Q3 2023 Provident Financial Services Inc Earnings Call
Good morning, My name is Robin I'll be your conference operator today at this time I would like to welcome everyone to the Provident Financial Services, Inc. Third quarter 2023 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'd like to ask a question during this.
Time simply press Star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige Starwood. Thank you Adrianne No Duarte Investor Relations Officer, you May begin your conference.
Thank you Rob good morning, everyone and thank you for joining us for our third quarter earnings call. Today's presenters are president and CEO, Tony Robbins, and senior Executive Vice President and Chief Financial Officer, Tom Lyons.
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 contained in last night'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 Rob is that it will offer us.
Perspective on our third quarter Tony.
Thank you Adriana good morning, everyone and welcome to the Provident financial services earnings call.
The third quarter was marked by rising interest rates and persistent inflationary pressures. These conditions have presented substantial challenges to many in the banking sector.
Against that backdrop I'm pleased to report that Providence has demonstrated its resilience and agility delivering results that point towards the underlying strength of our operation and our commitment to responsible growth.
Despite the difficult economic environment Provident produced good financial results this quarter, which once again demonstrates the strength of the franchise and talented management team.
As such we've reported earnings of <unk> 38 per share and annualized return on average assets of eight 1% and a return on average tangible equity of 947%.
Excluding merger related charges, our core pretax pre provision return on average assets was 148%.
At quarter end, our capital was strong and exceeded well capitalized levels tangible book value per share was $15 41 and.
And our common tangible.
Tangible common equity ratio was solid at 854% as such our board of directors approved a quarterly cash dividend of <unk> 24 per share payable on November 24.
Presently.
Our uninsured and uncollateralized deposits of $2 5 billion or approximately 25% of our total deposits our on balance sheet liquidity plus borrowing capacity is three 6 billion or 144% of uninsured deposits.
Our core deposits are a valuable component of our franchise during the quarter. Our average core deposits decreased 85 million <unk>, 9%.
Which we attribute to bis normal business activities and customers seeking higher yielding investment alternatives in this environment.
A rising rate cycle to date deposit beta was approximately 29, 5%, which we believe is among the best in the peer group and is reflective of the quality of our deposit base.
Consequently, our total cost of deposits increased and in large part drove our total cost of funds up 33 basis points, 2.0% to 4%.
Compressing, our net interest margin 15 basis points to 296%.
Our commercial lending team closed approximately $330 million of new commercial loans during the third quarter.
<unk> decreased 16% to about 94 million as compared to the trailing quarter.
Our credit metrics continued to be excellent in the third quarter, and we are maintaining prudent underwriting standards, particularly increased lending.
As part of our normal pre monitoring processes, we have perform targeted in depth analysis to evaluate portfolio segments concentrations in loan level risks. These enhanced evaluations of our portfolio have not indicated any meaningful deterioration despite difficulties in the wider market.
Our line of credit utilization percentage decreased one 9% in the third quarter to 33% remaining below our historical average of approximately 40%.
As a result of the improved production and reduced prepayments offset by a decrease line of credit utilization, our commercial loans grew approximately $134 million or 148% for the quarter for the nine months, we grew $296 million or four 9%, which is pacing at <unk>.
Annualized growth rate of about six 5%.
The pull through in our commercial loan pipeline during the third quarter was good and the gross pipeline remains strong at approximately $1 7 billion.
The pull through adjusted pipeline, including loans pending closing is approximately $1 1 billion and our projected pipeline rate increased 39 basis points to 762%.
We are encouraged by strength and quality of our pipeline. In addition, payoffs have slowed and as a result, we expect to achieve our commercial lending growth targets for the remainder of 2023.
Unknown Executive: Good morning.
Rob: My name is Rob and I will be your conference operator today. At this time I'd like to welcome everyone to the Provident Financial Services Inc. 3rd quarter 2023 earnings conference call.
Our fee based businesses performed well, despite a hardening insurance market private and protection plus had a strong third quarter with 63% organic growth, which resulted in an 11, 9% increase in revenue and a 12, 3% increase in operating profit as compared to the same quarter last year.
Rob: 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star one.
Beacon Trust performed in line with expectations as conditions in the financial markets continue to remain volatile.
Rob: Thank you.
Adriano Duarte: Adriano Duarte investor relations officer. You may begin your conference. Thank you, Rob. Good morning, everyone. And thank you for joining us for our third quarter earnings call. Today's presenters are president and CEO Tony Labozzetta and senior executive vice president and chief financial officer Tom Lyons. Before beginning 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 display must contain the last night's earnings release, which has been posted to the investor relations page on our website, Providence.bank.
Fee income remained stable despite the reduction in assets under management, which was due in part to market conditions.
<unk> investment performance compares favorably to the applicable benchmarks.
With respect to our previously announced announced merger with Lakeland Bank we.
