Q2 2023 Provident Financial Services Inc Earnings Call
Thank you for standing by at this time I would like to welcome everyone to the Provident Financial Services, Inc. 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. If you would like to ask a question during this.
Shouldn't really press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one. Thank you Adrianne No Duarte Investor Relations Officer, you May begin your conference.
Thank you Cheryl good morning, everyone and thank you for joining us for our second quarter earnings call. Today's presenters are president and CEO , Tony Robbins, and senior Executive Vice President and Chief Financial Officer Tamara.
Before beginning their review of our financial results. We ask that you. Please take note of our standard question on any forward looking statements that may be made during the course of today's call. Our disclaimer. Our full disclaimer is contained in last evening's earnings release, which has been posted to the Investor Relations page on our website Provident Stopbank now it's my pleasure.
To introduce Tony Robbins, who will offer his perspective on our second quarter Tony.
Thank you Andrea.
Good morning, everyone and welcome to the Provident financial services earnings call.
The disruption to the banking system and result in volatility that we all experienced in the first quarter has abated.
And thanks fared well through the instability. Please.
These events, however, combined with more rate hikes by the Federal Reserve gave rise to new headwinds for the banking industry in the form of funding challenges as we headed into the second quarter.
These funding challenges included more demands by customers for higher rates needs for more insurance and disintermediation from low cost deposits to higher yielding time deposits and certain deposits shifting to treasury securities.
Consequently, we experienced higher deposit betas for the quarter, which increased our funding costs and compressed our net interest margin.
Despite these unfavorable market conditions Provident produced good financial results this quarter, which once again demonstrates the strength of our franchise and talented management team.
As a result, we reported earnings of 43 cents per share and annualized return on average assets of 93% and a return on average tangible equity of 10, 75%.
Excluding merger related charges and normalizing seasonal provision for stabilized economic forecast, we estimate our core return on average assets was approximately 1.07% for the second quarter.
Our capital is strong and comfortably exceed well capitalized levels tangible book value per share expanded three 6% during the first six months to $15.66 on the strength of our earnings.
Our tangible common equity ratio at June 30 was 872% as.
As such our board of directors approved a quarterly cash dividend <unk> 24 per share payable on August 25th.
Presently our uninsured and on collateralized deposits were $2 7 billion or approximately 26% of our total deposits.
Our on balance sheet liquidity, plus borrowing capacity is $3 8 billion or 140% of uninsured deposits.
Our core deposits are a valuable component of our franchise during the quarter, our core deposits decreased 55 million, 27%, which.
Which we attribute to normal business activity and customers seeking higher yields on their deposits.
For the second quarter, our deposit beta was 148% with the rising rate cycle to date deposit beta was about 25%.
Consequently, our total cost of deposits increased and in large part drove our total cost of funds up 50 basis points to 171% and compressed our net interest margin 37 basis points.
Our commercial lending team closed approximately $516 million of new commercial launch during the second quarter.
Prepayments decreased 56% to $125 million as compared to the trailing quarter.
Our credit metrics remained strong in the second quarter, and we continue to maintain prudent underwriting standards.
Particularly increased lending.
As part of our normal credit monitoring processes, we have performed targeted in depth analysis to evaluate portfolio and loan level of risks.
Our line of credit utilization percentage increased 4% in the second quarter to 35%, which is approaching our historical average of approximately 40%.
As a result of the improved production reduced prepayments and increased line utilization, our commercial loans grew $315 million or three 6% for the quarter.
For the six months, we grew $296 million or three 4%, which is pacing at an annualized growth rate of about six 7%.
The pull through on our commercial loan pipeline during the second quarter was good and the gross pipeline remains strong at approximately $1 7 billion.
Pull through adjusted pipeline, including launch pending closing is approximately $1 billion and our projected pipeline rate increased 47 basis points to 724%.
We are encouraged by the strength and quality of our pipeline. In addition, payoffs have slowed as.
As a result, we expect to achieve commercial loan lending growth targets for the remainder of 2023.
Yeah.
Our fee based businesses performed well this quarter private and protection plus had an outstanding second quarter with 82% organic growth, which resulted in a 34% increase in revenue and then 87% increase in operating profit as compared to the same quarter last year.
