Provident Financial Services Inc (PFS) Q2 2026 Earnings Call Transcript

Hello everyone. Thank you for joining us and welcome to the Provident Financial Services second quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference call over to Michael Pareto, Head of Investor Relations. Michael, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our second quarter 2026 earnings call. Today's presenters are President and CEO Tony Labazzetta and Executive Vice President and Chief Financial Officer Adriano Duarte. Before beginning their 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, I'd like to hand it off to Tony LaPazeta, who will offer his perspective on our second quarter. Tony?

Thank you, Michael, and good morning, everyone. I appreciate you joining us today to discuss our second quarter 2026 results. I am pleased to report another outstanding quarter of performance that validates the momentum we've built across our business. Through the first half of 2026, we have grown earnings per share by 17% as compared to the same period last year, while also significantly improving our profitability. More specifically, in the second quarter, we delivered net earnings of 78 million or 60 cents per diluted share and core net earnings of 80 million or 61 cents per share our annualized adjusted return on average assets was 1.27 percent and our adjusted return on average tangible common equity was over 16 percent this quarter's results were highlighted by record revenues driven by expanding net interest income and non-interest income our adjusted pre-provision net revenue reached a record 118 million representing 90 cents per share and an annualized core ppnr return on average assets of 1.87 percent this represents a 23 basis points improvement compared to the same quarter last year underscores the positive operating leverage that we've generated as we continue to grow speaking of growth our commercial loan team delivered exceptional results in the second quarter demonstrating the strength and depth of its capabilities in the second quarter we funded 700 million in new commercial loans bringing our year-to-date commercial loan fundings to over 1.1 billion on a net basis total commercial loans grew 10 percent annualized driven primarily by 20 growth in our cni group we ended the quarter with a record pipeline of $3.2 billion. This represents our second consecutive quarter with both our Cree and C&I pipelines exceeding $1 billion, a significant milestone that demonstrates the balanced, diversified nature of our growth strategy. As a result of our strong production and pipeline, we believe our long growth expectations for the full year should be guided towards the high end of the range shifting to deposits the operating environment has become very competitive for incremental funding particularly in consumer and municipal segments core deposits adjusted for normal seasonality in our municipal portfolio increased 67 million in the second quarter representing a two percent annualized growth rate this was largely driven by growth in commercial deposits, including in our treasury management group. Despite the competitive environment, we remain encouraged by some of the deposit growth opportunities the bank is generating, particularly within our commercial and small business customer segments. We remain committed to driving sustainable core funding growth through continued strategic investments in our people, products, and capabilities. So far in 2026, we've added several senior deposit focused bankers who have built a nearly 150 million deposit pipeline as of june 30th we also continue to make investments in deposit initiatives within digital small business and municipal banking asset quality metrics all improved when compared to the prior quarter a trend we expect to continue in the second half of 2026 with respect to the senior housing commercial relationship which migrated to non-accrual last quarter the bankruptcy process is proceeding as expected we have increased visibility towards final resolution and still expect all four credits to be settled by year-end with no material lost to the bank excluding this relationship which totaled 82 million our non-performing loans would be just 27 basis points of total loans as of June 30th. Overall, we continue to feel good about our asset quality and the discipline that we've maintained building our loan portfolio. In addition to the strong top line results and improved credit metrics, we achieved record non-interest income of $32 million in the second quarter. Year to date, our non-interest income has reached $64 million, or 14% of total revenue, which is up from 12.5% in the first six months of 2025. We are proud of the progress we've made towards our goal of having non-spread income exceed 20% of our revenues, even as our net interest income continues to grow. Provident Protection Plus continues to be a standout performer and a differentiator for our franchise. Top-line revenues are up 18% in the first half of 2026 versus the comparable period in 2025 this strong performance is driven by both industry leading customer retention and new client acquisition the pipeline for our insurance business heading into the second half of 2026 remains robust similarly we're encouraged by beacon trust recent performance with revenues in the first half of 2026 up five percent when compared to last year. Beacon Trust assets under management grew to $4.5 billion during the second quarter, benefiting from market appreciation and improved client retention. Our SBA group had another good quarter of originations and loan sale activity, but gain on sale revenues up 16% in the first half of 2026 when compared to 2025. The momentum we've established across all of our fee-based businesses gives us confidence that non-interest income will continue to be a significant driver of our financial performance moving forward lastly i just wanted to comment on a couple of important enterprise initiatives which will be critical to our long-term success our previously disclosed core conversion continues to track well towards our labor day target despite our intense focus on the conversion we also continue to make progress on other technology initiatives ranging from digital capabilities to ai our team has built an internal ai agent to be utilized by employees following conversion to help quickly provide answers to customer inquiries this project is a great example of how people can utilize technology to efficiently deliver a differentiated customer experience i'm incredibly proud of the hard work of our employees our strong performance is the direct result of the culture we've built at provident now i'd like to turn a call over to adriano for his comments on our financial performance adriano thank you tony and good morning everyone as tony noted our adjusted net income increased 11 versus the second quarter of 2025 to 80 million dollars or 61 cents per share with a return on average assets of 1.27 percent.