We are continuing our engagement with the regulators and have complied with all information requested and now we await final approval of the merger.
Anthony Labozzetta: Now it's my pleasure to introduce Tony Labozzetta who will offer his perspective on our third quarter. Tony. Thank you, Adriano.
The companies have made significant progress in various integration initiatives through outstanding team works from both banks.
Anthony Labozzetta: Good morning, everyone. And welcome to the Provident Financial Services earnings call. The third quarter was marked by rising interest rates and persistent inflationary pressures. These conditions have presented substantial challenges to many in the banking sector. Against that backdrop, I'm pleased to report the Provident has demonstrated its resilience and agility, delivering results that point towards the underlying strength of our operation and our commitment to responsible growth. Despite the difficult economic environment, Provident produced good financial results this quarter, which once again demonstrates the strength of the franchise and talented management team.
While regulatory approval is not within our control preparations for for our merger with Lakeland continues to progress as both companies eagerly await approval.
As we look forward, we remain focused on growing and strengthening the fundamentals of our business.
However, being disciplined and remaining committed to our responsible risk management principles is critical during these challenging times.
While we await for regulatory approval, 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.
Anthony Labozzetta: As such, we've reported earnings of $0.38 per share and annualized return on average assets of 0.81% and a return on average tangible equity of $1,000 per year. With 9.47%. Excluding merger related charges, our core free tax, prepervision return on average assets was 1.48%. At quarter end, our capital was strong and exceeded well capitalized levels, tangible book value per share was $15.41 and our common tangible, tangible common equity ratio was solid at 8.54%.
Thank you Tony and good morning, everyone.
As Tony noted our net income for the quarter was $28 $5 million 38 per share compared with $32 million or <unk> 43 per share for the trailing quarter and $43 4 million or <unk> 58 per share for the third quarter of 2022.
Transaction charges related to our pending merger with Lakeland Bank book totaled $2 3 million in the current quarter or approximately <unk> <unk> per share and $2 million in the trailing quarter.
Excluding these merger related charges pretax pre provision earnings for the current quarter were $52 $2 million or an annualized $1, 48% of average assets.
Anthony Labozzetta: As such, our board of directors approved a quarterly cash dividend of $0.24 per share payable on November 24th. Presently, our uninsured and uncollateralized deposits are $2.5 billion or approximately 25% of our total deposits. Our unbalanced sheet liquidity plus borrowing capacity is $3.6 billion or 144% of uninsured deposits. Our core deposits are a valuable component of our franchise. During the quarter, our average core deposits decreased 85 million or 0.9%, which we attribute to normal business activities and customer seeking higher yielding investment alternatives in this environment.
Revenue totaled $116 million for the quarter compared with $118 million for the trailing quarter, along with $138 million for the third quarter of 2022.
No prior year earnings for the third quarter of 2022 included an $8 $6 million gain on the sale of a foreclosed property.
Our net interest margin decreased 15 basis points from the trailing quarter to 296%.
The yield on earning assets improved by 16 basis points versus the trailing quarter as floating and adjustable rate loans re priced 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.
Anthony Labozzetta: Our rising rate cycle-to-date deposit beta was approximately 29.5%, which we believe is among the best in the peer group and is reflective of the quality of our deposit. Base. Consequently, our total cost of deposits increased and in large part drove our total cost of funds of 33 basis points to 2.04%. Compressing our net interest margin, 15 basis points to 2.96%. Our commercial lending team closed approximately 330 million of new commercial loans during the quarter.
Certain noninterest bearing balances also moved to our interest bearing insured cash suite product in order to obtain increased deposit insurance.
In addition, lower costing demand and savings balances shifted to higher costing time deposits.
The average total cost of deposits increased 32 basis points from the trailing quarter to 174%.
This brought our rising rate cycle to date beta to 29, 5%.
The average cost of total interest bearing liabilities increased 37 basis points in the trailing quarter to 250%.
Anthony Labozzetta: Pay off decreased 16% to about 94 million as compared to the trailing quarter. Our credit metrics continue to be excellent in the third quarter and we are maintaining prudent underwriting standards particularly in creek lending. As part of our normal tree monitoring processes, we have performed targeted in-depth analysis to evaluate portfolio segments, concentrations and loan level risk. These enhanced evaluations of our portfolio have not indicated any meaningful deterioration despite difficulties in the wider market.
The prolonged inverted yield curve ongoing deposit competition and an increase in the attractiveness of investment alternatives continue to impact funding costs. As a result, we expect to see some continued net interest margin compression for the balance of 2023 and currently project the margin will stabilize in Q4 at around $2 nine zero percent.
Period end total loans grew $137 million driven by multifamily mortgage loan originations.
Our pull through adjusted loan pipeline increased 75 million from last quarter to $1 1 billion with a weighted average rate of 760% versus our current portfolio yield of 537%.
