Q3 2022 Provident Financial Services Inc Earnings Call
Good morning, and thank you for joining us for our third quarter earnings call. Today's presenters are president and CEO , Tony a lot of data and senior Executive Vice President and Chief Financial Officer, Tom lines 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 are full disclaimers contained in this morning's earnings release, which has been posted to the Investor Relations page on our website Provident that bank now it's my pleasure to introduce Tony <unk>, who will offer his perspective on our third quarter results Tony.
Thank you Andrea Adam and good morning, everyone.
In the third quarter Provident delivered a strong financial performance once again, producing record revenues, resulting in earnings of 58 per share.
Our performance was driven in large part by the strength and stability of our funding base growth in loans and in an expanding net interest margin.
The expanding net interest margin drove a 10, 1% increase in net interest income over the trailing quarter.
This resulted in an annualized return on average assets of one 2% to 6%.
Return on average tangible equity of 14, 96%.
For solid earnings performance continues to positively impact, our capital, which remains strong and comfortably exceed well capitalized levels.
Our board of directors approved a quarterly cash dividend of <unk> 24 per share.
We remain committed to furthering our goal of delivering a best in class customer experience, which creates advocates for life and will help build our business all of our business lines.
Commercial lending continues to be our primary focus and in the third quarter, we closed approximately $533 million of new loans.
Our line of credit utilization percentage decreased 3% from the second quarter to 33%, which is trailing our historical average of about 40%.
In addition, prepayments increased approximately 17% to $265 million as compared to the second quarter.
Approximately two thirds of the pay offs were due to the sale of the underlying collateral.
As a result of our reduction in the levels of prepayments. We grew our commercial loan portfolio, excluding PPP at an annualized rate of three 9% for the quarter and 10% for the first nine months of 2022.
Pull through in our commercial loan pipeline during the third quarter was as expected.
We also replenished our gross pipeline, which remains strong at approximately $1 5 billion.
Pull through adjusted pipeline, including loans pending closing is approximately $963 million and.
Our projected pipeline rate increased 112 basis points from the last quarter to $6 one 1%.
Through the first nine months of 2022, we had record commercial loan production and growth.
The competitive market and rising interest rates.
Also encouraged by the activity that replenished our pipeline and we expect normal pull through in the fourth quarter, which should result in good commercial loan.
However, we remain watchful of rising interest rates and the potential impact. This may have industrywide on pipeline pull through.
The stability of our core deposits is a valuable component of our franchise.
During the quarter the average balance of our core deposits increased $89 million or three 6% annualized.
Total cost of deposits for the quarter increased 15 basis points to 35 basis points.
For the third quarter, our deposit beta was 10%, while the rising rate cycle to date deposit beta was about 5%.
The stability of our core deposits and relatively low betas combined with the growth and improved yields on our earning assets, particularly commercial loans helped drive a 30 basis point improvement in our net interest margin.
Given our moderately asset sensitive balance sheet are stable core deposits and our prospective loan growth, we expect more improvement in the net interest margin in the near term.
Our fee based business lines are in a central component of our community banking model.
Provident protection, plus formerly SB, one insurance had a solid third quarter with a 19% increase in revenue and a 31% increase in operating profit as compared to the same quarter last year.
The unfavorable conditions in the financial markets persisted in the third quarter and as a result Beacon trust experienced a decline in market value of assets under management and related fee income.
Beacon Trust fee income decreased 239000, or three 4% as compared to the trailing quarter.
As we move forward and organically build our business lines, we are conscious of the potential deteriorating market conditions.
<unk> remains committed to its strong risk management culture.
In September we announced the merger of Lakeland Bancorp with Provident.
Excited about this partnership which will form a powerhouse Super community banking organization in the Tri State region.
We began planning the next steps with our new colleagues that collective enthusiasm about the combination of the two organizations continues to grow.
I would like to express a special thank you to the Providence team this quarter not only for their commitment and dedication but for remaining focused on producing strong financial results, while working diligently on the prospective merger transaction.
I also want to thank Tom Sheriff in the Lakeland Bank team for their professionalism and commodity during the merger negotiations.
Look forward to growing our business lines and creating value for our employees customers communities and shareholders with that 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 our net income for the quarter was $43 4 million.
<unk> 58 per diluted share compared with $39 2 million or <unk> 53 per share for the trailing quarter and $37 three or.
<unk> 49 per share for the third quarter of 2021.
Current quarter results included $2 $9 million of non tax deductible charges related to the recently announced definitive merger agreement with Lakeland Bancorp.
