Good morning and welcome to the Provident Financial Services Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Len Gleason, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Phil. Good morning, ladies and gentlemen, and thank you for joining us today. The presenters for our second quarter earnings call are Chris Martin, Chairman, President and CEO; and Tom Lyons, Executive Vice President and Chief Financial Officer. Before beginning a 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 can be found in the text of this morning's earnings release, which has been posted to the Investor Relations page on our website provident.bank. Now I am pleased to introduce Chris Martin who will offer his perspective on our second quarter's financial results. Chris?

Thank you, Len, and good morning, everyone. Solid earnings performance continued in the second quarter with record levels of revenue, net interest income, net income and earnings per share. Our return on average assets for the quarter was 1.03% and return on average tangible equity was 11.33%. This was accomplished despite a lack of material loan growth as prepayments of larger credits, partially offset new loan originations. Payoffs totaled nearly $213 million year-to-date and some clients have sold properties or businesses to recognize gains. The loan pipeline remains strong however at over $1.3 billion with C&I and CRE are leading the way and the committed rates on new loan production exceed the current portfolio yields. Generally speaking, any fallout we've experienced in the pipeline has been to either the incumbent bank or to competitors who make overly aggressive loan pricing or credit structure offers. We continue to be selective in the credits we pursue and as for the balance of 2017, we still anticipate low single-digit loan growth with corresponding deposit growth. Average deposits increased slightly during the quarter and we have thus far been able to maintain stable deposit rates, although, we have been hearing from selected larger clients who see the Fed tightening as an opportunity to negotiate better returns. There are deposits specials being offered by some of our competitors who appear to be addressing high loan to deposit ratios and we continue to model the market and will depend our market share as necessary. Our core deposit level remains at 90% at June 30, 2017 and our all-in cost deposits was consistent with the trailing quarter at 28 basis points just 3 basis points higher than the loan set in 2015. As always, we will continue to rationalize our branch network, back office staffing and operations…

Thank you, Chris, and good morning, everyone. As Chris noted, our net income for the second quarter was a record $24.4 million compared to $23.5 million for the trailing quarter. Earnings per share were $0.38 compared with $0.37 for the trailing quarter. This was a $3 million or $0.04 per share increase compared to the second quarter of 2016. Revenues also set a record as net interest income reached a new quarterly high of $69 million. While loan growth was subdued in large part due to accelerated loan payoffs, our net interest margin expanded 6 basis points versus the trailing quarter to 3.17%. The margin benefited from stable funding costs, stable repricing of variable rate assets and hiring new loan and investment origination rates. Looking ahead, the loan pipeline remains strong and the pipeline rate has increased further continuing to exceed our loan portfolio rate at 4.32%. We anticipate modest additional expansion to the net interest margin throughout 2017. We provided $1.7 million for loan losses this quarter and increased from $1.5 million in the prior quarter. Asset quality metrics improved further versus the trailing quarter with non-accruing loans decreasing $1.6 million to $38.9 million or 0.55% of total loans. The allowance for loan losses to total loans was unchanged in the trailing quarter to 89 basis points at June 30. Net charge-offs decreased slightly to $1 million on annualized 6 basis points of average loans. Non-interest income was $2.4 million greater than in the trailing quarter as loan prepayment fees were $1.2 million higher, income on bank-owned life insurance including debt benefits was $1.1 million higher, and wealth management income including tax preparation fees was $296,000 higher than in the trailing quarter. These items were partially offset by reduced income on loan level swaps. Non-interest expense increased by $1.2 million versus the trailing quarter to $46.1 million as increase is attributable to the stock-based portion of annual Directors' compensation and REO write-down and legal costs more than offset seasonal rate reductions in occupancy expense and payroll taxes. Expense management remains strong however, with the efficiency ratio of 56.44% and annualized non-interest expenses to average assets at 1.99% for the quarter. Income tax expense increased $2.1 million from the trailing quarter to $10.5 million and our effective tax rate increased to 30% from 26.3%. As a change in accounting guidance related to the recognition of benefits from share-based transactions reduced our income tax expense by $1.2 million in the trailing quarter. We currently project an effective tax rate of approximately 30% for the remainder of 2017. And that concludes our prepared remarks. We would be happy to respond to questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Fitzgibbon with Sandler O'Neill.

Hey guys, good morning.

Good morning.

First question I had is on the C&I pipeline. First, it looks like your pipeline was strong, any particular industries that are driving this? And also it looks like historically that the C&I pipeline has been strong, but the pull through hasn't been as strong, I wonder why that is?

