Good morning. Thank you for attending today's Provident Financial Services, Inc Q3 earnings conference call. My name is Alexis, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Adriano M. Duarte, Investor Relations Officer of Provident Financial Services. You may proceed.
Thank you, Alexis. Good morning, and thank you for joining us for our Q3 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 Q3 results. Tony?
Thank you, Adriano, and good morning, everyone. In the Q3, Provident delivered a strong financial performance, once again producing record revenues, resulting in earnings of $0.58 per share. Our performance was driven in large part by the strength and stability of our funding base, growth in loans and an expanding net interest margin. The expanding net interest margin drove a 10.1% increase in net interest income over the trailing quarter. This resulted in an annualized return on average assets of 1.26%. A return on average tangible equity of 14.96%. Our solid earnings performance continues to positively impact our capital, which remains strong and comfortably exceeds well-capitalized levels. Our board of directors approved a quarterly cash dividend of $0.24 per share.
We remain committed to furthering our goal of delivering a best-in-class customer experience, which creates advocates for life and will help build our business for all of our business lines. Commercial lending continues to be our primary focus, and in the Q3, we closed approximately $533 million of new loans. Our line of credit utilization percentage decreased 3% from the Q2 to 33%, which is trailing our historical average of about 40%. In addition, prepayments increased approximately 17% to $265 million as compared to the Q2. Approximately 2/3 of the payoffs were due to the sale of the underlying collateral.
As a result of our production and the levels of prepayments, we grew our commercial loan portfolio, excluding PPP, at an annualized rate of 3.9% for the quarter and 10% for the first nine months of 2022. Pull-through in our commercial loan pipeline during the Q3 was as expected. We also replenished our gross pipeline, which remains strong at approximately $1.5 billion. Pull-through adjusted pipeline, including loans pending closing, is approximately $963 million. Our projected pipeline rate increased 112 basis points from the last quarter to 6.11%. Through the first nine months of 2022, we had record commercial loan production and growth despite the competitive market and rising interest rates.
We are also encouraged by the activity that replenished our pipeline, and we expect normal pull-through in the Q4, which should result in good commercial loan. However, we remain watchful of rising interest rates and the potential impact this may have industry-wide on pipeline pull-through. The stability of our core deposits is a valuable component of our franchise. During the quarter, the average balance of our core deposits increased $89 million or 3.6% annualized. Total cost of deposits for the quarter increased 15 basis points to 35 basis points. For the Q3, our deposit beta was 10%, while the rising rate cycle-to-date deposit beta was about 5%. The stability of our core deposits and relatively low betas, combined with the growth and improved yields on our earning assets, particularly commercial loans, helped drive a 30 basis point improvement in our net interest margin.
Given our moderately asset-sensitive balance sheet, our stable core deposits, and our prospective loan growth, we expect more improvement in the net interest margin in the near term. Our fee-based business lines are an essential component of our community banking model. Provident Protection Plus, formerly SB One Insurance, had a solid Q3 with a 19% increase in revenue and a 31% increase in operating profit as compared to the same quarter last year. The unfavorable conditions in the financial markets persisted in the Q3, and as a result, Beacon Trust experienced a decline in market value of assets under management and related fee income. Beacon Trust fee income decreased $239,000 or 3.4% as compared to the trailing quarter. As we move forward and organically build our business lines, we are conscious of the potential deteriorating market conditions.
Provident remains committed to its strong risk management culture. In September, we announced the merger of Lakeland Bancorp with Provident. We're excited about this partnership, which will form a powerhouse super community banking organization in the tri-state region. We begin planning the next steps with our new colleagues. The collective enthusiasm about the combination of the two organizations continues to grow. I would like to express a special thank you to the Provident team this quarter, not only for their commitment and dedication, but for remaining focused on producing strong financial results while working diligently on the prospective merger transaction. I also want to thank Tom Shara and the Lakeland Bank team for their professionalism and camaraderie during the merger negotiations. We look forward to growing our business lines and creating value for our employees, customers, communities, and shareholders.
With that, I'll 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 for the quarter was $43.4 million, or $0.58 per diluted share, compared with $39.2 million or $0.53 per share for the trailing quarter and $37.3 million or $0.49 per share for the Q3 of 2021. Current quarter results included $2.9 million of non-tax deductible charges related to the recently announced definitive merger agreement with Lakeland Bancorp. Including these merger-related charges, pre-tax, pre-provision earnings for the quarter was $73 million or an annualized 2.12% of average assets.
