Provident Financial Services, Inc

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would not like to turn the call over to Adriano Duarte, head and interest relations officer. Please go ahead,

sir. Thank you, Christophe. Good morning, everyone, and thank you for joining us for our fourth quarter earnings call. Today's presenters are President and CEO Tony Lavazetta 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 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 of our website, provident.bank. Now it's my pleasure to introduce Tony Lavazetta, who will offer his perspective on our fourth quarter. Tony.

Thank you, Adriano. Happy New Year, everyone, and welcome to the Provident Financial Services earnings call. The fourth quarter of 2024 was characterized by a more favorable macroeconomic environment with continued growth, additional interest rate cuts, improved performance in the banking sector, and an optimistic outlook. The Provident team maintained solid core performance and profitability thanks to the excellent asset quality, good deposit growth, and the increasing contributions of our fee-based businesses. During the quarter, we reported net earnings of $48.5 million, or $0.37 per share. Our annualized adjusted return on average assets was 1.05%, and our adjusted return on average tangible equity was 15.39%. Our adjusted pre-tax, pre-provision return on average assets was .53% for the fourth quarter. We are pleased with our core financial results and are confident in our ability to build on this momentum going into 2025. At the end of 2024, our capital levels remained healthy and comfortably exceeded levels deemed to be well capitalized. Normalizing for changes in AOCI, our tangible book value per share grew 34 cents to $14.71, and our tangible common equity ratio was consistent with the trailing quarter at 7.67%. As such, our Board of Directors approved a quarterly cash dividend, $0.24 per share, payable on February 28. During the quarter, our deposits grew $248 million, or .4% annualized. The average cost of total deposits decreased 11 basis points to 2.25%, and the average cost of interest-bearing deposits decreased 15 basis points. Our total cost of funds decreased 14 basis points to 2.48%, which remains favorable relative to our peer group. As a result, our core net interest margin expanded four basis points. However, our reported margin compressed three basis points to .28% due to a decrease in purchase accounting accretion. During the fourth quarter, our commercial lending team closed approximately $713 million of new commercial loans. However, we experienced approximately $328 million in loan payoffs, resulting in a modest growth in our portfolio. This quarter's production consisted of 53% commercial real estate, 47% commercial and industrial loans. Roughly one-half of the CNI production was in our specialty lending group. While on the topic of lending, we are excited to announce that as of Monday, Bill Fink has joined us as our new Chief Lending Officer, following the retirement of John Rath. Bill is responsible for leading our commercial lending growth strategy and brings with him over 30 years of experience in commercial banking, credit administration, and an impressive track record in credit risk management and operational strategy. In the past 20 years, Bill worked at TD in numerous leadership positions and most recently spearheaded its middle market and asset-based lending businesses with responsibility for a $24 billion portfolio. I am very confident that he will succeed in driving responsible growth in our commercial lending group. In addition to hiring Bill, we have added more resources to our lending teams and have expanded our lending presence in Pennsylvania and Westchester. Our credit quality is strong and for the quarter continued to improve as our non-performing loan ratio decreased 8 basis points to 39 basis points. This ratio compares favorably relative to our peer group. Our net charge-offs also decreased to $5.5 million from $6.8 million in the trailing quarter, which is also low relative to our peer group. We are confident in our underwriting and portfolio management standards as well as the quality of our portfolio. We have seen a modest decrease in our total loan pipeline to approximately $1.8 billion in the fourth quarter from approximately $2 billion in the preceding quarter. The weighted average interest rate is .91% compared to .18% in the trailing quarter. The pull-through adjusted pipeline, including loans pending closing, is approximately $1 billion. This quarter, Providence fee-based businesses continued to excel. Provident Protection Plus had 19% organic growth in the fourth quarter as compared to the same period last year. In addition, it had over 16% organic growth over the last 12 months and its retention rate was 100%. Beacon Trust Assets Under Management grew to $4.2 billion, which represents a .5% growth relative to last year. Income improved 12% relative to the last quarter of 2023 and was driven by good investment performance. As we enter 2025, we are pleased that the merger is now behind us. The fundamentals of our company are strong and we have built a solid foundation for growth. We are optimistic about the operating environment and our ability to build our business, which will help us produce even more value for our customers, employees, and stockholders. Now I'll turn the call over to Tom for his comments on our financial performance.

