Thank you for standing by. My name is Alex. I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Provident Financial Services, Inc. First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] I would now like to turn the call over to Adriano Duarte, Investor Relations Officer. Please go ahead.

Thank you, Alex. Good morning, everyone, 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 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 disclaimer is contained in yesterday evening's earnings release, which has been posted to the Investor Relations page on our website, www.provident.bank. Now it's my pleasure to introduce Tony Labozzetta who will offer his perspective on the first quarter. Tony?

Tony. Thank you, Adriano. Good morning, everyone. And welcome to the Provident Financial Services earnings call. Before I go on to discuss the results for the quarter, I am delighted to say that as of the 11th of April, we have received all regulatory approvals to complete our merger with Lakeland Bancorp. We are grateful for the efforts of the members of our team and the Lakeland team who worked tirelessly to achieve this milestone, and are continue to work diligently to plan for the merger and integration of our two exceptional banks. We expect to complete the merger this quarter promptly following the subordinated debt raised that is a condition to close. This merger will bring together the two high-performing institutions with like-minded cultures, an unwavering commitment to the employee and customer experience, and a dedication-to excellence. The scale and strong financial performance of our combined organizations will allow us to better invest in our future, compete for market share in the highly attractive and densely populated New Jersey, New York, and Pennsylvania markets, and serve our customers and communities while creating value for our shareholders. It will further aid us in attracting and retaining top talent and providing even better technological solutions for our customers and employees. We expect that Provident's two fee-based business lines, insurance and wealth management, will augment the broad product and service offerings available to the Lakeland Banc customers. Provident will also bring its strength in treasury management while Lakeland brings its capabilities in health care and asset-based lending to our combined institutions. Both institutions have talented management teams and boards, an important past experience navigating mergers and whose joint skill sets will bring even greater strength to our combined talent pool. Moving on to our quarterly results, the first quarter was characterized by…

Thank you, Tony, and good morning, everyone. As Tony noted our net income for the quarter was $32.1 million or $0.43 per share compared to $27.3 million or $0.36 per share for the trailing quarter and $40.5 million or $0.54 per share for the first quarter of 2023. Transaction charges related to our pending merger with Lakeland Bancorp totaled %2.2 million in the current quarter or approximately $0.03 cents per share and $2.5 million in the trailing quarter. Including these merger related charges, pretax, pre-provision earnings to the current quarter were $44.9 million or an annualized 1.28% of average assets. Revenue totaled $114.5 million for the quarter consistent with $114.7 million for the trailing quarter but a decrease from $130.5 million for the first quarter of 2023. Our net interest margin decreased five basis points in the trailing quarter to 2.87%. The yield on earning assets improved by two basis points versus the trailing quarter, however this was more than offset by an increase in interest bearing funding costs. Increased interest expense reflected current market conditions and funding requirements which resulted in an increase in average borrowings and increased deposit costs. The average total cost of deposits increased 12 basis points in the trailing quarter to 2.07%. This is a further deceleration from 21 basis points in the trailing quarter but the increased broader rising rate cycled to date total deposit cost beta to 35.8%. The average cost of total interest bearing liabilities also increased nine basis points in the trailing quarter to 2.80% as the prolonged inverted yield curves and ongoing profit competition continue to impact funding costs. We expect deposit costs to continue to stabilize over the next several quarters. Period and total loans decreased $31 million as increases in C&I construction and multi-family mortgage loans were more…

[Operator Instructions] And your first question comes from the line of Mark Fitzgibbon with Piper Sandler.

Hey, guys. Good morning. Tom, just to clarify, so you said once the deal's closed, you're going to sort of provide an update with deal marks and accretion numbers. Are you planning to do a call for that, or are you planning to put that out in a slide presentation, or what's your plan?

I think both of those will happen, Mark. The expectations will do some form of Investor Day post-deal to describe the forward-looking performance expectations.

Okay. And any update at all on timing, now that you've gotten all the approvals?

Yes, I think the timing right now is probably between the 10th and the 15th of May, is when we're aiming to get the deal close.

Okay, great. And then, could you share with us AUM and AUA at quarter end, and maybe how flows looked in the wealth management at Beacon?

Yes, AUM was $4 billion and $30 million at the end of the quarter. Flows were actually a little bit negative. We had about $77 million in new inflows, and about $83 million in net outflows. So market appreciation drove the rest of the increase.

Okay, great. And then, it looked like you closed about 57% of your pipeline as of 12/31. Is that sort of what we should sort of expect going forward from a pull-through rate, Tony?

I would suspect so. I think you can still aim at that 4%-5% loan growth for the year. I think we had a good closing in the fourth quarter, which obviously drained some of that activity, and the pipeline is starting to rebuild now. I think it's still safe to say that about 50% to 60% pull-through rate.

Well, actually, we were a little concerned in the estimates here. We pulled back the expected closing pipeline. That's where you get the $561 million versus the $1.09 billion, or $1.08 billion, I think, in the gross pipeline. So we're down to a projection for the current quarter of about 39%.

This quarter?

Yes. But longer term, you're right. That's typically where we are in the 50 kinds of range.

Your next question comes from the line of Bill Young with RBC.

Hey, good morning, guys. How are you? First, just to clarify, Tom, the comment on the combined company NIM of 3.25%, is that what we should be expecting for the first full run rate quarter in 3Q?

Every number I gave is a preliminary estimate all the way dependent on where the marks land at deal closing. So that assumed the marks that I disclosed. And yes, that would be the first quarter of full closing, I guess, Q3, if the assumption's all true.

