Provident Financial Services Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by. At this time, I would like to welcome everyone to the Provident Financial Services Incorporated Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Speaker 1

Thank you.

Operator

I would now like to turn the call over to Adriano Duarte, Head of Investor Relations. Adriano, please go ahead.

Speaker 2

Thank you, Greg. Good morning, everyone, and thank you for joining us for our Q2 earnings call. Today's presenters are President and CEO, Tony LaPazetta 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 yesterday's evening's earnings release, which has been posted to the Investor Relations page on our website providence.

Speaker 2

Bank. Now it's my pleasure to introduce Tony Lapizada, who will offer his perspective on the Q2.

Speaker 3

Tony? Thank you, Adriano. Good morning, everyone, and welcome to the Provident Financial Services earnings call. Before we discuss our quarterly results, I am happy to note that as of the 16th May, we closed the Provident Lakeland merger and officially welcome the Lakeland team into Provident. We'd like to congratulate and thank our team members who have worked diligently to complete the merger.

Speaker 3

As we combine our banks and our cultures, we are excited by the opportunities to offer our expanded customer base access to our valuable products and services, especially those of our insurance, wealth management and treasury management businesses. We continue to build momentum and our team is well prepared for systems integration in September. Please bear in mind that our financial statements this quarter reflect combined results beginning on May 16 and include one time costs related to the merger transaction. Moving on to our quarterly results. The Q2 was characterized by steady economic growth, continued high interest rates and an environment of mixed results in the banking sector.

Speaker 3

Thanks to the efforts of the Provident team, now reinforced by talented members from the former Lakeland Bank, we continue to build our core businesses and maintain strong credit quality. We are on track to achieve our projected merger cost savings and we are well positioned for the future. As expected, we reported a net loss of $11,500,000 or $0.11 per share, reflecting the impact of merger related transaction costs. If we were to exclude these expenses, earnings per diluted share would have been $0.44 for the quarter. We can see that our underlying performance remains strong as our pre tax pre provision return on average assets was 1.47% for the 2nd quarter compared to 1.28 percent for the trailing quarter.

Speaker 3

While market conditions in the first half of the year constrained loan growth, our fundamentals remain strong and we expect to achieve our projected growth for the second half of the year. At quarter end, our capital is healthy and exceeded levels deemed to be well capitalized, especially following the issuance of a $225,000,000 in subordinated notes on May 9, which was well subscribed. As part of the merger, we committed to maintain a minimum of Tier 1 leverage ratio of 8.5% and a minimum total risk based capital ratio of 11.25%. At quarter end, we have exceeded these requirements with a Tier 1 leverage ratio of 9.36 percent and a total risk based capital ratio of 11.66%. Tangible book value per share was $13.09 and our tangible common equity ratio was 7.34%.

Speaker 3

As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on August 30. During the quarter, our total cost of deposits remained relatively low at 2.27%. Our total cost of funds, which was further impacted by the issuance of our subordinated debt was 2.56%. Overall, our net interest margin increased 34 basis points to 3.21%. In our 1st full month as a combined company, our net interest margin was 3.38%, which exceeded our expectations.

Speaker 3

Moving forward, we are optimistic about the stability and improvement to our net interest margin and expect it to be between 3.35 percent and 3.4 percent in the upcoming quarter. Our commercial lending team closed approximately $307,000,000 of new commercial loans during the Q2. Of note, 54% of these new originations were part of our C and I lending business. Our ratio of commercial real estate loans to total capital was 4 77%. We project that by the end of the year, this ratio will be approximately 4 70%.

Speaker 3

Our credit quality was strong for the 2nd quarter as evidenced by our non performing loan ratio of only 36 basis points. The allowance for credit losses on loans represents 1% of total loans compared to 0.98% in the trailing quarter and 0.99% at the end of 2023%. Once again, I would like to express that our strong credit quality metrics reflect the conservative underwriting culture and portfolio management standards. We see improved activity in our combined commercial lending pipeline, which increased during the Q2 to approximately 1,670,000,000 dollars The weighted average interest rate is 7.53% compared to 7.42% in the trailing quarter. The pull through adjusted pipeline including loans pending closing is approximately $1,000,000,000 We remain very optimistic regarding the quality of our pipeline.

