Hello and welcome to the Provident Financial Services, Inc First Quarter Earnings Release Call. My name is Alex, and I'll be coordinating the call today. I will now hand over to your host, Adriano Duarte, Investor Relations Officer for Provident. Over to you, Adriano.

Thank you, Alex. Good morning, and thank you for joining us for our first quarter earnings call. Today's presenters are President and CEO, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons. 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 is contained in this morning's earnings release which has been posted to the Investor Relations page on our website provident.bank. Now it's my pleasure to introduce Tony Labozzetta, who will offer his perspective on our first quarter. Tony?

Thank you, Adriano and good morning, everyone. We are very pleased with Provident's strong financial performance for the first quarter with earnings of $0.58 per share. Our performance was driven by growth in our key business lines, resulting in the deployment of some of our excess liquidity and more desirable asset classes. The growth and improved asset mix combined with an expanding net interest margin bolstered net interest income, which drove the increase in quarterly revenue. In addition, improvements in credit metrics and the economic forecast supported a negative provision for the quarter. This produced an annualized rate of return on average assets of 1.3% and a return on average tangible equity of 14.58%. Our Board approved the quarterly cash dividend of $0.24 per share. During the quarter, we also repurchased approximately 1.3 million shares of common stock at an average price of $23.36 per share. Our capital position remains strong and comfortably exceeds both capitalized levels. Our focus is to continue to build our best-in-class customer experience and grow all of our business lines, especially commercial lending. Our commercial lending group continues to be very active and in the first quarter, we closed approximately $502 million of new loans, a 61% increase from the same quarter last year. Prepayments for the quarter adjusted for PPP included certain anticipated payoffs, which offset some of our strong production. A line of credit utilization percentage increased 3% for the first quarter to 31%, what remains below our historical average of about 40%. Our production continues to be robust consequently, we grew our commercial loan portfolio, excluding PPP at an annualized rate of 8.3%. We had good pull through in our commercial loan pipeline during the first quarter, yet our gross pipeline remains healthy at approximately $1.4 billion. The pull-through adjusted pipeline including…

Thank you, Tony and good morning, everyone. As Tony noted, our net income for the quarter was $44 million or $0.58 per diluted share compared with $37.3 million or $0.49 per share for the trailing quarter and $49.8 million or $0.63 per share for the first quarter of 2021. Pre-tax pre-provision earnings for the quarter were $50.4 million or an annualized 1.49% of average assets. We had record revenue that exceeded $114 million for the third consecutive quarter on the strength of record net interest income. Our net interest margin increased 7 basis points from the trailing quarter to 3.02% as interest-bearing cash was deployed to fund higher yielding loans invested in higher-yielding securities and borrowings were replaced with lower costing deposits. Income recognized from PPP loan forgiveness fell $700,000 versus the trailing quarter to $1.1 million, and remaining deferred PPP fees totaled $354,000 at March 31. Meanwhile, we drove funding costs down again as average deposits increased and average borrowings declined. Average non-interest bearing deposits increased $26 million versus the trailing quarter and the total cost of deposits declined another 2 basis points to just 19 basis points. Excluding the impact of PPP loans and purchase accounting adjustments, the core net interest margin increased 11 basis points in the trailing quarter to 2.95%. The pull-through adjusted loan pipeline at March 31 increased $134 million from the trailing quarter to $810 million, while the pipeline rate increased 55 basis points since last quarter to 4.15%. Excluding PPP loans, period-end commercial loan totals increased $165 million or an annualized 8.3% versus December 31. Loan growth occurred primarily in the CRE and C&I categories. Net of runoff in the residential and consumer loan portfolios, total loans excluding PPP loans grew $147 million or an annualized 6.2% for the quarter. The allowance for…

Thank you. We will now begin the Q&A. Our first question for today comes from Mark Fitzgibbon from Piper Sandler. Mark, your line is now open.

Gentlemen, good morning.

Good morning, Mark.

Hi, Mark. How are you?

