Provident Financial Services, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. The company is a bank holding company operating Provident Bank, a community bank serving northern and central New Jersey and eastern Pennsylvania.
Key financial results
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total assets at year-end | $9.81 billion | $9.73 billion | +0.9% |
| Total loans, net | $7.28 billion | $7.20 billion | +1.1% |
| Deposits | $7.10 billion | $6.83 billion | +4.0% |
| Borrowed funds | $1.13 billion | $1.44 billion | −22.0% |
| Net interest income | $298.0 million | $300.7 million | −0.9% |
| Net income | $112.6 million | $118.4 million | −4.9% |
| Diluted EPS | $1.74 | $1.82 | −4.4% |
| Net interest margin | 3.35% | 3.39% | −4 bps |
| Efficiency ratio | 55.72% | 53.36% | Higher expenses relative to income |
Interest income rose 3.2% to $371.5 million, but interest expense increased 24.3% to $73.5 million as funding costs rose faster than asset yields. Non-interest income increased 8.7% to $63.8 million, including wealth-management income of $22.5 million, up from $18.0 million. Non-interest expense rose 5.1% to $201.6 million. Return on average assets was 1.15% and return on average equity was 8.07%.
Net cash provided by operating activities was $136.9 million, compared with $155.7 million in 2018. Investing activities provided $42.9 million and financing activities used $135.7 million. Cash and cash equivalents ended the year at $186.7 million, up from $142.7 million. Cash dividends paid totaled $72.8 million ($1.12 per share); the company also repurchased 916,326 shares for $21.8 million.
Core deposits were $6.37 billion, or 89.7% of deposits. Regulatory capital remained strong: the company’s total risk-based capital ratio was 13.47%, and the Bank’s was 12.82%; both were reported as well-capitalized. Year-end stockholders’ equity was $1.41 billion.
Material changes and notable items
- Non-performing assets increased to $42.9 million, or 0.44% of assets, from $27.3 million, or 0.28%, in 2018. Non-performing loans rose to $40.2 million from $25.7 million, mainly reflecting deterioration in several commercial relationships. The allowance was $55.5 million, or 0.76% of loans, versus $55.6 million, or 0.77%.
- Commercial real estate, multifamily, construction and commercial loans represented 80.0% of the loan portfolio. Management emphasizes these higher-yielding categories while acknowledging their greater credit risk.
- Beacon acquired certain assets of wealth manager Tirschwell & Loewy on April 1, adding $822.4 million of assets under management at acquisition. The company recorded $8.2 million of goodwill, $13.4 million of customer-relationship and other intangibles, and contingent consideration that increased to $9.4 million by year-end; potential total earn-out payments are capped at $11.0 million.
- The 2019 results included $2.2 million of interest income from prepayment of previously non-accrual loans. FY2018 included a $1.9 million nonrecurring tax benefit and a $1.6 million after-tax gain on Visa shares. FY2019’s effective tax rate rose to 23.4% from 17.7%, largely due to New Jersey tax treatment changes and the prior-year tax benefit.
- Quarterly net income was $26.0 million in Q4 2019 versus $35.8 million in Q4 2018. Q4 2019 included a $2.9 million loan-loss provision and higher non-interest expense; management attributed a $2.8 million increase in the T&L contingent-consideration estimate to favorable performance and projections.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management stated it expected consolidated assets to exceed $10 billion in 2020, potentially bringing additional CFPB supervision, lower debit-card interchange income, higher regulatory costs and, after four consecutive quarters above the threshold, different FDIC assessment treatment.
- CECL became effective for the company on January 1, 2020. Based on its fourth-quarter parallel run, management expected the allowance for credit losses to increase approximately 15%–20% at adoption, with a cumulative-effect adjustment to retained earnings; it planned to phase in the regulatory capital effect over three years.
- Interest-rate sensitivity modeling projected a 2.5% ($7.1 million) reduction in 12-month net interest income from a gradual 300-basis-point rate increase, and a 0.3% ($782,000) decrease from a 100-basis-point decline. These are model estimates based on assumptions, not forecasts.
- Key risks include commercial real estate and commercial-loan concentration, local economic and property-market conditions, interest-rate and funding-cost changes, liquidity, competition, cybersecurity and third-party systems, and regulatory changes. CRE loans were 425.6% of risk-based capital; the filing noted the portfolio had not also met the stated 50% three-year growth condition for heightened supervisory scrutiny.
- Loans tied to LIBOR totaled $1.75 billion at year-end; the company had not selected a replacement benchmark. The filing also identified uncertainty around possible loss of New Jersey public-fund deposits to a proposed state bank, and noted COVID-19 as a potential external risk.
- Off-balance-sheet commitments and letters of credit totaled $1.47 billion. Management said ordinary-course legal actions were not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether elevated non-performing loans and impaired commercial relationships lead to further charge-offs or allowance increases.
- The actual CECL adoption adjustment and its effects on retained earnings, provisions and regulatory capital.
- Progress toward and the timing of crossing the $10 billion asset threshold, including related compliance costs and revenue effects.
- Whether deposit growth and lower borrowings can continue to offset rising deposit costs and protect net interest margin.
- Performance and retention of T&L’s acquired assets under management, and the final contingent consideration payable.
- LIBOR transition plans for the $1.75 billion of linked loans, and the sensitivity of results to interest-rate and local-market changes.