Provident Financial Services, Inc. Aktie

Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Michael Perito, Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our first quarter 2026 earnings call. Today's presenters are President and CEO, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons. 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 first quarter. Tony?

Thank you, Michael, and welcome, everyone. I appreciate you joining us today to discuss Provident's first quarter 2026 results. I am pleased to report that we delivered another strong quarter of financial performance, demonstrating the continued momentum of our business and the effectiveness of our strategic initiatives.

For the first quarter, we reported net earnings of $79 million or $0.61 per share, representing solid profitability as we continue to execute our growth strategy. Our annualized return on average assets was 1.29%, while our adjusted return on average tangible common equity was 16.6%. Pre-provision net revenue of $108 million, which grew 13.5% year-over-year, benefited from higher net interest income and notable growth in contingency income from our insurance platform, Provident Protection Plus. This represents 1.75% of average assets on an annualized basis compared to 1.61% for the same quarter last year. We continue to focus on our balanced approach to sustaining growth across our business lines while also managing risk appropriately and generating sustainable positive operating leverage.

Turning to our balance sheet. Our commercial loan team generated new loan production of $649 million in the first quarter, up 8% compared to the same quarter last year. This production contributed to our commercial loan portfolio growth of $161 million or 3.9% annualized. Commercial and industrial loan activity was particularly strong, growing at a 10% annualized rate. Commercial loan payoffs during the quarter were down significantly to $191 million. And overall, we remain positive about our loan growth guidance for 2026.

Our commercial loan pipeline reached a record $3.1 billion as of March 31. This pipeline is well diversified and comprised of $1.3 billion in CRE, $1.1 billion in C&I, $400 million in specialty lending and $200 million in middle market loans. This is the first time in our company's history that both the CRE and C&I pipelines have exceeded $1 billion, reflecting the investments we have made in our commercial banking group to generate sustainable, diversified loan growth.

Switching to deposits. Our total nonmaturity core business and consumer deposits increased $66.5 million during the quarter or 2.2% annualized. Seasonal municipal deposit outflow and an intentional reduction in broker deposits during the quarter impacted our total deposit balances, which were down sequentially. Our average noninterest-bearing deposits were relatively stable, and we remain focused on deposit generation strategies to build core deposits in consumer, small business and commercial verticals.

While the overall deposit environment remains very competitive, our focus on relationship banking, combined with our expanding digital capabilities and treasury management solutions positions us well to continue attracting quality deposit relationships that support our loan growth objectives.

Provident's commitment to managing credit risk and generating top quartile risk-adjusted returns remains unchanged. During the first quarter, we experienced net charge-off of $3.1 million, representing just 6 basis points of average loans. Nonperforming loans increased to 73 basis points of total loans from 40 basis points in the fourth quarter, with the increase primarily attributable to a bankruptcy that impacted 4 related commercial loans totaling $82 million.

I'd like to provide additional context on this relationship. These loans have no prior charge-off history and require no specific reserve allocations due to strong collateral values. Appraisals received in 2026 reflect loan-to-value ratios for the collateral properties of 32.9%, 51.7%, 61.3% and 81.9%, respectively. We are expecting resolution of these credits by year-end. Based on the current cash flow and occupancy rates of the properties and our secured position, we don't foresee a material loss to the bank.

Outside of this relationship, we would have seen improvements in all credit metrics during the first quarter, including the levels of loan delinquencies, nonaccrual loans and criticized and classified assets. Shifting to noninterest income. We are pleased with the performance during the quarter.

Our Provident Protection Plus insurance platform, in particular, delivered exceptional results in the first quarter with the customer retention rates continuing at approximately 95% and significant year-over-year growth in both new business and contingency income. The strong contingency income we received this quarter reflects the quality of the relationships with our clients and carriers and the effectiveness of our risk management approach.

We're seeing increased collaboration among our insurance platform, bank and Beacon Trust, which is creating meaningful cross-sell opportunities and deepening client relationships across our organization. The pipeline of our insurance business remains strong heading into the remainder of 2026, and we continue to invest in talent and capabilities that will drive sustainable growth in this differentiated revenue stream. Beacon Trust remains focused on retaining and growing its customer base, and we are optimistic that the recent hires will help accelerate growth over the balance of 2026. Additionally, we have a strong pipeline for further SBA gain on sale over the remainder of the year.

Our strong financial performance continues to build our capital position well beyond regulatory requirements. We delivered another quarter with significant year-over-year growth in earnings per share, profitability and tangible book value, with our tangible common equity ratio ending the first quarter at 8.6%. During the quarter, we opportunistically took advantage of market volatility and bought back $12.4 million of our shares. Having said that, our top capital priority remains unchanged, driving sustained organic growth across our franchise while achieving top quartile risk-adjusted profitability.

I'm incredibly proud of both the efforts and production of our employees. I would now like to turn the call over to Tom for his comments on our financial performance. Tom?

Thank you, Tony, and good morning, everyone. As Tony noted, our net income increased 24% versus the first quarter of 2025 to $79 million or $0.61 per share with a return on average assets of 1.29%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 16.6%. Pre-tax, pre-provision earnings were $108 million or an annualized 1.75% of average assets, a 13.5% increase from the $95 million or 1.61% of average assets reported for the first quarter of 2025.

Despite a lower day count, revenue topped $225 million for the second consecutive quarter, driven by net interest income of $194 million and record noninterest income of $31.5 million. Average earning assets increased by $264 million or an annualized 4.7% versus the trailing quarter, with the average yield on assets decreasing 13 basis points to 5.53%. This reduction in asset yield was largely offset by a 12 basis point decrease in the cost of interest-bearing liabilities to 2.71%. Interest-bearing deposit costs fell 21 basis points versus the trailing quarter to 2.39%, while total deposit costs declined 16 basis points to 1.94%.

While a reduction in net purchase accounting accretion attributable to lower loan payoffs resulted in a 4 basis point decrease in our reported net interest margin versus the trailing quarter to 3.40% our core net interest margin increased by 3 basis points to 3.04%. Given the macro development since the start of the year, we are now modeling no further Federal Reserve rate actions for the remainder of 2026 versus 3 cuts in Fed funds in our initial modeling. As a result, we are slightly tightening our NIM outlook to 3.4% to 3.45%, inclusive of purchase accounting accretion. We also now expect approximately 3 basis points of core NIM expansion in the second quarter.

Period-end loans held for investment increased $144 million or an annualized 3% for the quarter, driven by growth in commercial, multifamily and commercial mortgage loans, partially offset by reductions in mortgage warehouse, construction and residential mortgage loans. Total commercial loans grew by an annualized 3.9% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.9 billion. The pipeline rate of 6.24% is accretive relative to our current portfolio yield of 5.85%.

Period-end deposits decreased $178 million for the quarter or an annualized 3.8%. The decrease was driven by seasonal outflows of municipal deposits expected to return in subsequent quarters and a tactical decision to reduce brokered deposits in favor of lower-cost FHLB borrowings. More specifically, the pricing of brokered deposits was notably elevated in March, and we elected to utilize more borrowings at a cost savings of approximately 20 basis points, driving a more favorable impact to our net interest margin.

Asset quality remained strong despite the increase in nonperforming loans that Tony previously detailed with nonperforming assets representing 58 basis points of total assets. Net charge-offs were $3.1 million or an annualized 6 basis points of average loans. We recorded a net negative provision for credit losses of $2.1 million for the quarter as required specific reserves on individually evaluated impaired credits declined. There was modest improvement in our CECL economic forecast and changes in our portfolio mix warranted lower pooled reserves. This brought our allowance coverage ratio down 5 basis points from the trailing quarter to 90 basis points of loans at March 31.

Noninterest income increased to $31.5 million this quarter with solid performance from our insurance and wealth management divisions as well as increased BOLI claims and year-over-year increases in core banking fees and gains on SBA loan sales. Noninterest expense increased to $117.1 million this quarter, reflecting increased compensation and benefits costs and occupancy expense. Expenses to average assets and the efficiency ratio, however, both improved from the prior year quarter to 1.90% and 52%, respectively. We now project quarterly core operating expenses of approximately $117 million to $119 million for the remainder of 2026, with the run rate in the second half of the year being higher than the first half.

As we noted last quarter, in addition to normal expenses, we will be upgrading our core systems in Q3 of 2026 and expect additional nonrecurring charges of approximately $5 million in connection with this investment, largely to be recognized in the third and fourth quarters. Our continued sound financial performance supported earning asset growth and again drove strong capital formation. Tangible book value per share increased $0.33 or 2.1% this quarter to $16.03 per share, and our tangible common equity ratio increased to 8.55% from 8.48% last quarter.

Common stock buybacks for the quarter totaled $12.4 million and 589,000 shares, and we have 2.2 million shares remaining on our current authorization. We reaffirm our previous full year 2026 guidance of 4% to 6% loan and deposit growth, noninterest income averaging $28.5 million per quarter and core ROAA targeted 1.2% to 1.3% with a mid-teens return on average tangible common equity.

That concludes our prepared remarks. We'd be happy to respond to questions.

[Operator Instructions] Your first question will come from Feddie Strickland with Hovde Group.

Just wanted to start on credit and the senior housing facilities. It seems like you don't really expect material losses there. But can you speak any more to the collateral location and kind of types of senior housing facilities these were or are?

Yes. They consist of independent assisted living and memory care, no skilled nursing and minimal exposure to Medicaid in there. Strong demand for the properties, which is one of the reasons why we expect to see minimal loss as the bankruptcy gets resolved in fairly short order, we think. As for the location, East Coast, properties range from $15.1 million to our share of $31.8 million is the highest loan amount. LTVs, as we disclosed in the release, go from 51.7% to 81.9%. Probably noteworthy is the highest LTV is actually on the lowest loan amount. That's the $15.1 million credit. I guess more specifically, the properties are in New Jersey, Connecticut, Maryland and Florida.