Terrific. Thank you. I guess the first question I had, Tom, could you share with us what the impact of accretable yield was this quarter and last quarter, let's say?

The last quarter was 7 basis points and 6 basis points in the current quarter, Mark.

Okay. Great...

And then PPP was 5 last quarter and 2 in the current quarter.

Okay. Great. And then secondly, what was assets under management at the end of the quarter, and what were the net flows?

At the end of the quarter, $3.9 billion. On average, we're only down $59,000, so 4.03 for -- the average for the quarter. So, really, market valuation driving that. We actually increased number of clients by 7 over the course of the quarter. The fee rate remains about 77 basis points.

Okay. And then, Tom, could -- it sounds like the margin probably goes down a little bit in the short term as PPP income burns off and accretable yield declines. So, should we assume, the reported margin will kind of dip down a little bit in 2Q and then start to build in the back half of the year?

No, Mark. I think we're actually going to see it continue to build into Q2. PPP, as I said, only contributed 2 basis points this quarter. There's about $28 million worth of principal left and just $354,000 left in deferred fees, so that noise will go away. But we have a modestly asset-sensitive balance sheet as we've discussed. And we're currently modeling seven rate hikes over the course of the year, 50 basis points in May, and then 25 in June, July, August, September, November and December. So, our models have given us kind of a 3.12 to 3.15 for next quarter on the NIM, getting up into the low 3.20s by the end of the year.

Okay. Great. And then, I guess I was curious, I didn't notice anything in the release about it. Are you taking advantage of the consolidation around you in hiring some lenders from other banks? And if so, how many and -- how many might you consider this year? Thank you.

Yeah, Mark. The answer is yes on a number of fronts. If I recall correctly and don't hold me to this number, but I think we've hired about almost 19 new RMs this year. Not all of them from this intermediation that has taken place, but we certainly see some activity. And we've taken, I guess, our share of it and perhaps some more in the New York area as well in Westchester and Rockland too. So -- and on the loan side, I would say, yes, probably we've grown our book. I don't have a number right off the top of my head, but I'm certain that there are certain advantages that we've taken in terms of loan productivity as well.

Thank you.

Thank you. Our next question comes from Michael Perito from KBW. Michael, your line is now open.

Thank you. Good morning, guys.

Good morning, Michael.

Good morning, Michael.

I wanted to ask on the reserve, as we kind of think of the mechanics of that moving forward here, I mean, it seems like the credit environment for you guys is pretty benign and strong. But I imagine on the CECL front, as we move through the year here, even if it doesn't prove to be true, there'll probably be some increased weightings for some more negative economic scenario. So, is it fair to think, especially with the low growth pipeline where it is and everything, I just said that the reserve here on a percentage basis will probably be close to the low point? I'm curious if you guys are growing the priority context around that commentary as well.

I would expect that we're close to the low point. And as you said, I think provisioning going forward will be largely driven by growth with maybe a slight tinge to some more pessimistic forecast if they're placed in the or recessionary fears become reality. But right now, if you look at the most recent -- we look to Moody's for the economic forecast. And if you look at the April forecast, it actually saw some further improvement in the baseline versus March, so there's the potential for some additional smaller release, I believe, in the second quarter.

Okay. Helpful. And then on the -- I apologize, if I missed this kind of jumping around over here. But on the operating expense side, any thoughts near term on where the run rate might trend? And Anthony, you mentioned some digital investments you guys are making. Just curious if you guys could put that in context for us around the kind of the rate of those investments? Is it accelerating? Is it going to become a larger percentage of your OpEx moving forward? Just curious how you guys are thinking about that from a high level as well as to the kind of near-term OpEx run rate.

I'll go first and then Tony continue . I think in terms of an expense run rate for dollars, excluding the provisions on the off-balance sheet credit losses or credit exposures, I think we're probably in the $63 million to $64 million range for the next quarter. I think it's a little bit less certain as we move further out, but that's probably a fair run rate to use. My perspective on the digital investments is that we're pretty stable in there. I think we're running -- if you look at it as a percentage of revenue, total DP expense runs in the 7.3 to 8 kind of percent range. I don't see that changing materially.

