Provident Financial Services, Inc. Price & Performance (PFS)

Good morning, everyone. And thank you for joining us for our first quarter earnings call. Today's presenters are President and CEO, Tony Lavazeta and Senior Executive Vice President, and Chief Financial Officer, Tom Lyons. 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 during the course of today's call. Our full disclaimers contain the 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 Lavazetas, who will offer his perspective on our first quarter. Tony? Thank you, Adriano. And welcome to the Provident Financial Services earnings call. We are proud of the excellent performance the Provident team delivered this quarter.

We saw expanded margins increased top line revenue, solid earnings and tangible book value growth. As we've begun, to fully realize the benefit of last year's merger. During the quarter, reported net earnings of 64,000,000 or $0.49 per share. Our annualized adjusted return on average assets was 1.11% and our adjusted return on average tangible equity was 16.15%. Our adjusted pretax pre provision return on average assets was 1.61% for the first quarter. These core financial results improved from the trailing quarter and the same quarter last year and we are confident in our ability to continue our strong performance throughout 2025. Our capital position improved and continues to comfortably exceed levels deemed to be well capitalized. Our tangible book value per share grew $0.69 to $14.15 and our tangible common equity ratio expanded from the trailing quarter to 7.9%. As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on May 30. During the quarter, our deposits declined 175,000,000 or 0.94% in large part due to seasonal outflow of municipal deposits. We did, however, continue to have an improvement in our average cost of total deposits which decreased 14 basis points to an impressive 2.11%.

And the average cost of interest bearing deposits decreased 17 basis points. Our total cost of funds decreased nine basis points to a very solid 2.39%. As a result of our reported as a result, our reported net interest margin increased six basis points to 3.34%. And more notably, our core net interest margin grew nine basis points. During the first quarter, our commercial lending team closed approximately $600,000,000 in new loans. And our commercial loan portfolio increased 3.8%. This quarter's production consisted of a 30% commercial real estate and 70% commercial and industrial loans. In addition to the production mix, our strong capital formation has driven our CRE ratio down to 450%. Additionally, we have seen a substantial increase in our total loan pipeline to approximately 2,800,000,000.0 this quarter. The weighted average interest rate is 6.31% compared to 6.91% in the trailing quarter. The pull through adjusted pipeline including loans pending closing is approximately 1,800,000,000.0 compared to the 1,000,000,000 in the previous quarter. We congratulate the lending team for these results we are optimistic about the strength of our pipeline. Our credit quality remains strong to our peer group despite an increase in our non performing loan ratio to 0.54%.

Primarily attributable to two well secured loans with no prior charge off history. Our net charge offs decreased to 2,000,000 from 5,500,000.0 in the trailing quarter.

Which is also impressive relative to the peer group. These numbers demonstrate the high standards we apply to our risk underwriting and portfolio management practices. As well as the quality of our portfolio.

Overall, Provident's fee based businesses performed well this quarter.

Provident Protection Plus continues its strong performance with a 19% organic growth in new business for the first quarter as compared to the same period last year. And its income was up 23% compared to the same period 2024. However, due largely to market conditions, Beacon Trust assets under management and fee income decreased by approximately 4%. This quarter was the first which featured no transaction costs related to our merger with Lakeland and we are proud of our performance. We have used our solid foundation to excel in our core business and create value for stockholders and customers. Despite the uncertainties in the market, and the economy. We believe that we can carry this momentum forward throughout the rest of 2025 Now I'll turn the call over to Tom for his comments on our financial performance. Tom? Thank you, Tony, and good morning, everyone. As Tony noted, we reported net income of $64,000,000 or $0.49 per share for the quarter. Excluding the $2,700,000 write down associated with the pending sale of a foreclosed commercial property, core earnings were $65,900,000 or $0.51 per share, with a core ROA of 1.11%. Further adjusting for the amortization of intangibles, our core return on average tangible equity was 16.15% for the quarter.

Excluding this write down, pre tax pre provision earnings for the current quarter were $95,200,000 or an annualized 1.61% of average assets. Revenue increased to $208,800,000 for the quarter our core net interest margin increased nine basis points in the trailing quarter to 2.94%. Including 40 basis points of purchase accounting accretion, our net interest margin was 3.34% for the first quarter. We currently project a NIM in the 3.353.45% range for the remainder of 2025. Our projections include 25 basis point rate reductions in July, September and December 2025. Period end loans held for investment increased $133,400,000 or an annualized 2.8% for the quarter driven by growth in multi family, commercial and commercial real estate loans. Partially offset by reductions in construction and residential mortgage loans. C and I loans grew at an annualized 6.5% pace while total commercial loans grew by an annualized 3.8% for the quarter. Our pull through adjusted loan pipeline at quarter end was $1,800,000,000 with a weighted average rate of 6.31% versus our current portfolio yield of 5.95%. Deposits decreased $175,000,000 for the quarter with much of that decline attributable to seasonal outflows in municipal deposits. Average deposits for the quarter decreased $72,000,000 or an annualized 1.5% versus the trailing quarter.

