Provident Financial Services Inc Q4 FY2025 Earnings Call

Thank you for standing by. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services Fourth Quarter Earnings Call. I would now like to turn the conference over to Adriano Duarte, Investor Relations.

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 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 the fourth quarter. Tony?

Thank you, Adriano, and welcome, everyone, to the Provident Financial Services Fourth Quarter Earnings Call. The Provident team delivered another strong quarter, driven by record revenues, favorable credit metrics and expanding core profitability. Throughout 2025, we built organic growth momentum on both sides of the balance sheet, which combined with positive operating leverage resulted in notable improvement in our financial performance. Accordingly, in the fourth quarter, we reported net earnings of $83 million or $0.64 per share. Our annualized return on average assets was 1.34%, and our adjusted return on average tangible common equity was 17.6%. Pre-provision net revenue was a record $111 million or an ROA of 1.78%. Since closing the Lakeland transaction, we have grown core pre-provision net revenue every quarter. Turning to our balance sheet. Our commercial loan team generated total new loan production of $3.2 billion in 2025. Elevated loan payoffs of $1.3 billion, which were primarily in our CRE portfolio, partially offset our strong production, resulting in net commercial loan growth of 5.5% for the year. We remain focused on generating high-quality diversified loan growth. At year-end, our pipeline remained solid at $2.7 billion with a weighted average rate of 6.22%. Our loan pipeline has consistently been north of $2.5 billion for the last 4 quarters, and more importantly, our originations have grown every quarter in 2025, peaking at over $1 billion in the fourth quarter. On the funding side, core deposits grew $260 million or 6.6% annualized compared to the linked quarter. Favorable trends in our commercial and consumer segments contributed to growth in our average noninterest-bearing deposits of 2% annualized. The deposit market remains competitive, but we continue to invest in our capabilities to drive meaningful growth in our core funding. Provident's commitment to managing credit risk and generating top quartile risk-adjusted returns has remained unchanged. During the quarter, we successfully resolved $22 million of nonperforming loans while experiencing just $1.3 million in associated net charge-offs. As a result, nonperforming assets improved 9 basis points to a favorable 0.32%. The business environment in our market continues to be healthy. And as a reminder, our exposure to rent-stabilized multifamily properties in New York City is less than 1% of total loans, all of which are performing. Growing our noninterest income remains a strategic priority. We generated record fee revenue of $28.3 million in the quarter. I want to take a minute to highlight the momentum and diversity of our noninterest income. Provident Protection Plus continues to drive consistent growth in our insurance agency income. New business and over 90% customer retention helped grow pretax income 13% year-over-year. Provident Protection Plus has a strong pipeline at the start of 2026, and I'm encouraged by the increased collaboration with both the bank and Beacon Trust, which should strengthen further in 2026. Beacon Trust saw revenue growth again in the fourth quarter, increasing to $7.6 million on approximately $4.2 billion of AUM. Beacon remains focused on both growth and retention, and we continue to make investments in talent to help achieve these goals. We also continue to invest in our SBA capabilities, which have been a more significant contributor to noninterest income in 2025, generating $946,000 of gains on sale in the fourth quarter. For the full year, we have generated $2.8 million of SBA gains on sale, which is up from $905,000 in 2024. While total assets grew nearly $1 billion in 2025, our strong profitability helped further build Provident's capital position, which comfortably exceeds well-capitalized levels. As such, earlier this week, we announced a new share repurchase authorization that will allow us to buy back an additional 2 million shares. I'd like to conclude my remarks by discussing our strategic priorities for 2026. We expect to continue investing in revenue-producing talent across our middle market banking, treasury management, SBA, wealth management and insurance platforms. We expect recent balance sheet growth momentum to be sustained and that loan payoff activity will normalize when compared to 2025. Finally, we are preparing for a core system conversion in the fall of 2026, an important investment that will enhance scalability and our digital capabilities. I'm confident in our team's ability to successfully complete this conversion, particularly given how seamlessly we integrated Lakeland Bank in 2024. I'm incredibly proud of the efforts and production of our employees. We are pleased with our organic growth momentum and improved profitability, and we continue to target sustained top quartile performance. Now I'd like to turn the call over to Tom for his comments on our financial performance and to discuss our 2026 guidance.