Anthony Labozzetta: Our line of credit utilization percentage decreased 1.9% in the third quarter to 33% remaining below our historical average of approximately 40%. As a result of the improved production and reduced prepayments offset by a decreased line of credit utilization, our commercial loans grew approximately 134 million or 1.48% for the quarter. For the nine months we grew 296 million or 4.9%, which is pacing at an annualized growth rate of about 6.5%. To pull through in our commercial loan pipeline during the third quarter was good and the gross pipeline remained strong at approximately 1.7 billion.
Asset quality remains strong with nonperforming loans as a percentage of total loans falling to 37 basis points in both early stage and total delinquencies improving.
Criticized and classified loans did increase slightly this quarter, but we're still low at one 7% of total loans.
Net charge offs were $5 $5 million or an annualized 21 basis points of average loans this quarter, bringing year to date net charge offs to nine basis points.
The current quarter loss was driven by a single C&I loan impacted by our strategic business shift implemented by our primary customer.
The provision for credit losses on loans increased $6 million for the quarter to 100, sorry to $11 million, primarily due to a weakened economic forecast within our seasonal model.
Anthony Labozzetta: To pull through just a pipeline including loans pending closing is approximately 1.1 billion and our projected pipeline rate increased 39 basis points to 7.62%. We are encouraged by the strength and quality of our pipeline. In addition, payoffs have slowed and as a result we expect to achieve our commercial lending growth targets for the remainder of 2023. Our fee-based businesses performed well despite a hard-meaning insurance market, Provident Protection Plus, had a strong third quarter with 63% organic growth, which resulted in an 11.9% increase in revenue and a 12.3% increase in operating profit as compared to the same quarter last year.
As a result, the allowance for credit losses on loans increased to 101 basis points of total loans at September 30 from 97 basis points at June 30.
Noninterest income remained steady decreasing only $67000 versus the trailing quarter.
Excluding provisions for credit losses on commitments to extend credit and merger related charges noninterest expenses consistent with the trailing quarter at $63 3 million, representing an annualized one 8% of average assets for the current quarter compared with 183% in the trailing quarter.
189% for the third quarter of 2022.
Anthony Labozzetta: Beacon trust performed in line with expectations, as conditions in the financial markets continue to remain volatile, fee income remains stable despite the reduction in assets on their management, which was due in part to market conditions. Beacon's investment performance compares favorably to the applicable benchmarks.
The efficiency ratio was $54 eight 1% for the third quarter of 2023, compared with $53 two 9% in the trailing quarter and $47 one 1% for the third quarter of 2022.
Our effective tax rate declined to 23, 7% this quarter as a result of a decrease in projected taxable income.
Anthony Labozzetta: With respect to our previously announced merger with Lakeland Bankhole, we are continuing our engagement with the regulators and have complied with all information requested and now we await final approval of the merger. The companies have made significant progress in various integration initiatives through outstanding key works from both banks. While regulatory approval is not within our control, preparations for our merger with Lakeland continues to progress as both companies eagerly await approval. As we look forward, we remain focused on growing and strengthening the fundamentals of our However, being disciplined and remaining committed to our responsible risk management principles is critical during these challenging times. While we await for regulatory approval, 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.
We expect the fourth quarter effective tax rate of approximately 25, 5%.
That concludes our prepared remarks, we'd be happy to respond to questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
First question today comes from the line of Mark Fitzgibbon from Piper Sandler Your line is open.
Hey, guys good morning Happy Friday.
Good morning, Hey, good morning.
Tom just to clarify on the margin I think you said you expected to stabilize around $2 90 in the fourth quarter. So you think at that point the margin will have bottomed.
That's what our model is showing it stayed pretty stable at around the 290 level over the course of the next 12 months Mark.
Okay.
And then secondly, you mentioned in the press release.
Little bit about sort of triggering events in testing for goodwill impairment.
Thomas Lyons: Now I'll turn the call over to Tom for his comments on our financial performance. Tom. Thank you Tony. Good morning everyone. As Tony noted, our net income for the quarter was 28.5 million dollars or 38 cents per share compared with 32 million or 43 cents per share for the trailing quarter and 43.4 million or 58 cents per share for the third quarter of 2022. Transaction charges related to our pending merger with Lakeland Bank work total to 2.3 million in the current quarter or approximately 3 cents per share and 2 million dollars in the trailing quarter.
Can you explain exactly what would what a triggering event would be what the consideration would be that that would cause an interim.
Goodwill impairment tests.
I think a lot of it mark is the relative performance to the group that you see price to book multiples vary materially or price to tangible book multiples that would indicate any kind of permanent impairment.
