Provident Financial Services, Inc

Thank you Adriano, and welcome everyone to the Provident Financial Services fourth quarter earnings call. The Provident team delivered another strong quarter driven by record revenues, favorable credit metrics, and expanding core profitability. Throughout 2025, we built organic growth momentum on both sides of the balance sheet, which combined with positive operating leverage resulted in notable improvement in our financial performance. Accordingly, in the fourth quarter, we reported net earnings of 83 million, or 64 cents per share. Our annualized return on average assets was 1.34%, and our adjusted return on average tangible common equity was 17.6%. Pre-provision net revenue was a record 111 million, or an ROA of 1.78%. Since closing the Lakeland transaction, we have grown poor pre-provisioned net revenue every quarter. Turning to our balance sheet, our commercial loan team generated total new loan production of $3.2 billion in 2025. Elevated loan payoffs of $1.3 billion, which were primarily in our CREE portfolio, partially offset our strong production, resulting in net commercial loan growth of 5.5% for the year. We remain focused on generating high quality diversified loan growth. At year end, our pipeline remains solid at 2.7 billion with a weighted average rate of 6.22%. Our loan pipeline has consistently been north of 2.5 billion for the last four quarters. And more importantly, our originations have grown every quarter in 2025, peaking at over 1 billion in the fourth quarter. On the funding side, Core deposits grew $260 million, or 6.6% annualized, compared to the link quarter. Favorable trends in our commercial and consumer segments contributed to growth in our average non-interest-bearing deposits of 2% annualized. The deposit market remains competitive, but we continue to invest in our capabilities to drive meaningful growth in our core funding. Providence commitment to managing credit risk and generating top quartile risk-adjusted returns has remained unchanged. During the quarter, we successfully resolved 22 million of non-performing loans while experiencing just 1.3 million in associated net charge-offs. As a result, non-performing assets improved nine basis points to a favorable 0.32%. The business environment in our market continues to be healthy. And as a reminder, our exposure to rent-stabilized multifamily properties in New York City is less than 1% of total loans, all of which are performing. Growing our non-interest income remains a strategic priority. We generated record fee revenue of $28.3 million in the quarter. I want to take a minute to highlight the momentum and diversity of our non-interest income. Profit and Protection Plus continues to drive consistent growth in our insurance agency income. New business and over 90% customer retention helped grow pre-tax income 13% year over year. Profit and Protection Plus has a strong pipeline at the start of 2026, and I'm encouraged by the increased collaboration with both the bank and Beacon Trust, which should strengthen further in 2026. Beacon Trust saw revenue growth again in the fourth quarter. increasing to 7.6 million on approximately 4.2 billion of AUM. Beacon remains focused on both growth and retention, and we continue to make investments in talent to help achieve these goals. We also continue to invest in our SBA capabilities, which have been a more significant contributor to non-interest income in 2025, generating 946,000 of gains on sale in the fourth quarter. For the full year, we have generated 2.8 million of SBA gains on sale, which is up from 905,000 in 2024. While total assets grew nearly $1 billion in 2025, our strong profitability helped further build Providence Capital position, which comfortably exceeds well-capitalized levels. As such, earlier this week, we announced a new share repurchase authorization that will allow us to buy back an additional 2 million shares. I'd like to conclude my remarks by discussing our strategic priorities for 2026. We expect to continue investing in revenue-producing talent across our middle market banking, treasury management, SBA, wealth management, and insurance platforms. We expect recent balance sheet growth momentum to be sustained and that loan payoff activity will normalize when compared to 2025. Finally, we are preparing for a core system conversion in the fall of 2026, an important investment that will enhance scalability and our digital capabilities. I'm confident in our team's ability to successfully complete this conversion, particularly given how seamlessly we integrated Lakeland Bank in 2024. I'm incredibly proud of the efforts and production of our employees. We are pleased with our organic growth momentum and improved profitability, and we continue to target sustained top quartile performance. Now I'd like to turn the call over to Tom for his comments on our financial performance and to discuss our 2026 guidance. Tom? Thank you, Tony, and good morning, everyone.

