Q2 2024 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 incorporated second quarter earnings Conference call.
Speaker Change: 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 time simply press star followed by the number one on your telephone keypad once again star one thank you.
Speaker Change: I would now like to turn the call over to Adrian I know Duarte head of Investor Relations at Rialto. Please go ahead.
Thank you Greg Good morning, everyone and thank you for joining us for our second quarter earnings call. Today's presenters are president and CEO, Tony a lot the Zeta and senior Executive Vice President and Chief Financial Officer, and timelines before beginning their review of our financial results. We ask that you. Please take note of our standard caution as to any forward looking.
Statements that may be made during the course of today's call. Our full disclaimer is contained in yesterdays evenings earnings release, which has been posted to the Investor Relations page on our website.
It didn't stop bank now it's my pleasure. Thank you.
Speaker Change: Produce Tony lots of Zeta, who will offer his perspective on our second quarter Tony.
Thank you Adriana good morning, everyone and welcome to the Provident financial services earnings call.
Tony: Before we discuss our quarterly results I am happy to note that as of the 16th of May we closed the Provident Lakeland merger and officially welcome the Lakeland team into Provident.
Speaker Change: We'd like to congratulate and thank our team members, who have worked diligently to complete the merger.
Speaker Change: As we combine our banks and our cultures were excited by the opportunities to offer our expanded customer base access to our valuable products and services, especially those of our insurance wealth management and Treasury management businesses.
We continue to build momentum and our team is well prepared for systems integration in September.
Please bear in mind that our financial statements. This quarter reflect combined results beginning on May 16, and include one time costs related to the merger transaction.
Moving onto our quarterly results. The second quarter was characterized by steady economic growth continued high interest rates and an environment of mixed results in the banking sector.
Thanks to the efforts of the Provident team now reinforced by the by talented members from the former Lakeland Bank, we continue to build our core businesses and maintained strong credit quality.
We are on track to achieve our projected merger cost savings and we are well positioned for the future.
As expected we reported a net loss of $11 5 million or <unk> 11 per share, reflecting the impact of merger related transaction costs.
If we were to exclude these expenses earnings per diluted share would have been 44 for the quarter.
We can see that our underlying performance remains strong as our pre tax pre provision return on average assets was 147% for the second quarter compared to $1 two 8% for the trailing quarter.
While market conditions in the first half of the year constrained loan growth our fundamentals remained strong and we expect to achieve our projected growth for the second half of the year.
At quarter end, our capital is healthy and exceeded levels deemed to be well capitalized, especially following the issuance of a 225 million in subordinated notes on may nine which was well subscribed.
As part of the merger, we committed to maintain a minimum tier one leverage ratio of eight 5% and a minimum total risk based capital ratio of 11 two 5%.
At quarter end, we have exceeded these requirements with a tier one leverage ratio of 936% and a total risk based capital ratio of 11 six 6%.
Tangible book value per share was $13 nine and our tangible common equity ratio was $7 three 4%.
As such our board of directors approved a quarterly cash dividend of <unk> 24 per share payable on August 30.
During the quarter, our total cost of deposits remained relatively low at 227%.
Speaker Change: Our total cost of funds, which was further impacted by the issuance of our subordinated debt was two 5% to 6%.
Speaker Change: Overall, our net interest margin increased 34 basis points to 32, 321%.
And our first full month as a combined company our net interest margin was 338% which exceeded our expectations.
Speaker Change: Moving forward, we are optimistic about the stability and improvement to our net interest margin and expect it to be between 335% and three 4% in the upcoming quarter.
Speaker Change: Our commercial lending team closed approximately $307 million of new commercial loans during the second quarter.
Oh, no 54% of these new originations were part of our C&I lending business.
Our ratio of commercial real estate loans to total capital was 477% we projected by the end of the year. This ratio will be approximately 470%.
Our credit quality was strong for the second quarter as evidenced by our nonperforming loan ratio of only 36 basis points.
The allowance for credit losses on loans represents 1% of total loans compared to nine 8% in the trailing quarter and <unk> 99 at the end of 'twenty three.
Once again I would like to express that our strong credit quality metrics reflect the conservative underwriting culture and portfolio management standards.
We see improved activity in our combined commercial lending pipeline, which increased during the second quarter to approximately $1 $6 7 billion.