Yeah. I think they're embedded in the number that you already gave guidance on and nothing is draconian in there. I think a lot is really to make us more efficient and perhaps reduce the run rate as we go forward or handle more units of business with the same level of better efficiency. So, I wouldn't characterize it as we should see a big boost in our expense spending as a byproduct of the things I mentioned.

Got it. And Tony, are you willing to provide a little bit more detail about some of the things you're looking at on that front? Is it third-party vendors? Is it more like operational and organization on your side and making things more efficient that way or just love a little bit more color.

Yeah. I mean so we do, and I might have mentioned this in the last call, we're putting a new LOS system, loan origination system in place, which is going to make us much more efficient in terms of not only how loans flow through our bank, but the customers' journey and the employees' experience on how we handle credits, which in theory or in actuality, we should see an increase in productivity in the number of units that we handle. We should see better reporting within our organization as well. And so, it really positions us better as we continue to get larger. We're also looking at a new small business lending platform, which automates things a little bit better and gives us better analytics around those tools. We're doing a lot of internal development in terms of these bots that we use to reduce a lot of the mundane processes internally. So, we're -- all of these things are aimed at obviously improving the efficiency, the customer and employee experience, which we believe all of these will improve upon and more productivity. Tom, did I miss anything there in terms of...

No, not at all. Actually, I just wanted to correct scenario that I made when I misspoke, I was thinking about occupancy expense in terms of the percentage of cost to revenue. It's more about 5% on the IT side.

Great. And then just one last one for me and I'll step back. Just Tony, on capital deployment, just pretty simple question. Just curious if you could provide us maybe some updated thoughts, obviously, the valuations on the banking sector are pulled in here, but it sounds like near term, you guys have pretty good line of . Just curious how you guys are thinking about overall capital deployment as we kind of move into the balance of the year here?

I'll start first, and then let Tom -- like this is a conversation that we have almost periodically that balancing, seeing us undervalued and being a good buyback versus the growth plans that we have and deploying that. So, it's a continuing balancing act for us to make sure that we can execute both of those, right? So...

Yeah. And I think that's why we target the 45% to 55% range for the regular recurring cash dividend because that gives us sufficient capital formation to support our current expectations of growth, and we assess that periodically. In terms of what we like to be to, I think we've talked before about trying to work the TC down to around 8.5%. We think that's a comfortable level. And -- but, as Tony said, we've never been programmatic in our approach to buybacks that's really been opportunistic and as you noted, when we have a clear kind of view of our comfort level with earnings projections, we take advantage of market conditions.

Cool. Thank you, guys. Very much appreciate you taking my questions.

Thank you.

Thank you. Our next question comes from Billy Young of RBC. Billy, your line is now open.

Hey, good morning, guys. How are you?

Good morning, Bill.

So, first question on maybe the loan growth outlook for the year. It seems like loan growth is accelerating, and it's good to see your pipelines are up from year-end. On the core, it does seem like growth is tracking to your previously guided 5% to 6%. And it also sounds like prepayment activity was generally as expected. I know in the past, you've spoken to maybe some moderation in that payoff activity in the back half of the year. Do you still see some room for that to happen? And if so, how do you think about potential lift to growth as we progress further in the year?

