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spk02: Thank you for standing by. My name is Alex. I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services Incorporated First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, 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. If you would like to withdraw your question, press star 1 again. I would now like to turn the call over to Adriano Duarte, Investor Relations Officer. Please go ahead.
spk00: Thank you, Alex. Good morning, everyone, and thank you for joining us for our first 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 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 yesterday evening's earnings release, which has been posted to the investor relations page on our website, provident.bank. Now, it's my pleasure to introduce Tony LaBazzetta, who will offer his perspective on the first quarter. Tony.
spk03: Thank you, Adriano. Good morning, everyone, and welcome to the Provident Financial Services earnings call. Before I go on to discuss the results for the quarter, I am delighted to say that as of the 11th of April, we have received all regulatory approvals to complete our merger with Lakeland Bancorp. We are grateful for the efforts of the members of our team and the Lakeland team who worked tirelessly to achieve this milestone. and who continue to work diligently to plan for the merger and integration of our two exceptional banks. We expect to complete the merger this quarter promptly following the subordinated debt raise that is a condition to close. This merger will bring together two high-performing institutions with like-minded cultures, an unwavering commitment to the employee and customer experience, and a dedication to excellence. The scale and strong financial performance of our combined organizations will allow us to better invest in our future, compete for market share in the highly attractive and densely populated New Jersey, New York, and Pennsylvania markets, and serve our customers and communities while creating value for our shareholders. It will further aid us in attracting and retaining top talent and providing even better technological solutions for our customers and employees. We expect that Providence' two fee-based business lines, insurance and wealth management, will augment the broad product and service offerings available to the Lakeland Bank customers. Providence will also bring its strength in treasury management, while Lakeland brings its capabilities in healthcare and asset-based lending to our combined institutions. Both institutions have talented management teams and boards and important past experience navigating mergers, and whose joint skill sets will bring even greater strength to our combined talent pool. Moving on to our quarterly results, the first quarter was characterized by continued economic growth, stubbornly high interest rates, and persistently difficult environment for the banking sector. Thanks to the efforts of the Provident team, our customer-centric culture, and robust risk management, we have performed very well. Providence produced strong financial results this quarter, which once again demonstrates the strength and discipline of our management team. We reported earnings of 43 cents per share, an annualized return on average assets of 0.92%, and a return on average tangible equity of 10.4%. Excluding merger-related charges, our pre-tax, pre-provision return on average assets was 1.28% for the first quarter. At quarter end, our capital is strong and exceeded levels deemed to be well capitalized. Tangible book value per share remains steady at $16.30, and our tangible common equity ratio improved to 9.05%. As such, our board of directors approved a quarterly cash dividend of 24 cents per share, payable on May 31st. During the quarter, our average deposits, excluding broker deposits, increased approximately 3% annualized as compared to the trailing quarter. And our total cost of deposits was impressive at 2.07%. The total cost of funds grew nine basis points to 2.32%, which compressed our net interest margin five basis points. Our commercial lending team closed approximately 275 million of commercial loans during the first quarter. As expected, commercial loan payoffs increased $77 million to $173 million when compared to the trailing quarter. Our credit metrics continued to improve in the first quarter, and the economic forecast in our CECL model modestly improved, resulting in a reduced provision for credit losses. We continue to maintain prudent underwriting and portfolio management standards, particularly in our CRE lending portfolio. Furthermore, Our Crete portfolio is comprised of well-diversified exposure levels concentrated within favorable asset classes. Overall, our total commercial loan portfolio remained relatively flat. However, we had good productivity in our C&I lending, which grew approximately $72.1 million, or 11.5% annualized for the quarter. In addition, our construction loans grew approximately $58.2 million, or 8.9% annualized, due to funding of existing commitments. The pull-through in our commercial loan pipeline during the first quarter was in line with our expectations, and the gross pipeline remained steady at approximately $1.1 billion. The pull-through adjusted pipeline, including loans pending closing, is approximately $561 million, and our projected pipeline rate is 7.46%. We remain optimistic regarding the strength and quality of our pipeline. Our fee-based business businesses performed exceedingly well. Despite the continuation of the hard insurance market, Profit and Protection Plus had a strong first quarter, which resulted in a 17.4% increase in operating profit as compared to the same quarter last year. Better market conditions helped increase Beacon Trust assets under management to about $4 billion at quarter end, which helped grow fee income 9.4% as compared to the trailing quarter. As we move further into 2024, our attention will, of course, be on completing all aspects of the merger and becoming the preeminent community bank in our market. We will also focus on growing our business lines with an emphasis on deposit growth, achieving operational synergies and other revenue enhancement opportunities resulting from our merger. Now, I will turn the call over to Tom for his comments on our financial performance. Tom? Thank you, Tony. Good morning, everyone.
