Q4 2022 Provident Financial Services Inc Earnings Call
Okay.
Hello, and welcome to today's Provident financial services incorporated fourth quarter earnings Conference call. My name is baby and I'll be the moderator for todays call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to pass the conference.
Adriana Gelati head of Investor Relations. Please go ahead.
Thank you Bill and good morning, everyone and thank you for joining us for our fourth quarter earnings call. Today's presenters are president and CEO , Tony Love is that it.
Senior Executive Vice President and Chief Financial Officer online.
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 this morning's earnings release, which has been posted to the Investor Relations page on our website Provident stopping now it's my pleasure to introduce Tony Robbins.
Who will offer his perspective on our fourth quarter results Tony.
Provident finished the year strong by delivering another solid financial performance in the fourth quarter.
We produced record interest income and record non net interest income, resulting in earnings of <unk> 66 per share.
Our performance was driven by loan growth the stability of our deposit base that continues to exhibit good betas and sound balance sheet management.
All which resulted in an expansion of our net interest margin to 362%.
The expanding net interest margin drove a four 2% increase in net interest income over the trailing quarter.
This resulted in an annualized return on average assets of 142% and a return on average tangible equity of 17.51%.
Our solid earnings performance continues to positively impact capital, which remains strong and comfortably exceeds well capitalized levels as such our board of directors approved a quarterly cash dividend of <unk> 24 per share payable on February 24.
At Provident, we remain focused on our mission of delivering a best in class customer experience and deepening the emotional connections with our customers, thereby creating advocates for life.
We believe this is essential to build and retain all of our businesses.
Our emphasis is commercial lending and in the fourth quarter, we closed approximately $574 million of new commercial loans.
Which increased our production to $2 4 billion for the calendar year.
Our line of credit utilization percentage increased 1% in the fourth quarter to 34%, but still trails, our historical average of approximately 40%.
Given the rise in interest rates prepayments decreased 33% to $176 million as compared to the trailing quarter.
All of those payoffs about 50% were due to the sale of the underlying collateral and.
And 14% were associated with loans, we chose not to renew.
As a result of our production and the reduced levels of prepayments. We grew our commercial loan portfolio, excluding PPP at an annualized rate of nine 7% for the quarter and 10, 1% for the year.
The pull through and our commercial loan pipeline during the fourth quarter was as expected and the gross pipeline remained strong at approximately $1 3 billion.
The pull through adjusted pipeline, including loans pending closing is approximately $714 million and our projected pipeline rate increased 61 basis points from the last quarter to 676%.
For the year, we had record commercial loan production and growth despite a competitive market and rising interest rates we.
We are also encouraged by the activity that has replenished our pipeline and while we are mindful of a potential economic slowdown we expect normal pull through in the first quarter, which should result in good commercial loan growth.
The stability of our core deposits is a valuable component of our franchise.
During the quarter the average balance of our core deposits increased $76 million or three 1% annualized on.
On a spot basis core deposits decreased $89 million or three 6% annualized which we attribute to normal business activity and some outflow of excess liquidity.
The total cost of deposits for the quarter increased 32 basis points to 67 basis points for the fourth quarter, our deposit beta was 26%, while the rising rate cycle to date deposit beta was about 11%.
The stability of our core deposits and relatively good data is combined with the growth and improved yields in our in our earning assets, particularly commercial loans helped drive an 11 basis point improvement in our net interest margin.
Given our moderately asset sensitive balance sheet, our stable core deposits and our perspective long growth. We expect the net interest margin to remain stable in the near term.
We continue to focus on building our fee based businesses, our insurance agency private and protection plus had a solid fourth quarter with a four 5% increase in revenue and a 24% increase in operating profit as compared to the same quarter last year.
The unfavorable conditions in the financial markets continued into the fourth quarter and as a result Beacon trust experienced a decline in the market value of assets under management.
And related fee income.
<unk> fee income decreased 398000, or six 5% as compared to the trailing quarter.
On a positive note our team of wealth advisers has successfully retain clients and generated positive net funds flows to be.
As we move into 2023, the macroeconomic outlook appears challenging to the industry, specifically liquidity funding cost and credit quality may come under pressure.
As we move forward and organically build our business lines, we remain conscious of this potential of the potential for these market challenges and are committed to strong risk management culture.
