Provident Financial Services, Inc. Q1 FY2026 earnings call

• Tony noted strong first quarter financial performance with net earnings of $79 million and $0.61 per share. Pre-provision net revenue grew 13.5% y/y. • Commercial loan team had new loan production of $649 million in Q1, up 8% y/y, with commercial loan portfolio growth. • Deposits: total non-maturity core and consumer deposits increased, but total deposit balances were down sequentially due to seasonal and broker deposit factors. • Credit risk: net charge-offs $3.1 million, non-performing loans increased but no material loss foreseen outside specific relationship. • Non-interest income: Insurance platform had strong results with 95% customer retention, new business and or contingent income growth. Beacon Trust focused on growing customer base. • Tom mentioned net income increase 24% y/y to $79 million. Pre-tax, pre-provision earnings $108 million, up 13.5% y/y. • Balance sheet: loans held for investment increased $144 million, deposits decreased $178 million. Asset quality strong despite non-performing loans increase. Non-interest expense increased, but efficiency ratio improved. • Capital: tangible book value per share increased, and $12.4 million of shares bought back.

For the first quarter, net earnings were $79 million, or $0.61 per share. Pre-provision net revenue was $108 million, growing 13.5% year over year. Commercial loan team generated new loan production of $649 million in the first quarter, up 8% year over year. Commercial loan portfolio grew 161 million, or 3.9% annualized. Total non-maturity core business and consumer deposits increased $66.5 million during the quarter, or 2.2% annualized. Non-interest income was strong, with the insurance platform delivering exceptional results.

• Now modeling no further Fed rate actions for remainder of 2026 vs initial 3 cuts. Slightly tightening NIM outlook to 3.4-3.45% inclusive of purchase accounting accretion. • Expect ~3 basis points of core NIM expansion in Q2. • Reaffirm full-year 2026 guidance of 46% loan and deposit growth, non-interest income averaging $28.5 million per quarter, core ROA 1.2%-1.3% with mid-teens return on average tangible common equity.

• Macro economic development uncertainty. • Intense deposit competition. • Uncertainty in loan repayments. • Credit risk related to specific commercial loan relationships. • Impact of Fed policy changes.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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.

A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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 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.

Q: 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?

A: 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.

Q: 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.

A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.