Good morning and welcome to the Provident Financial Services Inc. Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Leonard Gleason Investor Relations Officer. Please go ahead.

Thank you, Carrie. Good morning ladies and gentlemen. Thank you for joining us for our Second Quarter Earnings Call. Today's presenters are; Chris Martin, Chairman President and CEO; and Tom Lyons, Senior Executive Vice President and Chief Financial Officer. 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 this morning's earnings release which has been posted to the Investor Relations page on our website provident.bank. Now I'm pleased to introduce Chris Martin who will offer his perspective on our second quarter. Chris?

Thanks Len and good morning everyone. As we begin the summary of our second quarter, it is our sincere hope that you and yours are safe and healthy. Second quarter earnings were impacted by COVID and CECL as the provision for loan losses and expenditures related to providing a safe environment for our customers employees took priority, as we phased our staff-back-to-office process and afforded our customers full branch access. On a positive yet related note, we had expenses for the planned acquisition of SB One of $683000 during the quarter and look to complete the closing tomorrow. We remain comfortable with our capital structure and balance sheet strength. Our capital ratios continue to be strong given our business mix and risk management processes. In view of our capital and pretax pre-provision earnings expectations the Board approved a $0.23 cash dividend. Net income for the quarter was $14.3 million or $0.22 per share. Net interest margin decreased 23 basis points linked quarter to 2.97% as the impact of lower rates and higher cash balances was partially offset by lower deposit costs and above-average growth in noninterest-bearing deposits. The impact of PPP loans on our margin was 2 basis points. And we continue to experience a reduction in our all-in cost of deposits to 41 basis points for the quarter ended June 30 2020 versus 62 basis points from the trailing quarter. Borrowing costs also improved to 1.31% from 1.80% in the trailing quarter. The decrease in earning asset yields of 45 basis points linked quarter reflects falling benchmark interest rates on adjustable rate loans accompanied by modest growth in new originations at lower rates and the $403 million in PPP loans. And of the PPP loans we are assuming that approximately 75% to 80% will be forgiven once the government…

Thank you Chris and good morning everyone. As Chris noted our reported net income was $14.3 million or $0.22 per diluted share compared to $24.4 million or $0.38 per diluted share for the second quarter of 2019 and $14.9 million or $0.23 per diluted share in the trailing quarter. Earnings for the current quarter were again adversely impacted by elevated provisions for credit losses under the CECL standard and the recessionary economic forecast attributable to the COVID-19 pandemic. In addition, we incurred costs specific to our COVID response including supplemental pay for customer-facing employees PPE equipment and security costs and costs related to the upcoming merger with SB One. Core pretax pre-provision earnings were $35.9 million excluding $16.2 million in provisions for credit losses on loans and commitments to extend credit $1 million of COVID costs and $683,000 of professional fees related to the SB One merger. This compares with $36.4 million in the trailing quarter excluding provisions for credit losses and merger-related charges and $42.7 million for the second quarter of 2019. Our net interest margin contracted 23 basis points versus the trailing quarter and 45 basis points versus the same period last year. As declining market interest rates cash collateral pledged against that and money swaps, excess liquidity and PPP loans all produced lower earning asset yields. To combat margin compression, we continue to reprice deposit accounts downward. This deposit rate management coupled with a continued emphasis on attracting noninterest-bearing deposits resulted in a 21 basis point decrease in the total cost of deposits this quarter to 41 basis points. Noninterest-bearing deposits averaged $1.8 billion or 25% of the total average deposits for the quarter. This was an increase from $1.5 billion in the trailing quarter with a sizable portion of that growth attributable to PPP and stimulus…

[Operator Instructions] First question will come from Mark Fitzgibbon of Piper Sandler.

It's John LaViola on for Mark this morning. Good morning gentlemen.

Good morning.

Wondered if we could just start by potentially giving us an update on asset flows in your wealth management business? And just remind us what AUM was as of March 31 and then as of the end of the most recent quarter?

Sure John. AUM at March 31 was $2.8 billion and at the end of June $3.2 billion. So we've recovered. But on an average basis for the quarter we're down about $100 million $3.2 billion to the average in Q1 versus -- I guess $3.2 billion to the average in Q1 versus $3.1 million in Q2.

Got it. Got it. And then the pipeline does look strong down just a touch quarter-over-quarter to $1.3 billion. How much would you expect to close in 3Q? I think you normally are looking at a 50%-ish pull through rate.

Yes. 58% is the expected pull-through rate at a -- yes the rate of about 3.43.

3.4. Okay, fantastic. And I appreciate the initial color on the margin, but I was hoping we could maybe dig a little bit deeper on the outlook specifically for the back half of the year. Given not only the closing of SB One tomorrow but also the blend of PPP fees through NII there's just a lot of moving parts, if you could provide any clarity on that, that would be great?