spk04: As Tony noted, our net income for the quarter was $32.1 million, or 43 cents per share, compared with 27.3 million, or 36 cents per share, for the trailing quarter, and 40.5 million, or 54 cents per share, for the first quarter of 2023. Transaction charges related to our pending merger with Lakeland Bancorp totaled 2.2 million in the current quarter, or approximately 3 cents per share, and 2.5 million in the trailing quarter. Including these merge-related charges, pre-tax, pre-provision earnings for the current quarter were $44.9 million, or an annualized 1.28% of average assets. Revenue totaled $114.5 million for the quarter, consistent with $114.7 million for the trailing quarter, but a decrease of $130.5 million for the first quarter of 2023. Our net interest margin decreased five basis points in the trailing quarter to 2.87%. The yield on earning assets improved by two basis points versus the trailing quarter. However, this was more than offset by an increase in the interest-bearing funding costs. Increased interest expense reflected current market conditions and funding requirements, which resulted in an increase in average borrowings and increased deposit costs. The average total cost of deposits increased 12 basis points in the trailing quarter to 2.07%. This is a further deceleration from 21 basis points in the trailing quarter But the increase brought our rising rate cycle to date total deposit cost data to 35.8%. The average cost of total interest bearing liabilities also increased 9 basis points from the trailing quarter to 2.80%. As the prolonged inverted yield curve and ongoing deposit competition continue to impact funding costs. We expect deposit costs to continue to stabilize over the next several quarters. Period end total loans decreased $31 million as increases in C&I, construction, and multifamily mortgage loans were more than offset by decreases in CRA, residential mortgage, and consumer loans. This was an expected decline from strong growth in the trailing quarter, as several loan repayments originally expected to occur last year were pushed out into the current quarter. Our pull-through adjusted loan pipeline at quarter end was $561 million with a weighted average rate of 7.46%, versus our current portfolio yield of 5.51%, and we continue to project full-year net loan growth of 4 to 5%. Asset quality remains strong, with non-performing loans declining to 44 basis points of total loans and criticized and classified loans representing 2.1% of total loans. Net charge-offs were just $971,000 on annualized 4 basis points of average loans this quarter. The provision for credit losses on loans decreased to $200,000 for the quarter to a modestly improved economic forecast within our CISO model. As a result, the allowance for credit losses on loans decreased 98 basis points of total loans as of March 31st from 99 basis points as of December 31st. Non-interest income increased to $21 million this quarter. Insurance agency income increased $2 million versus the trailing quarter as a result of new business growth and the cyclical first quarter recognition of contingency income. Wealth management income also increased $645,000 versus the trailing quarter, as assets under management grew to $4 billion. Excluding provisions for credit loss inside commitments to extend credit and merger-related charges, non-interest expense decreased to $69.6 million for the quarter, even after including an additional $195,000 special FDIC assessment. Our effective tax rate was 25.3% for the quarter, aided by the lapse of the New Jersey Corporation business tax surcharge. We currently project our 2024 effective tax rate to approximate 25.5%. Regarding post-Lakeland merger projected financial performance, we will provide enhanced estimates and additional pro forma and projected combined company financial metrics in the coming weeks. As I'm sure you can appreciate, we are somewhat limited in our disclosures ahead of the upcoming subordinated debt offering. However, we can offer the following general insights into the combined company's expected performance. Total combined company merger charges of $95 million and projected cost saves of 35% remain unchanged from deal announcement. Increases in interest rates have brought the estimated net interest marks to approximately $540 million and increased estimated core deposit intangibles to 3.25% of core deposits. As a result, we currently project a combined company net interest margin of approximately 3.25%, including approximately 65 basis points of purchase accounting accretion. With fully-saved and cost-saved, we estimate 2025 return on average assets of approximately 1.10% and return on tangible equity of approximately 15.25%, with an operating expense ratio of approximately 1.75% and an efficiency ratio of approximately 52%. That concludes our prepared remarks. We'd be happy to respond to questions.
spk02: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And your first question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.
spk07: Hey guys, good morning. Tom, just to clarify, so you said once the deal's closed, you're going to sort of provide an update with deal marks and accretion numbers. Are you planning to do a call for that, or are you planning to put that out in a slide presentation, or what's your plan?
