Provident Financial Services, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a filing limited to 2018 Q4. Provident is a bank holding company serving northern and central New Jersey and eastern Pennsylvania through Provident Bank and related financial services businesses.
Financial performance and condition
| Metric | FY 2018 / year-end | Prior comparable period |
|---|---|---|
| Net interest income | $300.7 million | $278.2 million in 2017 |
| Non-interest income | $58.7 million | $55.7 million in 2017 |
| Net income | $118.4 million | $93.9 million in 2017 |
| Diluted earnings per share | $1.82 | $1.45 in 2017 |
| Net interest margin | 3.39% | 3.21% in 2017 |
| Efficiency ratio | 53.36% | 56.25% in 2017 |
| Total assets | $9.73 billion | $9.85 billion at year-end 2017 |
| Net loans | $7.20 billion | $7.27 billion at year-end 2017 |
| Deposits | $6.83 billion | $6.71 billion at year-end 2017 |
| Borrowed funds | $1.44 billion | $1.74 billion at year-end 2017 |
| Stockholders’ equity | $1.36 billion | $1.30 billion at year-end 2017 |
Net interest income increased 8.1%, reflecting higher average loan balances and asset yields, partly offset by higher funding costs. Return on average assets was 1.22% and return on average equity was 8.93%. Income tax expense fell to $25.5 million from $46.5 million; the effective tax rate was 17.7%, versus 33.1% in 2017.
Net cash provided by operating activities was $155.7 million. Investing activities provided $46.7 million and financing activities used $250.6 million. Cash and cash equivalents decreased $48.2 million to $142.7 million. At year-end, the Bank had $1.49 billion of off-balance-sheet loan commitments and letters of credit. Core deposits were $6.08 billion, or 89.0% of deposits. The Company and Bank reported capital ratios above regulatory minimums and were classified as well capitalized; the Bank’s leverage and total risk-based capital ratios were 9.86% and 12.80%, respectively.
Material changes and unusual items
- Provision for loan losses increased to $23.7 million from $5.6 million; net charge-offs rose to $28.3 million from $7.3 million. The increase was primarily driven by a $14.9 million loss related to a commercial borrower’s Chapter 7 bankruptcy filing.
- Despite elevated charge-offs, non-performing assets declined to $27.3 million, or 0.28% of assets, from $41.8 million, or 0.42%. Non-performing loans were $25.7 million, or 0.35% of loans.
- Commercially oriented loans—commercial real estate, multifamily, construction and commercial loans—made up 78.9% of the portfolio. Total loans declined $75.1 million year over year, while commercial mortgage balances increased $128.2 million.
- Deposits increased $116.0 million, including a $115.7 million increase in time deposits. Borrowings decreased $300.2 million, primarily as lower-cost deposits replaced wholesale funding.
- Results included a non-recurring $1.9 million tax benefit from a cost-segregation study and a $2.2 million pre-tax gain from selling Visa Class B shares. Dividends paid were $53.6 million; the Company repurchased 635,436 shares during 2018.
- Fourth-quarter 2018 net income was $35.8 million, versus $19.5 million in Q4 2017. Q4 2018 provision for loan losses was $1.8 million.
Outlook, risks and subsequent events
The filing provides no specific earnings or revenue guidance. Management described continued emphasis on commercial lending, relationship banking, core deposits, credit quality and interest-rate-risk management. The Company was approaching the $10 billion asset threshold; management noted that crossing it could bring additional regulatory obligations and costs. A 300-basis-point gradual rate increase was modeled to reduce 12-month net interest income by 3.5%, or $10.8 million; an immediate and sustained 300-basis-point shock was modeled to reduce economic value of equity by 12.1%, or $188.9 million. These are model estimates, not forecasts.
Key risks include commercial real estate, multifamily, construction and commercial credit exposures; geographic concentration in New Jersey and eastern Pennsylvania; competition and deposit pricing; liquidity and interest-rate sensitivity; cyber and third-party operational risks; and regulatory and tax changes. Commercial real estate loans equaled 422% of risk-based capital, although the portfolio had not met the agencies’ stated 50% growth trigger over the preceding 36 months. The expected-credit-loss standard (CECL) was scheduled to take effect for the Company after December 15, 2019; management said the adoption impact could not yet be reasonably estimated and might increase reserves.
After year-end, Beacon announced an agreement to acquire investment adviser Tirschwell & Loewy, with closing anticipated in Q2 2019 subject to customary conditions. The Company also adopted the new lease standard on January 1, 2019, recording approximately $44.9 million in right-of-use assets and $46.1 million in lease liabilities. Management said legal proceedings and other contingencies were not expected to have a material adverse impact. The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Review the $14.9 million commercial-credit loss, related charge-offs, and the allowance’s adequacy given the concentration in commercial and real estate lending.
- Assess deposit pricing, the $584.5 million of certificates of deposit maturing within one year, and the Bank’s reliance on borrowings and other liquidity sources.
- Monitor progress toward $10 billion in assets and the resulting potential regulatory costs, as well as the eventual CECL reserve impact.
- Evaluate sensitivity to higher rates, including the filing’s modeled NII and economic-value-of-equity declines and the assumptions underlying those estimates.
- Confirm the closing and financial terms of the Tirschwell & Loewy acquisition and the effects of the 2019 lease-standard adoption.