Operator
Hello, everyone. Thank you for joining us, and welcome to the Provident Financial Services Third Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Michael Pareto, Head of Investor Relations. Michael, please go ahead.
Thank you. Good morning, everyone, and thanks for joining us for our third quarter 2026 earnings call. Today's presenters are President and CEO, Tony Labazzetta, 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 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 Thank you. Thank you. Our 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 MPAs 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 pre-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 Providence. 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 intangible. During the quarter, we had several non-core expense items that impacted our reported net income of $69 million, or 53 cents 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 an 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, where an annual at 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% to 103% range on this ratio. Asset quality remains strong, with non-performing assets representing 55 basis points of total assets. We've 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 of two 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 bully 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, four 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 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 a 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% to 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% to 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.
Operator
We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Fetty Strickland with Hufti. Your line is open. Please go ahead.
Hey, good morning, Tony and Adriano. Just wanted to start on deposits, if we could. You guys have been able to consistently grow DDAs for two quarters in a row at this point. Can we see that start to flatten out with higher rates and maybe some mixed shift, or can you continue growing that given the momentum you talked about last quarter and Treasury and some other areas?
Our expectation that deposits will continue to grow. Obviously, you know, market dynamics like changing rates may make the cost of acquisition a little higher than they presently are. But the strategies that we have both in production now and in flight, we expect that the focus, the laser focus that we have on deposits to continue to show growth in the upcoming borders.
Can the non-interest-bearing balances grow from here, you think, or are they relatively flat?
Well, we had a 5% growth this quarter in non-interest-bearing demand. You know, the focus that we have in our commercial lending side and our treasury management side, we think we could continue to grow. Now, can I promise that it's going to be 5%? I think changing rates will also impact that as well. You know, but we still expect to have some expansion in that, you know, obviously depending on what happens to market rates and the delta between zero and the offering rate.
Exactly. It may create a little bit of a transition from NIP to other deposit lines, but as Tony said, I think the production will definitely be there.
Understood. Totally fair. And then just switching gears to loans just seems like a relatively stable pipeline and quarter. You reiterated the guide here. Is it fair to assume we see loan growth maybe kick back up in the fourth quarter? And I also just wanted to ask if you're starting to see paydowns slow at all with higher rates?
Yeah. I mean, you know, we're pretty, when it comes to the commercial loan pipeline overall, I think we're very confident in not only its pull-through, but in its diversity and mix that's in that pipeline. I think rates would have to move. You know, I would say more than 50 basis points, and depending on which part of the curve moves, obviously, if the short part, the Fed moves, we might see some reduction in activity beyond a 50 basis point move in more of the C&I type loans. Obviously, the Treasury curve moves. We can see that on the term loans, like pre, et cetera. But right now, we feel pretty strong about our pipeline, the pull through, the level that it's at, the activity that we're seeing flow in to replace the closed and funded business. And I think, you know, as I mentioned in my opening remarks, I think we're seeing a 6% growth level. Obviously, I have to put a caveat that if we see prepayments beyond what we're anticipating, that could impact that number. But right now, it's looking good. But I will stress one more thing. Volume by itself is not important. I think we haven't bent one bit on credit structure. We continue to deal with some of the most notable sponsors. So we're feeling pretty good, not only about the level of production, but the quality of that production. Just wanted to reiterate.
Great. Thank you for the color. Just one more quick one, if I could, on appreciation. Is there any significant change to that number? I think I had about 20 million from MassRite this quarter.
It should tick down a little bit, Freddie. Pre-payments have slowed down on some of the CRE loans. We're projecting for the next 12 months around 60 to 62.
Got it. Thanks, Adrian. I'll step back.
Operator
Your next question comes from the line of Tim Schweitzer with KBW. Your line is open. Please go ahead.
Hey, good morning, guys. Thank you for taking my questions. Great. Good morning. Hey, good morning. Real quick, sorry, Adriano, can you repeat what the expected purchase accounting is going forward?
So, for securities and loans, we anticipate somewhere between $60 million and $52 million for the next 12 months. So, about $15 million in the quarter.
Okay, I couldn't tell if it was $50 million or $60 million. Got it, 5-0. And then my other question for you guys. 6-0, Tim. Oh, sorry, 6-0. My apologies. You guys have talked a good amount about benefits to core conversion, particularly in the commercial part of the business. Now that it's completed, could you maybe discuss what some of the immediate benefits are or already have been and what the near-term opportunities going forward will be? And how much of this is efficiency-focused versus revenue opportunities?