Okay. Got it. That's super helpful. And just switching gears to fees. I just wanted to touch on the guide. You came in pretty meaningfully above your kind of quarterly run rate guide but kept the full year outlook intact. Should we expect fees to pretty meaningfully step down from the first quarter on maybe some nonrecurring revenue or some seasonality? Or is there maybe some upside there?

Yes. I think it's just an acknowledgment of some of the volatility in some of those line items. A piece of that was BOLI income. We do expect to see some seasonality in the insurance business, but we are anticipating continued improvement in the wealth management revenues as well over the course of the year to offset some of that to a degree.

And SBA, so that will be genuine.

Yes, that's another one that's volatile to a degree, though, dependent on the production and what the gain on sale margins are at any point in time. So there may be a little bit of conservatism in that $28.5 million average.

Got it. And just one more quick one, if I could, on loan discount accretion expectations. I think you had a decent step down there this quarter. What's kind of the expectation for the next quarter or 2 there?

There's a significant reduction in payoffs this quarter, which we kind of like actually to retain the asset. But if we're looking for 3 basis points of core margin expansion to roughly 3.07% and still anticipating a margin in the 3.40% to 3.45% range for the balance of the year, the difference being purchase accounting accretion.

Your next question will come from Tim Switzer with KBW.

Really quick follow-up on your comments there on the NIM. Can you talk about maybe how a Fed rate cut would impact not necessarily 2026 numbers, but perhaps 2027? Is that accretive to earnings going forward if we get 1 or 2 cuts?

It is, Tim. I think consistent with last quarter when we talked, each cut's about 2 to 3 basis points of benefit to us on the current balance sheet.

Okay. Great. And then on your loan back book repricing, I know you guys have a good amount of loans over the next year or so. Can you update us on how much there is and what the gap is on new yields versus old?

Yes. So Tim, the gap, the loan pipelines at about just under 6.25%, we still have loans coming off in the mid-5s generally. So there's some pickup there. I think we've isolated that benefit to the NIM to be a couple -- 2 to 3 basis points over the 12-month period. We can get you -- Tom might have the exact dollar amount of the reprice, but -- or AD, but that's the general impact on margin.

It's about $5 billion in the total loan portfolio, but you would say only 60% of that you get a benefit from because that's the Lakeland -- sorry, the other 40% of the Lakeland related portfolio.

Okay. So it is a slight benefit. And then last one for me. Could you guys walk us through some of the benefits in new capabilities, the core upgrade? I think it's from FIS, will bring you. And are there any like new products that will enable or anything like that?

Yes. I mean just at a high level, we're going to be able to get more robustness around the lending area in terms of information and data flows. The branch opening -- account opening activity is going to be much faster, robust. So these are some of the things that we expect. Also creates the foundation for us to be able to attach other applications to the APIs that work more efficiently. The IBS core is much more functional for what I would call more complicated commercial bank that has a lot of verticals that we can't get the full benefit on the current core as some of the benefits.

Your next question will come from Steve Moss with Raymond James.

Maybe just starting off here on the loan pipeline here looking good. Just kind of curious how you guys are thinking about the pull-through, economic uncertainty? I realize you didn't update -- increase the loan book guidance, but just how you're thinking about those things?

Well, I'll start there. I mean I look at our pipeline, our pull-through, our commitments, they're looking good. I think we're still thinking the guidance is good. We might overachieve the guidance depending on what happens with prepayments and market conditions. But I don't see anything right at this time, given the geopolitical circumstances that would affect the guidance that we've provided to you. So we're still feeling good about that. And depending on prepayments determines whether we can overachieve or come close.

Yes. Steve, I kind of indicated in my comments the pull-through adjusted pipeline at about $1.9 billion, too. So we expect that -- if you do the math on that, it's about 60%, 61% pull-through rate. In terms of mix of that pipeline, about 47% of it is commercial real estate and multifamily. Commercial lending, C&I growth is about 49% and the balance is in consumer, that's just 4%.

Yes. And I would just, Steve, add another dimension. This is pretty good dynamic at Provident because what you're seeing is the way it's distributed, it's very diverse. So just by the normal dynamics without us doing anything and just achieving our CRE loan objectives, we can still see the CRE ratio coming down because of capital build and diversification into the other books like C&I, specialty lending and middle market. So that's a pretty good dynamic that we're accomplishing here, which is our strategic focus.

Right. Okay. I appreciate all that color there. And then just on the deposit side, just curious what you guys are seeing for competition these days and how you're feeling about funding cost trends?

I would say that the competition has probably tightened more than I've seen in the last bunch of quarters. I think it's getting to not only on the deposit side, but also on the lending side. We're seeing spreads coming down. We're seeing creative structures on deposit programs. So for people like waiving fees, waiving certain scenarios, pricing. So we're seeing that. And again, we're responding to that. We have our pathways.

We're seeing some good dynamics on our consumer side and our small business side. The municipals, I think we're seeing good dynamics even though the flows are [out] because we have some good RFPs moving forward into the second quarter. Our focus is to get our regional teams and our TM teams more expanded so that we can go get more scale in that space. We're feeling good about the prospects, but the competition to your question, is stronger than I've seen it in a while.

Okay. And then on to maybe the reserve here. Just with the CECL move down, do we just think of this as a onetime adjustment? Or kind of how are your thoughts on where this reserve goes?

As you know, Steve, a lot of that is dependent on the forecast going forward. I wouldn't expect material continued improvement in that forecast, again, given the macro events in the world. But a big piece of that was also the reduction in specific reserves. We had a really strong quarter for resolutions with very minimal losses and you saw the net charge-offs of $3.1 million, about $2.5 million of that was previously reserved for. So no need to replenish those reserves. There's limited specific reserves on the remaining impaired loans that have been identified.

And we're very positive on the resolution prospects for a number of those credits in the following quarter. So we don't see a lot of loss content in the book overall. We did have some improvement in the portfolio mix in terms of construction loans reducing a bit. So that required less pooled reserves as well. And yes, that's it. So overall, again, 6 basis points of charge-offs, we feel pretty strongly about the quality of our underwriting and our asset quality going forward.

Got it. Okay. I appreciate that. And just last one following up on the credits here with the senior housing. Are those nonperformers cross- collateralized? And just do you by any chance have a weighted average LTV?

They are not cross-collateralized. They're in Delaware statutory trust, but the specific LTVs are outlined in the release. They go from 32.9% up to 81.9% on the smallest dollar credit.

Just to give a little bit more color. I think it's something that might get lost in the write-up. These loans that we mentioned went into NPA, not because of cash flow, not because of anything except the bankruptcy of the holding entity that dragged that into payment stopping. So that's why we feel strong about the ultimate resolution of these because the cash flows are intact, the LTVs are strong, and we just needed to go through the bankruptcy process and get us pushed through, and we feel the resolution can happen in this calendar year with minimal to no loss to us. It's hard for us to say absolutely no, but we think it's going to be a positive resolution.

Your next question will come from David Storms with Stonegate.

Just want to start with the noninterest income. It was mentioned in the prepared remarks that there's been some cooperation between insurance and the rest of the business, and that's been helping to drive the insurance growth. Maybe how much more integration or cooperation could there be here? And how applicable could that be to the wealth segment?

It was a little faint, but maybe...

Collaboration among the insurance wealth divisions and the retail division and what the upside is there.

What I'm seeing is huge momentum. I think part of why the insurance company is growing, I think they did 21% revenue growth year-over-year. It's the constant dynamic of working with the commercial bank and the Beacon and the retail side of the organization to work collaboratively, very integrated. We're seeing a lot more to attract the referrals. But now it's become sort of natural to the bank. You don't have to force it through incentives. People are doing it because they see the value that it creates for our customer base.

And so it's fun to watch from my perspective because there's no end to how far the insurance can grow. In fact, the conversations we have is about making sure that we continue to staff up and find that workforce in order to be able to handle that business. There's still a lot of business within the bank that we can refer across. And the same thing is happening on the Beacon side. We've seen -- in this quarter, we've seen positive flows, and we've also seen a good dynamic of referrals from the bank and insurance back into Beacon.

So as these things -- I think that momentum will only pick up. What we have to do on the Beacon side is continue to build up that sales force to be able to handle these cross referrals as they come in. So I think that is -- I think the way we described it in the write-up, it's a very differentiated revenue stream, and I think it's one that we continue to build. So the team is doing a great job on that.

Understood. That's very helpful. One more for me. And I know your primary goal is strong organic growth. But just thinking about your efficiency ratio hovering in the low 50s for a little bit now. What appetite or ability is there to keep dialing that lower? Do any of these core updates have a significant impact on that? Just any thoughts around your efficiency ratio?

I'll start. I mean we're constantly looking for operational efficiencies. Some of the -- if you look at our efficiency ratio today, I think the part that needs to be really described is how much investment we've made in our technology over the last bunch of quarters in our infrastructure. So that's in the run rate. And we're seeing the revenue streams coming in from some of the investments we've made. So we can lower the efficiency ratio in that regard.

We'll continue to do branch optimization strategies. We'll continue to look at some tools on the technology side for efficiency. I would look at us more from the standpoint of doing more with less in the future than continuing to have to invest in more talent in order to execute. So -- and I would expect the efficiency ratio to continue to come down. But it will be sawtooth. The way we look at it here is it will come down because of the positive operating leverage, and then we'll invest and bump up and then it will come back down by getting to positive operating again. But the -- certainly, the new system will play in the efficiency side on flows, how we get things into automated boarding, closing. So we'll see a lot of that stuff in future state.

Carrie, before we move to the next question, I just wanted to -- in response to the last question to Steve, the weighted average LTV on the 4 properties is 53%.

They're not cross-collateralized.

No, but just so that we know about the size of the property.

And your final question will come from Manuel Navas with Piper Sandler.

Can you revisit the buyback pace going forward and how it's impacted with kind of greater loan growth in the second quarter? And you're talking about opportunistic, like what's the pricing that would get you involved?

