PROVIDENT FINANCIAL SERVICES INC(PFS)Q3 2024 法說會逐字稿

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

Thank you, Dustin. Good morning, everyone, and thank you for joining us for our third quarter 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 yesterday evening’s earnings release, which has been posted to the Investor Relations page on our website, provident.bank. Now it’s my pleasure to introduce Tony Labozzetta, who will offer his perspective on the third quarter.

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 3rd, 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, and we are excited to carry this momentum into 2025. Moving on to our quarterly results. The third quarter was characterized by stronger-than-expected economic growth, the first interest rate cut in more than four 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. During the quarter, we reported net earnings of $46.4 million, 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 pretax pre-provision return on average assets was 1.48% for the third 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% to 13.66, and our tangible common equity ratio was 7.68% compared to 7.34% for the trailing quarter. 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 million this quarter, largely in short-term certificates of deposit. 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% and we expect to see continued improvement over the next several quarters. During the third quarter, our commercial lending team closed approximately $489 million of new commercial loans. We experienced approximately $227 million in loan payoffs, resulting in a net growth of about $39 million. This quarter’s production consisted of 35% commercial real estate, 43% commercial and industrial lending and 22% specialty lending. Despite a slight deterioration in nonperforming loans, primarily due to one commercial real estate credit for which we anticipate a near-term resolution with no expected loss, our credit quality remains strong for the third quarter as evidenced by our nonperforming 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. We have seen an increase in our total loan pipeline, which grew during the third quarter to approximately $2 billion. The weighted average interest rate is 7.18% compared to 7.53% in the trailing quarter. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.2 billion. 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, Provident’s fee-based businesses performed very well. Provident Protection Plus had 13% organic growth in the third quarter as compared to the same quarter last year, which was the highest third quarter growth rate in its history.

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 $4.2 billion, which represents a 10% year-to-date growth. This growth was driven largely by good investment performance. As a result, fee income improved 9% as compared to the third quarter 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. Tom?

Thank you, Tony. And good morning, everyone. As Tony noted, we reported net income of $46.4 million or $0.36 per share for the quarter. Excluding charges related to our merger with Lakeland Bancorp, core earnings were $57.7 million 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, pretax pre-provision earnings for the current quarter were $90.1 million or an annualized 1.48% of average assets. Revenue increased to $210.6 million for the quarter, reflecting our first 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 margins included 53 basis points of purchase accounting accretion. Excluding purchase accounting for both periods, our core margin expanded four basis points versus the trailing quarter to 2.78%.

We project the NIM in the 3.3% to 3.35% range for the remainder of 2024, increasing to around 3.45% over the course of 2025. Our projections include two additional 25 basis point rate reductions in 2024 and another three rate cuts in 2025. Period-end total loans were essentially flat for the quarter. Within the portfolio, C&I loans increased by $94 million and multifamily loans increased by $37 million, while construction loans decreased by $97 million. Our pull-through adjusted loan pipeline at quarter end has increased to $1.2 billion with a weighted average rate of 7.24% versus our current portfolio yield of 6.21%. Deposits totaled $18.4 billion at September 30, consistent with the trailing quarter. Our loans to deposit ratio remained stable at 102%. The average cost of total deposits increased to 2.36% this quarter, reflecting a full period combined with Lakeland. We expect that this represents the cyclical peak in deposit costs.

While metrics worsened slightly during the quarter, overall asset quality remained strong with nonperforming loans representing just 47 basis points of total loans and NPAs to assets at 41 basis points. Total delinquencies were 56 basis points of loans and criticized and classified loans totaled 2.74% of loans. The increase in nonperforming loans this quarter was largely driven by one $19.7 million 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 $6.8 million or an annualized 14 basis points of average loans this quarter. Charge-offs were primarily driven by one commercial credit, which carried a specific reserve of $4.4 million at June 30. The remaining collateral securing this relationship is scheduled to be auctioned in November with full resolution expected in the fourth quarter.

The provision for loan losses increased to $9.6 million 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. Noninterest income increased to $27 million this quarter, reflecting the combined Lakeland combination, strong performance from our wealth management and insurance agency subsidiaries, and an increase in BOLI income. Noninterest expenses, excluding merger-related charges, were in line with our expectations at $120 million, 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 merger cost saves, and we project noninterest expenses of approximately $110 million for the fourth quarter of 2024. We currently project our effective tax rate for the remainder of 2024 and 2025 to approximate 29.5%.

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. We’d be happy to respond to questions.

Thank you. And our first question comes from the line of Mark Fitzgibbon from Piper Sandler. Your line is open.

Hey guys, it’s Greg Zingone stepping in for Mark at the moment, how are you?

Thank you, good morning Greg.

Very good. How are you?

Good. First question, one of your competitors just announced that they were selling a large pool of commercial real estate loans to drive their concentration down. Is this something that you guys would also consider doing? And then lastly, what are your thoughts on the securities portfolio restructuring?

No. It’s not even in our discussions here. We don’t have a lot of transactional accounts; we are a 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 concentration risk perspective. So there’s no business or strategic reason for us to entertain that at this time.

Again, not anticipated at this time. We’re happy with the quality, content and performance of the securities portfolio as well.

We did a minor reshift when we bought Lakeland.

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

And reinvested some of that. Yes.

Awesome. Thanks guys. I’ll sit back to the queue.

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

Hey good morning guys. How are you?

Good, how are you?

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 a follow-on to that is, does that matter? Or do you have enough natural repricing ability on the deposit book to kind of get there? And then, your updated expense guide is tracking a little higher than the $107 million you previously guided to. Can you just elaborate what areas you might be seeing incremental expense pressure? And can you clarify what you’re assuming in terms of the expense growth run rate target for next year? And just touching on the positive commentary on loan pipelines, are you starting to see an inflection point in underlying demand and client activity?