We will intensify our focus on sectors, we believe could pose heightened risks in a period of declining economic conditions.
Regarding our previously announced merger with Lakeland Bank or.
Our team continues to work diligently towards obtaining stockholder and regulatory approvals necessary to combine our two companies into a powerhouse Super community Bank.
We are excited about this combination which will enhance our our ability to serve our customers and our communities.
Business combinations, increasing <unk> levels in an organization I'm very pleased and impressed with the professionalism and collegiality with which our teams are working towards combining our two companies.
Providence has accomplished much in 2022.
Which culminated in strong financial performance and our prospective merger with Lakeland Bancorp.
These achievements could not be possible without the tireless effort of our talented team.
The board of directors and I are incredibly thankful to our team for their commitment to our goals and guiding principles.
Many thanks to the Provident in Lakeland teams for the incredible amount of effort preparing our two companies for a successful combination.
In the new year, we look forward to growing our businesses and integrating the merger with Lakeland Bank, which we believe will create value for all of our stakeholders.
Thank you Tony and good morning, everyone.
As Tony noted our net income for the quarter was a record $49 million was <unk> 66 cents per diluted share compared with $43 4 million or <unk> 58 per share for the trailing quarter and $37 3 million or <unk> 49 per share for the fourth quarter of 2021.
Current quarter results included $1 $2 million of non tax deductible charges related to our pending merger with Lakeland Bank.
Excluding these merger related charges pretax pre provision earnings for the quarter was $70 $3 million or an annualized 2.0% to 3% average assets.
Revenue totaled $132 million for the quarter on the strength of record net interest income of $114 million.
Our net interest margin increased 11 basis points in the trailing quarter to 362%.
The yield on earning assets improved by 46 basis points versus the trailing quarter as floating and adjustable rate loans repriced favorably in new loan originations reflected higher market rates.
Meanwhile, increases in funding costs continued to lag the improvement in asset yields the average total cost of deposits, increasing 32 basis points, 0.67%.
This represents deposit betas of 26% for the current quarter and 11% for the rising cycle to date.
The average cost of total interest bearing liabilities increased 46 basis points from the trailing quarter to 1%.
These betas were in line with our expectations, while we believe that our net interest margin is likely at or near its peak, we expect the margin to stabilize and the $3 50 to $3, 60% range for 2023.
Excluding PPP loans period end commercial loan totals increased to $109 million or an annualized nine 7% versus September 30.
Net of runoff in consumer loans total loans, excluding PPP loans grew $205 million or an annualized eight 2% for the quarter.
The allowance for credit losses on loans decreased 600000 for the quarter as a result of a $3 million provision for credit losses on loans and $4 million of net charge offs.
The charge off activity was expected and was primarily attributable to the write off of specific reserves established in prior quarters unimpaired commercial loans.
Asset quality in the economic forecast were largely stable versus the trailing quarter.
As a result of the charge offs that specific reserves on impaired credits the allowance coverage ratio declined slightly to 86 basis points of loans from 88 basis points of loans at the trailing quarter end.
Noninterest income decreased $10 2 million versus the trailing quarter, driven by an $8 $6 million gain on the sale of Oreo realized last quarter and lower insurance agency income prepayment fees gains on loan sales and wealth management income, partially offset by an increase in bank owned life insurance income in the current quarter.
Excluding provisions for credit losses on commitments to extend credit and merger related charges operating expenses were an annualized $1, 79% of average assets for the current quarter compared with $1 eight 9% in the trailing quarter and $1 eight 1% for the fourth quarter of 2021.
The efficiency ratio was $46 eight 8% for the fourth quarter of 2022, compared with $47, one 1% in the trailing quarter and $54, 74% for the fourth quarter of 2021.
Our effective tax rate was stable at 27, 1% versus 27, 7% for the trailing quarter.
Excluding nondeductible merger related charges, the effective tax rate was 26, 6%.
That concludes our prepared remarks, we'd be happy to respond to questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to and maybe this question. Please press star followed by two again to ask a question. Please press star followed by one as a reminder, if you are using a speakerphone. Please pick up your handset.
For asking a question.
The first question today comes from the line of Nox skin from Piper Sandler. Please go ahead. Your line is now laser.