Speaker 3

Our fee based businesses performed very well. Despite the persistence of a hard insurance market, which has driven commercial insurance rates higher, Provident Protection Plus had a great second quarter with 19% organic growth as compared to the same quarter last year and a retention rate of over 100%. Favorable market conditions helped grow Beacon Trust assets under management to about $4,100,000,000 at quarter end compared to $3,700,000,000 in the same quarter last year, which improved fee income 3.8% as compared to the trailing quarter. For the 1st 6 months 2024 Beacon produced $168,000,000 in new business compared to $107,000,000 for the same period last year. We are pleased by the success of our fee based businesses and are enthusiastic about the prospects of enhanced growth from our expanded customer base.

Speaker 3

As we move into the second half of twenty twenty four, as previously mentioned, our intention will be on completing all aspects of the merger, integrating our system smoothly and becoming the preeminent community bank in our market. We expect to achieve synergies and deliver even more value to our customers, employees and stockholders. Now, I'll turn the call over to Tom for his comments on our financial performance. Tom?

Speaker 4

Thank you, Tony, and good morning, everyone. As Tony noted, we reported a net loss for the quarter of $11,500,000 or $0.11

Speaker 5

per share due to merger related activity.

Speaker 4

Total charges related to our merger with Lakeland Bancorp were $86,900,000 in the current quarter, consisting of initial CECL provisions on non PCB acquired loans and commitments to extend credit of $65,200,000 transaction costs of $18,900,000 and a $2,800,000 loss realized on the sale of Lakeland subordinated debt from Providence Investment Portfolio prior to the merger. The remaining provision for credit losses on loans and commitments to extend credit was also somewhat elevated at $4,500,000 for the quarter despite strong asset quality and a stable economic forecast. This increase in the organic provision for loan losses was due to the development of new quantitative models for the combined bank, which resulted in changes in projected loss factors for all loan segments. In addition, qualitative adjustment ranges were recalibrated in connection with the development of the new merged bank models. This brought our allowance coverage ratio to 1% of total loans.

Speaker 4

Excluding merger related charges, pre tax pre provision earnings for the current quarter were $70,100,000 or an annualized 1.47 percent of average assets. Revenue increased to $163,800,000 for the quarter, reflecting 46 days as a combined company, and our net interest margin increased to 3.21%. For the quarter, the margin included 47 basis points of purchase accounting accretion. We project the NIM in the 3.35% to 3.40% range for the remainder of 2024, increasing to around 3.45% over the course of 2025. Our projections include 2 rate reductions in 2024 and another 2 rate cuts in 2025.

Speaker 4

Regarding interest rate risk, our newly combined balance sheet remains largely neutral. However, we expect little benefit on deposit costs from the first two rate cuts. We completed a successful regulatory capital raise through the issuance of $225,000,000 of 9% subordinated debt in the quarter, which increased funding costs. However, the impact of the margin was partially offset by the sale of $550,000,000 of securities acquired from Lakeland and the repayment of a similar amount of overnight borrowings and brokered deposits. Excluding the $7,910,000,000 of acquired loans, period end total loans were essentially flat for the quarter.

Speaker 4

Within the portfolio, C and I loans increased by 90,000,000 dollars and CRE loans decreased by $75,000,000 Our pull through adjusted loan pipeline at quarter end was $1,000,000,000 with a weighted average rate of 7.5% versus our current portfolio yield of 6.05%. Deposits increased to $18,400,000,000 at June 30, including 8.6 $2,000,000,000 acquired from Lakeland. Excluding municipal deposits that are subject to cyclical outflows and broker deposits, which were paid down with the proceeds of security sales, Organic deposits increased $123,000,000 for the quarter and our loans to deposits ratio decreased to 102%. Asset quality remained strong with non performing loans declining to 36 basis points of total loans and total delinquencies declining to just 44 basis points of loans. Criticized and classified loans did increase modestly, but remained relatively low at 2.6% of total loans.

