Earnings Call Transcript - PFS Q2 2025

Operator, Operator

Thank you for joining us today. My name is Abby, and I will be your conference operator. I would like to welcome everyone to the Provident Financial Services Second Quarter Earnings Call. I will now turn the conference over to Adriano Duarte, the Investor Relations Officer. You may begin.

Adriano M. Duarte, Investor Relations Officer

Thank you, Abby. Good afternoon, everyone, and thank you for joining us for our second 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 regarding any forward-looking statements that may be made during the course of today's call. Our full disclaimer is contained in this morning'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 second quarter. Tony?

Anthony J. Labozzetta, CEO

Thank you, Adriano, and welcome, everyone, to the Provident Financial Services Earnings Call. The Provident team delivered an impressive performance this quarter. Our team gained momentum with solid earning asset growth, improved margins and asset quality, record earnings, and expansion of tangible book value. During the quarter, we reported net earnings of $72 million or $0.55 per share. Our annualized return on average assets was 1.19%, and our adjusted return on average tangible equity was 16.79%. For the second quarter, pretax pre-provision return on average assets was 1.64%. These core financial results improved from the trailing quarter and the same quarter last year, and we are confident in our ability to sustain this momentum throughout the remainder of 2025. We continue to build our capital position, which comfortably exceeds levels deemed to be well capitalized. For the quarter, our tangible book value per share grew $0.45 to $14.60 and our tangible common equity ratio expanded to 8.03%. As such, this morning, our Board of Directors approved a quarterly cash dividend of $0.24 per share, payable on August 29. During the quarter, our deposits increased $260 million, on an annualized growth rate of 5.6%. We continue to improve our average cost of total deposits, which decreased to 2.1%. During the second quarter, our commercial lending team closed approximately $764 million in new loans, bringing our production to a record $1.4 billion for the first half of the year. As a result, our commercial loan portfolio grew at an annualized rate of 8%. This quarter's production consisted of 20% commercial real estate and 80% commercial and industrial loans. Our strong capital formation, combined with our production mix, has reduced our CRE ratio to 444%. Adjusting for merger-related purchase accounting marks, the CRE ratio is actually 408%. Notwithstanding the high level of loan closings this quarter, our loan pipeline remains robust at approximately $2.6 billion, and the weighted average interest rate is stable at 6.3%. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.6 billion. We remain confident about the strength of our pipeline and our ability to achieve our commercial loan growth expectations for the rest of the year. Our credit quality is strong relative to our peer group with a modest improvement in our nonperforming assets and a decline in delinquencies and classified loans. Our net charge-offs decreased this quarter to just $1.2 million or 3 basis points of average loans. These numbers demonstrate our commitment to prudent underwriting and portfolio management standards. Overall, Provident's fee-based businesses performed well this quarter. Provident Protection Plus maintained its strong performance with an 11.3% increase in revenue for the second quarter and its income was up 10.1% compared to the same period in 2024. Given market conditions early in the quarter, Beacon Trust revenue declined 0.2% due to a decrease in average market value of assets under management. However, asset valuations have recovered and Beacon closed the quarter with $4.1 billion in AUM, which is consistent with the trailing quarter. The Beacon team is focused on building AUM, and I am pleased to report that Beacon has hired a new Chief Growth Officer to further this objective with a projected start date late in the third quarter. Overall, we are proud of our performance this quarter. We have a dynamic team and a solid foundation to grow our core businesses, expand profitability and create even more value for our stockholders and customers. Building on our strong results, we believe we will continue this momentum and achieve our desired goals for the remainder of 2025. Now I will turn the call over to Tom for his comments on our financial performance. Tom?