Adjusting for the amortization of intangibles, our core return on average tangible common equity was 16.2 percent. Core pre-provision net revenue is 118 million dollars or an annualized 1.87 percent of average assets, an 18 percent increase from the 100 million dollars or 1.64 percent of average assets reported for the second quarter of 2025. Our record revenue of $235 million was driven by record net interest income of $203 million and record non-interest income of $32 million. Average earning assets increased by $272 million for an annualized 4.7% versus the trailing quarter, with an average yield on assets increasing 8 basis points to 5.61%. Interest-bearing deposit costs fell 2 basis points versus the trailing quarter to 2.37%. while total deposit costs also declined two basis points to 1.92%. Our reported net interest margin expanded eight basis points versus a trailing quarter to 3.48%, which included a $2.2 million interest income recovery on resolved non-performing loans, equating to a four basis point benefit. Poor net interest margin expanded five basis points to 3.09%. We are currently modeling no further Federal Reserve rate actions for the remainder of 2026 and project approximately one to two basis points of core NIM expansion in the third and fourth quarter. Overall, we expect reported NIM inclusive of purchase accounting accretion to come in at approximately 3.45 to 3.50% for the remainder of 2026. Period end loans held for investment increased $398 million or an annualized 8% for the Our pull-through adjusted loan pipeline at quarter end was $1.8 billion. The pipeline rate of 6.33% is accretive relative to our current portfolio yield of 5.9%. Area end deposits increased $445 million for the quarter, or an annualized 9%, driven by higher broker deposit balances and growing commercial deposits. As a reminder, we elected to utilize lower-cost FHLB borrowings in the first quarter to offset seasonal outflows in the municipal deposit portfolio due to the elevated pricing in the broker deposit market this quarter we returned to utilizing broker deposits which was the largest driver of the link quarter increase our loan to deposit ratio improved slightly quarter over quarter to 102.6 percent and we continue to target a 97 to 103 percent range on this ratio asset quality remained strong when not performing assets representing 54 basis points of total assets. Net charge-offs were $1.9 million, or an annualized four basis points of average loans this quarter. We recorded a provision of credit losses of $9.3 million for the quarter as loan growth required specific reserves on individually evaluated impaired credits increase and changes in our portfolio mix warranted higher pool reserves. This brought our allowance coverage ratio of two basis points from the trailing quarter to 92 basis points of loans on June 30th. Non-interest income increased to $32 million this quarter, with solid performance from our insurance and wealth management division, as well as year-over-year increases in core banking fees and gains on SBA loan sales. Core non-interest expense decreased slightly to $116.9 million when adjusted for non-operating expense items related to our systems conversion of $1.5 million and severance costs of $900,000. dollars. Core expenses to average assets and the efficiency ratio both improved from the trailing quarter to 1.85 percent and 49.8 percent respectively. We continue to project quarterly operating expenses of approximately 117 to 119 million dollars. As we noted last quarter, in addition to normal expenses, we will be upgrading our core systems in Q3 of 2026 and expect additional non-recurring charges of approximately 4.5 million dollars over the remainder of 2026. Our continued sound financial performance supported earning asset growth and again drove strong capital formation. Tangible book value per share increased 39 cents or 2.4% this quarter to $16.42 and our tangible common equity ratio increased to 8.6% from 8.03% year-over-year. Our Cree concentration ratio was 399% adjusted for purchase accounting marks at quarter run. There were no buybacks during the second quarter, and we have over 2 million shares remaining on our share repurchase authorization. Lastly, I'd like to share a couple of updates to our guidance following the strong start to 2026. We expect loan and deposit growth to be at the high end of our initial range, now expecting 5-6% full-year growth. We also are raising our non-interest income guide for the third and fourth quarters to $29 million dollars per quarter versus 28 and a half million dollars previously. We expect full year effective tax rate of approximately 28 to 28.25 percent and we continue to target a core ROA of 1.2 to 1.3 percent with a mid-teens return on average tangible common equity. That concludes our prepared remarks and we would be happy to respond to questions.

We will now begin the question and answer session. question. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the roster. Your first question comes from Fetty Strickland with Hafty. Your line is open. Please go ahead.

