Provident Financial Services, Inc. — Q3 2017 Form 10-Q
Business context and reporting period
Provident Financial Services, Inc. is the holding company for Provident Bank. This unaudited filing covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Amounts below are in millions except per-share data and ratios.
Financial performance and condition
- Q3 earnings: Net income was $26.6 million, up from $22.9 million a year earlier; diluted EPS was $0.41 versus $0.36. For the first nine months, net income was $74.5 million versus $65.2 million, and diluted EPS was $1.15 versus $1.02.
- Revenue and margins: Q3 net interest income rose to $70.2 million from $65.0 million; nine-month net interest income increased 7.5% to $206.3 million. Net interest margin was 3.22% for Q3 and 3.19% for nine months, up 17 and 9 basis points year over year, respectively. Non-interest income rose 7.4% in Q3 to $15.1 million and 3.6% for nine months to $42.4 million.
- Expenses and taxes: Non-interest expense increased 0.9% in Q3 to $46.3 million and 2.3% for nine months to $139.7 million. Effective tax rates were 31.1% for Q3 and 29.3% for nine months, compared with 28.8% and 29.1% in 2016.
- Assets and loans: Total assets were $9.50 billion, broadly unchanged from year-end. Loans were $7.03 billion, up 0.4%; commercial real estate, commercial and construction loans together represented 76.7% of the portfolio, up from 75.3%.
- Credit quality: Non-performing loans declined to $36.4 million, or 0.52% of loans, from $42.4 million, or 0.61%, at year-end. Non-performing assets were $42.2 million, or 0.44% of assets. The allowance for loan losses was $60.3 million, equal to 0.86% of loans, versus $61.9 million and 0.88% at year-end. Nine-month net charge-offs were $5.3 million, compared with $4.5 million in 2016.
- Funding, debt and liquidity: Deposits increased 0.6% to $6.59 billion; core deposits were 90.5% of total deposits. Borrowed funds declined 5.4% to $1.53 billion. Cash and cash equivalents were $148.8 million. Nine-month operating cash flow was $90.5 million; investing cash flow used $1.2 million and financing cash flow used $84.8 million. The company cites loan repayments, investment maturities, deposits and borrowing access as liquidity sources.
- Capital and equity: Stockholders’ equity was $1.30 billion. The Bank’s actual regulatory ratios were 9.13% Tier 1 leverage, 11.43% common equity Tier 1, 11.43% Tier 1 risk-based and 12.27% total risk-based capital; the filing states the Bank and holding company exceeded applicable minimums. Book value per share was $19.56 and tangible book value per share was $13.23.
Material changes versus comparable periods
- Earnings growth reflected higher average loan balances, improved asset yields, net interest margin expansion and increased non-interest income. Interest expense also rose, particularly on deposits.
- Non-interest income benefited from commercial loan prepayment fees, stronger wealth-management fees and bank-owned life insurance death-benefit claims. The prior-year period included a gain on a strategic deposit sale; loan-sale gains were lower in 2017.
- Loan growth was concentrated in commercial, construction and commercial mortgage lending, partly offset by declines in multifamily, residential mortgage and consumer loans. Non-performing loans and foreclosed assets decreased from year-end.
- Unrealized securities losses narrowed: the filing reported 253 securities in an unrealized loss position at September 30, versus 419 at year-end. The company recorded no other-than-temporary impairment charge.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management attributes current performance to loan growth, core-deposit growth and margin expansion.
- Interest-rate sensitivity modeling projected a 1.3% decrease in 12-month net interest income under a gradual 300-basis-point rate increase, and a 4.8% decrease under a 100-basis-point decline. An immediate, sustained 300-basis-point increase was modeled to reduce present value of equity by 8.6%. Management cautions that model assumptions limit predictive precision.
- Management identifies economic weakness, declining real-estate values, unemployment, commercial-property vacancies and interest-rate changes as credit risks. It notes that allowance estimates are judgmental and may require additions if conditions deteriorate.
- Expected credit loss standard ASU 2016-13 may increase the allowance; the company was assessing its impact and could not yet reasonably estimate the effect. The filing also discusses implementation of other forthcoming accounting standards.
- Q3 included $3.2 million of charge-offs on collateral-dependent impaired loans. Nine-month bank-owned life insurance income included death-benefit claims. Management reported goodwill was not impaired in its September 2017 annual assessment.
- Routine legal claims were not expected by management to have a material adverse effect. The company reported no material changes to previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Whether margin gains persist as deposit costs rise and rates change.
- Credit performance in the growing commercial real estate, commercial and construction portfolios, including charge-offs and reserve adequacy.
- Deposit stability, wholesale funding needs and available liquidity under adverse conditions.
- The realized impact of ASU 2016-13 on reserves, earnings and capital when adopted.
- Whether fee and insurance-income contributions, including prepayment fees and death benefits, are recurring.