flat. However, we had good productivity in our C and I lending, which grew approximately $72,100,000 or 11.5 percent annualized for the quarter.

Speaker 2

In addition, our construction loans grew approximately $58,200,000 or 8.9 percent annualized due to funding of existing commitments. The pull through in our commercial loan pipeline during the Q1 was in line with our expectations and the gross pipeline remains steady at approximately 1,100,000,000 dollars The pull through adjusted pipeline including loans pending closing is approximately $561,000,000 and our projected pipeline rate is 7.46 percent. We remain optimistic regarding the strength and quality of our pipeline. Our fee based businesses performed exceedingly well. Despite the continuation of the heart insurance market, Provident Protection Plus had a strong first quarter, which resulted in a 17.4 increase in operating profit as compared to the same quarter last year.

Speaker 2

Better market conditions helped increase Beacon Trust assets under management to about $4,000,000,000 at quarter end, which helped grow fee income 9.4% as compared to the trailing quarter. As we move forward further into 2024, our attention will of course be on completing all aspects of the merger and becoming the preeminent community bank in our market. We will also focus on growing our business lines with an emphasis on deposit growth, achieving operational synergies and other revenue enhancement opportunities resulting from our merger. Now, will turn the call over to Tom for his comments on our financial performance. Tom?

Speaker 3

Thank you, Tony and good morning everyone. As Tony noted, our net income for the quarter was $32,100,000 or $0.43 per share compared to $27,300,000 or $0.36 per share for the trailing quarter and $40,500,000 or $0.54 per share for the Q1 of 2023. Transaction charges related to our pending merger with Lakeland Bancorp totaled $2,200,000 in the current quarter or approximately $0.03 per share and $2,500,000 in the trailing quarter. Excluding these merger related charges, pre tax pre provision earnings for the current quarter were $44,900,000 or an annualized 1.28 percent of average assets. Revenue totaled $114,500,000 for the quarter, consistent with $114,700,000 for the trailing quarter, but a decrease from $130,500,000 for the Q1 of 2023.

Speaker 3

Our net interest margin decreased 5 basis points from the trailing quarter to 2.87%. The yield on earning assets improved by 2 basis points versus the trailing quarter. However, this was more than offset by an increase in the interest bearing funding costs. Increased interest expense reflected current market conditions and funding requirements, which resulted in an increase in average borrowings and increased deposit costs. The average total cost of deposits increased 12 basis points in the trailing quarter to 2.07%.

Speaker 3

This is a further deceleration from 21 basis points in the trailing quarter, but the increase brought our rising rate cycle to date total deposit cost beta to 35.8%. The average cost of total interest bearing liabilities also increased 9 basis points in the trailing quarter to 2.80% as the prolonged inverted yield curve and ongoing deposit competition continue to impact funding costs. We expect deposit costs continue to stabilize over the next several quarters. Period end total loans decreased $31,000,000 as increases in C and I, construction and multifamily mortgage loans were more than offset by decreases in CRA, residential mortgage and consumer loans. This was an expected decline from strong growth in the trailing quarter as several loan repayments originally expected to occur last year were pushed out into the current quarter.

Speaker 3

Our pull through loan pipeline at quarter end was $561,000,000 with a weighted average rate of 7.46% versus our current portfolio yield of 5.51 percent and we continue to project full year net loan growth of 4% to 5%. Asset quality remains strong with non performing loans declining to 44 points of total loans and criticized and classified loans representing 2.1% of total loans. Net charge offs were just 971 $1,000 on annualized 4 basis points of average loans this quarter. The provision for credit losses on loans decreased to $200,000 for the quarter due to a modestly improved economic forecast within our CECL model. As a result, the allowance for credit losses on loans decreased to 98 basis points of total loans as of March 31 from 99 basis points as of December 31st.

Speaker 3

Non interest income increased to $21,000,000 this quarter. Insurance agency income increased $2,000,000 versus the trailing quarter as a result of new business growth and the cyclical first quarter recognition of contingency income. Wealth management income also increased $645,000 versus the trailing quarter, as assets under management accrued to $4,000,000,000 Excluding provisions for credit losses on commitments to extend credit and merger related charges, non interest expense decreased to $69,600,000 for the quarter, even after including an additional $195,000 special FDIC assessment. Our effective tax rate was 25.3 percent for the quarter aided by the lapse of the New Jersey Corporation business tax surcharge. We currently project our 2024 effective tax rate to approximate 25 0.5%.

Speaker 3

Regarding Post Lakeland merger projected financial performance, we will provide enhanced estimates additional pro form a and projected combined company financial metrics in the coming weeks. As I'm sure you can appreciate, we are somewhat limited in our disclosures ahead of the upcoming subordinated debt offering. However, we can offer the following general insights into the combined company's expected performance. Total combined company merger charges of $95,000,000 and projected cost saves of 35% remain unchanged from deal announcing. Increases in interest rates have brought the estimated net interest marks to approximately $540,000,000 and increased estimated core deposit intangibles to 3.25 percent of core deposits.

