Provident Financial Holdings Inc (PROV) 2025 Q1 法說會逐字稿

Thank you for standing by. I would like to welcome everyone to the Provident Financial Services Inc. Third quarter earnings conference call. I would now like to turn the call over to Adriano Duarte the industrial relations officer. Please go ahead, sir.

Thank you, [Dustin]. Good morning, everyone. And thank you for joining us for our third quarter earnings call. Today's presenters, our President and CEO Anthony Labozzetta and Senior executive Vice President and Chief Financial Officer, Thomas Lyons. Before beginning their review of our financial results, we ask that you please take note of our standard question as to any forward-looking statements that may be made during the course of today's call.

Our full disclaimers 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 Anthony Labozzetta who will offer his perspective on the third quarter, Anthony?

Thank you, Adriano and welcome everyone to the Provident financial services earnings call. Before we discuss our quarterly results, I am pleased to announce that as of September 3rd, the conversion of Lakeland Bancorp, Inc. core system was completed and we are now operating as a fully united organization.

Our cultures are combining well and we have successfully retained virtually all legacy Lakeland customers.

We are grateful to all the team members whose hard work and diligent preparation allowed us to have a smooth systems integration.

We are already seeing the benefits of the merger through cost savings expansion in our margin and more revenue enhancement opportunities. And we are excited to carry this momentum into 2025.

Moving on to our quarterly results. The third quarter was characterized by stronger than expected economic growth. The first interest rate cut in more than four years and an optimistic outlook for the banking sector. Despite weak loan demand and higher deposit costs, the Provident team achieved solid core profitability highlighted by core margin expansion growth in the loan pipeline.

Significant contributions from our fee based businesses and improved operating efficiency. During the quarter, we reported net earnings of $46.4 million or $0.36 per share on an annualized adjusted return on average assets of 0.95% and a return on average tangible equity of 14.53%.

Our adjusted pre tax pre provision return on average assets was 1.48% for the third quarter.

As we move forward, we expect to continue to leverage synergies and further enhance earnings going into 2025. At quarter end, our capital is healthy and exceeded levels deemed to be well capitalized.

Our tangible book value per share increased 4.5% to 13.66%.

And our tangible common equity ratio was 7.68% compared to 7.34% for the trailing quarter.

As such, our board of directors approved a quarterly cash dividend of $0.24 per share payable on November 29th. During the quarter, our average cost of total deposits increased nine basis points to 2.36%.

Our deposits grew by 22 million this quarter largely in short term certificates of deposits.

Our total cost of funds increased six basis points to 2.62% and remains favorable. Relative to our peer group. Overall, our net interest margin increased 10 basis points to 3.31% and we expect to see continued improvement over the next several quarters.

During the third quarter, our commercial lending team closed approximately 489 million of new commercial loans.

We experienced approximately 227 million in loan payoffs resulting in a net growth of about 39 million.

This quarter's production consisted of 35% commercial real estate, 43% in commercial and industrial lending and 22% in specialty lending. Despite a slight deterioration in nonperforming loans, primarily due to one commercial real estate credit for which we anticipate a near term resolution with no expected loss. Our credit quality remains strong for the third quarter as evidenced by our nonperforming loan ratio of 47 basis points.

We do not see any systemic weakness in our loan portfolio and remain confident in our underwriting and portfolio management standards. This is further supported by lower levels of net charge offs. Relative to our peer group, we have seen an increase in our total loan pipeline which grew during the third quarter to approximately 2 billion.

The weighted average interest rate is 7.18% compared to 7.53% in the third quarter to pull through adjusted pipeline including loans pending closing is approximately 1.2 billion. We are optimistic regarding the strength and quality of our pipeline and as such, we expect good growth over the next two quarters.

This quarter. Provident fee based businesses performed very well. Provident protection plus had 13% organic growth in the third quarter as compared to the same quarter last year, which was the highest third quarter growth rate in its history. In addition, it has 16% organic growth year-to-date and its retention rate was 99%. Even as insurance rates continue to rise.