Excluding these merger related charges pretax pre provision earnings for the quarter was $73 million or an annualized $2, one 2% of average assets.
We again achieved record revenue this quarter totaling $138 million on the strength of record net interest income of $109 million.
And an $8 $6 million gain on the sale of a foreclosed multi tenanted office building to a purchaser who will reposition the property to industrial use.
Our net interest margin increased 30 basis points from the trailing quarter to $3 five 1% yield.
Yield on earning assets improved by 47 basis points versus the trailing quarter as floating and adjustable rate loans repriced favorably and new loan originations reflected higher market rates.
Meanwhile, increases in funding costs continued to lag the improvement in asset yields with the average total cost of deposits, increasing 15 basis points to 35 basis points.
This represents deposit betas of 10% for the current quarter and five 3% for the rising rate cycle to date.
The average cost of total interest bearing liabilities increased 23 basis points from the trailing quarter to point applied 4%.
Pull through adjusted loan pipeline at September 30 increased 138 million from the trailing quarter to $963 million, while the pipeline interest rate increased to 112 basis points since last quarter to $6 one 1%.
Excluding PPP loans period end commercial loan totals increased $83 million or an annualized three 9% versus June 30.
Net of runoff in residential and consumer loans total loans, excluding PPP loans grew $65 million or an annualized two 6% for the quarter.
The allowance for credit losses on loans increased $9 6 million for the quarter as a result of an $8 4 million provision for credit losses on loans and $1 2 million of net recoveries.
The increased provision in the current quarter was primarily attributable to deterioration in the economic forecast and the $2 $4 million increase in specific reserves on impaired commercial loans.
Nonaccrual loans increased $19 1 million, including a single $18 $2 million loan collateralized by an office building in Philadelphia for which at $2 1 million specific reserve was established.
The deterioration in this credit as close as a quality metrics to worsen slightly from the trailing quarter nonperforming loan and asset levels total delinquencies criticized and classified loans and related ratios remained strong and our improved versus the same quarter last year.
Nonperforming assets were 45 basis points of total assets up from 36 basis points at June 30.
Excluding PPP loans the allowance represented 88.
0.88% of loans up from 79 basis points of loans at the trailing quarter end.
Noninterest income increased $7 $5 million versus the trailing quarter driven by an increase in gains on sales of Oreo, partially offset by decreases in bully income wealth management income low prepayment fees gains on loan sales swap income and gains on securities transactions.
Excluding provisions for credit losses on commitments to extend credit and merger related charges operating expenses were an annualized $1, 89% of average assets for the current quarter.
Compared with 192% in the trailing quarter and $1, 85% for the third quarter of 2021.
Efficiency ratio was $47, one 1% for the third quarter of 2022, compared with 50, 383% in the trailing quarter and $54 five 1% for the third quarter of 2021.
Our effective tax rate increased to 27, 7% versus 26, 8% for the trailing quarter. However, excluding nondeductible merger related charges. The effective tax rate was stable at 26, 5%.
That concludes our prepared remarks, we'd be happy to respond to questions.
If you would like to ask a question. Please press star followed by one on your telephone keypad, if money, losing you would like to turn that question. Please press Star followed 19 again to ask a question press Star one.
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Before asking a question.
We will pause briefly ask questions here.
Our next question is from the line of <unk> Yang with RBC you May proceed.
Hey, good morning, guys.
Portability.
Just to comment on I guess, we'll start with loan growth.
It sounds like there's optimism here that.
We will improve in the fourth quarter, given the higher adjusted pipeline I guess what gives you.
Confidence that.
A more elevated prepayment activity this quarter.
Won't continue over the next couple of quarters.
But what won't continue elevated prepayments.
<unk>.
Yes, I mean, so the ability of the way I would characterize that as the rising rates don't really.
Avail themselves to refinancing with other institutions. So they won't be only we had about two thirds of our prepayments were the sale of collateral that.
On the logo underlying alone so.
While we can't predict it for sale will take place.
We expect prepayments to kind of.
Drop.
In terms of especially on the refinance side, we expect them to drop substantially.
Given given the first part of your question, which was do we expect loan growth in the fourth quarter I do expect it to pick up.
One of the things that I should noted or I can note now as the third quarter tends to be our lowest production quarter of the year.
So that's why I made the statement that the pull through was as expected.
But in the fourth quarter, we expect to see that pick up and we're seeing that activity certainly in October to be able to substantiate. This statement that I'm, making sure yes, I feel good about the loan growth going into the fourth quarter.