As Tony noted, we reported net income of $83 million, or 64 cents per share, for the quarter, with a return on average assets of 1.34%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 17.58%. Pre-provision net revenue increased 2% over the trailing quarter to a record $111 million or an annualized 1.78% of average assets. Revenue increased to a record for a third consecutive quarter at $226 million driven by record net interest income of $197 million and record non-interest income of $28.3 million. Average earning assets increased by $307 million or an annualized 5.4% versus the trailing quarter with the average yield on assets decreasing 10 basis points to 5.66%. This reduction in asset yield was more than offset by a 13 basis point decrease in the cost of interest-bearing liabilities to 2.83%. While a reduction in net purchase accounting accretion limited our reported net interest margin expansion to one basis point versus the trailing quarter at 3.44%, our core net interest margin increased by seven basis points to 3.01%. The company continues to maintain a largely neutral interest rate risk position, but anticipates future benefit to the core margin from recent Fed rate cuts and expected steepening of the yield curve. The core margin for the month of December continued to trend upward at 3.05%. We currently project continued core NIM expansion of three to five basis points for the next two quarters, with reported NIM estimated in the 3.4 to 3.5% range for 2026. Period end loan sales for investment increased $218 million, or an annualized 4.5% for the quarter, driven by growth in multifamily, commercial mortgage, and commercial loans, partially offset by reductions in construction and residential mortgage loans. Total commercial loans grew by an annualized 5.4% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.5 billion. The pipeline rate of 6.22% is accretive relative to our current portfolio yield of 5.98%. Period end deposits increased $182 million for the quarter, or an annualized 3.8%, while average deposits increased $786 million, or an annualized 16.5% versus the trailing quarter. The average cost of total deposits decreased four basis points to 2.1% this quarter, while the total cost of funds decreased 10 basis points to 2.34%. Asset quality remains strong with non-performing assets declining $22 million, or 22%, to 32 basis points of total assets. Net charge-offs were 4.2 million, or an annualized nine basis points of average loans this quarter, while full-year 2025 net charge-offs were just seven basis points of average loans. Current quarter charge-offs reflected the disposition of several non-performing and underperforming loans and the write-off of related specific reserves. We recorded a net negative provision for credit losses of $1.2 million for the quarter, as year-end loan closings drove a decrease in approved commitments pending closing, asset quality improved, and there was modest improvement in our CECL economic forecast. This brought our allowance coverage ratio down two basis points from the trailing quarter to 95 basis points of loans at December 31st. Non-interest income increased to $28.3 million this quarter, with gains realized on calls of corporate securities and solid performance from our wealth management and insurance divisions, as well as gains on SBA loan sales and increased board banking fees. Non-interest expense increased to $114.7 million this quarter, as strong operating results drove increased performance-based incentive accruals, while expenses to average assets and the efficiency ratio were consistent with the trailing quarter at 1.84%, and 51% respectively. Excluding the amortization of intangibles and the related average balance, these ratios were 1.76% and 48.15% respectively. We project quarterly core operating expenses of approximately $118 to $120 million for 2026, with the second half of the year run rate being slightly higher than the first half. In addition to normal expenses, as Tony mentioned, we will be upgrading our core systems in Q3 of 2026 and expect additional non-recurring charges of approximately $5 million in connection with this investment, largely to be recognized in the third and fourth quarter. Our sound financial performance supported earning asset growth and drove strong capital formation. Tangible book value per share increased 57 cents, or 3.8% this quarter, to $15.70, and our tangible common equity ratio increased to 8.48%, from 8.22% last quarter. We realized the $3.4 million benefit to our income tax expense from the purchase of energy production tax credits for the 2025 tax year. We are exploring opportunities to purchase additional similar tax credits for the 2026 year and open carryback years. Excluding the discrete benefit of any tax credit carrybacks, we currently project an effective tax rate of approximately 29% for 2026. Regarding additional 2026 guidance, we are expecting loans and deposits to grow in the 4% to 6% range, non-interest income to average $28.5 million per quarter, and are targeting a core return on average assets in the 120% to 130% range with a mid-teens return on average tangible common equity. That concludes our prepared remarks. We'd be happy to respond to questions.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Mark Fitzgibbon of Piper Sandler. Your line is open.

Hey, guys. Good morning. Nice quarter. Morning, Mark. Tom, first question for you. I heard your comments on the effective tax rate being 29% for 2026. I guess I'm curious, those tax credit investments that you announced you made, I think it was $54 million. How does that flow through to the effective rate, or when does it flow through?

So that was in the Q4. Those are 2025 tax year benefits. So that was reflected in the $3.4 million we saw in reduction in income tax expense. Next year's purchases, the 2026 year, will be realized in 2026 as a reduction. That's where we're dropping from close to 30% down to about 29% in our estimate of what the effective rate will be.

And it's spread out throughout the year. So it's not a one time like we did in 2025.

