Provident Financial Services Inc Q1 FY2025 Earnings Call

Thank you for joining us. My name is Kate, and I will be your operator for today's conference. I would like to welcome everyone to the Provident Financial Services, Inc. First Quarter 2025 Earnings Conference Call. I will now hand the call over to Adriano Duarte, Investor Relations Officer. Please proceed.

Thank you, Kate. Good morning, everyone, and thank you for joining us for our first 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 full 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 our first quarter. Tony?

Thank you, Adriano, and welcome to the Provident Financial Services Earnings Call. We are proud of the excellent performance the Provident team delivered this quarter. We saw expanded margins, increased top line revenue, solid earnings, and tangible book value growth as we've begun to fully realize the benefits of last year's merger. During the quarter, we reported net earnings of $64 million or $0.49 per share. Our annualized adjusted return on average assets was 1.11%, and our adjusted return on average tangible equity was 16.15%. Our adjusted pretax pre-provision return on average assets was 1.61% for the first quarter. These core financial results improved from the trailing quarter and the same quarter last year, and we are confident in our ability to continue our strong performance throughout 2025. Our capital position improved and continues to comfortably exceed levels deemed to be well capitalized. Our tangible book value per share grew $0.69 to $14.15, and our tangible common equity ratio expanded from the trailing quarter to 7.9%. As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on May 30. During the quarter, our deposits declined $175 million or 0.94%, largely due to seasonal outflow of municipal deposits. We did, however, continue to have an improvement in our average cost of total deposits, which decreased 14 basis points to an impressive 2.11%, and the average cost of interest-bearing deposits decreased 17 basis points. Our total cost of funds decreased 9 basis points to a solid 2.39%. As a result, our reported net interest margin increased 6 basis points to 3.34%. Notably, our core net interest margin grew 9 basis points. During the first quarter, our commercial lending team closed approximately $600 million in new loans, and our commercial loan portfolio increased 3.8%. This quarter's production consisted of 30% commercial real estate and 70% commercial and industrial loans. In addition to the production mix, our strong capital formation has driven our CRE ratio down to 450%. Additionally, we have seen a substantial increase in our total loan pipeline to approximately $2.8 billion this quarter. The weighted average interest rate is 6.31% compared to 6.91% in the trailing quarter. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.8 billion compared to $1 billion in the previous quarter. We congratulate the lending team for these results, and we are optimistic about the strength of our pipeline. Our credit quality remains strong relative to our peer group despite an increase in our nonperforming loan ratio to 0.54%, primarily due to two well-secured loans with no prior charge-off history. Our net charge-offs decreased to $2 million from $5.5 million in the trailing quarter, which is also impressive relative to the peer group. These numbers demonstrate the high standards we apply to our risk underwriting and portfolio management practices, as well as the quality of our portfolio. Overall, Provident's fee-based businesses performed well this quarter. Provident Protection Plus continues its strong performance, with a 19% organic growth in new business for the first quarter compared to the same period last year, and its income was up 23% compared to the same period in 2024. However, due largely to market conditions, Beacon Trust assets under management and fee income decreased by approximately 4%. This quarter was the first that featured no transaction costs related to our merger with Lakeland, and we are proud of our performance. We have used our solid foundation to excel in our core businesses and create value for stockholders and customers despite the uncertainties in the market and the economy. We believe that we can carry this momentum forward throughout the rest of 2025. Now I'll turn the call over to Tom for his comments on our financial performance. Tom?

Thank you, Tony, and good morning, everyone. As Tony noted, we reported net income of $64 million or $0.49 per share for the quarter. Excluding the $2.7 million write-down associated with the pending sale of a foreclosed commercial property, core earnings were $65.9 million or $0.51 per share with a core ROA of 1.11%. Further adjusting for the amortization of intangibles, our core return on average tangible equity was 16.15% for the quarter. Excluding this write-down, pretax pre-provision earnings for the current quarter were $95.2 million or an annualized 1.61% of average assets. Revenue increased to $208.8 million for the quarter, and our core net interest margin increased 9 basis points from the trailing quarter to 2.94%. Including 40 basis points of purchase accounting accretion, our net interest margin was 3.34% for the first quarter. We currently project the NIM in the 3.35% to 3.45% range for the remainder of 2025. Our projections include 25 basis points rate reductions in July, September, and December 2025. Period-end loans held for investment increased $133.4 million or an annualized 2.8% for the quarter, driven by growth in multifamily, commercial, and commercial real estate loans, partially offset by reductions in construction and residential mortgage loans. C&I loans grew at an annualized 6.5% pace, while total commercial loans grew by an annualized 3.8% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.8 billion with a weighted average rate of 6.31% versus our current portfolio yield of 5.95%. Deposits decreased $175 million for the quarter, with much of that decline attributable to seasonal outflows in municipal deposits. Average deposits for the quarter decreased $72 million or an annualized 1.5% compared to the trailing quarter. The average cost of total deposits decreased 14 basis points to 2.11% this quarter. Asset quality remained strong despite a $31.2 million increase in nonperforming loans attributable to two credits, a $20.3 million commercial real estate loan secured by a mixed-use property with a current loan-to-value of 53%, and an $11.5 million construction loan secured by a nearly completed warehouse facility with a current loan-to-value of 62%. These loans have no prior charge-off history and carry no specific reserve allocation. Nonperforming loans represented 54 basis points of total loans at quarter end with NPAs to assets totaling 45 basis points. Net charge-offs were just $2 million or an annualized 4 basis points of average loans this quarter. The provision for loan losses decreased to $325,000 this quarter, reflecting stable-specific reserve requirements and a reduction in required reserves on pooled credits within our CECL estimate. This brought our allowance coverage ratio to 1.02% of loans at March 31. Noninterest income increased to $27 million this quarter, driven by seasonally strong performance from our insurance agency and an increase in other income. Noninterest expenses, excluding the previously discussed write-down on foreclosed assets, were $113.6 million, with adjusted expenses to average assets totaling 1.92% and the efficiency ratio improving to 54.4% for the quarter. We currently project quarterly core operating expenses of approximately $112 million to $115 million for the remainder of 2025. Our effective tax rate for the quarter increased to 30.3% due to a discrete expense associated with the vesting of stock-based compensation. We currently expect our effective tax rate to approximate 29.5% for the remainder of 2025. Regarding projected 2025 financial performance, we currently estimate return on average assets of approximately 1.15%, return on tangible equity of approximately 16% with an operating expense ratio of approximately 1.85% and an efficiency ratio of approximately 52%. That concludes our prepared remarks. We'd be happy to respond to questions.