Yes. I think the pace is going to depend on market conditions and what our expectations are for growth. You saw a significant bump in the pipeline rate, but we do believe we have adequate capital and adequate capital formation to continue to take advantage of market conditions when it warrants. I don't want to define a specific price. We try to keep the earn back on that in the low 3 kind of range at a maximum level. But again, I don't want to define it too narrowly because it really does depend on our current view about asset generation and capital formation at any point in time.

Could you update on the periphery of your geography where you've added talent or added offices and their growth ramps so far?

Yes. I mean we've added some talent in the Westchester market. We've added talent down in the main line of the Pennsylvania around the Philadelphia area. We're moving -- we're adding some talent into the Cherry Hill area as part of our growth strategy, not only on lending, but on deposit gathering. Also moving some of our business partners down there like insurance and wealth to be able to penetrate some of those markets. So those are just 2 of the areas that I mentioned. And obviously, our strategic plan is to continue some more thoughts on expansion.

There are no further questions at this time. I would like to turn the call back over to Tony Labozzetta for any closing remarks.

Thank you, everyone, for joining the call and your questions. Before we end, I would like to take a moment to congratulate Tom Lyons. This is his last official earnings call. Tom obviously has been a great figure here and has done so much for Provident. He's been a great partner. And certainly, he will be missed by me, and I'm sure all of his colleagues at the bank. So thank you, Tom.

Thank you, Tony.

And we look forward to speaking to you soon, and thank you very much.

Thank you for your participation. This does conclude today's conference. You may now disconnect.

Thank you for standing by. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services Fourth Quarter Earnings Call.

[Operator Instructions] I would now like to turn the conference over to Adriano Duarte, Investor Relations.

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 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 it's my pleasure to introduce Tony Labozzetta, who will offer his perspective on the fourth quarter. Tony?

Thank you, Adriano, and welcome, everyone, to the Provident Financial Services Fourth Quarter Earnings Call. The Provident team delivered another strong quarter, driven by record revenues, favorable credit metrics and expanding core profitability. Throughout 2025, we built organic growth momentum on both sides of the balance sheet, which combined with positive operating leverage resulted in notable improvement in our financial performance. Accordingly, in the fourth quarter, we reported net earnings of $83 million or $0.64 per share.

Our annualized return on average assets was 1.34%, and our adjusted return on average tangible common equity was 17.6%. Pre-provision net revenue was a record $111 million or an ROA of 1.78%. Since closing the Lakeland transaction, we have grown core pre-provision net revenue every quarter.

Turning to our balance sheet. Our commercial loan team generated total new loan production of $3.2 billion in 2025. Elevated loan payoffs of $1.3 billion, which were primarily in our CRE portfolio, partially offset our strong production, resulting in net commercial loan growth of 5.5% for the year.

We remain focused on generating high-quality diversified loan growth. At year-end, our pipeline remained solid at $2.7 billion with a weighted average rate of 6.22%. Our loan pipeline has consistently been north of $2.5 billion for the last 4 quarters, and more importantly, our originations have grown every quarter in 2025, peaking at over $1 billion in the fourth quarter. On the funding side, core deposits grew $260 million or 6.6% annualized compared to the linked quarter.

Favorable trends in our commercial and consumer segments contributed to growth in our average noninterest-bearing deposits of 2% annualized. The deposit market remains competitive, but we continue to invest in our capabilities to drive meaningful growth in our core funding. Provident's commitment to managing credit risk and generating top quartile risk-adjusted returns has remained unchanged. During the quarter, we successfully resolved $22 million of nonperforming loans while experiencing just $1.3 million in associated net charge-offs.

As a result, nonperforming assets improved 9 basis points to a favorable 0.32%. The business environment in our market continues to be healthy. And as a reminder, our exposure to rent-stabilized multifamily properties in New York City is less than 1% of total loans, all of which are performing. Growing our noninterest income remains a strategic priority. We generated record fee revenue of $28.3 million in the quarter. I want to take a minute to highlight the momentum and diversity of our noninterest income. Provident Protection Plus continues to drive consistent growth in our insurance agency income. New business and over 90% customer retention helped grow pretax income 13% year-over-year.

Provident Protection Plus has a strong pipeline at the start of 2026, and I'm encouraged by the increased collaboration with both the bank and Beacon Trust, which should strengthen further in 2026. Beacon Trust saw revenue growth again in the fourth quarter, increasing to $7.6 million on approximately $4.2 billion of AUM.

Beacon remains focused on both growth and retention, and we continue to make investments in talent to help achieve these goals. We also continue to invest in our SBA capabilities, which have been a more significant contributor to noninterest income in 2025, generating $946,000 of gains on sale in the fourth quarter.

For the full year, we have generated $2.8 million of SBA gains on sale, which is up from $905,000 in 2024. While total assets grew nearly $1 billion in 2025, our strong profitability helped further build Provident's capital position, which comfortably exceeds well-capitalized levels.

As such, earlier this week, we announced a new share repurchase authorization that will allow us to buy back an additional 2 million shares.

I'd like to conclude my remarks by discussing our strategic priorities for 2026. We expect to continue investing in revenue-producing talent across our middle market banking, treasury management, SBA, wealth management and insurance platforms. We expect recent balance sheet growth momentum to be sustained and that loan payoff activity will normalize when compared to 2025.

Finally, we are preparing for a core system conversion in the fall of 2026, an important investment that will enhance scalability and our digital capabilities. I'm confident in our team's ability to successfully complete this conversion, particularly given how seamlessly we integrated Lakeland Bank in 2024.

I'm incredibly proud of the efforts and production of our employees. We are pleased with our organic growth momentum and improved profitability, and we continue to target sustained top quartile performance.

Now I'd like to turn the call over to Tom for his comments on our financial performance and to discuss our 2026 guidance. Tom?

Thank you, Tony, and good morning, everyone. As Tony noted, we reported net income of $83 million or $0.64 per share for the quarter with a return on average assets of 1.34%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 17.58%. Pre-provision net revenue increased 2% over the trailing quarter to a record $111 million or an annualized 1.78% of average assets.

Revenue increased to a record for a third consecutive quarter at $226 million, driven by record net interest income of $197 million and record noninterest income of $28.3 million. Average earning assets increased by $307 million or an annualized 5.4% versus the trailing quarter, with the average yield on assets decreasing 10 basis points to 5.66%.

This reduction in asset yield was more than offset by a 13 basis point decrease in the cost of interest-bearing liabilities to 2.83%. While a reduction in net purchase accounting accretion limited our reported net interest margin expansion to 1 basis point versus the trailing quarter at 3.44%, our core net interest margin increased by 7 basis points to 3.01%.

The company continues to maintain a largely neutral interest rate risk position, but anticipates future benefit to the core margin from recent Fed rate cuts and expected steepening of the yield curve. The core margin for the month of December continued to trend upward at 3.05%.

We currently project continued core NIM expansion of 3 to 5 basis points for the next 2 quarters with reported NIM estimated in the 3.4% to 3.5% range for 2026. Period-end loans held for investment increased $218 million or an annualized 4.5% for the quarter, driven by growth in multifamily, commercial mortgage and commercial loans, partially offset by reductions in construction and residential mortgage loans. Total commercial loans grew by an annualized 5.4% for the quarter.

Our pull-through adjusted loan pipeline at quarter end was $1.5 billion. The pipeline rate of 6.22% is accretive relative to our current portfolio yield of 5.98%. Period-end deposits increased $182 million for the quarter or an annualized 3.8%, while average deposits increased $786 million or an annualized 16.5% versus the trailing quarter.

The average cost of total deposits decreased 4 basis points to 2.1% this quarter, while the total cost of funds decreased 10 basis points to 2.34%. Asset quality remains strong with nonperforming assets declining $22 million or 22% to 32 basis points of total assets. Net charge-offs were $4.2 million or an annualized 9 basis points of average loans this quarter, while full year 2025 net charge-offs were just 7 basis points of average loans.

Current quarter charge-offs reflected the disposition of several nonperforming and underperforming loans and the write-off of related specific reserves. We recorded a net negative provision for credit losses of $1.2 million for the quarter as year-end loan closings drove a decrease in approved commitments pending closing, asset quality improved, and there was modest improvement in our CECL economic forecast. This brought our allowance coverage ratio down 2 basis points from the trailing quarter to 95 basis points of loans at December 31.

Noninterest income increased to $28.3 million this quarter with gains realized on calls of corporate securities and solid performance from our wealth management and insurance divisions as well as gains on SBA loan sales and increased core banking fees.

Noninterest expense increased to $114.7 million this quarter as strong operating results drove increased performance-based incentive accruals, while expenses to average assets and the efficiency ratio were consistent with the trailing quarter at 1.84% and 51%, respectively.

Excluding the amortization of intangibles and the related average balance, these ratios were 1.76% and 48.15%, respectively. We project quarterly core operating expenses of approximately $118 million to $120 million for 2026, with the second half of the year run rate being slightly higher than the first half.

In addition to normal expenses, as Tony mentioned, we will be upgrading our core systems in Q3 of 2026 and expect additional nonrecurring charges of approximately $5 million in connection with this investment, largely to be recognized in the third and fourth quarter.

Our sound financial performance supported earning asset growth and drove strong capital formation. Tangible book value per share increased $0.57 or 3.8% this quarter to $15.70, and our tangible common equity ratio increased to 8.48% from 8.22% last quarter.

We realized a $3.4 million benefit to our income tax expense from the purchase of energy production tax credits for the 2025 tax year. We are exploring opportunities to purchase additional similar tax credits for the 2026 year and open carryback years. Excluding the discrete benefit of any tax credit carrybacks, we currently project an effective tax rate of approximately 29% for 2026. Regarding additional 2026 guidance, we are expecting loans and deposits to grow in the 4% to 6% range, noninterest income to average $28.5 million per quarter and are targeting a core return on average assets in the 120% to 130% range with a mid-teens return on average tangible common equity. That concludes our prepared remarks. We'd be happy to respond to questions.

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

Tom, first question for you. I heard your comments on the effective tax rate being 29% for 2026. I guess I'm curious, those tax credit investments that you announced you made, I think it was $54 million. How does that flow through to the effective rate or when does it flow through?