Hey, guys good morning.
Good morning, Marc Good morning, Mark.
Tom I Wonder if you could help us understand the thinking around taking a provision for off balance sheet credit exposure in the third quarter of $1 six and then reverse it out this quarter why was that.
It really depends on the composition of the pipeline markets. The approved pending closing loans, we had some pretty strong closing activity during the quarter and as you saw the pipeline decreased a little bit so that wasn't replenished and in addition, the line of credit usage ticked up a little bit. So when there was less unused lines. So the commitments that are subject to that reserve where lesser during the questions.
I think in terms of the loss rates that were pretty consistent from one quarter to the next so it was really just volume.
Okay.
And I apologize I missed Tony your comments on where assets under management at Beacon and net flows this quarter.
We closed the year AUM I'll take this one thing because I have that right in front of me here at $3 5 million billion sorry in AUM.
I'm sorry, Mark what was the second part net net flows in the quarter.
Net flows were negative for the year to date 66 million positive for the year.
That excludes so that's new business and increases from existing clients.
Let's close business.
It does not contemplate the withdrawals that are made in the normal course lifestyle maintenance.
Okay.
And I know.
It's still uncertain on the closing date of Lakeland, but when do you sort of roughly targeting the systems conversion on Lakeland.
The conversion or the closing remark.
Conversion.
Well right now in our calendar I think we have it for October Columbus day.
Hopefully things will continue to go as planned.
We would have a closing in the second quarter.
Earlier the better.
And then just two last little modeling things, Tom maybe share some thoughts on your expense outlook and the effective tax rate as well. Thank you.
Sure expenses I would say are likely to be in the first part of the year. It's always higher we had some seasonal costs.
Payroll taxes potentially.
Whether it's kind of events. So I think in the 66% to $67 million range, we had.
Favorable adjustment in the fourth quarter of 'twenty two related to employee medical expenses, we saw claims activity come in lower than anticipated some of that carries forward into our run rate for 2023. So we do get a little bit of benefit for that but there was some nonrecurring adjustment to that so you really can't build the run rate off of Q4 'twenty. Two just one other question on that.
And the effective tax rate of 26 ish percent.
The 26 and a half ex any distortion caused by merger related charges is still appropriate.
Great. Thank you.
Thank you thanks Mark.
Thank you.
Our next question today comes from the line of Billy Young from RBC Capital markets. Please go ahead. Your line is now open.
Hey, good morning, guys. How are you bill.
Just first.
Hey, just first on on your margin outlook of 350 to 360 for the full year. What are you. What are you kind of assuming in terms of the fed funds rate and potential fed actions there.
Fed funds rate, probably with most everybody else I guess, its a 225 basis points in February and March and then stability thereafter.
The month the margin for the month of December was about 360. So I think we will slow down a little bit over the course of the year, but the first quarter should be pretty consistent with where we are for Q4.
Great.
Got it got it. Thank you. Thank you.
And.
You've given given the uptick in deposit betas. This quarter I think you had said it was 26% in <unk>.
Are you still pretty confident in your through the cycle beta rate of 23%.
We are yeah was that that uptick was right in line with in line with our expectations I think.
A bit elevated in terms of percentage on the next two hikes as well.
But we're pretty comfortable when we look at the trends in our deposits core deposits, excluding municipal deposits and brokered very stable for the for the entire year really.
Got it. Thank you. Thank you.
And.
Just a separate topic any color you can add on.
Yes.
Some of the drivers of the uptick in charge offs. This quarter I know it wasn't a big number but are you seeing any trends.
And any particular asset classes and sectors there.
No no deteriorating trends in asset quality at all I would say very stable in fact, if you look at the the specific metrics there like a point or two better across the board.
Those charge offs were really related to two very specific credits that were previously reserved for and for the most part.
Isolated yep.
Okay, great great Great and just one final question just.
How are you thinking about that.
The Securities book going forward in terms of management this year and can you just.
Quantifying how much debt portfolios cash flow each quarter.
Sure.
I don't see us, adding a lot of leverage unless we get a curve that makes sense. So I expect we will continue to see the securities book run down a little bit and be used to fund loan growth.
And improved spreads.
Okay, great. Thank you.
