Prepared remarks
Hello, everyone. Thank you for joining us, and welcome to the Provident Financial Services second quarter 2026 earnings conference call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference call over to Michael Anthony Perito, Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us for our second quarter 2026 earnings call. Today's presenters are President and CEO Tony Labozzetta and Executive Vice President and Chief Financial Officer Adriano Duarte. 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 would like to hand it off to Tony Labozzetta, who will offer his perspective on our second quarter. Tony?
Thank you, Michael. And good morning, everyone. I appreciate you joining us today to discuss our second quarter 2026 results. I am pleased to report another outstanding quarter of performance that validates the momentum we have built across our business. Through the first half of 2026, we have grown earnings per share by 17% as compared to the same period last year while also significantly improving our profitability. More specifically, in the second quarter, we delivered net earnings of $78 million or $0.60 per diluted share, and core net earnings of $80 million or $0.61 per share. Our annualized adjusted return on average assets was 1.27% and our adjusted return on average tangible common equity was over 16%. This quarter's results were highlighted by record revenues driven by expanding net interest income and noninterest income. Our adjusted pre-provision net revenue reached a record $118 million, representing $0.90 per share and an annualized core PPNR return on average assets of 1.87%. This represents a 23 basis point improvement compared to the same quarter last year and underscores the positive operating leverage that we generated as we continue to grow. Speaking of growth, our commercial loan team delivered exceptional results in the second quarter, demonstrating the strength and depth of its capabilities. In the second quarter, we funded $700 million in new commercial loans, bringing our year-to-date commercial loan fundings to over $1.1 billion. On a net basis, total commercial loans grew 10% annualized, driven primarily by 20% growth in our C&I group. We ended the quarter with a record pipeline of $3.2 billion. This represents our second consecutive quarter with both our CRE and C&I pipelines exceeding $1 billion, a significant milestone that demonstrates the balanced, diversified nature of our growth strategy. As a result of our strong production and pipeline, we believe our loan growth expectations for the full year should be guided toward the high end of the range. Shifting to deposits, the operating environment has become very competitive for incremental funding, particularly in consumer and municipal segments. Core deposits, adjusted for normal seasonality in our municipal portfolio, increased $67 million in the second quarter, representing a 2% annualized growth rate. This was largely driven by growth in commercial deposits, including our treasury management group. Despite the competitive environment, we remain encouraged by some of the deposit growth opportunities the bank is generating, particularly within our commercial and small business customer segments. We remain committed to driving sustainable core funding growth through continued strategic investments in our people, products, and capabilities. So far in 2026, we have added several senior deposit-focused bankers, who have built a nearly $150 million deposit pipeline as of June 30. We also continue to make investments in deposit initiatives within digital, small business, and municipal banking. Asset quality metrics all improved when compared to the prior quarter, a trend we expect to continue in the second half of 2026. With respect to the senior housing commercial relationship, which migrated to nonaccrual last quarter, the bankruptcy process is proceeding as expected. We have increased visibility toward final resolution and still expect all four credits to be settled by year end with no material loss to the bank. Excluding this relationship, which totaled $82 million, our nonperforming loans would be just 27 basis points of total loans as of June 30. Overall, we continue to feel good about our asset quality and the discipline that we have maintained building our loan portfolio. In addition to the strong top-line results and improved credit metrics, we achieved record noninterest income of $32 million in the second quarter. Year to date, our noninterest income has reached $64 million or 14% of total revenue, which is up from 12.5% in the first six months of 2025. We are proud of the progress we have made toward our goal of having nonspread income exceed 20% of our revenues even as our net interest income continues to grow. Provident Protection Plus continues to be a standout performer and a differentiator for our franchise. Top-line revenues are up 18% in the first half of 2026 versus the comparable period in 2025. This strong performance is driven by both industry-leading customer retention and new client acquisition. The pipeline for our insurance business heading into the second half of 2026 remains robust. Similarly, we are encouraged by Beacon Trust's recent performance. Revenues in the first half of 2026 were up 5% when compared to last year, and Beacon Trust assets under management grew to $4.5 billion during the second quarter benefiting from market appreciation and improved client retention. Our SBA group had another good quarter of originations and loan sale activity, with gain on sale revenues up 16% in the first half of 2026 when compared to 2025. The momentum we have established across all of our fee-based businesses gives us confidence that noninterest income will continue to be a significant driver of our financial performance moving forward. Lastly, I just wanted to comment on a couple of important enterprise initiatives which will be critical to our long-term success. Our previously disclosed core conversion continues to track well toward our Labor Day target. Despite our intense focus on the conversion, we also continue to make progress on other technology initiatives ranging from digital capabilities to AI. Our team has built an internal AI agent to be utilized by employees following conversion to help quickly provide answers to customer inquiries. This project is a great example of how people can utilize technology to efficiently deliver a differentiated customer experience. I am incredibly proud of the hard work of our employees. Our strong performance is the direct result of the culture we have built at Provident. Now I would like to turn the call over to Adriano for his comments on our financial performance. Adriano?
