Provident Financial Services, Inc. (NYSE:PFS) Q4 2023 Earnings Call Transcript
Provident Financial Services, Inc. (NYSE:PFS) Q4 2023 Earnings Call Transcript January 26, 2024
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Operator: Thank you for standing by, and welcome to the Provident Financial Services, Inc. Fourth Quarter 2023 Earnings Conference Call. I would now like to welcome, Adriano Duarte, Investor Relations Officer to begin the call. Adriano, over to you.
Adriano Duarte: Thank you, Mandeep. Good morning, everyone, and thank you for joining us for our fourth quarter earnings call. Today's presenters are President and CEO, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons. Before beginning 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 disclaimer is contained in last 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 Labozzetta who will offer his perspective on the quarter. Thanks. Tony?
Anthony Labozzetta: Thank you, Adriano. Good morning, everyone, and welcome to the Provident Financial Services earnings call. The fourth quarter was characterized by moderate economic growth, fluctuating interest rates and continued industry-wide funding challenges, resulting in reduced profits for many regional banks. Provident has navigated these complexities with resilience, bolstered by a commitment to our robust risk management and customer centric approach. Provident produced good core financial results this quarter, which once again demonstrates the stability of our franchise and the strength of our management team. As such, we reported earnings of $0.36 per share, an annualized return on average assets of 0.77%, and a return on average tangible equity of 9.47%.
Excluding merger related charges and contingent litigation reserves, our pre-tax pre-provision return on average assets was 1.25% for the fourth quarter. At quarter end, our capital was strong and exceeded well capitalized. Tangible book value per share increased 5.9% to $16.32. Our tangible common equity ratio was 8.96%. As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share, payable on February 23. During the quarter, our average core deposits remain very stable. Our rising rate cycle-to-date deposit beta was approximately 33.5%, which is well below average based on available data and we believe is among the best in our peer group. Our deposit beta and steady deposit levels reflect the quality of our deposit base.
Our total cost of deposits increased as expected, given market trends, but remained among the best in our peer group. The total cost of funds grew 19 basis points to 2.23%, compressing our net interest margin 4 basis points to 2.92%. We expect a continued easing in the rate of increase in our total cost of funds, which should stabilize the net interest margin. Our commercial lending team closed approximately $450 million of new commercial loans during the fourth quarter. Payoffs remained relatively low at about $95 million, which is consistent with the trailing quarter. Our credit metrics continue to be strong in the fourth quarter, and we are maintaining prudent underwriting standards, particularly in our CRE lending portfolio. As a result of our production and low level of prepayments, our commercial loans grew approximately $212 million or 9.2% annualized for the quarter.
For the year, we grew $641 million or 7.3%. The pull-through in our commercial loan pipeline during the fourth quarter was in line with our expectations, and the gross pipeline remained strong at approximately $1.1 billion. The pull-through adjusted pipeline, including loans pending closing is approximately $671 million, and our projected pipeline rate is 7.17%. And we remain optimistic regarding the strength and quality of our pipeline. Our fee based business has performed well. Despite a hardened insurance market, Provident Protection Plus has strong fourth quarter with 81% organic growth, which resulted in a 19.7% increase in revenue, and a 4.1% increase in operating profit as compared to the same quarter last year. Fee income at Beacon Trust remained stable.
Improved market conditions drove an increase in assets under management to $3.9 billion at year end, which should drive improved fee income in the first quarter of 2024. With regard to our prospective merger with Lakeland Bancorp, we are continuing our engagement with the regulators and await final approval of the merger. While regulatory approval is not within our control and is not guaranteed, preparations for our merger with Lakeland continues to progress, as both companies eagerly await approval. As we move into 2024, our focus will be on growing our business lines with an emphasis on deposit growth. In addition, we will continue to strengthen the fundamentals of our business with a particular attention towards operational efficiency, pricing discipline and risk management.
Now I will turn the call over to Tom for his comments on our financial performance. Tom?
Tom Lyons: Thank you, Tony, and good morning, everyone. As Tony noted, our net income for the quarter was $27.3 million or $0.36 per share compared with $28.5 million or $0.38 per share for the trailing quarter, and $49 million or $0.66 per share for the fourth quarter of 2022. Transaction charges related to our pending merger with Lakeland Bancorp totaled $2.5 million in the current quarter or approximately $0.03 per share, and $2.3 million in the trailing quarter. Excluding these merger-related charges and a $3 million charge for contingent litigation reserves, pre-tax pre-provision earnings for the quarter were $44.4 million or an annualized 1.25% of average assets. Revenue totaled $115 million for the quarter compared with $116 million for the trailing quarter, from $132 million for the fourth quarter of 2022.
Our net interest margin decreased 4 basis points from the trailing quarter to 2.92%. The yield on earning assets improved by 15 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 interest expense reflected current market conditions and funding requirements, which resulted in an increase in average borrowings, despite an increase in average deposits. Average non-interest-bearing balances also decreased as some balances moved to our interest-bearing insured cash suite product in the trailing quarter, in order to obtain increased deposit insurance.
The shift from non-interest-bearing to the ICS product has greatly diminished in the fourth quarter. In addition, whilst average balances and rates paid on interest-bearing demand and time deposits increased during the quarter. The average total cost of deposits increased 21 basis points in the trailing quarter to 1.95%, this is a deceleration from the trailing quarter, but the increase towards our rising rate cycle to date, total deposit cost beta to 33.5%. The average cost of total interest-bearing liabilities also increased 21 basis points in the trailing quarter to 2.71%. The prolonged inverted yield curve and ongoing deposit competition continued to impact funding costs. This is expected to largely offset future improvements in asset yields, and we currently project the margin will stabilize in the 2.85% to 2.90% range.
Period end total loans grew $206 million, driven by C&I, CRE and multi-family mortgage loans. Our pull-through adjusted loan pipeline at year end was $671 million with a weighted average rate of 7.17% versus our current portfolio yield of 5.5%. Asset quality remains strong, with non-performing loans totaling 46 basis points of total loans, and criticized and classified loans representing 2.2% of total loans. Net charge-offs were $863,000 or an annualized 3 basis points of average loans this quarter, bringing our full year net charge-offs to just 8 basis points. The provision for credit losses on loans decreased to $500,000 for the quarter due to a modestly improved economic forecast within our CECL model. As a result, the allowance for credit losses on loans decreased to 99 basis points of total loans at December 31 from 1.01% at September 30.
Non-interest income remained steady this quarter at $19 million. Excluding provisions for credit losses on commitments to extend credit, merger-related charges and the establishment of a $3 million contingent litigation reserve related to a previously disclosed matter, non-interest expense increased to $70.4 million for the quarter and included two additional notable items that are not expected to recur. These items consisted of a $2 million write-down of an REO property and a $775,000 special FDIC assessment. Our effective tax rate was also impacted by an unusual discrete item this quarter as a deferred tax asset related to performance-based stock compensation was written down by $1.9 million. We currently project our 2024 effective tax rate to return to approximately 26.5%.
That concludes our prepared remarks. We'd be happy to respond to questions.
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