Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. Adriano Duarte, Investor Relations Officer, you may begin your conference.

Thank you, Rob. Good morning, everyone, and thank you for joining us for our third 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 the 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 last night’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 third quarter. Tony?

Thank you, Adriano. Good morning, everyone, and welcome to the Provident Financial Services earnings call. The third quarter was marked by rising interest rates and persistent inflationary pressures. These conditions have presented substantial challenges to many in the banking sector. Against that backdrop, I’m pleased to report that Provident has demonstrated its resilience and agility, delivering results that point towards the underlying strength of our operation and our commitment to responsible growth. Despite the difficult economic environment, Provident produced good financial results this quarter, which once again demonstrates the strength of the franchise and talented management team. As such, we reported earnings of $0.38 per share, an annualized return on average assets of 0.81% and a return on average tangible equity of 9.47%. Excluding merger-related charges, our core pretax pre-provision return on average assets was 1.48%. At quarter end, our capital was strong and exceeded well-capitalized levels. Tangible book value per share was $15.41 and our common -- tangible common equity ratio was solid at 8.54%. As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on November 24. Presently, our uninsured and uncollateralized deposits are $2.5 billion or approximately 25% of our total deposits. Our on-balance sheet liquidity plus borrowing capacity is $3.6 billion or 144% on insured deposits. Our core deposits are a valuable component of our franchise. During the quarter, our average core deposits decreased $85 million or 0.9%, which we attribute to normal business activities and customers seeking higher-yielding investment alternatives in this environment. Our rising rate cycle to date deposit data was approximately 29.5%, which we believe is among the best in the peer group and is reflective of the quality of our deposit base. Consequently, our total cost of deposits increased and in large part, drove our total…

Good morning, everyone. As Tony noted, our net income for the quarter was $28.5 million or $0.38 per share compared with $32 million or $0.43 per share for the trailing quarter and $43.4 million or $0.58 per share for the third quarter of 2022. Transaction charges related to our pending merger with Lakeland Bancorp totaled $2.3 million in the current quarter or approximately $0.03 per share and $2 million in the trailing quarter. Excluding these merger-related charges, pretax pre-provision earnings for the current quarter were $52.2 million or an annualized 1.48% of average assets. Revenue totaled $116 million for the quarter compared with $118 million for the trailing quarter and $138 million for the third quarter of 2022. Please note, prior year earnings for the third quarter of 2022 included an $8.6 million gain on the sale of foreclosed property. Our net interest margin decreased 15 basis points from the trailing quarter to 2.96%. The yield on earning assets improved by 16 basis points versus a trailing quarter as floating and adjustable rate loans repriced favorably and new loan originations reflected higher market rates. This improvement in asset yields, however, was more than offset by an increase in interest-bearing funding costs. Increased funding costs reflected current market conditions, which resulted in an increase in borrowings accompanied by a decrease in deposits. Certain noninterest-bearing balances also moved to our interest-bearing insured cash sweep product in order to obtain increased deposit insurance. In addition, lower costing demand and savings balance has shifted to higher costing time deposits. The average total cost of deposits increased 32 basis points in the trailing quarter to 1.74%. This brought our rising rate cycle to date beta to 29.5%. The average cost of total interest-bearing liabilities increased 37 basis points in the trailing quarter to 2.50%. The…

[Operator Instructions] Your first question today comes from the line of Mark Fitzgibbon from Piper Sandler.

Happy Friday. Tom, just to clarify on the margin, I think you said you expect it to stabilize around [2.90%] in the fourth quarter. So do you think at that point, the margin will have bottomed? .

That’s what our model is showing. It stays pretty stable at around the [2.90%] level over the course of the next 12 months, Mark.

And then secondly, you mentioned in the press release a little bit about sort of triggering events and testing for goodwill impairment. Can you explain exactly what a triggering event would be, what the consideration would be that would cause an interim goodwill impairment test?.

I think a lot of it, Mark, is the relative performance to the group. If you see price to book multiples, very materially or price to tangible multiples that would indicate any kind of permanent impairment -- permanent is a stronger word, but near-term impairment and the valuation of the company.

And then on credit, you guys were one of the few banks that showed a sequential quarter decline in Provident loans, which is great. I guess I was curious, are there any areas that you’re paying particular attention to aside from the obvious office loans that everybody talks about. Any areas that you’re sort of watching carefully or pairing exposures or things of that nature?

Mark, it’s Tony. We’ve done -- I would say we’ve probably spent the better part of 6 to 9 months doing deep dives in all categories. I could comfortably state right now that there’s not any segments that we’re seeing that present any concern to us. In fact, the results show that there’s no systemic pressure. I mean, in any of the segments. Obviously, you’re familiar with that we don’t have a lot of exposure in office as we noted, but we’re comfortable with the way our assets are classified at this time. Obviously, I always have to put the caveat. We don’t know what recessions. We don’t know if bankruptcies take place, things of that nature. But what we’re observing right now do not point to any sectors that we have a concern within our portfolio.