Weighted average interest rate is 753% compared to 742% in the trailing quarter the pull through adjusted pipeline, including launch pending closing is approximately $1 billion.
We remain very optimistic regarding the quality of our pipeline.
Speaker Change: Our fee based businesses performed very well despite the persistence of a hard insurance market, which has driven commercial insurance rates higher Provident protection protection plus had a great second quarter with 19% organic growth as compared to the same quarter last year and a retention rate of over one <unk>.
Hundred percent.
Favorable market conditions helped grow Beacon trust assets under management to about $4 1 billion at quarter end compared to $3 7 billion in the same quarter of last year, which.
Which improved fee income three 8% as compared to the trailing quarter for the first six months of 2020 for Beacon produced $168 million in new business compared to $107 million for the same period last year.
We are pleased by the success of our fee based businesses and are enthusiastic about the prospects of enhanced growth from our expanded customer base.
Speaker Change: As we move into the second half of 2024 as previously mentioned our attention will be on completing all aspects of the merger.
Speaker Change: Integrating our systems smoothly and becoming the preeminent community bank in our market.
We expect to achieve synergies and will deliver even more value to our customers employees and stockholders.
Speaker Change: 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, we reported a net loss for the quarter of $11 5 million or <unk> 11 per share due to merger related activity.
Tom: Total charges related to our merger with Lakeland Bancorp were $86 $9 million in the current quarter consisting of initial seasonal provisions on non PCB acquired loans and commitments to extend credit of $65 2 million transaction cost of $18 9 million and a $2 8 million loss realized on the sale of Lakeland subordinated debt from <unk>.
Evidence investment portfolio prior to the merger.
Tom: The remaining provision for credit losses on loans and commitments to extend credit was also somewhat elevated at $4 5 million for the quarter, Despite strong asset quality and a stable economic forecast.
This increase in the organic provision for loan losses was due to the development of new quantitative models for the combined bank, which resulted in changes in projected loss factors for all loan segments.
In addition, qualitative adjustment ranges will recalibrated in connection with the development of the New merged Bank models. This brought our allowance coverage ratio to 1% of total loans.
Tom: Excluding merger related charges pretax pre provision earnings for the current quarter was $70 $1 million or an annualized.
Last 147% of average assets.
Revenue increased $163 8 million for the quarter, reflecting 46 days as a combined company and our net interest margin increased to three 1%.
Tom: For the quarter. The margin included 47 basis points of purchase accounting accretion we project a NIM in the 335 to $3 four zero percent range for the remainder of 2024, increasing to around 345% over the course of 2025.
Our projections include two rate reductions in 2024, and another two rate cuts in 2025.
Regarding interest rate risk our newly combined balance sheet remains largely neutral. However, we expect little benefit on deposit costs from the first two rate cuts.
We completed a successful regulatory capital raised through the issuance of $225 million up 9% subordinated subordinated debt in the quarter, which increased funding costs.
However, the impact to the margin was partially offset by the sale of $550 million of securities acquired from Lakeland and the repayment of a similar amount of overnight borrowings and broker deposits.
Excluding $7 $91 billion of acquired loans period end total loans were essentially flat for the quarter.
Within the portfolio C&I loans increased by $90 million and CRE loans decreased by $75 million.
Our pull through adjusted loan pipeline at quarter end was $1 billion with a weighted average rate of seven 5% versus our current portfolio yield of 6.05%.
Tom: Deposits increased to $18 4 billion at June 30, including 862 billion acquired from Lakeland.
Excluding the municipal deposits that are subject to cyclical outflows in broker deposits, which were paid down with the proceeds of security sales.
Organic deposits increased $123 million for the quarter and our loans to deposits ratio decreased to 102%.
Asset quality remains strong with nonperforming loans declining to 36 basis points of total loans and total delinquencies declining to just 44 basis points of loans.
Tom: Criticized and classified loans did increase modestly but remained relatively low at two 6% of total loans.
Net charge offs were just $1 $3 million or an annualized four basis points of average loans this quarter.
Tom: With strong asset quality and a stable economic outlook, we expect future provisions to be driven primarily by loan growth and expect the coverage ratio to remain at approximately 1%.
Excluding the loss on security sales noninterest income increased to $25 million this quarter, reflecting the Lakeland conscious combination strong performance of our wealth management and insurance agency subsidiaries and an increase in bully income.
