Why Provident in N.J. is bullish on loan growth

Provident Financial Services in Iselin, New Jersey, said loan growth proved challenging through the third quarter as it worked to integrate a major acquisition and borrower demand remained soft.

However, the $24 billion-asset bank said it completed the conversion of its Lakeland Bancorp acquisition in September — the same month that the Federal Reserve cut its benchmark interest rate by 50 basis points and signaled more reductions could follow.

The combination of lower borrowing costs and Provident’s fully merged lending teams, free from the inevitable distractions of putting two companies together, positions the bank for growth, executives said Wednesday. Provident has a loan pipeline of about $2 billion.

“We are optimistic regarding the strength and quality of our pipeline and, as such, we expect good growth over the next two quarters,” CEO Anthony Labozzetta said during the company’s third-quarter earnings call.

Provident bought in-state peer Lakeland in May and grew by about $10 billion of assets. The all-stock deal, valued at $1.3 billion when it was announced in 2022, faced regulatory delays on its way to finalization. The drawn-out process created distractions, Labozzetta said, as it has for several other banks that have faced heightened regulatory scrutiny of M&A transactions under President Biden.

Provident’s total third-quarter loans increased slightly from the prior quarter — by less than 1% — to $18.8 billion. But last quarter marked an inflection point, Labozzetta said.

“I think we had a dynamic that affected Provident, one that was just outside of normal rates and market conditions. We had a merger integration happening, and as hard as you try, there’s always going to be a little bit of a disruptive factor there,” he said. “It’s hard to gauge what percentage that was. But suffice to say that as we got through it, the merger got approved, and we got through our conversion, the momentum picked up on both sides of the legacy organizations.”

Lower rates add an important catalyst, Labozzetta said. Provident is projecting two more rate reductions this year, both by 25 basis points, and another three cuts of the same magnitude next year.

“We are seeing a great deal of activity. The sentiment from the clients today is that it’s great that rates went down, and that is starting to trigger more activity,” Labozzetta said. “I think we’re in a space now where people are being active with projects because the specter of rising rates isn’t there. So they can say, ‘OK, we don’t have to worry about variable rates continuing to move.'”

Provident’s CEO also said that, once the Nov. 5 presidential election is over, it could provide needed clarity for commercial clients.

“There’s also discussions out there in certain industrial sectors that people are waiting for what happens with the election, depending on policy changes and how it might affect their business,” Labozzetta said.

“We’re also seeing a little bit of a pull down from the bigger banks,” he said, explaining that national lenders are exhibiting caution, which is offering more lending opportunities for Provident.

“There’s been a little disruption in the market, and we’re getting a lot more activity coming in from top banks on down,” he added. “I think the fourth quarter is looking nice right now for us. And we’re going to keep that momentum going into 2025.”

Provident reported third-quarter net income of $46.4 million, up from $28.5 million a year earlier. The year-over-year increase in net income was due largely to the Lakeland acquisition. Earnings per share decreased to 36 cents from 38 cents a year earlier.

Provident’s net interest margin increased by 10 basis points during the quarter to 3.31%. “We expect to see continued improvement over the next several quarters” as loans grow and deposit costs decline alongside lower rates, Labozzetta said.

The bank’s third-quarter net interest income increased by $42.2 million from the prior quarter to $183.7 million, due largely to a full quarter of combined operations with Lakeland.

Funding costs are broadly projected to gradually decline for the banking industry, according to Morningstar DBRS analyst Michael McTamney. “We expect net interest income to trend upward in the near term, given the upcoming tailwinds from deposit cost stabilization, with further benefits likely ahead if the Federal Reserve continues to cut rates,” he said.