Speaker 4

Net charge offs were just $1,300,000 or an annualized 4 basis points of average loans this quarter. With strong asset quality and a stable economic outlook, we expect future provisions to be driven primarily by loan growth and expect the coverage ratio to remain at approximately 1%. Excluding the loss on security sales, non interest income increased to $25,000,000 this quarter, reflecting the Lakeland combination, strong performance from our Wealth Management and Insurance Agency subsidiaries and an increase in BOLI income. As Tony noted, we are on track to achieve our targeted merger cost saves and project non interest expenses of approximately $120,000,000 for Q3 of 2024, declining to approximately $107,000,000 in Q4 following our Labor Day core systems conversion. Our effective tax rate this quarter was impacted by several unusual items, including merger related charges, the imposition of a 2.5% New Jersey transit fee surcharge and the related revaluation of deferred tax assets.

Speaker 4

We currently project our effective tax rate for the remainder of 2024 to be approximately 29.5%. Regarding projected 2025 financial performance, we remain on track to meet or exceed our targeted total combined merger charges of $95,000,000 and projected cost saves of 35 percent, unchanged from deal announcement. Our net interest market acquisition totaled approximately $480,000,000 and our core deposit intangible was 4.98 percent of core deposits excluding municipal deposits. We currently project a net interest margin of approximately 3.35% to 3.45% for the full year 2025, including approximately 65 basis points of purchase accounting accretion. With fully estimate 2025 return on average assets of approximately 1.1% and return on tangible equity of approximately 15% with an operating expense ratio of approximately 1.75% and an efficiency ratio of approximately 52%.

Speaker 4

That concludes our prepared remarks. We'd be happy to respond to questions.

Speaker 1

Thanks, Tom.

Operator

And it looks like our first question today comes from the line of Mark Fitzgibbon from Piper Sandler. Mark, please go ahead.

Speaker 5

Hey, guys. Good morning. Congratulations on the deal.

Speaker 3

Good morning. Thanks, Mark.

Speaker 5

First, I wondered if you could give us a little more detail, Tom, on the timing of the cost synergies. I see you

Speaker 3

got about

Speaker 5

a $13,000,000 difference from 3rd to 4th quarter. Will all the cost synergies be in, do you think, by the end of this year?

Speaker 1

We do. Okay.

Speaker 5

Okay, great. And then in what areas do you see potential revenue synergies with Lakeland? And are there any sort of early surprises on the deal?

Speaker 3

Areas that we see revenue, obviously, are the things I mentioned in my notes, which are to try to get more integrated activity between our insurance, our wealth, enhance the ABL business that Lakeland has, more treasury management functions overlaid not only within the Lakeland customer base, but more broader. I think all those are elements of that we can that we could achieve some revenue enhancements and also changing the funding mix to try to get back to that roughly 25% on non interest bearing. I think those are activities that we're going to be looking to do as well as grow our normal business.

Speaker 5

Okay, great. And since you marked all of Lakeland's loans, I guess I was curious if there's any plan to sort of sell CRE or office loans to maybe try to reduce that CRE concentration some more?

Speaker 3

I think at this time, Mark, there's not an active plan to sell off assets for CRE ratio, because accrete ratio will come down naturally as we accrete the merger mark and it will get to levels that are more than satisfactory for us. I think what we're doing, I think which is a good segue from your question is we're actively managing the book. And so if you see why the loan growth this year this quarter was a little bit flat for the year, there's also some management in there where roughly $100 plus 1,000,000 of loans have been managed out very, I would say politely because of the fact that they had some characteristics that we didn't want to renew those loans. So it's an act of management, but there's nothing in that says we have to sell because we have super high concentrations in office or any subsector. I would actually say for the purpose of everyone on the call, when you sub segment our book, we're very comfortable that there's no individual concentrations that would require us to take some further action to reduce that.

Speaker 4

To follow-up on that, I mean, we're very comfortable with our CRE lending practices, underwriting standards and the rest. So in those projections that we have for the CRE ratio being managed down to a lower level, it does still consider growth in the CRE portfolio of approximately 5% a year. Well said.

Speaker 5

Okay. And then lastly, I wonder if you could share with us if you had a target capital ratio in mind and maybe how you think at some point, maybe it's early next year, how you'd feel about stock buybacks?

Speaker 4

The non standard conditions for the merger, Mark, required us at the bank level to keep a Tier 1 leverage ratio in excess of 8.5% and a total risk based capital ratio of 11.25%. So kind of use those as goalposts for now in terms of threshold levels. The targets obviously will be slightly above that so that we have appropriate trigger warnings in the event that we approach those limits.

Speaker 3

Yes. That's well said. You would think that would a little buffer on the upside.