That's correct. We did them at the end of the year. So it should be spread through three quarters of the year in 2026.

Okay, great. And then secondly, I saw the buyback announcement. I guess You know, you have a little bit of excess capital. Could you help us think about, you know, how you'd rank your priorities for deployment of excess capital today?

Yeah, I don't think they've changed. Still, profitable balance sheet growth is our primary objective. We think that's the longest-term value creator. But we wanted to add additional flexibility to our capital deployment options, which is why we refreshed the stock buyback plan.

I think that's spot on. Organic growth is our primary focus. The second half of the year, we might look at our dividend as our productivity continues. Obviously, there's always the additional uses of capital if we want to invest deeper into our insurance and wealth platforms. And then there's always in the background the thoughts of mergers. Our primary number one focus is organic growth.

Yeah, our capital levels, we're comfortable with where they are now, and we're confident in our capital formation projections for the rest of the year. So, again, that was another trigger, as Tony said, to both give some consideration in the remainder of the year to the dividend rate as well as to reintroduce some buyback options.

Okay. And I hear what you're saying, Tony, on M&A being sort of back of the list, so to speak. But if you were to look at bank deals, what kinds of things would you be looking for in a potential target?

Well, I think as I mentioned in the past, I think the primary, I would start by saying this team is a pretty outstanding team and we put together a pretty good engine. Everybody's meshing well. We got a good dynamic group from board on down. And number one thing is that the cultures have to be compatible so that we don't create a tremendous amount of pickups in what we've been building here already. that's producing value. So that being said, we would also love to see some additional talent acquisition and then also perhaps a new line of business or a market that we're not in. Complimentary things, adding to the wealth side or deepening our insurance penetration is certainly something of value, but we do recognize that you can't get all those boxes checked off in any situation. So you have to pick off How many boxes do you want checked off in order to get the deal done? But there's still a lot of good franchises out there that we think we could be good partners with. However, I didn't just cover what we thought was a value of virtue.

Thank you.

Your next question comes from the line of Tim Switzer of KBW. Your line is open.

Hey, good morning. Thanks for taking my questions. I also want to congratulate Congrats to Tom on his pending retirement. Thank you, Tim. Appreciate it. The first question I have is there's been a good amount of talk on conference calls this quarter about rising deposit competition in some of your core markets, particularly on pricing. What have you guys seen in the market? Where is the highest level of competition right now in terms of category, geography? Does that maybe impact your NIM outlook or liquidity management at all?

Well, I kind of want to say competition is heightening a little bit, but I see the competition for deposits in our market as being universal. It's always been there as long as I've been in the space. It kind of moves here and there in different segments. I would argue that everybody's in a fight for non-interest bearing demand and low-cost money And then that's part of your model. I think from our perspective, we're doing a good job with our core model. If you look this quarter, we had 16.5% growth on average balances. You're seeing we produced nearly $479 million of commercial deposits this year that tend to be your lower-costing deposits, funding about 24% of our loan production. So those are all good things. So the competition is there. But if you go to market with the right talent and with the right approach, I think you can win your share. I would say a safe answer would be that if everybody has designs to grow high single digits, there's just not enough new money for everybody's needs. So that's what creates a competition. It's just not enough to cover everybody's growth needs.

Gotcha. Yeah, it makes sense. And then can you remind us on, I think you have close to $5 to $6 billion of fixed rate loans repricing in your back book over the next year. Can you refresh us on what that number is and maybe the gap on, you know, new origination yields versus what's rolling off?

Yeah, the total repricing over the next four quarters, this is on the adjustable side, is about $5.7 billion. looking for okay back book repricing uh cash flows both amortization and and prepays we're looking at another uh 4.7 billion dollars over the next 12 months as well so the pickup and rate is about 30 40 basis points i think it adds about four basis points to the name gotcha okay um and then the last question i have is just on

CRE market trend seems like it's becoming a little bit healthier. Volumes are improving, pricing, you know, holding up to rising, you know, trying to get enough. Like, are you guys seeing the same thing there? And then I believe there's also due to some M&A in your market, there's a competitor looking to sell potentially some CRE portfolios in the New York market. Is that anything with your guys' capital levels you'd be interested in or just focused on organic?

