Earnings Call Transcript - PFS Q3 2025

Operator, Operator

Thank you for joining us. I would like to welcome everyone to today's Provident Financial Services Third Quarter Earnings Call. I will now hand the call over to Adriano Duarte, Head of Investor Relations. Adriano?

Adriano Duarte, Head of Investor Relations

Thank you, Greg. Good afternoon, everyone, and thank you for joining us for our third 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 third quarter. Tony?

Anthony Labozzetta, President and CEO

Thank you, Adriano, and welcome, everyone, to the Provident Financial Services earnings call. I'm happy to share Provident's third quarter results today, which demonstrated continued strong performance and advancement on several strategic initiatives. Looking back over the past 12 months, we have made notable progress driving consistent and diversified growth, while also improving operational efficiency across our entire organization. Our hardworking team remains focused, contributing to our strong results by expanding our loan portfolio and pipeline, broadening our deposit base, and driving record revenues for the second consecutive quarter. During the quarter, we reported net earnings of approximately $72 million or $0.55 per share, which is consistent with the previous quarter. Our annualized return on average assets was 1.16% and our adjusted return on average tangible equity was 16.01%. While we are pleased with the bottom line metrics, we are even more energized by the meaningful improvement in pretax pre-provision revenues during the third quarter, which grew to a record of nearly $109 million. Our pretax pre-provision return on average assets of 1.76% has improved substantially compared to the 1.64% in the prior quarter and 1.48% for the same quarter last year. We believe this improvement serves as a good indicator that we have consistently enhanced the underlying profitability of our business, even as we have accelerated and diversified our loan growth. One of our primary areas of strategic focus continues to be deposits. During the quarter, our deposits increased by $388 million or an annualized rate of 8%. It is worth noting that this growth was primarily driven by core deposits, which increased by $291 million or 7.5% annualized. We continue to remain focused on efficiently funding our strong commercial loan growth and have made investments in people and capabilities to support quality deposit growth over the intermediate term. Switching to loans, during the third quarter, our commercial lending team closed approximately $742 million in new loans, bringing our production year-to-date to $2.1 billion. As a result, our commercial portfolio grew at an annualized rate of 5%, driven primarily by C&I production. Our strong capital formation, combined with the growth and diversification of our loan portfolio, has reduced our CRE concentration ratio to 402%, if adjusted for the merger-related purchase accounting marks. This compares favorably to the 408% in the prior quarter. Our loan pipeline grew appreciably to nearly $2.9 billion, with a weighted average interest rate of approximately 6.15% as of quarter end. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.7 billion. We are proud and encouraged by the loan team's performance and the strength of our pipeline as we approach the final stages of 2025. While we have worked hard to grow and diversify our loan pipeline, our commitment to managing credit risk and generating top quartile risk-adjusted returns has remained unchanged. Nonperforming assets improved 3 basis points to 0.41%, which compares favorably to our peers. We also saw a decline in nonaccrual loans during the third quarter, while our net charge-offs were only $5.4 million. Overall, we remain very comfortable with our credit position and our underwriting standards, and we continue to look for risk-appropriate opportunities to grow our business. We believe it is worth reiterating that our exposure to rent-stabilized multifamily properties in New York City is modest at $174 million or less than 1% of total loans, all of which are performing. Additionally, our credit exposure to non-depository financial institutions is limited to $292 million of mortgage warehouse loans. We are comfortable with the credit structure of these loans, including the controls we have in place to minimize risk. Furthermore, the customers we deal with are established and well-known counterparties to our banking. Another area of strategic focus is growing noninterest income, which performed well during the third quarter. Provident Protection Plus continues to drive consistent growth in our noninterest income with revenues up 6.1% when compared to the same quarter last year. While normal seasonality drove a step down in revenues when compared to the linked quarter, we remain optimistic about the high level of business activity occurring