Speaker 4

Yes. So buyback thoughts would kind of play into that, Mark, just kind of based on our expectations around capital formation are strong. As Tony said, that's why we see the CRE ratio coming down naturally. Something to consider opportunistically, but no broad based plans in the current environment.

Speaker 1

Great. Thank you. Thank you.

Operator

All right. Thanks, Mark. And our next question comes from the line of Tim Switzer from KEW. Tim, please go ahead.

Speaker 6

Hey, good morning. Thank you for taking my questions. We appreciate all of the forward guidance you guys provided, very helpful. Could you discuss some of the areas that can maybe drive some upside or downside? And then if any changes to the macro environment, if we enter a little slower economic cycle here, how that could potentially impact your earnings?

Speaker 3

I mean, I will start from the business side and then I'll let Tom jump in from a rate environment and what it does to our modeling. But the things that can really drive some good upside on revenue It would be growth obviously in the loans meeting our growth objectives for the rest of the year and with a complementary funding source. Penetrating our insurance business into the legacy Lakeland portfolio, I think it have a good upside impact for us and give some super growth in insurance as well as some of penetration to Beacon space. I think from treasury management is a big thing for me because it gives us the balances required for some of that growth. So I think we're going to try to do that a little deeper as well as enhance our SBA and ABL business.

Speaker 3

And obviously, the things I didn't mention, but in terms of what could be a surprise in the rate side.

Speaker 4

Yes, as far as rates go, I mean, I think everybody assumes probably correctly that the next move is going to be down. As we talked about, the balance sheet is quite neutral at this point. We don't see us getting tremendous benefit from the 1st 50 basis points of rate cuts, but we do see some enhancement to the margin beyond that level. In terms of overall business activity being slower, obviously, that would impede growth. We'd have to look ever more closely at efficiencies.

Speaker 4

We do that as a matter of course anyway.

Speaker 3

Exactly. And we could look at some of the funding mix as some CDs runoff and what our pricing strategy is around those that could give us a little bit of a benefit as well. So it's not going to be one item. There's not one silver bullet. It's going to be a number of management factors that play into us overachieving our expectations.

Speaker 6

Okay, great. Yes, that was helpful. And now that the deal has closed and you guys have been able to talk to some of the customers on both the consumer and commercial side. What has the response been overall? And are there any new products or services you're able to offer them that they've been more excited about?

Speaker 6

Yes.

Speaker 3

Early indication on a macro level, I haven't heard anything negative. So most of it has been a positive response. Some of the things when you look at the commercial banking side, to date we already have, if I'm quoting John Rath correctly, roughly 14, who is our Chief Lending Officer, roughly 14 to 16 referrals already from the commercial bank into the insurance group. And we have a few referrals into the wealth group. So that activity has picked up and as those products are now expressed to the new customer base that they're available to them as well as the treasury management enhancements.

Speaker 3

And from the Lakeland side, we're obviously trying to deepen the relationships into the SBA. Small business will play a big factor, which Lakeland had a sound platform on, not only for expanding that, but put on the deposit gathering function. So I think generally the excitement is there. Internally and externally. Customers are now done with the delays of the delay in the merger and we're talking business.

Speaker 3

And as long as we deliver a great experience, I think it's going to be exciting for us.

Speaker 6

Great. It's good to hear. Thank you for taking my questions.

Operator

Great. Thanks, Tim. And our next question comes from the line of Billy Young with RBC Capital Markets. Billy, please go ahead.

Speaker 1

Hey, good morning, guys. How are you?

Speaker 4

Good morning, Billy. Good morning.

Speaker 1

First, I just want to echo the thanks on the deck and outlook this morning. It's extremely helpful. Just to follow a thread from the previous question, maybe just to kind of expand on your thoughts on the trajectory of the core margin kind of moving forward? I think in the past you said the core kind of stabilizes at $285,000,000 to $290,000,000 Does that still hold as we're tracking a little below that today? And you mentioned kind of improving the CD and funding mix, but do you kind of see a big opportunity to for kind of the loan back book repricing up to be an opportunity for margin expansion?