Sure. So inclusive of the fee income I think PPP is about $325 million. I believe that was discussed in the earnings release too. So that's assuming the regular accretion. If you're going to take the -- accelerate the forgiveness and book more in Q3 and Q4 which is the expectation, I think about 75% is what we're projecting will be paid this year. Obviously you see the bump on that. So the total fee income was $11.5 million collected. And we recorded -- about 2.5 months' worth of that was accreted into income, so about $480,000 a month for 2.5 months in Q2.

Okay. Okay great. And then I guess just one last one on credit. With the reserves as you mentioned now around 1.17% of total loans ex-PPP, do you feel comfortable with this moving forward? Or do you think maybe it could be conservative to build this a little bit higher over time? I know it's subject to so many different moving parts but...

It's largely model-driven at this point. I mean there's a little bit of flexibility in the qualitative factor assessment. And that's where we're trying to account for institution-specific things or things that you think might be outliers in the model depending on what's happened in the world versus the last baseline forecast. But we're going to adhere to the process. I'm comfortable with where we are. I think it's the appropriate reserve level. I don't see a huge build unless -- it so much depends on the pandemic. We saw some ugly numbers as expected on GDP. Employment numbers are looking a little bit weak. So we'll have to see what comes.

Yes, this is Chris. I think on the deferral, it's going to be the second wave of this to say, how much of this is part of the pandemic and how much of the businesses are going to continue to struggle obviously opening up the economy in New Jersey. We've been holding back a little bit for our own protection. Pennsylvania is the same. So I think the third quarter we'll start to see, who's going to be surviving and who's going to be struggling and that will probably add to the qualitative factors that we'll be looking at between Q3 and Q4.

We had some encouraging discussions and some good news in terms of the number of folks that have already returned to a regular payment status. But so much dependent on whether or not we remain in an open position to continue to do that.

Great. Thank you, gentlemen. That's all I had.

Thank you. Okay.

The next question comes from Erik Zwick of Boenning & Scattergood.

Good morning guys.

Good morning.

With the SB One transaction scheduled to close tomorrow, are there any updates you can share on the loan mark and then CECL assumptions you plan to record relative to the original expectations?

Unfortunately, Erik, we're still in a lot of the throes of that and really aren't prepared to discuss any of those assumptions at this point.

Okay. And then given that SB One hasn't released 2Q results at this point. And I'm assuming like most other banks they've likely seen a buildup of liquidity during the quarter. Curious can you just provide any expectations for what the average earning assets in 3Q will look like kind of including the two-month contribution from SB One?

I think when you look at the -- we're talking about earning asset returns slight…

Levels.

Yes, levels, as they…

The balance of average earning assets.

Yes. I think when you look at where they were for the first quarter and second quarter, I don't see a dramatic increase. We're looking at maybe about -- and commercial loan growth around 6.7%, 6.9% annualized. Their portfolio has held up fairly well. Prepayments have been not really that extreme. So we're looking forward to be kind of contiguous to what we are.

Okay. Thanks for the color there. And then turning to the deferrals and I'm curious about the $130 million in hotels. Can you provide a mix of those hotels in terms of use kind of business versus leisure? And then any updates you have on current occupancy rates?

Well, I think of the loans that we have that are certainly not levered in the way of loan-to-value. Certainly the RevPAR is off on those. There are several -- we have a few hotels right in the Newark airport area that have struggled, because obviously business travel is down. We hope that that will improve. But with our -- the Governor shutting down most of the areas that you can travel to that will hold those off a little bit. They've been on the books for -- one of them is right across from the hotel has been on the books a long, long time. So we think that they'll get through this. It will just be a longer time frame to recover.

It's really a mix of business and leisure portfolio. And I'd say, occupancies are averaging in the 30% to 50% range again pretty dispersed.

A pretty even mix between business and leisure then Tom?

Yes. Leisure, yes.

Okay. Great. And then just kind of last one for me. Curious if you can talk about your strategy for dealing with the loans that at the end of the second deferment period still may need some sort of accommodation and how you're thinking about the treatment in terms of non-accrual or TDR accounting? And I guess ultimately what that might imply for risk rating changes and the calculations for the loan loss provisions?

So we've been risk rating loans appropriately from a level of maintaining scrutiny internally, but as it affects the risk rating or the allowance calculation those are really captured in the economic forecast deterioration until the point when they might become impaired and they get pulled out with that individually. We are looking at the pool of second deferrals and trying to make some sense from there. I would think might go to a potential TDR meaning that as you indicated they might not be able to come back to a normalized status at the end of the deferral period. Best guess maybe $132 million that would be subject to some kind of TDR and longer-term resolution.