Well, Tom will give you some detail on the pipeline Mark. But I certainly would think that we are seeing in that space that the incumbent comes back and kind of lowballs the idea, they don't want to lose that. So we go down the path and we're in term sheets we agree and then all the sudden, there is an aggressive approach to keep the business. So sometimes we miss out on those. So we go down the path that process and then all the sudden it doesn't come through. And then - that's why we have to keep the pipeline very full, because there is that runoff at the end of the day. Tom, maybe those pipeline details.

Chris, just in clarify though to get into the pipeline, what's the determination that gets - made a term sheet is created?

Pretty much we got a term sheet. We have an indication that they are interested and we are going down the pipeline. The process it is not just a registered whole. There is definitely a paperwork and information being gathered and put together and some of that is also all the way through the process of being underwritten and then closed.

Yes, so Mark in the broad pipeline of the $1.3 billion, right that's the gross pipeline subject to pull through. We anticipate about 56% pull through of that total pipeline. Within that $251 million is approved the weight in closing, you got about $1 billion in work in process. Part of the slowness in the pickup and outstanding, there is a large piece of the leading - more currently used in the construction arena. So while you have loan originations, you don't see funding on day-one. And as Chris mentioned, some of the competitive pressures as you working through the work in process is sometime the season fallout. In addition, we've been doing less in the multi-family space for some time - some period of time now as we've gotten more discerning as supply as started to exceed the management opinion. So those are the reasons why you see some limitations in growth.

And Tom, what would you guess the average rate on the pipeline is both the CRE and C&I pipelines?

Overall we had a 4.32% Mark, which is up from last quarter. Last quarter, we finished with 4.18% and our actual loan rates were 4.26%. So even though I was concerned about where we're going to close those loans because of the volatility in the seven and 10 years space. We actually did well for the quarter, which is why we saw 6 basis points to margin expansion.

And the other thing Mark that we are seeing is people are extending their rate lots out of the 90 and even sometimes further to keep the business in place.

Okay. And then could you share with us what AUM was at Beacon this quarter?

$2.3 billion and it's pretty flat.

Okay. And then lastly, as you creep closer to the $10 billion threshold, can you kind of update us what's left in terms of preparing for that in terms of costs and procedures?

Sure. Preparation cost recognized this quarter were about $150,000 and looking at about another $500,000 to $600,000 for the back half of the year and then anticipating pricing in the second quarter 2010. We probably have another $0.5 million in the first part of the year and then we start to hit our run rate - which will be in the $6 million to $7 million year range that's including [indiscernible] of $2.8 million.

Thank you.

Thank you.

The next question comes from Collyn Gilbert with KBW. Please go ahead.

Thanks. Good morning, guys.

Good morning.

Could you just talk a little bit about the branch sale leaseback and kind of the impact there and where you are exactly in that process and the impact that will have on expenses?

[Indiscernible] on detail, yes Congress was still working through the diligent face. We don't know what the ultimate proceeds will be. I expect it to be fairly neutral. I think we'll see some reduction perhaps in our - on our lease costs as a result of hopefully a gain recognition that will be differing use to reduce leasing costs going forward by - I really can't give you solid number at this point.

Okay. And what was the big drop in occupancy this quarter Q2?

Seasonal stuff to the most part thus, no one actually move up from the trailing quarter and utilities cost being lower and that's typical from Q1 to Q2.

Okay. And then just on the funding side, I know you guys have done a pretty good job holding deposit rate flat relatively, but just where do you see kind of pressure coming on that and tying that and I guess to the margin. I know you said expected to move a little bit higher, but it continues. I feel like the margin is continue to sort outperform perhaps your expectation and maybe talk a little bit about where the upside is coming from that?

I think the on rates were a little better than I expected as I just mentioned on the previous question. We had a 4.18% pipeline and we actually closed to 4.26%. And funding is perhaps held up better than we thought when we're trying to forecast the margin. We didn't move it all this quarter, non-interest bearing deposits albeit small growth, there were still some growth there. So I guess looking forward, the pressure has been in selected pockets and we tried to react to it, selectively rather repricing the book, overall which is not seeing that much pressure on the funding side. Chris, do you brief that.