The conditions in the financial markets are more stable in the second quarter as a result, Beacon trust experienced growth in market value of assets under management.
And related fee income.
Beacons fee income remained stable compared to the trailing quarter as the increase in advisory fees was mostly offset by a reduction in trust revenue.
With respect to our previously announced merger with Lakeland Bank.
We continue our engagement with the regulators and have provided additional information in order in order to further support our application for approval of the merger.
The companies have made significant progress in various integration initiatives through outstanding teamwork from both banks, we look forward to receiving regulatory approval and combining our two great franchises into the best Bank in New Jersey.
As we look forward, we remain focused on growing our business, however, staying disciplined and committed to our risk management principles is critical during these challenging times and.
In addition, we expect to close and integrate the merger with Lakeland Bank in the near future, which we believe will create value for all of our stakeholders.
Now I'll 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 $32 million 43 per share compared with $40 5 million or <unk> 54 per share for the trailing quarter.
$39 2 million or 53 per share for the second quarter of 2022.
Non tax deductible charges related to our pending merger with Lakewood Bancorp totaled $2 million from the prior quarter and $1 1 million in the trailing quarter.
Excluding these merger related charges pretax pre provision earnings for the current quarter were $55 3 million.
Or an annualized one 6% of average assets.
Revenue totaled $118 million for the quarter compared with $130 million for the trailing quarter and $120 million for the second quarter of 2022.
Our net interest margin decreased 37 basis points in the trailing quarter to $3 one 1%.
Yield on earning assets improved by 10 basis points versus the trailing quarter as floating and adjustable rate loans repriced favorably in new loan originations reflected higher market rates.
This improvement in asset yields however was more than offset by an increase in interest bearing funding costs.
Increased funding costs, reflecting current market conditions, which resulted in an increase in borrowings accompanied by a decrease in deposits.
Noninterest bearing balances also moved to our insured are interest bearing insured casualty product in order to obtain increased deposit insurance.
In addition, lower questing demand and savings balances shifted to higher costing time deposits.
The average total deposits increased 37 basis points to 142%.
This brought our rising rate cycle to date beta to 25%.
The average cost of total interest bearing liabilities increased 59 basis points in the trailing quarter to $2 one 3%.
The prolonged inverted yield curve ongoing deposit competition and an increasingly attractiveness of investment alternatives continue to impact funding costs.
As a result, we expect to see some continued net interest margin compression through the balance of 2023 and protect the margin will stabilize at around 3%.
Period end total loans grew $306 million with commercial loans, increasing $315 million in the quarter.
Our pull through adjusted loan pipeline increased $109 million last quarter to $1 billion with a weighted average rate of seven 4% versus our current portfolio yield of five 4%.
The provision for credit losses on loans increased $4 4 million for the quarter to $10 $4 million.
Primarily due to a worsening commercial property price index forecast.
As a result, the allowance for credit losses on loans increased to 97 basis points of total loans at June 30.
From 91 basis points at March 31.
Current credit metrics. However, we're stable and annualized net charge offs were just four basis points of loans for the border.
Noninterest income decreased $2 8 million versus the trailing quarter as a $2 million gain related to a prior quarter sale of Oreo was realized upon the satisfaction of post closing conditions in the trailing quarter.
In addition deposit fees were down 612000 versus the trailing quarter and insurance agency income well ahead of plan for the second quarter was $255000 less than the seasonally strong first quarter.
Excluding provisions for credit losses on commitments to extend credit and merger related charges non interest expense decreased $4 5 million versus the trailing quarter with $3 $5 million of that decline coming in compensation and benefits expense as incentive accruals and stock based compensation employer payroll tax expense were all lower than the trailing quarter.
Adjusted operating expenses were an annualized 183% of average assets for the current quarter compared with 2% in the trailing quarter and $1, 92% for the second quarter of 2022.
The efficiency ratio was $53 two 9% for the second quarter of 2023 comparable 50, 185% in the trailing quarter and 50, 383% for the second quarter of 2022.
That concludes our prepared remarks, we'll be happy to respond to questions.