on our insurance platform. Beacon Trust saw revenue growth in the third quarter, increasing to $7.3 million. We are excited to announce that Beacon's new Chief Growth Officer, Annamaria Vitelli, joined us in September and will bring her demonstrated track record of driving strategic growth to expand Beacon's market presence and deepen client relationships. We also continue to invest in our SBA capabilities, which have been a steadier contributor to noninterest income. In 2025, generating $512,000 in gains on sale in the third quarter. Year-to-date, we have generated $1.8 million of SBA gains on sale, which is up from $451,000 in the comparable period last year. While our total assets have grown 3% year-to-date, our strong and consistent profitability continues to build Provident's capital position, which comfortably exceeds well-capitalized levels. As such, this morning, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on November 28. I'd like to conclude my remarks by emphasizing how proud we are to see the results of careful planning and hard work translate into continued strong performance in the third quarter. None of these accomplishments would be possible without the dedication and commitment of our employees. We will continue to execute our key strategic initiatives aimed at sustaining growth in our core business while simultaneously making the necessary investments on our platform to ensure Provident is well prepared for the future. Now I'd like to turn it over to Tom for his comments on the 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 a return on average assets of 1.16%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 16.01% for the quarter. Pretax pre-provision earnings for the current quarter increased 9% over the trailing quarter to a record $109 million or an annualized 1.76% of average assets. Revenue increased to a record $222 million for the quarter, driven by record net interest income of $194 million and noninterest income of $27.4 million. Average earning assets increased by $163 million or an annualized 3% versus the trailing quarter, with the average yield on assets increasing 8 basis points to 5.76%. Our reported net interest margin increased 7 basis points versus the trailing quarter to 3.43%, while our core net interest margin increased by 1 basis point. The company maintains a largely neutral interest rate risk position but anticipates future benefits of the core margin from recent Fed rate cuts and expected steepening of the yield curve. We currently project the NIM in the 3.38% to 3.45% range in the fourth quarter. Our projections include another 25 basis point rate reduction in December of 2025. Period-end loan sales per investment increased $182 million or an annualized 4% for the quarter, driven by growth in mortgage warehouse and other commercial and multifamily loans, partially offset by reductions in construction and residential mortgage loans. Total commercial loans grew by an annualized 5% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.7 billion. The pipeline rate of 6.15 is accretive relative to our current portfolio yield of 6.09%. Period-end deposits increased by $388 million for the quarter or an annualized 8%, while average deposits increased by $470 million or an annualized 10% versus the trailing quarter. The average cost of total deposits increased 4 basis points to 2.14% this quarter, while the total cost of funds increased by 1 basis point to 2.44%. Asset quality remained strong with nonperforming assets declining to 41 basis points of total assets. Net charge-offs were $5.4 million or an annualized 11 basis points of average loans this quarter, while year-to-date net charge-offs were just 6 basis points of average loans. Current quarter charge-offs reflected the resolution of several nonperforming loans and the write-off of related specific reserves. Our provision for credit losses increased to $7 million for the quarter as a result of growth in loans and commitments and minor deterioration in our CECL economic forecast. Our allowance coverage ratio was 97 basis points of loans at September 30. Noninterest income increased to $27.4 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 well managed at $113 million with expenses to average assets totaling 1.83% and the efficiency ratio improving to 51% for the quarter. Excluding the amortization of intangibles and the related average balance, these ratios were 1.73% and 46.72%, respectively. We project quarterly core operating expenses of approximately $113 million for the final quarter of 2025. Our sound financial performance supported earning asset growth and drove strong capital formation. Tangible book value per share increased $0.53 or 3.6% this quarter to $15.13, and our tangible common equity ratio improved to 8.22% from 8.03% last quarter. That concludes our prepared remarks. We'd be happy to respond to questions.

