Good day and welcome to the Provident Financial Services, Inc. Fourth Quarter and Year-End Earnings Release. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Adriano Duarte of Investor Relations. Please go ahead, sir.

Thank you, Chuck. Good morning, everyone and thank you for joining us for our fourth 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 you 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 the fourth quarter. Tony?

Thank you, Adriano and good morning, everyone. Provident had strong financial performance for the fourth quarter with earnings of $0.49 per share. Our performance was driven by growth in all of our key business lines, resulting in the deployment of some of our excess liquidity and increased average earning assets. That growth, combined with improved credit metrics and a strong expansion in our fee-based businesses, drove the increase in quarterly revenue which produced a solid annualized return on average assets of 1.08% and return on average tangible equity of 12.04%. Our Board approved quarterly cash dividend of $0.24 a share. During the quarter, we also repurchased approximately 290,000 shares of our common stock at an average price of $23.43 per share. Our capital position remains strong and comfortably exceeds well capitalized levels. Our focus continues to be on growing our business lines, especially commercial lending. Our commercial lending group continues to exhibit strong productivity. In the fourth quarter, we closed over $663 million of new loans, an increase of 18.6% from the prior quarter. Prepayments adjusted for PPP remain elevated and partially offset our strong production. Approximately 50% of our commercial loan prepayments were driven by the sale of the underlying asset or refinanced away at terms that were deemed unacceptable by us. In the fourth quarter, we saw a nominal increase in our line of credit utilization percentage to 28%, still below our historical average of approximately 40%. Our production continues to outpace the pressures of the current operating environment. As such, we grew our commercial loan portfolio, excluding PPP, at an annualized rate of 7.1%. We have substantial pull-through in our commercial loan pipeline during the fourth quarter. However, as we move into 2022, our pipeline remains solid at approximately $1.05 billion. The pull-through adjusted pipeline, including loans…

Thank you, Tony and good morning, everyone. As Tony noted, our net income for the quarter was $37.3 million or $0.49 per diluted share, consistent with the trailing quarter. Pretax preprovision earnings for the quarter were $52 million or an annualized 1.5% of average assets. Revenue exceeded $114 million for the second consecutive quarter on the strength of record interest and net interest income. Average earning assets increased $330 million over the trailing quarter and the net interest margin increased 1 basis point to 2.95% despite elevated liquidity. Income recognized from PPP loan forgiveness fell $622,000 versus the trailing quarter to $1.8 million and remaining deferred PPP fees totaled $1.5 million at December 31. Meanwhile, we drove our funding costs down again as average deposits increased and average borrowings declined. Average noninterest-bearing deposits increased $208 million versus the trailing quarter and the total cluster deposits declined another 2 basis points to just 21 basis points. Excluding the impact of PPP loans and purchase accounting adjustments, the core net interest margin decreased 2 basis points from the trailing quarter to 2.84%. The pull-through adjusted loan pipeline at December 31 decreased $416 million from the trailing quarter to $641 million as loan closings were strong. Loan funding was 13% higher than the trailing quarter and 23% greater than in the fourth quarter of 2020. The pipeline rate increased 20 basis points since last quarter to 3.6% and we're seeing good origination activity and pipeline growth to start 2022. Excluding PPP loans, period-end loan totals increased $106 million or an annualized 4.5% versus September 30. Loan growth occurred primarily in the CRE and C&I categories with total commercial loans growing at an annualized 7.1% pace this quarter. The allowance for credit losses on loans increased $700,000 for the quarter as a result of…

And the first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey guys, good morning.

Good morning, Mark.

Hey Tony. First, I was wondering, Tom, could you share with us what the accretable yield for the last two quarters was?

Yes. I think the impact on margin was about 7 basis points. Let me see, purchase accounting -- 7 basis points this quarter, 5 basis points last quarter.

Okay, great. And then secondly, I wondered if you could help us think about the margin going forward.

Yes. I think for the year, we're looking at about probably 2.99% to a 3.03%, 3.05% kind of range on the top end, depending on what the Fed does.

And so that bakes in 3% rate increases this year?

Yes. 1% to 3% is kind of the range when, say, in 2.99%, if there's one increase and 3% would give us approximately a 3.03% to 3.05% kind of number.

Okay. And then historically, you guys have been pretty disciplined on the expense front. Anything unusual coming down the pipe this year that's likely to nudge that expense growth higher?

No. I mean we're continuing to make investments in business which will give us returns. But I'd say total all-in probably close to $260 million was what I think about for the year, so roughly $65 million a quarter. It's usually skewed a little bit heavier to the first part of the year because of the payroll tax reset and some seasonal costs around utilities and snow removal.

Okay. And then, Tony, first off, congratulations on your new role. I know you have some small shoes to fill, I mean -- excuse me, big shoes. What are some of, I guess, your key priorities in your new role? What areas are you likely to focus most heavily on?