Tom: As Tony noted we are on track to achieve our targeted merger cost saves and project noninterest expenses.
Tony: Ultimately $120 million for Q3 of 2020 for declining to approximately $107 million in Q4, following our labor day core systems conversion.
Tony: Our effective tax rate this quarter was impacted by several unusual items, including merger related charges. The imposition of a two 5% New Jersey transit fee surcharge and the related to revaluation of deferred tax assets.
We currently project our effective tax rate for the remainder of 2024 to <unk> to be approximately 29, 5%.
Regarding projected 2025 financial performance, we remain on track to meet or exceed our targeted total combined merger charges of $95 million.
And projected cost saves of 35% unchanged from deal announcement.
Net interest market acquisition totaled approximately $480 million and our core deposit intangible was 498% of core deposits excluding municipal deposits.
We currently project net interest margin of approximately $3, 35% to 345% for the full year 2025, including approximately 65 basis points of purchase accounting accretion.
Tony: With fully phased in cost saves, we estimate 2025% return on average assets of approximately one 1% and return on tangible equity of approximately 15% with an operating expense ratio of approximately 175% and an efficiency ratio of approximately 52%.
That concludes our prepared remarks, we'd be happy to respond to questions.
Sure.
Speaker Change: Thanks, Tom and at this time again, just like to remind everyone star one on your telephone keypad, if you'd like to ask a question. Once again star one and we will pause just a moment to compile the Q&A roster.
Yeah.
And it looks like our first question today comes from the line of Mark Fitzgibbon from Piper Sandler Mark. Please go ahead.
Guys. Good morning, congratulations on the deal.
Speaker Change: Thanks Mark.
First I wondered if you could.
Give us a little more detail Tom on the timing of the cost synergies.
Speaker Change: So you've got about a $13 million.
Yes, $13 million difference from third to fourth quarter, we will all the cost synergies be and do you think by the end of this year.
Tom: We did.
Tom: Okay.
Okay, Great and then in what areas do you see potential revenue synergies with Lakeland area and are there any sort of early surprises on the deal.
Areas that we see revenue.
Obviously are the things I mentioned in my notes, which are to try to get more integrated.
Activity between our insurance or wealth or.
Enhance the ABL business that Lakeland has.
More treasury management functions.
Tom: Overlaid not only within the Lakeland customer base, but more broader I think all of those are elements of.
That we can.
That we can achieve some revenue enhancements and also changing changing the funding mix to try to get back to that roughly 25% on on noninterest bearing.
Tom: I think those are those are activities that we're going to be looking to do as well as grow our normal business.
Okay great.
<unk> you marked all of Lakeland loans, I guess I was curious if there's any plan to sort of sell CRE or office loans to maybe try to reduce that CRA CRE concentration some more.
I think at this time market.
There is.
There's not an active plan to sell off assets for Cree ratio, because the Cree ratio will come down naturally as we accrete.
The merger Mark that.
Tom: And it will get to levels that are more than satisfactory for us.
I think what we are doing.
I think which is a good segue from your question is we are actively managing the book and so if you see why the loan growth. This year. This quarter was a little bit flat for the year. There's also some management and there were roughly 100 plus million dollars of loans have been managed out.
No.
Barry.
I would say politely because of the fact that they add some characteristics that we didn't want to renew those loans. So it's an active management, but there is nothing that says we have to sell because we have super high concentrations in office or any sub sector I would actually say for the purpose of everyone on the call when you sub.
Our book, we're very comfortable that there is no individual concentrations that would require us to take some further action to reduce that so just to follow up on that I mean, we're very comfortable with our key lending practices underwriting standards and the rest. So in those projections that we have for the Cree ratio being managed down to a lower level. It does still consider growth in the <unk>.
Folio of approximately 5% a year.
Ed.
Okay, and then lastly, I wondered if you could share with us.
If you had a target capital ratio in mind, and maybe how you would think at some point maybe it's early.
Speaker Change: Early next year.
How you feel about stock buybacks.
Yes, the non standard conditions to the merger Mark required us at the bank level to keep a tier one leverage ratio in excess of eight 5% and a total risk based capital ratio of 11, 5%.