We again achieved record revenue this quarter, totaling $138 million on the strength of record net interest income of $109 million and an $8.6 million gain on the sale of a foreclosed multi-tenanted office building to a purchaser who will reposition the property to industrial use. Our net interest margin increased 30 basis points from the trailing quarter to 3.51%. Yield on earning assets improved by 47 basis points versus the trailing quarter as floating and adjustable rate loans repriced favorably and new loan originations reflected higher market rates. Meanwhile, increases in funding costs continued to lag the improvement in asset yields, with the average total cost of deposits increasing 15 basis points to 35 basis points.
This represents deposit betas of 10% for the current quarter and 5.3% for the rising rate cycle to date. The average cost of total interest-bearing liabilities increased 23 basis points from the trailing quarter to 0.54%. Pull-through adjusted loan pipeline at September 30 increased $138 million from the trailing quarter to $963 million, while the pipeline interest rate increased 112 basis points since last quarter to 6.11%. Including PPP loans, period-end commercial loan totals were increased $83 million or an annualized 3.9% versus June 30th. Net of runoff in residential and consumer loans, total loans excluding PPP loans grew $65 million or an annualized 2.6% for the quarter.
The allowance for credit losses on loans increased $9.6 million for the quarter as a result of an $8.4 million provision for credit losses on loans and $1.2 million of net recoveries. The increased provision in the current quarter was primarily attributable to deterioration in the economic forecast and a $2.4 million increase in specific reserves on impaired commercial loans. Non-accrual loans increased $19.1 million, including a single $18.2 million loan collateralized by an office building in Philadelphia, for which a $2.1 million specific reserve was established. While the deterioration in this credit has caused asset quality metrics to worsen slightly from the trailing quarter, non-performing loan and asset levels, total delinquencies, criticized and classified loans and related ratios remain strong and are improved versus the same quarter last year.
Non-performing assets were 45 basis points of total assets, up from 36 basis points at June 30. Including PPP loans, the allowance represented 0.88% of loans, up from 79 basis points of loans at the trailing quarter end. Non-interest income increased $7.5 million versus the trailing quarter, driven by an increase in gains on sales of REO, partially offset by decreases in BOLI income, wealth management income, loan prepayment fees, gains on loan sales, swap income, and gains on securities transactions. Including provisions for credit losses on commitments to extend credit and merger-related charges, operating expenses were an annualized 1.89% of average assets for the current quarter, compared with 1.92% in the trailing quarter and 1.85% for the Q3 of 2021.
The efficiency ratio was 47.11% for the Q3 of 2022, compared with 53.83% in the trailing quarter and 54.51% for the Q3 of 2021. Our effective tax rate increased to 27.7% versus 26.8% for the trailing quarter. However, excluding nondeductible merger-related charges, the effective tax rate was stable at 26.5%. That concludes our prepared remarks. We'd be happy to respond to questions.
If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Billy Young with RBC. You may proceed.
Hey, good morning, guys.
Good morning.
Good morning, Billy.
Just to comment on, I guess we'll start with loan growth. It sounds like that, you know, there's optimism here that growth will improve in the Q4 given the higher adjusted pipeline. I guess what gives you know, confidence that, you know, a more elevated prepayment activity this quarter, you know, won't continue over the next couple of quarters?
Sorry, what won't continue?
Elevated prepayments.
Yeah, I mean, Billy, the way how we characterize that is, you know, the rising rates don't really avail themselves to refinancing with other institutions. The only. We had about 2/3 of our prepayments were the sale of collateral that on the line of the loan. While we can't predict if a sale will take place, we expect prepayments to kind of drop in terms of. Especially on the refinance side, we expect them to drop substantially. Given the first part of your question, which was do we expect loan growth in the Q4? I do expect it to pick up.
One of the things that I should have noted or I can note now is the Q3 tends to be our lowest production quarter of the year. That's why I made the statement that the pull-through was as expected. In the Q4, we expect to see that pick up, and we're seeing that activity certainly in October to be able to substantiate the statement that I'm making. Yes, I feel good about the loan growth going into the Q4.
Great. Thank you for that. Just my next question. I guess I think you have previously stated, you know, you expected through the cycle deposit betas of around 23% and, you know, right now it's tracking at, you know, call it 10%. Do you still feel that 23% is a good number? You know, do you expect to, you know, maybe perhaps outperform that? Do you expect some acceleration as we go into year-end with betas?