Your first question comes from the line of Tim Switzer with KBW.

The first question I have is, you guys are a few quarters into the integration, and you guys have been investing in a few different areas, I think, in wealth management, and also making some new hires. Can you provide some updates there on how many other bankers or other personnel you've brought in over the last few months and when we should start to see an impact of growth from that?

Tim, I want to ensure I'm addressing all your questions. First, regarding the integration, I believe most of that process is completed. No one in the company refers to it in a legacy context anymore; we’re just moving forward as Provident Bank. There's nothing noteworthy to report about merger integration as it went very smoothly. The culture is uniting well under shared guiding principles, and the atmosphere is great. Concerning hiring, we weren't specifically discussing the wealth group last quarter. We've focused on expanding teams in the Pennsylvania and Westchester markets, and that's happened. Part of our growth in pipeline is due to our renewed activity in Pennsylvania's REIT market, which is thriving and contributing positively to our pipeline, with similar growth emerging in Westchester. In other business areas like wealth management or insurance, we continue to strengthen our team, but there haven’t been any standout hires in those fields.

Okay. That's helpful. I know it might still be early, but could you discuss how conversations with customers have been regarding the macro outlook and the impact of tariffs? Are you seeing them pull back or be more cautious with investment spending? Also, can you highlight any specific industries within your loan portfolio that you think could be particularly affected by tariffs?

I tend to be more optimistic than others, but I'm being cautious in my statements. Specifically regarding Provident, we have the largest pipeline in our history at $2.8 billion. The pipeline is robust, and our pull-through percentage appears strong. In the past month, as we moved into April, the loan closings have also been quite solid. We've initiated efforts to assess our portfolio and identify any potential ripple effects from policies across various sectors, and thus far, we haven't found anything significant. We've been engaging with our customers informally at first, which we then formalized with questionnaires to gather more insights. Currently, the main takeaway is the element of uncertainty. We’ve not lost any clients from the pipeline due to this uncertainty, but some clients are pausing in certain areas, especially in the ABL sector, rather than completely halting transactions. We believe we are still productive, and while we hope any shifts happen in the summer, we remain cautious about potential developments. At this moment, we do not see any particular segment in our portfolio that raises concerns. We also assessed areas impacted by government contracts. I want to maintain a cautious tone because while I may sound optimistic, I acknowledge the uncertainty that also applies to my remarks. Situations can evolve, but for now, we aren’t encountering factors that could negatively affect our portfolio. Tom?

Yes, I'd only add that potential for uncertainty, Tim, that's what was reflected in that guidance slide that we published, where we went from a straight 3% and 5% expected growth on deposits and loans to a range recognizing the lower bound of 1% to 3% on deposits and 3% to 5% on loans.

And that's based purely on that uncertainty, it's not based on what we're seeing in the pipeline today.

Yes. I think like the broader economy, it's more soft data than hard data at this point. So sentiment is certainly up in the area a little bit from uncertainty, but we're not really seeing any outright effects on this yet. And as Tony indicated, we did evaluate the portfolio for any significant exposures to supply chain issues from the Far East. I think people did a nice job diversifying their supply chains as a result of COVID, and where we haven't identified any areas of great concern.

But we're still working on it to get a little bit more granular.

Your next question comes from the line of Mark Fitzgibbon with Piper Sandler.

First question, I wondered if you could share with us any color on those two large loans that went on nonaccrual? When you might see some resolution or any updates on those post-quarter end?