spk04: I think both of those will happen, Mark. The expectations will do some form of investor day post-deal to describe the forward-looking performance expectations.
spk07: Okay. And any update at all on timing now that you've gotten all the approvals?
spk03: Yeah, I think the timing right now is probably between the 10th and the 15th of May is when we're aiming to get the deal closed.
spk07: Okay, great. And then could you share with us AUM and AUA at quarter end and maybe, you know, how flows looked in the wealth management at Beacon?
spk04: Yeah, AUM was $4 billion, $30 million at the end of the quarter. Flows were actually a little bit negative. We had about 77 million in new inflows and about 83 million in net outflows. So market appreciation goes with the rest of the increase.
spk07: Okay, great. And then it looked like you closed about 57% of your pipeline as of 12-31. Is that sort of what we should sort of expect going forward from a pull-through rate, Tony?
spk03: I would suspect so. I think you can still aim at that four or five percent loan growth for the year. I think the, you know, we had a good closing in the fourth quarter, which obviously, you know, drained some of that activity and the pipeline is starting to rebuild now. I think it's still safe to say that about 50 to 60% pull through rate.
spk04: Well, actually, we were a little conservative in the estimates here. We pulled back the expected closing pipeline. That's where you get the 561Million versus the 1.09Million or 1.08Million, I think, in gross pipeline. So we're down to a projection for the current quarter of about 39%. This quarter? Yeah. But longer term, you're right, typically where we are is in the 50 kind of range.
spk08: Great. Thank you.
spk02: Your next question comes from the line of Billy Young with RBC. Please go ahead.
spk05: Hey, good morning, Dallas. How are you? First, just to clarify, Tom, the comment on the combined company NIM of 325, is that what we should be expecting for the first full run rate quarter in 3Q?
spk04: You know, every number I gave is a preliminary estimate, all very dependent on where the marks land at deal closing. So that assumed the marks that I disclosed. And yeah, that would be the first quarter of full closing, I guess Q3, if the assumptions hold true.
spk05: Got it. Understood. Thank you. And then, I know you had commented that you expect deposit costs to stabilize over the next few quarters. But can you just give us a comment on maybe what you're seeing in the deposit pricing environment today across your markets? You know, we've heard a few mixed messages from your peers about pricing getting a little more competitive as of late. Is that kind of what you're seeing? And what are your expectations if rates stay higher for longer as we progress through 2024?
spk04: Yeah, we're not feeling that same pressure right now. Through the cycle to date, beta is about 35.8%, or we modeled the terminal beta of about 37.1 ahead of the first rate cut. So we feel like the margin is going to continue to, you know, standalone company margin, which continue to stabilize in the 3, in the 285 to 290 range.
spk03: Yeah, so far we've been holding steady on our pricing. We haven't seen those competitive, you know, pressures. And we've been holding steady in terms of our deposit flows. I mean, if you look at our activity, we haven't seen, we see very little deposit account closures. More of our deposit, I would characterize it that we're seeing non-interest bearing moving into the interest bearing classes, which is affecting our cost of deposits more so than deposits leaving and having to be replaced with external funds. So I think that's why we're saying we think it's going to hold steady.
spk04: Yeah, in terms of higher prolongability, I don't think it has a dramatic impact on us. I know you're aware that we've managed to a pretty neutral interest rate risk position, slightly asset sensitive at this point. And given that about 27% of our deposit base is sub 350, we don't see a lot of benefit in the initial rate cuts, at least we're conservatively modeling that way. I think the effective beta we're modeling is about 10% on the overall deposit base for the first couple of cuts. So we shouldn't see a dramatic shift if rates hold.
spk05: Got it. Thank you for that. And just moving to a separate topic, I know obviously credit quality has been relatively pristine for you guys over the last several quarters. But do you have any updated thoughts on kind of where you'd like to maintain reserve levels moving forward? particularly following the Lakeland close. Do you see the need to build ratios longer term, you know, with a bigger balance sheet?
spk04: Thanks. Really all model-driven. I don't expect a change. If anything, I would think that the coverage ratio would come in a bit post-acquisition.
spk03: I mean, you know, when we're looking at Lakeland's portfolio, it kind of emulates ours in terms of credit quality. So that expectation is that we would remain constant.
spk05: Got it. Thank you for taking my questions, guys. Thank you.