So that was in the Q4. Those are 2025 tax year benefits. So that was reflected in the $3.4 million we saw in reduction in income tax expense. Next year's purchases, the 2026 year will be realized in 2026 as a reduction. That's why we're dropping from close to 30% down to about 29% in our estimate of what the effective rate will be.

It's spread out throughout the year. So it's not a onetime like we did in 2025.

That's correct. We did them at the end of the year. So it should be spread through 3 quarters of the year in 2026.

Okay. Great. And then secondly, I saw the buyback announcement. I guess you have a little bit of excess capital. Could you help us think about how you'd rank your priorities for deployment of excess capital today?

Yes, I don't think they've changed. Still profitable balance sheet growth is our primary objective. We think that's the longest-term value creator. But we wanted to add additional flexibility to our capital deployment options, which is why we refreshed the stock buyback plan.

I think that's spot on. Organic growth is our primary focus. The second half of the year, we might look at our dividend as our productivity continues. Obviously, there's always the additional uses of capital we want to invest deeper into our insurance and wealth platforms. And then there's always in the background, the thoughts of mergers, but our primary #1 focus is organic growth.

Yes. Our capital levels, we're comfortable with where they are now, and we're confident in our capital formation projections for the rest of the year. So again, that was another trigger, as Tony said, to both give some consideration in the remainder of the year to the dividend rate as well as to reintroduce some buyback options.

Okay. And I hear what you're saying, Tony, on M&A being sort of back of the list, so to speak. But if you were to look at bank deals, what kinds of things would you be looking for in a potential target?

Well, I think, as I mentioned in the past, I think, the primary, I would start by saying this team is a pretty outstanding team, and we put together a pretty good engine. Everybody is meshing well. We got a good dynamic group from Board on down. And #1 thing is that the cultures have to be compatible so that we don't create a tremendous amount of hiccups in what we've been building here already that's producing value. So that being said, we would also love to see some additional talent acquisition and then also perhaps new line of business or a market that we're not in, complementary things, adding to the wealth side or the deepening our insurance penetration is certainly something of value, but we do recognize that you can't get all those boxes checked off in any situation.

So you have to pick up how many boxes do you want checked off in order to get the deal done, but a lot of good -- still a lot of good franchises out there that we think we could be good partners with. However, I did just cover what we thought was a value of verge.

Your next question comes from the line of Tim Switzer of KBW.

I also want to congrats to Tom on his pending retirement.

Thank you, Tim. Appreciate it.

The first question I have is there's been a good amount of talk on conference calls this quarter about rising deposit competition in some of your core markets, particularly on pricing and -- what have you guys seen in the market? Where is the highest level of competition right now in terms of like category or geography? And does that maybe impact your NIM outlook or liquidity management at all?

Well, I kind of want to say competition is heightening a little bit, but I see the competition for deposits in our market as being universal. It's always been there as long as I've been in this space. It kind of moves here and there in different segments. I would argue that everybody is in a fight for interest -- noninterest-bearing demand and low-cost money, and then that's part of your model. I think from our perspective, we're doing a good job with our core model. If you look this quarter, we had 16.5% growth on average balances.

You're seeing, we produced nearly $479 million of commercial deposits this year that are -- tend to be your lower costing deposits. Funding about 24% of our loan production. So those are all good things. So the competition is there. But if you go to market with the right talent and with the right approach, I think you can win your share.

I would say a safe answer would be that if everybody has designs to grow high single digits, there's just not enough new money for the -- for everybody's needs. So that's what creates the competition. It's like what -- it's just not enough to cover everybody's growth needs.

Got you. Yes, that makes sense. And then can you remind us on -- I think you have close to $5 billion to $6 billion of fixed rate loans repricing in your back book over the next year. Can you repress us on what that number is and maybe the gap on new origination yields versus what's rolling off?

Yes. The total repricing over the next 4 quarters, this is on the adjustable side, it's about $5.7 billion. Looking for. Okay, back book repricing, cash flows, both amortization and prepays, we're looking at another $4.7 billion over the next 12 months as well. So the pickup in rate is about 30, 40 basis points. I think it adds about 4 basis points to the NIM.

Got you. Okay. And then the last question I have is just on the CRE market trends. It seems like it's becoming a little bit healthier, volumes are improving, pricing holding up to rising. Trying to get -- like are you guys seeing the same thing there? And then I believe there's also -- due to some M&A in your market, there's a competitor looking to sell potentially some CRE portfolios in the New York market. Is that anything with your guys' capital levels you'd be interested in? Or just focused on organic?

Yes. I mean, there's a couple of questions in there. I'll try to tackle them all. I'll start with the last 1 first. There's probably little to no desire for us to acquire anyone's portfolio since our productivity is quite high, and being able to allocate that capital to our clients is more important, right? So the relationship banking that we do, we would view that book acquisition as a filler and it's just not necessary for us in the way we approach our business. When you look at the CRE market overall, I do see a healthier CRE market. Our CRE book has held up incredibly well throughout any of these perceived cycles. You're starting to see other banks that may have stepped a little bit back on the CRE space stepping back in. And certainly, the agencies, if you look at half of our prepayments that I mentioned in the call, 50% of them were with the agencies that basically are offering terms that we just don't do, which is high level of prepayments of IO is rather long-term IOs and high leverage and rates that are just not balanced with the risk reward.

So again, I think that the market is healthy, and you're always going to have spotty situations like right now, the big thought process is what's happening on the rent controlled, rent stabilized in New York with the new administration. We're attentive to it.

We don't see anything even in our small portfolio that is alarming to us at this point. So knock on wood, everything appears to be healthy going into the 2026 year.

Your next question comes from the line of Feddie Strickland of Hovde Group.

I wanted to touch back on loan yields a little bit. And Tom, I think you mentioned this a little bit in your opening comments, but is there the potential for yields to move up a bit as we move into early '26, just given the increase in the pipeline yield of 12/31 versus 9/30? And what you just talked about back book repricing?

I think so stable to slight improvement overall.

Yes, that makes sense. We had a little bit of a lift in the 5-year from the prior quarter of about 20 basis points, and that's where the yield improvement came from, where the rate improvement came from.

Got it. And then just switching over to fees. I noticed the wealth AUM was down a little bit from last quarter despite what I'd imagine is positive market move impacts, but it still sounds like you're pretty bullish on '26. Can you talk a little bit about what drove AUM maybe a little lower in the fourth quarter?

It was down a little bit on a spot basis, up on average, though, by about $80 million. We did have some net outflows for the quarter, but we did have some good strong business production during the period as well. So overall client count is pretty stable.

Yes. I would add, it's a little bit more exciting of what we expect for 2026, right? So we've added some more talent to Beacon to augment the growth and retention strategies that are there. We brought in some teams along with that to help. Pretty exciting early indications. Obviously, it's way too early for any real huge material numbers to change, but we're seeing the engagement. We're seeing new-to-bank clients coming in. We're seeing a group that can deeper penetrate -- deeply penetrate both Provident and work with Provident Protection Plus and the bank to deepen those client relationships. So I'm pretty excited about the prospects for '26 when it comes to Beacon. I'm expecting some pretty good things there.

Got it. And just one last one for me. Just is there any desire or opportunity to expand the footprint a little bit more in adjacent geographies? More organically is what I'm talking about. I mean, maybe areas like Long Island, given some of the disruption there, maybe a little further south in the Philly suburbs? Or are you pretty happy with where you are today?

Well, people that know me, I'm never really happy. So I would say that. Yes, all of the above. I mean, we're already out on Long Island in Manhasset, and we have an office in Astoria. So continuing to penetrate there is obviously intelligent. We like the Westchester, Rockland markets. We do like the mainline around Philly. All of those areas are where we already have teams down there. We don't have physical locations in that -- around that Philly market, but we already have lending teams down there, same as in Westchester and New York. And so seeing us expand geographically in those areas is not something that should surprise anyone on this call.

Congrats, Tom, on the retirement.

Thank you very much. Really appreciate.

Your next question comes from the line of Steve Moss of Raymond James.

Tom, congrats on your retirement. Maybe just starting back on the accretion numbers here. Just kind of curious, Tom, what you're thinking for total purchase accounting accretion for 2026?

On the loan book, it's about $60 million for the full year.

Okay. Got it.

The volatility there on prepayments, but that's our kind of base case model.

Right. Okay. So then a lot of the adjustable rate loans you're referring to that are repricing carry rate marks at the current time, just looking to convert those to kind of like a core margin, kind of how to think about that benefit?

Not all. Some, not all, Steve, just because there's a blend -- a healthy blend of legacy Provident loans and leases.

Got it. And -- but it is about 3 to 4 basis points or 4 basis points to the margin just from the back book repricing, if I heard that correctly.

That's correct, yes.

Okay. Perfect. And then my other question here is just kind of, Tony, in your prepared remarks, you mentioned the hirings planned for 2026. You kind of alluded to it a little bit in some of your earlier commentary. Just kind of looking for any specific niches, maybe you're looking to add how many people you're looking to hire in the upcoming year?

Yes. As I mentioned the area, I think one of the biggest areas of focus, when we look at hiring the people, it's augmenting some of the things we're doing already, like in the insurance space and in our wealth space, you should expect to see a lot more on the production side and the retention side. I think the -- one of the greatest areas of investments for us this year is going to be in the middle market space. That range of $75 million to $0.5 billion in client size, we think that is an area that we haven't really penetrated deeply yet, comes with all the attributes that we like, strong deposits, strong relationships. We're able to use our wealth group in those segments as well as our insurance. It meets not that our other clients don't, but this is an area that we think is very suitable for us in the scale that we're at. So there's going to be some good -- I wouldn't be surprised in there if you add another 3 to 5 additional complements in this year.

