Provident Financial Services, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Provident Financial Services, Inc., through Provident Bank, is a bank holding company. This unaudited quarterly report covers the three and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $109.5 | $91.2 | $303.5 | $272.1 |
| Provision for loan credit losses | $8.4 | $1.0 | $5.0 | $(24.7) benefit |
| Non-interest income | $28.4 | $23.4 | $69.5 | $66.2 |
| Non-interest expense | $69.4 | $63.4 | $195.2 | $188.0 |
| Net income | $43.4 | $37.3 | $126.6 | $130.6 |
| Diluted EPS | $0.58 | $0.49 | $1.69 | $1.70 |
| Net interest margin | 3.51% | 2.94% | 3.24% | 2.99% |
- For Q3, net interest income increased 20% year over year, reflecting higher loan yields and reinvestment of securities cash flows into higher-yielding loans. Net income rose 17%; results included an $8.6 million gain on sale of a foreclosed commercial office property and $2.9 million of merger transaction costs.
- For the first nine months, net income declined 3% and diluted EPS edged lower. The prior-year comparison included a $24.7 million provision benefit, while 2022 included a $5.0 million provision expense. The 2022 period also included the $8.6 million property-sale gain and $2.9 million of merger costs.
- Q3 total interest income was $121.7 million and interest expense was $12.2 million. The nine-month amounts were $329.0 million and $25.5 million, respectively. The Q3 weighted average yield on interest-earning assets rose to 3.90% from 3.21%; the cost of interest-bearing liabilities rose to 0.54% from 0.37%.
Financial position, cash flow and capital
- Total assets were $13.60 billion, down $177.4 million from year-end. Loans rose $464.9 million to $10.05 billion; deposits fell $548.4 million to $10.69 billion.
- Cash and cash equivalents were $184.9 million, down $527.6 million. Management attributed the decline mainly to deploying excess liquidity into loans and a reduction in short-term investments. Nine-month operating cash flow was $157.9 million; investing activities used $476.7 million and financing activities used $208.8 million.
- Borrowed funds increased $436.8 million to $1.06 billion, or 7.8% of assets versus 4.5% at year-end. The company cited shifting brokered deposits into lower-cost FHLB borrowings as a key factor.
- Stockholders’ equity was $1.55 billion, down $146.1 million, primarily reflecting unrealized securities losses, dividends and share repurchases, partly offset by earnings. Accumulated other comprehensive loss was $174.5 million, compared with $6.9 million of accumulated other comprehensive income at year-end; the change was mainly from interest-rate-driven unrealized losses on available-for-sale securities.
- The allowance for loan credit losses was $88.6 million, or 0.88% of loans, versus $80.7 million, or 0.84%, at year-end. Non-performing loans increased to $59.5 million (0.59% of loans) from $48.0 million (0.50%); non-performing assets were $61.6 million (0.45% of assets).
- The Bank’s actual capital ratios were 9.28% Tier 1 leverage, 10.46% common equity Tier 1, 10.46% Tier 1 risk-based and 11.14% total risk-based. The filing states the Bank and holding company exceeded applicable minimum requirements.
Material changes, outlook and risks
- Pending merger: On September 26, 2022, Provident agreed to merge with Lakeland Bancorp. Lakeland shareholders would receive 0.8319 Provident shares per share, plus cash for fractional shares. Closing was expected in Q2 2023, subject to shareholder and regulatory approvals and other customary conditions. No financial forecast or earnings guidance is provided in the supplied filing text.
- Credit and economic conditions: Management cited a weakening economic forecast and loan growth as drivers of the current-period loan-loss provision. It identifies economic deterioration, falling real-estate values, unemployment, commercial-property vacancies, interest rates and continuing COVID-19 effects as risks to borrowers and estimates.
- Interest-rate and securities exposure: The company described itself as moderately asset-sensitive. Its model projected that a gradual 300-basis-point increase would raise 12-month net interest income by 2.7% ($12.7 million), while a 100-basis-point decrease would reduce it by 1.1% ($5.3 million). Management cautions that model assumptions may differ from actual results. Rising rates also drove substantially more securities into unrealized loss positions.
- Merger risks and contingencies: Regulatory or shareholder approval could be delayed or denied; integration, employee retention, transaction costs and failure to realize expected benefits are additional risks. Under specified termination circumstances, Provident may owe Lakeland a $50 million termination fee. The filing also notes that rising rates could increase acquisition fair-value marks and affect capital and tangible book value.
- Management reported effective disclosure controls. Routine legal proceedings were not expected to have a material adverse effect, in management’s view.
Investor verification priorities
- Track deposit outflows, funding mix, borrowing costs and liquidity as deposits declined and FHLB borrowing increased.
- Review loan quality trends, especially the rise in non-performing commercial mortgage loans, and assess allowance assumptions against economic conditions.
- Monitor unrealized securities losses, their potential effects on equity and funding flexibility, and the impact of further rate changes.
- Verify merger approval milestones, expected closing timing, total costs, any termination-fee exposure and management’s ability to deliver integration benefits.
- Separate recurring operating performance from the $8.6 million property-sale gain and $2.9 million merger costs when assessing earnings trends.