So kind of use those as goalposts for now and in terms of the threshold levels. The targets, obviously will be slightly above that so that we have appropriate trigger warnings in the event that we approach those limits.
Speaker Change: Yes, that's well said.
You would think that with a little buffer on the on the upside.
So buyback thoughts would kind of play into that Mark just kind of based on our expectations around capital formation are strong as Tony said Thats why we see the Cree ratio coming down naturally.
Something to consider Opportunistically, but no broad based plans and the in the current environment.
Great. Thank you.
Thank you.
Alright, Thanks, Mark and our next question comes from the line of Tim <unk>, Tim. Please go ahead.
Hey, good morning. Thank you for taking my questions. We appreciate all of the forward guidance you guys provided very helpful.
Could you discuss.
The areas that can maybe drive some upside or downside and then no if any changes to the macro environment. You know if we enter a little bit slower economic cycle here.
That could potentially impact your earnings.
Speaker Change: I will start from the business side, and then I'll, let Tom jump in probe from a rate environment and what it does to our modeling.
But the.
Things that can really drive some good upside on revenue for it would be growth obviously in the Los meeting our growth objectives for the rest of the year and with.
With a complementary funding source.
Speaker Change: Penetrating our insurance business into the legacy Lakeland portfolio I think it have a good upside impact for us and give some super growth in insurance as well as some.
Speaker Change: Penetration into Beacon space I think from Treasury management is a big thing for me because it gives us the balances required for some of that growth. So I think we're going to try to do that a little little deeper as well as enhance our SBA and ABL business and obviously the things I didn't mention but in terms of what could be a surprise in the right side as far as rates go.
I think everybody assumes probably correctly that the next move is going to be down as we talked about the balance sheet is quite neutral at this point.
We don't see us getting tremendous benefit from the first 50 basis the basis points of rate cuts, but we do see some enhancement to the margin beyond that level.
Terms of the overall business activity being slower obviously that would impede growth we'd have to look at.
Speaker Change: More closely efficiencies, we do that as a matter of course anyway, exactly and we can look at some of the funding mix some Cds.
Run off from what our pricing strategy is around those that can that can give us a little bit of a benefit as well. So it's not going to be one one item that is not one silver bullet that's going to be a number of management factors that play into us over achieving our expectations.
Okay, great that was helpful.
And now that the deal has closed and you guys have been able to talk to some of the customers on both the consumer and commercial side. What is the response been overall and are there any.
New products or services, you are able to offer them that they have.
Speaker Change: Ben.
More excited about.
Yes.
Early indication on a macro level I haven't heard anything negative. So most of it has been a positive response.
Some of the things when.
When you look at our the commercial banking side.
To date, we already have.
If I am quoting are drawn RAF correctly, roughly 14, who's our chief lending officer, roughly 14% to 16.
Referrals already from the commercial bank into the insurance group and we have a few referrals into the wealth group. So that activity has picked up and as those products are now.
Express to the new customer base that they are available to them as.
As well as the Treasury management enhancements.
And from our from our Lakeland side with obviously.
Obviously trying to to deepen the relationships into the SBA small business will play a big factor, which Lakeland had a sound platform on not only for expanding that but on the deposit gathering function.
So.
Think gelling of the excitement is there internally and externally customers are now done with the malaise of.
The delay in the merger and we're talking business.
As long as we deliver a great experience. So I think it's going to be exciting for us.
Speaker Change: Great good to hear thank you for taking my questions.
Great. Thanks.
Thanks, Tim.
And our next question comes from the line.
Billy Young with RBC capital markets. Billy Please go ahead.
Hey, good morning, guys how are you.
Good morning.
First I just wanted to echo the thanks on the deck and outlook. This morning, it's extremely helpful.
Just a follow up.
Thread from the previous question can you, maybe just to kind of expand on your thoughts on the trajectory of the core margin kind of moving forward I think in the past you've said.
Speaker Change: The core kind of stabilizes at $2 85 to $2 90 does that still hold.
We're tracking a little below that today.
And you mentioned kind of improving the CD funding mix, but you kind of see a big opportunity.
For.
The loan back book repricing up to be an opportunity for margin expansion.
You just have to reset the core expectation a little bit because the $2 87 to $2 90 was provident legacy Standalone Bank. If you remember back in March our Lakeland margin was 246 versus Providence 287, so on a blended basis. The core margin has come in.