The only additional thing I’d offer, Mark, is that the nonperforming asset formation this quarter was very small. It’s about $2.5 million and it’s really attributable to one $3 million loan that I’m very confident there’s no loss content, and it’s a technical maturity issue.

And then last question. Tony, you’ve probably seen that several other banks have recently sold their insurance agency businesses at fairly large gains. I wondered if you could share with us your thoughts on the possibility of doing something like that, whether it would make sense or not.

Well, we look at all of our businesses with an annual frequency. I would say when it comes to insurance, it’s such an integral part of our business the way it links with our commercial platform, the rate of growth, the value add that it provides to our customers that at this time, it’s not in our consideration, and it’s probably one of our largest growing segments. So I think the combination of those things, just to turn it into a financial transaction, I think it will be a net takeaway from our client experience and the rate of growth in our noninterest income. By the way, as we’ve spoken in the past, as many know, it is our objective to increase the percentage of noninterest income as a percentage of total revenue. So that has taught us an important piece of business that is not considered for sale right now.

I think the profitability on that business for us, Mark, is pretty strong compared to some of the sales that I’ve seen. I think we get a net margin of about 26%. So that’s really a business we want to continue to invest in and grow further.

With high-growth prospects.

Our next question comes from the line of Bill Young from RBC Capital Markets.

Just quickly on the Lakeland deal. If I recall correctly, I think the original deadline might be -- for the deal might be around year-end. So has there been any discussions with Lakeland about possibly extending that merger deadline?

The answer is yes, but we’re hoping we don’t have to go there because we are as I mentioned in my talking points with relative to the merger, which I know is on everybody’s mind, we have provided everything that the regulators need for them to finalize their decision. And at this point, we’re waiting for their final decision. And we hope that we don’t have to be in an state in December where we’ve to consider that. But to your question is, yes, we are talking about it, and that’s under consideration.

Understood. And just to touch on loan growth. Can you just speak to the trends you’re seeing in multifamily. It’s been a good source of growth for you in recent quarters. Just any sense of what kind of yields you’re putting up on that? How attractive are the spreads for that business? .

Relative -- let us look here. I think we’re still probably in that [$170 million] to over on the spreads. I would have to get back to you on that. That’s what’s coming to mind right now.

At least [$170 million to $200 million] range sense, right?

That’s correct. But I will tell you one of the things that just does kind of give a little bit more insight into how we’re thinking about lending. Our business model, it’s always been this, but it’s more acute today that transactions are not in high favor. A lot of it is relational oriented where we’re looking at the deposit components, insurance components and other elements as capital dollars become a little bit more -- the availability of those dollars. So I think when we’re looking at the total profitability model that we run again, we put in -- we drop in there the deposits and everything else that goes with it. But in general, the spread is, I would say, between [$170 million and $190 million] , I would say, is a pretty good guess.

Understood. And maybe lastly, just to touch on funding. I know you’ve said in the past, you’re not particularly interested in being too aggressive on promotional activity and wholesale sources kind of make sense for you right now from a price perspective, but I guess as you kind of look on to budgeting for next year, do you see kind of any need to make any changes in terms of the core deposit gathering? Do you see a need maybe kind of the change in incentive structures for bankers to kind of lean into it a little bit or to make core deposits grow more on priority?

Well, I think you touched on a number of things and all of that is within our thinking. But as a general direction in terms of how we’re viewing funding today, it’s still -- I would still characterize it as defensive in nature, right, which is we’re paying. If you look at our cost of deposits at 1.74% and our total cost of funds at 2.04%. It’s amongst some of the best in our peer group. So we’re very cognizant not to damage that value. That being said, that’s why we use the defensive approach right now in terms of trying to maintain deposits versus being aggressive and disintermediated and having incremental cost and damaging that. That being said, we still have to grow our business. And the way we’re approaching that into the new year is, yes, we have some targeted campaigns that we think we’re not going to do that. We have one going on now, which is producing some decent results. But some of our small business platform is going to be a big focus for us as we go into ‘24, commercial C&I and some of the things that we’re doing in that sector and targeted and also with compensating balances on some of the loans that we have. Now there’s a massive push from the entire organization when I say from the entire organization, I mean, from our wealth group, insurance group, our commercial bank, our retail on deposits. That’s the #1 driver in everybody’s incentive plan as we move into 2024 because we all know that’s the greatest challenge that we face these days.

[Operator Instructions] Your next question comes from the line of Michael Perito from KBW.