Thank you, Tony, and good morning, everyone. As Tony noted, our adjusted net income increased 11% versus the second quarter of 2025 to $80 million or $0.61 per share, a return on average assets of 1.27%. Adjusting for the amortization of intangibles, our core return on average tangible common equity was 16.2%. Core pre-provision net revenue was $118 million or an annualized 1.87% of average assets, an 18% increase from the $100 million or 1.64% of average assets reported for the second quarter of 2025. Our record revenue of $235 million was driven by record net interest income of $203 million and record noninterest income of $32 million. Average earning assets increased by $272 million for an annualized 4.7% versus the trailing quarter with an average yield on assets decreasing 8 basis points to 5.61%. Interest-bearing deposit costs fell 2 basis points versus the trailing quarter to 2.37%, while total deposit costs also declined 2 basis points to 1.92%. Our reported net interest margin expanded 8 basis points versus the trailing quarter to 3.48%, which included a $2.2 million interest income recovery on resolved nonperforming loans equating to a 4 basis point benefit. Core net interest margin expanded 5 basis points to 3.09%. We are currently modeling no further Federal Reserve rate action for the remainder of 2026 and project approximately 1 to 2 basis points of core NIM expansion in the third and fourth quarters. Overall, we expect reported NIM inclusive of purchase accounting accretion to come in at approximately 3.45% to 3.50% for the remainder of 2026. Period-end loans held for investment increased $398 million or an annualized 8% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.8 billion. The pipeline rate of 6.33% is accretive relative to our current portfolio yield of 5.9%. Average deposits increased $445 million for the quarter, or an annualized 9%, driven by higher broker deposit balances and growing commercial deposits. As a reminder, we elected to utilize lower-cost FHLB borrowings in the first quarter to offset seasonal outflows in the municipal deposit portfolio due to the elevated pricing in the broker deposit market. This quarter, we returned to utilizing broker deposits which was the largest driver of the linked-quarter increase. Our loan-to-deposit ratio improved slightly quarter over quarter to 102.6% and we continue to target a 97% to 103% range on this ratio. Asset quality remains strong with nonperforming assets representing 54 basis points of total assets. Net charge-offs were $1.9 million, an annualized 4 basis points of average loans this quarter. We recorded a provision for credit losses of $9.3 million for the quarter, as loan growth required specific reserves on individually evaluated impaired credits and changes in our portfolio mix warranted higher pool reserves. This brought our allowance coverage ratio up 2 basis points from the trailing quarter to 92 basis points of loans on June 30. Noninterest income increased to $32 million this quarter with solid performance from our insurance and wealth management divisions as well as year-over-year increases in core banking fees and gains on SBA loan sales. Core noninterest expense decreased slightly to $116.9 million when adjusted for nonoperating expense items related to our systems of $1.5 million and severance costs of $900 thousand. Core expenses to average assets and the efficiency ratio both improved from the trailing quarter to 1.85% and 49.8%, respectively. We continue to project quarterly operating expenses of approximately $117 million to $119 million. As we noted last quarter, in addition to normal expenses, we will be upgrading our core systems in Q3 of 2026 and expect additional nonrecurring charges of approximately $4.5 million over the remainder of 2026. Our continued sound financial performance supported earning asset growth and again drove strong capital formation. Tangible book value per share increased $0.39 or 2.4% this quarter to $16.42 and our tangible common equity ratio increased to 8.6% from 8.03% year over year. Our CRE concentration ratio was 399%, adjusted for purchase accounting marks at quarter end. There were no buybacks during the second quarter, and we have over 2 million shares remaining on our share repurchase authorization. Lastly, I would like to share a couple of updates to our guidance following the strong start to 2026. We expect loan and deposit growth to be at the high end of our initial range, now expecting 5% to 6% full-year growth. We also are raising our noninterest income guide for the third and fourth quarters to $29 million per quarter versus $28.5 million previously. We expect a full-year effective tax rate of approximately 28% to 28.25%. We continue to target a core ROA of 1.2% to 1.3% with a mid-teens return on average tangible common equity. That concludes our prepared remarks. We would be happy to respond to questions.
Questions and answers
We will now begin the question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the roster. Your first question comes from Feddie Strickland with Hovde. Your line is open. Please go ahead.
