Provident Financial Services, Inc

Thank you for standing by. And at this time, I would like to welcome everyone to today's Provident Financial Services third quarter earnings call. 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Once again, star one. And if you'd like to withdraw your question, simply press star one again. Thanks. I would now like to turn the call over to Adriano Duarte. head of investor relations. Adriano?

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 Lavazzetta 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, providence.bank. Now it's my pleasure to introduce Tony Lavazzetta, who will offer his perspective on the third quarter. Tony.

Thank you, Adriano, and welcome everyone to the Providence Financial Services earnings call. I'm happy to share Providence'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 pre-tax, pre-provision revenues during the third quarter. which grew to a record of nearly 109 million. Our pre-tax, 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, and during the quarter, our deposits increased $388 million, or an annualized rate of 8%. It is worth noting that this growth was primarily driven by core deposits, which increased $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 loan, our commercial lending team closed approximately 742 million in new loans, bringing our production year to date 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. Non-performing assets improved three basis points to 0.41%, which compares favorably to our peers. We also saw a decline in non-approval 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 the 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 bank. Another area of strategic focus is growing non-interest income, which performed well during the third quarter. Profit and protection plus continues to drive consistent growth in our non-interest 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, Anna Marie 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 non-interest income in 2025, generating 512,000 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 Providence capital position, which comfortably exceeds well-capitalized levels. As such, this morning, our board of directors approved a quarterly cash dividend of 24 cents per share, payable on November 28th. 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? Thank you, Tony, and good afternoon, everyone.

As Tony noted, we reported net income of $72 million, or 55 cents per share for the quarter, with a return on average assets of 1.16%. Adjusting to the amortization of intangibles, our core return on average tangible equity was 16.01% for the quarter. Pre-tax 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 non-interest 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 one 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 a NIM in the 338 to 345% range in the fourth quarter. Our projections include another 25 basis point rate reduction in December of 2025. Period end loan sales for 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 $388 million for the quarter, or an annualized 8%, while average deposits increased $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 1 basis point to 2.44%. Asset quality remains strong, with non-performing 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 six basis points of average loans. Current quarter charge-offs reflected the resolution of several non-performing 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. Non-interest income increased to $27.4 million this quarter, with solid performance realized from poor banking fees, insurance, and wealth management, as well as gains on SBA loan sales. Non-interest 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 in 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 53 cents, 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.

And at this time, I would like to remind everyone, if you would like to ask a question, press star, then the number 1 on your touch-tone keypad. Once again, star 1. And we will pause just a moment to compile the Q&A roster. Okay, looks like our first question today comes from the line of Tim Switzer with KBW. Tim, please go ahead.

Hey, thank you for taking my questions. I hope you guys are doing well. My first question is, on the margin, I think you guys have, you know, I understand kind of the interest rate impacts on the floating rate book in your deposits there, but I think you guys also have quite a bit of loan back book repricing as well. Can you maybe update us on, you know, the quantity of loans that are fixed rate repricing over the next 12 months or so, and then what kind of uplift you would expect on the yields just at current rates?

I think I can give it to you in pieces, Tim. The total repricing is just under $6 billion, say $5.9 billion. Within that, the floating book is about $4.9 billion. So the balance is either longer-term adjustable repricing in the period or fixed rate.

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

I do not. I mean, the margin projection reflects all of that, so you can see the increase based on the expected new on rates, the 615 that's in the pipeline. But I don't have at my fingertips the current portfolio rate for that piece, that segment.

Gotcha. 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 CNI and then the CRE market?

Sure. Yeah, I think that's a fair statement that we've seen some increased competition in the lending market, for sure, mostly on the CRE side with what the either the private space or the agencies are doing. In fact, we had about $348 million of payoffs this quarter. Some of that had to do with that. Some of it had to do with loans just selling. But on the C&I side, we're not seeing the same level of competition that we are on the CRE side. But I would say it's a fair statement to say overall the competition has grown stronger. However, I would like to end that by saying that our team is still building a pipeline that's kind of record high at $2.9 billion. So in our pull-through, I'd say we're closing about 65% of the things we touch. So those are good, consistent metrics for us. We're careful about what the economy looks like. We're doing good loans to good sponsors under good terms. But we're aware that there's some pricing competition or structure competition out there.

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

I think as we might have mentioned on the written prepared comments was this quarter, The CNI reflected most of our growth, which includes health care, ABL, warehouse lending did very well for us this quarter. In fact, those were all double-digit growth in some of those categories, where our CRE was relatively stable because of some of the prepayments, unanticipated prepayments we saw was in that class. So, again, those are good. That's the areas that we are strategically focused on scaling up. We're doing it very well. We're very proud of that. We have the good teams to handle that. It's also driving a good result on our Cree concentration ratio, as I mentioned. So it's having all the strategic effects that we desired. If Cree picks up, I think this quarter, while I said that loans grew 5%, the effective production would have been somewhere around 7, 7 plus, if the prepayments were not there in the Cree space. So I'm pretty proud of the productivity this bank has right now. And our focus will continue on those verticals, which we put inflation strategically. We expect them to be high single, double-digit growth because the scale of that book is not substantial. So all the productivity is going to be substantial. And while Cree will run in that 5% space.

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 resident consumer, and the balance is the other commercial loan categories, middle market and other commercial lending.

All right. Got it. Thanks for taking my question. Sure. Very good.

Thanks, Tim. And our next question comes from the line of Fetty Strickland with Hovde. Fetty, please go ahead.

