Provident Financial Services, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are against December 31, 2022. Dollar amounts are in millions unless stated otherwise.
Business context and financial performance
Provident Financial Services is a bank holding company whose principal subsidiary is Provident Bank. Its lending is concentrated in commercial real estate, multifamily, construction and commercial loans. The pending Lakeland Bancorp merger is a significant strategic transaction.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $96.2 | $109.5 | $303.7 | $303.5 |
| Net interest margin | 2.96% | 3.51% | 3.19% | 3.24% |
| Provision for loan credit losses | $11.0 | $8.4 | $27.4 | $5.0 |
| Non-interest income | $19.3 | $28.4 | $60.9 | $69.5 |
| Non-interest expense | $67.2 | $69.4 | $201.1 | $195.2 |
| Net income | $28.5 | $43.4 | $101.1 | $126.6 |
| Diluted EPS | $0.38 | $0.58 | $1.35 | $1.69 |
Interest income rose substantially, but deposit and borrowing costs increased faster. Q3 interest expense was $62.0 million versus $12.2 million a year earlier; the average cost of interest-bearing liabilities rose to 2.50% from 0.54%. Loan yields improved, but quarterly margin compressed by 55 basis points. Nine-month net interest income was essentially flat as higher loan income was largely offset by funding costs.
Q3 net income fell about 34% year over year; nine-month net income fell about 20%. The nine-month provision increase reflected a worsened economic forecast and weaker projected commercial property price indices. Lower non-interest income also weighed on comparisons, particularly because Q3 and nine-month 2022 included an $8.6 million gain on sale of a foreclosed commercial property.
Financial condition, cash flow and liquidity
- Assets and lending: Total assets were $14.09 billion, up $303.4 million from year-end 2022. Gross loans rose $418.7 million to $10.67 billion, with growth led by multifamily, commercial and commercial mortgage lending. Commercial-related loans were 86.2% of the portfolio.
- Credit quality: Allowance for loan losses was $107.6 million, or 1.01% of loans, compared with $88.0 million, or 0.88%, at year-end. Non-performing loans declined to $39.5 million (0.37% of loans) from $58.5 million (0.57%). Foreclosed assets increased to $16.5 million from $2.1 million, primarily commercial real estate. Nine-month net charge-offs were $7.3 million, mainly tied to two commercial loans.
- Deposits and borrowings: Deposits declined $421.6 million to $10.14 billion. Lower-cost savings and demand deposits decreased, while time deposits increased $316.7 million. Insured cash sweep deposits grew to $500.7 million from $58.9 million. Borrowed funds increased $684.9 million to $2.02 billion, or 14.4% of assets.
- Cash flows: For the first nine months, operating activities provided $127.1 million, investing activities used $337.4 million and financing activities provided $213.1 million. Cash and cash equivalents ended at $189.3 million. Deposit outflows and loan growth were important funding uses.
- Liquidity and capital: Management reported $3.59 billion of on-balance-sheet liquidity and borrowing capacity, equal to 144% of estimated uninsured and uncollateralized deposits of $2.49 billion. Borrowing capacity included $1.14 billion at FHLB and $1.69 billion at the Federal Reserve Bank of New York. The Bank had pledged approximately $521 million of securities to the Bank Term Funding Program but had not drawn on it. The Bank’s total risk-based capital ratio was 11.98%; the Company’s was 12.40%. Both exceeded stated minimums with the capital conservation buffer.
- Equity and securities: Stockholders’ equity was $1.62 billion. Accumulated other comprehensive loss was $195.1 million, largely reflecting unrealized securities losses. Available-for-sale securities had $290.8 million of gross unrealized losses; management reported all such securities were investment grade.
Outlook, risks and unusual items
- No specific earnings guidance is provided in the filing. Management’s interest-rate model indicated net interest income could rise 0.6% under a gradual +200-basis-point scenario or fall 1.4% under a gradual -300-basis-point scenario over 12 months. The modeled economic value of equity declined 6.9% under an immediate, sustained -300-basis-point shock. Management cautioned that modeling assumptions may differ from actual outcomes.
- Merger: The Lakeland Bancorp merger had shareholder and board approval but remained subject to regulatory approvals and other closing conditions. The exchange terms provide 0.8319 Provident shares per Lakeland share, plus cash for fractional shares; expected ownership of the combined company was approximately 58% Provident and 42% Lakeland. Merger expenses were $2.3 million for Q3 and $5.3 million year to date.
- Credit and economic risks: Management identified economic weakness, declining real estate values, higher vacancies and interest rates, and unemployment as risks to repayment and credit costs. The CECL allowance is a significant estimate and could be volatile. Management said using unadjusted commercial and multifamily property-price forecasts would have increased the provision by $8.5 million and the allowance coverage ratio to 1.09%.
- Funding and market risks: Deposit outflows, migration to higher-cost time deposits, increased borrowing and higher rates pressured margins. Interest-rate sensitivity, securities valuations and deposit behavior remain material uncertainties.
- Contingency: Provident Bank is defending a New Jersey purported class action alleging improper overdraft fees on debit-card transactions. Mediation began October 20, 2023; the outcome and potential loss range were described as uncertain.
- Other items: The company recorded four additions to foreclosed assets during the nine months. It adopted ASU 2022-02, recording a $0.4 million after-tax increase to retained earnings. Management reported disclosure controls were effective.
Most important facts for investors to verify
- Whether deposit trends stabilize and how much additional funding depends on borrowings or higher-cost time deposits.
- Whether net interest margin and earnings continue to face pressure as funding costs reprice.
- Whether commercial real estate credit quality, foreclosed assets, charge-offs and the allowance develop consistently with management’s forecasts.
- The size and duration of unrealized securities losses and any effect on liquidity, capital or earnings.
- Regulatory approval, completion timing, integration costs and expected benefits of the Lakeland merger.
- Developments in the overdraft-fee litigation and whether a loss becomes probable or estimable.