To ask a question. Please press star one your first question is from Mark Fitzgibbon of Piper Sandler. Please go ahead. Your line is open.
Hey, good morning, guys Happy Friday.
Good morning, Mark.
Tony I'm wondering if there's anything left that you all need to do our provide to the regulators or.
Or have you sort of done all of that and do you have any any rough sense, what the timing might look like for a closing on the Lakeland deal.
Yes.
What I can say to that is that.
We have weekly meetings with calls with the FDIC to ensure that.
Any questions that are open or anything that's pending.
Has been provided.
So.
When I look at this as like run at back end of that right, we've given them everything that they need.
To process the application.
Questioner to arise during during the quarter.
I would call that a final analysis short but.
From my perspective, and I know I get guided by counsel not to not to beat.
Two two forward on this it just appears that everything is there and they have to go through their process and.
So I'm expecting it to happen to happen relatively soon.
Great.
And then second question Tom on the expense trends, obviously, they were great this quarter.
And it sounded like.
Yes.
Expenses might tick up a little bit in the third quarter did I hear that correctly.
I think we'll be able to maintain in the $64 million to $65 million range Mark It seems like a lot of our peers. We're cognizant of the pressure on net interest margins put on on earnings and now we're looking carefully at all our expenses.
Okay and.
I heard your comments also on the margin sort of bottoming out around 3% is that assumed in the third quarter.
Yes, I think someone comes in it comes in around three and stays there.
Okay and with the strong pipeline that you have.
Given sort of the softening economic situation.
How are you thinking about provisioning levels for the back half of the year.
No I think you think about the total coverage at 97 basis points and I don't really see it going much higher than that and that was really responsive to the economic forecast and particularly the commercial property price index.
Moody's baseline for economic forecasts and I think they were a little bit slower than some other forecasters maybe in catching up on their view of CRE potential losses.
That said our own book is quite strong as you saw.
Really strong in the asset quality metrics overall and no concerns.
Reflected in the current book.
Great. Thank you.
One question is from Billy Young of RBC capital markets. Please go ahead. Your line is open.
Hey, Good morning, guys know me okay.
Perfect.
Great.
Maybe maybe kind of a two part question here to start.
First on loan growth.
It looks like you're set up to have continued nice growth.
Third quarter was what the stronger adjusted pulse through pipelines.
Kind of what are your thoughts.
I guess what are thoughts on growth in the back half of the year and then secondly.
Can you guys give us an update on your thoughts on funding going forward from here.
Particularly given the.
Loan to deposit ratio at close to 103%.
Sure.
I might give you a long winded answer on the two part question so with regards to our our lending.
We think the pacing that I mentioned during the call are around six seven.
7% is something that is.
In the wheelhouse, we still guide to that 5% to 6% growth rate.
Pipeline is strong the activity is strong.
Our underwriting is strong so we feel pretty good about that sector. One of the thing that to point out that.
In the first half of the year, we've seen big substantive growth on the C&I side of the book as well so theres not there which is consistent with our plan so not to rely so heavily on <unk> lending.
So just to give you a quick metric on now we did about 40% of our production wasn't C&I versus 27% last year at the same time so.
The teams are doing a good job executing on that.
And I'm feeling really good in terms of funding.
I guess, our expectation if I were to just throw it out there on a macro basis is that our aim is to probably try to keep deposits stable for the rest of the year.
There are I don't think it's prudent to have strategies that that two.
To attract because it's very expensive to do that that being said, we still grow a lot of our deposits through our business our business banking program. So we still expect some good activity there and growth.
The municipal side I think that we had new norms and a lot of the excess money that was the municipalities through stimulus.
Has gone out.
So therefore that we don't expect a lot of growth in that sector and we are aiming to maintain consumer deposits on a level basis and I think if we can do that it's a good achievement.
That being said how do you fund the growth.
We're going to fund it through our business banking growth in terms of deposits.
Going to probably go to the wholesale market if needed.
Given that it's a better pricing play than trying to to incrementally pressure deposits through some campaigns.
And lastly, we use some securities cash flows that come in.
To divert those into into the lending sector.
I think that we're cognizant of loan to deposit ratio is not going out of bounds.
