KBRA Assigns Ratings to Provident Financial Services, Inc.

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

Provident’s ratings are supported by its well-executed banking model that has been implemented by an experienced management team, which has produced favorable long-term performance through various economic and interest rate cycles. The pending combination with Lakeland Bancorp, Inc. (NASDAQ: LBAI or "Lakeland") is expected to provide significant scale, deepen the executive team, and deliver further diversification opportunities to the pro forma company. We view the anticipated transaction as strategically positive as both institutions reflect many similarities, including conservative credit cultures and an emphasis on maintaining strong core deposit franchises. Moreover, the acquisition offers meaningful potential for improved earnings capacity, with minimal integration/execution risk given the aforementioned cultural alignment, geographic overlap, and management’s proven track record. PFS has reported solid earnings results in recent years, with core ROA averaging just under 1.20% from 2018-2022, which was reinforced by a durable NIM, in part, due to its low-cost deposit base (1.95% for 4Q23), consistent noninterest income levels (tracking between 15%-20% of total revenue), and effective cost controls. Moreover, profitability has remained respectable in 2023 (core ROA just below 1.00%) despite NIM headwinds and a modest increase to provision for loan losses, principally driven by weakening economic forecasts. Despite an elevated concentration in investor CRE (58% of total loans or 469% of total risk-based capital as of 4Q23), we believe that the company reflects a comparatively lower risk credit profile, evidenced by an NCO ratio that has averaged a minimal 20 bps since 2007, and has been supported by stringent underwriting and in-depth monitoring and review. Moving forward, Provident is relatively insulated from the maturity wall looming in the CRE space, with a minimal amount of repricing set to occur over the next twelve months. Moreover, the company's exposure to the troubled office sector is manageable at 4% of total loans, with a meaningful portion of the tenant mix being concentrated in the medical space, which provides more resiliency, in our view. Additionally, it is worth noting, despite being situated in close proximity to the NYC markets, as well as reflecting an above average exposure to multifamily (17% of loans at YE23), PFS has a minimal concentration in the rent-regulated space (1% of total loans). As such, combined with the manageable level of criticized/classified loans, and minimal amount of delinquent loans, we believe the company's near-term credit risks are comparatively low. Capital has been consistently managed in a conservative fashion, with a CET1 averaging 11.6% since 2018, though ratios are expected to decrease considerably following the proposed acquisition and the related interest rate marks on LBAI’s securities and loan portfolios. However, management has made clear the intention to fully rebuild capital ratios closer to historical levels over the medium term. KBRA also recognizes Provident's quality core deposit franchise, which has been rather resilient despite the shrinking deposit levels across the industry and continues to reflect a majority of total funding (81% as of YE23). Moreover, as noted, the company maintains a below average deposit beta, which has persisted throughout various interest rate cycles, and has consistently tracked lower than local peers. While liquidity as measured by the loan-to-deposit ratio has generally been more aggressive at right above or below 100% (105% as of YE23), we view total available liquidity, including on-balance sheet and contingent funding sources, as adequate in the context of uninsured deposit balances, deposit flows, and growth prospects.

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