Provident Financial Services Inc. Q1 2023 Earnings Call

Speaker 2: Good morning. Thank you for attending today's Providence Financial Services Inc. first quarter earnings conference call. My name is Francis and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

Speaker 2: If you'd like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Adriano Duarte, with Provident Financial Services. Please go ahead.

Speaker 3: Thank you, Francis. Good morning, everyone, and thank you for joining us for our first 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 space.

Speaker 4: Thank you, Adriano. Good morning, everyone, and welcome to the Providence Financial Services earnings call.

Speaker 4: First quarter was an extraordinary time for the banking industry.

Speaker 4: What has been described as an idiosyncratic event resulted in the failure of two high-profile regional banks and caused a disruption to the banking system that can be properly termed a deposit flight crisis.

Speaker 4: Presently, it appears that the volatility has moderated and the banking industry, including Providence, remains fundamentally strong, liquid, and well-capitalized.

Speaker 4: Given this recent disruption to the banking system, out of an abundance of caution, we prudently took measures to maximize our on balance sheet liquidity. This included increasing our cash position using higher cost funding sources and higher costing deposit programs that provide more insurance.

Speaker 4: Despite the current market conditions, Providence produced good financial results this quarter, which demonstrates the resiliency of our business model, strong deposit franchise, and talented management team.

Speaker 4: As such, we reported earnings of $0.54 per share, an annualized return on average assets of 1.2%, and a return on average tangible equity of 14.1%.

Speaker 4: Our capital is strong and comfortably exceeds well-capitalized levels.

Speaker 4: Tangible book value expanded $0.52, or 3.4%, during the quarter to $15.64 on the strength of our earnings and the improvement in the unrealized loss on our securities portfolio.

Speaker 4: Our tangible common equity ratio at March 31 was 8.56. As such, our board of directors approved a quarterly cash dividend of 24 cents per share, which will be available on May 26.

Speaker 4: In response to the disruption that I previously mentioned, we instituted a robust customer outreach program.

Speaker 4: I am pleased to report that these efforts were well received by our customers. We identified a limited amount of deposit outflows that were directly associated with the deposit flight crisis.

Speaker 4: Presently, our uninsured deposits are 2.9 billion or approximately 29% of our total deposits. Our on-balance sheet liquidity plus our powering capacity is 3.7 billion or 126% of uninsured deposits.

Speaker 4: Our core deposits are a valuable component of our franchise. During the quarter, our core deposits decreased 265 million, or 2.5%, which we attribute to normal business activity, customers seeking higher rates, and some outflow of liquidity related to the market disruption.

Speaker 4: For the first quarter, our deposit beta was 76%, while the rising rate cycle-to-date deposit beta was about 18%.

Speaker 4: Consequently, our total cost of deposits increased and when combined with the excess liquidity previously mentioned, drove our total cost of funds up 42 basis points to 1.21% and compressed our net interest margin 14 basis points.

Speaker 4: Our commercial lending team closed approximately $350 million of new commercial loans during the first quarter. Pre-payments increased 61% to $283 million as compared to the trailing quarter.

Speaker 4: Approximately 116 million, or 41%, represented desired payoffs.

Speaker 4: The remainder were due to the sale of the underlying federal or refinanced elsewhere.

Speaker 4: Our credit metrics improved in the first quarter, and we continue to maintain prudent underwriting standards, particularly in our Crete lending. In addition, our Crete monitoring processes have been enhanced with targeted, in-depth initiatives to evaluate portfolio and loan level risks.

Speaker 4: Areas of focus include the office property portfolio and the construction portfolio.

Speaker 4: as well as low-level reviews for credits that are maturing or have upcoming rate resets.

Speaker 4: Our line of credit utilization percentage decreased 3% in the first quarter to 31%, trailing our restorable average of approximately 40%. As a result of the heightened payoffs and decreased line utilization, our commercial loans remain relatively flat versus the trailing quarter.

Speaker 4: The pull through in our commercial loan pipeline during the first quarter was good, and the gross pipeline remained strong at approximately $1.5 billion.

Speaker 4: The pull-through adjusted pipeline, including loans fending close, is approximately $898 million.

Speaker 4: and our projected pipeline rate remained unchanged at 6.77%.

Speaker 4: We are encouraged by the strength of our pipeline and with normal payoffs we expect to achieve our growth targets.

