Provident Financial Services, Inc. — Q1 2021 Form 10-Q
Business context and period: Provident Financial Services, Inc. is the holding company for Provident Bank. This unaudited report covers the three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. The July 2020 acquisition of SB One Bancorp materially expanded the company’s assets, loans, deposits, branches and fee businesses, affecting year-over-year comparisons. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $48.6; $0.63 | Q1 2020: $14.9; $0.23 |
| Net interest income | $90.0 | Q1 2020: $72.0 |
| Provision for loan credit losses | Benefit of $15.0 | Q1 2020: expense of $14.7 |
| Non-interest income / expense | $21.6 / $61.9 | Q1 2020: $17.0 / $54.1 |
| Net interest margin | 3.10% | Q1 2020: 3.20% |
| Total assets | $13,130 | December 31, 2020: $12,920 |
| Loans, gross / allowance | $9,804 / $85.6 | December 31, 2020: $9,823 / $101.5 |
| Deposits / borrowed funds | $10,298 / $941 | December 31, 2020: $9,838 / $1,176 |
| Stockholders’ equity | $1,647 | December 31, 2020: $1,620 |
| Cash and cash equivalents | $687.6 | December 31, 2020: $532.4 |
Net interest income plus non-interest income was $111.6 million, compared with $89.0 million in Q1 2020. The filing reports net cash from operating activities of $36.4 million, cash used in investing activities of $90.6 million, and cash from financing activities of $209.4 million. Cash and cash equivalents increased $155.2 million during the quarter.
At March 31, the allowance was 0.87% of total loans, or 0.92% excluding PPP loans. Non-performing loans were $82.1 million (0.84% of loans), versus $87.1 million at year-end. The company reported regulatory capital ratios above stated minimums; the Bank’s total risk-based capital ratio was 11.18% and its common equity Tier 1 ratio was 10.38%.
Material changes and management commentary
- Net income rose substantially, chiefly reflecting a $15.0 million loan-loss provision benefit versus a $14.7 million provision expense a year earlier, the SB One acquisition, and lower funding costs. Management attributed the provision benefit to a more favorable economic forecast; it cautioned that future credit costs remain uncertain.
- Net interest income increased $18.0 million year over year, while net interest margin declined 10 basis points to 3.10%. Lower asset yields and PPP fee recognition affected results; management said margin compression was partly tempered by loan growth and lower-cost core deposits.
- Deposits grew $459.7 million during the quarter, including $590.9 million growth in core deposits, while time deposits fell $131.2 million. Borrowed funds declined $235.4 million as deposit inflows replaced some wholesale funding.
- Gross loans declined $19.4 million from year-end despite $770.5 million of originations, as repayments and PPP forgiveness offset growth. Commercial real estate, commercial and construction loans were 83.3% of the portfolio.
- Non-interest expense increased $7.7 million year over year, principally from compensation, occupancy and FDIC insurance costs associated in part with SB One. Non-interest income benefited from $2.7 million of acquired insurance-agency income and stronger wealth-management revenue.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management’s outlook highlights uncertainty around the continuing effects of COVID-19, borrower performance, economic recovery and future credit-loss requirements.
- COVID-related loan deferrals had declined from a peak of $1.31 billion to $132.0 million as of April 20, 2021. The remaining deferrals included hotel, multifamily/student-housing, retail and restaurant exposures. The company reported $664.5 million of PPP loans originated through March 31 and $481.9 million outstanding in the note disclosure.
- Interest-rate simulation estimated that a gradual 300-basis-point rise would increase 12-month net interest income 2.4%, while a 100-basis-point decline would reduce it 3.3%. An immediate, sustained 100-basis-point decline was modeled to reduce economic value of equity 12.3%. Management cautioned that the models rely on assumptions and are not precise forecasts.
- Key risks include deterioration in the economy or real-estate collateral, elevated unemployment, COVID-19 effects, interest-rate and liquidity changes, acquisition integration, and credit concentration. Management identifies the allowance for credit losses and deferred-tax-asset valuation as critical estimates. No valuation allowance for deferred tax assets was recorded.
- Derivative agreements contain default and capital-status provisions that could require early settlement. At March 31, the company reported a $38.5 million termination value on its net liability position with four dealer counterparties and $42.0 million of posted collateral. Management said ordinary-course legal claims were not expected to have a material adverse effect; the filing reports no change in previously disclosed risk factors.
Important facts for investors to verify
- Reconcile PPP balances: the notes state $481.9 million outstanding at March 31, while MD&A states $486.6 million; confirm the applicable balance and reporting basis.
- Assess the sustainability of earnings given the large provision benefit, and monitor allowance levels, criticized loans, non-performing assets and performance of remaining COVID-related deferrals.
- Review portfolio concentration in commercial real estate, commercial and construction lending, including hotel and student-housing exposures, and the disclosed troubled shared-national-credit relationship.
- Evaluate the effect of margin compression, interest-rate scenarios and deposit pricing on future net interest income and funding costs.
- Confirm that capital, liquidity and acquisition integration remain sound; the filing states the Bank and company exceeded regulatory minimum capital requirements.