Yeah, I mean, there's a couple of questions in there. I'll try to tackle them all. I'll start with the last one first. There's probably little to no desire for us to acquire anyone's portfolio since our productivity is quite high and being able to allocate that capital to our clients is more important, right? So the relationship banking that we do, we would view that book acquisition as a filler and it's just not necessary for us in a way we approach our business. When you look at the Cree market overall, I do see a healthier Cree market. Our Cree book has held up incredibly well throughout any of these perceived cycles. You're starting to see other banks that may have stepped a little bit back on the Cree space, stepping back in. And certainly the agencies, if you look at half of our prepayments that I mentioned in the call, 50% of them, We're with the agencies that basically are offering terms that we just don't do, which is high level of prepayments, of IOs rather, long-term IOs, and high leverage and rates that are just not balanced with the risk-reward. Again, I think that the market is healthy, and you're always going to have spotty situations. Like right now, the big thought process is what's happening on the rent-controlled rent rent stabilized in New York with the new administration. We're attentive to it. We don't see anything even in our small portfolio that is alarming to us at this point. So knock on wood, everything appears to be healthy going into the 2026 year.

Awesome. Appreciate all the color. Thank you.

Your next question comes from the line of Freddie Strickland of Hovde Group. Your line is open.

Hey, good morning. I wanted to touch back on loan yields a little bit. And, Tom, I think you mentioned this a little bit in your opening comments, but is there the potential for yields to move off a bit as we move into early 26, just given the increase in the pipeline yield at 1231 versus 930 and what you just talked about with backflow-free pricing?

I think so, and stable to slight improvement overall.

Yeah, that makes sense, especially we had a little bit of a lift in the five-year from the prior quarter, about 20 basis points, and that's where the yield improvement came from. Yeah. Or the rate improvement came from.

Got it. And then just switching over to fees, I noticed the wealth AUM was down a little bit from last quarter, despite what I would imagine is positive market move impacts. But it still sounds like you're pretty bullish on 2016. Can you talk a little bit about what drove AUM maybe a little lower in the fourth quarter?

It was down a little bit on a spot basis, up on average though by about $80 million. We did have some net outflows for the quarter, but we did have some good strong business production during the period as well. So overall client count is pretty stable.

Yeah, I would add it's a little bit more exciting of what we expect for 2026, right? So we've added some more talent to Beacon to augment the growth and retention strategies that are there. We've brought in some teams along with that to help. Pretty exciting early indications. Obviously, it's way too early for any real huge material numbers change, but we're seeing the engagement. We're seeing new-to-bank clients coming in. We're seeing a group that can deeper penetrate, deeply penetrate both Provident and work with Provident Protection Plus and the bank to deepen those client relationships. So, I'm pretty excited about the prospects for 26 when it comes to Beacon. I'm expecting some pretty good things there.

Got it. And just one last one for me. Is there any desire or opportunity to expand the footprint a little bit more in adjacent geographies, more organically is what I'm talking about? I mean, maybe areas like Long Island, given some of the disruption there, maybe a little further south in the Philly suburbs, or are you pretty happy with where you are today? Well, people that know me, I'm never really happy.

So I would say that, yes, to all of the above. I mean, we're already out on Long Island in Manhasset, and we have an office in Astoria. So continuing to penetrate there is obviously intelligent. We like the Westchester Rockland markets. We do like the main line around Philly. All of those areas are where we already have teams down there. We don't have physical locations there. around that Philly market, but we already have lending teams down there, same as in Westchester in New York. And, you know, so seeing us expand geographically in those areas is not something that should surprise anyone on this call. All right, great.

Thanks for taking my questions, and congrats, Tom, on the retirement. Thank you very much. Really appreciate it.

Your next question comes from the line of Steve Moss of Raymond James. Your line is open. Hey, Steve.

Good morning.

Good morning.

Hey, Tony. Hey, Tom. Congrats on your retirement. You're welcome. Maybe just starting back on the accretion numbers here. Just kind of curious, Tom, what you're thinking for total purchase account accretion for 2026?

On the loan book, it's about $60 million for the full year. Okay. Got you. Volatility in there, you know, on prepayments, but that's our kind of base case model.

Right. Okay. So then a lot of the adjustable rate loans you were referring to that are repricing carry rate marks at the current time, you're just looking to convert those to kind of like a core margin, kind of how to think about that benefit?

Not all. Some. Not all, Steve. Just because there's a blend, a healthy blend of legacy provident loans and . Yeah.

Got you. But it is about three to four basis points or four base points to the margin just from the back book repricing, if I heard that correctly.

That's correct. Yep.