Thomas Lyons: Excluding these merger related charges, pre tax pre provision earnings for the current quarter were 52.2 million dollars for an annualized 1.48% of average assets revenue totals 116 million dollars for the quarter compared with 118 million for the trailing quarter and 138 million for the third quarter of 2022. Please note prior year earnings to the third quarter of 2022 included an 8.6 million dollar gain on the sale of a foreclose property. Our net interest margin decreased 15 basis points from the trailing quarter to 2.96%.
Permanent said, a stronger word but near term impairment in the valuation of the company.
Okay.
And then on credit you guys were one of the few banks that showed a sequential quarter decline in problem loans, which is great. I guess I was curious are there any areas that you are paying particular attention to aside from the obvious office loans that everybody talks about any areas that you're you're sort of watching carefully or paring exposure.
Yours or things.
Things of that nature.
Our Mark Tony.
We've done I would say, we've probably spent the better part of six to nine months doing deep dives in all categories.
I can comfortably state right now that there is not any segments that were seeing that present any concern to us in fact.
Thomas Lyons: The yield on earning assets improved by 16 basis points versus the trailing quarter as floating in adjustable rate loans reprised favorably and new owned 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 reflected current market conditions, which resulted in an increase in borrowings accompanied by a decrease in deposits. Certain on interest bearing balances also moved to our interest bearing and short cash sleep product in order to obtain increased deposit insurance.
The results show that there is no systemic pressure I mean.
Any of the segments, obviously, you're familiar with that we don't have a lot of exposure in office.
As we noted.
But we're comfortable with the with the way our assets are classified at this time.
Obviously.
I always have to put the caveat, we don't know what recessions, we don't know if a bankruptcy safe place things of that nature.
Thomas Lyons: In addition, lower costing demanded savings amounts is shifted to higher costing time deposits. The average total cost of deposits increased 32 basis points from the trailing quarter to 1.74%. This brought our rising rate cycle to date beta to 29.5%. The average cost of total interest bearing liabilities increased 37 basis points from the trailing quarter to 2.50%. The prolonged inverted yield curve, ongoing deposit competition, and an increase in the attractiveness of investment alternatives continued to impact funding costs.
We're observing right now do not point to any sectors that we are a concern within our portfolio.
The only additional thing I'd offer a mark is that the nonperforming asset formation. This quarter was very small is about $2 $5 million and it's really attributable to one $3 million loan that I'm very confident there is no loss content in its a technical maturity issue.
Okay, and then last question.
Tony you've probably seen that several other banks have recently sold their insurance agency businesses at purely large gains.
I wondered if you could.
Thomas Lyons: As a result, we expect to see some continued net interest margin impressions for the balance of 2023 and currently project the margin will stabilize in Q4 at around 2.90%. Period end total loans grew $137 million driven by multi-family mortgage loan originations. Our pull through adjusted loan pipeline increased 75 million from last quarter to 1.1 billion, with a weighted average rate of 7.62% versus our current portfolio yield of 5.37%. As the quality remains strong with non-performing loans as a percentage of photo loans falling to 37 basis points and both early stage and total delinquencies improving.
Share with us your thoughts on the possibility of doing something like that whether it would make sense or not.
Well.
We.
We look at all of our businesses.
Emmanuel frequency I would say when it comes to insurance as.
As such.
Part of our business the way it links with our commercial platform or.
The rate of growth the value add that it provides to our customers.
At this time, it's not in our consideration and it's probably one of our largest growing segments.
So I think the combination of those things just just to turn it into a financial transaction I think it will be a net takeaway from our client experience and the rate of growth in our noninterest.
Thomas Lyons: Criticizing classified loans did increase slightly this corner, but we're still low at 1.7% of total loans. Net Chargers were $5.5 million or an annualized 21 basis points of average loans this quarter, bringing year-to-date net charge loss to nine basis points. The current look quarter loss was driven by a single C&I loan impacted by a strategic business shift implemented by a primary customer. The provision for credit losses on loans increased $0.6 million for the quarter to $11 million, $11 million, primarily due to a weak and economic forecast within our Cecil model.
Noninterest income.
By the way.
We've spoken in the past as many know it is our objective to increase the percentage of non interest income.
As a percentage of total revenue.
So that to US is an important piece of business that is not considered for sale right. Now do you think the profitability on that business for us market is.
Pretty strong compared to some of the sales that I've seen and I think we get a net margin of about 26%.
Thomas Lyons: As a result, the allowance for credit losses on loans increased to 101 basis points of total loans at September 30th, from 97 basis points at June 30th. Non-interesting income remains steady decreasing only $67,000 versus the trailing quarter. Excluding provisions for credit losses on commitments to extend credit and merger-related charges, non-interesting expenses consistent with the trailing quarter at $63.3 million, representing an annualized 1.8% of average assets for the current quarter, compared with 1.83% in the trailing quarter and 1.89% for the third quarter of 2022.