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

Yeah, you got it, Freddie. It's maybe a little conservatism in there as well, but the prepayment fees, again, subject to some volatility. They were about a million seven this quarter. So we scaled that back. But we, you know, who knows what we'll see. Personally, I'd rather hold the loan and leave the fees out. But yeah, that and the seasonality in the fourth quarter is not necessarily the strongest for insurance. We see, well, going into Q4 too. Q1 is where we see the pickups, right?

And I guess along the same line with non-interested 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?

Well, absolutely. As I mentioned on a call, you know, we've hired Anna Vitelli. You know, she's the chief growth officer. She's building, she's charged with growing and service and retainage of, in a way of extraordinary service in that space. and deeply integrating it with the bank. So we think there's a lot of great opportunity. So Anna will build out her needs, adding more sales and production staff and organizing herself in a fashion that will give us the things that we're looking for. But certainly these investments are aimed at one growing new AUM and deepening connections that we have within the organization already.

James Rattling Leafs- got it it just one more quick one for me on capital just hoping to get your updated thoughts on you know how do you think about capital and about deployment via dividend versus buybacks versus organic growth, while still managing the theory concentration piece as well.

James Rattling Leafs- yeah 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 now. We're close to $1,190, 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 dividend, 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'll help inform our capital decisions as well as we get more confidence around our asset growth and capital formation projections.

All right, great. Thanks for the color. I'll step back.

Thank you. All right. Thanks, Betty. And our next question comes from the line of Dave Storms with Stonegate. Dave, please go ahead.

afternoon and appreciate you taking my questions um just wanted to start with some of the decreasing 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 decreasing deposit costs um well we saw growth in non-interest bearing which was helpful to us the overall cost of funds was only up one basis point to 244 this quarter so there was a little bit of shift in mix while deposit costs were up It was still at an attractive rate in terms of funding advantage relative to the wholesale borrowings. So that's really what we try to manage, obviously, is the overall cost of funds. That all said, we do have, you know, we had the Fed rate cut the end of September, the 17th, I think it was. And then this most recent one, this yesterday, I guess. So we're going to see the benefit of both of those cuts in Q4. The September cut was effective October 1st, and the most recent cut will be effective November 1st. In terms of beta overall, I think we conservatively model something in the 30% to 35% range on deposits.

Understood. That's very helpful. Thank you. 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 the 50 and maybe what that would entail?

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's investments that we want to continue to make to support growth.

I would argue that, you know, we've been steadily making the requisite investments in our business to build out the platform for our future. The efficiency ratio, we will see that come down further by enhanced revenue opportunities. And then you might see a blip up with further investments. And I know, you know, obviously we'll get a positive operating leverage and you'll see it move back down. And that's kind of the trend we've been watching. But I think Tom says it's in this area. It can go down another point if we're building the revenue base. And then that doesn't factor in future investments.

Yeah, Tony made a really good point. I was focused on the expense side, but I think the revenue opportunities are there. You saw Dave Kuntz, Two consecutive quarters of nice growth and record levels for us, we do project for March and expansion over the next several quarters of. Dave Kuntz, Saying the three to five basis point range each quarter, so I and again we talked about some of the investments that we hope to see returns on in the in the fee based businesses over the course of the next year there's a lot of room there.

James Meeker, that's great commentary, thank you for taking my questions and good luck, thank you.

Dave Kuntz, Thanks Dave. And our next question comes from the line of Gregory Zingoni with Piper Sandler. Gregory, please go ahead.

Hey, guys.

Good afternoon.

Hey, how are you? Good. How are you? Quick question. How frequently are you bumping into private credit firms nowadays?

I'm sorry, Greg. Could you say that again? We had difficulty hearing you.

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

We know that's out there. It's not really been a factor for us at all. Most of the business we're doing is relational. So clients are not that reticent to go to private credit for one transaction, knowing that the whole relationship is important to them and us. So again, we're very cognizant of it being out there and the scale of it. It has not been a factor in us building our pipeline or getting our deals closed.

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

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

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

And then lastly, for us, M&A 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 acquisitional target?

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, you know, the build outs and In our advancement into 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 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. um 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 awesome thank you all right thanks greg and our next question comes from the line of stephen moss with raymond james stephen please go ahead uh good afternoon guys maybe just

Good. Maybe just starting on, you know, purchase accounting here. I realize it's probably elevated from the prepays this quarter. But curious as to how you guys are thinking about that going forward. And, you know, also on the subject of prepays, just kind of curious, do you think those will continue to be elevated in the near term? Or do we, you know, from the fee income comment, we're going to moderate down to more full levels?

I think the prepays, usually, you know, if you look at past trends, the third quarter seems to have a heightened pickup, which is the summer months. We expect that to normalize and, you know, maybe $150 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 they paid. 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, 150, 200 is probably a good place to be.

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.

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

yeah i mean so you know i think we have a pretty good visual to our to our strategic planning process of what our needs are to give us the productivity in future years particularly in areas of focus um it is 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 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 of what the positive operating leverage will be derived from that. So it is part of our process in terms of forecasting and strategic planning. We'll build all that out for you guys in the first quarter, and you'll get better clarity of the investments against the returns.

Okay, great. I really appreciate all the call here, and I'll step back. Thanks, guys. Thank you. You're welcome.

Thanks, Steve. And it looks like there are no further questions at this time, so I will now turn the call back over to Tony Labazzetta for closing comments. Tony?

Great. Thank you, 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.

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