I apologize if I missed this, but are you guys able to give a little more incremental color on kind of where you’re originating new commercial loans today? And just broadly, Tony, what’s the kind of both sides of the appetite for loan growth in the intermediate future here. I mean, I guess, our clients kind of receptive to the pricing raises, I’m sure you guys are putting in across the board. And I guess from your perspective, just with NIM stabilizing the merger pending, what do you guys kind of feel like on loan growth that we should be thinking about? .

Mike, I would characterize that 4% to 6% would be a good target for you to consider in your modeling. I would say today, it’s a very interesting environment. If we untethered our thinking, we can probably grow our loans at about 15%, given all the activity and volume that we’re seeing. However, we’re -- our underwriting metrics have tightened. The amount of commitments that we’re willing to put out there for construction has tightened. Relational banking has become more acute. So transactional volume that might have been a filler in the past is not bold today. So if we’re focusing our calories more on the relationships when it some to the deposits. And that being said, we have declined some loans that might have been acceptable just from a lending perspective in the past because we’re looking at it from a holistic approach. And that’s the focus of our company today, and I think that’s important. But our appetite, to answer your question, the way we’re calculating it, is that 4% to 6% given how we’re approaching things today.

Got it. And then do you guys have any -- and again, sorry if I missed it if you provided it already, but just any color on kind of where the incremental commercial loan yields are that you guys are getting on the books today?

Last quarter, I think the average -- I’m sorry, the average loan rate last quarter is about 6.75%. I think we’re seeing like more like 7.25%.

7.62% is the pipeline, but then you have to kind of bring that down a little bit to reality. So I would say probably 7% to 7.25% is a good target range.

And then just if we appreciate the update on the merger. If we just kind of assume that the transaction goes forward, how should we be I just -- you don’t have to get too specific, I’m sure you guys will post close, but just wondering what kind of the investment road map looks like if you can maybe give us an update whether it’s kind of on the technology or the people side? And I mean, are there any areas that we should be kind of mindful of as we think about expense growth kind of post-merger for Provident? .

I would say we’re going to get synergies post-merger for start, and we’ll deliver on our expectation on those synergies. But for us, planning for Provident and the future growth, I would say probably the greatest investment, which I don’t think is anything that’s going to be monumental, is going to be investment in our technology as move forward, a new platform that’s going to be able to manage a commercial bank as we get into that $30 billion, $35 billion, even higher size. That’s the next steps for us and a lot more on data. But that is already largely in the works now. I don’t see a huge expense component on that. As we characterize it, there’s going to be some rises in some areas. There’s some declines in other areas. So how we allocate the spend more so than the incremental spend is the way we will look at it internally.

Your next question comes from the line of Manuel Navas from D.A. Davidson.

In the commentary on the NIM, you said your model is roughly pointing to stable across 2024. What do you kind of assume in terms of rates and deposit betas with that stability? .

Yes, there’s 225-point decreases in the back half of ‘24 there, I think in July and September, if I remember correct, for later part.

You said increases?

Decreases. We’re not modeling any more rate hikes, 2 decreases in the back half of ‘24.

And total deposit betas still like at 32% range? .

Yes. I think we bumped the expectation a little bit through the cycle, maybe more like 35% to 37% is the expectation, I think, is fair, given that the performance will lag a little bit behind what we were projecting this quarter.

You talked a little bit about deposit initiatives and kind of the focus of the company. Should this be kind of the peak of the loan-to-deposit ratio at 105%? Or is there comfort at this level? Just kind of talk about the loan-to-deposit ratio and its trend going forward?

We’re comfortable at this level given the overall liquidity faster of the bank. We have a low reliance on time deposits at this point. Overall, the reliance on the wholesale funding in terms of percentage of earning assets, percentage of average assets is really just getting us back to a more traditional funding base if you go back pre-pandemic, when we saw the surge in deposits throughout the industry as a result of the stimulus. So we are not comfortable with wholesale funding, but obviously, the lower cost alternative is always preferred. And as Tony mentioned, we have significant plans to try and grow the commercial deposit base.

And just do you have any extra color on the one commercial loan that drove net charge-offs. I think you’ve described it very briefly, but just anything you could add there?

My intention there was just to show that it was very much circumstances unique to that borrower. Nothing that I think you could read across to the border portfolio. There was a fairly heavy reliance on a primary customer that had made some strategic shifts in their need for services, which impacted the revenue stream, and it was challenging to recover from. So based on current performance, we took the right path.

We have a follow-up question from the line of Bill Young from RBC Capital Markets.

Just one quick follow-up, and apologies if I missed this. Do you have -- what’s your sense for where expenses might trend in the fourth quarter? .

Think in the $64 million to $65 million range, Bill.

And there are no further questions at this time. Mr. Tony Labozzetta. I turn the call back over to you for some closing remarks.

Thank you, everyone, for attending our call this quarter. We look forward to chatting with you throughout the quarter and getting back on next time. Have a nice day. Thank you.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.