Provident Financial Services, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Provident Financial Services, Inc. and its subsidiary Provident Bank reported unaudited results for the quarter and six months ended June 30, 2018. The company is a regional bank holding company. Unless noted otherwise, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $74.3 | $69.1 | $147.6 | $136.1 |
| Provision for loan losses | $15.5 | $1.7 | $20.9 | $3.2 |
| Net income | $19.2 | $24.4 | $47.2 | $47.9 |
| Diluted EPS | $0.30 | $0.38 | $0.73 | $0.74 |
| Non-interest income | $13.8 | $14.8 | $27.1 | $27.3 |
| Non-interest expense | $48.8 | $47.3 | $95.7 | $93.5 |
- Net interest margin was 3.33% in Q2, up 16 basis points year over year; first-half margin was 3.31%, also up 16 basis points. Higher earning-asset yields more than offset higher funding costs.
- Q2 effective tax rate was 19.2%, versus 30.0% a year earlier; the first-half rate was 18.8%, versus 28.2%. The company attributed the decrease primarily to the federal Tax Cuts and Jobs Act.
- Other comprehensive loss was $3.2 million in Q2 and $12.3 million for the first half, mainly reflecting unrealized losses on available-for-sale securities.
Financial position, liquidity and capital
- At June 30, 2018, total assets were $9.73 billion, down $112.4 million from year-end 2017. Gross loans were $7.25 billion, down $72.5 million; deposits were $6.67 billion, down $40.2 million.
- Cash and cash equivalents were $142.0 million, compared with $190.8 million at year-end. First-half operating cash flow was $73.2 million; investing activities provided $42.7 million; financing activities used $164.8 million. Cash decreased $48.9 million over the period.
- Borrowed funds were $1.64 billion, down $101.0 million from year-end. The filing describes liquidity sources including loan and securities cash flows and borrowing capacity from the Federal Home Loan Bank and approved broker-dealers.
- Stockholders’ equity was $1.31 billion. Book value per share was $19.64 and tangible book value per share was $13.36. Available repurchase authorization remaining was approximately 3.1 million shares.
- The Bank’s actual regulatory capital ratios were 9.37% Tier 1 leverage, 11.41% common equity Tier 1, 11.41% Tier 1 risk-based, and 12.18% total risk-based. These exceeded stated minimums including the applicable capital conservation buffer.
Material changes and unusual items
- Credit losses materially reduced earnings. A $15.4 million commercial credit went into bankruptcy and resulted in a $14.9 million net charge-off; two loans to another commercial borrower resulted in $4.0 million of net charge-offs. The company said it believed borrower fraud was involved in both relationships. Management reported an after-tax earnings impact of $11.8 million, or $0.18 per diluted share, for Q2, and $13.6 million, or $0.21 per diluted share, for the first half.
- First-half net charge-offs were $22.3 million, versus $2.2 million in the prior-year period. The allowance for loan losses was $58.8 million, or 0.81% of loans, versus $60.2 million, or 0.82%, at year-end. Non-performing loans were $32.6 million, or 0.45% of loans, down from $34.9 million, or 0.48%.
- Commercial real estate, commercial and construction loans represented 78.4% of the loan portfolio, up from 77.9% at year-end. Total classified and criticized loans were $117.0 million, compared with $110.6 million at year-end.
- Deposits shifted: core deposits declined $55.0 million, while time deposits increased $14.7 million, partly due to a promotional certificate-of-deposit campaign. Core deposits were 90.3% of total deposits.
- Net interest income increased, but higher deposit costs and provision expense offset some of the benefit. Q2 interest expense on deposits rose to $7.0 million from $4.7 million a year earlier.
Outlook, risks and contingencies
- The filing provides no specific earnings or balance-sheet guidance. Management described record net interest income, loan growth in average balances and margin expansion, but cautioned that interim results are not necessarily indicative of full-year results.
- New Jersey tax legislation enacted July 1, 2018 creates a temporary surtax for 2018–2021 and requires combined tax returns beginning in 2019. The company anticipated a third-quarter tax benefit from remeasuring its net deferred tax asset, followed by higher state tax expense; the effect was still under evaluation.
- Interest-rate modeling projected that a gradual 300-basis-point rate increase would reduce 12-month net interest income by 3.2% ($9.6 million); an immediate and sustained 300-basis-point increase was projected to reduce economic value of equity by 13.3% ($202.9 million). Management cautioned that these models depend on assumptions and are not precise forecasts.
- The company identified credit quality, real estate values, unemployment, commercial-property vacancies and interest-rate changes as risks to borrowers’ repayment capacity and the allowance for loan losses. It was implementing the expected-credit-loss standard (CECL) and could not yet reasonably estimate its impact; adoption may increase credit-loss allowances.
- Management said ordinary-course legal actions were not expected to have a material adverse effect. The filing also noted that regulatory relief from the 2018 Economic Growth Act may be limited as the company grows, and that implementing regulations remained uncertain.
Important facts for investors to verify
- Follow developments and recoveries related to the commercial borrower bankruptcies and suspected-fraud credit losses, and whether further charge-offs or provisions are required.
- Review trends in criticized loans, non-performing assets, commercial real estate exposure and the allowance for loan losses.
- Monitor deposit pricing, core-deposit retention, borrowing levels and the company’s ability to sustain net interest margin as rates change.
- Confirm the realized impact of New Jersey tax changes and the company’s eventual CECL adoption estimate.
- Assess the assumptions and sensitivity in management’s interest-rate risk models alongside actual results.