Okay. Perfect. And then my other question here is just kind of, you know, Tony, in your prepared remarks, you mentioned, you know, the hiring plan for 2026. You kind of alluded to it a little bit. in some of your earlier commentary, just kind of looking for any specific niches maybe you're looking to add, how many people you're looking to hire in the upcoming year?

Yeah. As I mentioned, the area, I think one of the areas, the biggest areas of focus, when we look at hiring the people, it's augmenting some of the things we're doing already, like in the insurance space and in our wealth space, you should expect to see a lot more in the production side and the retention side. I think one of the greatest areas of investments for us this year is going to be in the middle market space, that range of $75 to half a billion in client size. We think that is an area that we haven't really penetrated deeply yet. It comes with all the attributes that we like, strong deposits, strong relationships. We're able to use our wealth group in those segments as well as our insurance. It means not that our other clients don't, but this is an area that we think... is is very suitable for us in the scale that we're at so there's going to be some some good i wouldn't be surprised in there if you had another you know three to five additional compliments in in this year um obviously all of that is timed in the expense guidance we we've given and you know we were paying close we are very attentive to positive operating leverage so it's not we're not going to race ahead of ourselves um also the other area that you could expect to see some some growth is in our treasury management capabilities, particularly on the outbound deposit-only categories like the gathering functions. You know, we want to deepen that investment as we move deeper into 26. So, great. I mean, it's a great thing because we keep investing in our future and that it's exciting because we're having the growth and we just want to make sure that we can continue to deliver growth in 26 and 27. Hiring these productive individuals is going to be a critical process.

Okay.

Got you.

That's helpful. And then one last one for me on credit here, just with the reserve has come down a fair amount over the course of the year. Curious what the potential is for maybe incremental reserve bleed here or, you know, is there just, is there less give on that number here going forward?

You know, it's largely a model-driven exercise at this point. The macroeconomic variables drive the provision requirements. That said, it feels like we're at a base here. But, you know, we've been very consistent in our approach and our methodology throughout the year. And it really has been warranted, as you can see, with seven basis points net charge-offs over the year. Good, strong credit metrics, 32 basis points in NPAs. I think it's 40 basis points NPLs to loans. So the credit quality and the strong underwriting and the low leverage ending we do have all supported the lower allowance coverage ratio.

Okay, great. Appreciate all the color there. Thank you very much. Thank you. Thank you.

Your last question comes from line of Dave Storms of Stonegate Capital Partners. Your line is open.

Morning. Thank you for taking my questions. Morning, Mike. Morning. Just wanted to start with, you know, you mentioned in prayer more decrease in deposit costs. Just curious as to how you see the room to run here and if there's any specific initiatives that we should keep in mind as you continue to try to bring those costs down.

I'm sorry, Dave. I had trouble hearing that. Could you try to speak a little louder, please?

Apologies. Yeah. Just around decrease in deposit costs. How much more room do you think there is to run here? And if there's any specific initiatives that we should keep an eye on as you're working through these costs?

So we are still repricing downward. We didn't get the full benefit of the last cut reflected, which is one of the reasons we wanted to bring to everybody's attention that the margin for the last month of the quarter of December was 3.05% on a core basis. So we'll see the full benefit of that. I think every 25 basis point cut that we may get gives us another two to three basis points in the core margin in terms of improvement. Overall, I'd say our betas are going to continue to run in the 25 to 30% range relative to the Fed rate cuts.

That's great. Thank you. And then just one more for me. You mentioned the core systems conversion. Is there anything more you can tell us about maybe the timeline for that and maybe any other tech investments or initiatives that you have on the horizon?

I think that's the major initiative on the near-term horizon. The conversion is scheduled for Labor Day weekend of 2026. It's the IBS platform of FIS. It's a very commercial oriented, very proven system, commercial oriented. We'll meet the needs, our needs as we move into the future from a digital perspective or product perspective, everything that we need. It's comparable to a lot of banks between 25 and 150 billion are on it. And we talk to them and the system works very well for them. So I think it's something that we need to do to position our bank for the growth that we're experiencing in our future.

We expect to realize additional efficiencies in our processes as a result, enhancements that will help our product set and delivery to our customers.

That's a great call. Thank you for taking my questions.

You're welcome. This concludes our Q&A session. We'll now turn the conference back over to Anthony Labuzetta for closing remarks.

Well, thank you, everyone, for your questions and for joining the call. We hope everyone had a good start to the new year, and we look forward to speaking with you very soon. Thank you very much.

This concludes today's conference call. You may now disconnect.