Provident Financial Services, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing is unaudited and covers Provident Financial Services, Inc. and its subsidiary, Provident Bank. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $69.8 | $76.6 | $141.8 | $151.6 |
| Provision for credit losses on loans | $10.9 | $9.5 | $25.6 | $9.7 |
| Net income | $14.3 | $24.4 | $29.2 | $55.3 |
| Diluted EPS | $0.22 | $0.38 | $0.45 | $0.85 |
| Net interest margin | 2.97% | 3.42% | 3.09% | 3.41% |
- Q2 net income fell 41% year over year; six-month net income fell 47%. Management attributed the decline principally to COVID-19-related credit provisioning, CECL adoption, lower net interest margin, and acquisition and pandemic-related expenses.
- Total assets were $10.51 billion at June 30, up $705.0 million from year-end 2019. Gross loans were $7.78 billion, up $442.7 million; deposits were $7.66 billion, up $557.5 million.
- Cash and cash equivalents were $453.8 million, versus $186.7 million at December 31, 2019. Six-month operating cash flow was $63.7 million, investing cash outflow was $370.9 million, and financing cash inflow was $574.3 million.
- Borrowed funds were $1.18 billion, up $50.1 million from year-end. Stockholders’ equity was $1.41 billion, down $3.4 million.
- The allowance for credit losses was $86.3 million, or 1.11% of loans (1.17% excluding PPP loans), versus $55.5 million, or 0.76%, at year-end. Non-performing loans were $35.5 million, or 0.46% of loans; non-performing assets were $38.7 million, or 0.37% of assets.
- At June 30, the Bank’s capital ratios were 9.17% Tier 1 leverage, 10.61% common equity Tier 1 and 11.87% total risk-based capital. The Company elected the five-year regulatory transition for CECL.
Material changes and notable items
- Net interest margin contracted 45 basis points year over year in Q2 as yields on earning assets fell faster than funding costs. Q2 weighted-average yield on earning assets was 3.47%, versus 4.28%; cost of interest-bearing liabilities was 0.68%, versus 1.12%.
- Non-interest income was $14.4 million in Q2, down $1.5 million year over year, mainly from lower deposit-related fees and wealth-management income. Six-month non-interest income increased to $31.4 million, largely reflecting loan-level swap fees and the 2019 T&L wealth-management acquisition.
- Non-interest expense was $55.3 million in Q2 and $109.4 million for six months. Q2 included $5.3 million of off-balance-sheet credit-loss expense, $683,000 of SB One merger expenses and $1.0 million of COVID-19-related costs. Six-month merger expenses were $1.1 million.
- CECL was adopted January 1, 2020. Adoption increased the loan allowance by $7.9 million and established a $3.2 million off-balance-sheet credit exposure liability; the cumulative after-tax reduction to retained earnings was $8.3 million. The filing says CECL forecasts incorporate six quarters followed by a four-quarter reversion period.
- As of June 30, the company had originated 1,025 PPP loans totaling $400.3 million. At July 31, COVID-related payment deferrals had declined from a peak $1.31 billion to $404.1 million; $354.4 million had been or was expected to be granted a second 90-day deferral. These are subsequent-period figures disclosed in the filing.
Outlook, risks and contingencies
- The filing provides no numerical earnings or full-year guidance. Management cautions that COVID-19’s effects remain uncertain and that results may be affected by borrower distress, unemployment, collateral values, credit-loss estimates, low interest rates and reduced wealth-management revenues.
- Management identifies the allowance for credit losses and deferred-tax-asset valuation as critical estimates. Future provisions may rise if economic conditions or forecasts deteriorate.
- Interest-rate simulations project 12-month net interest income down 3.2% under a 100-basis-point decline and up 2.9% under a 300-basis-point increase. An immediate, sustained 100-basis-point decline would reduce modeled economic value of equity by 15.2%; these are model estimates, not forecasts.
- The SB One Bancorp acquisition closed July 31, 2020, after the reporting date. SB One had approximately $2.22 billion in assets, $1.78 billion in loans and $1.75 billion in deposits; consideration was approximately $180.8 million, including about 12.8 million Provident shares.
- Management said routine legal proceedings were not expected to have a material adverse effect. The filing also describes derivative-counterparty termination provisions and $139.7 million of collateral posted against derivative obligations.
Important facts for investors to verify
- Whether COVID-19 deferral borrowers resume regular payments, particularly hotel, retail and restaurant credits, and how the portfolio’s criticized loans and non-performing assets evolve.
- Whether CECL reserves remain adequate as economic forecasts change, including the allowance on commercial real estate and off-balance-sheet commitments.
- Whether PPP loan forgiveness, repayment timing and fee recognition affect loan balances, income and liquidity as expected.
- How SB One’s integration, share issuance, acquired credit quality and potential cost savings affect results and capital after closing.
- Whether lower asset yields, deposit pricing and interest-rate conditions continue to pressure net interest margin and earnings.