Provident Financial Services, Inc

Good morning, my name is Carrie and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services first quarter 2026 earnings conference 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 would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star 1 again. I would now like to turn the call over to Michael Perito, Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our first quarter 2026 earnings call. Today's presenters are President and CEO Tony LaBazzetta 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 on our website, provident.bank. Now I'd like to hand it off to Tony LaBazzetta, who will offer his perspective on our first quarter. Tony?

Thank you, Michael, and welcome, everyone. I appreciate you joining us today to discuss Providence's first quarter I am pleased to report that we delivered another strong quarter of financial performance, demonstrating the continued momentum of our business and the effectiveness of our strategic initiatives. For the first quarter, we reported net earnings of $79 million, or $0.61 per share, representing solid profitability as we continue to execute our growth strategy. Our annualized return on average assets was 1.29%, while our adjusted return on average tangible common equity was 16.6%. Pre-provision net revenue of $108 million, which grew 13.5% year over year, benefited from higher net interest income and notable growth in contingency income from our insurance platform, Provident Protection Plus. This represents 1.75% of average assets on an annualized basis compared to 1.61% for the same quarter last year. We continue to focus on our balanced approaches to sustaining growth across our business lines while also managing risk appropriately and generating sustainable, positive operating leverage. Turning to our balance sheet, Our commercial loan team generated new loan production of 649 million in the first quarter, up 8% compared to the same quarter last year. This production contributed to our commercial loan portfolio growth of 161 million, or 3.9% annualized. Commercial and industrial loan activity was particularly strong, growing at a 10% annualized rate. Commercial loan payoffs during the quarter were down significantly to $191 million. And overall, we remain positive about our loan growth guidance for 2026. Our commercial loan pipeline reached a record $3.1 billion as of March 31st. This pipeline is well diversified and comprised of $1.3 billion in CRE, $1.1 billion in C&I, $400 million in specialty lending, and $200 million in middle market loans. This is the first time in our company's history that both the Cree and CNI pipelines have exceeded 1 billion, reflecting the investments we have made in our commercial banking group to generate sustainable, diversified loan growth. Switching to deposits, our total non-maturity core business and consumer deposits increased 66.5 million during the quarter, or 2.2% annualized. Seasonal municipal deposit outflow and an intentional reduction in broker deposits during the quarter impacted our total deposit balances, which were down sequentially. Our average non-interesting bearing deposits were relatively stable, and we remained focused on deposit generation strategies to build core deposits in consumer, small business, and commercial verticals. While the overall deposit environment remains very competitive, our focus on relationship banking combined with our expanding digital capabilities and treasury management solutions, positions as well to continue attracting quality deposit relationships that support our loan growth objectives. Providence's commitment to managing credit risk and generating top quartile risk-adjusted returns remains unchanged. During the first quarter, we experienced net charge off of $3.1 million, representing just six basis points of average loans. Nonperforming loans increased to 73 basis points of total loans from 40 basis points in the fourth quarter, with the increase primarily attributable to a bankruptcy that impacted four related commercial loans totaling $82 million. I'd like to provide additional context on this relationship. These loans have no prior charge-off history and require no specific reserve allocations due to strong collateral values. Appraisals received in 2026 reflect loan-to-value ratios for the collateral properties of 32.9%, 51.7%, 61.3%, and 81.9% respectively. We are expecting resolution of these credits by year-end. Based on the current cash flow and occupancy rates of the properties and our secure position, we don't foresee a material loss to the bank. Outside of this relationship, we would have seen improvements in all credit metrics during the first quarter, including the levels of loan delinquencies, non-accrual loans, and criticized and classified assets. Shifting to non-interest income, we are pleased with the performance during the quarter. Our Profit and Protection Plus insurance platform, in particular, delivered exceptional results in the first quarter, with the customer retention rates continuing at approximately 95%, and significant year-over-year growth in both new business and contingency income. The strong contingency income we received this quarter reflects the quality of the relationships with our clients and carriers and the effectiveness of our risk management approach. We're seeing increased collaboration among our insurance platform, bank, and Beacon Trust, which is creating meaningful cross-sell opportunities and deepening client relationships across all organizations. The pipeline of our insurance business remains strong heading into the remainder of 2026, and we continue to invest in talent and capabilities that will drive sustainable growth in this differentiated revenue stream. Beacon Trust remains focused on retaining and growing its customer base, and we are optimistic that the recent hires will help accelerate growth over the balance of 2026. Additionally, we have a strong pipeline for further SBA gain on sale over the remainder of the year. Our strong financial performance continues to build our capital position well beyond regulatory requirements. We delivered another quarter with significant year-over-year growth in earnings per share, profitability, and tangible book value, with our tangible common equity ratio ending the first quarter at 8.6%. During the quarter, we opportunistically took advantage of market volatility and bought back $12.4 million of our shares. Having said that, our top capital priority remains unchanged, driving sustained organic growth across our franchise while achieving top quartile risk-adjusted profitability. I'm incredibly proud of both the efforts and production of our employees. I would now like to turn the call over to Tom for his comments on our financial performance.