We can trust assets under management grew by 4% for the quarter to a record high 4.2 billion which represents a 10% year-to-date growth. This growth was driven largely by good investment performance. And as a result, the income improved 9% as compared to the third quarter of 2023 as we move towards the end of the year.

We are increasingly optimistic about the prospects for future performance as we anticipate a more favorable operating environment growth in our business lines, continued revenue enhancement opportunities, strong credit quality and improving operating efficiency which will help us deliver even more value to our customers employees and stockholders.

Now I will turn the call over to Tam for his comments on our financial performance. Tam.

Thank you Anthony and good morning everyone.

As Anthony noted, we reported net income of $46.4 million or $0.36 per share for the quarter. Excluding charges related to our merger with Lakeland Bancorp Inc. Core earnings were 57.7 million in the current quarter or [0.40] per share with a core ROA of 95 basis points.

Further adjusting to the amortization of intangibles. Our core return on average tangible equity was 14.53% for the quarter. Excluding merger related charges. Pretax pre provision earnings for the current quarter were $90.1 million or an annualized 1.48% of average assets.

Revenue increased to $210.6 million for the quarter. Reflecting our first full quarter combined with Lakeland and our net interest margin increased 10 basis points in the trailing quarter to 3.31%. For the quarter. Our margin included 53 basis points of purchase, accounting and CRE excluding purchase accounting from both periods. Our core margin expanded four basis points versus the trailing quarter to 2.78%.

We projected them in the 3.3% to 3.35% range for the remainder of 2024 increasing to around 3.45% over the course of 2025.

Our projections include two additional 25 basis point rate reductions in 2024 and another three rate cuts in 2025. And total loans were essentially flat for the quarter within the portfolio C&I loans increased by 94 million and multifamily loans increased by 37 million. While construction loans decreased by 97 million.

Our pull through adjusted loan pipeline at quarter end has increased to 1.2 billion with a weighted average rate of 7.24% verses our current portfolio yield of 6.21%.

Deposits totaled 18.4 billion at September 30th. Consistent with the trailing quarter, our loans to deposit ratio remained stable at 102%.

The average cost of coal deposits increased to 2.36% this quarter reflecting a full period combined with Lakeland.

We expect that this represents the cyclical peak in deposit costs while metrics worsen slightly during the quarter. Overall asset quality remains strong with nonperforming loans representing just 47 basis points of total loans. [NP A] to assets at 41 basis points total delinquencies at 56 basis points of loans and criticized and classified loans totaling 2.74% of loans.

The increase in nonperforming loans. This quarter was largely driven by $19.7 million credit secured by an industrial property that has a current loan to value ratio of approximately 39%.

There is an active new term resolution plan and we expect to incur no loss on this credit. Net charge offs were $6.8 million or an annualized 14 basis points of average loans, this quarter. Charge offs were primarily driven by one commercial credit which carried a specific reserve of $4.4 million at June 30th.

The remaining collateral securing this relationship is scheduled to be auctioned in November with full resolution expected in the fourth quarter.

The provision for loan losses increased to $9.6 million this quarter. Reflecting specific reserve requirements and some deterioration in the macroeconomic variables that drive our [cecil] estimate. This increased our coverage ratio to 1.02% of loans at September 30th. Noninterest income increased to 27 million this quarter reflecting the combined the Lakeland combination, strong performance from our wealth management and insurance agency subsidiaries and an increase in [bly] income.

Noninterest expenses excluding merger related charges were in line with our expectations at $120 million with expenses to assets at 1.98%. And the efficiency ratio at 57.2% for the quarter.

We have currently realized the majority of our targeted merchant cost saves and we project noninterest expenses of approximately $110 million for the fourth quarter of 2024.