Operator, Operator

Our first question today comes from Tim Switzer with KBW.

Timothy Switzer, Analyst

My first question is on the margin. I understand the impacts of interest rates on the floating rate deposits, but I also recognize that you have a considerable amount of loan back book repricing. Can you provide an update on the volume of loans that will be repricing from fixed rates in the next 12 months? Additionally, what uplift do you anticipate on the yields at the current rates?

Thomas M. Lyons, CFO

I think, I can give it to you in pieces, Tim. The total repricing is just under $6 billion to $5.9 billion. Within that, the floating book is about $4.950 billion. So the balance is either longer-term adjustable repricing in the period or fixed rate.

Timothy Switzer, Analyst

Got you. And do you have kind of like what the blended yield is on that fixed rate and adjustable portion?

Thomas M. Lyons, CFO

I do not. I know, the margin projection reflects all of that. So you can see the increase based on the expected new loan rates of 6.15% that's in the pipeline. But I don't have it at my fingertips the current portfolio rate for that piece of that segment.

Timothy Switzer, Analyst

Got you. Okay. And there's been some discussion on other conference calls about increasing loan competition on pricing. Could you maybe discuss what you've seen in your markets and then kind of dissect that between C&I and then the CRE market?

Anthony Labozzetta, President and CEO

Sure. I think it's accurate to say that we've noticed heightened competition in the lending market, particularly in the commercial real estate sector due to activities from both private firms and insurance agencies. This quarter, we experienced approximately $348 million in payoffs, which can be attributed in part to this competition as well as the sale of loans. On the commercial and industrial side, however, we aren't experiencing the same intensity of competition as we are in the commercial real estate sector. Overall, it is fair to say that competition has indeed intensified. That said, our team is successfully building a strong pipeline, currently at a record high of $2.9 billion. We are closing about 65% of the opportunities we pursue, which are solid metrics for us. We remain cautious about economic conditions and are focused on making good loans to reliable sponsors under favorable terms, even as we acknowledge the presence of pricing and structural competition in the market.

Timothy Switzer, Analyst

Got it. That's helpful. And if I could get one more follow-up. Could you maybe add some color on how some of your new specialty verticals like ABL and healthcare are contributing to the loan growth?

Anthony Labozzetta, President and CEO

This quarter, the Commercial and Industrial segment accounted for most of our growth, particularly in health care and warehouse lending, both of which experienced double-digit growth. Meanwhile, our Commercial Real Estate segment remained stable, impacted by some unexpected prepayments. These areas are the focus of our strategic efforts to scale up, and we are successfully managing them with a capable team. This strategy is also positively influencing our Commercial Real Estate concentration ratio. If it weren't for the prepayments, production in this sector would have seen growth closer to 7 percent instead of the 5 percent reported. I am very proud of our current productivity and will keep our focus on these strategically identified verticals, which we anticipate will deliver high single to double-digit growth, given the relatively modest scale of that book. Despite this, I expect Commercial Real Estate to maintain around 5 percent growth.

Thomas M. Lyons, CFO

Tim, the other thing I could add, if it helps with the projected loan mix is the pipeline breakdown. Commercial real estate represents about 42% of the pipeline. The specialty lending category, which includes the ABL and healthcare you were referring to, is about 14%; there's 5% in residential and consumer and the balance is the other commercial loan categories, middle market and other commercial lending.

Operator, Operator

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

Feddie Strickland, Analyst

Good afternoon, everybody. Just wanted to touch on noninterest income, the guide seems to imply about a $1 million step down linked quarter. Is that just an expectation of lower loan prepayment fees, plus maybe some seasonality on the insurance?

Thomas M. Lyons, CFO

Yes, Feddie, that's correct. There might be a bit of conservatism in play as well. The prepayment fees were around $1.7 million this quarter, but we decided to scale that back due to potential volatility. Personally, I would prefer to hold the loan and not include the fees. Additionally, the fourth quarter is not typically the strongest for insurance, but we are optimistic as we move into Q4. The first quarter is when we generally see an increase, right?

Feddie Strickland, Analyst

And I guess, along the same lines of noninterest income. Can you talk about the opportunity on the wealth side as we enter '26 and whether you're working to bring on additional talent there?

Anthony Labozzetta, President and CEO

Well, absolutely. As I mentioned on the call, we've hired Anna Vitelli as Chief Growth Officer. She is responsible for growing our services and maintaining an extraordinary level of service in that area while integrating it closely with the bank. We believe there are many great opportunities ahead. Anna will assess our needs, add more sales and production staff, and organize ourselves in a way that meets our goals. These investments are focused on increasing new assets under management and strengthening our existing connections within the organization.