The average cost of total deposits decreased 14 basis points to 2.11% this quarter. Asset quality remains strong despite a $31,200,000 increase in non performing loans attributable to two credits. A $20,300,000 commercial real estate loans secured by a mixed use property with a current loan to value of 53% and an $11,500,000 construction loan secured by a nearly completed facility with a current loan to value of 62%. These loans have no prior charge off history and carry no specific reserve allocation. Non performing loans represented 54 basis points of total loans at quarter end with NPAs to assets totaling 45 basis points. Net charge offs which is $2,000,000 or an annualized four basis points of average loans this quarter. The provision for loan losses decreased to $325,000 this quarter reflecting stable specific reserve requirements and a reduction in required reserves on pooled credits within our CECL estimate. This brought our allowance coverage ratio to 1.02% of loans at March 31. Non interest income increased to $27,000,000 this quarter driven by seasonally strong performance from our insurance agency and an increase in other income. Non interest expenses excluding the previously discussed write down on foreclosed [indiscernible] were $113,600,000 with adjusted expenses to average assets totaling 1.92% and the efficiency ratio improving to 54.4% for the quarter.

We currently project quarterly core operating expenses of approximately $112,000,000 to $115,000,000 for the remainder of 2025. Our effective tax rate for the quarter increased to 30.3% due to a discrete expense associated with the vesting of stock based compensation. We currently expect our effective tax rate to approximate 29.5% the remainder of 2025. Regarding projected 2025 financial performance, we currently estimate return on average assets of approximately 1.15% return on tangible equity of approximately 16% with an operating expense ratio of approximately 1.85% and an efficiency ratio of approximately 52%. That concludes our prepared remarks. We'd be happy to respond to questions.

Your first question comes from the line of Tim Spencer with KBW. Please go ahead.

Good morning. Thank you for taking my question. The the first question I have is, I know you guys are a few quarters into the integration, and you you guys have been investing in a few different areas. I think in wealth management, also making some new hires Can you provide some updates there on how many other, you know, bankers or other you've brought in over the last few months and, when we should start seeing impact to growth from that Tim, good morning. I just want to make sure there was multi questions in there that I'm addressing all of them. First was the integration. I I I think pretty much everything is behind us at this point. I don't think most most of us I don't think anybody in the company talks about it in a legacy format anymore. I think, we're just Provident Bank, New Provident moving forward. Pretty much nothing to talk about in terms of, you know, merger integration at all. We're going seamlessly. The culture is coming together beautifully on the one set of guiding principles. The dynamic is excellent. When it comes to hiring folks, I think, wasn't the wealth group that we were talking about specifically last quarter.

I think we we've talked about bringing in more teams in the Pennsylvania and Westchester markets which we've done, And part of our pipeline growth is the production that we're seeing out of the Pennsylvania, the the re our new reintroduction into that market, if you will, We're seeing great activity in that space. It's helping boost the pipeline, and we're starting to see some of that in Westchester as well. On the on the other business lines, like whether it's Walter Insurance, they're just to add to the compliment, but I don't think there was any outlier outlier tires in that space.

Okay. Got it. That's helpful. And I know it might still be a little bit early, but could you guys discuss you know, how conversations customers have been going in regards to the macro outlook and the impact of [indiscernible] Are you starting to see them pull back at all or be a little bit more cautious on investment spending? And then could you also review the the new slides you guys have put out there are great reviewing areas of your loan book. But could you highlight any specific industries that you think would be particularly impacted by tariffs within your portfolio?

I tend to not be as as dour as many, but I'm trying to be in terms of my my statements. So if you look, I'm I'm speaking Provident specific. When when you look at our our position, we have the highest pipeline our history. 2,800,000,000.0 The pipeline is stout and the pull through percentage is looking strong. When you look at the committees and the loan closings that we've seen over the last you know, month or so, going into April. Has been pretty strong. So yes, we've also undertaken initiatives to look throughout our portfolio and determine where some of the policies might have some ripple effects in and we thought so in different sectors. We haven't spotted anything to this point that is even even to be talked about. However, one of the the comments the more the way I can frame it would be that we've been now for some time talking to our customers initially informally through conversation conversation and then we converted it to formality with questionnaires. So that we can gather more intelligence. And and and the takeaway at this point is more about the uncertainty We have not seen any clients decay out of the pipeline as a byproduct of this.

It's more about pausing in certain areas, particularly in the ADL sector, than it is you know, absolutely shutting down from the transaction. So we see this as we're productive now. And hopefully, if some of that timing shifts, you know, perhaps it moves into the summer. We're we're we're not pollyatic. We're we're cautious about what can happen. But right now, we're not seeing anything or segments in the portfolio that would give us pause or alarmed in any way. And we looked at government, any things that are affected by government contracts, anything of that nature.

Now I just wanna be cautious in my statement because I'm sounding very optimistic and maybe others have not. But I just wanna say there is uncertainty, and that uncertainty would apply to even to some of my statements. So as as time moves forward, things can change. But right now, we're not seeing things that would impact our particular portfolio a very negative way. Tom?