Speaker 4: However, we remain mindful of a potential economic slowdown.

Speaker 4: Our fee-based businesses performed well this quarter. Profit and Protection Plus had a strong first quarter with 35% organic growth, which resulted in a 26% increase in revenue and a 27% increase in operating profit as compared to the same poor last year.

Speaker 4: The conditions in the financial markets were more stable in the first quarter, and as a result, Beacon Trust experienced growth in the market value of assets under management and related fee income.

Speaker 4: Beacon's fee income increased $319,000, or 4.8%, as compared to the trailing quarter.

Speaker 4: Regarding our previously announced merger with Lakeland Bank Corp, our team continues to work diligently towards obtaining the regulatory approvals necessary to combine our two companies.

Speaker 4: We are excited about this combination which will enhance our ability to serve our customers and our communities. Looking forward, we remain focused on growing our business, staying committed to our risk management principles, and integrating the merger with Lakeland Bancorp, which we believe will create value for all of our stakeholders.

Speaker 4: Now, I'll turn the call over to Tom for his comments on our financial performance. Tom? Styles ONE INTERisks

Speaker 4: Thank you, Tony, and good morning, everyone. As Tony noted, our net income for the quarter was $40.5 million, or $0.54 per share, compared with $49 million, or $0.66 per share for the trailing quarter, and $44 million, or $0.58 per share for the first quarter of 2022.

Speaker 5: Non-tax deductible charges related to our pending merger with Lakeland Bank Corp. totals $1.1 million in the current quarter and $1.2 million in the trailing quarter.

Speaker 5: Excluding these merger related charges, pre-tax pre-provision earnings for the current quarter was $62.8 million or an annualized 1.86% of average assets.

Speaker 5: Revenue total of $130 million for the quarter compared to 132 million for the trailing quarter and 115 million for the first quarter of 2022.

Speaker 5: Our net interest margin decreased 14 basis points from the trailing quarter to 3.48%. The yield on earning assets improved by 27 basis points versus the trailing quarter. Exploding and adjustable rate loans reprised favorably and new loan originations reflected higher market rates. Our total is a resulting starting profit of $16. inspiration carnivore of advancing magnesium

Speaker 5: This improvement in asset yields, however, was more than offset by an increase in interest bearing funding costs of 54 basis points versus the trailing quarter. Increased funding costs reflected current market conditions which resulted in an increase in borrowings accompanied by a decrease in deposits.

Speaker 5: Certain non-interest-bearing balances also move to our interest-bearing insured cash sweet product in order to obtain increased deposit insurance.

In addition, lower clusting demand and savings balance is shifted to higher clusting time deposits.

The average total cost of deposits increased 38 basis points to 1.05%. This represents deposit basis of 76% for the current quarter and 18% for the rising rate cycle to date.

The average cost of total interest fairing liabilities increased 54 basis points from the trailing quarter to 1.54%.

While an increase in funding costs was anticipated, recent bank failures, resulting industry liquidity concerns, and an increase in the attractiveness of investment alternatives have altered the competitive environment and increased depositor security and price sensitivity. As a result, we expect to see some continued net interest margin compression for the balance of 2023.

rate of 6.77% versus our current portfolio yield of 5.12%.

The provision for credit losses on loans increased $2.6 million for the quarter to $6 million due to a worsened economic forecast.

As a result, the allowance for credit losses on loans increased to 91 basis points of total loans at March 31 from 86 basis points at December 31. Current credit metrics, however, improved with delinquencies in criticizing classified assets falling and non-performing assets, total assets, declining to 36 basis points at March 31. Net charge-offs were an annualized three basis points of loans for the quarter.

Non-interest income increased $3.9 million versus the trailing quarter as an additional $2 million gain on a prior quarter sale of REO was realized upon the satisfaction of the close closing conditions in the current quarter.

In addition, our fee-based business lines performed well with insurance agency and wealth management income both increased versus the trailing quarter.

including provisions for credit losses on commitments to extend credit and merger-related charges, operating expenses were an annualized 2% of average assets for the current quarter, compared with 1.79% in the trailing quarter and 1.90% for the first quarter of 2022.

The efficiency ratio was 51.85% for the first quarter of 2023 compared with 46.88% in the trailing quarter and 56.05% for the first quarter of 2022.