Obviously, all of that is timed in the expense guidance we've given, and we were paying -- we are very attentive to positive operating leverage. So it's not -- we're not going to race ahead of ourselves. Also, the other area that you could expect to see some growth, it is in our treasury management capabilities, particularly on the outbound deposit-only categories like deposit gathering functions. We want to deepen that investment as we move into -- deeper into '26. So great -- I mean, it's a great thing because we keep investing in our future and that it's exciting because we're having the growth, and we just want to make sure that we can continue to deliver the growth in '26 and '27. So hiring these productive individuals is going to be critical for us.

Okay. Got you. That's helpful. And then one last one for me on credit here. Just with the reserve has come down a fair amount over the course of the year. Curious what the potential is for maybe incremental reserve bleed here? Or is there just -- is there less give on that number here going forward?

Yes. It's largely a model-driven exercise at this point. The macroeconomic variables drive the provision requirements. That said, it feels like we're at a base here, but we've been very consistent in our approach and our methodology throughout the year, and it really has been warranted as you could see, with 7 basis points in net charge-offs over the year. Good strong credit metrics, 32 basis points in NPAs, I think it's 40 basis points NPLs to loans. So the credit quality and the strong underwriting and the low leverage lending we do have all supported the lower allowance coverage ratio.

Your last question comes from the line of Dave Storms of Stonegate Capital Partners.

Just wanted to start with -- you mentioned in the prepared remarks, a decrease in deposit costs. Just curious as to how you see the room to run here and if there's any specific initiatives that we should keep in mind as you continue to try to bring those costs down?

I'm sorry, Dave, I had trouble hearing that. Could you just try to speak a little louder, please?

Apologies, yes. Just around decrease in deposit costs. How much more room do you think there is to run here? And if there's any specific initiatives that we should keep an eye on as you're working through these costs?

So we are still repricing downward. We didn't get the full benefit of the last cut reflected, which is one of the reasons we wanted to bring to everybody's attention that the margin for the last month of the quarter, December was 3.05% on a core basis. So we'll see the full benefit of that I think every 25 basis point cut that we may get gives us another 2 to 3 basis points in the core margin in terms of improvement. Overall, I'd say our betas are going to continue to run in the 25% to 30% range relative to the Fed rate cuts.

That's great. And then just one more for me. You mentioned the core systems conversion. Is there anything more you can tell us about maybe the time line for that? And maybe any other tech investments or initiatives that you have on the horizon?

I think that's the major initiative on the near-term horizon. The conversion is scheduled for Labor Day weekend of 2026. It's the IBS platform of FIS. It's a very commercial-oriented, very proven system commercial-oriented. -- we'll meet the needs -- our needs as we move into the future from a digital perspective or product perspective, everything that we need. It's comparable to a lot of banks between $25 billion and $150 billion are on it. And we talk to them, and the system works very well for them. So I think it's something that we need to do to position our bank for the growth that we're experiencing in our future.

We expect to realize additional efficiencies in our processes as a result and enhancements that will help our product set and delivery to our customers.

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

Well, thank you, everyone, for your questions and for joining the call. We hope everyone had a good start to the new year, and we look forward to speaking with you very soon. Thank you very much.

This concludes today's conference call. You may now disconnect.

Thank you for standing by. And at this time, I would like to welcome everyone to today's Provident Financial Services Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Adriano Duarte, Head of Investor Relations. Adriano?

Thank you, Greg. Good afternoon, 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 evening'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 third quarter. Tony?

Thank you, Adriano, and welcome, everyone, to the Provident Financial Services earnings call. I'm happy to share Provident's third quarter results today, which demonstrated continued strong performance and advancement on several strategic initiatives.

Looking back over the past 12 months, we have made notable progress driving consistent and diversified growth, while also improving operational efficiency across our entire organization. Our hardworking team remains focused, contributing to our strong results by expanding our loan portfolio and pipeline broadening our deposit base and driving record revenues for the second consecutive quarter.

During the quarter, we reported net earnings of approximately $72 million or $0.55 per share, which is consistent with the previous quarter. Our annualized return on average assets was 1.16% and our adjusted return on average tangible equity was 16.01%, while we are pleased with the bottom line metrics, we are even more energized by the meaningful improvement in pretax free provision revenues during the third quarter, which grew to a record of nearly $109 million.

Our pretax pre-provision return on average assets of 1.76% has improved substantially compared to the 1.64% in the prior quarter and 1.48% for the same quarter last year. We believe this improvement serves as a good indicator that we have consistently enhanced the underlying profitability of our business, even as we have accelerated and diversified our loan growth.

One of our primary areas of strategic focus continues to be deposits. And during the quarter, our deposits increased $388 million or an annualized rate of 8%. It is worth noting that this growth was primarily driven by core deposits, which increased $291 million or 7.5% annualized. We continue to remain focused on efficiently funding our strong commercial loan growth and have made investments in people and capabilities to support quality deposit growth over the intermediate term.

Switching to loans. During the third quarter, our commercial loan -- our commercial lending team closed approximately $742 million in new loans, bringing our production year-to-date $2.1 billion. As a result, our commercial portfolio grew at an annualized rate of 5%, driven primarily by C&I production. Our strong capital formation, combined with the growth and diversification of our loan portfolio has reduced our CRE concentration ratio to 402%, if adjusted for the merger-related purchase accounting marks.

This compares favorably to the 408% in the prior quarter. Our loan pipeline grew appreciably to nearly $2.9 billion, with a weighted average interest rate of approximately 6.15% as of quarter end. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.7 billion. We are proud and encouraged by the loan team's performance and the strength of our pipeline as we approach the final stages of 2025.

While we have worked hard to grow and diversify our loan pipeline, our commitment to managing credit risk and generating top quartile risk-adjusted returns has remained unchanged. Nonperforming assets improved 3 basis points to 0.41%, which compares favorably to our peers. We also saw a decline in nonaccrual loans during the third quarter, while our net charge-offs were only $5.4 million.

Overall, we've remain very comfortable with our credit position and our underwriting standards, and we continue to look for the risk appropriate opportunities to grow our business. We believe it is worth reiterating that our exposure to rent-stabilized multifamily properties in New York City is modest at $174 million or less than 1% of total loans, all of which are performing.

Additionally, our credit exposure to non-depository financial institutions is limited to $292 million of mortgage warehouse loans. We are comfortable with the credit structure of these loans, including the controls we have in place to minimize risk. Furthermore, the customers we deal with our established and well-known counterparties to our banking.

Another area of strategic focus is growing noninterest income, which performed well during the third quarter. Provident Protection Plus continues to drive consistent growth in our noninterest income with revenues up 6.1% when compared to the same quarter last year. While normal seasonality drove a step down in revenues when compared to the linked quarter, we remain optimistic about the high level of business activity occurring on our insurance platform.

Beacon Trust saw revenue growth in the third quarter, increasing to $7.3 million. We are excited to announce that Beacon's new Chief Growth Officer, Annamaria Vitelli, joined us in September and will bring our demonstrated track record of driving strategic growth to expand Beacon's market presence and deepen client relationships. We also continue to invest in our SBA capabilities, which have been a steadier contributor to noninterest income.

In 2025, generating $512,000 gains on sale in the third quarter. Year-to-date, we have generated $1.8 million of SBA gains on sale, which is up from $451,000 in the comparable period last year. While our total assets have grown 3% year-to-date, our strong and consistent profitability continues to build Province capital position, which comfortably exceeds well capitalized levels.

As such, this morning, our Board of Directors approved a quarterly cash dividend of $0.24 per share payable on November '28. I'd like to conclude my remarks by emphasizing how proud we are to see the results of careful planning and hard work translate into continued strong performance in the third quarter.

None of these accomplishments would be possible without the dedication and commitment of our employees. We will continue to execute our key strategic initiatives aimed at sustaining growth in our core business, while simultaneously making the necessary investments on our platform to ensure Provident is well prepared for the future.

Now I'd like to turn it over to Tom for his comments on the financial performance. Tom?

Thank you, Tony, and good afternoon, everyone. As Tony noted, we reported net income of $72 million or $0.55 per share for the quarter, with a return on average assets of 1.16%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 16.01% for the quarter.

Pretax pre-provision earnings for the current quarter increased 9% over the trailing quarter to a record $109 million or an annualized 1.76% of average assets. Revenue increased to a record $222 million for the quarter, driven by record net interest income of $194 million and noninterest income of $27.4 million. Average earning assets increased by $163 million or an annualized 3% versus the trailing quarter, with the average yield on assets increasing 8 basis points to 5.76%.

Our reported net interest margin increased 7 basis points versus the trailing quarter to 3.43%, while our core net interest margin increased 1 basis point. The company maintains a largely neutral interest rate risk position, but anticipates future benefits of the core margin from recent Fed rate cuts and expected steepening of the yield curve. We currently project the NIM in the 3.38% to 3.45% range in the fourth quarter.

Our projections include another 25 basis point rate reduction in December of 2025. Period-end loan sales per investment increased $182 million or an annualized 4% for the quarter, driven by growth in mortgage warehouse and other commercial and multifamily loans, partially offset by reductions in construction and residential mortgage loans.

Total commercial loans grew by an annualized 5% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.7 billion. The pipeline rate of $6.15 is accretive relative to our current portfolio yield of 6.09%. Period-end deposits increased $388 million for the quarter or an annualized 8%, while average deposits increased $470 million or an annualized 10% versus the trailing quarter.

The average cost of total deposits increased 4 basis points to 2.14% this quarter, while the total cost of funds increased 1 basis point to 2.44%. Asset quality remained strong with nonperforming assets declining to 41 basis points of total assets. Net charge-offs were $5.4 million or an annualized 11 basis points of average loans this quarter, while year-to-date net charge-offs were just 6 basis points of average loans.

Current quarter charge-offs reflected the resolution of several nonperforming loans and the write-off of related specific reserves. Our provision for credit losses increased to $7 million for the quarter as a result of growth in loans and commitments and minor deterioration in our CECL economic forecast.

Our allowance coverage ratio was 97 basis points of loans at September 30. Noninterest income increased to $27.4 million this quarter, with solid performance realized from core banking fees, insurance and wealth management as well as gains on SBA loan sales. Noninterest expenses were well managed at $113 million with expenses to average assets totaling 1.83% and the efficiency ratio improving to 51% for the quarter.

