KBRA Affirms Ratings for Provident Financial Services, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Iselin, New Jersey-based Provident Financial Services, Inc. (NYSE: PFS) ("Provident" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for Provident Bank, the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Provident’s ratings are supported by a well-executed banking model led by an experienced and capable management team, which has delivered favorable long-term performance across various economic and interest rate cycles. This strong execution has continued following the Lakeland Bancorp, Inc. ("Lakeland") acquisition, with the company demonstrating solid earnings capacity through the successful integration and realization of cost savings, despite a challenging interest rate environment. This is reflected in a core ROA of 1.05% during 4Q24, which management expects to persist on a reported basis in 2025 as most one-time costs have been realized. The continued positive profitability trends stem from expectations of an expanding NIM into the 3.35%-3.45% range (3.32% during 4Q24), driven by rising loan yields as older loans reset at higher rates and a continued decline in deposit costs following the 100 bps of Fed cuts in 2H24. Additionally, PFS remains well-insulated from further Fed rate cuts due to its neutral balance sheet positioning with respect to interest rate risks. Further balance sheet growth should also support positive operating leverage, potentially reducing expenses to average assets to 1.8%. Revenue diversification has decreased following the merger and is situated below peer levels, with noninterest income to total revenues of 14% during 2024, though remains an area of emphasis among the management team, specifically within the wealth management and insurance agency businesses.

Despite an elevated concentration in investor CRE at 433% as of YE24, we believe that the company maintains a lower-risk credit profile. This is evidenced by an NCO ratio that has averaged a minimal 20 basis points since 2007, supported by stringent underwriting standards and comprehensive monitoring and review. Strong credit trends have persisted in recent years, with both NPA and NCO ratios consistently tracking below the rated peer average. While risk rating migration has been negative—a trend observed across the industry over the past year—criticized and classified loan levels remain manageable overall. Regarding potential headwinds, particularly within the CRE space as loans mature and interest rate resets take effect, we believe Provident is well-positioned. The management team employs conservative borrower selection practices, favoring low leverage, strong debt service coverage, and capable guarantors who can right-size deals when necessary. Exposure to sectors experiencing pockets of weakness, notably office properties, remains manageable at just under 5% of total loans. This segment is largely concentrated in medical office properties (36% of total office exposure), primarily located in New Jersey suburban markets, with minimal exposure to central business districts. Furthermore, despite proximity to New York City, exposure to rent-regulated multifamily housing is nominal at less than 1% of total loans.

Capital ratios remain below historical norms following the Lakeland acquisition, with a CET1 ratio of 10.0% at YE24. However, the ratio has been on a positive trajectory since the transaction close and is expected to continue improving in the coming years. Management is targeting a return to levels closer to the pre-merger range, which we view as adequate given the company’s risk profile and rating group. We believe this target is achievable over the medium term, supported by PFS’s improving earnings capacity—expected to drive the dividend payout ratio down to approximately 40% in 2025—alongside measured balance sheet growth and continued discipline around share repurchases.

Despite modestly higher balance sheet leverage—including elevated loan-to-deposit and loan-to-earning asset ratios—PFS maintains a solid core funding mix, which has resulted in controlled deposit betas (total deposit costs of 2.25% during 4Q24) through the current interest rate cycle. We also view the company’s liquidity profile as adequate, despite a largely encumbered securities portfolio (13% of total assets). Total on- and off-balance sheet liquidity stands at nearly $7 billion, equating to over 1.5x uninsured deposit levels, which represent a reasonable 26% of total deposits (excluding collateralized relationships).

Rating Sensitivities

A rating upgrade is unlikely in the intermediate term, though continued positive trends in profitability and capital targets, as well as the maintenance of sound credit quality, a solid deposit base, and a more conservative liquidity position could support positive momentum over time. Conversely, a rating downgrade is not expected, though deterioration in credit quality, unexpected liquidity or earnings challenges, or a more aggressive approach to capital management could potentially pressure the ratings.

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