Our estimates show that there is still within it.
The bands that we want to operate in.
So we're comfortable pushing for that five 6% as long as there's good responsible growth because that will also come with some self funding in that category is just going to add with some of our peers stepping back a bit in the lending arena. It affords us the ability to continue to be selective both with regard to pricing and structure. So we're getting looks at some quality months.
Exactly.
Long winded answer Bill hopefully I gave you what you need it.
You did and it wasn't long wind at all thanks.
I guess the second question.
Uh huh.
Kind of follow up on.
Mark's questioning on the margin it sounds like you know.
Does it does it kind of feel like some of the.
Deposit pressures that we saw in the second quarter or.
Normalizing or getting better so far in the third quarter. It sounds like we're pretty close to the margin bottom here bottoming here and you know what.
The fed hike.
Heiko earlier this week.
Last one for this year do you see guys.
Better about.
Your ability to kind of.
Incrementally get margin expansion as we get further out from this.
Do you think Thats the case Bill I think a lot of the industry ourselves included have caught up to a degree on the leg that we had on deposits were much closer to or added market rates. So I think thats. The funding pressure will abate. Some I think we've been conservative in our NIM modeling in the assumptions around shift in composition within that.
Portfolio to the higher costing Cds, which we've seen on the consumer side and recognizing the Ics product, which has a right to it.
Has been one of the areas, where we've seen growth as well.
And then the beta that we've applied to the most current hike.
It's pretty significant to capture the rest of that land.
And I would just add on that.
Hearing that from from the business lines as well so we kind of look back at the second quarter. The Delta between what we were we were pricing and where the markets have moved which has kind of widened to a place where our customers became.
Extremely aware and obviously what happened in the first quarter with.
Around liquidity.
Every time, there was a fed hike the customers were almost ahead of the fed hike looking for what's going to happen on their account and Hasnt happen. This go around so this fed hike. There was there was silence and so we're seeing a much I'm not suggesting that there is not any of it happening, but it was happening network wide and now it might be small.
Pieces so.
The expectation is and I think it's consistent with some of what we're hearing from our comp our peers is that that slowed down so the customers close the gap between or the delta between market and.
And where we were pricing so kind of feels like it's leveling off.
Secondly, we're not seeing any unusual irrational behaviors from from our.
Competition in the marketplace that would result in any dynamic pricing going into the third and fourth quarter. So that also gives me a little a little bit of a solid to say, yes. We are kind of plateauing in that space. So I think Tom's projection on the margin given that all of it is coming nearly from the funding side.
Pressure.
Is that's why we can make that statement secondly, there is another element here in terms of the feds hike.
Tom and I talk about.
That is that our assets will continue to price up and if the behavior under deposits kind of subsided, we might see we might add a little bit.
Benefit in that category to stabilize any further on the asset side within the loan book 52% of that.
Variable rate was 24% within that being floating.
We saw the <unk> move up to.
Yes.
Six and three eights I think it was roughly in the second quarter, we saw the portfolio right at 724, and the I'm sorry, the pipeline rate and the portfolio yield currently at 524, if you look at the average balance growth in loans versus the spot balance. So you can see the average balances lagging. So some of that production. We saw in Q2, we're going to see greater benefit from.
In Q3, so all those things are helping to maintain that margin by <unk> <unk> from an asset yield over the projection.
But I just I think it's probably a good time for me to also expressed that as an organization, we're very cognizant on risk and we're not doing anything from a from a standpoint of trying to stretch in any areas to make up for this margin pressure.
We're just going along doing our strong business, we like the nature and quality of the loans that we're putting on and we feel good about a lot of things.
The funding cost is market driven.
Other than that we're staying resilient to our risk management processes.
Perfect. Thank you very much for taking my questions.
Thank you.
Your next question is from Michael Perito of <unk> W. Please go ahead. Your line is open.
Hey, guys. Good morning, Thanks for taking my question.
Good morning, Mike.
Tom are you able to.
Maybe rehash or update us on kind of where you are.
Some time has passed rates of change do you have new kind of pro forma capital ratios for the bank consuming Lakeland closes in the back half of the year at some point or a range or just some guideposts around how youre thinking about that.