spk02: Your next question comes from the line of Tim Switzer with KBW. Please go ahead.
spk01: Hello, Tim. I think your line is unmuted.
spk06: Good morning, Tim. You might be on mute.
spk02: All right, since we're not hearing anything, we will now move to the next question. So the next question we have comes from the line of Manuel Navas with DA Davidson. Please go ahead.
spk06: Hey, good morning. Could you speak a little bit about the balance side or the volume side of deposit growth channels, just kind of where you're going to see improvement there? You talked about in the quarter that there was some payoff of brokerage and there was some beauty there.
spk03: outflows uh but just kind of where you expect to to see deposits inflows going forward so if you look at this quarter i think the the like like i mentioned earlier the there wasn't any account closure activity that was of no most of the uh dynamics were normal opera normal activity in our in our non-expiring accounts which is cash cash going flowing out for whatever business purposes and some disintermediation going into other accounts where we're seeing the growth moving forward and we're experiencing some of that we're observing it is largely in the business banking side so we're seeing a lot of you know compensating balances and things of that nature um we're also you know the municipal accounts should flow back in as we move forward and we have all the targeted activities that we're doing to deepen the share with our existing customers as well as obtaining new ones as well. So that's where we expect it to be. However, I do think it'll still represent a challenge for us moving forward because we expect the lending growth levels to go back to their normal course. And so you'll have that little bit of a gap as we move forward.
spk06: I appreciate that. And just on a separate topic, I just wanted to confirm The numbers so far with the deal do not include revenue synergies at the moment? That's correct.
spk04: Correct.
spk06: And that would be helpful with the insurance business and with ABL and the things you highlighted at the beginning.
spk04: Yeah, we're excited about the opportunities there, but we have not included those in our model. That's great.
spk06: That's great. Looking forward to hearing that update. Thank you.
spk04: Thanks.
spk02: All right, for the last question, we have Tim Switzer with KBW. Please go ahead.
spk08: Hey, sorry about that, guys. My headset messed up. Hey, good morning. Good morning. Thank you for all the updated financial impact. Do you guys have a projection on where capital levels will end up at the end of Q2 once you guys close the deal? particularly TCE and the total regulatory capital ratio.
spk04: Yeah, I don't know if we can go into much more detail than we already disclosed, Tim. I can assure you that there'll be a comfortable cushion over the required limits that we agreed to as part of the nonstandard conditions.
spk08: Okay. Are you able to provide any kind of framing around if rates continue to rise, how that would impact Um, capital levels, and then maybe some of the other, you know, the purchase accounting you provided.
spk04: Yeah, I guess all I can, I can say is, I don't have a sensitivity analysis in front of me, but rates are up to 5 years, about 60 basis points higher. Then then deal announcement, and you can kind of do a ratio and figure out what change versus there. I think we're about 400M at deal announcement. We're up to 540 now. So you could straight line it that way.
spk08: Okay, and that purchase accounting, the 65 basis points, was that the number with rates at the end of the quarter or as of like this week? Current rates. Okay, great. And have you guys gotten any indications yet on where pricing on the sub-debt raise could fall, a range or something?
spk04: We really can't speak on anything on the offering until it happens to us.
spk08: Okay, that's understood. And the last question I have is, historically, you guys have done a really good job of keeping your efficiency ratio pretty low compared to the industry. 52% efficiency ratio in 2025. Over the long term, as you combine these two companies, where do you think the efficiency ratio could land over the long term?
spk03: Well, that efficiency ratio just combines our current earning power, right? I think if you look at what happened to the efficiency ratio over the last 12 to 18 months, it's been more the compression in NIM and the revenue drivers. So as those things get back to normal, we expect that the efficiency ratio will continue to improve downward from where it is on a pro forma basis.
spk04: Yeah, I guess you'd have to figure what the projected margin expansion is beyond the 325 and continue to maintain that roughly 175 expense ratio to average assets.
spk08: Okay, great. Thanks for taking my questions, and congrats on getting the final approvals.
spk04: Thank you very much. Thank you, Jeff.
spk02: That concludes our Q&A session. I will now turn the conference back over to Tony Labuzetta for closing remarks.
spk03: Thank you, everyone, for your questions and for joining the call. I'd like to once again thank the Providence and Lakeland teams for the successful merger approval, and I think I speak for everyone when I say that we can move forward into 2024 with optimism and vigor. We look forward to talking to you all throughout the quarter and speaking to you all again next time. Have a great weekend.
spk02: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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