Provident Financial Services, Inc. 2026 Q3 Earnings Call

Good morning, everyone, and thanks for joining us for our third quarter 2026 earnings call. Today's presenters are President and CEO, Tony Labozzetta, and Executive Vice President and Chief Financial Officer, Adriano Duarte. 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 last evening's earnings release, which has been posted to the investor relations page on our website, provident.bank. Now I'd like to hand it off to Tony Labozzetta, who will offer his perspective on our third quarter.

Tony? Thank you, Michael, and good morning, everyone.

I appreciate you joining us today to discuss our third quarter results. Provident continued its strong performance, delivering another quarter of solid financial results. With core net income of $84 million, or $0.65 per diluted share, our annualized adjusted return on average assets was 1.3%, and our adjusted return on average tangible common equity was over 16% for the sixth consecutive quarter. Total operating revenues of $238 million marked another record quarter and continued to be driven by good growth in both our spread and fee-based businesses. Year-over-year, net interest income grew 7%, and our wealth and insurance revenues grew 6% and 20% respectively. Our adjusted pre-provision net revenue reached a record $120 million, representing $0.92 per share and an annualized core PPNR return on average assets of 1.85%.

Over Labor Day weekend, the bank completed its core conversion as planned. This was a significant project that touched virtually every aspect of our bank. I'm extremely proud of our team for executing with excellence on this critical initiative. Their planning, collaboration, effort, and focus on the customer experience resulted in a very successful conversion. Our strong core profitability and ability to drive positive operating leverage while making significant investments, such as our core conversion, represents one of the key elements of our strategy. Balance sheet trends during the quarter show continued positive momentum, keeping us on track to achieve the growth we guided to for the year. We saw solid expansion during the quarter in non-interest bearing deposits, and more broadly, our core business deposits, which drove deposit growth over 5% annualized. The bank remains focused on growing our deposits to fund our strong lending activity.

We have several impactful deposit initiatives in flight, particularly in our small business group and within certain targeted specialty deposit verticals. Commercial loan balances grew 3% annualized in the third quarter, which, as a reminder, is typically a seasonally slower quarter for our business. In addition to normal seasonality, the recent rise in interest rates also weighed slightly on our mortgage warehouse balances. Overall, activity and loan growth remain positive. We funded approximately $550 million of commercial loans during the quarter, and our pipeline remains over $3 billion. For the third consecutive quarter, our pipeline remains well-diversified with C&I middle market and specialty representing over 50% of the total. We are pacing to achieve approximately 6% loan growth for the year. Although, we remain mindful that payoffs in the fourth quarter could have an impact on net growth.

Asset quality metrics were stable when compared to the prior quarter and remain at low levels. We continue to make good progress on the senior housing relationship that migrated to non-performing status earlier this year and anticipate a satisfactory resolution by year-end. Adjusting our non-performing assets for the resolution of these four credits, our NPAs would be only 23 basis points of total assets. Overall, asset quality trends remain favorable. Commercial delinquencies have improved, and net charge-offs were only five basis points for both this quarter and year to date. The bank has strong balance sheet, and we continue to actively manage our interest rate risk profile. During the quarter, we saw improvement in both our loan-to-deposit and CRE concentration ratios. Our CET1 ratio grew to 10.9%, and during the past few weeks, the bank has been buying back stock due to increased market volatility.

Overall, I'm incredibly proud of the hard work of our employees. Our strong performance is a direct result of the culture we have at Provident. Now, I would like to turn the call over to Adriano for his comments on our financial performance.

Adriano? Thank you, Tony, and good morning, everyone.

As Tony noted, our adjusted net income for the third quarter was $84 million, or $0.65 per share, which increased 17.5% versus the third quarter of 2025. This produced an adjusted return on average assets of 1.3% and a core return on average tangible equity of 16.6%, adjusting for the amortization of intangibles. During the quarter, we had several non-core expense items that impacted our reported net income of $69 million, or $0.53 per share. These items included a $17.5 million loss on extinguishment of debt due to accelerated amortization of purchase accounting, $3.7 million of core conversion costs, and $465,000 of early lease termination costs. Adjusted pre-provision net revenue was nearly $120 million or annualized 1.85% of average assets, a 10% increase from the $109 million, or 1.76% of average assets reported for the third quarter of 2025.

Our record revenue of $238 million was driven by record net interest income of $208 million and non-interest income of $30.5 million. Average earning assets increased $341 million or an annualized 5.8% versus the trailing quarter, with average yield on assets increasing 7 basis points to 5.68%. Interest-bearing deposit costs were 2.5%, an increase of 13 basis points versus the trailing quarter, while total deposit costs were 2.02%, an increase of 10 basis points. Our core net interest margin expanded 7 basis points to 3.16%, while our reported net interest margin expanded 2 basis points to 3.5%. We are currently modeling one rate increase by the Federal Reserve in December of 2026 and expect core margin to expand 1 to 2 basis points in the fourth quarter. Period end loans held for investment increased $124 million or an annualized 2.5% for the quarter.

Our pull-through adjusted loan pipeline at quarter end was $1.7 billion. The pipeline rate is approaching 6.5% and remains accretive relative to our current portfolio yield of 5.94%. Period end deposits increased $262 million for the quarter or an annualized 5.4%. The increase was driven by commercial and municipal deposit growth. Our loan-to-deposit ratio improved quarter-over-quarter to 101.8%, and we continue to target a 97%-103% range on this ratio. Asset quality remains strong, with non-performing assets representing 55 basis points of total assets. We recorded a provision for credit losses of $5.2 million for the quarter, driven mainly by loan growth, changes in portfolio mix, and required specific reserves. This brought our allowance coverage ratio up 2 basis points from the trailing quarter to 94 basis points. Non-interest income of $30.5 million was slightly ahead of expectations, partly due to elevated BOLI income of $3.5 million.

In addition, we continue to see solid performance from both our insurance and wealth management divisions. Wealth management AUM was relatively stable during the quarter at $4.4 billion. Total non-interest expense increased $140.7 million in the third quarter, reflecting non-operating expenses I previously noted. After adjusting for these items, core non-interest expense was approximately $119 million for the quarter. Adjusted expenses to average assets and the efficiency ratio were stable from the trailing quarter at 1.84% and 49.9%, respectively. We project quarterly core operating expenses of approximately $118 million to $120 million in the fourth quarter, with the increased range most notably driven by higher incentive accruals due to our stronger financial performance. In addition to normal expenses, we will be incurring final costs associated with the successful core conversion of approximately $1 million in the fourth quarter.

Our continued sound financial performance supported earning asset growth and again drove strong capital formation, excluding changes in AOCI. Tangible book value per share decreased $0.26 this quarter to $16.16, and our tangible common equity ratio decreased slightly to 8.4% quarter-over-quarter. Lastly, I'd like to share a couple of additional updates with our guidance. We continue to expect full-year loan and deposit growth of 5%-6% with non-interest income of approximately $29 million in the fourth quarter. We expect a full-year effective tax rate of approximately 28%, and we continue to target a core ROA of 1.2%-1.3% with a mid-teens return on average tangible common equity. That concludes our prepared remarks, and we would be happy to respond to any questions.