Thank you, Tony, and good morning, everyone. As Tony noted, we reported net income of $83 million or $0.64 per share for the quarter with a return on average assets of 1.34%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 17.58%. Pre-provision net revenue increased 2% over the trailing quarter to a record $111 million or an annualized 1.78% of average assets. Revenue increased to a record for a third consecutive quarter at $226 million, driven by record net interest income of $197 million and record noninterest income of $28.3 million. Average earning assets increased by $307 million or an annualized 5.4% versus the trailing quarter, with the average yield on assets decreasing 10 basis points to 5.66%. This reduction in asset yield was more than offset by a 13 basis point decrease in the cost of interest-bearing liabilities to 2.83%. While a reduction in net purchase accounting accretion limited our reported net interest margin expansion to 1 basis point versus the trailing quarter at 3.44%, our core net interest margin increased by 7 basis points to 3.01%. The company continues to maintain a largely neutral interest rate risk position, but anticipates future benefit to the core margin from recent Fed rate cuts and expected steepening of the yield curve. The core margin for the month of December continued to trend upward at 3.05%. We currently project continued core NIM expansion of 3 to 5 basis points for the next 2 quarters with reported NIM estimated in the 3.4% to 3.5% range for 2026. Period-end loans held for investment increased $218 million or an annualized 4.5% for the quarter, driven by growth in multifamily, commercial mortgage and commercial loans, partially offset by reductions in construction and residential mortgage loans. Total commercial loans grew by an annualized 5.4% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.5 billion. The pipeline rate of 6.22% is accretive relative to our current portfolio yield of 5.98%. Period-end deposits increased $182 million for the quarter or an annualized 3.8%, while average deposits increased $786 million or an annualized 16.5% versus the trailing quarter. The average cost of total deposits decreased 4 basis points to 2.1% this quarter, while the total cost of funds decreased 10 basis points to 2.34%. Asset quality remains strong with nonperforming assets declining $22 million or 22% to 32 basis points of total assets. Net charge-offs were $4.2 million or an annualized 9 basis points of average loans this quarter, while full year 2025 net charge-offs were just 7 basis points of average loans. Current quarter charge-offs reflected the disposition of several nonperforming and underperforming loans and the write-off of related specific reserves. We recorded a net negative provision for credit losses of $1.2 million for the quarter as year-end loan closings drove a decrease in approved commitments pending closing, asset quality improved, and there was modest improvement in our CECL economic forecast. This brought our allowance coverage ratio down 2 basis points from the trailing quarter to 95 basis points of loans at December 31. Noninterest income increased to $28.3 million this quarter with gains realized on calls of corporate securities and solid performance from our wealth management and insurance divisions as well as gains on SBA loan sales and increased core banking fees. Noninterest expense increased to $114.7 million this quarter as strong operating results drove increased performance-based incentive accruals, while expenses to average assets and the efficiency ratio were consistent with the trailing quarter at 1.84% and 51%, respectively. Excluding the amortization of intangibles and the related average balance, these ratios were 1.76% and 48.15%, respectively. We project quarterly core operating expenses of approximately $118 million to $120 million for 2026, with the second half of the year run rate being slightly higher than the first half. In addition to normal expenses, as Tony mentioned, we will be upgrading our core systems in Q3 of 2026 and expect additional nonrecurring charges of approximately $5 million in connection with this investment, largely to be recognized in the third and fourth quarter. Our sound financial performance supported earning asset growth and drove strong capital formation. Tangible book value per share increased $0.57 or 3.8% this quarter to $15.70, and our tangible common equity ratio increased to 8.48% from 8.22% last quarter. We realized a $3.4 million benefit to our income tax expense from the purchase of energy production tax credits for the 2025 tax year. We are exploring opportunities to purchase additional similar tax credits for the 2026 year and open carryback years. Excluding the discrete benefit of any tax credit carrybacks, we currently project an effective tax rate of approximately 29% for 2026. Regarding additional 2026 guidance, we are expecting loans and deposits to grow in the 4% to 6% range, noninterest income to average $28.5 million per quarter and are targeting a core return on average assets in the 120% to 130% range with a mid-teens return on average tangible common equity. That concludes our prepared remarks. We'd be happy to respond to questions.