We currently project our effective tax rate for the remainder of 2024 and 2025 to approximate 29.5%. Regarding projected 2025 financial performance with fully [flacs] in cost saves. We currently estimate 2025 return on average assets of approximately 1.15% and return on tangible equity of approximately 16% with an operating expense ratio of approximately 1.8% and an efficiency ratio of approximately 52%.

That concludes our prepared remarks. We will be happy to respond to questions.

Thank you.

As a reminder. If you'd like to ask a question,(Operator instructions)

Thank you. We will begin the question and answer session and our first question comes from the line of Mark Fitzgibbon from Piper Sandler.

The line is open.

Hey guys, it's Great going stepping in for Mark at the moment. How are you?

Hey, good going. Very good. How are you?

Good. First question, one of your competitors just announced it was selling a large pool of commercial real estate loans to drive their concentration down. Is this something that you guys would also consider doing?

No, it's, it's not even in our discussions here. We don't have a lot of transactional accounts, you know, relationship oriented institution. We like our book. There's no, systemic deterioration in there. It's all within our concentration, risk levels that, that meet our tolerances from a risk, concentration, risk perspective. So there's no, no business or strategic reason for us to entertain that at this time.

Okay. And then lastly, what are your thoughts on a security portfolio restructuring?

Again, none anticipated at this time. We're happy with the quality content and performance of the securities portfolio as well.

We, we did a minor shift there.

And we did when we bought Lakeland as you know, we, we was about 550 million that we restructured out and paid down.

And reinvested some.

Of that. Yeah.

Awesome. Thanks guys. I'll sit back to be here.

Thank you.

Thank you.

Our next question comes from the line of Billy Young from RBC capital.

The line is open.

Hey, good morning guys. How are you?

How are you.

Doing well, thank you. Just kind of looking at next year's margin guide the 335 or 340. Can you just maybe comment on, you know what type of fed rate actions you would need to see to kind of get to the upper end of that range, I guess, fall on to that is, does that matter or do you have enough natural repricing ability on, on the deposit book to kind of get there?

Yeah, but I think it's less about the Fed's actions as, as we've discussed, we're pretty neutral in terms of interest rate risk and more about the repricing of the, of the, the, the organic book. So I think we're looking at probably core margin expansion in the three to five basis points range per quarter over the course of the next several quarters.

And that 54,55 kind of purchase accounting that we saw this quarter. Is probably representative of the future, subject to some volatility depending on the cash flows that you know, that underlie that. So depending on the loan prepayments.

So I think we're moving towards like a 345 number closer to the end of the year, the year 2025 to.

Maybe, maybe you want to share that the core margin movement, some of the data that we had on our deposits that we worked a little bit better than, than what we thought.

And in terms of repricing with the fed trade homes.

Yeah, so again, a lot of what goes into the quality of the of the margin expansion is how effectively and aggressively we can manage deposit funding costs. Our, our our stated rates are typically pretty low relative to the peer group. So that's the concern. There's not a lot of room for movement there. But there's a fair amount of exception pricing in the book as well as there is with most institutions. We're very successful in this first round and you'll see it effective with the October 1st rate of repricing some of those down about two point $2.3 billion worth of deposits at an average of about 3,738 basis points reduction that we, we saw, saw effective October 1st. So again, that's what's going to influence our ability to outperform going forward is how effectively we're able to manage those funding costs.

While we're returning to the bars.

Got it. Thank you for all that. Appreciate it. Just moving on to a different topic, the your, your updated expense guide is tracking a little higher than the the 107 you previously guided to. So can you just maybe elaborate what areas you might be seeing? Incremental express expense pressure and I apologize if I missed this, but can you just kind of help clarify what you're kind of assuming in terms of the expense growth run rate target for next year?

Yeah, the 110 I think we talked about a 107 last quarter for Q4. Some of that's just a little bit of the timing on the realization of the remaining causation, the merger. So that's what's given us a little bit more, a little bit more of a delay in fully realizing that those benefits for next year, I'm thinking the 1st, 1st couple of quarters, at least we will probably pick up a little bit from there as you know, this typically seasonal expenses, compensation increases payroll taxes on the employer side and whatever weather related costs that come into play. So I'm thinking that something like a 112 to 115 for the first quarter or two.