Great. Thank you for that.
And then my next question just.
Hey, guys.
I think you had previously stated you expect it through the cycle deposit betas.
Around 23% and right now it's tracking at.
Call it 10%.
Do you still feel that 23% is a good number or do you expect here.
Perhaps outperform that or do you expect some acceleration as we go into year end what betas.
I mean, I think it's a conservative number through the cycle Bill we do expect to see some acceleration obviously for the industry as a whole repricing activity has picked up certainly more competitive environment out there as liquidity kind of drains from the system.
And so that and I guess I still think the 23 is a good number but we have increased our models on deposit betas for the remaining part of the cycle.
To about 40%.
Weighted average data, excluding Cds, including noninterest bearing I think thats, a conservative number I don't know if we get there, but that would get us to 23 in fairly short order.
Okay, great great and just a follow up there do you have any.
Updated thoughts on.
The deposit strategy our deposit mix.
Would there be any appetite to hum.
Maybe add more Cds over time since at pretty low levels today in the loan deposit ratio is moving up.
And can you also remind us what your goals are on the longer term loan to deposit ratio.
Yes, not a lot of <unk>.
Interest in building a CD book significantly I think we are a core funded bank and Thats one of the is the real.
Strong attributes and strength of the company.
So we're at about six 4% Cds right now that said, we do have some promotional items out there as well as an alternative to our customers that still offer a cheaper funding than than on the wholesale side.
Our deposit book is largely price insensitive, it's about 30% commercial demand is like 15% to 17% the municipal which has a little bit more volatility, but it is not not ongoing it's sort of they reprice once and then they sit for a bit.
And then the balance is really core consumer accounts, which don't again don't exhibit a lot of price sensitivity for us. So I think we have the appropriate alternatives available, but we should be able to continue to maintain lower than peer on deposit betas going forward.
The loans to deposit ratio, we have good strong liquidity available to us off balance sheet plenty of borrowing capacity, we maintain a level of on balance sheet liquidity that satisfactory to our regulators. So I mean, I think probably getting to the 100 hundred five would be okay.
If you think back to the past we've been as high as $1 13 $1 15.
It all depends on how much borrowing capacity exists outside that gives us a comfort level on overall liquidity, but right now we have stress tested our liquidity metrics and we're quite comfortable where we are.
Great. Thank you for taking my questions guys.
Thank you Bill.
Thank you Mr. Yang.
The next question comes from the line of Mark Fitzgibbon with Piper Sandler You May proceed.
Hey, guys good morning.
Tom I wondered if you could share with us your thoughts on the outlook for expenses.
We are in the budget process I'll certainly be able to give you more color around 'twenty three as we proceed through that but for the fourth quarter I think we stay.
And roughly where we were in the third quarter between 6400 $65 million exclusive of whatever the provision for off balance sheet commitments requires.
Okay, Great and then secondly, any color on the uptick in non accruals in the commercial real estate book is at one credit several credits any anything unique there.
Yes, I'll start and then Tom a sharp jump in I think we had one credit that Tom mentioned.
It's often said that it appears to be a one off but in this case a truly appears to be a one off from the sense that our team has done some deeper deeper analysis on AWN related type assets.
At this stage, we see no indication that there is any any other deterioration in that sector, albeit we still pay attention.
<unk>.
Do you want to add to that yes, again, mark that was a.
In office building, which experienced some vacancy in the Westin Philadelphia suburb.
We have been monitoring new office portfolio is one that's an area, where we might see some stress as an industry.
Total is about $544 million exclusive of that $18 million that we referred to so 560 roughly all in.
We've gone through an extensive analysis and we continue to monitor the portfolio in terms of.
Outstanding balances medical non medical a single tenant multi tenant rollover risk.
Kind of upcoming maturities.
So we've been pretty thorough in our evaluation and we're not seeing anything of immediate concern nothing that would indicate indicates any kind of systemic weakening in the portfolio true and the one thing I would add to that this is an existing customer that we also have other business with the majors happen to lose a tenant.
So it's really a matter of whether we can get that building repurposed or re tenanted. So that we're working in tandem to see.
So a good resolution.
Okay, Great and then could you share with us what assets under management were in net flows this quarter.
Yes, that's an under management fell to about three three to $3 $3 million. This quarter. Unfortunately, as a result of market conditions.
Flows.
Average AUM was $3 $5 million, that's down from $3 8 million in the trailing quarter. We did lose a couple of clients on a net basis that 10 clients. So that's a little bit of a concern.