Speaker 4

I guess I have to reset the core expectation a little bit because the $287,000,000 to $290,000,000 was Provident Legacy standalone bank. If you remember back in March, Lakeland's margin was 2.46% versus Provident's 2.87%. So on a blended basis, the core margin has come in pre purchase accounting marks. So if you view it that way, I'd say the core piece would be about 2.70 to 2.75 purchase accounting adjustments of about 65 to 75 basis points a quarter, that's where we're getting that $335,000,000 to $345,000,000 range over the course of the rest of this year through next through 2025.

Speaker 1

Got it. Thank you. That's helpful. And the 65 basis points of accretion from here through the end of 2025, that's all scheduled accretion. Is that correct?

Speaker 4

Yes. I mean, a lot of it is level yield. So it could move a little bit with the cash flows, but that's our expectations.

Speaker 1

Understood. Okay, thanks. Just moving to a separate topic, can you you mentioned kind of muni deposit flows had impact on reported growth this quarter. Can you just remind us of the timing of those flows? When does this typically flow back in?

Speaker 4

Yes. It goes with the real estate tax revenue largely. So we're starting to see the money come back in the beginning of August. So that's typical. When we price it, we consider that we have to fund the trough for short term overnight funding or weekly funding.

Speaker 4

It's all considered as part of the valuation of the profitability of the relationship.

Speaker 3

Yes. We're seeing that inflow start right now and it will flow into the beginning of August.

Speaker 1

Great. Thank you. And then just my last question, just kind of more broadly, kind of I see your 4% to 5% in the back half the year. Can you just maybe comment on kind of how you're feeling about customer activity and sentiment in recent weeks, kind of how they're feeling, what they're concerned about. It seems a lot of your peers have kind of commented that they see growth kind of materially moving up in the back half.

Speaker 1

Or are you kind of seeing similar sentiment? Thanks.

Speaker 3

I think, as I mentioned, our pipeline is pull through is about $1,000,000,000 Certainly, we're seeing some of the same things that our colleagues are seeing out in the industry. But we have an active pipeline. A lot of the growth reduction was some of it was contained by us, right? As we were getting our merger applications on, folks a lot of folks were distracted, not that it's an excuse into the portfolio management side and getting the CRE down, making sure that we had an understanding because of obviously the CRE overhang in the marketplace. So we did a lot of enhanced work, which took some of those distractions and we let some run off as I mentioned.

Speaker 3

But the activity and the quality of what's in our pipeline remains strong. And from the conversations I have with our team, we're not going to make up for the 4% in the first half of the year, but we certainly can achieve 4% to 4% -ish to 5% of what we expect if we can get these things pulled through on the pipeline. So the amount of volume is available to us to achieve that growth. It's just a matter of the teams getting it closed in the second half of the year. There is a possibility that some of this can run into the Q1, but right now we're not expecting that.

Speaker 3

I'm expecting that we can get that 4% in the second half of the year.

Speaker 1

Great. Thank you for taking my questions. I'll step back.

Speaker 4

Sure. Thank you.

Operator

Thanks, Billy. And our final question today comes from the line of Manuel Nieves from D. A. Davidson. Manuel, please go ahead.

Speaker 7

Hello, good morning. This is Sharon Zhit on for Manuel. Thank you for taking my question. I was wondering what does the current talent retention look like across the combined company?

Speaker 4

Talent retention?

Speaker 3

Great question. I think the talent retention across the companies is exceptional. I think we there hasn't been any major surprises. You're always going to have one offs for people advancing their career or moving something. But what I the way I would characterize this is that the executive teams and the senior management teams are working very well together and collaboratively.

Speaker 3

Cultures are fusing nicely. And as a byproduct of that, there is no subterfuge or an environment that's toxic and people enjoy being here. I think our retention rates are really high. And more importantly or not more importantly, as importantly, our continued attraction of new talent is pretty robust. So I would I'm feeling really strong about the culture and our ability to attract and retain talent.

Speaker 7

That's great to hear. Thanks again for taking my questions.

Speaker 4

Thank you.

Speaker 3

Thanks, Sharon.

Operator

And that concludes our Q and A session. So with that, I would like to turn the call back over to Tony LaBazetta for closing comments. Tony, the floor is yours.

Speaker 3

Thank you everyone for your questions and for joining the call. We look forward to speaking to you all again next time. Have a great weekend and enjoy your summer. Thank you.

Operator

And ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now

Powered by Quartr
Earnings Conference Call
Provident Financial Services Q2 2024
00:00 / 00:00