I think the thing that I'm most focused going into 2022 for us is making sure our business lines are all integrated and humming and getting the production that we need, designing the organizational table, aligning all the executives, so we can move on into the future. I think we're also spending some good time on digitalization, analytics for our group that can give us better decisioning and affect the outcome of our performance a little bit better. So those are some of the things that are at a high level. And certainly, we're looking at our fee-based businesses, both Beacon and Insurance and trying to scale them up so that they can maintain some relativity with the bank. I think I touched upon most of that. I think that what's important for me for this year.

Okay. And then I guess I'm also curious now that you've -- the integration is complete with SB One, how are you thinking about future acquisitions?

I mean, I think, Chris and I are always pretty aligned on this thought process. Future acquisitions are always part of our, what I would call, strategic thought process. However, we're not doing them just for the sake of scale. I think we have a number of parameters around how we think about it in terms of culture first. We want to make sure that the culture fits within what we're doing and who we are so that we don't create too much disruption. But certainly, that's something that we will continually look at. In addition, we also -- as I mentioned earlier, we're looking at our fee-based businesses, both -- our wealth group which is Beacon and Insurance which is SB One. And we would look to activities around M&A with them as well to scale up that business.

Thank you.

You're welcome.

The next question will come from Michael Perito with KBW. Please go ahead.

Hey, good morning. Thanks for taking my questions.

Good morning, Mike.

I wanted to start on the loan growth commentary. It seems like you guys still feel pretty good about the outlook. I'm just curious, as we think about kind of the cadence of the year, I mean, with the pipeline stepping down quarter-on-quarter and the prepayments seem a little elevated. Is it fair to think that the growth could kind of pick up as the year progresses in 2022? Or do you think that there's room to rebound pretty quickly off that 4% level annualized you guys put out for the fourth quarter?

Mike, I think when we look at our focus tends to be more on the commercial side. And on an annualized basis, we were actually 7.1% there and that's where a lot of our calories are being directed. That being said, I'm pretty optimistic and that's why I put the comments in our written statement. I'm seeing a tremendous amount of activity within our group when we discuss with the teams what's happening, the number of deals that are going through our deal screen committees. It's heightened, so the expectation right now is that the pipeline will replenish rapidly. We still have some good funding that we have to do on loans we closed at the end of the quarter. So we expect the first quarter to be a good growth quarter for us with the caveat of the unknown which is if we see any prepayments that come through that we didn't expect, that would be the only constraint. But that -- our production activity is quite impressive in our commercial bank. I mean if you look at this year, we closed nearly $2 billion of production. It's just the prepayments that have offset that. And so as that slows down, we're going to be a highly productive bank in terms of commercial loan growth.

That's good to hear. And then on the noninterest income side, you kind of conceptually mentioned a few of your focuses around the insurance and wealth business. I was wondering if you guys could just give a little bit more context around the financials around that. And as we look at the fee income run rate in the back half of '21, any thoughts about what our realistic growth ranges or where that could head for 2022?

I can comment just on the historical results for wealth to start. AUM at the end of the period is about $4.2 billion. The last 12 months fee rate runs about 77 basis points. Good profitability out of the business. Net margin is close to 30%. And we're about 28% in change in terms of net margin, solid growth year-over-year in revenue, about 19.6% in revenue. Net income from the -- fully allocated with the tax effect and everything is about 17.2% better than last year, so a strong performance for us in '21.

Sure. And I would add another color to the Beacon side which is pretty strong year in new business production. The integration with the bank continues to build. I mean they -- I think 10% of the new production that Beacon had was generated from referrals coming from the bank side. So we're seeing some good dynamics there. I think the only caution that I would put on Beacon is the broader market, what happens to valuations. But in terms of growing the business and it's profitability, it's strong. And the only -- again, the only thing that can possibly be a negative is what happens to the broader market. With regards to SB One Insurance, they had a banner year. I think that we can continue to put that 15% to 20% growth on them for the upcoming year. They ended the fourth quarter very strong. First quarter tends to be one of their best performing quarters. So certainly, this is not -- it's a seasonal-type business and I'm expecting -- we're expecting that the insurance company will do well again in the first quarter.

One final metric on Beacon that I wanted to mention also, the year-over-year change in new clients was 74, so that bodes a little bit well for future growth, too, as you deep work to broaden that relationship over time. Generally, we were able to acquire additional assets as we add new clients.

Exactly. And last comment I'll make on insurance. I mean insurance is, same with Beacon, they're seeing a high level -- heightened level of activity in terms of referrals from the commercial and retail banks and et cetera. So I like that integrated approach to our business and we're seeing some good pickup there.

That's helpful. And not to get too nitty-gritty but just on the BOLI line, it kind of jumped around a bit this past year. And any thoughts of where that could maybe settle a little bit more as we look to next year?

Yes. Difficult to predict because the , unfortunately, is benefit claims.

Especially in...

I guess maybe asking a little differently, understanding it's a little difficult to predict. But did you kind of view the back half of '21 as a little elevated relative to what you expected? Or just trying to get a little bit of a better sense of...

Yes, I think the first half of '21 was more representative of a run rate ex benefit claims.

