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spk00: Again, press the star one. Thank you. Adriano Duarte, Investor Relations Officer, you may begin your conference.
spk01: 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 Labazzetta and Senior Executive Vice President and Chief Financial Officer Tom Lyons. Before beginning the review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today's call. Our full disclaimer is contained in last night's earnings release, which has been posted to the investor relations page on our website, providence.bank. Now, it's my pleasure to introduce Tony LaBazzetta, who will offer his perspective on our third quarter. Tony?
spk03: Thank you, Adriano. Good morning, everyone, and welcome to the Providence 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 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. As such, we've reported earnings of $0.38 per share, an annualized return on average assets of 0.81%, and a return on average tangible equity of 9.47%. Excluding merger-related charges, our core pre-tax, pre-provision 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%. As such, our board of directors approved a quarterly cash dividend of 24 cents 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 customers seeking higher yielding investment alternatives in this environment. Our rising rate cycle-to-date deposit data 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 third quarter. Payoffs 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 Cree lending. As part of our normal pre-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. 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%. 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 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 business has performed well. Despite a hardening 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. Beacon Trust performed in line with expectations as conditions in the financial markets continue to remain volatile. The income remains stable despite the reduction in assets under management, which was due in part to market conditions. Beacon's investment performance compares favorably to the applicable benchmarks. With respect to our previously announced merger with Lakeland Bancorp, 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 team 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 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?
spk04: Thank you, Tony, and good morning, everyone. As Tony noted, our net income for the quarter was $28.5 million, 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 Bancorp totaled 2.3 million in the current quarter or approximately three cents per share and $2 million in the trailing quarter. Excluding these merger related charges, pre-tax pre-provision earnings for the current quarter were $52.2 million for an annualized 1.48% of average assets. Revenue total is $116 million 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 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 2.96%. The yield on earning assets improved by 16 basis points versus the trailing quarter, as floating and adjustable rate loans repriced favorably, and 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 reflected current market conditions, which resulted in an increase in borrowings accompanied by a decrease in deposits. Certain non-interest-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 balance has 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 increasing 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 2.90%. Period end total loans grew $137 million, driven by multifamily mortgage loan origination. 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%. Asset quality remains strong, with non-performing loans as a percentage of total loans falling to 37 basis points, and both early-stage and total delinquencies improving. Criticized and classified loans did increase slightly this quarter, but were still low at 1.7% 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 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, primarily due to a weakened economic forecast within our CECL model. 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-interest income remained steady, decreasing only $67,000 versus the trailing quarter. Excluding provisions for credit losses on commitments to extend credit and merger-related charges, non-interest expense was 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. 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 declined to 23.7% this quarter as a result of a decrease in projected taxable income. we expect a fourth quarter effective tax rate of approximately 25.5%. That concludes our prepared remarks. We'd be happy to respond to questions.
spk00: 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. Your first question today comes from the line of Mark Fitzgibbon from Piper Sandler. Your line is open.
spk02: Hey, guys. Good morning. Happy Friday.
spk00: Hey, good morning.
spk02: 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 bottomed?
spk04: 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.
spk02: Okay. 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 a triggering event would be, what the consideration would be that would cause an interim goodwill impairment test?
spk04: I think a lot of it, Mark, is the relative performance to the group. If you see price to book multiples vary materially or price to tangible book multiples, that would indicate any kind of permanent impairment or permanent is a stronger word, but near-term impairment in the valuation of the company.
spk02: OK. 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're paying particular attention to, aside from the obvious office loans that everybody talks about, any areas that you're sort of watching carefully or pairing exposures or things of that nature?
spk03: Mark, this is 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 could comfortably state right now that there's not any segments that we're seeing that present 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. um but we're comfortable with the with the way our assets are classified at this time um obviously you know i always have to put the caveat 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 we have a concern of 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
spk04: And it's really attributable to one $3 million loan that I'm very confident there's no lost content in. It's a technical maturity issue.
spk02: Okay. And then last question. Tony, you've probably seen that several other banks have recently sold their insurance agency businesses at fairly large gains. I wondered if you could share with us your thoughts on the possibility of doing something like that, whether it would make sense or not.
spk03: Well, we look at all of our businesses 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, 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 financial transaction, I think will be a net takeaway from our client experience and the rate of growth in our non-interest income. But by the way, as 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.
spk04: I 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.
spk02: Makes sense. Thank you.
spk00: Your next question comes from a line of Billy Young from RBC Capital Markets. Your line is open.
spk05: Hey, good morning, guys. How are you?
spk00: Morning, Billy.
spk05: Hey, 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, you know, possibly extending that merger deadline?
spk03: The answer is yes. 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, we have provided everything that the regulators need for them to finalize their decision. And at this point, we're waiting for their final decision. And we hope that we don't have to, be an estate in December where we have to consider that. But to your question is, yes, we are talking about it and that's under consideration.
spk05: 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. Just kind of sense what kind of yields you're putting up on that. You know, how attractive are the spreads for that business?
spk03: um relative let us look here i think i think we're still probably in that 170 to over on the spreads i would have to get back to you on that that's what's coming to mind right now i think the 170 200 range sounds right that's correct but but i will tell you one of the things that like just as uh kind of give a little bit more insight into how we're thinking about lending um the the Our business model, it's always been this, but it's more acute today that transactions are not in high favor. A lot of it is relational oriented where we're looking at deposit components, insurance components, and other elements as capital dollars become a little bit more, 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 deposits and everything else that goes with it. But in general, the spread is, I would say between 170 and 190, I would say is a pretty good guess.