Thomas M. Lyons, CFO

Thank you, Tony, and good afternoon, everyone. As Tony noted, we reported net income of $72 million or $0.55 per share for the quarter with an ROA of 1.19%. Adjusting for the amortization of intangibles, our return on average tangible equity was 16.79% for the quarter. Pretax pre-provision earnings for the current quarter were $99.6 million or an annualized 1.64% of average assets. Revenue increased to a record $214 million for the quarter driven by record net interest income of $187 million and noninterest income of $27 million. Average earning assets increased by $383 million or an annualized 7% versus the trailing quarter with the average yield on assets increasing 5 basis points to 5.68%. Our reported net interest margin increased 2 basis points versus the trailing quarter to 3.36% and while our core net interest margin remained stable. We currently project the NIM in the 3.35% to 3.45% range for the remainder of 2025. Our projections include 25 basis point rate reductions in September and November. Period-end loans held for investment increased $318 million or an annualized 6.8% for the quarter, driven by growth in commercial, multifamily, and commercial real estate loans, partially offset by reductions in construction and residential mortgage loans. C&I loans grew at an annualized 21% pace while total commercial loans grew by an annualized 8% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.6 billion. The pipeline rate of 6.3% is accretive relative to our current portfolio yield of 6.05%. Period-end deposits increased $260 million for the quarter. However, average deposits decreased $278 million versus the trailing quarter. The average cost of total deposits decreased to 2.10% this quarter. Asset quality remained strong with nonperforming assets declining to 44 basis points of total assets. Net charge-offs were just $1.2 million or an annualized 3 basis points of average loans this quarter. In addition, total delinquencies declined to 65 basis points of loans, and criticized and classified loans fell to 2.97% of loans. This strong and stable asset quality, coupled with an improved economic forecast used in our CECL model, drove a $2.9 million reserve release this quarter. This brought our allowance coverage ratio to 98 basis points of loans at June 30. Noninterest income was steady at $27 million this quarter with solid performance realized from core banking fees, insurance and wealth management as well as gains on SBA loan sales. Noninterest expenses were $114.6 million with annualized expenses to average assets totaling 1.89% and the efficiency ratio improving to 53.5% for the quarter. We reaffirm our previous guidance of quarterly core operating expenses of approximately $112 million to $115 million for 2025. Our effective tax rate for the quarter was 29.7% and we currently expect our effective tax rate to approximate 29.5% for the remainder of 2025. Our sound financial performance supported asset growth and drove strong capital formation. Tangible book value per share increased $0.45 or 3.2% to $14.60 and our tangible common equity ratio improved to 8.03% from 7.9% last quarter. That concludes our prepared remarks. We would be happy to respond to questions.

Operator, Operator

And our first question comes from the line of Mark Fitzgibbon with Piper Sandler.

Mark Thomas Fitzgibbon, Analyst

First question I had for you, Tony, is on the Beacon business. I heard your comments about growth starting to ramp with some new people. I guess I was curious, is there any change in strategy? Or is it just simply you brought in some new people that will go out in the market aggressively and grow the business? Or are you trying to kind of market to a different audience?

Anthony J. Labozzetta, CEO

Great question. I don’t believe this represents a significant strategic shift. Our primary goal remains to increase assets under management. Beacon is a robust platform, and we aim to strengthen our sales and service efforts, particularly in sales. We are working to build a larger team that can collaborate effectively with our business line partners across commercial, retail, treasury, and insurance. This approach will help us not only deepen our existing relationships but also attract new clients to both our bank and Beacon. Our strategy is forward-looking, with a strong emphasis on client retention, and we are focused on better integrating these efforts into our businesses. The individual we hire for this role will be crucial to achieving these objectives.

Mark Thomas Fitzgibbon, Analyst

Okay. And then a couple of questions around provisioning. You mentioned in the release that part of the reason for the reserve release was the improved sort of economic forecast. I assume is that Moody's their assumptions changed?

Thomas M. Lyons, CFO

That's correct, Mark. Moody's baseline and primarily in our case, the main driver in terms of macroeconomic variables is the commercial property price index that drove most of the release.