Thank you, Tony. Good morning, everyone. As Tony noted, we reported net income of $48.5 million or $0.37 per share for the quarter. Excluding charges related to our merger with Lakeland Bancorp, core earnings was $62.9 million in the current quarter for $0.48 per share with a core ROA of 1.05%. Further adjusting for the amortization of intangibles, our core return on average tangible equity was .39% for the quarter. Note that all merger related charges have now been recognized with no further merger expense to be recorded in 2025. Excluding merger related charges, pre-tax pre-provision earnings for the current quarter were $91.8 million or an annualized .53% of average asset. Revenue totaled $205.9 million for the quarter and our core net interest margin increased four basis points from the trailing quarter to 2.85%. Including 43 basis points of purchase accounting accretion, our net interest margin was .28% for the fourth quarter. We currently project a NIM in the .45% range for 2025. Our projections include two additional 25 basis point rate reductions in September and December 2025. During the quarter, we reclassified $151.3 million of non-relationship equipment lease loans to help for sale. Excluding this transfer, period and total loans were essentially flat for the quarter as growth in multifamily and commercial loans was largely offset by reductions in CRE, construction, residential and consumer loans. December closings were strong, however, and our pull through adjusted loan pipeline at quarter end was $1 billion with a weighted average rate of .98% versus our current portfolio yield of 5.99%. Deposits increased $248 million or an annualized .4% from the trailing quarter to $18.6 billion at December 31st with growth driven by municipal and consumer non-interest bearing and money market balances. As a result, our loans to deposit ratio decreased slightly to 101%. The average cost of total deposits decreased 11 basis points to .25% this quarter. Asset quality remained strong with non-performing loans representing just 39 basis points of total loans, NPAs to assets declining to 34 basis points, total delinquencies at 57 basis points of loans, and criticized and classified loans totaling .67% of loans. Net charge-offs were $5.5 million or an annualized 12 basis points of average loans this quarter. The provision for loan loss has decreased to $7.8 million this quarter, reflecting specific reserve requirements and some deterioration in the macroeconomic variables that drive our CSEL estimates. This increased our coverage ratio to .04% of loans at December 31st. Non-interest income decreased to $24 million this quarter, mainly due to fewer boldly benefit claims and a seasonal reduction in insurance agency income. Non-interest expenses excluding merger-related charges were $114 million, with expenses to average assets declining to .90% and the efficiency ratio improving to .4% for the quarter. Non-interest expenses for the quarter included certain items that are not expected to recur in the 2025 run rate, including a $1.4 million litigation reserve charge and approximately $1.6 million of year-end adjustments to incentive accruals. We currently project quarterly core operating expenses of approximately $112 to $115 million for 2025. Our effective tax rate for the quarter fell to .6% due to a $4.2 million benefit recorded on the revaluation of certain deferred tax assets. We currently expect our 2025 effective tax rate to approximate 29.5%. Regarding projected 2025 financial performance, we currently estimate return on average assets of approximately .15% and return on tangible equity of approximately 16%, with an operating expense ratio of approximately .80% and an efficiency ratio of approximately 52%. That concludes our prepared remarks. We'd be happy to respond to questions.

At this time, I would like to remind everyone in order to ask a question, simply press star then the number one on your telephone keypad. I'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Mark Fitzgibbon with Piper Sandler. Mark, please go ahead.

Hey guys, good morning. Morning, good

morning.

First question I had, Tom, you know, I guess I'm curious how you hit that $26 million fee projection in like the third and fourth quarter when insurance revenues declined seasonally. What's kind of the offset? I mean, what are some of the other items that you anticipate being higher to mitigate that seasonal decline in insurance?

