Provident Financial Services, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results include Provident Financial Services, Inc. and Provident Bank. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $99.5 | $90.9 | $194.0 | $180.9 |
| Provision for loan credit losses | $3.0 expense | $10.7 benefit | $3.4 benefit | $25.7 benefit |
| Non-interest income | $20.9 | $21.2 | $41.1 | $42.8 |
| Non-interest expense | $63.8 | $62.7 | $125.7 | $124.6 |
| Net income | $39.2 | $44.8 | $83.2 | $93.3 |
| Diluted earnings per share | $0.53 | $0.58 | $1.11 | $1.22 |
- Net interest margin was 3.21% in Q2, up from 2.99% a year earlier; for the first half it was 3.11%, versus 3.02%.
- Q2 effective tax rate was 26.8%, compared with 25.4%; the first-half rate was 26.2%, compared with 25.2%.
- Six-month operating cash flow was $101.8 million, versus $88.4 million in 2021. Investing activities used $476.4 million, and financing activities used $60.4 million.
Financial position and material changes
- Total assets were $13.72 billion at June 30, down $65.3 million from year-end 2021. Loans grew $410.8 million to $9.99 billion; commercial real estate, multifamily, commercial and construction lending accounted for 85.0% of loans.
- Deposits declined $359.8 million to $10.87 billion. Borrowed funds rose $375.7 million to $1.00 billion, including $314 million of FHLB overnight borrowings. Management attributed much of the funding shift to replacing brokered demand deposits with lower-cost FHLB borrowings.
- Cash and cash equivalents were $277.5 million, down $434.9 million. Total investments were $2.41 billion, down $115.8 million, including a substantial increase in unrealized securities losses as interest rates rose.
- Stockholders’ equity declined $111.8 million to $1.59 billion, primarily due to unrealized losses on available-for-sale securities, dividends and share repurchases, partly offset by earnings. Accumulated other comprehensive loss was $111.8 million.
- For the first half, the company repurchased 2.04 million shares at an average $23.23 per share and paid $36.7 million in dividends. About 1.1 million shares remained under the repurchase authorization at June 30.
- The allowance for loan credit losses was $79.0 million, or 0.79% of total loans, versus $80.7 million and 0.84% at year-end. Non-performing loans fell to $40.4 million (0.40% of loans) from $48.0 million; non-performing assets were $49.5 million, or 0.36% of assets.
- Bank capital ratios exceeded regulatory minimums: common equity Tier 1 was 10.60%, Tier 1 risk-based capital 10.60%, total risk-based capital 11.21%, and Tier 1 leverage 9.13%.
Management commentary, outlook and risks
- Higher net interest income reflected growth in earning assets, lower funding costs, core deposit growth, favorable repricing of adjustable-rate loans and higher rates on new originations. Lower PPP fee accretion partly offset the gains.
- Earnings declined year over year despite higher net interest income, reflecting smaller credit-loss benefits than in 2021 and lower non-interest income. Compensation and employee benefit costs rose, including stock-based compensation, salaries and incentive accruals.
- The filing provides no specific earnings or revenue guidance. Its interest-rate model estimated that a gradual 300-basis-point rise over 12 months would increase projected net interest income 3.2% ($14.2 million); a 100-basis-point decline would reduce it 1.9% ($8.3 million). Management cautioned that model assumptions mean actual outcomes may differ.
- Management identifies economic deterioration, real estate values, unemployment, commercial property vacancies and interest-rate changes as credit risks. Allowance estimates depend on forecasts and assumptions and could require additional provisions if conditions worsen. The filing also notes continuing uncertainty from COVID-19, liquidity and funding costs, competition, regulation and market volatility.
- The company reported 751 available-for-sale and held-to-maturity securities in unrealized-loss positions, up from 166 at year-end, primarily due to higher market rates. Management stated the annual goodwill impairment test found impairment was not more likely than not.
- Management reported disclosure controls were effective. It said there were no changes to previously reported risk factors, and ordinary-course legal claims were not expected to have a material adverse financial effect.
Important facts for investors to verify
- Whether loan growth and the shift from deposits to FHLB funding remain sustainable as rates and funding costs change.
- How unrealized securities losses, including the $118.7 million first-half after-tax other comprehensive loss, affect equity, liquidity and capital under changing rate conditions.
- Whether credit quality and the allowance remain adequate if economic or commercial real estate conditions deteriorate.
- Whether net interest margin benefits persist as depositors reprice balances and the company’s interest-rate exposure evolves.
- How share repurchases, dividends and expenses affect capital and per-share results relative to future earnings.