Okay. Just to make sure I understood that correctly. It seems like any potential risk rating migration you've accounted for already in the economic outlook. So, even as we move into late 3Q and 4Q, you may not need big adjustments to the provision for some of those loans. Is that the right way to interpret that?

That's the expectation. CECL works the way it's supposed to. That's the expectation. I guess that will be back-tested further if those loans become impaired and they get individually evaluated for impairment.

Great. Thanks for taking my questions.

Thank you.

Thank you.

The next question is from Russell Gunther of D.A. Davidson.

Hey, good morning guys.

Good morning.

Good morning.

Just a quick follow-up on the deferral question. The 5% give or take kind of pro forma number. Do you have a sense for what that could shake out when we fold in the SB One deal kind of pro forma percentage deferrals to the total loans?

I'm just looking at again on official conversations in the way of they had in the first quarter or first round of we'll call it a pandemic assistant program to deferrals about -- hit about 20% of the portfolio. We're looking at removing of those about 12%. And the second go around we're looking at only about 2% in a second deferral. At this stage there's still some that are in -- within the first deferral that they still have to evaluate. So the numbers have come down dramatically from where they were and we were also.

Okay. That's great Chris. And then with the deal closed anything you can share in terms of -- I heard you loud and clear that you expect to get all the cost saves recognized. But just remind us in terms of the timing of when you'd expect that recognition? And then any thoughts around what a good pro forma expense run rate would be when those are fully recognized?

Again, I think with the cost saves -- we estimated 30% cost saves though we will exceed that. We're very comfortable. I think it was 80% of that and the balance in the following year. And that's with both companies. As we look at it it's not just SB One it's also ours as we look at putting two good companies together. And I think we have evaluated that and very comfortable where we are. And the deal cost the same thing coming in slightly under what we thought. So, that's -- those are positives going forward.

If you remember that the deal book I mean Russell is about $13.5 million expected plus saves of SB One space and they run at about $3.8 million a month as a run rate for their expenses. So, 30% off of that.

Great. Thank you both. That's it for me.

Okay. Thank you.

The next question is from Steven Duong of RBC Capital Markets.

Hey good morning guys.

Good morning.

Can you guys just go over just like the economic activity that you're seeing with reopening, how materially have things improved in the past couple of months?

Well, I think first and foremost, a lot of our clients we have when you look at retail exposure, a lot of them are anchored by grocery stores or essential businesses such as Walmarts and the pharmacies. Yes, Home Depots and Lowe's. So, the anchors have been supporting some of this -- the other parts of those centers we don't do large box. That said restaurants if they can do outdoor dining, I think everybody is getting that model in line. It's difficult to get the saturation and the number of customers you used to get, but you're seeing that doing better. I don't think it's kind of see of everything else. So, hotels I think we talk about that being difficult if nobody is traveling everybody's in staying in place. That's not going to help if we can't open up the other areas of the United States to flowing economy. The other side would be kind of the gyms, fitness, and wellness areas have been closed by the Governor. And until that opens up those businesses will still struggle and we hope that they're able to come back. Those are the question marks that I have. I don't know if Tom has anything else in that regard.

I think you covered it Chris. Thanks.

Great. And just any idea on latest rent collection numbers from your borrowers?

I don't have that number at all. I'm just trying to -- we're just checking a couple of things real quick. Yes, for that one Steve, we'll have to get back to you on that one.

Sure, sure. No problem. And just the BOLI picked up this quarter, should we expect it to kind of just track back down to where it was in the prior quarter?

Yes. That BOLI event there was one -- somebody who passed that came into the process. I think it was doing social security searches they found out that someone who had been not with the bank for a long period of time they had passed. So, that came in this quarter. So, BOLI will go back to normal. And hopefully nobody is passing it in.

I'm sorry on the prior question; I was able to get a little information. They're running about 90% in terms of collections on industrial and multifamily.

Okay, great. That's good to hear. And then just last one for me. If we were to -- going forward, I guess strip out the PPP impact, where do you think loan yields would kind of hover around?

So, again, I guess the quick way to do that was -- PPP was about $400 million for the quarter let's say maybe $330 million on average perhaps kind of at a yield of about $235 million.

$235 million, great. All right. Appreciate the color. Thank you.

Thank you.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Martin for any closing remarks.

Thank you very much. And as we've been experiencing any economic recovery will not be smooth regardless of the political outcomes in November. Much of the economy is partially closed or beginning to open with supply chain issues continuing. The pace and level of restrictions imposed by our political leaders at times seems out of touch. But many industries will take years to recover and sadly some will never make it. But we stand ready to assist our clients in any manner that promotes growth yet with safety for you our stockholders and we appreciate your attention. Stay well and stay safe. Thank you.

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.