That's great. That's a good question. I think the first thing I will draw back on in my comments, I couldn't do enough justice to how well that conversion took place. I think our team did an outstanding job. I would call it brilliant execution all the way across on how collaborative that was. Now that that's behind us, it's going to allow us to continue our focus on the projects that we have in flight. Some of the things I'll point to is our data capabilities. We have a big project to enhance our data capabilities, which is going to obviously increase efficiencies. It's going to increase, you know, decision-making power within our organization. When it comes to, you know, we had probably over a year now, we've had a governance council around AI. That particularly is to ensure that any initiatives that we have are aligned with the business use cases. It's worked well. We've developed our own AI agent that we call B as part of our conversion, which I think it was very instrumental to the success in terms of empowering our organization with knowledge and answers so that we could have a great customer experience In the conversion. And so, moving forward, we expect to use our platform with enhanced data, enhanced, you know, to continue to do these in-flight projects that we have and build along our loan capabilities and et cetera. So, I can keep going, but I think I gave you just what we're trying to accomplish.
Yeah, that was great, Keller. I appreciate it. And then one last one, another follow-up on the NIM. Given the impact of rate hikes near term, you guys are a little liability sensitive, I feel like, but longer term, does that change over time? Is there like a catch-up on loan repricing or anything? And how should we think about the trajectory of the margin if we get, say, like two or three hikes and then the Fed just kind of settles down for a little bit?
Yeah. So, I mean, our balance sheet position is mostly neutral across the board, both the rates down, rates up. Typically, we may see one to two basis point rate compression with a 25 basis point rate hike, but that takes into account no movement on the longer end of the curve. And I think we have enough management strategies to sustain a pretty stable margin across all rate events.
Basis points expansion in the margin with the rates down.
Operator
Your next question comes from the line of Steve Moss with Raymond James. Your line is open. Please go ahead.
Maybe just following up on expenses and the investments going forward, just kind of curious, like, you know, I know you guys are getting into planning season for 27, but just how you guys are thinking about the cadence of expense growth in 27?
So, on a core basis, Steve, I mean, we expect to finish out the year right around $474 million in total, and probably a growth between three and a half and three and three quarters off of that into 2027.
And what I would add to that is some of the projects that I talked about that are in flight are all within that paradigm that AD just discussed. So, and again, positive operating leverage is a big focus for us. So, as we invest, we expect that revenue.
Yeah, it has to match the revenue that we're producing.
Right. No, I hear you guys there. That's helpful. And then in terms of just thinking about the back book repricing here, just kind of curious, you know, is there any step up in cash flows in 27 that maybe helps the margin?
In 27, it's kind of hard to say, right? With rates up, we may actually see a little bit of a slowdown, but we still have about, just on natural maturities and a pretty conservative prepayment assumption, about $3.3 billion in loans repricing over the next 12 months. We're going from about five and three quarters to, let's say, six and a half or north of that. Down the security side, about $350 million for the year that we anticipate repricing in the next 12 months.
Yeah, and the only thing I'd ask, Steve, is we're still seeing a good pickup on rate on the investment side as well. So, really, both parts of the earning asset leverage are still in place as we move into 2027 in terms of seeing pickup on yields to help offset some of the funding costs rise that we've seen in the last 90 to 100 days.
Yeah, exactly. On a core basis, we're looking at a north of 100 basis points pickup on each one of those line items.
Okay, great. Appreciate that color there. And then just in terms of, you know, thinking about credit, I mean, hearing you guys in terms of the credit resolution, the reserve has kind of started to drift up a little bit over the last couple of quarters from the lows. Just thinking about, you know, modeling this going forward, obviously, a more greater C&I mix, you know, kind of, do we think that came to the reserve ratio just steadily higher over the next four to five quarters?
We've been pretty stable on a pool basis, right around 90 basis points. Some of that increase has actually been on some one-off specific reserves that we needed to put up. But on a CNI basis, obviously, something could pop in, but we don't see any broad possible issues.
Yeah, I mean, I would add, Steve, that when it comes to that, you know, it's not – there's a lot of look-sees in the organization. On a quarterly basis, we stress very different sectors of our loan portfolio from Cree or now into the CNI space. And we do something we call Kramer, which is, you know, loan reviews within the teams. So we got a pretty good eye into what is coming down the pike. And there's nothing that we see today that is in any way, shape, or form rising to a level of concern. And in fact, as we solve for the four credits that I mentioned, which is going according to plan, and we expect it to move out by the end of the fourth quarter, our total MPA will be down to 23 basis points. And so it's looking pretty positive.
No, great. Appreciate all that color here. I'll step back in the queue. Thank you very much, guys.
Operator
Your next question comes from Manuel Navas with Piper Sandler. Your line is open. Please go ahead.
Hey, good morning. So the pipeline is pretty steady, pretty strong, and you're going to close the year out with solid loan growth with rates not really impacting demand yet. But is this a good run rate into next year? Kind of thoughts on the opportunities for loan growth next year?