Tom? Thank you, Tony, and good morning, everyone. As Tony noted, our net income increased 24% versus the first quarter of 2025 to $79 million, or 61 cents per share, with a return on average assets of 1.29%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 16.6%. Pre-tax, pre-provision earnings were $108 million, or an annualized 1.75% of average assets, a 13.5% increase from the $95 million or 1.61% of average assets reported for the first quarter of 2025. Despite a lower day count, revenues topped $225 million for the second consecutive quarter, driven by net interest income of 194 million and record non-interest income of 31.5 million. Average earning assets increased by 264 million, or an annualized 4.7% versus the trailing quarter, with the average yield on assets decreasing 13 basis points to 5.53%. This reduction in asset yield was largely offset by a 12 basis point decrease in the cost of interest bearing liabilities to 2.71%. Interest bearing deposit costs fell 21 basis points versus the trailing quarter to 2.39%, while total deposit costs declined 16 basis points to 1.94%. While a reduction in net purchase accounting accretion attributable to lower loan payoffs resulted in a four basis point decrease in our reported net interest margin versus the trailing quarter to 3.40%, our core net interest margin increased by three basis points to 3.04%. Given the macro development since the start of the year, we are now modeling no further Federal Reserve rate actions for the remainder of 2026 versus three cuts in Fed funds in our initial modeling. As a result, we are slightly tightening our NIM outlook to 3.4 to 3.45%, inclusive of purchase accounting accretion. We also now expect approximately three basis points of core NIM expansion in the second quarter. Period end loans held for investment increased $144 million, or an annualized 3% for the quarter, driven by growth in commercial, multifamily, and commercial mortgage loans, partially offset by reductions in mortgage warehouse, construction, and residential mortgage loans. Total commercial loans grew by an annualized 3.9% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.9 billion. The pipeline rate of 6.24% is accretive relative to our current portfolio yield of 5.85%. Period end deposits decreased $178 million for the quarter, or an annualized 3.8%. The decrease was driven by seasonal outflows of municipal deposits expected to return in subsequent quarters and a tactical decision to reduce brokered deposits in favor of lower-cost FHLB borrowings. More specifically, the pricing of brokered deposits was notably elevated in March, and we elected to utilize more borrowings at a cost savings of approximately 20 basis points, driving a more favorable impact to our net interest margins. Asset quality remained strong despite the increase in non-performing loans that Tony previously detailed, with non-performing assets representing 58 basis points of total assets. Net charge-offs were $3.1 million, or an annualized six basis points of average loans. We recorded a net negative provision for credit losses of $2.1 million for the quarter, as required specific reserves on individually evaluated impaired credits declined. There was modest improvement in our CECL economic forecasts, and changes in our portfolio mix warranted lower pooled reserves. This brought our allowance coverage ratio down five basis points from the trailing quarter to 90 basis points of loans at March 31st. Non-interest income increased to $31.5 million this quarter, with solid performance from our insurance and wealth management divisions, as well as increased bully claims and year-over-year increases in core banking fees and gains on SBA loan sales. non-interest expense increased to $117.1 million this quarter, reflecting increased compensation and benefits costs and occupancy expense. Expenses to average assets in the efficiency ratio, however, both improved from the prior year quarter to 1.90% and 52% respectively. We now project quarterly core operating expenses of approximately $117 to $119 million for the remainder of 2026. with the run rate in the second half of the year being higher than the first half. As we noted last quarter, in addition to normal expenses, 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 quarters. Our continued sound financial performance supported earning asset growth and again drove strong capital formation. Tangible book value per share increased 33 cents or 2.1% this quarter to $16.03 per share. And our tangible common equity ratio increased to 8.55% from 8.48% last quarter. Common stock buybacks to the quarter totaled $12.4 million and 589,000 shares. And we have 2.2 million shares remaining on our current authorization. We reaffirm our previous full-year 2026 guidance of 46% loan and deposit growth, non-interest income averaging $28.5 million per quarter, and core ROA targeted 1.2% to 1.3% with a mid-teens return on average tangible common equity. That concludes our prepared remarks. We'd be happy to respond to questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one telephone keypad. If you would like to withdraw your question, please press star one again. Your first question will come from Freddie Strickland with Havde Group.