I'm sorry, Bill you also asked about funds flows its come down some with the mortgage backed security portfolio rates rising.
So it's probably more in the $15 million to $16 million a month at this point so call. It 40 to $45 50 a quarter.
Thank you I appreciate that thank you very much.
Thank you.
Mind, you if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from the line of Michael Perito from <unk>. Please go ahead. Your line is now open.
Yeah.
Hey, guys. Good morning, Thanks for taking my questions.
On the drill drill down on the margin I think Tom you said that the kind of the exit margin in December was about 360, I wonder what I mean, what's the kind of the spread you guys. Like if you look at the commercial lending pipeline and the yields you're getting there versus incremental funny, where where spreads kind of today.
As you guys see it.
Yeah.
As I mentioned our pipeline right.
Levi 676 is the number.
I think a lot of our activity that is coming in we're still growing having some inflows on deposits, especially when it when it's attached to our treasury function, our commercial lending group.
So I would say the spreads are still.
We're still in a place where we that's why we say the margin can stabilize.
Oh.
We also declared that we think that it's close to peak and that we may anticipate the funding cost rising a little bit faster as the year progresses.
On the loan yields can keep up particularly with two more fed hikes. You know when you think about incremental funding costs. As you said the portfolio rates split 67 basis points for the quarter, that's pretty reasonable in terms of a new deposit.
Overnight funding on the wholesale market is considerably higher rate overnight borrowings yesterday with 467%, Yes, I think the other thing we have to point out and maybe Tom can give some more color on that is that not all of our growth is going to be funded by loan growth up by deposit growth.
The securities portfolio actually has mentioned the regular cash flows as well as not reinvesting there that's correct.
What do you know what the estimated kind of cash flow cash flows from the securities book for the whole year for 2023 tell by chance or.
Okay.
It fluctuates, obviously with the performance of the mortgage backed portfolio and a large part of that is just government agency mortgage backed securities. So we've seen as high as <unk>.
$25 million to $30 million, a month and sometimes and I think you said were down around 15 12 to 15 at currently.
The portfolio is strong as well.
Yeah, Yeah, it makes sense and then.
For loan growth for 2023, Tony I mean, I think you said in your prepared remarks that the <unk>.
Pipeline.
About $1 3 billion I think you said you expect to kind of pull through rate to normalize to meet.
Are we right to think roughly kind of a mid single digit rate as it is is a good starting point for next year or do you think theres some room with payoffs probably be lower I imagine to do a little better.
I think it's a combination of oxalate ladies suggest obviously yeah yeah.
I would expect production to be down a little bit given the market cycle.
But prepayments are going to be down substantially as well. So a good guidance for US is correct. You are correct in that the 6% range is something that I would say, we would guide to and given given conditions. We could we can outperform that but I would not like to guide beyond 6%.
Yeah that makes sense.
Yeah.
And then just.
Lastly for me.
You mentioned kind of the.
The Lakeland merger moving as expected and I think next steps for regulatory approvals to close it seems like the teams are working well together.
Obviously I imagine that's taking up a lot of your your management board kind of human capital that at this point, but any other.
I'd vasculature strategic initiatives, there that we should be mindful of for for this year or is the focus kind of largely on closing that and getting it converted and then kind of moving from there.
Okay.
I think.
Our primary focus.
It is getting the Lakeland merger.
In combination together and getting the two cultures are clearly aligned that's job one.
<unk> two.
Our new CD Io in place getting him too.
You know evaluate the technology stack for a $25 billion organization and I think that's a priority in the evaluation phase decommission. Some things re commissioned new items that are aimed to digitize, our customer experience and improve our data.
Data analytics the ability for a bank that side. So those are our priorities I don't think those are going to require massive amounts of.
Capital spend to get there I think it's.
But those are our focuses as we go through the year. In addition to building all of our business lines.
Great. Thank you guys for the color and taking my questions I appreciate it.
Okay.
Thank you.
There are no additional questions waiting at this time, so I'll pass the conference over to <unk>.
Or is that just for any closing remarks. Please go ahead.
Again, I just want to thank everyone for being on the call and we look forward to a really good year in 2023 and <unk>.
Be safe and we'll look forward to talking to you on the next call.
Okay.
This concludes today's conference call. Thank you for your participation you may now disconnect your lines.
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