Got it. Thanks, thanks. And just my last question, I guess is just to touch on your positive commentary on kind of loan pipelines. They do seem to be kind of gaining momentum here. So can you, I guess can you just just a broader comment?

Are you starting to see that inflection point in terms of underlying demand and client activity? You know, we've talked about some of the macro headwinds that kind of plagued the industry for the last couple of quarters. Are you starting to see that inflect now that we're kind of getting some of that behind us? I know we have the election next week, but are you, are you starting to see any change in sentiment here?

Yes, that's a, it's a good question there. There's a couple of things, I think we had a dynamic that affected pro providence that is just outside of normal rates and market conditions. You know, we had a murder integration happening and as hard as you try, there's always going to be a little bit of a disruptive factor there. So it's hard to gauge what percentage that was.

But suffice to say that as we got through, you know, the merger got approved and we got through our conversion, the momentum picked up on both sides of the legacy organizations and we are seeing a great deal of activity.

The sentiment from the clients today is great that rates went down. And, and it's starting to trigger more activity. There, I think we're, we're in a space now where people are being active with projects because the specter of rising rates isn't there. So they can say, okay, we don't have to worry about, you know, variable rates continuing to move and I can do this project over the short term in three years from now. I can refinance it at a lower cost.

So there's that sediment, there's also the, the discussions out there in certain industrial sectors that people are waiting for. What happens with the election, depending on, on, on policy changes and how it might affect their business. You know, for Provident, we're also seeing a little bit of a pull down from, from the bigger banks. There's been a little disruption in the market and we're getting a lot more activity coming in from the top banks on down.

So suffice to say that I think there's some guarded optimism out there. We do expect we see the pipeline building and a lot of activity and as we're more focused now that the conversion is behind us, despite what the market is, I think we'll fare better, but if market conditions improve, we'll be, I think we'll be able to exceed our normal projected loan growth. And I think the fourth quarter is looking nice right now for us. And we want to keep that momentum going into 2025.

Great. Thank you guys for taking my questions.

Thank you.

Thank you.

Our next question comes from the line of [TS] is that it from [KBW]

The line is open.

Hey, good morning, good morning. Hope you're doing well.

We are. Thanks, you.

Do II I have a follow up on the margin outlook here, the purchase accounting accretion, you know, didn't move up much versus the previous quarter. And, you know, I'm, I'm kind of curious on what the dynamics were there and I know there's a lot that kind of goes into the estimates and calculations for that. But could you kind of walk us through the, you know why? I guess it wasn't higher, given the Q2 number? And then do you expect it to be stable over the near term instead of like kind of slowly moving down? How should we model that out?

Yes. And I think the primary driver was just the assumptions we were using around cash flows on the loan. So the prepayments on the loans came in less or lower than expected. And I think that is a reasonable run rate to use going forward. I would keep it stable. I mean, ultimately, there'll be some, some decrease in that over time, but I don't see a dramatic decrease in the 1st, 1st year or so.

I think it's important to point out that the core margin also improved and that's without consideration for this rate cut and the benefits that we'll see in October. So the core operating margin tim has improved and it's nothing more, nothing further to look at in that margin change than prepayment speeds that we anticipated. So, in essence, if those speeds pick up as rates continue to come down, we could actually see it go higher than, than what Thom and Anthony are guiding to. But I think Thom's guidance is to just keep it stable because just it's, it's the right thing, the right.

Baseline.

Yeah. No, that, that makes total sense. And then another quick one on the run rate for amortization expense is around $12 million this quarter. Is that a good run rate going forward? And also is that included in your [ROTC] projection?

It is added back to the [ROTC] and it is a good run rate.