Hey, good morning. Just wanted to start on credit in the senior housing facilities. It seems like you don't really expect material losses there. But can you speak any more to the collateral, location, and kind of types of senior housing facilities these were or are?

Yeah. They consist of independent assisted living and memory care, no skilled nursing, and minimal exposure to Medicaid in there. Strong demand for the properties, which is one of the reasons why we expect to see minimal loss as the bankruptcy gets resolved in fairly short order, we think. As far as the location, East coast properties range from 15.1Million to our share. 31.8Million is the highest loan. I'm out as we disclosed in the release go from 51.7 to 81.9%. Probably noteworthy is the highest LTV is actually on the lowest loan amount. That's the 15.1Million dollar credit. It's more specifically that properties are in New Jersey, Connecticut, Maryland and Florida.

Okay, got it. That's super helpful. Thank you. And just switching gears for fees, just wanted to touch on the guide. You came in pretty meaningfully above your kind of quarterly run rate guide, but kept the full year outlook intact. Should we expect fees to pretty meaningfully step down from the first quarter on maybe some non-recurring revenue or some seasonality, or is there maybe some upside there?

Yeah, I think it's just an acknowledgement of some of the volatility in some of those line items. A piece of that was bully income. We do expect to see some seasonality in the insurance business, but we are anticipating continued improvement in the wealth management revenues as well over the course of the year to offset some of that to a degree. And SBA, so that'll be genuine. Yeah, that's another one that's volatile to a degree, though, depending on the production and what the gain of sale margins are at any point in time. So there may be a little bit of conservatism in that $28.5 million average.

Got it. And just one more quick one, if I could, on loan discount appreciation expectations. I think you had a decent step down there this quarter. You know, what's kind of the expectation of the next quarter or two there?

There's a significant reduction in payoffs this quarter, which, you know, we kind of like, actually, to retain the asset. But if we're looking for three basis points of core margin expansion to roughly 307 and still anticipating a margin in the 340 to 345 range, for the balance of the year, the difference being purchase accounting appreciation.

Got it. Thanks for taking my question. Thank you.

Your next question will come from Tim Swartz with KBW.

Hey, good morning. Thanks for taking my questions. Good morning. Really quick follow-up on your comment there on the NIM. Can you talk about maybe how, you know, a Fed rate cut, would impact, not necessarily 2026 numbers, but perhaps 2027. Is that accretive to earnings going forward if we get one or two cuts?

It is, Tim. I think consistent with last quarter when we talked, each cut's about two to three basis points of benefit to us on the current balance sheet.

Okay, great. And then on your loan backlog repricing, I know you guys have a good amount of loans over the next year or so. Can you update us on, you know, how much there is and what the gap is on new yields versus old?

Mike, do you have any change?

Yeah, so Tim, the gap, you know, the loan pipelines at about just under a six and a quarter, you know, we still have loans coming off in the mid fives generally. So there's some pickup there. I think we've isolated that benefit to the NIM to be a couple, two to three basis points over the 12-month period. We can get you, Tom might have the exact dollar amount of the reprice, but, or ID, but that's the general impact and margin.

It's about $5 billion in the total loan portfolio, but you would say only 60% of that we get a benefit from because that's the Lakeland, sorry, yeah, the 40% of the Lakeland-related portfolio.

Yeah, yeah. Okay, so it's a slight benefit. And then last one for me. Could you guys walk us through some of the benefits and new capabilities, the core upgrade? I think it's from FIS will bring you. And, you know, are there any, like, new products it'll enable or anything like that?

Yeah. I mean, just at a high level, we're going to be able to get more robustness around the lending area in terms of information data flows. The branch opening, account opening activity is going to be much faster, robust. So these are some of the things that we expect. Also creates the foundation for us to be able to attach other applications to the APIs that work more efficiently. The IVS4 is much more functional for a, what I would call, more complicated commercial bank that has a lot of verticals that we can't get the full benefit on the current floor as some of the benefits.

Okay, great. Thank you.

Your next question will come from Steve Moss with Raymond James.