Yes, it only had that potential for uncertainty, Tim. That's what was reflected in those guide that guidance slide that we published where we went from a straight 35% expected growth on deposits and loans to a range recognizing the lower bound of 1% to 3% on deposits and three to five on loans.

And that's based purely on that uncertainty. It's not based on what seeing in the pipeline today.

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

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

Okay. Got it. That was great. Thank you for all the details.

Got it.

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

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

Don't have a lot of certainty around the two non accruals, Mark. They they are, part of a process. Still working with the borrowers to try and get to a to a positive resolution. The comfort level there is just in the recent appraisals first quarter of twenty five. And the favorable loan to values that we have as is.

Okay. Fair enough.

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

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

Okay. And then Tony, you mentioned the fact that the CRE concentration had gotten down to $450,000,000 And I know your being north of that 300% level, but was curious where you're targeting and how long it takes to get there?

Well, I don't I think just I would characterize it, like, we're not targeting a specific number. We usually are in a range. Just just for, and maybe it'd be a long winded answer. I think in our in our forecast, we're targeting about 5% growth in the CRE space. So I wanna make sure that I leave with that. Because that'll take us with the capital formation. Eventually, we should get down to [indiscernible] Now if it's four thirty or four if it's four forty, I I'm we're comfortable with that. I think our regulatory colleagues are very comfortable with the level of of CRE given the program that we have to manage our concentration. They're they're very comfortable with it. They have no problem with us being in this space. As long as we demonstrate the things that we have been. So I think we as an organization don't mind that. But as I mentioned in my written notes, we're starting to see a lot of activity since we diversified our commercial portfolio as a byproduct of the merger. We're starting to see good lending in the areas of in the specialty groups, in the C and I side, which doesn't make us so pre dependent.

And when our if our CRE keeps up at the five percent, because I think it was 1% this quarter, maybe one point something, So it's I just wanna be careful that I'm it's not a targeted initiative to for us to reduce our CRE exposure. What is a targeted initiative is to grow those other sectors. And that mix along with the capital gives us the projections that we're looking to aim at, which is roughly in that April Again, range to answer your question. Very long winded way, but, Mark, that's the answer.

Yeah. I would just add that that a good piece of the pipeline is in the CRE space. So I wouldn't be surprised to see that number move up a little bit. In the interim term too. As Tony said, that $4.20 kind of number is a longer term, intermediate term target. Right.

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

Well, would I'm going give you awkward answer. I said the first one, given where our stock's trading, buying our own stock back would be the greatest M and A that we can do. I think that that just points to the valuation that we're not getting recognized for at this time given, that we just came off the heels of our merger. I think once that normalizes and our stock trades at a point where we don't feel like we're given it away, I think we look for the number one is always culture. Culture culture groups that fit in because this this merger has made like, if you were here today, could see this the the the way the teams work. There's dynamic leadership team. It's it's something I'm very proud of, and we we don't wanna do a merger that kinda taints that. So we wanna have that same culture dynamic And then we want to have something that would be additive, whether it's a deposit element, whether it's a new line of business for us, Obviously, there's always just the financial transactions, but the stock has to be in a good place for us to pull up financial transactions.

So I think the market will consolidate further. I just think that valuations have to be in the right spot.

Before I think it takes off the way people think it will.

Thank you.

Again, before going to the next question, if you would like to ask a question press star 1 on your telephone keypad. Next question comes from the line of Fetty Strickland with Hovde Group. Please go ahead. Hey, good morning. If Appreciate the overall expense And I think last quarter, we talked little bit about timing that maybe expenses were a little higher earlier in the year and then kind of go down in the back part of the year. Is that still sort of the expectation throughout the course of 2025? Or can you just generally explain that how you see expenses playing out over the course of the year? Yes, that's accurate, Fedi. We left the guidance at 113,000,000 to $115,000,000 to give us a little room in case something unexpected shows up. But I would probably forecast on the lower end of that range. Theoretically as low as a $1.12 number could be possible. But we'd still a little bit conservative there.

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

I think the business is very seasonal. It tends to run the first quarter being the best second quarter trails right behind that, summer tends to be the weakest quarter. Not the weakest, but the lowest. And then the fourth quarter starts to inch up again. So it's kind of that seasonality The way I would characterize it is to look at comparing same quarter last year I think the business has been running at somewhere close to 20% growth over the comparable period. On compounded annual growth rate. Sorry? Pretax income. Pretax income. Yes. And so therefore, think that's kind of the guidance that I I would share, and and it it appears they're gonna be on pace to do the same as we move throughout the year.

Great. And then just last question. You mentioned something about potential thinking about buybacks here, and I was just going to ask how you think about capital as you're back in a bit of a capital build mode at this point. I mean, are repurchases something we could potentially see in the next couple of quarters if share price kind of stays at these levels? Yeah. We don't wanna foreclose the possibility like to have the flexibility to do that opportunistically. That said, you see the strength of the pipeline. There's a lot of good profitable high return growth available to us and that tends to be our first our first option. [indiscernible] Great. Thanks for taking my questions. Thank you.

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

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

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