Provident Financial Services, Inc. (PFS) Q1 2025 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services, Inc. First Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Adriano Duarte, Investor Relations Officer. Please go ahead.

Thank you, Kate. Good morning, everyone, and thank you for joining us for our first quarter earnings call. Today's presenters are President and CEO, Tony Labozzetta; 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 the last evening's earnings release, which has been posted to the Investor Relations page on our website, provident.bank. Now it's my pleasure to introduce Tony Labozzetta, who will offer his perspective on our first quarter. Tony?

Thank you, Adriano, and welcome to the Provident Financial Services Earnings Call. We are proud of the excellent performance the Provident team delivered this quarter. We saw expanded margins, increased top line revenue, solid earnings and tangible book value growth as we've begun to fully realize the benefits of last year's merger. During the quarter, we reported net earnings of $64 million or $0.49 per share. Our annualized adjusted return on average assets was 1.11% and our adjusted return on average tangible equity was 16.15%. Our adjusted pretax pre-provision return on average assets was 1.61% for the first quarter. These core financial results improved from the trailing quarter and the same quarter last year, and we are confident in our ability to continue our strong performance throughout 2025. Our capital position improved and continues to comfortably exceed levels deemed to be well capitalized. Our tangible book value per share grew $0.69 to $14.15 and our tangible common equity ratio expanded from the trailing quarter to 7.9%. As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on May 30. During the quarter, our deposits declined $175 million or 0.94% in large part due to seasonal outflow of municipal deposits. We did, however, continue to have an improvement in our average cost of total deposits, which decreased 14 basis points to an impressive 2.11%, and the average cost of interest-bearing deposits decreased 17 basis points. Our total cost of funds decreased 9 basis points to a very solid 2.39%. As a result of our reported -- as a result, our reported net interest margin increased 6 basis points to 3.34%. And more notably, our core net interest margin grew 9 basis points. During the first quarter, our commercial lending team closed approximately $600 million in new loans, and our commercial loan portfolio increased 3.8%. This quarter's production consisted of a 30% commercial real estate and 70% commercial and industrial loans. In addition to the production mix, our strong capital formation has driven our CRE ratio down to 450%. Additionally, we have seen a substantial increase in our total loan pipeline to approximately $2.8 billion this quarter. The weighted average interest rate is 6.31% compared to 6.91% in the trailing quarter. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.8 billion compared to the $1 billion in the previous quarter. We congratulate the lending team for these results, and we are optimistic about the strength of our pipeline. Our credit quality remains strong relative to our peer group despite an increase in our nonperforming loan ratio to 0.54%, primarily attributable to 2 well-secured loans with no prior charge-off history. Our net charge-offs decreased to $2 million from $5.5 million in the trailing quarter, which is also impressive relative to the peer group. These numbers demonstrate the high standards we apply to our risk underwriting and portfolio management practices as well as the quality of our portfolio. Overall, Provident's fee-based businesses performed well this quarter. Provident Protection Plus continues its strong performance, with a 19% organic growth in new business for the first quarter as compared to the same period last year, and its income was up 23% compared to the same period in 2024. However, due largely to market conditions, Beacon Trust assets under management and fee income decreased by approximately 4%. This quarter was the first, which featured no transaction costs related to our merger with Lakeland, and we are proud of our performance. We have used our solid foundation to excel in our core businesses and create value for stockholders and customers despite the uncertainties in the market and the economy. We believe that we can carry this momentum forward throughout the rest of 2025. Now I'll turn the call over to Tom for his comments on our financial performance. Tom?