Maybe, I'll give a long-winded answer here because I think that if you look at our growth this quarter on the commercial loan side of about $8.3 million annualized, when you factor about $100 million, roughly $98 million of loans that we plan to exit, which means these were things we wanted to happen, so we encourage these loans out of the bank. When you -- if you adjust just for that, our growth rate for the quarter on an annualized basis would have exceeded 13%. So, the messaging points that we've been giving everyone over the last bunch of quarters is that we've ramped up things. We've hired new people, we got focus, and we're seeing a lot of activity. Obviously, market conditions, which I'll mention in a moment. That being said, we still had some prepayments this quarter that offset. We have $510 million of closings this quarter. And probably, I think, close to $300 million was paid off. $100 million, as I mentioned, was planned on our part and close to $200 million was not. I would say nearly $150 million was refinanced elsewhere and then the rest of it was from sales of properties. But, if you look at our pipeline, if you look at our organizational capacity, if you look at the activity that we're seeing today, it really bodes well for us, particularly as we look out into the second quarter. Third quarter always gets a little bit soft because it's the summer months. And everybody is keeping an eye on what happens in the fourth quarter relative to the economic conditions that we see early onset of a downturn. So, we're being very careful about how we look at the fourth quarter, but everything right now points to us having some pretty solid loan growth in the upcoming quarters. And if you look at us relative to last year, most of our growth happened in the second half versus -- this year it's a better dynamic, we're having most of our growth in the first half. And if it continues on, it will really bode well for our net interest income. So hopefully, I gave some color there. I know there's some thoughts about what's happening in the marketplace. I'm talking to my teams, and we're still seeing some strong activity and also on the C&I side, so today, this quarter, we probably had 70% space, about 30% in the C&I space, which is a better ratio than we've had here at Provident for a while. So, hopefully, that gave you any good color. And if I didn't answer all of it, please give me a follow-up.

No, that was great. There was a lot to unpack there. And then separately, my follow-up is just on, I guess, expenses. It seems your margin performance this quarter was very strong and it seems like the outlook is even stronger than what we were thinking three months ago. As your margin accelerates higher, do you see some opportunity there to maybe accelerate investment in your business and some of your initiatives?

I don't think in a material fashion just because of internal resource constraints. There is some flexibility there. Usually, the flexibility is more on the discretion side to withhold some spending, as you said, the favorable margin performance gives us the ability to continue full speed ahead. But I don't know that there's that much opportunity to pull additional expenses forward.

You also have organizational capacity. We have a number of projects underway to build for the future, and it's a matter of what we can handle. So, I don't think anything is constraining our thinking in terms of just continuing to execute on our plan.

Great. Thank you very much. I'll step back.

Thanks, Bill.

Thank you. Our next question is from Erik Zwick of Boenning & Scattergood. Erik, your line is now open.

Thanks. Good morning, guys. How are you?

Good morning, Erik.

Good morning.

First, I'm wondering -- just a bit of a follow-up on the net interest margin. Tom, I appreciate the commentary you gave there kind of looking forward to 2Q. Wondering what that incorporates in terms of excess liquidity, kind of curious how you would quantify your excess liquidity position and then how you would expect that to be kind of deployed over the next few quarters? And if that was factored into the guidance you provided earlier?

Yeah. It's much less an excess liquidity story than an asset repricing story at this point. We've deployed the bulk, if not all of the excess liquidity last quarter. We do have good cash flows just off the investment portfolio returns about $30 million a month that we'll continue to reinvest into the rising rate environment. And as you know, we have a significant floating rate loan portfolio that will be adjusting with the increases in LIBOR over the course of the next quarter as well.

Great. Thanks for the clarification there. And then just thinking about kind of the noninterest income and the fees. A number of banks have recently kind of reconsidered how they assess non-sufficient fees, overdraft charges, things of that nature. Just curious how you guys feel about your assessment strategy today and whether you'd anticipate any changes?

We're comfortable right now. It's something we continue to evaluate and keep our eye on the marketplace. We think our processes are appropriate and fair to our customers. So, we don't see any immediate action there.

Agreed. And I think we'll continue to keep an eye on what's happening in the marketplace and reassess if we deem necessary.

Understood. And then, Tom, maybe just sticking on the noninterest income for one quick follow-up. Any thoughts on kind of the run rate going forward if 1Q is a good kind of starting point or if there's other things to consider as we think about 2Q and beyond?

I think it's a pretty good starting point. There's volatile items in there around gains on loan sales, particularly in the SBA, it depends on the origination and what the current market gain on sale margins are. Prepayment fees are volatile. BOLI income obviously jumps around. But, the 2021 kind of range seems like a safe number to work off of as a core. There are concerns about what the market performance does on the wealth management side of things, but I don't think that's a material detriment and the insurance business continues to look strong for us. So, all in, I'd say that's a safe number, $20 million to $21 million, with hopefully some upside potential.