Excluding the amortization of intangibles and the related average balance, these ratios were 1.73% and 46.72%, respectively. We project quarterly core operating expenses of approximately $113 million for the final quarter of 2025. Our sound financial performance supported earning asset growth and drove strong capital formation. Tangible book value per share increased $0.53 or 3.6% this quarter to $15.13 and our tangible common equity ratio improved to 8.22% from 8.03% last quarter.

That concludes our prepared remarks. We'd be happy to respond to questions.

[Operator Instructions] Our first question today comes from the line of Tim Switzer with KBW.

My first question is on the margin. I think you guys have -- I understand kind of the interest rate impacts on the floating rate book in your deposits there. But I think you guys also have quite a bit of loan back book repricing as well. Can you maybe update us on the quantity of loans that are fixed rate repricing over the next 12 months or so? And then what kind of uplift you would expect on the yields just at current rates?

I think, I can give it to you in pieces, Tim. The total repricing is just under $6 billion to $5.9 billion. Within that, the floating book is about $4.950 billion. So the balance is either longer-term adjustable repricing in the period or fixed rate.

Got you. And do you have kind of like what the blended yield is on that fixed rate and adjustable portion?

I do not. I know I mean the margin projection reflects all of that. So you can see the increase based on the expected new loan rates of 6.15% that's in the pipeline. But I don't have it at my fingertips the current portfolio rate for that piece of that segment.

Got you. Okay. And there's been some discussion on other conference calls about increasing loan competition on pricing. Could you maybe discuss what you've seen in your markets and then kind of dissect that between C&I and then the CRE market?

Sure. Yes. I think that's a fair statement that we've seen some increased competition in the lending market for sure, mostly on the CRE side with what the either the private space or insurance the agencies are doing. In fact, some of our -- we had about $348 million of payoffs this quarter. Some of that had to do with that. Some of it have to do with loans just selling. But on the C&I side, we're not seeing the same level of competition that we are on the CRE side. But I would say it's a fair statement to say overall, the competition has grown stronger.

However, I would like to end that by saying that our team is still building a pipeline that's kind of record high at $2.9 billion. So in our pull-through, I say we're closing about 65% of the things we touch, so those are good consistent metrics for us. We're careful about what the economy looks like. We're doing good loans to good sponsors under good terms, but we're aware that there's some pricing competition or structure competition out there.

Got it. That's helpful. And if I could get 1 more follow-up. Could you maybe add some color on how some of your new specialty verticals like ABL and health care are contributing to the loan growth?

I think as we might have mentioned on the written prepared comments was -- this quarter, the C&I reflected most of our growth, which includes health care, maybe our warehouse lending did very well for us this quarter. In fact, those were all double-digit growth in some of those categories, where our CRE was relatively stable because of some of the prepayments, unanticipated prepayment we saw was in that class.

So again, those are good. That's the areas that we are strategically focused on scaling up. We're doing it very well. We're very proud of that. We have the good teams to handle that. It's also driving a good result on our CRE concentration ratio, as I mentioned, so it's having all the strategic effects that we desire.

If CRE kicks up, I think, this quarter, while I said that loans grew 5% the effective production would have been somewhere around 7%, 7-plus-percent if the prepayments were not there in the CRE space. So I'm pretty proud of the productivity this bank has right now. And our focus will continue on those verticals, which we put in place strategically. We expect them to be high single double-digit growth because the scale of that book is not substantial, so that all the productivity is going to be substantial. And while CRE will run in that 5% space.

Tim, the other thing I could add, if it helps with the projected loan mix is the pipeline breakdown. Commercial real estate represents about 42% of the pipeline. The specialty lending category, which includes the ABL and health care, you were referring to is about 14% there's 5% in resi and consumer and the balance is the other commercial loan categories, middle market and other commercial lending.

And our next question comes from the line of Feddie Strickland with Hovde.

Good afternoon, everybody. Just wanted to touch on noninterest income, the guide seems to imply about a $1 million step down linked quarter. Is that just an expectation of lower loan prepayment fees, plus maybe some seasonality on the insurance?

Yes, you got it, Feddie. It's maybe a little conservatism in there as well. But the prepayment fees, again, subject to some volatility. They were about $1.7 million this quarter. So we scaled that back, but who knows what we'll see. Personally, I'd rather hold the loan and leave the fees out. But yes, that -- and the seasonality in the fourth quarter is not necessarily the strongest for insurance. We see well going into Q4 too. Q1 is where we see the pickup, right?

And I guess, along the same lines of noninterest income. Can you talk about the opportunity on the wealth side as we enter '26 and whether you're working to bring on additional talent there?

Well, absolutely. As I mentioned on the call, we've hired Anna Vitelli. She's the Chief Growth Officer. She's building -- she's charged with growing and service and retainage of -- in a way of extraordinary service in that space and deeply integrating it with the bank. So we think there's a lot of great opportunity.

So Anna will build out our needs, adding more sales and production staff and organizing ourself in a fashion that will give us the things that we're looking for. But certainly, these investments are aimed at 1, growing new AUM and deepening connections that we have within the organization already.

Got it. And just 1 more quick 1 for me on capital. Just hoping to get your updated thoughts on how do you think about capital and about deployment via dividends versus buybacks versus organic growth, while still managing the CRE concentration piece as well.

Yes. I think our first preference remains organic growth at profitable levels. And again, recognizing the strength of our pipeline, that's where our energy has been focused -- that said, we are at comfortable levels of capital there. We're close to $11.90, I think, on CET1 at the bank level. So there's opportunities for us there. We certainly think we're trading at an attractive price at this point.

With regard to dividend, we kind of like to get back to a 40%-ish payout ratio, somewhere in the 40% to 45% range. So I think that's when we look at that more carefully. The other thing is we're in the middle of budget season here, which is why we didn't give a lot of forward guidance. We want to wait until January to give everybody a full year update. But that will help inform our capital decisions as well as we get more confidence around our asset growth and capital formation projections.

And our next question comes from the line of Dave Storms with Stonegate.

I appreciate you taking my questions. Just wanted to start with some of the decrease in deposit costs and maybe get your thoughts on how much more room there might be to run here and what that looks like from a competitive landscape?

Decrease in deposit costs. Well, we saw growth in noninterest-bearing, which was helpful to us. The overall cost of funds was only up 1 basis point to 2.44% this quarter. So there was a little bit of shift in mix. While deposit costs were up it was still at an attractive rate in terms of funding advantage relative to the wholesale borrowings. So that's really what we try to manage, obviously, is the overall cost of funds.

That all said, we do have -- we had the Fed rate cut at the end of September, the 17th, I think it was -- and then this most recent 1 is yesterday, I guess. So we're going to see the benefit of that of both of those cuts in Q4. The September cut was effective on October 1, and the most recent cut will be effective November 1, in terms of beta overall, I think we conservatively model something in the 30% to 35% range on deposits.

And then just 1 more, if I could. It looks like your efficiency ratio is hovering right around that 50% mark. Curious as to how much of a push there is to get that under 50% and maybe what that would entail?

I don't think it's necessarily a push, but rather our desire to continue to make prudent investments and build for the future. So I think where we are is a really attractive level. If you look at a pure overhead management, the OpEx ratio at 183% and that's inclusive of some fairly significant intangible amortization is really quite well managed. So I don't know that there's a lot of room we're going to look to take down on that just because I think there's investments that we want to continue to make to support growth.

I would argue that we've been steadily making the requisite investments in our business to build out the platform for our future. The efficiency ratio, we will see that come down further by enhanced revenue opportunities. And then you might see a blip up with further investments.

And I know obviously, we'll get a positive operating leverage, and you'll see it move back down. And that's kind of the trend we've been watching, but I think Tom says -- it's in this area, it can go down another point, if we're building the revenue base and then represent factor in future investments.

Yes, Tony made a really good point. I was focused on the expense side, but I think the revenue opportunities are there. You saw 2 consecutive quarters of nice growth and record levels for us. We do project core margin expansion over the next several quarters of, say, in the 3 to 5 basis point range each quarter.

So and again, we talked about some of the investments that we hope to see returns on in the fee-based businesses over the course of the next year. A lot of room there.

Our next question comes from the line of Gregory Zingone with Piper Sandler.

Quick question. How frequently are you bumping into private credit firms nowadays?

I'm sorry, Greg, could you say that again? We have difficulty hearing you.

I asked how frequent are you bumping into private credit firms nowadays?

Yes. We know that's out there. We're not -- it's not really been a factor for us, at all. Most of the business we're doing is relational. So clients are not that reticent to go to private credit for 1 transaction knowing that the whole relationship is important to them and us. So again, we're very cognizant of it being out there and the scale of it. However, it has not been a factor in us building our pipeline or getting our deals closed.

Awesome. And at first glance, your average fee in wealth management of 70 bps seems kind of high. Have you felt any pressure on pricing recently?

I wouldn't say recently, it has actually come down. I can remember us being as high as 77 basis points probably 2 years ago or so. But it's been pretty stable, sorry...

I was going to ask on top of that, where are new relationships coming on today?

I would say similar levels because it has remained steady at 72 basis points for quite a few quarters now.

And then lastly for us, M&A is picking up in the industry, it seems like a pretty good time to ask you guys. What are you looking for in your next potential acquisitional target?

Well, I would actually answer the M&A question a little bit differently, right? So I think our primary focus here is on the organic growth strategies that we outlined. We're pretty excited about build-outs and our advancement at the middle market space, we think there's a huge opportunity for us to create shareholder value and 1 that we think is most relevant.

That being said, we're always evaluating opportunities that might be out there. I think we've proven that we have a great merger DNA, we can get stuff done. We have the right platform to do that. We'd love to see our currency trade at a place, where it's more reflective of what we're worth.

So we'll always evaluate opportunities from every direction, but it's a wonderful place to have the optionality, and we're creating that by having an organic growth and focusing there first.