So that's really a business we want to continue to invest in and grow further with high growth prospects.
Makes sense. Thank you.
Your next question comes from the line of Bill Young from RBC capital markets. Your line is open.
Hey, good morning, guys how are you.
Good morning Julien.
Okay.
Just quickly on the Lakeland deal.
If I recall correctly I think the original deadline might be for the deal might be around year end. So has there been any discussions with lakeland about possibly extending <unk> deadline.
Thomas Lyons: The efficiency ratio was 54.81% for the third quarter of 2023, compared with 53.29% in the trailing quarter and 47.11% for the third quarter of 2022. Our effective tax rate, applying to 23.7% is quarter as a result of a decrease in projected tax volume income. We expect the fourth quarter effective tax rate of approximately 25.5%.
The answer is yes.
But we're hoping we don't have to go there because we are as I mentioned in my talking points with relative to the merger, which I know is on everybody's mind.
We have provided everything that the regulators need for them to finalize their decision.
At this point, we are waiting for their final decision.
Thomas Lyons: That concludes our prepared remarks. We'd be happy to respond to questions.
And we hope that we don't have to.
Unknown Executive: At this time, I'd like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.
B and a state in December where we have to consider that.
To your question is yes, we are talking about it.
Mark Fitzgibbon: Your first question today comes from the line of Mark Fitzgibbon from Piper Sandler. Your line is open. Hey guys, good morning. Happy Friday. Good morning. Tom, just to clarify, on the margin, I think you said you expected to stabilize around $290 in the fourth quarter. So you think at that point, the margin will have bottoms. That's what our model is showing. It stays pretty stable at around the $290 level over the course of the next 12 months, Mark. Okay.
It's under consideration.
Understood.
And.
Just to touch on loan growth can you just speak to the trends youre seeing in multifamily it's been a good source of growth for you the recent quarters.
Kenny and central kind of yields you are putting up on that how attractive are the spreads for that business.
Relative to let US look here I think I think we're still probably in that $1 72.
Mark Fitzgibbon: And then secondly, you mentioned in the press release, a little bit about sort of triggering events and testing for goodwill impairment. Can you explain exactly what would what a triggering event would be, what the consideration would be that would cause an interim. Goodwill impairment test. I think a lot of it Mark is the relative performance to the group. If you see price to book multiples, very materially or price-detangeable book multiples that would indicate any kind of permanent impairment, or you know, to permanence of a stronger word, but near term impairment and evaluation of the company.
Over on the spreads I would have to get back to you on that Thats whats coming to mind right now the 170 to 200 range right that's correct.
But I will tell you one of the things that Doug just.
Kind of give a little bit more insight into how we're thinking about lending.
The <unk>.
Our business model, it's always been this but it's more acute today that trends transactions or not.
Hi, favor a lot of it is relational oriented where we're looking at the composite components insurance components and other elements.
As.
As capital dollars become a little bit more.
Mark Fitzgibbon: Okay. And then on credit, you guys were one of the few banks that showed us the sequential quarter decline in problem loans, which is great. I guess I was curious. So there are any areas that you're paying particular attention to, aside from, you know, the obvious office loans that everybody talks about. Any areas that you're, you're sort of watching carefully or pairing exposures or, you know, things of that nature. Mark, Tony, we've done, I would say we've probably spent the better part of six to the nine months doing deep dives in all categories.
The availability of those dollars. So I think when we're looking at the total profitability model.
We run again, we put in we drop in there to deposits and everything else that goes with it.
And in general that spread is I would say between $1 70 to 190 I would say is a pretty good guess.
I understood.
One of them.
And maybe lastly, just to touch on funding.
I know you've said in the past.
Particularly interested in being too aggressive on promotional activity.
Mark Fitzgibbon: I could comfortably state right now that there's not any segments that we're seeing that that presents any concern to us. In fact, you know, the results show that there's no systemic pressure. I mean, in any of the segments, obviously, you're familiar with that we don't have a lot of exposure in office as we noted. But we're comfortable with the, with the way our assets are classified at this time. Obviously, you know, I always have to put the caveat.
Wholesale sources kind of makes sense for you right now from a price perspective, but I guess as you kind of look out to the budgeting for next year.
See kind of any need to make any changes in terms of our core deposit gathering.
<unk> maybe.
The change incentive structures for our bankers to kind of lead into it a little bit or to make core deposit growth more priority.
Well I think you touched on a number of things and all of that is within our thinking but as a general general direction in terms of how we're viewing funding today.
Mark Fitzgibbon: We don't know what recessions. We don't know if bankruptcies take place, things of that nature. But what we're observing right now do not point to any sectors that we have a concern within our portfolio. The only additional thing I'd offer Mark is that the non performing asset formation this quarter was very small. It's about two and a half million dollars. And it's really attributable to one three million dollar loan that I'm very confident there's no loss content. And it's a technical maturity issue. Okay.