Speaker 3

As a result, we currently project a combined company net interest margin of approximately 3.25 percent, including approximately 65 basis points of purchase accounting accretion. With fully safe and cost saves, we estimate 2025 return on average assets of approximately 1.10 percent and return on tangible equity of approximately 15.25 percent with an operating expense ratio of approximately 1.75 percent and an efficiency ratio of approximately 52%. That concludes our prepared remarks. We'd be happy to respond to questions.

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Speaker 4

Hey guys, good morning.

Speaker 3

Good morning, Mark.

Speaker 4

Tom, just to clarify, so you said once the deal is closed, you're going to sort of provide an update with deal marks and accretion numbers. Are you planning to do a call for that? Are you planning to put that out in a slide presentation? Or what's your plan?

Speaker 3

I think both of those will happen, Mark. The expectation is we'll do some form of Investor Day post deal to describe the forward looking performance expectations.

Speaker 4

Okay. And any update at all on timing now that you've gotten all the approvals?

Speaker 2

Yes. I think the timing right now is probably between 10th May 15th is when we're aiming to get the deal closed.

Speaker 4

Okay, great. And then could you share with us AUM and AUA at quarter end and maybe how flows looked in the wealth management at Beacon?

Speaker 3

AUM was $4,030,000,000 at the end of the quarter. Flows were actually a little bit negative. We had about $77,000,000 in new inflows and about $83,000,000 in net outflows. So market appreciation drove the rest of the increase.

Speaker 4

Okay, great. And then it looked like you closed about 57% of your pipeline as of twelvethirty one. Is that sort of what we should sort of expect going forward from a pull through rate,

Speaker 2

Tony? I would suspect so. I think you can still aim at that 4%, 5% loan growth for the year. I think we had a good closing in the 4th quarter, which obviously drained some of that activity and the pipeline is starting to rebuild now. I think it's still safe to say that about 50% to 60% pull through rate.

Speaker 2

Well, actually we were

Speaker 3

a little conservative in the estimates here. We pulled back the expected closing pipeline. That's where you get the $561,000,000 versus the $1,09,000,000 or $1,08,000,000 I think in gross pipeline. So we're down to a projection for the current quarter of about 39%. This quarter?

Speaker 3

Yes. But longer term, you're right, Clint. That's typically where we are is in the 50% range.

Speaker 4

Great. Thank you.

Operator

Your next question comes from the line of Billy Young with RBC. Please go ahead.

Speaker 5

Hey, good morning, Dallies. How are you?

Speaker 2

Good morning, Billy.

Speaker 5

First, just to clarify, Tom, the comment on the combined company NIM of 3.25, is that what we should be expecting for the 1st full run rate quarter in 3Q?

Speaker 3

No, every number I gave is a preliminary estimate, all are very dependent on where the marks land at deal closing. So that assume the marks that I disclosed. And yes, that would be the Q1 of full closing, I guess, Q3, if the assumptions hold true.

Speaker 5

Got it. Understood. Thank you. And then just I know you had commented that you expect deposit costs to stabilize over the next few quarters, But can you just give us a comment on maybe what you're seeing in the deposit pricing environment today across your markets? We've heard a few mixed messages from your peers about pricing getting a little more competitive as of late.

Speaker 5

Is that kind of what you're seeing? And what are your expectations if rates stay higher for longer as we progress through 2024? Yes.

Speaker 3

We're not feeling that same pressure right now. Through the cycle to date beta is about 35.8 percent or we modeled the terminal beta of about 37.1% ahead of the first rate cut. So we feel like the margin is going to continue to in a standalone company margin, which continue to stabilize in the 3 in the 2.85 to 2.90 range.

Speaker 2

Yes. So far, we've been holding steady on our pricing. We haven't seen those competitive pressures and we've been holding steady in terms of our deposit flows. I mean, if you look at our activity, we haven't seen we've seen very little deposit account closures. More of our deposit I would characterize it that we're seeing non interest bearing moving into the interest bearing classes, which is affecting our cost of deposits more so than deposits leaving and having to be replaced with external funds.

Speaker 2

So I think that's why we're saying we think it's going to hold steady.

Speaker 3

Yes. In terms of higher for longer Billy, I don't think it has a dramatic impact on us. I know you're aware that we've managed to a pretty neutral interest rate risk position, slightly asset sensitive at this point. It doesn't and given that about 27% of our deposit base is sub-three fifty, we don't see a lot of benefit in the initial rate cuts, at least we're conservatively modeling that way. So I think the effective beta we're modeling is about 10% on the overall deposit base for the first couple of cuts.

Speaker 3

So we shouldn't see a dramatic shift if rates hold.

Speaker 5

Got it. Thank you for that. And just moving to a separate topic. I know, obviously, credit quality has been relatively pristine for you guys over the last several quarters. But do you have any updated thoughts on kind of where you'd like to maintain reserve levels moving forward, particularly following the Lakeland close?