Great. One thing that I think we are seeing and as I mentioned in my comments was that the business people that have large balances to see the material difference when you look at the rate of interest paid where is a lot of our consumers don't see it as evidence when you're having small balances, so we're talking pennies. So I don't think that's going to happen until we get - maybe another Fed hike or two. So - we know we have to defend our market and our customers. We do a lot of relationship type of pricing. So we are not just leading with a special product that has a high CD. We are just meeting with our customers when they have a conversation. We give our relationship managers and our branch people, the flexibility to within our parameters to make different rate adjustments. And one thing on the operating expenses, I want to remember that we did close down and consolidate two locations in the first quarter. So those costs savings are coming through also.

Okay, that's helpful. And then Tom, you may have said in your opening comments and I apologize that the paydowns, I know you gave year-to-date paydowns. But what was it for the quarter and just kind of curious as to what you think the expectation is going forward on potential paydowns?

I don't have it broken out by quarter in front me Collyn is about little under 2.13% for the year-to-date, going forward I think we expect to see a little bit of reduction from that level.

Yes, I think Collyn, this is Chris. I know that it was interesting, in less than a month, we had three of our middle market clients sold their businesses and so that something you probably don't see very often as opposed to a commercial loan that was again somebody selling their property. So I think that's - evidence of that is very tough to predict and that's something we wanted to be involved in a conversation. The one thing about one of the businesses that they sold out and now we're going to be able - this maybe offer them some of the opportunity to put their wealth to work and being trust.

Obviously we would rather hold the earning asserts, but we do have a prepayment protection on many of those loans and then you saw that contributed to the fee income side for us this quarter. Again to remind everybody, we do not include prepayments in the margin there in the fee income section, we reported core margin.

Got it, okay, super. Thanks guys.

Thank you.

The next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

Good morning, guys.

Good morning.

Just wanted to touch on M&A, and I was curious how M&A discussions have involved year-to-date whether or not you're seeing more or less activity and what markets activity seems to be more or less robust?

Well, we certainly have been absent with a lot of things going across our desk in the way of seeing other people doing deals outside of the market. We're always involved in having good conversations there are certain size of situations that wouldn't make sense to us at the stage. But we considered to that opportunity for us to put our capital to work for the right opportunity at the price. It's fair to our shareholders to their shareholders. So I think there's a - definitely conversations out there on the other hand. I think they're just that. I think everybody is trying to look at what's going on, is there going to be tax reform? Is there are going to be regulatory release of some of the burdens that are going on there, some of that might be visual thinking. So we want to be involved and we want people to like what we're doing and we would like what they're doing to make it as accretive that certainly earn back has to do within our parameters. And that's also on the wealth of space we see deals here and there. Some of them match up, some of them don't. We continue to be very disciplined in our approach.

Concerning your market, there are a number of institutions that either have elevated loan to deposit ratios or elevated commercial real estate concentrations, in some cases both? How would you approach that type of transaction? Would you approach that type of transactions and just think about the thought process of acquiring something like that, with that be something you do?

I think we probably have to look at the balance sheet as deposit type of franchise. Is there excess capital? How much of that loan to deposit? Is that CRE? How much of that has grown over the last few years? So I think we look at all things and obviously we look at every bit of credit that's in there. I never expected they would do the same thing to us. For the most part, I don't think we say no to anything on there. We want to make sure there is an asset generation capacity for either us or them and vice versa or funding that is beneficial to us and our shareholders long run.

Yes, obviously that scenario presents some challenges in terms of regulatory approval, given that we have a greater than 100% loan deposit ratio and CRE concentration as well. So you would have to look what the opportunities were and then mixing the balance sheet on any target that had those character risk.

Understood, and to be clear if M&A doesn't occur over the next year, your institution is fully prepared to cross $10 billion organically?

We're not going to hold onto the range just to stay under $10 billion. We think that growth is important. If we have to, we go through organically and I don't think that we would do a very dilutive deal just to get size of the scale. I think we would look at anything we will go over - we're pretty sure they may know that we will continue work on that opportunity to grow through it. If there is an opportunity to the right and accretive, we would definitely look at it. We are also getting into the timeframe where wouldn't - by the time, we closed the deal, will be test that March timeframe and that certainly as it helps us to defer some of the expenses going up to 2019. So we still stand ready to look at anything that makes sense and if not, we have to do it organically. We can't stop and stay at $9.7 billion for the next three years in just Tidewater.

Understood, that's all I had. Thanks for taking my questions.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Martin for any closing remarks.

Well, thank you. In closing, on behalf of Provident, I would like to extend our sympathies to the family of Kevin Ward, our Former Vice Chairman passed away at late June. Kevin was well known to many of the analysts and investors who followed PFS reception and he will be finally remembered by all who knew him that we wish well to the family. And we'd like to thank you for your interest in Provident and have a great day.

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