Thank you, Tony, and good morning, everyone. As Tony noted, we reported net income of $64 million or $0.49 per share for the quarter. Excluding the $2.7 million write-down associated with the pending sale of a foreclosed commercial property, core earnings were $65.9 million or $0.51 per share with a core ROA of 1.11%. Further adjusting for the amortization of intangibles, our core return on average tangible equity was 16.15% for the quarter. Excluding this write-down, pretax pre-provision earnings for the current quarter were $95.2 million or an annualized 1.61% of average assets. Revenue increased to $208.8 million for the quarter, and our core net interest margin increased 9 basis points from the trailing quarter to 2.94%. Including 40 basis points of purchase accounting accretion, our net interest margin was 3.34% for the first quarter. We currently project the NIM in the 3.35% to 3.45% range for the remainder of 2025. Our projections include 25 basis point rate reductions in July, September and December 2025. Period-end loans held for investment increased $133.4 million or an annualized 2.8% for the quarter, driven by growth in multifamily, commercial and commercial real estate loans, partially offset by reductions in construction and residential mortgage loans. C&I loans grew at an annualized 6.5% pace, while total commercial loans grew by an annualized 3.8% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.8 billion with a weighted average rate of 6.31% versus our current portfolio yield of 5.95%. Deposits decreased $175 million for the quarter, with much of that decline attributable to seasonal outflows in municipal deposits. Average deposits for the quarter decreased $72 million or an annualized 1.5% versus the trailing quarter. The average cost of total deposits decreased 14 basis points to 2.11% this quarter. Asset quality remained strong despite a $31.2 million increase in nonperforming loans attributable to 2 credits, a $20.3 million commercial real estate loan secured by a mixed-use property with a current loan-to-value of 53%, and an $11.5 million construction loan secured by a nearly completed warehouse facility with a current loan-to-value of 62%. These loans have no prior charge-off history and carry no specific reserve allocation. Nonperforming loans represented 54 basis points of total loans at quarter end with NPAs to assets totaling 45 basis points. Net charge-offs were just $2 million or an annualized 4 basis points of average loans this quarter. The provision for loan losses decreased to $325,000 this quarter, reflecting stable-specific reserve requirements and a reduction in required reserves on pooled credits within our CECL estimate. This brought our allowance coverage ratio to 1.02% of loans at March 31. Noninterest income increased to $27 million this quarter, driven by seasonally strong performance from our insurance agency and an increase in other income. Noninterest expenses, excluding the previously discussed write-down on foreclosed assets, were $113.6 million, with adjusted expenses to average assets totaling 1.92% and the efficiency ratio improving to 54.4% for the quarter. We currently project quarterly core operating expenses of approximately $112 million to $115 million for the remainder of 2025. Our effective tax rate for the quarter increased to 30.3% due to a discrete expense associated with the vesting of stock-based compensation. We currently expect our effective tax rate to approximate 29.5% for the remainder of 2025. Regarding projected 2025 financial performance, we currently estimate return on average assets of approximately 1.15%, return on tangible equity of approximately 16% with an operating expense ratio of approximately 1.85% and an efficiency ratio of approximately 52%. That concludes our prepared remarks. We'd be happy to respond to questions.

[Operator Instructions] Your first question comes from the line of Tim Switzer with KBW.

The first question I have is, you guys are a few quarters into the integration and you guys have been investing in a few different areas, I think, in wealth management, also making some new hires. Can you provide some updates there on how many other bankers or other personnel you've brought in over the last few months and when we should start to see an impact of growth from that?

Tim, I just wanted to make sure there was multi questions in there that I'm addressing all of them. First was the integration. I think pretty much everything is behind us at this point. I don't think most of us -- I don't think anybody in the company talks about it in a legacy format anymore. I think we're just Provident Bank, new Provident moving forward. Pretty much nothing to talk about in terms of merger integration. It all went seamlessly. The culture is coming together beautifully under one set of guiding principles. The dynamic is excellent. When it comes to hiring folks, I think -- it wasn't the wealth group that we were talking about specifically last quarter. I think we've talked about bringing in more teams into Pennsylvania and Westchester markets, which we've done, and part of our pipeline growth is the production that we're seeing out of the Pennsylvania, the [ REIT ], our new reintroduction into that market, if you will. We're seeing great activity in that space, and it's helping boost the pipeline, and we're starting to see some of that in Westchester as well. On the other business lines, like whether it's wealth or insurance, they're just continuing to add to the complement, but I don't think there was any outlier hires in that space.

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

Yes. I tend to not be as [ dour ] as many, but I'm trying to be cautious in terms of my statements. So if you look -- I'm speaking Provident specific. When you look at our position, we have the highest pipeline in our history, $2.8 billion. The pipeline is stout and the pull-through percentage is looking strong. When you look at the committee and the loan closings that we've seen over the last month or so going into April has been pretty strong. So -- we've also undertaken initiatives to look throughout our portfolio and determine where some of the policies might have some ripple effects and we've done so in different sectors, and we haven't spotted anything to this point that -- even to be talked about. However, one of the comments -- the more -- the way I can frame it would be that we've been now, for some time, talking to our customers initially informally through conversation, and then we converted it to formality with questionnaires so that we can gather more intelligence. And the takeaway at this point is more about the uncertainty. We have not seen any clients decay out of the pipeline as a byproduct of this. It's more about pausing in certain areas, particularly in the ABL sector, than it is absolutely shutting down from the transaction. So we see this as we're productive now. And hopefully, if some of the timing shifts, perhaps it moves into the summer. We're not [ pollyannic ]. We're cautious about what can happen. But right now, we're not seeing anything or segments in the portfolio that would give us pause or an alarm -- alarmed in any way. And we looked at government -- any things that are affected by government contracts, anything of that nature. Now I just want to be cautious in my statement because I'm sounding very optimistic and maybe others have not. But I just want to say, there is uncertainty, and that uncertainty would apply to even to some of my statements. So as time moves forward, things can change. But right now, we're not seeing things that would impact our particular portfolio in a very negative way. Tom?

