Q4 2023 Provident Financial Services Inc Earnings Call

Participants

Adriano Duarte; Executive Vice President, Chief Accounting Officer; Provident Financial Services Inc

Presentation

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. Tony?

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 and 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 pretax 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 remained very stable. Our rising rate cycle to date deposit beta was approximately 33.5%, which is well below the 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 net interest margin. Our commercial lending team closed approximately 450 million of new commercial loans during the fourth quarter. Payoffs remain relatively low at about $95 million, which is consistent with the trailing quarter.
Our credit metrics continued 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 businesses performed well. Despite a hardened insurance market, Provident Protection Plus had a 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 for 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?

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 to $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, pretax, 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 and $132 million for the fourth quarter of 2022. Our net interest margin decreased 4 basis points in 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 noninterest-bearing balances also decreased that some balances moved toward interest-bearing insured cash suite product in the trailing quarter in order to obtain increased deposit insurance. The shift from noninterest-bearing to the ICS product has greatly diminished in the fourth quarter.
In addition, both 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 brought 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 continue 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 multifamily 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 5.5%. Asset quality remains strong with nonperforming 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. Noninterest 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, noninterest expense increased to $70.4 million for the quarter and included two additional notable items that are not expected to recur. These items consist of a $2 million write-down of an REO property and the $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, and we'd be happy to respond to questions.

Operator

Floor is now open for your questions. To ask a question at this time, simply press the star followed by the number one on your telephone keypad. Again to ask a question at this time, simply press the star followed by the number one on your telephone keypad. We'll now take a moment to compile our roster.
Our first question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys, good morning.
Happy Friday, ARC, are you good, thanks.
Page 20, I wonder if you guys could explain that contingent litigation reserve, what it relates to and and how that flows in a market that's pending litigation that we disclosed in our last quarter.

10 Q within the contingency footnote, there's greater detail available there, but it's an estimate of a potential settlement or ultimate damage outcome.

I just don't have in front of me what does that what does it relate to time?

Yes, it's a class action or part of a class action lawsuit around approved passes, settle negative overdraft fees with respect to debit card transactions.

Got you.

Operator

Okay. Um.

And then secondly, it looked like there was about a $19.6 million uptick in nonperforming commercial loans.

Any color you could provide on those yes, the flows for the quarter were actually positive, absent one large loan moving into nonperforming category, we had about 10 million of favorable resolutions. And then we had in 19 a little over 19 million loan moved into the non-performing category. We have at this point, we deem adequate collateral coverage and we're working through a resolution on that. Borrowers cooperative winding down operations here and looking to market that the underlying collateral properties to suit our C&I loan.

Yes.

Okay.

And then, Tom, any thoughts on sort of expense growth this year, excluding the impact of Lakeland?

Yes, I think would be about 68 to 69 million a quarter. It usually wait a little heavier in the first quarter, first quarter and a half of the year, Mark, just because of the usual seasonal items and payroll tax resets.

Operator

Okay.

And then lastly, could you share with us on AUM and maybe net flows for the quarter and AUM closed at NOK3.9 billion on really the we saw a big pickup in the last month of the year. Looking at averages at September 30th, it was 3.6 billion, 3.51 went down to EUR3.41 billion, 3.7 and 3.9 at the end of the period. So in terms of flows, a pretty good pickup in terms of organic growth over the course of the year. And nothing notable fits in to bring to your attention in terms of outflows.

So in the fourth quarter, there were positive flows, positive net?

Operator

Correct.
Okay in.

Okay, great.

Operator

Thank you.

Yes.

Operator

Our next question comes from the line of Billy Young with RBC Capital Markets. Please go ahead.

Good morning, guys.

How are you kind of building on, I guess just to touch on the margin guidance, the as to 85 to 95 range for for the year. I guess can you just help us parse through what gets you to kind of the top end of the range?

And then what you're assuming on rate cards.

I think last quarter you were assuming two data for cards point of closer to six out on how did that kind of change your margin expectations?

Thanks.
Yes, there's the softest part of the estimate, those probably on the funding side, as we tried to anticipate absent any rate movement or even in the face of a declining rate environment, how much further, the liabilities cost could go up, particularly on the deposit side because we are pretty low relative to our peer group. So we don't see that necessarily stopping just incorporate this because rate movements have plateaued in terms of what's modeled, we work off the Moody's baseline forecast as a kind of a default and then adjusted if we deem it necessary so that's what's built into our model right now. They had four of 25 basis point rate increases in there, but the last ones in December, so Figure three that would be meaningful to 2024 here or would just add on to that good soon.

Some of the trends that we're seeing in terms of volume from the deposit side and the cost rising are very much stabilized. But I think what Tom was mentioning is that given where we are our total cost of deposits and the deal dynamics may occur that can show us on the lower end of that margin. But if they don't, we should be on the higher end of our expectation that's current.

And Bill, I misspoke. I said rating rate increases are the same every 23 excuse me, rate decreases.

Right.

Operator

Okay. Okay.