Purchase accounting marks.
Speaker Change: So if you view it that way I would say the core piece would be about $2 70 to $2 75 purchase accounting adjustments of about 65% to 75 basis points a quarter, that's where we get in that $3 35 to $3 45 range over the course of the rest of this year through next year through 2025.
Got it. Thank you that's helpful and that 65 basis points of accretion.
From here through the end of 2025, that's all scheduled accretion is that correct.
I mean, a lot of its level yield so it could move a little bit with the cash flows, but thats our expectations.
Understood Okay. Thanks.
Moving to a separate topic can you.
You mentioned kind of Muni deposit flows had impact on <unk>.
Speaker Change: Courted royalty this quarter can you just remind us of the timing of those flows windows is typically flow back in.
Yes, it goes with the real estate tax revenue largely so we're starting to see the money come back in the beginning of August.
So that's typical when we price it we consider that we have to fund the trough with short term overnight funding or weekly funding.
Well considered and is part of the devaluation of the profitability of the relationship.
Speaker Change: And we're seeing that inflow start.
Right now and then.
<unk> flow into the beginning of August.
Great. Thank you and then just my last question just kind of more broadly.
Speaker Change: I see a 4% to 5% in the back half of the year can you just maybe comment on.
Kind of how you're feeling about.
Customer activity and sentiment.
In recent weeks, you know kind of how are they feeling where they are concerned about it seems.
Rob your peers have kind of commented that they see growth kind of materially moving up in the back half are you kind of seeing similar sentiment.
Hello.
I think as I mentioned our pipeline is.
Pull through was about $1 billion. We're certainly we're seeing some of the same things that our colleagues are seeing out in the industry.
But we have an active pipeline a lot of.
Growth reduction was some some of it was contained by Australia as we were getting our murdered applications on folks.
Lot of folks were distracted not that thats, an excuse into R. R.
The portfolio management side, and getting the <unk> down making sure that we have an understanding because of obviously the Cree overhang in the marketplace.
Speaker Change: So we did a lot of enhanced work, which which.
It took some of those distractions and we let some some run off as I mentioned, but the activity and the quality of what's in our pipeline remains strong.
From the conversations I have with our team, we're not going to make up 4% to 4% in the first half of the year, but we certainly can turn achieved four 4% ish to five what we expect if we can get these things pull through on the pipeline. So the.
Speaker Change: The amount of volume is available to us to achieve that growth is just a matter of the teams getting it closed in the second half of the year.
There is a possibility that some of this can run into the first quarter, but right now we're not expecting that I am expecting that we can get that 4% in the second half of the year.
Speaker Change: Great. Thank you for taking my questions I'll step back.
Sure. Thank you thanks.
Thanks Billy.
And our final question today comes from the line of Manuel Novelists from da Davidson Manuel. Please go ahead.
Hello, Good morning.
Sharon: This is Sharon <unk> entre menu and thank you for taking my question.
I was wondering what is the current tenant retention look like across the combined company.
Talent retention.
Great question I think the talent retention across the company is exceptional I think we.
There hasnt been any any major surprises youre always going to have.
One offs for people advanced in their career moving something but what I.
The way I would characterize this is that the.
The executive teams and the senior management teams are.
Working very well together and collaboratively cultures.
Our fusing nicely.
And as a byproduct of that.
There is no subterfuge or an environment that is that's toxic and people enjoy being here I think we our retention rates are really high and more importantly are not more importantly, as importantly, our continued attraction of new talent is pretty robust. So I'm feeling really strong about the culture and our ability.
80 to attract and retain talent.
Sharon: Okay.
That's great to hear thanks again for taking the question.
Sharon: Thank you.
Thanks Sharon.
And that concludes our Q&A session. So with that I would like to turn the call back over to Tony <unk> for closing comments, Tony the floor is yours.
Great. Thank you everyone for your questions and for joining the call. We look forward to speaking to you. All again next time have a great weekend and enjoy your summer. Thank you.
Yes.
And ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
Sharon: Yes.
Okay.
Sharon: Yes.
Yes.
Okay.
Sharon: Okay.
Sharon: Thank you.
Okay.
Sharon: Yes.
Yes.
Thank you.
Okay.
Yes.
Okay.
Sharon: Yes.
Okay.