Yes, that's an average over the course of the year, Mark. So we're going to see seasonal improvement in the first half of 2025. In addition, there's some volatile items in there, as you know, regarding gains on loan sales, swap fee income, SBA loan sales, insurance contingency in the first quarter, which makes it higher than $26 million.

Right.

And also, boldly death benefit claims. You know, we don't model those, but there's an actuarial component to that where we see some recognition of income there. So overall, we expect the $26 million a quarter is a reasonable number.

So for the boldly number, is a normal run rate excluding death benefits sort of $2.3 million, is that the right number?

Is that on top of what we reported before,

Mark? I think so.

That's correct. This quarter had none, so that's a typical run rate, Mark.

Yes. Okay, great. And then I guess your expense guide looks like it assumes some pretty heavy lifting. I guess, you know, what are some of the bigger pieces of that? You know, where do we have cost synergies coming? Is it, you know, residual stuff from the Lakeland deal? Or is there other things where you think you can sort of reduce expenses on?

Yeah, I mean, we kind of worked off of the beginning reported expense for this quarter, Mark. We did not have any additional tax assets, the non-recurring items, and I mentioned a few of them in the comments, took into account the additional employer payroll taxes in the first quarter. Worked through the full cost savings, which were realized at the end of Q4, so we took full benefit for that in Q1. We get to, I'm getting about $113 million, $114 million for the first quarter. So the 112 to 115 guide seems reasonable. We'd expect to see that stabilized, maybe even trail off a little bit in the back half of the year.

Okay. And I think you said you're assuming two 25 basis point cuts and rates. What does each 25 basis point cut mean for NII or the margin?

To be honest, not a whole lot. The balance sheet is so neutral that we ran a number of scenarios, both with growth and different rate cut environments, and very tightly clustered in terms of NIM. And the difference in NINITRA's incomes, I'd most a couple of million dollars up or down, a couple hundred basis points even.

Okay. And lastly, Tony, I guess I'm curious from your perspective, what are sort of the top two or three priorities for the company right now?

Well, so for you, no problem. We're pretty good at the risk management and our balance sheet is pretty strong. So as we move into 2025 and beyond this year, in no particular order, I would probably say the, you know, continuing to build on our culture and nurture the team dynamics of bringing two companies together. Our growth, growth and growth are still going to be our biggest focus for this year in all sectors. I think some of the things that we're excited about is the changes that are happening in our commercial bank and treasury management and seeing some good dynamic growth there in deposits. Our fee based businesses are still dry. And lastly, I would say huge focus about deepening share across the channels. That's big. And I think with the Lakeland merger, being able to deploy some of that is also going to be very creative for us. And we want to do this while, and I know you mentioned it, while we're maintaining operational efficiency. So that's really the focus for me and the team as we move into 2025.

Thank

you. Welcome.

Thanks, Mark. And your next question comes from the line of Billy Young with RBC Capital Markets. Billy, please go ahead. Hey guys, how are you?

Good.

Good. Just, I guess for us just kind of like a bigger picture question, you know, kind of just looking at your adjusted returns for the quarter and your 2025 return targets. Just kind of how do you think about, how do you think those returns kind of stack against your longer term franchise goals? Do you see room to kind of optimize and do better than that longer term?

I think there's continued ability to gain efficiencies and scale, which should continue to improve the returns metrics overall.

Yeah, I would add to that, that, you know, we've done, you know, a lot of effort this year in building the foundation for an organization that could be some good, strong growth. We've done much and I think we're prepared and I think as we continue to build, we won't have to scale up at the same level so we can take advantage of that. We put some good dynamics for loan growth in this coming year. And we'll continue to look at areas to become even more efficient. So I think it's really growing our businesses and being able to handle the scale without adding to the operating expenses.

Got it. Thank you for that. And then just switching to loan growth a little bit. You know, I think we spent the last couple quarters talking about kind of improving activity and, you know, better customer sentiment. It hasn't really shown up in the bottom line numbers yet, but, you know, I kind of understand there's some moving parts this quarter. It feels like, you know, payoff activity was a little bit elevated this quarter. It's been a little bit of a headwind. Kind of. Do you need to see that moderate a little bit to kind of get to your 5% growth target for 2025 or what is it that gives you confidence that you'll get there?