Yeah, I mean, I think yes. The short answer is yes, but I want to frame it in the context that it's not a guess. I mean, it's looking at, you know, what's happening in the market and looking at our capacity within our organization and the number of producers and teams that we have. So, when you do the simple math of it, you know, again, we could outpace that guidance depending on certain dynamics, but the one thing we won't do is bend on our credit culture. So, we do project in that five to six range for next year as well.
Appreciate that. The guide for fees in the fourth quarter, can you kind of walk through some of the line items there? How do you get that $29 million? Okay.
So both wealth management and our insurance lines, we expect to grow versus the prior year, right? On the bank fee income, we should see a little bit of a pickup in the fourth quarter versus the third quarter. We had some statement overlaps during the conversion process where we passed on some fees just to make sure the customer experience was what we needed to be. We have pretty strong SBA loan sales coming down the pike on the fourth quarter as well. Boley is probably the one piece that was a little bit of an uptick in the third quarter, as we mentioned, about $3.5 million higher than the typical run rate.
I appreciate that. And you talked about buyback being a little bit opportunistic here in October. Can you update that, and what would be the right pace there, and how long can this extend, that kind of opportunistic repurchase trend?
Typically, we have a threshold as if we were acquiring ourselves. So, the earned back is typically three years. Right now, the threshold is about that $22 mark. So, we're active when the opportunity arises and our stock price dips below Currently, we purchase back about 370,000 shares.
Thank you. And so the price sensitivity is what would drive it. Okay, thank you.
Yeah, that's how we how we approach it, Manuel.
I appreciate it. Thank you for the commentary.
Operator
Your next question comes from the line of Matthew Breeze with Stevens. Your line is open. Please go ahead.
Hey, good morning. Good morning. I wanted to talk a little bit about the loan to deposit ratio. You provided some guidance there. And I guess within that, you know, maybe help me out on a couple areas. What were municipal deposits at the period? And I think the release noted they were down. I was just curious what the absolute level was. And what is the all-in incremental cost of deposits today? How does that compare to, you know, a quarter ago?
So, the all-in is about three and a quarter, Matt. We're probably a quarter ago, we were around 285, 295. And the municipal deposits are right around 3.6 billion at this point. But typically at quarter end, it's usually on the low side of those balances.
Okay. And just thinking about your loan to deposit ratio guide, I think it was, what, 97% at the low end? If you were to hit that perfect, does that include growth in some of the higher cost areas like CDs and money market? Is that necessary to get there? Or is it more functional loan growth?
You know, Matt, I don't think that's how we think about it. You know, that range is how we want to operate the business and manage our balance sheet to maximize our liquidity and our profitability. And so, you know, where we fall in that range and the reason the range is wide is because of some of that seasonality in the municipal business. But I think, you know, our intention, just purely stated, is to grow loans and fund them with core deposit initiatives that we have that Tony and AD ventured. And I think that's kind of how we think about growing the business.
I would add one thing that our expectation is that we're growing deposits in every one of our verticals, and that includes non-interest bearing and interest bearing. We want to outperform in the areas of the key core deposits, but in order for us to maintain that, to get to that 97 percent or sub one, you're going to have to grow all of your deposit verticals.
You can't do it with just one. True. And sometimes even being at that 97 may not be the most profitable approach to getting.
Understood. I just wanted to get some sense for how to get there. And then stepping back, you know, just on M&A, I'd be curious, you know, how active are conversations these days and maybe remind us in terms of size, geography, type of banks you'd be interested in partnering with?
Great question. I mean, I always have to start this question by putting, you know, as you've seen by our comments and our answers, and our hyper focus as an organization is to make sure that organically we're growing every business line within this bank. And I think we're doing so, and we're off to some good results. That being said, you know, M&A is something that is part of the job, right? You always have to have conversations. You have to know the markets around you. The way I would express it is we're fortunate enough to put ourselves in a position where we have optionality. The optionality would be that we're not forced to do anything. If something were to take place in the conversations that's culturally compatible, gives us a strategic purpose, then we would entertain it. But again, I want to make sure that everyone understands that the lion's share of our focus is on organic growth.
So, Tony, I'd just be curious, are conversations starting to pick up a little bit? And, yeah, just in terms of size and geography, I'd be curious where you're interested.
Yeah, Matt, I would say the conversations are always happening. I don't know if there's been a pickup, I think. I would say since the regulatory changes when you had a kind of a hyper pickup, I think then it just got steady. So now it's just business as usual when it comes to M&A discussions.
I'll leave it there. Thank you. Thank you.
Thanks, Matt. Thanks, Matt.
Operator
This concludes today's question and answer session. I will now turn the call back to Tony Labazzetta for closing remarks.
Well, thank you, everyone. I'd like to mention again that we're very excited about Providence Future. We appreciate you joining us on the call today, and we look forward to speaking with you again after the holidays.
Operator
This concludes today's call. Thank you for attending. You may now disconnect.