Mark Thomas Fitzgibbon, Analyst

Okay. And then kind of related, I guess, I was curious, your bottom-line ROA and ROE estimates kind of imply that provisioning will be pretty modest in the back half of the year. Am I thinking about it the right way? Because you've given really good guidance on most of the other items, and that's the one that kind of sticks out.

Thomas M. Lyons, CFO

I think that's the case, Mark. If you look at asset quality, we saw some nice improvement in terms of criticized and classified, and you don't see it in the release, but the watch list credits have improved as well. And for good economic reasons, we saw improved lease-up in both the retail commercial real estate space as well as the multifamily space. So feeling pretty good about credit quality overall.

Anthony J. Labozzetta, CEO

Barring any shift in market conditions or some global event, I think that's a good outlook.

Thomas M. Lyons, CFO

Yes. And I know, Mark, even though you saw a small increase in dollars of NPLs, there's virtually no loss content in the driver of the increase. There was one loan in excess of $10 million. It was really almost, I guess, a technical non-maturity in the sense that there's some ownership concerns among the owners of that business as to the disposition of the property, but really strong valuation. So we're not concerned about losses there.

Mark Thomas Fitzgibbon, Analyst

Okay. And then last question, Tony. Last quarter, I had asked you about sort of M&A and you said you're focused on organic growth, but open to M&A. However, your stock price didn't fully reflect the strength of the company, et cetera. Your stock is up maybe 10%, 12% since then. Do you feel like the currency gives you capacity to be able to seriously consider M&A at this point?

Anthony J. Labozzetta, CEO

I wasn't clear last time. We're always in a position to evaluate our strategic options, and we continue to do that. Right now, our primary focus is on organic growth, but we are not ruling out M&A opportunities. If the right opportunity arises that aligns with our strategic goals discussed last quarter, we would consider it and assess its implications for our shareholders moving forward. I believe our stock price is beginning to reflect more accurately the value of Provident, and I think there is still potential for further growth.

Operator, Operator

And our next question comes from the line of Steve Moss with Raymond James.

Thomas Bernard Reid, Analyst

This is Thomas on for Steve. Just want to start it off with loans here. C&I growth was really strong. What's driving that right now is it more line utilization? Or is it new originations? And maybe what additional hiring opportunities are you seeing for C&I lenders these days?

Anthony J. Labozzetta, CEO

I would say our organizational capacity is where we want it to be right now. We anticipate additional hiring as we expand and consider our next steps. The growth we're experiencing is due to the book, and not just that but also with Bill Fink's presence and the team's focus on Commercial and Industrial (C&I) lending. We have a diverse range of products available now that we didn't have three years ago, including Asset-Based Lending (ABL), health care lending, mortgage warehousing, and an increasing Small Business Administration (SBA) presence. All these services have positively contributed to our production this quarter, and our pipeline indicates they'll keep contributing well. However, we are still focused on Commercial Real Estate (CRE) and are actively growing our CRE book. It's just that other lines are advancing at a quicker pace, which we're happy about, as they are attracting substantial deposits. We have the capacity to grow, and we'll proceed as necessary, supported by a solid expansion plan in terms of both capacity and geographical reach. Overall, I'm quite satisfied with the direction of our Commercial Bank.

Thomas M. Lyons, CFO

And I would agree with Tony that it was primarily driven by origination, but we did see increased line usage over the last number of months. We call it normalization. We're traveling in low territory for a long time, as I guess was much of the industry. We're back up around 45% line utilization. And I'd add also, in terms of the pipeline, Tony talked a little bit about the mix going forward. About 40% of the pull-through adjusted pipeline is in CRE, about 55% is in the commercial categories, and about 5% consumer.

Anthony J. Labozzetta, CEO

I just would like to round out that comment by saying, it's not accidental. I think part of our strategic objective was to kind of diversify our commercial book. So we're not CRE heavy. And as you can see by the reported number that if you adjust for the merger-related charge, we're at 408%. That's a pretty solid number. And it will continue to improve as we continue to build our other lines of business.