All right. And our next question comes from the line of Stephen Moss with Raymond James.

Good. Maybe just starting on purchase accounting here. I realize it's probably elevated from the prepays this quarter. But curious as to how you guys are thinking about that going forward. And also on the subject of prepaid, just kind of curious, do you think those will continue to be elevated in the near term? Or do we -- from the fee income, kind of we're going to moderate down to more [indiscernible] levels?

I think the prepays, usually, if we look at past trends, the third quarter seemed to have a heightened pickup, which is the summer months. We expect that to normalize and maybe $150 million to $200 million range, I would say, is more normalized, but you always have in that number that I gave, there's a lot of businesses that sold as much as it wasn't a huge, huge number of refinancing elsewhere, probably $90 million of it refinanced elsewhere.

So there's always going to be activities, companies selling companies coming. We just have to have an organizational capacity to grow at a level to make up for that. But if I were to put a number on it, I would say $200 million, $150 million, $200 million is probably a good place to be.

And with regard to purchase accounting, Steve, I'd say our normal number runs about 40 to 45 basis points of the NIM. I would expect that to persist throughout the next 4 quarters.

Great. And then kind of on the theme of organic growth and hiring. I heard you guys' comments around the efficiency ratio. Just kind of curious how you guys are thinking about hiring for 2026. You've definitely made a number of investments over the last 12-plus months. Kind of curious if there's maybe another step-up in terms of bringing people over in the new year or just color around that?

Yes. I mean, so I think we have a pretty good visual to our strategic planning process of what our needs are to give us the productivity in future years, particularly in areas of focus. It is our expectation that we'll continue to invest. If you look at what insurance does, we hire roughly 10 to 12 new producers every year to keep pace with that. We're expecting that to happen in the Beacon space, our commercial platform continues to hire not only in new geographies, but in verticals that we're investing deeper in.

I would expect more investment in the middle market space for us next year. All of those things we have clarity of what the positive operating leverage will be derived from that. So it is part of our process in terms of forecasting and strategic planning that. We'll build all that out for you in the first quarter and you'll get a better clarity of the investment against the returns.

And it looks like there are no further questions at this time. So I'll now turn the call back over to Tony Labozzetta, for closing comments. Tony?

Great. Thanks everyone for your questions and for joining the call. We hope everyone has an enjoyable end of the year and a holiday season. We look forward to speaking with you again soon. Thank you.

Thanks, Tony. And again, this concludes today's conference call. You may now disconnect. Have a good day, everyone.

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services Second Quarter Earnings Call. [Operator Instructions]

And I would now like to turn the conference over to Adriano Duarte, Investor Relations Officer. You may begin.

Thank you, Abby. Good afternoon, everyone, and thank you for joining us for our second 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 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 our second quarter. Tony?

Thank you, Adriano, and welcome, everyone, to the Provident Financial Services Earnings Call. The Provident team delivered an impressive performance this quarter. Our team gained momentum with solid earning asset growth, improved margins and asset quality, record earnings and expansion of tangible book value.

During the quarter, we reported net earnings of $72 million or $0.55 per share. Our annualized return on average assets was 1.19%, and our adjusted return on average tangible equity was 16.79%. For the second quarter, pretax pre-provision return on average assets was 1.64%.

These core financial results improved from the trailing quarter and the same quarter last year, and we are confident in our ability to sustain this momentum throughout the remainder of 2025. We continue to build our capital position, which comfortably exceeds levels deemed to be well capitalized. For the quarter, our tangible book value per share grew $0.45 to $14.60 and our tangible common equity ratio expanded to 8.03%. As such, this morning, our Board of Directors approved a quarterly cash dividend of $0.24 per share, payable on August 29.

During the quarter, our deposits increased $260 million, on annualized growth rate of 5.6%. We continue to improve our average cost of total deposits which decreased to 2.1%.

During the second quarter, our commercial lending team closed approximately $764 million in new loans, bringing our production to a record $1.4 billion for the first half of the year. As a result, our commercial loan portfolio grew at an annualized rate of 8%.

This quarter's production consisted of 20% commercial real estate and 80% commercial and industrial loans. Our strong capital formation, combined with our production mix has reduced our CRE ratio to 444%. Adjusting for merger-related purchase accounting marks, the CRE ratio is actually 408%.

Notwithstanding the high level of loan closings this quarter our loan pipeline remains robust at approximately $2.6 billion, and the weighted average interest rate is stable at 6.3%. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.6 billion. We remain confident about the strength of our pipeline and our ability to achieve our commercial loan growth expectations for the rest of the year.

Our credit quality is strong relative to our peer group with a modest improvement in our nonperforming assets and a decline in delinquencies and classified loans.

Our net charge-offs decreased this quarter to just $1.2 million or 3 basis points of average loans. These numbers demonstrate our commitment to prudent underwriting and portfolio management standards.

Overall, Provident's fee-based businesses performed well this quarter. Provident Protection Plus maintained its strong performance with an 11.3% increase in revenue for the second quarter and its income was up 10.1% compared to the same period in 2024.

Given market conditions early in the quarter, Beacon Trust revenue declined 0.2% due to a decrease in average market value of assets under management. However, asset valuations have recovered and Beacon closed the quarter with $4.1 billion in AUM, which is consistent with the trailing quarter.

The Beacon team is focused on building AUM, and I am pleased to report that Beacon has hired a new Chief Growth Officer to further this objective with a projected start date late in the third quarter.

Overall, we are proud of our performance this quarter. We have a dynamic team and a solid foundation to grow our core businesses, expand profitability and create even more value for our stockholders and customers. Building on our strong results, we believe we will continue this momentum and achieve our desired goals for the remainder of 2025.

Now I will turn the call over to Tom for his comments on our financial performance. Tom?

Thank you, Tony, and good afternoon, everyone. As Tony noted, we reported net income of $72 million or $0.55 per share for the quarter with an ROA of 1.19%.

Adjusting for the amortization of intangibles, our return on average tangible equity was 16.79% for the quarter.

Pretax pre-provision earnings for the current quarter were $99.6 million or an annualized 1.64% of average assets.

Revenue increased to a record $214 million for the quarter driven by record net interest income of $187 million and noninterest income of $27 million.

Average earning assets increased by $383 million or an annualized 7% versus the trailing quarter with the average yield on assets increasing 5 basis points to 5.68%.

Our reported net interest margin increased 2 basis points versus the trailing quarter to 3.36% and while our core net interest margin remained stable.

We currently project the NIM in the 3.35% to 3.45% range for the remainder of 2025. Our projections include 25 basis point rate reductions in September and November.

Period-end loans held for investment increased $318 million or an annualized 6.8% for the quarter, driven by growth in commercial, multifamily and commercial real estate loans, partially offset by reductions in construction and residential mortgage loans.

C&I loans grew at an annualized 21% pace while total commercial loans grew by an annualized 8% for the quarter.

Our pull-through adjusted loan pipeline at quarter end was $1.6 billion. The pipeline rate of 6.3% is accretive relative to our current portfolio yield of 6.05%.

Period-end deposits increased $260 million for the quarter. However, average deposits decreased $278 million versus the trailing quarter. The average cost of total deposits decreased 2.10% this quarter.

Asset quality remained strong with nonperforming assets declining to 44 basis points of total assets. Net charge-offs were just $1.2 million or an annualized 3 basis points of average loans this quarter.

In addition, total delinquencies declined to 65 basis points of loans and criticized and classified loans fell to 2.97% of loans. This strong and stable asset quality, coupled with an improved economic forecast used in our CECL model drove a $2.9 million reserve release this quarter. This brought our allowance coverage ratio to 98 basis points of loans at June 30.

Noninterest income was steady at $27 million this quarter with solid performance realized from core banking fees, insurance and wealth management as well as gains on SBA loan sales.

Noninterest expenses were $114.6 million with annualized expenses to average assets totaling 1.89% and the efficiency ratio improving to 53.5% for the quarter. We reaffirm our previous guidance of quarterly core operating expenses of approximately $112 million to $115 million for 2025.

Our effective tax rate for the quarter was 29.7% and we currently expect our effective tax rate to approximate 29.5% for the remainder of 2025.

Our sound financial performance supported asset growth and drove strong capital formation. Tangible book value per share increased $0.45 or 3.2% to $14.60 and our tangible common equity ratio improved to 8.03% from 7.9% last quarter.

That concludes our prepared remarks. We would be happy to respond to questions.

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

First question I had for you, Tony, is on the Beacon business. I heard your comments about growth starting to ramp with some new people. I guess I was curious, is there any change in strategy? Or is it just simply you brought in some new people that will go out in market aggressively and grow the business? Or are you trying to kind of market to a different audience?

Great question. I really don't think that I would call it much of a strategy change. I think our focus has been growing the AUM. Beacon is a really strong platform. I think one of the things that we're looking to enhance is the sales and service, more the sales side, right?

I think we're trying to build a bigger force that could easily work with our business line partners on the other commercial, retail, treasury, insurance, so that we can penetrate not only our existing business, but we can also get new to bank or new to Beacon clients as well.

So it's a forward strategy with -- and also a focus on retention. And so integrating it better into our businesses is what we're trying to do. And I think the individual we hire for this role is going to be key to that initiative.

Okay. And then a couple of questions around provisioning. You mentioned in the release that part of the reason for the reserve release was improved sort of the economic forecast. I assume is that Moody's their assumptions changed?

That's correct, Mark. Moody's baseline and primarily in our case, the main driver in terms of macroeconomic variables is the commercial property price index that drove most of the release.

Okay. And then kind of related, I guess, I was curious, your bottom line ROA and ROE estimates kind of imply that provisioning will be pretty modest in the back half of the year. Am I thinking about it the right way? Because you've given really good guidance on most of the other items, and that's the one that kind of sticks out.

I think that's the case, Mark. If you look at asset quality, we saw some nice improvement in terms of criticized and classified, and you don't see it in the release, but the watch list credits have improved as well. And for good economic reasons, we saw improved lease-up in both the retail commercial real estate space as well as the multifamily space. So feeling pretty good about credit quality overall.