Speaker 5

Do you see the need to build ratios longer term with a bigger balance sheet? Thanks.

Speaker 3

Really all model driven. I don't expect a change. If anything, I would think that the coverage ratio would come in a bit post acquisition.

Speaker 2

I mean, we're looking at Lakeland's portfolio, it kind of emulates ours. So in terms of credit quality, so there's that expectation is that we would remain constant.

Speaker 5

Got it. Thank you for taking my questions, guys.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Tim Switzer with KBW. Please go ahead. Hello, Tim. I think your line is on muted. So the next question we have is comes from the line of Manuel Nieves with D.

Operator

A. Davidson. Please go ahead.

Speaker 6

Hey, good morning. Could

Operator

you speak

Speaker 6

a little bit about the balance side of or the volume side of deposit growth channels? Just kind of where you're going to see improvement there? You talked about in the quarter that there was some payoff of brokered and there was some beauty outflows, but just kind of where you expected to see deposit inflows going forward?

Speaker 2

So if you look at this quarter, I think the like I mentioned earlier, there wasn't any account closure activity that was of note. Most of the dynamics were normal activity in our non expiring accounts, which is cash flowing out for whatever business purposes and some disintermediation going into other accounts. Where we're seeing the growth moving forward and we're experiencing some of that, we're observing it is largely in the business banking side. So we're seeing a lot of compensating balances and things of that nature. We're also the municipal accounts should flow back in as we move forward.

Speaker 2

And we have all the targeted activities that we're doing to deepen the share with our existing customers as well as paying new ones as well. So that's where we expect it to be. However,

Speaker 6

I do think it

Speaker 2

will still represent a challenge for us moving forward because we expect the loan the lending growth levels to go back to their normal course. And so you'll have that little bit of a gap as we move forward.

Speaker 6

I appreciate that. And just on a separate topic, I just wanted to confirm, the numbers that so far with the deal do not include revenue synergies at the moment?

Speaker 3

That's correct. And

Speaker 6

that would be helpful with the insurance business and with ABL and the things you highlighted at the beginning?

Speaker 3

Yes, we're excited about the opportunities there, but we have not included those in our modeling.

Speaker 6

That's great. Looking forward to hearing that update. Thank you.

Operator

Thanks. All right. For the last question, we have Tim Switzer with KBW. Please go ahead.

Speaker 7

Hey, sorry about that guys. My headset messed up.

Speaker 3

No problem. Hey, guys. Good morning.

Speaker 7

Good morning. Thank you for all the updated financials impact. Do you guys have a projection on where capital levels will end up at the end of Q2 once you guys close the deal, particularly TCE and the total regulatory capital ratio?

Speaker 3

Yes. I don't know if we can go into much more detail than we already disclosed, Tim. I can assure you that there'll be a comfortable cushion over the required limits that we agreed to as part of the non standard conditions.

Speaker 7

Okay. Are you able to provide any kind of framing around if rates continue to rise, how that would impact capital levels and then maybe some of the other the NIM purchase accounting you provided?

Speaker 3

Yes. I guess all I can say is I don't have a sensitivity now in front of me, but rates are up the 5 years about 60 basis points higher than deal announcement and you can kind of do a ratio and figure out what changed versus there. I think we're about $400,000,000 at deal announcement, we're up to $540,000,000 now. So you could straight line it that way.

Speaker 7

Okay. And that purchase accounting, the 65 basis points, was that the number at the with rates at the end of the quarter or as of like this week?

Speaker 2

Currently.

Speaker 7

Okay, great. And do you have you guys gotten any indications yet on where pricing on the sub debt raise could fall a range or something?

Speaker 3

We really can't speak on anything on the offering until it's there it happens to.

Speaker 7

Okay, that's understood. And the last question I have is, historically, you guys have done a really good job of keeping your efficiency ratio pretty low, compared to the industry, 52% efficiency ratio in 2025. Over the long term, as you combine these 2 companies, where do you think the efficiency ratio could land over the long term?

Speaker 2

Well, that efficiency ratio just combines our current earning power, right? I think if you look at what happened to the efficiency ratio over the last 12 to 18 months, it's been more of the compression in NIM and the revenue drivers. So as those things get back to normal, we expect that the efficiency ratio will continue to improve downward from where it is on a pro form a basis.

Speaker 3

Yes, I guess you'd have to figure what the margin projected margin expansion is beyond the 3.25% and continue to maintain that roughly 175% expense ratio to average assets.

Operator

That concludes our Q and A session. I will now turn the conference back over to Tony Labuszetta for closing remarks.

Speaker 2

Thank you everyone for your questions and for joining the call. I'd like to once again thank the Provident and Lakeland teams for the successful merger approval. And I think I speak for everyone when I say that we can move forward into 2024 with optimism and vigor. We look forward to talking to you all throughout the quarter and speaking to you all again next time. Have a great weekend.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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