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

Tom, first question for you. I heard your comments on the effective tax rate being 29% for 2026. I guess I'm curious, those tax credit investments that you announced you made, I think it was $54 million. How does that flow through to the effective rate or when does it flow through?

So that was in the Q4. Those are 2025 tax year benefits. So that was reflected in the $3.4 million we saw in reduction in income tax expense. Next year's purchases, the 2026 year will be realized in 2026 as a reduction. That's why we're dropping from close to 30% down to about 29% in our estimate of what the effective rate will be.

It's spread out throughout the year. So it's not a one-time like we did in 2025.

That's correct. We did them at the end of the year. So it should be spread through 3 quarters of the year in 2026.

Okay. Great. And then secondly, I saw the buyback announcement. I guess you have a little bit of excess capital. Could you help us think about how you'd rank your priorities for deployment of excess capital today?

Yes, I don't think they've changed. Still profitable balance sheet growth is our primary objective. We think that's the longest-term value creator. But we wanted to add additional flexibility to our capital deployment options, which is why we refreshed the stock buyback plan.

I think that's spot on. Organic growth is our primary focus. The second half of the year, we might look at our dividend as our productivity continues. Obviously, there's always the additional uses of capital we want to invest deeper into our insurance and wealth platforms. And then there's always in the background, the thoughts of mergers, but our primary #1 focus is organic growth.

Yes. Our capital levels, we're comfortable with where they are now, and we're confident in our capital formation projections for the rest of the year. So again, that was another trigger, as Tony said, to both give some consideration in the remainder of the year to the dividend rate as well as to reintroduce some buyback options.

Okay. And I hear what you're saying, Tony, on M&A being sort of back of the list, so to speak. But if you were to look at bank deals, what kinds of things would you be looking for in a potential target?

I believe that this team is quite exceptional, and we have established an effective framework. Everyone is collaborating well, creating a positive dynamic from the Board down. The most important aspect is ensuring that the cultures align to avoid significant disruptions in what we have already developed, which is generating value. With that in mind, we are also interested in acquiring additional talent and possibly exploring new lines of business or markets that we are not currently involved in. These complementary opportunities could enhance our wealth management efforts or deepen our insurance market presence, which is certainly valuable. However, we understand that it's not feasible to meet all our goals in every situation. Therefore, we need to prioritize which objectives are essential to complete any potential deal, but there are still many viable franchises out there that we believe could make great partners. I just wanted to convey our perspective on value creation.

Your next question comes from the line of Tim Switzer of KBW.

I also want to congrats to Tom on his pending retirement.

Thank you, Tim. Appreciate it.

My first question is about the increased deposit competition we've heard mentioned on various conference calls this quarter, especially regarding pricing. What have you observed in the market? Where is the competition the strongest in terms of category or geography? Does this have any effect on your NIM outlook or liquidity management?

I want to mention that competition is increasing slightly, but I've noticed that the competition for deposits in our market has always existed. It's been present throughout my time in this industry, shifting across different segments. Everyone seems to be competing for interest and low-cost money, which is integral to our model. From our viewpoint, we're performing well with our core model. This quarter, we achieved 16.5% growth in average balances and generated nearly $479 million in commercial deposits this year, which are generally lower-cost deposits, funding about 24% of our loan production. These are all positive indicators. The competition is present, but if you approach the market with the right talent and strategy, you can secure your share. A reasonable observation would be that if everyone aims for high single-digit growth, there's simply not enough new money to satisfy everyone's needs, which drives the competition. There just isn't enough to meet everyone's growth requirements.

Got you. Yes, that makes sense. Can you remind us about the approximate $5 billion to $6 billion of fixed rate loans that will be repricing in your back book over the next year? What is that number, and what is the difference between new origination yields and what is rolling off?

Yes. The total repricing over the next 4 quarters, this is on the adjustable side, it's about $5.7 billion. Looking for. Okay, back book repricing, cash flows, both amortization and prepays, we're looking at another $4.7 billion over the next 12 months as well. So the pickup in rate is about 30, 40 basis points. I think it adds about 4 basis points to the NIM.

