Business context and reporting period
Provident Financial Services, Inc. (NYSE: PFS), a bank holding company, filed this unaudited Form 10-Q for the quarter ended September 30, 2020. Comparisons are with the third quarter and first nine months of 2019, or with December 31, 2019 for balance-sheet items. Results include two months of SB One Bancorp operations following its July 31, 2020 acquisition.
Financial performance and position
Dollars in millions, except per-share data and ratios.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $82.0 | $73.5 | $223.8 | $225.1 |
| Provision for loan credit losses | $6.4 | $0.5 | $32.0 | $10.2 |
| Non-interest income | $20.6 | $18.0 | $52.0 | $46.1 |
| Non-interest expense | $59.8 | $49.7 | $169.2 | $147.8 |
| Net income | $27.1 | $31.4 | $56.4 | $86.7 |
| Diluted EPS | $0.37 | $0.49 | $0.84 | $1.34 |
| Net interest margin | 3.01% | 3.23% | 3.06% | 3.35% |
- Net income declined year over year in both periods. Lower funding costs and acquired SB One balances supported quarterly net interest income, but lower asset yields compressed margin. The nine-month net interest income total was slightly lower than in 2019.
- At September 30, total assets were $12.87 billion, loans $9.76 billion, deposits $9.56 billion, and stockholders’ equity $1.60 billion. Assets, loans and deposits increased substantially from year-end, largely reflecting SB One and organic growth.
- Cash and cash equivalents were $510.1 million. Nine-month cash flows were $44.6 million from operations, negative $450.2 million from investing, and positive $729.0 million from financing; cash increased $323.4 million. Cash included $136.7 million pledged as collateral or required for regulatory reserves.
- Borrowed funds were $1.41 billion and subordinated debentures were $25.1 million. Deposits were $9.56 billion; core deposits represented 88.0% of deposits. The filing reports the Bank’s total risk-based capital ratio at 11.37% and the Company’s at 11.91%, above stated regulatory minimums.
- The allowance for loan credit losses was $106.3 million, or 1.09% of loans (1.16% excluding PPP loans), versus $55.5 million, or 0.76%, at year-end. Non-performing loans were $49.0 million (0.50% of loans); non-performing assets were $53.7 million (0.42% of assets).
Material changes versus comparable periods
- SB One added approximately $2.20 billion of assets, $1.77 billion of loans, $1.76 billion of deposits and 18 branches. PFS issued 12.8 million shares; consideration was $180.8 million. The acquisition included an insurance agency, contributing $1.7 million of reported nine-month insurance income. Three acquired offices were expected to close in Q4 2020.
- Commercial real estate, commercial and construction loans rose to 82.3% of the loan portfolio from 80.0% at year-end. PPP loans totaled $474.8 million at September 30.
- Net interest margin fell 22 basis points year over year in Q3 and 29 basis points for the first nine months. The decline in earning-asset yields outpaced lower funding costs.
- Non-interest expense rose, reflecting acquired operations, employee and technology costs, FDIC assessments, and merger costs. Merger-related expense was $2.0 million in Q3 and $3.1 million year to date.
- CECL adoption on January 1, 2020 increased loan and off-balance-sheet credit allowances and reduced retained earnings by $8.3 million net of tax. Prior-year figures use the prior accounting method.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management cautioned that future credit provisions remain uncertain amid the pandemic and evolving economic forecasts.
- COVID-19-related loan deferrals or modifications had declined from a peak of $1.31 billion to $310.8 million as of October 16, 2020. Of that remaining amount, $92.4 million was hotel-secured, $43.7 million retail-secured and $31.4 million restaurant-secured. The figure includes $47.5 million acquired from SB One.
- Management cited potential deterioration in borrower repayment capacity, real-estate collateral values, unemployment and commercial property occupancy as material credit risks. It also identified margin pressure from low interest rates, possible declines in wealth-management revenue, goodwill impairment risk, and heightened cybersecurity exposure from remote work.
- Interest-rate sensitivity modeling projected a 3.2% decline in 12-month net interest income under a 100-basis-point rate decrease and a 1.4% increase under a 300-basis-point increase. The filing cautions that model assumptions limit predictive accuracy.
- Management reported effective disclosure controls. Internal financial-reporting controls were modified for CECL adoption and SB One. Ordinary-course legal claims were not expected to have a material adverse effect.
Key facts for investors to verify
- How SB One integration, branch closures and acquisition accounting adjustments affect expenses, goodwill and future earnings.
- Whether credit quality and the allowance remain adequate as COVID-19 deferrals expire, particularly in commercial real estate and hospitality exposures.
- The sustainability of net interest margin and earnings under persistently low rates, given the filing’s asset-yield and rate-sensitivity disclosures.
- Deposit growth and funding trends, including reliance on borrowings and the treatment of PPP-related and stimulus-linked deposits.
- Capital and liquidity after acquisition-related growth, collateral requirements and the phased regulatory-capital treatment of CECL.