Good morning and welcome to the Provident Financial Services, Inc. Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Leonard Gleason, Investor Relations Officer. Mr. Gleason, please go ahead.

Thank you, Anita. Good morning, ladies and gentlemen. Thank you for joining us. The presenters for our third quarter earnings call are Chris Martin, Chairman, President and CEO; and Tom Lyons, Executive Vice President and Chief Financial Officer of Provident. 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 can be found in the text of this morning’s earnings release, which has been posted to the Investor Relations page on our website provident.bank. Now, I am pleased to introduce Chris Martin who will offer his perspective on our third quarter results. Chris?

Thanks, Len, and good morning, everyone. Our third quarter results included continued net interest margin expansion, record revenues and record earnings driven by higher yield on loans as the Federal Reserve continue to raise short-term interest rates. We achieved record annualized returns on average assets and tangible equity of 1.45% and 15.47%, respectively, and we remain focused on future earnings growth, stable-to-improving credit quality and continued expense discipline. The competition for quality loans remains fierce, and we continue to see credit structure and pricing in the market that is not commensurate with the risk and leverage we are comfortable with and we won’t overreach for loan growth. Loan payoff this quarter exceeded those of the first part of the year and are driven by a number of factors such as competition from non-bank lenders, including private equity firms, as well as sales of businesses or real estate by our borrowers. We have confidence in the quality and strength of our loan pipeline and continue to seek C&I growth. Core deposits were relatively stable as non-interest-bearing deposits grew at better-than-9% annualized rate. Deposit growth on the margin has been a challenge as competition continues to ratchet up rates to fund outside loan growth. And we have offered CD promotions on a selected basis since market rates are cheaper than overnight borrowings. Expenses remained well controlled and operating efficiency improved. We are reassessing our operating processes and pursuing automation to reduce repetitive tasks and improve our basic operating infrastructure to gain efficiencies. We are also spending time in investing dollars on technological initiatives and new product development, including Zelle and a small business automated platform, that will both likely be available early in 2019. Regards to M&A, we continue to assess opportunities and have conversations, although nothing is currently actionable. We believe the challenges of enhanced regulatory oversight and required investment in technology will continue to impact smaller institutions bottom lines and spur consolidation. On the outlook for Q4 in 2019, the market is lining up for a December rate hike and for more rate hikes next year. The U.S. and regional economies are strong with low unemployment, stronger consumer spending, growing wages and improving confidence despite the political betrayal in Washington preceding the midterm elections. For the most part, our clients remain optimistic and have been experiencing better operating results. With that, I’ll turn it over to Tom for more details.

Thank you, Chris, and good morning, everyone. Net income was a record $35.5 million for the third quarter of 2018 or $0.54 per diluted share compared with $19.2 million or $0.30 per share for the trailing quarter and $26.6 million or $0.41 per share for the third quarter of 2017. Current quarter earnings were driven by record revenue of $91.7 million as interest income and net interest income both achieved record levels. Our net interest margin expanded 5 basis points versus the trailing quarter as our earning asset yield increased 10 basis points while the cost of interest-bearing liabilities increased 8 basis points. Further helping the margin, non-interest-bearing deposits grew $33 million or an annualized 9.1% and average stockholders’ equity increased $13 million for the quarter. Note that our reported margin is core with prepayment fees excluded and reported as non-interest income. Pretax, pre-provision earnings also set a record of $45 million, an increase of approximately 15% when compared with both the trailing quarter and the third quarter 2017. Performance versus the trailing quarter was further helped by a lower loan loss provision and year-over-year earnings also benefited from a lower tax rate, improving net income compared with the third quarter of 2017 by a total of 34%. While growth was again constrained by high rate of payoffs, net outflows on lines of credit and maintenance of credit and pricing discipline, loan originations were 34% better than the trailing quarter and 10% better than in the third quarter of 2017. The pipeline remained strong at $1.1 billion while the pipeline rate has increased 28 basis points since last quarter to 4.95%, exceeding the loan portfolio rate of 4.38%. Based on our strong loan pipeline, 90% core and non-interest-bearing deposit funding and the variable-rate nature of many of our assets, we…

We’ll now begin the question-and-answer session. [Operator Instructions] The first question today comes from Mark Fitzgibbon with Sandler O’Neill. Please go ahead.

Hey guys, good morning.

Good morning.

