PROVIDENT FINANCIAL SERVICES INC Q3 FY2024 earnings call

• Merger integration: Conversion of Lakeland Bank’s core system completed on September 3rd, retaining virtually all legacy Lakeland customers, with cost savings and margin expansion seen.
• Quarterly results: Stronger-than-expected economic growth, net earnings $46.4 million, core profitability highlighted by core margin expansion, loan pipeline growth, fee-based business contributions, and improved operating efficiency.
• Capital and dividends: Capital healthy, exceeding well-capitalized levels, tangible book value per share increased 4.5%, Board approved $0.24 per share cash dividend payable November 29.
• Deposits and funding: Average cost of total deposits increased 9 basis points to 2.36%, deposits grew $22 million, total cost of funds increased 6 basis points to 2.62%.
• Loan activity: Closed $489 million of new commercial loans, net loan growth $39 million, loan pipeline $2 billion with weighted average rate 7.18%, pull-through adjusted pipeline $1.2 billion.
• Credit quality: Nonperforming loan ratio 47 basis points, strong credit quality with lower net charge-offs relative to peer group.

Net earnings for the third quarter were $46.4 million, or $0.36 per share. Core margin expanded. The loan pipeline grew to approximately $2 billion. Provident Protection Plus had 13% organic growth in the third quarter, with 16% organic growth year-to-date and a 99% retention rate. Beacon Trust assets under management grew by 4% for the quarter to a record high of $4.2 billion, representing 10% year-to-date growth. Net interest margin increased 10 basis points to 3.31%.

• NIM: Projected 3.3% to 3.35% for remainder of 2024, increasing to ~3.45% in 2025 with projected rate cuts.
• Expenses: Q4 2024 noninterest expenses projected at $110 million, next year expenses may pick up in first couple of quarters.
• Loan pipeline: Pull-through adjusted loan pipeline at quarter end $1.2 billion with weighted average rate 7.24%.
• Deposits: Expect cyclical peak in deposit costs, focus on managing funding costs while retaining deposit balances.

• Nonperforming loans: Slight deterioration in nonperforming loans due to one commercial real estate credit, but near-term resolution expected with no expected loss.
• Deposit costs: Managing funding costs while retaining deposit balances could be a challenge.
• Expense realization: Delayed realization of remaining merger cost saves affecting expense guidance.

Q: One of your competitors just announced selling a large pool of commercial real estate loans. Is this something you’d consider?

A: No, not in discussions. We’re a relationship-oriented institution, book is within concentration risk tolerances.

Q: Thoughts on securities portfolio restructuring?

A: Not anticipated, happy with securities portfolio quality and performance.

Q: Margin outlook and Fed rate actions?

A: Core margin expansion influenced by managing deposit funding costs, effective in managing funding costs with exception pricing and deposit balance retention.

Q: Expense guide tracking higher than previously guided. Elaborate on incremental expense pressure and next year expense growth?

A: $110 million for Q4 due to timing of merger cost save realization, next year expenses may pick up in first couple of quarters.

Q: Margin outlook and purchase accounting accretion dynamics?

A: Primary driver was lower-than-expected loan prepayments, expect purchase accounting accretion to be stable near-term.

Q: Impact of more aggressive or less aggressive Fed cuts on margin and NII?

A: More aggressive cuts could help pick up margin by repositioning maturing funding, slope of yield curve also helps.

Q: Deposit cost betas and fee revenue synergies?

A: Expect similar betas with good customer communication, fee revenue synergies seen in commercial activity, wealth management, and insurance referrals across legacy organizations