I mean, I think it's a conservative number through the cycle, Bill. We do expect to see some acceleration. Obviously, for the industry as a whole, repricing activity has picked up, certainly a more competitive environment out there as liquidity kind of drains from the system. Toward that end, I guess I still think the 23% is a good number, but we have increased our modeled deposit betas for the remaining part of the cycle up to about 40%, weighted average beta, excluding CDs, including non-interest bearing. I think that's a conservative number. I don't know if we get there, but that would get us to 23% in fairly short order.
Great. Just to follow up there, do you have any perhaps updated thoughts on you know the deposit strategy or the deposit mix? Would there be you know any appetite to you know maybe add more CDs over time you know since they're pretty low levels today and the loan deposit ratio is moving up? Can you also remind us you know what your goals are on the longer-term loan to deposit ratio?
Yeah. Not a lot of interest in building a CD book significantly. I think we are a core-funded bank, and that's one of the real strong attributes and strengths of the company. So we're about 6.4% CDs right now. That said, we do have some promotional items out there to offer an alternative to our customers that still offer cheaper funding than on the wholesale side. You know, our deposit book is largely price insensitive. It's about 30% commercial demand. There's like 15%-17% in the municipal, which has a little bit more volatility, but it's not ongoing. It's sort of they reprice once and then they sit for a bit.
The balance is really core consumer accounts, which don't, again, don't exhibit a lot of price sensitivity for us. So I think we have the appropriate alternatives available, but we should be able to continue to maintain lower than peer deposit betas going forward. In terms of loans to deposit ratio, we have good, strong liquidity available to us off balance sheet, plenty of borrowing capacity. We maintain a level of on-balance sheet liquidity that's satisfactory to our regulators. So I mean, I think probably, you know, getting to the 100, 105 would be okay. If you think back to the past, we've been as high as 113, 115. It all depends on how much borrowing capacity exists outside to give us a comfort level on overall liquidity.
Right now, we've stress tested our liquidity metrics and we're quite comfortable where we are.
Great. Thank you for taking my questions, guys.
Thank you, Billy.
Thank you.
Thank you, Mr. Young. The next question comes from the line of Mark Fitzgibbon with Piper Sandler. You may proceed.
Hey, guys. Good morning. Tom, I wondered if you could share with us your thoughts on the outlook for expenses.
We are in the budget process, so I'd certainly be able to give you more color on 2023 as we proceed through that. For the Q4, I think we stay roughly where we were in the Q3 between $64 million and $65 million, exclusive of whatever the provision for off-balance sheet commitments requires.
Okay, great. Secondly, any color on the uptick in non-accruals in the commercial real estate book? Is that one credit, several credits? Anything unique there?
Yes. I'll start and then Tom will sort of jump in. I think we had the one credit that Tom mentioned. You know, it's often said that it appears to be a one-off, but in this case it truly appears to be a one-off. It's from the sense that, you know, our team has done some deeper analysis on related type assets, and at this stage we see no indication that there's any other deterioration in that sector. Albeit, you know, we still pay attention. You want to add to that?
Yeah. Again, Mark, that was an office building that's experienced some vacancy in a western Philadelphia suburb. We have been monitoring the office portfolio as one that's, you know, an area where we might see some stress as an industry. Total is about $544 million exclusive of that $18 million credit we referred to. You know, $560 million roughly all in. We've gone through an extensive analysis, and we continue to monitor the portfolio in terms of outstanding balances, medical, non-medical, single tenant, multi-tenant, rollover risk, upcoming maturities. We've been pretty thorough in our evaluation, and we're not seeing anything of immediate concern. Nothing that indicates any kind of systemic weakening in the portfolio.
True. The one thing I would add to that, this is an existing customer that we also have other business with, and they just happen to lose a tenant. It's really a matter of whether we can get that building repurposed or re-tenanted. We're working in tandem to get to a good resolution.
Okay. Great. Could you share with us what assets under management were and net flows this quarter?
Yes. Assets under management fell to about $3.2 million-$3.3 million this quarter, unfortunately, as a result of market conditions. The average AUM was $3.5 million. That's down from $3.8 million in the trailing quarter. We did lose a couple of clients on a net basis, about 10 clients, so that's a little bit of concern. Overall up from last year by 24 clients. AUM is still about $3.2 million. Net margin on the business is about 26.5%.