spk05: I understood. And I just want to, and maybe lastly, just to touch on funding. I know you've said in the past, you're not, you know, particularly interested in being too aggressive on promotional activity. and you know wholesale sources kind of make sense for you right now from price perspective but i guess as you kind of look out into the budgeting for next year you see you know kind of any need to make any changes on in terms of like core deposit gathering you see a need you know maybe kind of to change incentive structures for bankers to kind of lean into it a little bit or to make for deposit growth more priority thanks
spk03: Well, I think you touched upon a number of things, and all of that is within our thinking. But as a general direction in terms of how we're viewing funding today, I would still characterize it as defensive in nature, right? If you look at our cost of deposits at 1.74 and our total cost of funds at 2.04, it's amongst the best in our peer group. So we're very cognizant not to damage that value. that being said that's why we use a defensive approach right now um in terms of trying to maintain deposits versus being aggressive and and disintermediating and having incremental costs 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 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 24. Commercial, CNI, 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 our wealth group, insurance group, our commercial bank, our retail. on deposits. That's the number one driver in everybody's incentive plan as we move into 2024, because we all know that's the greatest challenge that we face these days.
spk05: Thank you. I appreciate it. I'll step back.
spk00: And again, if you'd like to ask a question, it's star 1 on your telephone keypad. Your next question comes from the line of Michael Perito from KBW. Your line is open.
spk07: Hey, guys. Good morning. Thanks for taking my questions. Good morning. 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, what's the kind of both sides of the appetite for loan growth in the intermediate future here? I mean, I guess our client's kind of receptive to The pricing raises, I'm sure you guys are putting it in across the board. And I guess from your perspective, just with NIMS stabilizing, the merger pending, what do you guys kind of feel like on loan growth that we should be thinking about?
spk03: Mike, I would characterize that 4% to 6% would be a good target for you to consider in your modeling. I would say today, it's a very interesting environment. If we untethered our thinking, we could probably grow our loans at about 15% given all the activity and volume that we're seeing. However, our underwriting metrics have tightened. The amount of commitments that we're willing to put out there for constructions has tightened. Relational banking has become more acute. you know transactional volume that might have been a filler in the past is not bold today so if uh we're focusing our calories more on the relationship to comas deposits um and and that being said you know we have you know declined some loans that that uh might have been acceptable from just a 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 that's important but Our appetite, you know, to answer your question, the way we're calculating it is that 4% to 6% given how we're approaching things today.
spk07: Got it. And then do you guys have any – and again, sorry if I missed it, if you provided it already, but just any color on kind of where the incremental commercial loan yields are that you guys are getting on the books today?
spk04: Yeah, last quarter I think the average on – I'm sorry, the average on-rate last quarter is about six and three quarters. I think we're seeing more like seven and a quarter.
spk03: Seven, six, two is the pipeline, but then you have to kind of bring that down a little bit to reality. So I would say probably seven to seven and a quarter is a good target range. Yep.
spk07: Okay. And then just, you know, if we appreciate the update on the merger, if we just kind of assume that the transaction goes forward, how should we be, I just, and you don't have to get too specific, so I'm sure you guys will, you know, post-close, but just wondering what kind of the investment roadmap looks like, if you can maybe give us an update, whether it's kind of on the technology or the people side, and I mean, are there any areas that we should be kind of mindful of as we think about expense growth kind of post-merger for Provident?
spk03: I would say we're going to get synergies post-merger for for start and will deliver on our expectation on those synergies. But for us, you know, planning for Provident and the future growth is, I would say, probably the greatest investment, which I don't think is anything that's going to be monumental, is going to be investment in our technology as we move forward, a new platform that's 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 on data but that that is already largely in the works now i don't see a huge expense component on that but as you as we characterize it there's going to be some rises in some areas and some declines in other areas so 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 uh taking my questions appreciate it have a good weekend
spk07: Thank you.
spk00: Thank you. Our next question comes from the line of Manuel Navas from DA Davidson. Your line is open.
spk06: Hey, good morning. In the commentary on the NIM, you say your model's roughly pointing to stable across 2024. What do you kind of assume in terms of rates and deposit betas with that stability?
spk04: Yeah, there's the 225 point Decreases in the back half of 24 there. I think in July and September, if I remember correctly. You said increases? Decreases. Decreases, okay. So we're not modeling any more rate hikes. Two decreases in the back half of 24. And total deposit data is still like that 32 range? Yeah, I think we bumped the expectation a little bit for through the cycle, maybe more like 35 to 37 is the expectation. I think it's fair given that the performance would lag a little bit behind what we were projecting this quarter.
spk06: I'm sure, you know, 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 to deposit ratio at 105? Is there comfort at this level? Just kind of talk about the loan-to-deposit ratio and its trend going forward.
spk04: You know, we're comfortable at this level, given the overall liquidity posture of the bank. You know, we have a 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 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 alternative is always preferred. And as Tony mentioned, we have significant plans to try and grow the commercial deposit base.
spk06: And I appreciate that. And just do you have any extra color on the one commercial loan that drove net charge-offs? I think you described it very briefly, but just anything you could add there.
spk04: 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 border 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.
spk00: And we have a follow-up question from the line of Billy Young from RBC Capital Markets. Your line is open.
spk05: Hey, guys. Just one quick follow-up, and apologies that I missed this. Do you have – what's your sense for where expenses might trend in the fourth quarter? I think in the $64 million to $65 million range, Bill. $64 million to $65 million? Perfect. Thank you very much. Thank you. Thanks, Bill.
spk00: And there are no further questions at this time. Mr. Tony Labazzetta, I turn the call back over to you for some closing remarks.
spk03: 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.
spk00: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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