Provident Financial Services, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Provident Financial Services, Inc. and subsidiary Provident Bank reported unaudited results for the three and six months ended June 30, 2017. The company is a banking business with a loan portfolio concentrated in commercial real estate, commercial and construction lending.
Financial performance and position
- Q2 earnings: Net income was $24.4 million, up 14.2% from $21.4 million in Q2 2016. Diluted EPS was $0.38 versus $0.34.
- First-half earnings: Net income was $47.9 million, up 13.1% from $42.3 million. Diluted EPS was $0.74 versus $0.67.
- Net interest income and margin: Q2 net interest income rose 8.1% to $69.1 million; first-half net interest income increased 7.2% to $136.1 million. Net interest margin was 3.17% for Q2 and 3.15% for the first half, compared with 3.11% for both prior-year periods.
- Other income and expenses: Q2 non-interest income rose 7.2% to $14.8 million, including $2.5 million of bank-owned life insurance income, primarily reflecting death-benefit claims. Q2 non-interest expense increased 3.1% to $47.3 million. For the first half, non-interest income was $27.3 million and expense was $93.5 million.
- Credit costs: Provision for loan losses was $1.7 million for Q2 and $3.2 million for the first half, unchanged from comparable 2016 periods. First-half net charge-offs were $2.2 million, down from $3.7 million.
- Balance sheet at June 30: Total assets were $9.54 billion; loans were $7.03 billion, up 0.4% from year-end; and deposits were $6.50 billion, down 0.8%. Stockholders’ equity was $1.28 billion. Book value per share was $19.32 and tangible book value per share was $12.98.
- Credit quality: Non-performing loans were $38.9 million, or 0.55% of loans, versus $42.4 million, or 0.61%, at year-end. Non-performing assets were $45.5 million, or 0.48% of assets. The allowance for loan losses was $62.9 million, or 0.89% of loans, compared with $61.9 million, or 0.88%, at year-end.
- Cash flow and funding: First-half operating cash flow was $40.2 million, versus $57.0 million in 2016. Cash and cash equivalents increased $9.1 million to $153.4 million. Deposits declined $53.1 million while borrowed funds rose $63.5 million to $1.68 billion, as wholesale funding replaced net deposit outflows.
- Capital: The Bank reported a 11.35% common equity Tier 1 ratio and 12.23% total risk-based capital ratio; the company reported 12.08% and 12.96%, respectively. Both exceeded applicable minimums, including the stated capital conservation buffer requirements.
Material changes versus comparable periods
- Earnings growth reflected higher average loan balances, higher earning-asset yields, and modest net interest margin expansion. Q2 average loans increased $363.3 million year over year; the average loan yield rose to 4.02% from 3.97%.
- Deposit interest expense increased, but lower borrowing costs partly offset the increase. Q2 average interest-bearing deposit cost was 0.36%, compared with 0.33% a year earlier.
- First-half loan growth was led by commercial and construction loans, while residential, consumer and multifamily balances declined. Commercial real estate, commercial and construction loans represented 76.4% of loans, up from 75.3% at year-end.
- Q2 non-interest income benefited from BOLI death claims and higher commercial-loan prepayment fees. First-half non-interest income also included higher BOLI income, while the prior-year period included gains from a branch-related deposit sale and income from index licensing.
- Higher compensation, occupancy, data-processing and other operating costs drove expense growth; lower FDIC insurance expense and scheduled reductions in intangible amortization partly offset these increases.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management attributed the period’s improvement to loan and core-deposit growth and expansion in net interest margin; results for the first half are not necessarily indicative of full-year results.
- Interest-rate modeling estimated that a gradual 300-basis-point increase would reduce 12-month net interest income by 1.7% ($4.8 million), while a 100-basis-point decrease would reduce it by 4.5% ($12.5 million). An immediate, sustained 300-basis-point increase was modeled to reduce the present value of equity by 8.4% ($111.9 million). Management cautions that assumptions make these estimates imprecise.
- Key exposures include borrower credit quality and real-estate collateral values, concentration in commercial and construction lending, interest-rate movements, deposit competition and access to liquidity. Management identified the allowance for loan losses, goodwill, securities and deferred-tax assets as critical estimate areas.
- The company reported no securities other-than-temporary impairment charge and concluded that securities in unrealized-loss positions were not other-than-temporarily impaired. It reported no material change in previously disclosed risk factors and no expected material adverse impact from ordinary-course legal claims.
- A $1.2 million tax benefit from the accounting for share-based compensation reduced first-half income tax expense. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial real estate, commercial and construction loan growth and concentration remain consistent with the company’s credit-risk tolerances.
- Trends in non-performing loans, criticized/classified loans, charge-offs and allowance coverage, including the increase in specific reserves for impaired loans.
- Whether deposit outflows and increased wholesale borrowing continue, and the resulting effect on funding costs, liquidity and margins.
- The sustainability of earnings growth after considering BOLI death-benefit income, loan prepayment fees and the first-half share-based compensation tax benefit.
- Actual results against the filing’s interest-rate sensitivity estimates; these models rely on assumptions and are not forecasts.