And then I guess as a follow-up to that, you know, obviously your deposit beta screen very well versus peers in the industry like you said, and I guess there is and maybe they have a slight lag on the way up, you know, kind of thinking I guess beyond when you say for a little bit or how do you think deposit betas should behave on the way down?

No, again, if that if the terminal rate is lower than the competitive environment, it would probably slow down long term, meaning that we wouldn't be able to decrease quite as quickly on the way down as you would if we were up to full market pricing. Hopefully we're conserved, and that's how we're modeling.

Okay.

Got it. And then switching gears, our C&I growth was nice and pretty strong this quarter. Can you just speak to kind of the key logos, some of the drivers there that you saw and you have how are you feeling about the opportunities going into 2024 here of what the drivers were tactical on that. That was our focus internally, how we drove up on not only parts of our incentive plan, but our focus of even reducing the levels of increase side in terms of how much we would we were down on an individual home loan and some recalls of majors. More importantly, one of the drivers of that was how we attach the total relationship to it, meaning the deposit side. So naturally, you would see a lot of transactional credit not happening at Provident over over the last couple of quarters, and you'll see more of a focus on on the deposit relational side, which comes largely on the C&I, but even on the credit side of the stuff that we've been putting on has been coming on with a deposit relationships. So again, I think that's a focus internally. Our team rose to the challenge, and we see that happening again, market market conditions are considered, we see their focus moving into 2024, even more acutely.

The other factor that helped loan growth in Q4 bill is a reduction in prepayments on I think we're going to see a little bit of pickup. I know for the first couple of weeks of this quarter from some of the things that we expected to pay off in Q4 didn't pay off until Q1. So I think looking forward in terms of the loan growth rate, something in the 4% to 5% range makes sense for us for 2024.
Yes, very appreciate, guys.

Operator

That's all I've got.

Thank you.

Operator

Our next question comes from the line of Michael Perito with KBW. Please go ahead.

Hey, guys.

Operator

Good morning. Thanks for taking my question. And I just wanted one quick follow up on the last line of questioning, just around loan growth of 4% to 5% for the year. Seems seems very reasonable, but any areas of upside to that? I mean, like, for example, and maybe on the construction side where and there still seems to be a lot of supply issues, particularly on the residential construction side in your markets. Just any areas where you think there maybe could be a pickup if we kind of continue the kind of glide to the soft landing on the macro side, Al?

Yes, I will answer that in a little bit the way a unusual way because I think there's an upside in all of our lending categories that we choose to be in on. I think this year, we were very contained in our lending. We tightened down a lot of our underwriting standards in anticipation of what might happen in the marketplace?
Um, we we deemphasized certain concentrations we had and we spent a good amount of time, Bob, you're altering some of those, including the construction portfolio. So from our perspective, our had it been business as usual. We could have had a substantial growth in 2023 on our books are out there. I think if market conditions are our prevalent that that allow for loan growth. I think we'll get our fair share and we can certainly meet or exceed the expectations that Tom just mentioned. But all within the credit underwriting standards that we have in place.

Operator

Got it. Helpful, Tony, thanks. And have a little bit of it conceptual question here. But obviously, 23 kind of was a bit of a challenging year, right? You had at the macro and rate uncertainty has a pending deal. Just as we think about kind of at the onset of 24 here, assuming that, but the Lakeland deal closes at the end of the quarter here, what how do you kind of attack that the strategic priority list? What are some of the time. But you on the other side of that, where do you guys focus? What should we be mindful of as you guys, we'll move past the rate hikes and the pending deal or I mean, I can give you some color on that.

I mean, first, I harken back to 23 and see the product and team spike all the delays merger and often so much work that we put into it still managed to do a fair job of producing some good results. I think when when we look into 24 we're optimistic that we'll get the deal closed in as soon as possible. And then our focus will be on a number of things. One primarily is looking at our business lines and figuring out how we deepen and share across both organizations since we have complementary services and building our businesses would be a big focus principally on the funding side. I think up individually. I think both Lakeland and us are focused on growing our funding base. And together, I think we're going to look to deepen that.
And lastly, I think we've spent a good amount of calories preparing this bank for it to be 25 billion already. And I think sort of remaining of putting together these two banks achieving our efficiencies getting ready technology technologically. And as we move into into our future, I think those are the things that we're going to be paying a lot of attention to the pricing disciplines and things of that nature on box, big focus on building our businesses, operational efficiency. And again, and I think we're going to have the combined team that's going to be more than capable of rising to that challenge. So I'm excited and optimistic once we get the steel call.

Operator

Perfect.

Thanks.

Operator

Thanks, Tony. If you could update, I appreciate you guys taking my questions.

Have a good weekend.

Thank you, Jim.

Thank you.

Operator

I would now like to turn the call over to Tony LEVELS data for closing remarks.

Thank you. Thank you, everyone, for joining the call. As we all know, 23, 2023 was a very difficult year. I think as we enter 24 on a as I mentioned earlier, I think we're all optimistic that we're going to get the merger closed and focus on building our businesses. And the efficiencies I mentioned on the team is ready to meet those challenges. And I look forward to talking to you in the June quarter and speaking again comped in the future. Thank you very much. Have a great day.

Operator

This concludes today's call. You may now disconnect.