Got you. Okay. And then the last question I have is just on the commercial real estate market trends. It seems like it's becoming a little bit healthier, volumes are improving, and pricing is holding up. Are you guys seeing the same thing? Also, due to some mergers and acquisitions in your market, there's a competitor looking to potentially sell some commercial real estate portfolios in New York. Is that something you would be interested in considering, given your capital levels, or are you just focused on organic growth?

Yes. I mean, there's a couple of questions in there. I'll try to tackle them all. I'll start with the last 1 first. There's probably little to no desire for us to acquire anyone's portfolio since our productivity is quite high, and being able to allocate that capital to our clients is more important, right? So the relationship banking that we do, we would view that book acquisition as a filler and it's just not necessary for us in the way we approach our business. When you look at the CRE market overall, I do see a healthier CRE market. Our CRE book has held up incredibly well throughout any of these perceived cycles. You're starting to see other banks that may have stepped a little bit back on the CRE space stepping back in. And certainly, the agencies, if you look at half of our prepayments that I mentioned in the call, 50% of them were with the agencies that basically are offering terms that we just don't do, which is high level of prepayments of IO is rather long-term IOs and high leverage and rates that are just not balanced with the risk reward. So again, I think that the market is healthy, and you're always going to have spotty situations like right now, the big thought process is what's happening on the rent controlled, rent stabilized in New York with the new administration. We're attentive to it. We don't see anything even in our small portfolio that is alarming to us at this point. So knock on wood, everything appears to be healthy going into the 2026 year.

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

I wanted to touch back on loan yields a little bit. And Tom, I think you mentioned this a little bit in your opening comments, but is there the potential for yields to move up a bit as we move into early '26, just given the increase in the pipeline yield of 12/31 versus 9/30? And what you just talked about back book repricing?

I think so stable to slight improvement overall.

Yes, that makes sense. We had a little bit of a lift in the 5-year from the prior quarter of about 20 basis points, and that's where the yield improvement came from, where the rate improvement came from.

Got it. And then just switching over to fees. I noticed the wealth AUM was down a little bit from last quarter despite what I'd imagine is positive market move impacts, but it still sounds like you're pretty bullish on '26. Can you talk a little bit about what drove AUM maybe a little lower in the fourth quarter?

It was down a little bit on a spot basis, up on average, though, by about $80 million. We did have some net outflows for the quarter, but we did have some good strong business production during the period as well. So overall client count is pretty stable.

Yes. I would add, it's a little bit more exciting of what we expect for 2026, right? So we've added some more talent to Beacon to augment the growth and retention strategies that are there. We brought in some teams along with that to help. Pretty exciting early indications. Obviously, it's way too early for any real huge material numbers to change, but we're seeing the engagement. We're seeing new-to-bank clients coming in. We're seeing a group that can deeply penetrate both Provident and work with Provident Protection Plus and the bank to deepen those client relationships. So I'm pretty excited about the prospects for '26 when it comes to Beacon. I'm expecting some pretty good things there.

Got it. And just one last one for me. Just is there any desire or opportunity to expand the footprint a little bit more in adjacent geographies? More organically is what I'm talking about. I mean, maybe areas like Long Island, given some of the disruption there, maybe a little further south in the Philly suburbs? Or are you pretty happy with where you are today?

I'm generally not satisfied, so I would say yes to all of that. We are already established on Long Island in Manhasset, and we have an office in Astoria. Continuing to expand in that region makes sense. We are interested in the Westchester and Rockland markets, as well as the mainline around Philadelphia. While we don't have physical locations in the Philadelphia market, we do have lending teams there, similar to our presence in Westchester and New York. Therefore, our geographic expansion in those areas should not be surprising to anyone on this call.

Congrats, Tom, on the retirement.

Thank you very much. Really appreciate.

Your next question comes from the line of Steve Moss of Raymond James.

Tom, congrats on your retirement. Maybe just starting back on the accretion numbers here. Just kind of curious, Tom, what you're thinking for total purchase accounting accretion for 2026?

On the loan book, it's about $60 million for the full year.

Okay. Got it.

The volatility there on prepayments, but that's our kind of base case model.