It absolutely pains me to say it, but you had a pretty good quarter. I will – Tom, just a follow-up on your tax comment. I heard what you said about the $1.9 million in the fourth quarter. Previously, you had given guidance of 27% effective rate for 2019. Do you still feel that’s the right level?

Let’s say a preliminary assessment and there’s still a lot of ongoing review. We did discuss that last quarter. We are continuing to discuss with our tax compliance professionals as well as legal folks. There have been a number of technical changes, corrections that were published in the year – early in the fourth quarter. There’s the potential for additional technical changes to come through so it’s still under review.

Okay.

But I figure the range is somewhere that’s the kind of the high end of the range at 2017 and the low end would be we get to maintain roughly around the 20% level.

And then secondly on the margin. Given the intense deposit competition in New Jersey, do you think about the magnitude of the margin expansion that we could see in coming quarters is significant as what we saw this quarter?

I think we’ll step back from this. I’m looking at about 2 basis points a quarter for the next three or four.

Okay. And then it looked like there’s obviously some seasonality in the fee line in the third quarter there. What do you think fees and expenses trends are likely to normalize that in the fourth quarter?

So the volatile items on the income side were loan prepayment fees, which were up about $800,000 versus the trailing quarter to roughly $1.3 million. Wouldn’t mind if that backed off a little bit. We’ve got to retain a little bit more the loan portfolio. Payoffs were an issue for us in terms of trying to grow the balance sheet. We did have a BOLI claim, which about $700,000. BOLI starting to kick up a little bit, so credits are moving up as rate [indiscernible] a little bit better income production there, too. Gains on loan sales were higher by about $100,000 versus the trailing quarter. A piece of that was the sale of the ABL portfolio. So I wouldn’t expect that to recur. So you might see some reduction there. And then we had good profit on swaps, which is just kind of the quarter-to-quarter depending on customer preference and when the loans are closings. So that’s a tough one to predict. But that was about $395,000, so better than the trailing quarter.

And then on expenses, on the…

On the expense item, I’m thinking like 47 or 47.5 for the fourth quarter. We came in lower than I expected for Q3. I think some of our estimates around the costs of a seasonal implementation, some of the stress testing work we’ve been have been proven to be a little bit conservative. Occupancy also came in lower than I anticipated. I think there were more in the way of, believe it or not, snow and ice removal trailing costs in Q2 as well as some non-recurring, non-capitalizable repairs and maintenance expenses that happened in Q2. So we saw more of a benefit there than I had anticipated. And I think we also got a little bit more benefit in the comp line than I was thinking originally from the reduction on employer payroll taxes as well as incentive stock compensation market being under pressure incentive stock comp was lower on the stuff like the soft costs, which are dependent on the stock price.

Thank you.

Thank you.

Next question comes from Collyn Gilbert with KBW. Please go ahead.

Thanks. Good morning, guys.

Good morning.

So just starting on the loan outlook. You both eluded to in your comments just about the level of paydowns that you’re seeing. Can you give us any insight as to how you’re thinking about growth as we go into 2019? Obviously, I know paydowns are going to be perhaps an unknown variable, but just for what you do know and what you are seeing. Chris, I know you mentioned the C&I pipeline is really strong, but just kind of give us a little bit of frame work is to what you’re seeing out there in terms of potential loan demand.

Well, I think we have opportunities and the demand is there. We don’t see businesses expanding like you would think with this economy. I think everybody’s playing a little closer to the best. They’ve also had improve balance sheets and cash on hand. So they can utilize their own cash versus borrowing. And certainly on the line usage, we’re not seeing it as much as we thought we would see. The other side is all the areas with our commercial real estate and C&I groups were still getting a lot of looks. On the other hand, some of them are – as we’ve said in our comments, at levels that we don’t think are commensurate. And we’re not going to do with some heavy leverage lending that some may want. But I think we’re all kind of saying what the markets giving us with the pipeline is still pretty strong and solid. I think we continue think we’re doing the right process as opposed to reaching for growth. And so I think that payoffs should abate in the future. I’m hoping and then, Tom, I’ll give it to you on that.

I just thought we did see nice production growth. It was 10% better than a year-ago third quarter so – and 34% better than it was in Q2. So that’s the usual expected pick up towards the end of the year. Fourth quarter is traditionally been quite strong for us. So as you said, there with the wildcard is what level of payoffs do we see, and that’s really hard to predict at this point.