And then just one last one, I guess, maybe a bigger picture question. Tony, since you've joined, you've had a hand in kind of reemphasizing the importance of corporate culture with both regard to the employee and the customer experience. Curious just on your thoughts today on your current positioning and initiatives from kind of that ESG perspective across the franchise in light of kind of proposals for enhanced disclosure in some of your filings?

There was a couple of questions in there. I mean the first one was I think about the employee and customer experience culture. I would say -- I would look to my colleagues in a room to maybe confirm, but I think there's a lot of positives in that. I see a lot of energy. I see a lot of collegiality. It doesn't mean it didn't exist before. We just enhanced it. And I think the storyline is starting to expand beyond Provident, where a number of people that are calling in and that's the testament by the resumes we're getting when we have openings, the flow of activity in terms of talent that wants to join our banks. So, a lot of those things are initial proof points that what we're doing is paying some dividends. On the ESG side, our counsel and our group is looking at the disclosures, I think -- we're studying what other institutions are doing. And as we learn more about what needs to happen there, we'll do the appropriate disclosures. Meanwhile, from our bank as a whole, I would say we're pretty proud of what we look like in terms of organizational diversity and the things we do have our information, our ratios that we work with our Head of HR. Today, it feels good. That doesn't mean there's never more work to be done, but we feel pretty good about where we are as an organization.

Great. Thanks for taking my questions today.

Thank you.

Thank you. Our final question for today comes from Russell Gunther from D.A. Davidson. Russell, your line is now open.

Hey, good morning, guys.

Good morning, Russell.

I just wanted to -- good morning, follow up on the margin discussion, and Tom the glide path that you laid out, could you give us a sense for what you are assuming from a deposit beta perspective? And maybe just characterize any migration from the first 100 basis points to the second 100 basis points, how you guys would expect to perform?

Yeah. The all-in deposit beta is about 23%. Interest-bearing, I think, is closer to 31%, if you back the CDs out because they kind of come in pieces, it's more like an 18.5%, 19% kind of range. So, that's what's built into the margin expectations currently.

Okay.

In terms of lag…

There's potential for some upside there because we don't really build a lag in.

Okay. Yeah, you took kind of the words out of my mouth and it sounds like you might be able to outperform that in the earlier innings of rate hikes. So, I appreciate the color there, Tom. And then just last one for me, would be back to the fee vertical. So, I appreciate your thoughts on the organic growth outlook there. But, any commentary in terms of your acquisitive appetite in wealth management or insurance and likelihood something to come to fruition?

Sure. I think as we mentioned in the past, we are always looking to pursue situations that are both cultural and strategic fits for us in all of those areas, so wealth, I mean, we continue to look at opportunities there. The market is a little hot in terms of competing against these private equity enterprises. But -- and the same thing on the insurance side, but we're actively looking to augment both of those businesses as well as we are on the bank side. I mean, we all -- I mean, obviously, there's things we can and cannot say on these calls, but suffice to say that both myself and our Chairman, Chris, we're actively talking to our colleagues and seeing where opportunities exist for us to do some strategic partnerships. I mean, I don't think that's a shocking surprise. I think that's something that's part of our normal course of business. So, hopefully, I gave you -- I know I can't give you a lot of point of color, but suffice to say, we look at opportunities.

Yeah. It's very helpful. And Tony and Tom, thank you, guys, for the help. That's it for me.

Thanks, Russ.

Thank you

Thank you. We have no further questions for today. So, I'll hand back to Tony Labozzetta for any closing remarks.

Thank you. And we thank everybody for being on the call and asking some good questions. Once again, we look forward if there's any comments that people like to talk offline and further clarification, Tom and I are always available. If not, we look forward to talking to all of you throughout the second quarter. And best to all of you, and have a great day.

Thank you for joining today's call. You may now disconnect.