Got it. Understood. Thank you. And then, I know you had commented that you expect deposit costs to stabilize over the next few quarters, but can you just give us a comment on maybe what you're seeing in the deposit pricing environment today across your markets? We've heard a few mixed messages from your peers about pricing getting a little more competitive as of late. Is that kind of what you're seeing? And what are your expectations if rates stay higher for longer as we progress through 2024?

Yes, we're not feeling that same pressure right now. Through the cycle to date beta is about 35.8% or we modeled the terminal beta of about 37.1% ahead of the first rate cut. So we feel like the margin is going to continue to standalone company margin, which continue to stabilize in the three, in the 285 to 290 range.

Yes, so far, we've been holding steady on our pricing. We haven't seen those competitive pressures. And we've been holding steady in terms of our deposit flows. I mean, if you look at our activity, we haven't seen, we've seen very little deposit account closures, more of our deposit. I would characterize it that we're seeing noninterest bearing moving into the interest bearing classes which is affecting our cost of deposits more so than deposits leaving and having to be replaced with external funds. So I think that's why we're saying we think it's going to hold steady as we go forward.

Yes, in terms of higher for longer, Billy, I don't think it has a dramatic impact that on us. I know you're aware that we've managed to a pretty neutral interest rate risk position, slightly asset sensitive at this point. And given that about 27% of our deposit base is sub 350, we don't see a lot of benefit in the initial rate cuts, at least we're conservatively modeling that way. So I think the effective beta we're modeling is about 10% on the overall deposit base for the first couple of cuts. So we shouldn't see dramatic shift if rates hold.

Got it, thank you for that. And just moving to a separate topic, I know obviously credit quality has been relatively pristine for you guys over the last several quarters, but do you have any update thoughts on kind of where you'd like to maintain reserve levels moving forward, particularly following the Lakeland close? Do you see the need to build ratios longer term with a bigger balance sheet? Thanks.

Really all model driven, I don't expect a change. If anything, I would think that the coverage ratio would come in a bit post-acquisition.

I mean, when we're looking at Lakeland's portfolio, it kind of emulates ours, so in terms of credit quality. So that expectation is that we would remain constant.

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

Hey, good morning. Could you speak a little bit about the balance side of or the volume side of deposit growth channels, just kind of where you're going to see improvement there? You talked about in the quarter that there was some payoff of brokered and there were some annuity outflows, but just kind of where you expect to see deposits inflows going forward.

So, if you look at this quarter, I think the -- like I mentioned earlier, the -- there wasn't any account closure activity that was of no -- most of the dynamics were normal activity in our non-Experian accounts, which is cash flowing out for whatever business purposes and some disintermediation going into other accounts. Where we're seeing the growth moving forward, and we're experiencing some of that, we're observing it, is largely in the business banking side. So, we're seeing a lot of compensating balances and things of that nature. We're also -- the municipal accounts should flow back in as we move forward. And we have all the targeted activities that we're doing to deepen the share with our existing customers as well as paying new ones as well. So, there's -- that's what we expect it to be. However, I do think it will still represent a challenge for us moving forward because we expect the loan -- the lending growth levels to go back to their normal course. And so, you'll have that little bit of a gap as we move forward.

I appreciate that. And just on a separate topic, I just wanted to confirm the numbers that so far with the deal do not include revenue synergies at the moment?

That's correct.

Correct.

And that would be helpful with the insurance business and with ABL and the things you highlighted at the beginning.

Yes, we're excited about the opportunities there, but we have not included those in our modeling.

For the last question, we have Tim Switzer with KBW.

Hey, sorry about that, guys, my headset messed up. Good morning. Thank you for all the updated financials impact. Do you guys have a projection on where capital levels will end up at the end of Q2 once you guys close the deal, particularly TCE and the total regulatory capital ratio?

Yes, I don't know if we can go into much more detail than we already disclosed, Tim. I can assure you that there will be a comfortable cushion over the required limits that we agreed to as part of the nonstandard conditions.

Okay. Are you able to provide any kind of framing around if rates continue to rise, how that would impact capital levels and then maybe some of the other the NIM purchase accounting you provided?

Yes, I guess all I can say is I don't have a sensitivity analysis in front of me, but rates are up the five years, about 60 basis points higher than deal announcement, and you can kind of do a ratio and figure out what changed versus there. I think we're about $400 million at deal announcement, we're up to 540 now, so you can straight line at that one.

Okay, and that purchase accounting, the 65 basis points, was that the number with rates at the end of the quarter or as of, like, this week?

Current rates.

Okay, great, and have you guys gotten any indications yet on where pricing on the sub -debt rates could fall, a range or something?

We really can't speak on anything on the offering until it's there or as it happens, Tim.

Okay, that's understood, and the last question I have is historically, you guys have done a really good job of keeping your efficiency ratio pretty low compared to the industry, 52% efficiency ratio in 2025, over the long term, as you combine these two companies, where do you think the efficiency ratio could land over the long term?

Well, that efficiency ratio just combines our current earning power, right? I think if you look at what happened to the efficiency ratio over the last 12 to 18 months, it's been more the compression in NIM and the revenue drivers. So as those things get back to normal, we expect that the efficiency ratio will continue to improve downward from where it is on a pro forma basis.

Yes, I guess you'd have to figure what the margin, projected margin expansion is beyond the 3.25% and continue to maintain that roughly 1.75% expense ratio to average assets.

That concludes our Q&A session. I will now turn the conference back over to Tony Labozzetta for closing remarks.

Thank you everyone for your questions and for joining the call. I'd like to once again thank the Provident and Lakeland teams for the successful merger approval and I think I speak for everyone when I say that we can move forward into 2024 with optimism and vigor. We look forward to talking to you all throughout the quarter and speaking to you all again next time. Have a great weekend.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.