The first quarter of every year is impacted by increased employer payroll tax expense as Social Security income limits reset each calendar year.

In addition, the current quarter included non-recurring charges of approximately $563,000 related to achievement projections on performance-based stock compensation and $363,000 related to the conclusion of a multi-year sales tax audit.

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 remove that question, press star followed by two. Again, to ask a question, that's star one.

As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead, Mark. You can ask your question aboutRCPA.

a speaker phone, please remember to pick up your handset before asking your question. Our first question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead, Mark. Hey guys, good morning.

By mark

Tom I wonder if you could share with us what the spot deposit rates look like today.

I don't have the star race in front of me, Mark.

Okay, I can circle back with you on that. And I heard your comments about the margin trending down, you know, over the balance of 2023. Do you have a feel for roughly where you think that will bottom assuming you know we follow the forward curve?

Yeah, I mean I have a little bit less confidence in our projections in this typical mark because of the number of moving parts here and a little bit of volatility but I can offer that the the margin interest margin was 3.39 percent. I'm thinking probably something in the 335 range for Q2.

and continuing to drift down perhaps over the balance of the year as we continue to see that lag in deposit data pick up.

and continuing to drift down, perhaps, over the balance of the year as we continue to see that lag in deposit data pick up. OK, great. Thank you to our alum, Kevin.

As a public company mark we I think the average overall was 324, you know going back to 2003 Okay fair enough.

And then secondly, I just, and you may not have great color on this, but do you have any sense for the approximate timing of when the Lakeland transaction might happen?

Mark, this is Tony. We...

We don't have an absolute time, as you know, but we're getting closer. We've submitted the final comments that the FDIC required in our application, and they're processing that information as we speak.

And hopefully that should close out all requirements and if they see it clear, get us to an approval.

So if I had our internal expectations are May, but obviously I have to put a caveat on that.

So if I had our internal expectations are May, but obviously I have to put a caveat on that. Okay.

And then Tony, I saw your pipelines look like they strengthen nicely. How are you thinking about growth? Do you want to grow a lot in this environment? Do you feel like the spreads are attractive enough to justify really growing the balance sheet at this point in the cycle? I think what we're...

seeking does justify that. I think if we're not getting the pricing, especially on a risk adjusted basis, we generally would walk from those transactions. I think everything that is in our pipeline and that we discuss in our deal screens are deals that we think are

Provident, bankable, if you will. So the answer to that is yes, but we're not looking to have outsize growth. We're looking to have very rational growth in the asset classes that we desire, which in the event the question will come up momentarily.

I think we're seeing our growth and what our pipeline is comprised of largely, our assets in the multi-family space, industrial, and some desirable retail.

So that's largely where our growth has been And that's what we're focusing in on Okay, and that last question. Are you seeing any opportunities to pick up teams from you know places like signature first republic or other places

The answer is yes. We opened a regional office on Long Island just as an example. That office has now been almost fully staffed, if not fully staffed, with a number of talented

team leaders and RMs and a number of them have come from Signature as well as other places. So yes the answer is yes but it's not a wholesale hiring it's just we're picking up the talent that we're looking for. In this case it happens to be...

numerous members of a team, but usually it's one-offs.

Thank you. Mark, it's Tommy. Just to follow up on your deposit cost question, if I look at the average cost for March, it was 120 basis points, 1.2%.

Thanks, Tom. You're welcome.

Thanks Tom. You're welcome. Thank you for your questions.

The next question comes from Billy Young with RBC Capital Markets. Please go ahead Billy.

Our next question comes from Billy Young with RBC Capital Markets. Please go ahead, Billy. Hey, good morning, guys. How are you?

Just to follow up on the long growth question, can you just, I guess.

kind of help us square the trends you saw in the first quarter with the higher payoff activity and lower your utilization rates and your confidence in still hitting your mid-single digit growth this year. Was it more just timing or how what gives you confidence that you know you're not going to see continuation of

the higher payoffs and lower utilization going forward.

I'll start off by saying part of how we manage our loan portfolio, particularly our creep portfolio, had something to do with those levels of payoffs. As I mentioned in my written remarks, nearly $115 million in revenue.

of those payoffs or desired payoffs, which means they're assets that we were looking to exit from. And if you adjust that portion alone, it would probably equate to an annualized growth rate of about 4% or a little over that. So given what we're seeing in the pipeline, yes, the pipeline is big enough that if we have normal pull-throughs,

we should still be able to meet that 6% number that we're targeting. In terms of payoffs, we're not seeing a lot of payoffs related to re-pricing. Some sales of assets are taking place. But in our continued management of our pre-portfolio or all of our loans. We're not seeing a lot of payoffs related to re-pricing.