Hi. Good morning, guys. Maybe just starting off here. Morning. On the, you know, loan pipeline here looking good, just kind of curious, you know, how you guys are thinking about the pull-through, economic uncertainty. You know, I realize you didn't update, increase the loan growth guidance, but just how you're thinking about those things.

Well, I'll start there. I mean, I look at, you know, our pipeline, our commitments. They're looking good. I think, you know, we're still thinking the guidance is good. We might overachieve the guidance depending on what happens with prepayments and market conditions. But I don't see anything right at this time, given the geopolitical circumstances, that would affect the guidance that we've provided to you. So we're still feeling good about that. And depending on prepayments determines whether we can overachieve or. Or come close.

Yeah, Steve, I kind of did in my comments, the pull through adjusted pipeline at about 1.9Billion to so be expected if you do the math on that's about 6061% filter rate. In terms of mix of that pipeline about 47% of it is commercial real estate and multifamily. Commercial lending growth is about 49% and the balance is a consumer. That's just 4%.

Yeah, and I would just, you know, Steve, I don't know that you mentioned, this is a pretty good dynamic at Provident, because what you're saying is the way it's distributed, it's very diverse. So just by the normal dynamics without us doing anything and just achieving our CRE loan objectives, we can still see the CRE ratio coming down because of capital build and diversification into the other books like C&I, specialty lending, and middle markets. So That's a pretty good dynamic that we're accomplishing here, which is our strategic focus.

Right. Okay. I appreciate all that color there. And then just, you know, on the deposit side, just curious what you guys are seeing for competition these days and, you know, how you're feeling about funding cost trends.

I would say that the competition has probably heightened more than I've seen in the last bunch of quarters. think it's getting a little uh tough not only on on the deposit side but also on the lending side we're seeing spreads um coming down um we're seeing uh you know creative structures on on on deposit uh um programs so for people like waving fees waving certain scenarios uh pricing so we're seeing that and uh you know again we're you know we're responding to that. We have our pathways. We're seeing some good dynamics on our consumer side and our small business side. You know, the municipals, I think we're seeing good dynamics, even though the flows are now because we have some good RFPs moving forward and into the second quarter. Our focus is to get our regional teams and our teams more expanded so that we can go get more scale in that space. We're feeling good about the prospects, but the competition, to your question, is stronger than I've seen it in a while.

Okay. And then, you know, on to maybe the reserve here. Just with the CECL move down, do we just think of this as a one-time adjustment, you know, or kind of how are your thoughts on where this reserve goes?

As you know, Steve, a lot of that's dependent on the, on the forecast going forward. I wouldn't expect material continued improvement in that forecast. Again, given the macro events in the world. But a big piece of that was also the reduction in specific reserves. We had a really strong quarter for resolutions with with very minimal losses. You saw the net charge of 3.1Million about 2 and a half million of that was previously reserved for. So no need to replenish those those reserves. Um, there's limited specific reserves on the remaining impaired loans that have been identified. And we're very positive on on the resolution prospects for a number of those credits in in the following quarter. So, we don't see a lot of content in the book overall. Um, we did have some, some improvement in the portfolio mix in terms of construction loans, reducing a bit. So that required less pooled reserves as well. And, yeah, that's that's that sets up. Overall, again, six points to charge us. We feel pretty strongly about the quality of our underwriting and our asset quality going forward.

Got it. Okay. I appreciate that. And just last one following up on the credits here with the senior housing. Are those non-performers cross-collateralized? Do you by any chance have a weighted average LTV?

They are not cross-collateralized. They're in Delaware Statutory Trusts. But the specific LTVs are outlined in the release. They go from 32.9% up to 81.9% on the smallest dollar credit.

You know, just to give a little bit more color, I think it's something that might get lost in the write-up. These loans that we mentioned went into MPA not because of cash flow, not because of anything except the bankruptcy of the holding entity that dragged that into payments stopping. So that's why we feel strong about the ultimate resolution of these because the cash flows are intact, the LTVs are strong, and we just needed to go through the bankruptcy process and get us pushed through. And we feel the resolution can happen in this calendar year with minimal to no loss to us. You know, it's hard for us to say absolutely no, but we think it's going to be a positive resolution.

Okay, great. I appreciate all the colors. Thank you very much, guys. Thank you. Thank you.

Your next question will come from David Storms with Stonegate.

Morning, and thank you for taking my questions. I just wanted to start with the non-interest income. It was mentioned in prepared remarks that there's been some cooperation between insurance and the rest of the business, and that's been helping to drive the insurance growth. Maybe how much more integration or cooperation could there be here, and how applicable could that be to the wealth segment?