Hey, good morning. Wanted to ask on deposits. It seems like really good momentum in the back half of the year here, and you mentioned favorable repricing of deposits and the release. Is there much more to go there on the time deposit side just in terms of maturities coming up that can maybe reprice lower to offset some competitive pressures on new deposits? Or do we kind of see costs start to tick up from here? And then just one other question on the loan yield — did purchase accounting accretion step up some in the quarter? Or was some of the difference between core and GAAP NIM caused by some interest recoveries as well? And just one last question for me on credit: I noticed you did not change the guide on charge-offs for the year, but the first half charge-offs are pretty meaningfully below that 10 to 15 basis point range. Is that just conservatism as you work some of these larger credits in the back half of the year?
This is Adriano. We expect costs to actually go up 1 or 2 basis points over the next couple of quarters, mainly on pressures, as you have mentioned, on CDs and the competitive nature in our market at this point. The pickup on the interest margin is going to be mainly driven by the back-book repricing and some impact from cash flows on the securities portfolio. Regarding the loan yield question, it was mainly interest recoveries for the quarter, Feddie. For the quarter, it was pretty stable versus the prior quarter. It was really driven by back-book repricing in core net expansion. On the charge-offs guide, I would just add that we have set the guidance to reflect the risk profile of the portfolio and potential variability in the back half of the year.
I think that the charge-off expectation is in line with the risk profile that we take. If you look at what we cannot promise is that a loan will not go NPA, but what we can promise is the outlook we see. Our team has done a wonderful job working out the credits. We just do not have a ton in there, but as I mentioned in my prepared remarks, we do have that one relationship that went into NPA in the first quarter, and we see that resolving by the fourth quarter with no real material loss or any loss whatsoever for us. So again, I think we expect to see charge-offs remain low based on how we underwrite and the risks that we are willing to take as an organization.
All right. Great. That is helpful. Thanks for taking my questions. I will step back.
Your next question comes from the line of Timothy Switzer with KBW. Your line is open. Please go ahead.
Morning. On the loan side, along with NIM expansion, it is kind of rare to see this quarter. Can you talk about what you are seeing from a competitive standpoint, particularly in lending? Are there any pressures from maybe the larger banks in your area or anything on pricing? Given your expectation for the NIM to continue to move higher, how much of that is driven by some of the loan back-book repricing, and what is the gap on new loan yields versus old? And lastly, can you update us on your thoughts on M&A and how active you might be in participating in any discussions in your markets right now?
I would say on the loan side, from our vantage point, we are not seeing what I would call irrational behavior yet. My definition of irrational would be a structural breakdown in underwriting where spreads are too wide or pricing is being pursued in a way that breaks credit discipline. There is competition, no doubt, but I just do not see it on the irrational side yet. I see competition heightening more on the funding side of the balance sheet than I do on the lending side, which is supported by the $3.2 billion pipeline that we have. It is skewed somewhat toward C&I, which can become more competitive in today's environment as everybody is chasing that. In terms of M&A, it is certainly part of our strategy, but our number one focus and priority remains on organic growth across our businesses. The M&A environment, which was picking up, has settled out a bit. We remain disciplined: cultural alignment is critical, ensuring that the pro formas, deliverables, value adds, and strategic objectives check the boxes. M&A is something we will pursue selectively and not haphazardly.
I will speak specifically to the fixed portion of the loan portfolio. There is about $3 billion in cash flows coming in over the next 12 months. The weighted average yield, including purchase accounting marks, is about 5.6% on that, so we should be picking up about 4 basis points just on that back-book repricing. The spread between that and the pipeline is about 70 basis points.
Okay. Awesome. Thank you very much.
Your next question comes from the line of Steve Moss with Raymond James. Your line is open. Please go ahead.
Hi, good morning. On loan growth here, you guided to the high end of the range and the pipeline is above last quarter. I am curious why not increase the guidance a bit more? It seems like you could go over the high end of the range. Also, on purchase accounting accretion, what are your expectations for accretion in 2027? And thinking about the investment securities book, yield went up there — are you going to think about running it down given the more competitive environment on deposits?
We can certainly exceed the high end of the range; what we cannot predict is the level of prepayments we might see. This quarter, we had higher prepayments. There is a possibility we could come in a little higher, but we are also being selective on loans that come in with large past balances. Some verticals we are focused on are middle-market segments and areas that produce strong deposits. Summer is always a little slower, so internally we are guiding ourselves to the high end of that range and will manage production accordingly. If prepayments are lighter or we see highly desirable asset classes, there is a chance we could exceed the guidance.
On the loan-side accretion, top-level we would use 35 basis points as the adjuster — the difference between the 3.09% core NIM and the adjusted reported NIM which would have been 3.44%. When we do the loan-side calculation, we use the outstanding purchase accounting marks and adjust the loan balance accordingly, which explains some discrepancy between the dollar amounts you may calculate and our reported numbers. The true dollar amount for the quarter is about $15 million on accretion. Regarding the securities book, we still think there's opportunity: we are cash-flowing about $500 million annually with yields around 3.90% being replaced with coupons or yields near 5.25%, so we expect to remain active in that market.