Well, I think if you remember last quarter, we gave a little bit of caution that we might see some creep repayments and we saw some of that. This quarter, we also had about 50% of the 328 million that I mentioned was just maturities or and loans and sale of the underlying property. So that's just something that you can't really gauge. And about half was refinancing away from us. So the way I feel comfortable about it is, you know, we've made some good dynamic changes in our commercial bank. We have good leadership team there that across all our segments that can really build our business. We're seeing activity. If the operating environment cooperates and the rate cycle, I think that we're going to really jump ahead. Right. So there's those small headwinds that I mentioned, but we have the appropriate complement to be able to produce growth and excess of the numbers that we're guiding you guys on. And if, you know, just to give you a sense, the 712 million that we closed this quarter. We really need to be somewhere at the size of the bank that we are now between 24 and 25 billion. We need to be closer to about eight to 900 million of production. And then you take about 40% of that and that's what really affects those to your outstandings. That's sort of the algorithm or calculus that we do. And so we're able to see that at 712 in this environment. So, again, the only thing I would caution is the operating environment in terms of Providence Product capacity and having the right complement, the right leadership, the right go to market strategy, enhancing our Treasury management. I'm pretty excited about that. And I think 25 is going to demonstrate that. But we've had some headwinds of change. You know, obviously, John retired our CLO. We've got new changes there. We see opportunities coming from even the legacy organizations that some of those change agents have come to us from. So long with that answer to say, I know it hasn't showed up in our results in the last couple of three quarters. We're feeling pretty good about the foundation to build as we move forward.

Yes, I could just add a couple of thoughts, Tony. I think our market position currently is very strong. I know some of our competitors have some other internal issues that they're dealing with. And so I think we have the ability to be a real dominant player in the over the next year. I think Tony referenced a little bit some of the distractions we saw with integration and core systems conversion. All that's behind us now. So I think there's a full focus on moving forward. And then in Tony's prepared comments, he did reference Bill Fink joining us as chief lending officer and some other ads in the revenue producing side that we expect to see really generate some growth. So pretty optimistic. Yes.

So I would answer. I would say one last thing if you if you, you know, on that we've been historically very strong on growing the Cree side of the business. If you look at the real underlying sort of silver lining in our commercial growth in our production is that most of the growth we've seen as common to see in our space and our specialty lending businesses, which have done really well. Which I think we could amp up. You know, we had some some noise around Cree this year. If we could amp up our Cree to this traditional levels, which I think that's probably easier for us to do than the other size, that we should achieve the numbers that we're guiding to and maybe overachieve.

Appreciate it. Thank you for taking my questions.

And your next question comes from the line of Tim Swetzer with KBW. Tim, please go ahead.

Hey, good morning. Thank you for taking the questions. My first one is on kind of looking for a little bit more clarity on the expense outlook. It's kind of a wide range there. And you know, you're talking about 113 to 114 million for the first quarter, but then maybe trails down a little bit in the back half of the year. What would be driving that improvement later in 25? Is that like seasonality or some initiatives you have that would maybe be coming offline?

Yeah, typical seasonality, Tim, with the employer payroll tax thresholds being achieved and some of the utility maintenance kind of costs that you see in the colder months of the year being a little bit more elevated in the first quarter.

Okay. And what would maybe drive you, I guess, to the higher end of your range if you're thinking 113, 114, Q1 and then down from there?

You know, only additional investments in terms of core operating expense. I mean, things that come that I consider to be outside of operations would be decisions made around resolutions of not performing assets as an example where you might take a loss that's not reflected in these core projections.

Okay. And sorry if I missed this earlier, but is this quarter a good level for purchase accounting and accretion going forward?