Really China with where we stand versus.
Total risk based capital at the bank level, that's the weakest ratio among there.
Where we are in excess of well capitalized levels on a pro forma projections. So.
They have improved over the course of the year as both companies have Matt.
Manage their capital and had good earnings over the course of the first six months.
So relative to what you guys communicated when the deal was announced it sounds like they beat us modestly higher just based on the capital build at both institutions.
That's correct.
Okay.
And I wanted to also just ask on the noninterest income side.
If you have any apologize I missed this but if you have any kind of thoughts on that on the near term outlook here and then Tony maybe a bigger picture question I don't know.
Probably not but there was a midwest that that actually.
All of its insurance unit for what I thought was a very very healthy revenue multiple I know, it's a business historically, you've been pretty dedicated to it and happy with but just curious about what your thoughts are there, particularly.
Particularly if were.
In a position where your loan growth is good and a little extra capital would it hurt is that an option you would consider now and then just again reiterate just any thoughts on the near term noninterest income guide would be great.
Sure.
It's not we recognize the value of our insurance entity.
However.
They're producing somewhere around 40% return on that investment.
We don't see this strategy peeking out I think it can continue.
To elevate and its part of our strategic plan to have a greater percentage of our revenue.
Be comprised of non spread income.
So I think it's an imperative and important part of our strategic planning our direction.
And while Thats out there and I'm aware of it I think it's.
And it's also a great value add for our customers. So that's something that debt.
As in twined in there and it's very hard.
Decouple.
<unk>.
Relative to our strategy so.
While that's out there I think right now it's not a strong probability but.
Just you can't ever say no to anything in our business, Yes, I mean, we like the diversified revenue stream, we've got a 35% EBITDA margin in the business is contributing nicely.
Patrick.
Okay.
Just to add to that Beacon Trust I also had a nice quarter, we see AUM back up to $3 7 billion ended the period at $3 6 billion for the quarter.
Net new clients.
<unk>.
About a 22, 5% net margin on that business too so also contributing nicely.
Great as far as the outlook with the total noninterest income probably being a little conservative, but I, just kind of negative about $20 million a quarter in the near term.
Okay.
That's very helpful. Thank you guys for taking my questions and all the color. This morning I appreciate it.
Thanks, Mike Thanks, Mike.
Your next question is from Manuel novice of D. A Davidson. Please go ahead. Your line is open.
Hey, good morning.
The NIM stabilizes.
Okay.
Does that do you think that NII.
Trough in the third quarter or more in the fourth quarter.
Okay.
On a core basis.
Blake Glen Warren shifting.
Yes, yes, everything gets thrown up when the deal closes, but I think.
I think fourth quarter is when we were looking for then Dan AIG.
Okay.
Okay and then.
<unk>.
What's the rough cash flows on securities.
That's part of the funding profile.
Typically throws off between 16 and $20 million a month.
Sure.
And with the kind of the movement of the NIM and the NIM trajectory what are you kind of assuming.
Our through the cycle deposit betas, and kind of where our noninterest bearing deposit mix ends up.
Yes, we're at the 25% through the cycle. Thus far I think we are assuming something around <unk> 32 for the full.
Projection period.
Sorry, it was the other question.
Noninterest bearing deposit mix percentages like where is it kind of settle out.
How much more critical believe crop.
'twenty three 'twenty four I would agree.
Okay.
Okay.
That's really helpful.
It's probably early.
Do you have any thoughts on kind of how the environment may have shifted kind of the combined targets for for Lakeland.
Or kind of more more more to come on that I guess, but just any initial thoughts on that.
Yeah, I think it's a little too early to go out there until we get the balance sheets, combined and see where the environment stands at that combination data it would be too speculative.
Okay very fair I appreciate the comments.
Thank you.
There are no further questions at this time I will now turn the call over to Tony Lucas Zotto for closing remarks.
Thank you well, thank you everyone for being on the call.
We know these are challenging times.
I feel really confident in our management team at Provident.
I think we will tackle these challenges head on and an outperformance so to that end, we look forward to getting together next quarter and sharing with you our results have a good day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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