Hey, good morning. Morning, Freddie. I wanted to ask on deposits. Morning. It seems like really good momentum in the back half of the year here. And you mentioned favorable repricing of deposits and the relief.

Is there much more to go there on the time deposit side just in terms of maturities coming up that can maybe reprice lower to off? set some competitive pressures on new deposits or do we kind of see costs start to pick up from here um this is ad um we expect costs to actually go up one or two basis points over the next couple of quarters mainly on pressures as you mentioned on on cds and and we're probably in competitive nature in our in our market at this point uh the pickup on on the uh net interest margin is going to be mainly driven by the back book repricing and some impact from cash flows on the securities portfolio got it um and then just you know one other question on the loan yield did purchase

accounting or creation step up some on the quarter was some of the difference between corn gap and then caused by some interest recoveries as well um mainly interest recoveries buddy um for the quarter it's pretty stable versus the prior quarter it was really driven by back reprise backbook repricing and uh coordinate expansion uh just one last question for me just on credit i I know that she didn't change the guide on charge-offs for the year, but the first half charge-offs are pretty meaningfully below that 10 to 15 basis point range. Is that just conservatism as you work through some of these larger credits in the back half of the year?

You know, I think that the charge-off expectation is in line with the risk profile that we take. I think if you look at what we can't promise is that a loan won't go NPA, but what we can't promise is what the outlook looks like. So in terms of recovery, our team has done a wonderful job in terms of working out the credits. We just don't have a ton in there. But as I mentioned in my prepared remarks, you know, we do have that one relationship that, as an example, that went into NPA in the first quarter. And we see that resolving by the fourth quarter with no real material loss or any loss whatsoever for us. So, again, I think we expect to see charge-offs remain involved based on the nature of how we underwrite and the risks that we're willing to take as an organization. So, I'll stop there.

Well, thanks for taking my questions. I'll step back. Thank you.

Your next question comes from the line of Tim Switzer with KBW. Your line is open. Please go ahead.

Morning, Tim.

On the loan side, along with NIMM expansion, it's kind of rare to see this quarter. Can you talk about what you're seeing from a competitive standpoint, particularly in lending? And like, you know, are there any pressures from maybe the larger banks in your area or anything on pricing?

I would say on the loan side, we from our vantage point, we're not seeing what I would call irrational yet. and kind of sort of my definition of irrational would be structural breakdowns in the underwriting component where we're seeing too big of a spread to be competitive against. There is competition, no doubt. I just don't see it on the irrational side yet. I see competition heightening more on the funding side of the balance sheet than I do on the lending side, which is supported by the 3.2 billion dollar pipeline that we have both and it's split i would say larger towards c and i uh which can become more competitive in today's environment everybody's chasing that so again i would say from our vantage point um i know others might feel differently but we're not we're seeing competition but not irrational or something okay yeah it's good to hear um and give me your guys expectation for the NIM to continue to move higher.

How much of that is driven by some of the loan back book repricing and what's the gap on new loan yields versus fold?

So I'll speak specifically to the fixed portion, the fixed rate portion of the loan portfolio, which has about $3 billion in cash flows coming in for the next 12 months. The weighted average yield, including purchase accounting marks, is about 5.6 on that. So we should be picking up about four basis points just on that backwards. So the spread between that and the pipeline, you're talking about 70 basis points.

Okay, and then the last one for me, can you update us on your thoughts on M&A and, you know, how active you might be and participate in any discussions in your markets right now?

Sure. You know, M&A is certainly part of our strategy, but I'd just like to go back to and say that our number one focus and priority as and organization remains organic growth across our businesses, which we're experiencing, and a lot of focus on the funding side of the balance sheet, which we're feeling pretty good about the second half of the year as we move forward. However, the M&A environment, which was sort of picking up a bunch of steam, has sort of settled out a little bit. What I can say is that we're still the same kind of perspective that, you know, cultural alignment is critical, ensuring that, you know, the pro formas, the deliverables, value adds, what strategic objectives we look to meet. So there are a bunch of kind of things that we have to check off as we approach M&A. But again, M&A is not something that we're just going to do haphazardly. It's going to be very, very selective.

Thank you very much. Next time.

Your next question comes from the line of Steve Moss with Raymond James. Your line is open. Please go ahead.

Good morning. Tony, maybe just starting with you on loan growth here, you know, you guys dive into the high end of the range. You know, the pipeline is above last quarter. Just kind of curious, you know, why not increase maybe the guidance here a little bit? It seems like, you know, you could could go over the high end of the range there.

