KBRA Assigns Ratings to Provident Financial Services, Inc.

Rhea-AI Summary

KBRA assigns favorable ratings to Provident Financial Services, Inc. and its subsidiary, Provident Bank, supported by a strong banking model and pending merger with Lakeland Bancorp, Inc. The company has shown solid earnings performance and credit quality, with manageable risks and conservative capital management.

Insights

Financial Analyst

The ratings assigned by Kroll Bond Rating Agency (KBRA) to Provident Financial Services, Inc. and its main subsidiary, Provident Bank, are indicative of the company's solid financial position and the effective execution of its business model. The 'BBB+' and 'A-' ratings for senior unsecured and deposit debt respectively, suggest a strong ability to meet financial commitments, which is important for investor confidence. The stable outlook reflects a balanced risk profile and the expectation of consistent performance.

From an investment perspective, the announced combination with Lakeland Bancorp, Inc. is noteworthy. Mergers and acquisitions can be catalysts for stock price movement due to the potential for cost savings, increased market share and enhanced earnings. The alignment in corporate culture and minimal integration risk could smooth the transition and support the financial metrics that underpin these ratings. The transaction is likely to be closely watched by investors for its execution and the realization of the anticipated synergies.

Provident's low-cost deposit base and effective cost controls are key factors contributing to its robust net interest margin (NIM) and return on assets (ROA), which are important metrics for assessing a bank's profitability and efficiency. However, the modest increase in provision for loan losses, driven by a weaker economic outlook, is a concern that warrants monitoring as it could signal rising credit risk. Despite this, Provident's credit profile appears resilient, with a low net charge-off (NCO) ratio and a conservative capital management approach.

Market Research Analyst

The banking industry is sensitive to economic cycles and interest rate fluctuations. Provident's performance through various cycles demonstrates adaptability and resilience, key attributes for long-term stability. The company's exposure to the commercial real estate (CRE) sector, particularly in investor CRE, is significant. While this concentration presents a risk, Provident's minimal exposure to the troubled office sector and strategic focus on the more resilient medical space mitigate this concern.

The banking sector is currently facing headwinds from rising interest rates, which can squeeze NIMs. Provident's low deposit beta, which measures the sensitivity of deposit costs to changing interest rates, suggests that the company is better positioned than some peers to manage this aspect of its balance sheet. This is a positive sign for investors looking for banks that can navigate the rising rate environment effectively.

Investors should also consider the company's liquidity management, as indicated by the loan-to-deposit ratio. While Provident operates with a higher ratio, suggesting a more aggressive stance, its adequate liquidity, including on-balance sheet and contingent funding sources, should reassure stakeholders about its ability to meet short-term obligations.

Credit Analyst

KBRA's ratings provide a comprehensive view of Provident's creditworthiness, which is essential for assessing the risk of lending to or investing in the company. The ratings reflect a balance of strengths, such as a well-executed banking model and experienced management, against potential vulnerabilities like the high concentration in investor CRE loans.

The credit implications of the pending merger with Lakeland Bancorp are significant. A successful integration can lead to a stronger, more diversified institution. However, investors should be aware of the potential for execution risk and the impact on capital ratios post-acquisition. Provident's intention to rebuild capital ratios to historical levels post-acquisition will be an important factor to track, as it speaks to the company's commitment to maintaining a strong balance sheet.

Finally, Provident's credit profile benefits from its disciplined approach to underwriting and loan monitoring, which has kept credit losses low historically. The company's conservative approach to capital management, with a Common Equity Tier 1 (CET1) ratio averaging 11.6% since 2018, provides a buffer against potential credit losses, an aspect that is reassuring for debt holders and investors alike.

NEW YORK--(BUSINESS WIRE)-- 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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Methodologies

• Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
• ESG Global Rating Methodology

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1002341

View source version on businesswire.com: https://www.businesswire.com/news/home/20240325745767/en/

Analytical Contacts

John Rempe, Director (Lead Analyst)

+1 301-969-3045

john.rempe@kbra.com

Ian Jaffe, Senior Managing Director

+1 646-731-3302

ian.jaffe@kbra.com

Ashley Phillips, Managing Director (Rating Committee Chair)

+1 301-969-3185

ashley.phillips@kbra.com

Business Development Contact

Justin Fuller, Senior Director

+1 312-680-4163

justin.fuller@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What are the debt ratings assigned by KBRA to Provident Financial Services, Inc.?

KBRA assigns a senior unsecured debt rating of BBB+ and a subordinated debt rating of BBB to Provident Financial Services, Inc.

What is the Outlook for all long-term ratings assigned by KBRA to Provident Financial Services, Inc.?

The Outlook for all long-term ratings assigned by KBRA to Provident Financial Services, Inc. is Stable.

What is the pending combination mentioned in the press release involving Provident Financial Services, Inc.?

The pending combination mentioned in the press release involves Provident Financial Services, Inc. and Lakeland Bancorp, Inc.

What is the core ROA average reported by Provident Financial Services, Inc. from 2018-2022?

The core ROA average reported by Provident Financial Services, Inc. from 2018-2022 was just under 1.20%.

What percentage of total loans does Provident Financial Services, Inc. have in the investor CRE space?

Provident Financial Services, Inc. has 58% of total loans in the investor CRE space.