Feddie Strickland, Analyst

Got it. And just one more quick one for me on capital. Just hoping to get your updated thoughts on how do you think about capital and about deployment via dividends versus buybacks versus organic growth, while still managing the CRE concentration piece as well.

Thomas M. Lyons, CFO

Yes. I think our first preference remains organic growth at profitable levels. And again, recognizing the strength of our pipeline, that's where our energy has been focused. That said, we are at comfortable levels of capital there. We're close to $11.90, I think on CET1 at the bank level. So there's opportunities for us there. We certainly think we're trading at an attractive price at this point. With regard to dividends, we kind of like to get back to a 40%-ish payout ratio, somewhere in the 40% to 45% range. So I think that's when we look at that more carefully. The other thing is we're in the middle of budget season here, which is why we didn't give a lot of forward guidance. We want to wait until January to give everybody a full year update. But that will help inform our capital decisions as well as we get more confidence around our asset growth and capital formation projections.

Operator, Operator

And our next question comes from the line of Dave Storms with Stonegate.

David Storms, Analyst

I appreciate you taking my questions. Just wanted to start with some of the decrease in deposit costs and maybe get your thoughts on how much more room there might be to run here and what that looks like from a competitive landscape?

Thomas M. Lyons, CFO

We experienced a decrease in deposit costs, with growth in noninterest-bearing deposits contributing positively. The overall cost of funds increased slightly by 1 basis point to 2.44% this quarter. There was a small shift in our funding mix. Although deposit costs rose, they remain competitive compared to wholesale borrowings, which is a key aspect of our management strategy for overall funding costs. Additionally, we had a Fed rate cut at the end of September, followed by another cut recently. We expect to see the benefits of these cuts in the fourth quarter. The September cut took effect on October 1, and the latest cut will be effective November 1. In terms of deposit beta, we are conservatively modeling a range of 30% to 35%.

David Storms, Analyst

And then just one more, if I could. It looks like your efficiency ratio is hovering right around that 50% mark. Curious as to how much of a push there is to get that under 50% and maybe what that would entail?

Thomas M. Lyons, CFO

I don't think it's necessarily a push, but rather our desire to continue to make prudent investments and build for the future. So I think where we are is a really attractive level. If you look at a pure overhead management, the OpEx ratio at 183% and that's inclusive of some fairly significant intangible amortization is really quite well managed. So I don't know that there's a lot of room we're going to look to take down on that just because I think there are investments that we want to continue to make to support growth.

Anthony Labozzetta, President and CEO

I believe we have been consistently investing in our business to develop the platform for our future. The efficiency ratio should decrease further due to improved revenue opportunities. There may be a temporary increase with additional investments, but we will achieve positive operating leverage, and it will trend back down. This is the pattern we have observed, and as Tom mentioned, there is potential for it to decrease by another point if we are expanding our revenue base while considering future investments.

Thomas M. Lyons, CFO

Yes, Tony made a really good point. I was focused on the expense side, but I think the revenue opportunities are there. You saw two consecutive quarters of nice growth and record levels for us. We do project core margin expansion over the next several quarters of, say, in the 3 to 5 basis point range each quarter. So and again, we talked about some of the investments that we hope to see returns on in the fee-based businesses over the course of the next year. A lot of room there.

Operator, Operator

Our next question comes from the line of Gregory Zingone with Piper Sandler.

Gregory Zingone, Analyst

Quick question. How frequently are you bumping into private credit firms nowadays?

Thomas M. Lyons, CFO

I'm sorry, Greg, could you say that again? We have difficulty hearing you.

Gregory Zingone, Analyst

I asked how frequently are you bumping into private credit firms nowadays?

Anthony Labozzetta, President and CEO

Yes, we are aware of that situation. It has not significantly impacted us. Most of our business is built on relationships, and clients are generally willing to engage in private credit for individual transactions while recognizing the importance of the overall relationship. We acknowledge the presence and scale of private credit, but it has not influenced our ability to build our pipeline or close deals.