Yes. Billy, 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 it’s more about the repricing of the organic book. So I think we’re looking at probably core margin expansion in the 3 basis points to 5 basis points range per quarter over the course of the next several quarters and that 53 or 55 basis points of purchase accounting accretion that we saw this quarter is probably representative of the future, subject to some volatility depending on the cash flows that underlie that. So depending on the loan prepayments – I think we’re moving towards a 3.45% number closer to the end of 2025. 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 there’s not a lot of room for movement there.

But there’s a fair amount of exception pricing in the book as well, as there is with most institutions. We were very successful in this first round, and you’ll see it effective with the October 1 rate of repricing some of those down about $2.3 billion worth of deposits at an average of about 37 to 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 to manage those funding costs.

Maybe you want to share the core margin movement, some of the betas that we had on our deposits that worked a little bit better than we expected, and in terms of some repricing with the Fed’s rate moves.

So the $110 million for Q4 versus the $107 million we discussed last quarter: some of that is timing on the realization of the remaining merger cost saves. That’s what has given us a bit of a delay in fully realizing those benefits. For next year, I’m thinking in the first couple of quarters, at least, it will probably be a bit higher. 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 something like $112 million to $115 million for the first quarter or two. On the pipeline and demand, we had a dynamic that affected Provident that was outside of normal market conditions: we had a merger integration happening and as hard as you try, there’s always going to be a little bit of disruption. As we got through the merger approval and our conversion, momentum picked up on both sides of the legacy organizations.

We are seeing a great deal of activity. Client sentiment today is positive: rates went down and that is starting to trigger more activity. People are more willing to move forward with projects because the specter of rising rates isn’t there. They can do a project over the short term and expect to refinance later at a lower cost. We’re also seeing some activity pull down from bigger banks due to market disruption, and we’re getting more activity from those institutions. We see guarded optimism, the pipeline is building and the fourth quarter is looking promising. We plan to keep that momentum into 2025.

Got it. Thank you for all that. Appreciate it.

Great. Thank you guys for taking my questions.

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

Hey. Good morning, guys. Hope you are doing well. 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 curious on what the dynamics were there. I know there’s a lot that goes into the estimates and calculations for that. Could you walk us through why it wasn’t higher given the Q2 number? And then, do you expect it to be stable over the near-term instead of slowly moving down? How should we model that out? Also, another quick one on the run rate for amortization expense: is around $12 million this quarter a good run rate going forward, and is that included in your ROTCE projection? And finally, could you provide a quick review of the impact of more aggressive Fed cuts or less aggressive Fed cuts to your margin and NII outlook?

Tim, the primary driver was the assumptions we were using around cash flows on the loans. The prepayments on the loans came in lower than expected and I think that is a reasonable run rate to use going forward. I would keep it stable. Ultimately, there will be some decrease over time, but I don’t see a dramatic decrease in the first year or so. The amortization expense run rate is a good one to use and it is added back to the ROTCE. Regarding Fed actions, you pick up a little bit on the margin because we can be effective in managing funding costs and we have $4.5 billion of maturing funding over the next 12 months at a rate of about 4.26%. To the extent we can reprice that down, that will help quite a bit. The slope of the yield curve will also help in terms of reinvesting those funds. There’s greater opportunity with more dramatic rate decreases. That said, we are fairly neutral from an interest rate risk perspective, so regardless of the path, we should be fine.

I think it’s important to point out that the core margin also improved, and that’s without consideration for the October rate repricing and the benefits we’ll see. The core operating margin has improved. If prepayment speeds pick up as rates continue to come down, we could actually see margin go higher than what Tom and Adriano are guiding to, but Tom’s guidance is an appropriate baseline.

Appropriate baseline.

That makes sense. Thank you. And thanks for the clarification on amortization being added back to ROTCE.

It is a good run rate and it is included in the ROTCE adjustments.

Okay, perfect. Thank you guys.

Thank you.

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

Hey. Good morning. That’s great about the deposit cost declines in October. Is that similar deposit beta expected across 2025 you’re extending that out—and has there been any pushback at the moment to those cuts? And can you just speak to potential fee revenue synergies now that the deal is closed, where could insurance and wealth management all be stronger together than where it was before?

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 and communication and they were able to successfully get about 38 basis points of the 50 basis point cut. We’ve conditioned our customers on expectations as we move forward. There are always relationships that produce a lot of value where accommodations are needed, but the treasury group did a fine job preparing customers in advance of rate cuts. I expect similar betas, though it’s hard to predict exactly, but I’m comfortable it should be relatively close. On fee revenue synergies, we’ve seen a great reception across the two legacy organizations. There’s been a lot of commercial activity going into our insurance business from the legacy Lakeland side, and we’ve had wealth business refer commercial clients to the bank. Insurance referrals and activity have picked up tremendously.

As a larger organization, we can accommodate certain transactions we previously could not. This quarter alone, there are two or three transactions the legacy Provident couldn’t have done without the combined scale, which gave us capacity for more treasury management business and other activity in insurance as a byproduct. Those are the revenue enhancement opportunities we referenced, and we’re just at the beginning stages of integrating culturally and operationally. It’s exciting and we intend to keep that momentum going.

In our modeling for next year, recognizing the timing of maturing funding, we have a weighted average beta on interest-bearing deposits of a little over 31%, and on total deposits about 24% including noninterest-bearing deposits. That also includes CDs repricing as they come to maturity. Those numbers are modeled over the course of next year.

That’s over the course of the year next year, correct?

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

I appreciate that clarity. And thanks for the color on fee synergies.

Perfect.

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

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.

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