Don't have a lot of certainty around the two nonaccruals, Mark. They are part of a process, still working with the borrowers to try and get to a positive resolution. The comfort level there is just in the recent appraisals, first quarter of '25, and the favorable loan-to-values that we have.

Okay. Fair enough.

I would add one more dimension to that. Like one thing we can never promise is that a loan won't go bad. But I think what we can promise, or at least what we can see is what happens if it goes bad. I think we take some solace here in the very low LTVs in this space at this time. And hopefully, as time moves on, our group can resolve these.

Yes, I think that's reflected in Provident's long history of traditionally outperforming in terms of ultimate loss content on these things. That's a tribute to the underwriting at origination and the low leverage lending that we do.

Okay. And then, Tony, you mentioned the fact that the CRE concentration had gotten down to 450%, and I know you're comfortable being north of that 300% level, but I was curious where you're targeting and how long it takes you to get there?

I want to clarify that we're not aiming for a specific number, but rather a range. In our forecast, we're targeting around 5% growth in the commercial real estate space. This growth is important for our capital formation, which should bring us down to the 420s. We're open to being in the 430% or 440% range, and our regulatory colleagues are comfortable with our CRE levels given our concentration management program. They are fine with our presence in that space as long as we continue to show positive results. We are seeing increased activity since diversifying our commercial portfolio due to the merger, leading to good lending in various specialty groups, meaning we don't want to rely heavily on CRE. While our CRE growth is around 1% this quarter, we don't have a focused initiative to reduce our CRE exposure. Instead, we're targeting growth in those other sectors, which combined with our capital, will help us meet our projections in the 420s range. This is a lengthy way to answer your question, but that's where we stand.

Yes. I would just add that a good piece of the pipeline is in the CRE space. So I wouldn't be surprised to see that number move up a little bit in the interim term, too. As Tony said, that 420% kind of number is a longer-term intermediate-term target.

Okay. And in the last couple of days, we've seen some M&A activity back in the bank space. I guess I'm curious if, a, you think it's likely we'll see a bunch of consolidation in the Metro New York market over the next couple of quarters; and b, now that Lakeland is comfortably in the rearview mirror, what characteristics would you be looking for in potential acquisition candidates down the road?

I'm going to give you an awkward answer. I believe that considering our current stock price, buying back our own shares will be the best move we can make instead of pursuing mergers or acquisitions. This reflects the valuation that isn't being recognized at the moment, especially since we've just completed a merger. Once the situation normalizes and our stock is valued appropriately, we can explore opportunities, but the first priority will always be maintaining our culture. It's essential for us to have compatible teams, as this merger has significantly shaped our dynamic leadership. I'm proud of how our teams collaborate, and we want any future merger to enhance rather than disrupt that culture. Additionally, we will look for opportunities that provide value, whether through new deposits or business lines. While financial transactions are always an option, our stock needs to be valued properly before any financial deal can proceed. I believe the market will continue to consolidate, but we need to see valuations align before that potential can be realized.

Your next question comes from the line of Feddie Strickland with Hovde Group.

Appreciate the overall expense guide. I think last quarter, we talked a little bit about timing that maybe expenses were a little higher earlier in the year and then kind of go down in the back part of the year. Is that still sort of the expectation throughout the course of 2025? Or can you just generally explain that, how you see expenses playing out over the course of the year?

Yes. That's accurate, Feddie. We left the guidance at $113 million to $115 million to give us a little room in case something unexpected shows up, but I would probably forecast on the lower end of that range. Theoretically, as low as the $112 million number could be possible, but we're just being a little bit conservative there.

Perfect. And then I saw insurance commissions were particularly strong in the quarter. I think you mentioned it in your opening comments. Is there any seasonality in there? Or I suppose, what sort of growth could we maybe see on a year-over-year basis in the second quarter?

I think the business is very seasonal. It tends to run the first quarter being the best, second quarter trails right behind that. Summer tends to be the weakest quarter, not the weakest but the lowest, and then the fourth quarter starts to inch up again. So it's kind of that seasonality. The way I would characterize it is to look at comparing the same quarter last year. I think the business has been running at somewhere close to 20% growth over the comparable period on a compounded annual growth rate. Sorry? Pretax income.

Pretax income.

Yes. And so therefore, I think that's kind of the guidance that I would share, and it appears they're going to be on pace to do the same as we move throughout the year.

Great. And then just one last question. You mentioned something about potential buybacks, and I was going to ask how you view capital as you're moving into a bit of a capital build mode at this point. Are share repurchases something we might see in the next couple of quarters if the share price remains at these levels?

Yes, we don't want to foreclose the possibility. I'd like to have the flexibility to do that opportunistically. That said, you see the strength of the pipeline. There's a lot of good profitable high-return growth available to us, and that tends to be our first option.

We're evaluating them.

I will now turn the call back to Anthony Labozzetta for closing remarks.

Thank you, everyone, for your questions and for joining the call. We are excited for the rest of the year and look forward to speaking with you soon. Thank you very much. Have a great day.

Ladies and gentlemen, that concludes today's call. You can now disconnect. Thank you, and have a great day.