Yeah, I think it's a good base, Tim. It's a little bit unpredictable because of the volatilities and the cash flows. I mean, what happened to us this quarter is we saw fewer prepayments of loans that had acquisition discounts and we actually saw some prepayments of loans that had acquisition premiums in the SBA book that was acquired. There's not a lot of premium loans left in there. It's about total of about $2.4 million. But that was about $800,000 of the reduction in the current quarter.

Oh, wow. Okay. And I think we've asked this before, but you know, are you guys considering a securities restructuring just given the change in the yield curve and with some of your lower yielding assets, it seems like it could give you a nice earn back relatively quick.

No, Tim, I think we continue to feel that it's appropriate to hold the assets. We don't see that again in an efficient market. We don't see the earn back in a short enough time frame to warrant that. We did do the restructuring in connection with the acquisition. We did make the acquisition of about $550 million at the Lakeland acquisition because there it made sense the hit equity was already baked in through the purchase accounting.

You might want

to add

that we're thinking about this thoroughly since we made the announcement on the lease and you might want to expand on that.

Oh, that's true. We did decide, as you saw in the earnings lease, to exit the non-relationship portion of the equipment lease financing business. So I consider that a restructure. It's not a big spread business and we think there's it's just not attractive from a building the franchise point of view and better use of capital.

Yeah. Okay. That makes sense. Thank you guys.

Thank you.

And your next question comes from the line of Fed is frequent with the health day group. Feddy, just go ahead.

Hey, good morning. Was what are you getting updated on the opportunity with upcoming CD maturities and what you're what you're seeing on repricing CDs today?

Yeah, CDs repricing over the next 12 months total about $3 billion, $1.2 billion in the first quarter. About 57 basis points to pick up in the first quarter. When I talked about how neutral our balance sheet is, it's funny if you look at floating rate loans are about $4.8 billion and the maturing CDs and and borrowings are about $4.3 billion over the next 12 months. And then the flexibility on the rest of the liability side

of things. We also have a slight repricing downward on some of the specialty pricing deposits that are non CDs.

Yeah, that makes up the rest of the difference. Why I say that no, regardless of the rate environment, really the impact on the NIM is fairly minimal.

Got it. And then one of the big into fees really wealth in particular, you know, two questions on that. Number one, is there an opportunity to move that average fee higher from that 73 basis points or so? And then the second portion of that is DC. What are the opportunities for the non advisory portions of the wealth business?

Don't think that there's a lot of ability to up the fee rate. The 73 is pretty strong relative to the industry and the

peer group. Exactly. I think the game for us in the is to up the AUM. And if we can keep the fee at that relative level, I think that will be the success in that space. The second part of that question was with the. Is that the I didn't get the second part. Could you repeat if any? I didn't know I didn't. Just grow the

non advisory portions of the business.

Yeah, I think that's that's been growing. You know, for us, you know, I think we this year, I think we did, I think, three hundred and something million dollars of new mostly outside bank growth in that business. It's not a what I would call a material segment of our space, but it's a good contributor. And ultimately, I think I would love to see more graduation and from that space and into as assets build and into more of our our beacon wealth business. You know, so having more of a synergy there. But ideally, I think from my perspective, I see the greatest promise for us is to continue to synergize across the channels and have our AUM growth on the beacon side is going to be the greatest path forward. Profitability. Yeah, I'm not sure if we

understood the failure. Let me just check the question. I think Tony was referring to the non deposit investment products outside of beacon. But I think you might have been asking about non advisory services provided by beacon. Is that correct? Things like the tax estate that kind of.

That's correct. I was just wondering whether that, you know, I guess the pie grows a little bit for those sections relative to the non advisory or relative to the advisory part of business.

It does, but it's a relatively small portion really the money at beacon is made through the advisory services.

Got it. And just last question, I wanted to touch on credit. I know there's not a pond in terms of, but could you talk about potential opportunities resolve some of the non performing loans over the course of twenty, twenty five.

Continue, we continue to work with the customers. We look at note sales, see where they make sense on the on the side. We start. We're trying to work through a couple of resolutions on the remaining. I think it's about nine point six million dollars left in real estate owned. We expect to see some of that continue to move. They do. We do a pretty good job of retaining those not performing assets for relatively short period of time.