Thomas M. Lyons, CFO

Especially when you consider we were at 475% a year ago. Correct.

Thomas Bernard Reid, Analyst

That's all great color. I really appreciate that. And if I can get one more in wealth management fees did feel a little light at 68 basis points of EOP AUM, was that driven by maybe lower average AUM from market volatility or maybe something else?

Thomas M. Lyons, CFO

Yes. That is the case for the quarter. As Tony noted, I think, in his opening comments, the average balance was down. It impacted revenue for the quarter, but we did see market recovery, and we're back up actually a little bit ahead of where we were at the end of period at the first quarter. So client count has remained constant. We're actually at plus 3% on the client count. The AUM per client has gone up a little bit, so nice recovery by the end of the period.

Operator, Operator

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

Feddie Justin Strickland, Analyst

Just wanted to start on the expense guide. Last quarter, I think you mentioned you might be able to come in potentially at the lower end of the range. Do you still feel like maybe that's achievable and we could see the quarterly expense line coming down a little bit in the back half of the year?

Thomas M. Lyons, CFO

I do, Feddie. So there was a little bit of unanticipated what I would consider nonrecurring costs in terms of some severance charges of about $750,000 to $1 million in nonrecurring items there. That said, the back half of the year is usually when we take a closer look at some of our incentive accruals for the current period as we get greater visibility into where we might end the year. So the various incentive programs throughout the different disciplines in the bank, we try to get a finer point on a little more precise, and that can affect the accruals either positively or negatively. So that's why we're giving a range of $112 million to $115 million.

Feddie Justin Strickland, Analyst

Got it. Appreciate that. And just wanted to talk through the municipal deposit flow seasonality. Kind of what your expectations are there? Am I thinking about that correctly that maybe the increase in broker deposits is really to replace some of that outflow and then we could maybe see those broker deposits come back down as you maybe have some seasonal inflows in municipal deposits?

Anthony J. Labozzetta, CEO

Yes. I think that's a fair statement. I would kind of expand on that to say we also allowed some high-yielding CDs that we had on our books from pre-merger during the liquidity times. And that was just a trade-off between the broker deposits or the consumer CDs, which were high yield, and we thought that was a good trade. And it also made up the delta in funding needs because of the municipal outflows. So that was a combination of those two things. If you look at our municipal pipeline now, not only do we expect the flows which are strong in the third quarter, particularly this month, and we're starting to see that, but you also are now seeing the pipeline of potential new municipal business is also there. So that should come along nicely as we achieve those wins.

Thomas M. Lyons, CFO

You are correct, though, that the municipal deposits, the trough is the deepest in the second quarter historically.

Operator, Operator

And our next question comes from the line of Tim Switzer with KBW.

Timothy Jeffrey Switzer, Analyst

With you guys a little bit less interested in M&A right now, do you have like a target capital level you're trying to get to? And how does that play into your appetite for more share repurchases?

Thomas M. Lyons, CFO

I don't think it's a significant strength. I kind of like around 11.25% for the CET1.

Timothy Jeffrey Switzer, Analyst

Okay. Okay. And sorry, this has already been asked. But for the NIM trajectory, you guys took up the high end of the guide a little bit. Can you talk about what's helping drive that? And how would Fed rate cuts impact your margin?

Thomas M. Lyons, CFO

The balance sheet is fairly neutral. So I mean the two cuts of 25 basis points are built into that margin expectation. We've run a whole number of models and working off the most likely, though, but it looks like around 3.40% in Q3, maybe exiting as high as 3.45%, 3.47% even at the end of the year. But again, just exercise a little caution in that. And again, that's two rate cuts in September and November.

Timothy Jeffrey Switzer, Analyst

Great. Okay. That's good to hear. And then last one for me. The loan pipeline moved down just slightly lower, but you obviously had pretty good growth in Q2. Is there any slowdown or uncertainty causing borrowers to be more cautious at all? Or does everything still look pretty good? People aren't too concerned about tariffs or anything like that?