The 10 clients that left, what was the rough assets associated with that? I can circle back to you, Tom, if you don't know. Okay. No problem.
Funding conditions were the overall client one.
Okay. Great. Lastly, on the provision, I know a lot of moving parts, and it'll depend on loan growth, but how should we be thinking about the provision for the next quarter or two?
Largely dependent on the economic outlook. I don't think. As I said, I don't think we've seen anything significant in terms of deterioration. In fact, our criticized and classified levels are the best they've been in some time. It's only about 2.48% of total loans. So it really comes down to the forecast. I think Moody's played a little bit of catch up this quarter. I know they've deteriorated a little bit in October from September, but I don't think it's going to be the same pace of deterioration next quarter versus this quarter as it was in September versus June. I expect that that'll moderate a little bit, but I would still say provisions, if I had to guess, you know, maybe $3 million-$5 million.
Great. Thank you.
Thank you, Mr. Fitzgibbon. The next question comes from the line of Michael Perito with KBW. You may proceed.
Hey. Good morning, guys. Thanks for taking my questions.
Mike, how are you?
I'm doing well. You know, Giants are 6-1, right? I wanted to follow up on the prior question around fees. I mean, with the wealth management run rate probably a step lower here. I mean, I think, Tom, you had kind of talked about a $20 million-$21 million run rate prior. I mean, it sounds like between that and you know, maybe there's room for that to drift a smidge lower. Is that fair, at least near term here?
Maybe a little bit. The insurance business continues to run strong and the core banking fees have all been consistent in growing. You know, I think we're holding our own despite the reduction in the value on the assets under management. Yeah, maybe $1 million less near term.
Okay. Tony, you know, I appreciate all the color on kind of pipeline and growth expectations and are you seeing any pockets, not necessarily like credit deterioration, but just pockets of customers or any particular areas or asset classes where you're starting to see some commercial customers maybe think a bit more conservatively about their growth or debt, you know, taking on more debt or anything of that sort start to materialize yet, or not really?
I mean, I would say the construction sector, I mean, if you look at that, you know, I think that has our clients thinking about, you know, the cost of the projects and the viability. I would say because of rising interest rates and the rise in inflationary pressures, you know, I personally have spoken to some clients on certain projects that, you know, maybe they're pausing on only because of the viability of the returns that they can get. But in terms of our C&I space, of which I should note that this quarter we had a pretty impressive growth, you know, in the C&I space. It was approximately 34% of our production was in C&I. That seems to be humming along.
I mean, obviously, everybody's got cautions on what the economic outlook looks like and the effects of interest rate rises, but the activity is still there.
Helpful. Just kind of another big picture question. I mean, I think part of the optimism for you guys around growth historically has been a lot of the dislocation in your market stemming from other M&A transactions. Obviously you guys now have your own M&A transaction that will hopefully close next year. Just wondering if you guys are starting to put any kind of blueprint around how to try to keep some of the organic momentum that I imagine you and Lakeland were both experiencing arising from some of this other disruption, you know, while you also integrate your own transaction. I mean, it's kind of a qualitative question, but just curious if there's any thoughts you're willing to provide there.
Oh, absolutely. That's something we talk about often. I mean, it really all begins with the cultural integration and the employee experience. I mean, the employees are the synapse to the customer, right? Usually when you disrupt that, the customer loses the connectivity. I know we like to say they run the company, but those relationships are critically important. I think the teams are doing an extraordinary job in the dynamic and how we're communicating together in the beginning of this process and how we're sharing ideas. We have a very like-minded approach to credit and the way we manage our customer relationships. I think that there should be some of this new disruptive way. I think we can only tighten and make things better.
I'm really expecting that this might be a merger that has as minimal disruption as possible during the combination. It's only on us to drop the ball, but I think the teams will do a good job.
Great. That's it for me. Thank you guys for taking my questions. Have a good weekend.
Thank you.
Thank you, Mr. Perito. Again, if you would like to ask a question, please press star followed by one. There are currently no further questions registered in queue. I will now pass the line back to the management team for closing remarks.
Thank you. Thanks everyone for joining us on the call and asking good questions. We look forward to a solid Q4 and be safe and have a great day.
That concludes the Provident Financial Services, Inc Q3 earnings conference call. Thank you for your participation. You may now disconnect your lines.