Barring any shift in market conditions or some global event, I think that's a good outlook.

Yes. And I know, Mark, even though you saw a small increase in dollars of NPLs, there's no -- virtually no loss content in the driver of the increase. There was 1 loan in excess of $10 million. It was really almost, I guess, a technical nonmaturity in the sense that there's some ownership concerns among the owners of that business as to the disposition of the property, but really strong valuation. So we're not concerned about losses there.

Okay. And then last question, Tony. Last quarter, I had asked you about sort of M&A and you said you're focused on organic growth, but open to M&A. However, your stock price wasn't -- didn't fully reflect the strength of the company, et cetera. Your stock is up maybe 10%, 12% since then. Do you feel like the currency gives you capacity to be able to seriously consider M&A at this point?

Well, Just -- I wasn't clear last time, I think we're always in a place where we have to evaluate our strategic options and we continue to do that. I think right now, our main focus is on organic growth, but we're not closing the door to M&A at all.

In fact, if there was right opportunity to have met the strategic things that I talked about last quarter came up, we would have to entertain, observe it and evaluate it to what it means for our shareholders as we go forward.

But I think the price is starting to reflect a little bit more of what we think Provident is, and I think there's still some more room that we can move there.

And our next question comes from the line of Steve Moss with Raymond James.

This is Thomas on for Steve. Just want to start it off with loans here. C&I growth was really strong. What's driving that right now is a more line utilization? Or is it new originations? And maybe what additional hiring opportunities are you seeing for C&I lenders these days?

Well, I would characterize our organizational capacity is where we want it right now. And additional hirings will come from the standpoint of expansion and what we're thinking about. I think that growth is because of the book. I think that growth -- not only the book but also Bill Fink being here, the team's focus on C&I.

We have very diverse products today that we didn't have 3 years ago. We have the ABL, health care lending, mortgage warehousing, SBA is ramping up. So we have all these businesses. They've all contributed nicely to our production this year -- this quarter, and our pipeline shows that they'll continue to contribute nicely.

But our focus is not away from CRE. I just want to be careful not to express that. We're growing our CRE book. We're doing it. It's just that for those other lines are moving at a much faster pace, and so we're pleased with that. They're bringing in some great deposits with it. We do have the capacity, but we'll just keep going when we need to, and we have a good plan on expansion, both from a capacity numbers and geographies. So I think I'm pretty pleased with the general direction of where we are with the Commercial Bank.

And I would agree with Tony, that it was primarily driven by origination, but we did see increased line usage over the last number of months. We call it normalization. We're traveling in a low territory for a long time, as I guess was much of the industry. We're back up around 45% line utilization. And I'd add also, in terms of the pipeline, Tony talked a little bit about the mix going forward. About 40% of the pull-through adjusted pipeline is in CRE, about 55% is in the commercial categories and about 5% consumer.

I just would like to round out that comment by saying, it's not accidental. I think part of our strategic objective was to kind of diversify our commercial book. So we're not CRE heavy. And as you can see by the reported number that if you adjust for the merger-related charge, we're at 408%. That's a pretty solid number. And it will continue to improve as we continue to build our other lines of business.

Especially when you consider we were at [475%] a year ago. Correct.

That's all great color. I really appreciate that. And if I can get 1 more in wealth management fees did feel a little light at 68 basis points of EOP AUM, was that driven by maybe lower average AUM from market volatility or maybe something else?

Yes. That is the case for the quarter. As Tony noted, I think, in his opening comments, the average balance was down. It impacted revenue for the quarter, but we did see market recovery, and we're back up actually a little bit ahead of where we were at the end of period at the first quarter. So client count has remained constant. We're actually at plus 3% on the client count. The AUM per client has gone up a little bit, so nice recovery by the end of the period.

And our next question comes from the line of Feddie Strickland with Hovde Group.

Just wanted to start on the expense guide. Last quarter, I think you mentioned you might be able to come in potentially at the lower end of the range. Do you still feel like maybe that's achievable and we could see the quarterly expense line can come down a little bit in the back half of the year?

I do, Feddie. So there was a little bit of unanticipated what I would consider nonrecurring costs in terms of some severance charges about $750,000 to $1 million, let's say, in nonrecurring there. That said, the back half of the year is usually when we take a closer look at some of our incentive accruals for the current period as we get greater visibility into where we might end the year.

So the various incentive programs throughout the different disciplines in the bank, we try to get a finer point on a little more precise, and that can affect the accruals either positively or negatively. So that's why we're giving a range of $112 million to $115 million.

Got it. Appreciate that. And just wanted to talk through the municipal deposit flow seasonality. Kind of what your expectations are there? Am I thinking about that correctly that maybe the increase in burger deposits is really to replace some of that outflow and then we could maybe see those broker deposits come back down as you maybe have some seasonal inflows in municipal deposits?

Yes. I think that's a fair statement. I would kind of expand on that to say we also allowed some high-yielding CDs that we had on our books from pre-merger during the liquidity times. And that was just a trade-off between the broker deposits or the consumer CDs, which were high yield, and we thought that was a good trade.

And it also made up the delta in funding needs because of the municipal outflows. So that was a combination of those 2 things. If you look at our municipal pipeline now, not only do we expect the flows which are strong in the third quarter, particularly this month, and we're starting to see that. But you also are now seeing the pipeline of municipal -- potential new municipal business is also there. So that should come along nicely as we achieve those wins.

You are correct, though, that the municipal deposits, the trough is the deepest in the second quarter historically.

And our next question comes from the line of Tim Switzer with KBW.

With you guys a little bit less interested in M&A right now, do you have like a target capital level you're trying to get to? And how does that play into your appetite for more share repurchases?

I don't think it's a significant strength. I kind of like around 11.25% for the CET1.

Okay. Okay. And sorry, this has already been asked. But for the NIM trajectory, you guys took up the high end of the guide a little bit. Can you talk about what's helping drive that? And how would Fed rate cuts impact your margin?

The balance sheet is fairly neutral. So I mean the 2 cuts of 25 basis points are built into that margin expectation. There's -- we've run a whole number of models and working off the most likely, though, but it looks like around 3.40% in Q3, maybe exiting as high as 3.45%, 3.47% even at the end of the year. But again, just exercise a little caution in that. And again, that's 2 rate cuts in September and November.

Great. Okay. That's good to hear. And then last one for me. The loan pipeline moved down just slightly lower, but you obviously had pretty good growth in Q2. Is there any like slowdown or uncertainty causing borrowers to be more cautious at all? Or everything still looks pretty good. People aren't too concerned about tariffs or anything like that?

Actually, that's one of the real bright spots. On the pipeline down, it did go down because of some, what I will call very strong loan closings in the quarter, right? And I think the key is we scrub our pipeline incredibly well. So the stuff that's in there, we feel pretty good about it. And so we also, in all the conversations with our verticals, I don't see any signs of anything slowing down immediately. The replenishment appears to be happening. We do expect to have a nice pull-through in the third quarter and continue to replenish it. And so again, I don't see anything right now that I'm concerned. I think it's a bright spot for us moving forward.

And our final question comes from the line of Manuel Navas with D.A. Davidson.

I appreciate the commentary on the NIM in the back half of the year. Is the main drivers there, the accretive new loan production with deposits kind of being more flat? Or could you see some deposit cost decline as well? I guess you do include 2 cuts, so that's part of it as well.

Yes. I would put more emphasis on the asset repricing though. You got about $6 billion of the existing back book repricing over the next 12 months, about $5.1 billion is floating. So as the rates move, we should see that benefit. And then the new loan production coming on at accretive levels as well. I would be cautious about taking too much credit even with the rate cut on the funding side just because the competitive environment, I think, is a little bit more challenged now. Deposits are a high commodity.

Yes. I would characterize -- I would add one dimension to that. I think certainly, there's a lot of accretive loan production. I think whether we're in the high end of the range or low end of the range, it's going to be dictated by the funding side. But I also want to preface us that while we make managerial decision, we're focusing a lot of our energy around the NII. So we'll be willing to give away 1 or 2 basis points of our NII can grow. So I just want to -- you guys to remember that for the next earnings call, that will be management decisions that we'll make to drive better earnings and that's part of the management game, right?

That's a really good point. And you saw some of that even on the investment portfolio side. I think I mentioned last quarter, I'd be very comfortable taking the investments back up to about 15% of assets. We're still a little bit under that now. But the leverage growth obviously gives you a little bit less spread, but good income with very little credit losses because we're buying high-quality treasuries and agency securities.

But we're feeling pretty good because some of the funding growth that we're seeing. And if that manifests along with the loan production, it should be well in the range of what Tom's saying.

I definitely sense the optimism on NII growth. Could you speak a little bit more to that competition you're seeing, just in some of that commentary? I mean that's also because there's more demand out there, but just -- could you just speak to that for a moment?

Yes. I think a lot of the competition we're seeing and Tom can jump in at any moment. On the consumer deposit side, we're seeing more of the stress, right, whether they're the deposit accounts moving into money markets or other banks are starting to get a little bit more competitive for the space, particularly with CD products. Our business deposits are stable and growing.

Just a fact point for everybody on this call, we're probably funding about 30% of our commercial product -- commercial funding is being done with business deposits. And that's a pretty good ratio. And so like I said, if we can have the municipals come back, we're not seeing a lot of stress there in terms of competition. We're seeing the competition more on the consumer side, not that the municipals don't have it, but the biggest level of competition is happening on the consumer deposits. Tom, would you like to add on that?

I think you covered it just to accentuate that it's not just banks, it's the availability of viable investment alternatives for folks as well and you can get a decent return.

And that concludes our question-and-answer session. I will now turn the conference back over to Mr. Tony Labozzetta for closing remarks.

Well, thank you, everyone, for your questions and joining the call. We hope everyone has an enjoyable summer and a great rest of the year. We look forward to speaking with you soon. Thank you very much.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.