Okay, okay. That’s helpful. And then, Tom, just in your NIM outlook there, just may be 2 basis points or so expansion over the next couple of quarters. What is going into that assumption? I mean, I presume obviously gradual increase in funding costs and the betas, but is that assuming – it’s got to be assuming some balance sheet growth I’m guessing or just talk a little bit about maybe the drivers of how you’re seeing that NIM being able to continue to expand.

Yes. I don’t know if it’s much driven by growth although that is in there, but I think we’re pretty modest in our growth assumptions as it is by the variable nature of the book. The short duration loan book is 2.3 years. It’s about 60% floating and variable rate, adjustable rate loans. So it’s the asset repricing more so than growth that drives the expansion as well as, I think, our reasonable assumptions around the deposit betas, which are continue to run lower than most of the group given the quality of our deposit base.

Okay. And then just in terms of what you’re doing on the deposit side. Where you’re seeing – you’re being more aggressive either in terms of rate or product to kind of get the growth or just how you’re thinking about, how you want to fund the balance sheet today and into the future.

I guess the shift we’ve seen in recent quarters has been more of a customer preference for time deposits and willingness on our part to compete for some of those, because of the increase in rate on overnight borrowings. So we’ve done 13 months promotion. I think I talked about in previous quarters that folded a nice amount of dollars. We did another 13 months to targeted non-customers and then we also did a 7-month Customer Appreciation Day thing, which is a one-day new money only that folding a lot of dollars as well. So that’s really the strategic shift that we’ve actually implemented so far, we continue to review our product set and obviously try to stay as close to the market and the customers we can to defend our deposit base and obviously manage our costs as best as we can.

Collyn, this is Chris. I think the other side of that is the next few rate rises I think it starts to become more material for people who have been sitting on the sidelines and the vice versa on the – some of our competitive brother and that are finding a lot of the loan production with money market instruments as rates rise, they’re going to have to continue to make those. Otherwise, they will run off to others. So I think that the next batch of deposit betas will be a little bit more accelerated than the previous.

Okay. And then just curious, Tom, on the promotions that you mentioned, the 13-month and the 7-month, roughly how – cost were you having to offer those promotions?

Initial 13 was 1.75. I think we went to two in a quarter on the second one and the 7-month was a 2.05.

Okay. Okay, good. And then just on the decision to exit the ABL business this quarter. Can you just talk about sort of the decision around that and then I know you obviously had loan sales this quarter, but any other flow-through of impact from getting out of that business?

I think it’s one of the reasons why we saw the allowance level debt because it freed up some allowance once we decided to takes at that business and sold off and obviously unfortunately some of the charge-offs related to that. That was a decision relates on some – based on some personal departures as well as some of the risk characteristics, which we were no longer comfortable with. The large charge-off that we saw in Q2 was an asset-based loan and we did suffer this impairment on a decision to go ahead and bite the bullet and exit one that was – that we weren’t comfortable with holding at this point in the cycle.

Okay, okay. So no – the expense – any kind of related expense reduction on the operating side is already in the run rate?

That’s in the run rate, yes.

Okay, okay. And then just one final question, sorry. Just decline in occupancy, that’s been coming down to the last few quarters. What’s driving that? I know you mentioned the snow removal, but that seems – well, anyway…

[Indiscernible] quarter-to-quarter, so that actually was like a couple of $100,000 that’s still remained in Q2. That’s not all of that, obviously, but it was a piece of it. And the other stuff, as I said, was non-recurring repair and maintenance. Items that were non-capitalizable. We did have – last year that had some impact as well, but that’s kind of been filtering through.

And Collyn, going forward, obviously, we always do, I guess, I will call it like required region purification of the branches over every year, so there’ll be a few branches that are online. And also, ATM machines with all the issues going on with skimmers and EMV and things that are going onto so we’re trying to protect ourselves like modernizing the equipment we have and/or replacing, which will be more sophisticated equipments to, one, help customers, but also ward off. Those are probably costs that will be ongoing but not material.

So, that’s a fair point. That balance with the aging facilities also that have depreciation expense reducing.

Got it, okay. All right, that’s helpful. Thanks, guys.

Next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

Good morning.