Right. Okay. So then a lot of the adjustable rate loans you're referring to that are repricing carry rate marks at the current time, just looking to convert those to kind of like a core margin, kind of how to think about that benefit?

Not all. Some, not all, Steve, just because there's a healthy mix of legacy Provident loans and leases.

Got it. It is about 3 to 4 basis points or 4 basis points to the margin just from the back book repricing, if I heard that correctly.

That's correct, yes.

Okay. Perfect. And then my other question here is just kind of, Tony, in your prepared remarks, you mentioned the hirings planned for 2026. You kind of alluded to it a little bit in some of your earlier commentary. Just kind of looking for any specific niches, maybe you're looking to add how many people you're looking to hire in the upcoming year?

Yes. As I mentioned, one of our key focus areas in hiring is to enhance our existing efforts, particularly in the insurance and wealth sectors. Expect to see significant improvements in both production and retention. This year, we are prioritizing investments in the middle market sector, which includes clients ranging from $75 million to $0.5 billion. We believe this segment has not been fully explored yet and offers strong attributes such as robust deposits and solid relationships. Our wealth and insurance teams can effectively engage with clients in this space, which aligns well with our scale. We anticipate adding an additional 3 to 5 new hires this year. We are mindful of our expense guidance and are focused on achieving positive operating leverage, so we will not rush our progress. Additionally, growth can be expected in our treasury management capabilities, especially in outbound deposit-only categories like deposit gathering. We aim to expand this further as we approach 2026. It's an exciting time for us as we continue to invest in our future while ensuring we can sustain growth through 2026 and 2027. Therefore, hiring productive individuals will be essential for our success.

Okay, that's helpful. One last question for me on credit. The reserve has decreased significantly over the year, so I'm curious about the potential for any additional reserve reductions. Is there less flexibility with that number going forward?

Yes. It's largely a model-driven exercise at this point. The macroeconomic variables drive the provision requirements. That said, it feels like we're at a base here, but we've been very consistent in our approach and our methodology throughout the year, and it really has been warranted as you could see, with 7 basis points in net charge-offs over the year. Good strong credit metrics, 32 basis points in NPAs, I think it's 40 basis points NPLs to loans. So the credit quality and the strong underwriting and the low leverage lending we do have all supported the lower allowance coverage ratio.

Your last question comes from the line of Dave Storms of Stonegate Capital Partners.

I wanted to start by asking about the decrease in deposit costs that you mentioned in your prepared remarks. I'm curious about the potential for further reductions and if there are any specific initiatives we should be aware of as you work to lower those costs.

I'm sorry, Dave, I had trouble hearing that. Could you just try to speak a little louder, please?

Apologies, yes. Just around decrease in deposit costs. How much more room do you think there is to run here? And if there's any specific initiatives that we should keep an eye on as you're working through these costs?

So we are still repricing downward. We didn't get the full benefit of the last cut reflected, which is one of the reasons we wanted to bring to everybody's attention that the margin for the last month of the quarter, December was 3.05% on a core basis. So we'll see the full benefit of that I think every 25 basis point cut that we may get gives us another 2 to 3 basis points in the core margin in terms of improvement. Overall, I'd say our betas are going to continue to run in the 25% to 30% range relative to the Fed rate cuts.

That's great. And then just one more for me. You mentioned the core systems conversion. Is there anything more you can tell us about maybe the time line for that? And maybe any other tech investments or initiatives that you have on the horizon?

I believe that the main initiative on the immediate horizon is the conversion scheduled for Labor Day weekend of 2026. It involves the IBS platform from FIS, which is a well-established and commercially-oriented system. This system will meet our future digital and product needs. Many banks in the $25 billion to $150 billion range are using it, and they report that it works exceptionally well for them. Therefore, I see this as a necessary step to position our bank for the growth we anticipate in the future.

We expect to realize additional efficiencies in our processes as a result and enhancements that will help our product set and delivery to our customers.

This concludes our Q&A session. I will now turn the conference back over to Anthony Labozzetta for closing remarks.

Well, thank you, everyone, for your questions and for joining the call. We hope everyone had a good start to the new year, and we look forward to speaking with you very soon. Thank you very much.

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