Got it, perfect. And then just lastly, can you guys just rehash the appetite on repurchases here? You got a little bit of room left on the authorization. I'm just curious how you guys are thinking about it at the start of 2022.

Pretty much the same methodology we've always supplied. We look for entry points that give us a good return on our earnback on the tangible book dilution. So we were below $23.50 in the last quarter's purchases. That made sense for us at that point. That's something we analyze on a continuing basis. So we continue to be in that position. We stay opportunistic and we evaluate our price point regularly.

Okay. Thank you, guys. Appreciate the thoughts.

Thanks, Mike.

The next question will come from Russell Gunther with D.A. Davidson. Please go ahead.

Hey, good morning, guys.

Good morning, Russell.

Good morning. I wanted to start -- I wanted to follow up on the loan growth discussions; it sounds very constructive. I'm wondering if you guys would be willing to bracket expectations for organic growth in 2022. It sounds like very much commercial weighted. But any additional color in terms of loan verticals or geographic contributions would be helpful as well.

Sure. I would probably feel comfortable putting on that 5%, 6% growth as something that is very doable. Again, our productivity is high. So prepayments are a much reduced level. That percentage could be much higher. But I'm comfortable based on the dynamics that I'm seeing now that 5%, 6% is a good thing to model. I didn't get that second part, Russell, of your question. Do you mind repeating it?

It's just any anticipated change in terms of the mix, the drivers of that 5% to 6% or any pockets of strength within the footprint to call out.

Yes. I think if you look at this year, most -- a lot of our production, we did about 31% in C&I loans which is a little higher than where we were pacing. So I expect the C&I side to continue to see a little higher growth. In terms of the CRE space, we like that industrial. We're seeing a lot of activity there, some multi, things of that nature. Geographically, I think we're still in the markets that we historically observed. And from time to time, we'll follow our clients outside of our markets in order to serve them.

And then just a follow-up, Tom, in terms of the margin guidance, I appreciate the rate expectations in there. What do you guys assume in terms of deposit betas within that rate hike scenario?

Yes. I think, Russell, I might recall, I mentioned last time we were conducting deposit study and reevaluating some of the assumptions around that. We have brought those betas down. I think, all in, on a weighted average basis, it's more like 23% at this point in our model which is more consistent with what we saw during the last rate rising cycle.

Okay, great. And then, just last one for me is on expenses that kind of thinking about a $65 million average for the year per quarter. A little bit of a step-up from the current run rate, obviously, inflationary pressures. But any additional color in terms of what's driving the step-up in terms of your outlook for '22?

There are some business investments in there, some system things, like a new loan origination system. It's -- there's some contract cost on small business lending platform enhancements that we're doing. So there's a number of IT-related items that are taking some of that cost that we think will give us a nice return overtime.

Great. Guys, thanks so much for the help. Have a good one.

Thanks, Russell.

The next question will come from Erik Zwick with Boenning & Scattergood. Please go ahead.

Hey, good morning, guys.

Good morning.

Tom, maybe just first a follow-up on your commentary there that you've kind of lowered the expected deposit betas for the cycle compared to your previous modeling. I'm curious, how much of an impact does that have on your interest rate sensitivity tables that you show in your 10-Q? If you have those numbers, maybe just say for like a plus 100 basis point increase.

Yes. Net income ramped up 100 basis points. The percentage change favorable from the base case is about 4.4%.

Great, that's helpful. And then thinking about the loans and the pipeline today, I guess, first, curious, do you have the average weighted yield of loans originated in 4Q? And then, I guess, is the pipeline yield similar to that level as well?

Almost exactly. We're right about 3.60% in both cases.

That was 3-6-0?

Yes, 3.6%, 3-60.

Great. And then let's see what else. Any thoughts on the effective tax rate in '22? I think you're around, what, 26% in '21?

Yes. I think we're looking at 25.75% for '22. We see a little bit of a bump up from that change in apportionment with the acquisition last year that we saw reflected in Q4. So some of that persists but we do have some tax planning strategies we put into play. I think lower taxable income relative to this year is going to make the proportion of tax exempt items a little bit less and therefore, that drives up the rate -- the effective rate a little bit as well, so 25.75%.

Perfect. And then last one for me. If I look at the investment securities portfolio today, about $2.5 billion or so, about 19% of total assets. Just curious how you think about that today, if you're comfortable with that level? And should we see it grow commensurate with loans and kind of hold that percentage level or if you'd look to make any change one way or the other?

Really, a liquidity deployment play less than the desire to maintain an investment portfolio at that level. If we had adequate loan growth, we certainly could shift funding. That said, we do still have excess liquidity on the balance sheet. We think, on average, we could deploy about another $200 million, so it will be done in a mix of loans and investments. And then that investment portfolio throws up about $35 million a month in new cash flow. So we can shift the mix to loans and use after funding over time as well.

Great. Thanks for taking my questions today.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tony Labozzetta for any closing remarks. Please go ahead.

Thank you. I would like to thank everyone for joining us on the call and we look forward to talking to many of you throughout the year. If you're on the East Coast, stay safe in the snowstorm. And thank you very much and have a great day.

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