Okay. Got it. I appreciate all the color. I'll step back here. Thanks.
Your next question comes from the line of Matthew Breese with Stephens Inc. Your line is open. Please go ahead.
Hey, good morning. I wanted to go back to accretion because the numbers were a bit inconsistent. I've been modeling around $20 million a quarter with a slight decline into year-end 2027. Could you reframe for us what accretable yield impact is supposed to be through year-end and early 2027? Also, thinking about deposits and the updated outlook for deposit growth, what are the drivers this quarter? There was a bit more time deposit growth and money market growth of 5%. Are those similar representations of growth through year-end? Considering intensifying deposit competition, what is the cost to bring new money market or CDs in the door in your market — what are promo rates from Provident these days? Then on fee income, stepping down from Q2, what areas are you expecting reductions in? Insurance looked seasonal, BOLI looked a little elevated, and other income was high — is anything unsustainably high this quarter? Lastly, you made recent hires in wealth management, Tony — what do you expect out of that fee income line, AUM growth or fee income growth over the next year? Do you anticipate some acceleration?
If you look at promo rates, you are probably seeing promotional CD pricing in the low-to-mid 4% range in the market. This is one of the areas with heightened competition. We expect municipal deposits to roll in at a good clip and represent about 5% back-end growth annualized. We have a number of new capacities put in place in our treasury management capabilities that are producing good growth, and we are careful not to fund the balance sheet with excessive promo rates. We're focused on growing but not chasing hot money. We see capacity to grow, but we'll balance promos against wholesale funding depending on gaps in the second half. On wealth, we are making meaningful investments in sales and service and advisory capabilities. My expectation is enhanced retention, new AUM inflows to the bank, and a growing pipeline of new clients with the new positions we've added. We expect greater integration between commercial, retail, and wealth, which should generate more referrals and improved results at Beacon.
On deposit costs, are you seeing it above the 1.91% or 1.92% we reported this quarter? It is up a couple of basis points. What we will see in the second half of the year is the benefit of municipal inflows that are typically at seasonal troughs as of June 30. Those should come in at a lower rate than the competitive pricing on CDs: municipal inflows usually come in around the mid-3% range, which should offset some of the incremental cost. On fee income, insurance is definitely seasonal based on premiums underwritten each quarter; year-over-year comparisons show double-digit growth for the period. BOLI is running between $800,000 and $900,000 on a monthly basis; there were some unplanned benefits in the first quarter, but overall we are seeing pickup on the fee income side. That is where the main driver for the guidance change was. Also on the banking fee side, we saw some prepayment income from loan payoffs up about $300,000 quarter-over-quarter.
Beacon's AUM is growing. We see the SBA secondary market activity and other fee sources contributing, and we expect to see greater integration and results as we hire more advisors and deepen cross-sell among commercial, retail, and wealth. We have high hopes for Beacon moving forward.
Yes.
We are seeing a good pickup in new AUM to existing clients and a pipeline of new clients building with the new positions we mentioned. We are also looking to hire more, and that should drive fee income and AUM growth.
I know I ask a lot of questions. Appreciate it. Thank you.
Your next question comes from the line of Manuel Navas with Piper Sandler. Your line is open. Please go ahead. A reminder that if you are muted locally to please unmute.
Good morning. How much of the deposit pipeline do you expect to come from noninterest-bearing accounts? It was nice to see growth this quarter, and I know some treasury management initiatives are helping. Could you add color on how you are generating noninterest-bearing growth? Also, how responsive is NIM to a 25 basis point rate move — what would be the approximate impact?
I do not have a precise number for the pipeline that is purely noninterest-bearing, but it is a big focus for us. The noninterest-bearing sector is harder to grow in this market. What I can share is that our treasury management new business development efforts are producing results: we recently hired three TM new business developers who have nearly a $150 million pipeline as of June. Those hires are relatively new and we expect production in the $25 million to $50 million range from them. We have also changed the structure internally with our commercial relationship managers to deepen relationships and capture more low-cost business checking and noninterest-bearing balances.
I appreciate that color. In thinking about NIM sensitivity, how responsive is it to a 25 basis point rate hike or cut? Does a hike compress margin meaningfully on the short end of the curve?
A 25 basis point rate hike would reduce reported NIM by about 2 basis points for us under the current structure and positioning of assets and liabilities.
This concludes today's Q&A session. Thank you. I will now hand the call back over to Tony Labozzetta for closing remarks.
So thank you, everyone. I would like to mention again that we are very excited about Provident's future. We appreciate you joining us on today's call. We look forward to speaking with you again soon.
This concludes today's call. Thank you for attending. You may now disconnect.