It was a little faint, but maybe. Collaboration among the insurance wealth divisions and what the upside is there.

What I'm seeing is huge momentum. I think part of why the insurance company is growing, I think they did 21% revenue growth year over year. It's the constant dynamic of working with the commercial bank and the beacon and retail side of the organization. They work collaboratively, very integrated. We're seeing a lot more. They track the referrals. But now it's become sort of natural to the bank. You don't have to force it through incentives. People are doing it because they see the value that it creates for our customer base. And so it's fun to watch from my perspective because there's no end to how Florida insurance can grow. In fact, the conversations we have is about making sure that we continue to staff up and find that workforce in order to be able to handle that business. There's still a lot of business within the bank. that we can refer across. And the same thing is happening on the Beacon side. You know, we've seen in this quarter, we've seen positive flows, and we also have seen a good dynamic of referrals from the bank and insurance back into Beacon. So as these things, I think that momentum will only pick up. You know, what we have to do on the Beacon side is continue to build up that sales force to be able to handle these cross referrals as they come in. So I think that is... I think the way we described it in the write-up, it's a very differentiated revenue stream, and I think it's one that we can continue to build. So the team's doing a great job on that.

Understood. That's very helpful. Thank you. One more for me. And I know your primary goal is strong organic growth, but just thinking about your efficiency ratio hovering in the low 50s for a little bit now, what appetite or ability is there to Dialing that lower, do any of these core updates have a significant impact on that? Just any thoughts around your efficiency ratio.

I'll start. I mean, you know, we're constantly looking for operational efficiency. Some of the, you know, if you look at our efficiency ratio today, I think the part that needs to be really described is how much investment we've made in our technology over the last bunch of quarters. in our infrastructure. So that's in the run rate. And we're seeing the revenue streams coming in from some of the investments we've made. So we can lower the efficiency ratio in that regard. We'll continue to do branch optimization strategies. We'll continue to look at some tools on the technology side for efficiency. I would look at us more from the standpoint of doing more with less in the future. than continuing to have to invest in more talent in order to execute. So I would expect the efficiency ratio to continue to come down, but it'll be sawtooth. The way we look at it here is it'll come down because of the positive operating leverage, and then we'll invest and bump up, and then it'll come back down by getting the positive operating again. But certainly the new system will play in the efficiency side on flows, how we get things into automated boarding, closing. So we'll see a lot of that stuff in future states.

Understood. Thank you for taking my questions.

Kerry, before we move to the next question, I just wanted to respond to the last question to Steve. The weighted average LTV on the four properties is 53%. Thanks. They're not cross-level. No, but just that we know about the size of the problem.

And your final question will come from Manuel Navas with Piper Sandler.

Hey, can you revisit the, good morning, can you revisit the buyback pace going forward and how it's impacted with kind of greater loan growth in the second quarter? You're talking about opportunistic, like what's the pricing that would get you involved?

Yeah, I think the pace is going to depend on market conditions and what our expectations are for growth. You saw a significant bump in the pipeline rate, but we do believe we have adequate capital and adequate capital formation to continue to take advantage of market conditions when it warrants. I don't want to define a specific price and try to keep the earn back on that in the low three kind of range at a maximum level. But again, I don't want to define it too narrowly because it really does depend on our current view about asset generation and capital formation at any point in time.

Could you update on, place on the periphery of your geography where you've added talent or added offices and their growth ramps so far?

Yes. I mean, we've added some talent in the Westchester market. We've added talent down in the main line of the Pennsylvania around the Philadelphia area. We're adding some talent into the Cherry Hill area as part of our growth strategy, not only on lending, but on deposit gathering, also moving some of our business partners down there like insurance and wealth to be able to penetrate some of those markets. So those are just two of the areas that I mentioned and obviously our strategic plan is to continue some more thoughts on expansion.

That's great. Thank you.

There are no further questions at this time. I would like to turn the call back over to Tony Lapazetta for any closing remarks.

Thank everyone for joining Paul and your questions. Before we end, I would like to take a moment to congratulate Tom Lyons. This is his last official earnings call. Tom obviously has been a great figure here and has done so much for Provident. You've been a great partner, and certainly he will be missed by me, and I'm sure all of his colleagues at the bank. So thank you, Tom. Thank you, Tom. And we look forward to speaking to you soon, and thank you very much.

Thank you for your participation. This does conclude today's conference. You may now disconnect.