Well, it's true. We can. What we can't predict is the level of prepayments that we might see. You know, this quarter we had three forty. We're just I think there's a possibility that we could come a little higher. But we're also being more selective on loans that come in with large cost balances. So some of the verticals that we're paying attention to that are important to us is like the middle market segment. and areas that produce strong deposits. However, if prepayments come in a little lighter, there's a chance that we can break the high end of the range again, but it's a managed process for us, right? So I think right now internally, we're guiding ourselves to the high end of that range. And if we break it, it'll be because of situations like low prepayments or asset classes that are highly desirable that we want to be in. It also takes into account a little bit lower level of production in the third quarter, Steve.

Yeah, the summer is always a little slower.

I hear you guys there. And then on purchase account and creation, just kind of curious, what are your expectations for creation in 2027?

On the loan book, it should be coming in at about $36 million, about, Steve. For this year, we estimated around $40 million. but for 2027 we expect around 36 now prepays are definitely gonna play a part in that if rates go down that should go up not significantly but it should go up okay you guys are running let's call it 22 million 20 22 million for per quarter right now so it's going to step down to about half that next year if i hear you correct ad uh so the adjustment really is so what we do the calculation to getting back to the core name, we adjust the assets as well. I think that's why there's a discrepancy between the number that you guys calculate versus what we come up with. But the true dollar amount for the quarter is about 45, sorry, 15, about $15 million.

Okay, got it. Okay, that's helpful. And then in terms of just thinking about the investment securities book, you kind of touched on a little bit. I think obviously, you know, yields went up there. But are you guys going to think about running it down here just given the more competitive environment on deposits?

We still think there's an opportunity there. So with cash flow in about half a billion dollars annually, would the yield of $3.90 being replaced with a coupon or yield of five and a quarter? I think there's still an opportunity. There's still not a spread between that and the wholesale funding, so we'll still be active in that market.

Okay, great. I appreciate it. I'll step back here.

Your next question comes from the line of Matthew Breeze with Stevens, Inc. Your line is open. Please go ahead.

Hey, good morning. I just wanted to go back to accretion. So that was a little bit, the numbers were a little bit all over the place. I think I've been modeling 20 million a quarter or there and abouts with a slight decline from here until year end 27. I'm just not sure what you were referencing in terms of the average balance sheet adjustments.

Could you kind of reframe for us what accretable yield impacts are supposed to be you know at least through year end and uh early 27. top level matt i would use 35 basis points as the adjuster right so the difference between the 309 and the adjusted reported them which would have been 344 and that should be consistent throughout okay yeah um so the loan side when we do that calculation we use the outstanding think purchase accounting marks and reduce the, sorry, increase the loan balance by that. And that's why there's a little bit of a discrepancy between true P&L dollars and the actual difference.

Okay.

All right. Thank you.

One of the focus on deposits for a second, just thinking about the updated kind of outlook for deposit growth and some of the drivers this quarter. There was, you know, a little bit more time deposit growth. Money market growth was 5%. I'm curious if those are going to be similar kind of representations of growth through the end of the year and considering kind of intensifying deposit competition. What's the cost to bring new money market or new CDs in the door in your market? What are kind of promo rates from on, on, on from Providence these days?

Well, I think if you're going down the promo rate, uh, scenario, you're looking at probably a four handle, right? 4%. Um, kind of, if you look at, as I mentioned on the call, this is one of the areas that has, uh, I think the heightened competition. Um, I think we have a good eyes, eyesight into what the second half will look like. We expect our municipal deposits to roll in at a good clip to represent about 5% back-end growth annualized. We have a bunch of new capacities that we put in place in terms of our TM capabilities that are producing some good growth and other verticals. The reason I mentioned that, Matt, is because we're not trying to fund our balance sheet with all these promo rates. I in terms of the process that we use, so we don't create a lot of incremental cost pricing on our balance sheet and destroy the funding base that we have now. So we see the capacity to grow, but we're not chasing the hot money. And I'll stop there unless you have a follow-up.

Yeah, no, that was all very helpful. Don't get me wrong. Just thinking about some of AD's comments on deposit costs outlook as well, maybe one or two basis points of increase. I'm just curious if up until now, either average costs in June or spot costs in June, if that's already started to take place. Are you seeing it above the 191 or 192 we saw this quarter?

It's up a couple of basis points. What we'll see though in the second half of the year is the benefit of the municipal inflows that are typically at the trough as of June 30th. And those should come in at a lower rate than the competitive pricing that you're seeing on the CDs. So those usually come in around three and a half to three and three quarters. So that should offset some of that incremental cost.