We may exit alone here from time to time or not not renew it But on balance we don't expect to see a ton of that We expect that to be stable and with the pull through we're still guiding to that 6% as I mentioned earlier

Understood. Thank you.

And just drilling down a little bit into some of the positive trends, given everything that happened in March, can you just give a little bit of color on if you saw any commonalities on the types of customers?

that drove the limited amount of outflows that you saw over the month, as well as maybe a little bit of color on how pricing evolved pre and post mid-March.

Sure, I'll start and I'm sure Tom will help me. Just to put a little color on a macro picture, I'll try to break it into a couple of categories. If we can first look at the municipal deposit categories, we saw a run out in the first quarter and that's typical. If you look at what's happened as we enter the second quarter.

almost all of that has come back. So I look at that sector as being secured and business as usual. As we break down the business deposit categories, we saw a small handful that went out as early on in this liquidity crisis, if you will, but we see the whole class is stabilized.

in terms of the business side. What we did see there in terms of repricing was a number of customers that are moving into the ICS program, which is the insured program. That adds another 15 basis points. And where possible, we're passing that through to our customers. I think what you're seeing industry-wide is also a little bit of a lock down of the power plug at a future speed. With some changes TO plan to make, I would say that the last two weeks of Katarina, theRob validating several months late that increased the growth oil especially in North America, in Asia. That took that $1.8 million

because I think this crisis has awakened the sensitivity associated with pricing on a consumer side. So we saw more behavior on the consumer side in terms of flow outs to either money markets or us treasury securities or even moving between lower cost products within our bank.

into higher costing CDs. So there was more of a dynamic there and we're in uncharted waters, but what we're expecting as we move forward is that kind of levels out that people that have taken action, we're presuming that large percentage of it has happened, but we still expect some more to happen.

Internally, we're doing a lot more analysis around it and to prepare a response. But our overall attitude is not to chase deposits because the cost of chasing deposits is extraordinarily high. So our strategy is largely defensive and make sure that we don't have a tremendous amount of incremental cost pricing and thereby preserve our margin.

I understood I'll step back. Thank you guys.

I understood I'll step back. Thank you guys. Thank you.

Thank you for your questions. The next question comes from Manuel Navas with DA Davidson. Please go ahead.

Hi, good morning. With kind of more NIM pressure expected, what are you kind of assuming for new assumption for deposit data? Overall, we're still modeling the 25% through the cycle. We have stressed that.

With some of the, I guess.

Some of the staffing in Long Island being from Signature, is there any color you can give on their prior book of businesses? And if there's any pipeline for more hires in general from M&A disruption.

I think, you know, so first I will say that it's mixed both of, you know, C&I type lending team and some, you know, to fill in some open pre-position, pre-lending staff that we needed out there. That's a compliment. You know, it.

From the onset, the asset classes were chasing and the strength of the sponsors appears to be solid. And we're thrilled with the progress there. I don't know if I caught the last part of that was whether we have a desire to do more. And I think I will characterize that by

You know, there's never, we always seek to enhance our talent, right? But.

At the same time, there's a process, right? We need to get the positive operating leverage on our investment and then move forward as we look to go into other potential markets. So hopefully I kind of gave you the answer on that.

I appreciate the color. Any kind of update on expenses? What type of runway should we expect from here?

I had to relate my gut just on a core basis. Yep, on a core basis I'm thinking the 66.5 million to 67 million dollar range makes sense if I kind of normalize Q1 back to some of the non-recurring items and some of the seasonal items that were in there.

Thank you. I appreciate it. Thank you.

Thank you.

Thank you for your question. There are no questions waiting at this time, so I'll pass the conference back over to Mr. Labazeta for any additional remarks. Thank you. Thanks, thanks everyone for attending our call. We look forward to speaking with you at our next quarterly earnings call.

and have a very nice day. Thank you. That concludes the Providence Financial Services Inc. first quarter earnings conference call. Thank you for your participation. You may now disconnect your line.