It's still I would still characterize it as defensive in nature right, which is we're paying if you look at our cost of deposits at 174, and our total cost of funds of 2.04, it's amongst.
Some of the best in our peer group.
So we're very cognizant not to damage that value, but that being said that's why we use a defensive approach right now.
Mark Fitzgibbon: And then last question, you know, Tony, you've probably seen that, you know, several other banks have recently sold their insurance agency businesses at at fairly large gains. I wondered if you could, you know, share with us your thoughts on the possibility of doing something like that, whether it would make sense or not. Well, you know, we look at all of our businesses, you know, with an annual frequency. I would say when it comes to insurance, it's such an integral part of our business the way it links with our commercial platform, the rate of growth, the value add that it provides to our customers.
In terms of trying to maintain deposits versus being aggressive and disintermediation and have an incremental cost and damaging that that being said, we still have to grow our business and the way we're approaching that into the new year is yes. We have some targeted campaigns that we think we're not going to do that we have one going on now which is producing some decent results.
But some of our small business platform is going to be a big focus for us as we go into 'twenty four.
Commercial C&I and some of the things that we're doing in that sector and targeted and also with compensating balances on some of the loans that we have now there is a massive push from the entire organization when I say from the entire organization I mean from from our wealth Group insurance group, our commercial bank, our retail on deposits Thats the number one driver in.
Mark Fitzgibbon: That at this time, it's not in our consideration, and it's probably one of our largest growing segments. So I think the combination of those things, just to turn it into a transfer transaction, I think it would be a net takeaway from our client experience and the rate of growth in our non interest, non interest income. But by the way, you know, as you, we've spoken in the past as many know, it is our objective to increase the percentage of non interest income as a as percentage of total revenue.
Everybody's incentive plan as we move into 2024, because we all know that's the greatest challenge that we face these days.
Thank you I appreciate it I'll step back.
And again, if you would like to ask a question at Star one on your telephone Keypad. Your next question comes from the line of Michael Perito from K B W. Your line is open.
Mark Fitzgibbon: So that's how it taught us is an important piece of business that is not considered for sale right now. You think the profitability on that business for us, Mark, is pretty strong compared to some of the sales that I've seen. I think we get a net margin of about 26%. So that's really a business we want to continue to invest in and grow further with high growth prospects. Yep. Makes sense.
Hey, guys. Good morning, Thanks for taking my questions.
Mark Fitzgibbon: Thank you.
Good morning, Matt.
Apologize if I missed this but.
Are you guys able to give a little more incremental color on kind of where you're originating new commercial loans today, and just broadly Tony whats the kind of both sides of the appetite for loan growth.
Bill Young: You are next question comes from a line of billion from RBC capital markets. Your line is open. Hey, good morning guys.
In the intermediate future here I mean.
Our clients kind of receptive to the pricing raises I'm sure you guys are putting in and across the board and I guess from your perspective, just with NIM stabilizing the merger pending what are you guys kind of feel like on loan growth that that we should be thinking about.
Bill Young: How are you? Hey, just quickly on the Lakeland deal. If I recall correctly, I think the original deadline might be for the deal might be around your end. So has there been any discussions with Lakeland about, you know, possibly extending that merge deadline? Um, the answer is yes. Um, you know, but we're hoping we don't have to go there because we are, as I mentioned in my talking points with relative to the merger, which I know is on everybody's mind.
Mike I would characterize that four 4% to 6%.
It would be a good target for you to consider in your modeling.
I would say today.
It's a very interesting environment. If we on tethered are thinking we can probably grow our loans at about 15% given given all the activity and volume that we're seeing.
Bill Young: We have provided everything that the the regulators need for them to finalize their decision. And at this point, we're waiting for for their final decision. And we hope that we don't have to be in a state in the December where we have to consider that book due to your question is yes, we are talking about it and that's on the consideration.
However, we.
Our.
Our underwriting metrics of tightened.
The amount of commitments that were willing to put out there for construction has tightened relational banking as become more acute.
So transactional volume that might've been a pillar in the past does not bode today, so we're focusing our calories more on the relationships that come with deposits.
Bill Young: Understood. And just to touch on loan growth, can you just speak to the trends you're seeing in multifamily? You know, it's been a good source of growth for you, recent quarters. Um, just really essential kind of yield to pointing up on that, you know, how attractive are the rights for that business? Um, relative, let us look here, I think, I think we're still probably in that 170 to over on the spreads.
And that being said we have.
Declines from loans that that might've been acceptable from just.
From a lending perspective in the past because we're looking at it from a holistic approach and that's the focus of our company today and I think thats important, but our appetite to answer your question. The way, we're calculating it as that 4% to 6% given how we're approaching things today.