So overall up for last year by 2000 and for clients.
<unk> still about $3 million.
The business is about 26, 5%.
The 10 clients that left what was the rough assets associated with that.
I can circle back and talk to you again, okay understood.
This is just about your.
Nine months.
Okay, Great and lastly on the provision I know a lot of moving parts and it will depend on loan growth, but how should we be thinking about the provision for the next quarter or two.
Largely dependent on the economic outlook I don't think as I said I don't think we've seen anything significant terms of deterioration in fact, our criticized and classified levels are the best they've been in some time, it's only about $2 four 8% of total loans.
So it really comes down to the forecast.
I would expecting Moody's played a little bit of catch up this quarter I know they have deteriorated a little bit in October from September , but I don't think it's going to be the same pace of deterioration next quarter versus this quarter as it was in September versus June . So I expect that that will moderate a little bit, but I would still say provisions if I had to guess maybe $3 million to $5 million.
Great. Thank you.
Yes.
Thank you Mr Gibbon.
Our next question comes from the line of Michael Perito with <unk>.
You May proceed.
Hey, good morning, guys. Thanks for taking my questions.
Greg how are you.
Doing well.
Yeah, John It's <unk> 601 right.
Sure.
Yes.
So.
I wanted to follow up on <unk>.
Prior question around fee, so I mean with the to wealth management.
Run rate, probably a step lower here I mean, I think Tom.
Tom you had kind of talked about a $20 million to $21 million run rate prior I mean, it sounds like between that and.
Maybe there is room for that to drift a smidge lower is that fair at least near term here.
Okay.
Maybe a little bit the insurance business continues to run strong in the core banking fees of all been consistent and growing so.
I think we're holding our own despite the reduction in the value on the assets under management.
The $80 million less.
Near term progress.
And then Tony I appreciate all the color on kind of pipeline and growth expectations.
Are you seeing any.
Pockets.
Not necessarily like credit to.
Deterioration, but just pockets of customers are already particular areas or asset classes, where you're starting to see some commercial customers, maybe think a bit more conservatively about there.
Their growth there or.
Debt, taking on more data or anything of that start to materialize, yet or not really.
Well I mean, I would say the construction sector I mean, if you look at that.
So as our clients thinking about that.
The cost of the projects and the viability so.
I would say because of rising interest rates with horizon and inflationary pressures.
Personally I've spoken to some clients on certain projects that maybe they are pausing on and only because of the viability of the returns that they can get.
So but in terms of our C&I space of which I should note that this quarter, we had a pretty impressive growth.
In the C&I space was approximately 34% of our production was in C&I.
That seems to be humming, along I mean, obviously, everybody Scott cautions on on what the economic outlook looks like and the effects of interest rate rises, but the activity is still there.
Helpful and then just kind of another.
Big Picture question, I mean, I think part of the optimism for you guys around growth historically has been a lot of the dislocation in your markets stemming from other M&A transactions.
Obviously, you guys now have your own M&A transaction that will hopefully close next year. Just wondering if you guys are starting to put any kind of blueprint around how to try to keep some of the organic momentum that I imagine you in Lakeland, which were both experiencing us from some of this other disruption while you're also integrate your own transaction, then kind of a qualitative question.
I'm just curious if there's any thoughts you're willing to provide there.
So absolutely that's something we talk about often I mean, it really all begins with.
The cultural integration and the employee experience I mean, the employees of the <unk> to the customer right. So usually when you disrupt that the.
The customer loses that connectivity I know, we like to say their company, but those relationships are critically important.
I think I think the teams are doing an extraordinary job of.
In the dynamic and how were communicating together in the beginning of this process.
And our sharing ideas and we have a very like minded approach to credit.
And way we.
Manage our customer relationships. So I think that there should be some this new disruptive way and I think we can only tightened to make things better so I'm really expecting that this might be.
A merger that has.
As minimal disruption as possible.
During the combination and it is only on us to drop the ball, but I think the teams will do a good job.
Okay.
Great.
That's it for me. Thank you guys for taking my questions have a good weekend.
Okay.
Thank you.
Thank you Mr <unk>.
Again, if you would like to ask a question. Please press star followed by one.
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Students mentioned check in queue I will now pass the line back to the management team for closing remarks.
Thank you and thanks, everyone for joining us on the call and asking good questions. We look forward to a solid fourth quarter and be safe and have a great day.
That concludes the Provident financial services incorporated third quarter earnings Conference call. Thank you for your participation you may now disconnect your lines.
Goodbye.
Okay.