Yes, I'd only add that potential for uncertainty, Tim, that's what was reflected in those -- that guidance slide that we published, where we went from a straight 3% and 5% expected growth on deposits and loans, to a range recognizing the lower bound of 1% to 3% on deposits and 3% to 5% on loans.

And that's based purely on that uncertainty, it's not based on what we're seeing in the pipeline today.

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

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

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

First question, I wondered if you could share with us any color on those 2 large loans that went on nonaccrual? When you might see some resolution or any updates on those post quarter end?

Don't have a lot of certainty around the 2 nonaccruals, Mark. They are part of a process, still working with the borrowers to try and get to a positive resolution. The comfort level there is just in the recent appraisals, first quarter of '25, and the favorable loan to values that we have as is.

Okay. Fair enough.

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

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

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

Well, I don't -- I think just -- I would characterize it, look, we're not targeting a specific number. We usually are in a range. Just for -- and maybe it would be a long-winded answer. I think in our forecast, we're targeting about 5% growth in the CRE space. So I want to make sure that I lead with that because that will take us with the capital formation, eventually, we should get down to the [ 420s ]. Now if it's 430% or if it's 440%, we're comfortable with that. I think our regulatory colleagues are very comfortable with the level CRE of given the program that we have to manage our concentration. They're very comfortable with it. They have no problem with us being in the space as long as we can demonstrate the things that we have been. So I think we, as an organization, don't mind that. But as I mentioned in my written notes, we're starting to see a lot of activity since we diversified our commercial portfolio as a byproduct of the merger. We're starting to see good lending in the areas of -- in the specialty groups in the C&I side, which doesn't make us so CRE dependent. And if our CRE keeps up at the 5%, because I think it was about 1% this quarter, maybe 1 point something. So I just want to be careful that it's not a targeted initiative for us to reduce our CRE exposure. What is a targeted initiative is to grow those other sectors. And that mix, along with the capital, gives us the projections that we're looking to aim at, which is roughly in that [ 420s ], again, range, to answer your question. Very long-winded way, but Mark, that's the answer.

Yes. I would just add that a good piece of the pipeline is in the CRE space. So I wouldn't be surprised to see that number move up a little bit in the interim term, too. As Tony said, that 420% kind of number is a longer-term intermediate-term target.

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

Well, I would -- I'm going to give you an awkward answer. I'd say the first one, given where our stock is trading, buying our own stock back will be the greatest M&A that we can do. I think that just points to the valuation that we're not getting recognized for at this time, given that we just came off the heels of a merger. I think once that normalizes and our stock trades at a point where we don't feel like we're giving it away, I think we look for the -- #1 is always culture. Culture, culture, groups that fit in because this merger has made -- like if you were here today, you could see the way the teams work, this dynamic leadership team. It's something I'm very proud of, and we don't want to do a merger that kind of taints that. So we want to have that same culture dynamic. And then we want to have something that would be additive, whether it's a deposit element, whether it's a new line of business for us. Obviously, there's always just the financial transactions, but the stock has to be in a good place for us to pull a financial transaction. So I think the market will consolidate further. I just think that valuations have to be in the right spot before I think it takes off the way people think it will.

[Operator Instructions] Your next question comes from the line of Feddie Strickland with Hovde Group.

Appreciate the overall expense guide. I think last quarter, we talked a little bit about timing that maybe expenses were a little higher earlier in the year and then kind of go down in the back part of the year. Is that still sort of the expectation throughout the course of 2025? Or can you just generally explain that, how you see expenses playing out over the course of the year?

Yes. That's accurate, Feddie. We left the guidance at $113 million to $115 million to give us a little room in case something unexpected shows up, but I would probably forecast on the lower end of that range. Theoretically as low as the $112 million number could be possible, but we're just being a little bit conservative there.

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

I think the business is very seasonal. It tends to run the first quarter being the best, second quarter trails right behind that. Summer tends to be the weakest quarter, not the weakest but the lowest, and then the fourth quarter starts to inch up again. So it's kind of that seasonality. The way I would characterize it is to look at comparing same quarter last year. I think the business has been running at somewhere close to 20% growth over the comparable period on a compounded annual growth rate. Sorry?

Pretax income.

Pretax income, yes. And so therefore, I think that's kind of the guidance that I would share, and it appears they're going to be on pace to do the same as we move throughout the year.

Great. And then just last question. You mentioned something about potential -- thinking about buybacks here, and I was just going to ask how you think about capital as you're back in a bit of a capital build mode at this point. I mean, are repurchases something we could potentially see in the next couple of quarters, if share price kind of stays at these levels?

Yes, we don't want to foreclose the possibility. I'd like to have the flexibility to do that opportunistically. That said, you see the strength of the pipeline. There's a lot of good profitable high-return growth available to us, and that tends to be our first option.

We're evaluating them.

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

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

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