Bill Young: I would have to get back to you on that. That's what's coming to mind right now. It'll make the 170 to 200 range sense, right? But I will tell you one of the things that just as kind of give a little bit more insight into how we're thinking about lending the our our business model. It's always been this, but it's more cute today that transactions are not in high favor. A lot of it is relational oriented where we're looking at the positive components insurance components and other elements.
Got it and then do you guys have any again, sorry, if I missed it if you provided or anything but just any color on kind of where the incremental commercial loan yields are that you guys are getting on the books today.
No again last quarter I think the average.
Im sorry, the average run rate last quarter was about six and three quarters I think we're seeing like more like 7% quarter 76 Blue is the pipeline, but then you have to kind of.
Bill Young: As as as capital dollars become a little bit more. Or, you know, the availability of those dollars. So I think when we're looking at the total profitability model that we run again, we put in we drop in there to deposit and everything else that goes with it. But in general, this bread is is I would say between 170 and 190. I would say it's pretty good guess.
Bring that down a little bit to reality, so I would say probably 7% to seven of our quarters a good target range.
Okay.
And then just if we.
I appreciate the update on the merger.
If we just kind of.
Assume that the transaction goes forward how should we be.
Just and you don't have to get too specific because I'm sure you guys will post close but just wondering what kind of the investment roadmap looks like if you could maybe give us an update whether it's kind of on the technology or the people side. I mean are there any areas where have we should be kind of mindful of as we think about expense growth kind of post merger.
Bill Young: I understood. And it's one and maybe lastly just to touch on funding. I know you've said in the past, you're not, you know, particularly interesting being too aggressive on promotional activity. And, you know, wholesale forces kind of make sense for you right now from price perspective. But I guess as you kind of look out to the budgeting for next year, you see, you know, kind of any need to make any changes in terms of like core deposit gathering, you see a need, you know, maybe kind.
For for Providence.
I would say, we're going to get synergies post murdered for start and will deliver deliver on our expectation on those synergies.
But for us.
Planning for provident into future growth.
Bill Young: To change incentive structures for bankers to kind of lead into it a little bit or to make for deposit growth more priority. Thanks. Well, I think you touched on a number of things and all of that is within our or thinking, but as a general general direction in terms of how we're viewing funding today. It's still I was still characterized as defensive in nature, right, which is we're paying if you look at our cost of deposits at 1.74 and our total cost of funds at 2.04.
I would say probably the greatest investment, which I don't think is anything thats going to be monumental is going to be investment in our technology has moved forward a new platform thats going to be able to manage a commercial bank as we get into that 30% $35 billion, even higher size. That's the next steps for us.
And a lot more on data but.
That is already large.
And the works now I don't see a huge expense component on that.
Bill Young: It's amongst, you know, some of the best in our peer group. So we're very cognizant not to damage that value. That being said, that's why we use the defensive approach right now in terms of trying to maintain deposits versus being aggressive and disintermediate and have an incremental cost and damaging that. That means that we still have to grow our business and the way we're approaching that into the new year is yes, we have we have some targeted campaigns that we think we're not going to do that.
As we characterize it there is going to be some rises in some areas as some declines in other areas. How we allocate the spend more more so than the incremental spend is the way we will look at it internally.
Got it okay guys. Thanks for taking my questions I appreciate how can we have.
Thank you.
Your next question comes from the line of Emmanuel <unk> from D. A Davidson your line is open.
Bill Young: We have one going on now, which is producing some decent results. But some of our small business platform is going to be a big focus for us as we go into 24 commercial C and I and some of the things that we're doing in that sector and targeted. And also with compensating balances on some of the loans that we have now there's a massive push from the entire organization. When I say from the entire organization, I mean from from our wealth group insurance group, our commercial bank, our retail on deposits. That's the number one driver and everybody's incentive plan as we move into 2024 because we all know that's the greatest challenge that we face these days.
Hey, good morning.
In the commentary on the NIM you said your model's roughly point pointing to stable across 2024.
Bill Young: Thank you. I appreciate it. I'll step back.
What are you kind of assume in terms of rates and.
Deposit betas with that stability.
Yes.
<unk> 25 point decreases in the back half of 'twenty four there.
I think in July and September if I remember correct. The later part.
So it increases.
Decreases.
The decreases were not.
Modeling any more rate hikes to decreases in the back half of 'twenty four.
And total deposit beta is still it's still 32 range.
Unknown Executive: And again, if you would like to ask a question, it's star one on your telephone keypad.
Yes, I think we bumped the expectation a little bit for through the cycle may be more like 35% to 37% is the expectation I think is fair given that the performance lagged a little bit behind what we are projecting this quarter.
Michael Perito: Your next question comes from line of Michael Perrito from KBW. Your line is open. Hey guys, good morning. Thanks for taking my question. . Thanks for taking my questions. I appreciate it.