Okay. Okay. That's helpful. And then could you maybe provide just a quick review of, you know, what's the impact of, you know, more aggressive fed cuts or, you know, less aggressive fed cuts to your margin and, and I I.

Outlook, I think it picked up a little bit on the margin because I think we will be able to be effective in the, in the funding costs. And, and there's a fair amount of, let me see what the number is.

We have $4.5 billion worth of maturing funding over the next 12 months at a rate of about 426. So to the extent we get to reprice that down, that will certainly help us quite a bit flow of the eur will help as well in terms of re reinvesting those funds. So there's opportunity, greater opportunities with, with the more dramatic decreases that said we are fairly neutral from interest rate risk perspective. So regardless we should be just fine.

Okay, perfect.

Thank you guys.

Thank you.

Thank you. And our last question comes from the line of Manuel Avas from D A Davidson.

The line is open.

Good.

Morning.

Good morning, good morning. That, that's great about the deposit cost declines in October. Is that similar deposit date is expected across 25. You're you're extending that out. And there has there been any push back at, at the moment to those cuts?

I I think, I think, you know, our team did an outstanding job prepping the customers. We didn't just do it and, and let the customer find out there was a lot of outreach. A lot of communication and, and they were able to successfully get about 38 basis points of the 50 basis point cut.

We've conditioned our customers on expectation as we move forward. There's always those relationships that produce a lot of value as you know, that you make accommodations for. But I think, I think the team is, is along with the Treasury Group is doing a fine job of preparing in advance of rate cuts in terms of customer communication.

So II I really expect that we should get similar betas, but it's, but it's really hard to predict what the next, how far. But I would, I would say I'm pretty comfortable that it should be relatively close.

Yeah, and I can share what we're we're modeling recognizing the the timing of the maturing funding. So in our, in our modeling for next year, we have a weighted average interest, I'm sorry, weighted average bid on the interest bearing deposits of a little over 31% and on total deposits about 24%. So including the noninterest bearing.

So that also includes the cds again, repricing as they come to mature.

That's by year end next year, that the right thought process.

Yeah, that's over the course of the year next year. Yes. Okay.

I appreciate that clarity. And can you just speak to potential fee revenues synergies? You've talked about it a bit already but just kind of now that the deal is closed, where can insurance, wealth management, all kind of be stronger together than, than where it was before.

Well, that's a great question. I did mention that in my written notes and we had a great deal of time. I will give you a lot of the factual or anecdotal information that we're seeing. Suffice to say that there's been a great reception across the two legacy organizations in terms of the businesses that we contributed. For instance, you know, we're seeing a lot of commercial activity going into our insurance from the Legacy Lakeland side.

You know, we've actually we had even our wealth business refer a commercial client over to our bank. We're seeing insurance refer, the activity has picked up tremendously and, and I think part of that is the excitement as we go in, I think we're just touching the beginning stages of you know, what we do is as a culture working on an integrated basis, but the storylines are there.

So in addition to how we're referring business across the channels, you also have what we mentioned earlier on a few calls ago that as a large organization, we're able to accommodate certain transactions that we were not. So, I mean, just this quarter alone, I can point to about two or three transactions that the legacy provident couldn't have done unless we had the combined scale.

And and it gave us the capacity to do more Treasury management, business and other activity and insurance as a byproduct of that. So all of those are the revenue enhancement things that, that we refer to and, and just watching that, that customer experience that goes back and forth between the teams. It's pretty exciting for me. We just have to keep that momentum going.

I appreciate that. Thanks for the color. Thanks for the commentary.

Perfect.

Thank you.

That now concludes our question and answer session. I will now turn the call over back to our CEO Anthony Labozzetta for closing remarks.

Well, thank you everyone for your questions and for joining the call. You know, it has been a very productive and eventful quarter for us and we hope that you all have a great rest of the year and holiday season. We look forward to speaking to all of you in the new year. Thank you very much.

Ladies and gentlemen that includes today's call. Thank you all for joining. You may now disconnect.

You have.