I think we have a good group in the resolution area and they have good active strategies on the best path out for all the things that are moving into. So we're pretty comfortable that things don't stay in there forever. And there's a good exit strategy.

All right, great. Thanks for taking my questions.

Thank you. And our final question comes on the line up manual nervous with the a devison manual. Let's go ahead.

Hey, good morning. Could you speak a little bit more to the good morning? Can you speak a little bit more to the kind of the wild cards around the range? What could get you to the top and what could get you to the bottom?

Really? The biggest drivers, the shape of the curve. So long as the longer end stays somewhat anchored on the ten year side of things. If especially that's where we see a little bit of a pick up, break down versus rate up rates up is that we see more benefit to the wholesale funding cost and a little bit on deposits. But at deposits, you get to a level where I think the beta starts to drop more. But that's really the primary challenge there is just that the shape of the church, the curve changes materially. The other thing would be the accretion, which has volatility and growth overall. Right. We talked about last quarter, I believe, and we're going to continue to execute on that, adding some to the securities portfolio. Like to see that get up to about 15% of assets spread on that a little lower. So we could drive the name down a bit, but still give us greater net interest income.

That's great. You've been able to lower deposit costs pretty well. Is there any difference in the first 75 basis points versus December cut? And is there still going to be some deposit costs felt into the first quarter beyond CD repricing?

Yes, you'll see cuts that were effective January 1.

Okay. Any difference in the difficulty of those cuts or pushback?

No, when the initial cuts came through, the communication was pretty clear that there were going to be continued movements in line with the Fed for the most part. So I would expect a

lot of those communications happened between the relationship managers and a lot of our customers. So not only did they inform about the rate cut, but they informed about prospective rate cuts and what the impacts would be. So since the stability is there, we're pretty comfortable that the clients are well informed in their behaviors. One of the things we saw this quarter at, which wasn't clearly pointed out, we also saw some good consumer deposit flowing. Most of that growth happened in the consumer side, both non-income bearing and interest bearing and also some municipal. Our business deposits were actually cycling down through the payments of bonuses, taxes, et cetera, which we didn't see any account closure. So most of that we expect to kind of recycle back in. So with the consumer activity coming back, which has been the outflows over the last, you know, since COVID, I think that that is probably a good indication that that flows in and if our commercial deposits come back in, it should bode well for our growth as we move forward.

I appreciate that. Can you expand a little bit more on the just kind of shifting gears to the opportunity geographically? You brought up Pennsylvania and Westchester. Just could you add some more color, maybe sizing or timing of that opportunity?

Sure. In my spoken comments earlier, I mentioned that we had more compliments to our current lending teams in our present markets. In addition to that, we've also expanded by having, I think, a four-person team into Pennsylvania. I think two more individuals into the crease space in Pennsylvania. And so that that'll help us grow the, you know, we have a sort of a more focused strategy in building out our Eastern Pennsylvania marketplace, which we have a good presence in. And I think those folks will help us build that in tandem, working with our other retail side. We're looking at both building, you know, not only the commercial, but the treasury management and deposits as well in that market. And then we've added some compliments in the Westchester, New York, Westchester, not Westchester, Pennsylvania, to be able to build out some of the lending in that space. So, you know, we're pretty comfortable and I think they'll think coming on board. Perhaps he'll build out his team from folks that follow him. And, you know, it's pretty exciting time. I know it's not showing up in the balance sheet just yet. But I'm pretty comfortable that we've set the foundation for good growth as we move forward.

Thank you. I appreciate the commentary.

Thank you. That concludes our Q&A session. I will now turn the call back over to Antonella Bozzetta for closing remarks. Tony?

Sure.

I just wanted to say thank you to everyone and appreciate the good questions this quarter. I'm pretty comfortable and optimistic for Providence' future. I wish you all a good 2025 and look forward to having conversations with you in the near future. Thank you.

This concludes the meeting. Thank you all for joining. You may now disconnect.