So also I would add that some of the growth we're seeing now that's been offset by some of the consumer and CDs has largely come into our treasury management area. are business banking and small business banking, which tend to be the lower cost funds, which gives us a little firepower if we want to do promos in the second half as needed. So we'll balance that thing against the wholesale side, depending on the funding gaps that we may have in the second half, the broker market versus promos. But again, if we have the inflows that we expect on the munis plus the other sectors continue, that should build wealth and profitability.

Okay. I wanted to turn to fee income just to step down and kind of the quarterly pace from QQ. And I was curious what areas you're expecting kind of fee income reductions in. The ones that stand out to me would be, you know, kind of, you know, insurance because of seasonal factors. BOLI looked a little elevated. I'm curious what the right level is there.

And then other income looked a little high this this quarter as well and i'm wondering if anything is you know unsustainably high there uh insurance definitely matt just because that's very seasonal based on the premiums underwritten for each quarter so year over year that's how we compare it uh at least double digit growth versus the prior year for the same period um a bully we're probably running between 800 and 900 thousand dollars on a monthly basis uh obviously there's some some benefits there that that happened in the second and first quarter that were unplanned for um but we're seeing some pickup on the fee income side that that should bode well that's where the main driver for the

guidance change was yeah so beacon is uh is obviously a um it's growing there we still see the sba sell the secondary market business we were amplifying so those are other areas that will contribute to that, Matt.

Yeah, on the banking side.

Sorry, go ahead. No, I stepped on your toes. I'm sorry, you go ahead, AD.

Okay, Matt. Now I was just going to say on the banking fee side, we did see some pre-payment income come in from loan payoffs. It was up about $300,000 quarter over quarter, so.

Just one follow-up there and then I'm done. You made some recent hires in the wealth management effort. Tony, I think you were hinting at that. maybe update us on what you expect out of that fee income line, AUM growth or fee income growth over the next year? I guess I'm wondering if you anticipate some acceleration there.

Yeah. What I certainly expect is we're making a good deal of investments in the sales and service sides of that business. So my expectation, and also on the advisory capacity, right? So I'm I'm expecting enhanced retention, you know, beyond the normal outflows that clients need to live on. I'm expecting new AUM to the bank. We're already seeing a good pickup in new AUM to existing clients. That's been really good this quarter. So we're also seeing a pipeline of new clients build with these new positions that I mentioned. And we're looking to hire more. We're seeing an increased dynamic between our commercial bank, our retail bank, and the wealth group. We're seeing a lot more referrals going into that because of the capabilities that we have on the advisory functions with our wealth clients. So I'm pretty excited to see this. We're building out, so I don't want to be too premature on this. But that's my expectation that we see a greater integration and greater results. So we have high hopes for Beacon moving forward.

I know I asked a lot of questions. Appreciate it. Thanks, Matt.

Your next question comes from the line of Manuel Navas with Piper Sandler. Your line is open. Please go ahead. A reminder that if you are muted locally to please unmute.

Sorry, guys. Good morning. How much of the deposit pipeline do you kind of expect to come from non-interest-sparing? It was nice growth this quarter. Just kind of speaking to how that should progress going forward. I think some of the treasury management initiatives are helping there, but if you could add color on how you're generating that non-interest-sparing growth.

Yeah, I don't have a clear number on a pipeline of just purely non-interest bearing. I think it's a big focus for us, but I would also say the non-interest bearing sector is the harder one to grow in this market. What we are, what I can give you as a general statement on overall lower cost business checking and non-interest that comes in from the TM efforts, the deepening of relationships. We changed some of the structure internally that you're seeing with our commercial relationship managers so i i i don't have a direct number of pipeline but what we are seeing is a i'll give you a small pipeline that we're tracking is if you look at our tm new business development folks in there uh we just just three of them that uh have nearly 150 million pipeline as of june and and They're relatively new to the organization, and we see that as 25 to 50 million in production. So while I don't have a gross number for you, there are a lot of verticals that we're looking to attack in the low-cost deposit space.

I appreciate that color. In thinking about the NIM, just kind of switching over, how responsive is it to a rate hike or a rate cut?

So on the rate hike, it's meaning on the short end of the curve, it probably compresses the slope a little bit. So it would be a reduction of about two basis points, Manuel. I appreciate it. For a 25 basis point rate hike, meaning that you're holding the five-year part of the curve steady and you just…

Thank you for the commentary.

This concludes today's Q&A session. I will now hand the call back over to Tony Laposetta for closing remarks.

So thank you, everyone. I'd like to mention again that we are very excited about Providence Future. We appreciate you joining us on today's call, and we look forward to speaking with you again soon.

This concludes today's call. Thank you for attending. You may now disconnect.