Up.
I am sure you talked a little bit about the deposit.
Initiatives and kind of the focus.
The company.
Should this be kind of the peak of the loan to deposit ratio at 105 or is there a comfort at this level just kind of talk about the loan to deposit ratio and its trend going forward.
We're comfortable at this level given the overall liquidity faster the bank.
Our low reliance on time deposits at this point.
Overall, the reliance on wholesale funding in terms of percentage of earning assets percentage of average assets is really just getting us back to a more traditional funding base. If you go back pre pandemic when we saw that the surge in deposits throughout the industry as a result of stimulus.
So we are not comfortable with wholesale funding, but obviously the lower cost alternatives always prepared and as Tony mentioned and we have a <unk>.
Significant plans to try and grow the commercial deposit base.
Yes.
I appreciate that and just do you have any extra color on the one commercial loan that drove net charge offs I think you've described it very briefly.
Just anything you could add there.
Yes, my intention there was to show that it was very much circumstances unique to that borrower nothing that I think you could read across to the boarder portfolio. There was a fairly heavy reliance on our primary customer that had made some strategic shifts in their need for services, which impacted the revenue stream and it was challenging to recover from.
Based on current performance, we took the right now.
Okay.
Appreciate that thank you.
Sure.
And we have a follow up question from the line of Billy Young from RBC capital markets. Your line is open.
Hey, guys just a just one quick follow up and I apologize I missed this.
Do you have what's your sense for where expenses might trend in fourth quarter.
Thinking of $64 million to $65 million range.
60, 465, perfect. Thank you very much.
Thanks, Bob.
And there are no further questions at this time, Mr. Tony <unk> I turn the call back over to you for some closing remarks.
Thank you. Thank you everyone for attending our call this quarter.
We look forward to chatting with you throughout the quarter and getting back on next time have a nice day. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Sure.
Okay.
Yeah.
Yes.
Michael Perito: Have a good weekend. Thank you.
Manuel Navas: Your next question comes from Alina, Manuel Navas from DA Davidson. Your line is open. Hey, good morning. In the commentary on the men, you say your models roughly pointing to space will across 2024. What do you kind of assume in terms of rates and deposit it as with that stability? Yeah, there's 225 point decreases in the back half of 24 there. I think in July and September. I remember correctly later part.
Manuel Navas: So it increases. Decreases. So the word we're not modeling anymore rate hikes to decreases in the back half of 24. And total deposit base still still like that 32 range. Yeah, I think we bumped the expectation a little bit for through the site, or maybe more like 35 to 37 is the expectation, I think is fair, given that the performance would lag a little bit behind what we were projecting this quarter.
Manuel Navas: I'm sure you talked a little bit about the deposit initiatives and kind of the focus of the company. Should this be kind of the peak of the loan deposit ratio at 105 or is there comfort at this level just kind of talking about the loan deposit ratio and its trend going forward. You know, we're comfortable at this level, given the overall liquidity posture of the bank. You know, we're a low reliance on time deposits at this point.
Manuel Navas: Overall, the reliance on the wholesale funding in terms of percentage of earning assets percentage of average assets is really just getting this back to a more traditional funding base. If you go back pre pandemic when we saw the surgeon deposits throughout the industry as a result of stimulus. So we are not comfortable with wholesale funding, but obviously the lower cost alternative is always prepared. And as Tony mentioned, and we have a significant plans to try and grow the commercial deposit base.
Manuel Navas: And I appreciate that.
Manuel Navas: And just give it an extra color on the one commercial loan that drove that charge off. I think you described it very briefly, but just say anything you get out there. Yeah, my intention there was just to show that it was very much circumstances unique to that borrower. Nothing that I think you could read across to the board of portfolio. There was a fairly heavy reliance on a primary customer that had made some strategic shifts in their need for services, which impacted the revenue stream. And it was challenging to recover from. So, you know, based on current performance, we took the right path. Okay, I appreciate that. Thank you. Sure.
Bill Young: And we have a follow-up question from the line of Billy Young from RBC capital markets.
Bill Young: Your line is open. Hey guys, just a just one quick follow-up and apologies I missed this. Do you have what's your sense for where expenses my trend in fourth quarter? Thinking the 64 to 65 million dollar range bill. 6465.
Bill Young: Perfect.
Bill Young: Thank you very much.
Bill Young: Thank you.
Unknown Executive: And there are no further questions at this time.
Anthony Labozzetta: Mr. Tony Labozzetta, I turn the call back over to you for some closing remarks. Thank you. Thank you everyone for attending our call this quarter. We look forward to chatting with you throughout the quarter and getting back on next time. Have a nice day. Thank you.
Unknown Executive: This concludes today's conference call. Thank you for your participation. You may now disconnect.