Anthony J. Labozzetta, CEO

Actually, that's one of the real bright spots. On the pipeline down, it did go down because of some, what I will call very strong loan closings in the quarter. Right? And I think the key is we scrub our pipeline incredibly well. So the stuff that's in there, we feel pretty good about it. And so we also, in all the conversations with our verticals, I don't see any signs of anything slowing down immediately. The replenishment appears to be happening. We do expect to have a nice pull-through in the third quarter and continue to replenish it. And so again, I don't see anything right now that I'm concerned. I think it's a bright spot for us moving forward.

Operator, Operator

And our final question comes from the line of Manuel Navas with D.A. Davidson.

Manuel Antonio Navas, Analyst

I appreciate the commentary on the NIM in the back half of the year. Is the main drivers there, the accretive new loan production with deposits kind of being more flat? Or could you see some deposit cost decline as well? I guess you do include two cuts, so that's part of it as well.

Thomas M. Lyons, CFO

Yes. I would put more emphasis on the asset repricing though. You've got about $6 billion of the existing back book repricing over the next 12 months, about $5.1 billion is floating. So as the rates move, we should see that benefit. And then the new loan production coming on at accretive levels as well. I would be cautious about taking too much credit even with the rate cut on the funding side just because the competitive environment, I think, is a little bit more challenged now. Deposits are a high commodity.

Anthony J. Labozzetta, CEO

Yes. I would like to add one point to that. There is certainly a significant amount of beneficial loan production. Whether we are at the high or low end of the range will depend on the funding side. However, I want to emphasize that while we make managerial decisions, we are putting a lot of focus on net interest income. We are willing to give away one or two basis points if it means our net interest income can grow. I just want you to keep this in mind for the next earnings call, as these will be management decisions we make to drive better earnings, and that’s part of the management strategy.

Thomas M. Lyons, CFO

That's a really good point. And you saw some of that even on the investment portfolio side. I think I mentioned last quarter, I'd be very comfortable taking the investments back up to about 15% of assets. We're still a little bit under that now. But the leverage growth obviously gives you a little bit less spread, but good income with very little credit losses because we're buying high-quality Treasuries and agency securities.

Anthony J. Labozzetta, CEO

But we're feeling pretty good because some of the funding growth that we're seeing. And if that manifests along with the loan production, it should be well in the range of what Tom's saying.

Manuel Antonio Navas, Analyst

I definitely sense the optimism on NII growth. Could you speak a little bit more to that competition you're seeing, just in some of that commentary? I mean, that's also because there's more demand out there, but could you just speak to that for a moment?

Anthony J. Labozzetta, CEO

Yes. I believe much of the competition we're encountering, and Tom can chime in at any time. On the consumer deposit side, we're experiencing more stress, whether it's deposit accounts shifting to money markets or other banks becoming more competitive, especially with CD products. Our business deposits remain stable and are growing. To give everyone on this call an idea, we're funding about 30% of our commercial products with business deposits, which is a solid ratio. As I mentioned, if we can see the return of municipals, we're not experiencing much stress regarding competition there. The competition is primarily on the consumer side; while municipals face competition too, the most significant level of competition is occurring in consumer deposits. Tom, do you want to add anything to that?

Thomas M. Lyons, CFO

I think you covered it. Just to accentuate that it's not just banks; it's the availability of viable investment alternatives for folks as well, and you can get a decent return.

Operator, Operator

And that concludes our question-and-answer session. I will now turn the conference back over to Mr. Tony Labozzetta for closing remarks.

Anthony J. Labozzetta, CEO

Well, thank you, everyone, for your questions and joining the call. We hope everyone has an enjoyable summer and a great rest of the year. We look forward to speaking with you soon. Thank you very much.

Operator, Operator

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.