Thank you, Matt. Couple of just other questions, there’s an article out there yet today, one of the banks in your market actually CEO noted that there’s been some pressure by the auditors for banks to disclose some of the early seasonal impacts in the 10-Ks. Are you seeing that at all? Or could we hear sooner than later what CECL would look like?

I think the requirement disclose where you are in the process. You have to put information out as it becomes available. So we are working toward that process were not prepared to disclose an estimate at this point, but we will be updating as to where we are in the process of adoption.

Understood. And when throughout to 2019 might we have some good idea of what the CECL impact from a dollar’s perspective will be?

Probably between the second and third quarter as we run models and then we verify them and I think that’s when you probably see most of the impact, unless we can certainly do some exercise and with the regulators and in Washington to try to phase it out – or phase it in over a three-year period, which it starting the conversation and obviously the large banks are leading that charge.

Okay. All right. I think Chris, I thought your M&A comment was interesting. You said nothing was actionable. And so I guess, I was just hoping you could flesh it out a little bit more. I’m curious if you could describe the scope of the market for banks for sale right now. Is there an active market of banks for sale in your market? And could you frame for us as well the market of potential buyers, how is that all fitting out?

First thing, I look over in my account was probably say no. But I think everybody’s looking at things in the way of this has been a good market, a good economy. And if you’re not getting the growth, then or the cost keep coming up that there’s certainly more conversations going on. On the other hand, I think as people get comfortable with the reduction of tax rates. They feel that their runway is there and so that kind of mutes of those conversations. When I say actionable, obviously, if we thought there were something we will probably be involved right now, we have been not necessarily the sidelines. We continue to see that as part of our capital management strategy and exercise that accordingly.

Understood. Okay. That’s all I had. Thank you.

Next question comes from Russell Gunther with D.A. Davidson. Please go ahead.

Hey good morning guys.

Hi Russel.

Just want to circle on the paydowns again. Could you guys quantify sort of what that was this quarter? And how much above where are you would traditionally expect to see in a more normal quarter at this point?

Sure. Payoffs were about $235 million for Q3 compared to $227 million in Q3 of 2017 and about $161 million in the trailing quarter.

Okay, great. Thanks, Tom. And then I’m sorry, if I miss this. But could – the size of the ABL portfolio that you guys exited, what was that? Where does it stand today? And then maybe just a little history from you as to when you got into that and why you’re getting out.

Sure. I’ll give you the numbers and maybe, Chris, you want to touch on the history. But at the beginning of the year, the commitments were $181 million, outstanding was $142 million. At $930 million, we still have about $50 million committed and $40 million outstanding that we’re working to wind down the rest of the way. The sale in the third quarter was about $25 million.

Okay.

And then going back, the ABL, we bought a bit of the portfolio from another institution that was performing at a – basically at par and then we got the team with it. And at that point, the – so from 2015 to basically now, we just felt that it wasn’t running as we thought it would. Performance wasn’t there. And at that point, we said this is the directional. We – also, we’re not getting the growth that we anticipated with that. So when we parsed through the personnel and some of the issues we said this is not kind of we thought it would be a great opportunity, which on its face it was, but then ended up being not necessarily the way you want to go and to redeploy and give another team and everything else, we felt the best thing to do is exit and to move on to the normal lending that you’d expect.

All right. Great. Thanks for that color guys. And then just last one. On the M&A front here, there’s nothing immediately actionable, but big picture, does Pennsylvania make more sense to you for potential targets based on how the New Jersey tax code shakes out?

I think that we are not going to discriminate between the markets that we’re in and anything contiguous. I think Pennsylvania has a lot more smaller institutions that have little – the market shares that might be something that we would like to continue that conversation. Majority is certainly there’s less institutions that kind of match up to what makes sense. So not to say we’re say no to anything else, but we certainly looking at both markets in an equal approach.

Okay, great. Thanks for taking my questions.

You bet.

The next question is a follow-up from Collyn Gilbert with KBW. Please go ahead.

Russell just asked my question on the M&A interest versus DA versus New Jersey, so I’m all set. Thanks.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Christopher Martin for any closing remarks.

Thank you. As we look past the midterms, which is no small feat, we see a solid economy with positive prospects. Rate should continue to rise slowly and lockstep with inflation, and we are at full employment, more positive which hope will carry the momentum as we prepare for 2019 and beyond and we wish everybody a great fall season. Thank you very much.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.