Gregory Zingone, Analyst

Awesome. And at first glance, your average fee in wealth management of 70 bps seems kind of high. Have you felt any pressure on pricing recently?

Thomas M. Lyons, CFO

I wouldn't say recently, it has actually come down. I can remember us being as high as 77 basis points probably two years ago or so. But it's been pretty stable, sorry...

Gregory Zingone, Analyst

I was going to ask on top of that, where are new relationships coming on today?

Thomas M. Lyons, CFO

I would say similar levels because it has remained steady at 72 basis points for quite a few quarters now.

Gregory Zingone, Analyst

And then lastly for us, M&A is picking up in the industry, it seems like a pretty good time to ask you guys. What are you looking for in your next potential acquisition target?

Anthony Labozzetta, President and CEO

Well, I would actually answer the M&A question a little bit differently, right? So I think our primary focus here is on the organic growth strategies that we outlined. We're pretty excited about build-outs and our advancement at the middle market space; we think there's a huge opportunity for us to create shareholder value and one that we think is most relevant. That being said, we're always evaluating opportunities that might be out there. I think we've proven that we have a great merger DNA; we can get stuff done. We have the right platform to do that. We'd love to see our currency trade at a place where it's more reflective of what we're worth. So we'll always evaluate opportunities from every direction, but it's a wonderful place to have the optionality, and we're creating that by having an organic growth and focusing there first.

Operator, Operator

All right. And our next question comes from the line of Stephen Moss with Raymond James.

Stephen Moss, Analyst

Good. I’d like to start with purchase accounting. I understand it may be elevated this quarter due to the prepays. I'm interested to know how you see this developing moving forward. Also, regarding prepaid, do you believe they will remain elevated in the short term, or do you expect the fee income to decrease to more normal levels?

Anthony Labozzetta, President and CEO

I think the prepays, usually, if we look at past trends, the third quarter seemed to have a heightened pickup, which is the summer months. We expect that to normalize and maybe $150 million to $200 million range, I would say, is more normalized, but you always have in that number that I gave. There's a lot of businesses that sold as much as it wasn't a huge, huge number of refinancing elsewhere; probably $90 million of it refinanced elsewhere. So there's always going to be activities, companies selling companies coming. We just have to have an organizational capacity to grow at a level to make up for that. But if I were to put a number on it, I would say $200 million, $150 million to $200 million is probably a good place to be.

Thomas M. Lyons, CFO

And with regard to purchase accounting, Steve, I'd say our normal number runs about 40 to 45 basis points of the NIM. I would expect that to persist throughout the next four quarters.

Stephen Moss, Analyst

Great. And then kind of on the theme of organic growth and hiring. I heard you guys' comments around the efficiency ratio. Just kind of curious how you guys are thinking about hiring for 2026. You've definitely made a number of investments over the last 12-plus months. Kind of curious if there's maybe another step-up in terms of bringing people over in the new year or just color around that?

Anthony Labozzetta, President and CEO

Yes. I mean, so I think we have a pretty good visual to our strategic planning process of what our needs are to give us the productivity in future years, particularly in areas of focus. It is our expectation that we'll continue to invest. If you look at what insurance does, we hire roughly 10 to 12 new producers every year to keep pace with that. We're expecting that to happen in the Beacon space; our commercial platform continues to hire not only in new geographies but in verticals that we're investing deeper in. I would expect more investment in the middle market space for us next year. All of those things we have clarity on what the positive operating leverage will be derived from that. So it is part of our process in terms of forecasting and strategic planning that we'll build all that out for you in the first quarter and you'll get a better clarity of the investment against the returns.

Operator, Operator

And it looks like there are no further questions at this time. So I'll now turn the call back over to Tony Labozzetta, for closing comments. Tony?

Anthony Labozzetta, President and CEO

Great. Thanks everyone for your questions and for joining the call. We hope everyone has an enjoyable end of the year and a holiday season. We look forward to speaking with you again soon. Thank you.

Operator, Operator

Thanks, Tony. And again, this concludes today's conference call. You may now disconnect. Have a good day, everyone.