Provident Financial Services, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Comparisons are with the corresponding 2020 periods unless otherwise noted. Balance-sheet changes are versus December 31, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context and financial performance
Provident Financial Services is a bank holding company whose principal subsidiary is Provident Bank. Results include the SB One Bancorp acquisition, completed July 31, 2020; year-over-year comparisons therefore reflect the acquired business as well as organic changes.
| Metric | Q3 2021 | Nine months 2021 |
|---|---|---|
| Net interest income | $91.2 million, up $9.2 million | $272.1 million, up $48.3 million |
| Non-interest income | $23.4 million, up $2.7 million | $66.2 million, up $14.2 million |
| Net income | $37.3 million; $0.49 basic and diluted EPS | $130.6 million; $1.71 basic and $1.70 diluted EPS |
| Net interest margin | 2.94%, down 3 basis points | 2.99%, down 4 basis points |
| Provision for loan credit losses | $1.0 million expense | $24.7 million benefit (negative provision) |
| Non-interest expense | $63.4 million, up $3.7 million | $188.0 million, up $18.8 million |
Higher net interest income reflected growth in average earning assets, including SB One assets and securities, lower funding costs, and accelerated recognition of fees on forgiven PPP loans. PPP fee accretion was $2.5 million in Q3 and $9.3 million year to date. The margin nevertheless declined as asset yields fell. Higher wealth-management and insurance-agency income also supported non-interest income; the Durbin Amendment interchange-fee cap affected debit-card revenue beginning July 1, 2021.
Balance sheet, liquidity, credit quality and capital
- Assets and funding: Total assets were $13.39 billion, up $472.2 million from year-end 2020. Deposits rose $998.8 million to $10.84 billion; cash and cash equivalents were $505.3 million. Total investments reached $2.38 billion, up $763.9 million, while total loans declined $268.3 million to $9.55 billion.
- Borrowings and debt: Borrowed funds fell $558.6 million to $617.4 million, or 4.6% of assets, mainly as deposits replaced FHLB funding. Subordinated debentures were $25.2 million. Scheduled FHLB advance maturities included $347.6 million due within one year. The company described available borrowing channels and enhanced collateral monitoring; no liquidity shortfall was reported.
- Loan mix and credit: Commercial real estate, commercial and construction loans were 83.7% of the portfolio. The allowance for loan losses was $80.0 million, or 0.84% of loans, versus $101.5 million and 1.03% at year-end. Non-performing loans declined to $66.2 million (0.69% of loans) from $87.1 million; non-performing assets were $67.8 million (0.51% of assets), down from $91.6 million. Net recoveries for the nine months were $3.3 million. Management attributed the lower allowance and negative year-to-date provision mainly to improved asset quality and a better economic forecast.
- Cash flow: For the nine months, operating activities provided $123.8 million, investing activities used $526.1 million and financing activities provided $375.2 million. Cash and cash equivalents decreased $27.1 million to $505.3 million. Investing outflows included $1.14 billion of available-for-sale securities purchases; financing included $998.8 million of net deposit growth and net repayment of long-term borrowings.
- Equity and regulatory capital: Stockholders’ equity was $1.68 billion, up $59.6 million from year-end. The company repurchased 675,380 shares year to date for an average $22.00 per share; 3.44 million shares remained authorized for repurchase at quarter-end. The Bank reported a 10.89% common equity Tier 1 ratio and 11.55% total risk-based capital ratio; it exceeded stated minimum requirements.
Material changes, outlook, risks and unusual items
- Loan balances contracted despite strong funding, in part because of paydowns and PPP forgiveness. PPP loans outstanding fell to $173.8 million from $473.2 million at year-end; $508.1 million of PPP loans had been forgiven by September 30.
- Operating costs rose, notably compensation, occupancy and FDIC insurance. Management linked increases to the SB One footprint and staff, incentive and stock-based compensation, and higher assessment costs. The filing reports no formal earnings or financial guidance.
- Management said the pandemic’s effects remain uncertain, including possible impacts on demand, employment, borrowers, collateral values, credit losses, staffing and cybersecurity. Other stated risks include interest-rate changes, competition, regulation, acquisition integration, funding availability and credit risk.
- Interest-rate simulations estimated a 3.6% decline in 12-month net interest income under a gradual 100-basis-point rate decrease; a 300-basis-point increase produced minimal modeled change. An immediate, sustained 100-basis-point decrease reduced modeled economic value of equity by 13.0%. Management cautioned that model assumptions make these estimates imprecise.
- Unusual items included a $3.4 million reduction in contingent consideration from the 2019 T&L acquisition, recognized in other income, and loan-level PPP fee accretion. Available-for-sale securities had $11.9 million of gross unrealized losses at quarter-end, which the filing associated mainly with higher market interest rates; accumulated other comprehensive income fell to $7.8 million from $17.7 million at year-end.
- The company reported no material change to previously disclosed risk factors. Management said ordinary-course legal matters were not expected to materially affect financial condition. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the $24.7 million year-to-date credit-loss benefit is sustainable, and how allowance assumptions respond to economic and portfolio changes.
- Trends in commercial real estate concentration, non-performing loans, criticized credits, charge-offs and PPP runoff.
- Whether deposit growth and lower funding costs persist, and the effect of asset yields and market rates on net interest margin and earnings.
- Liquidity and refinancing needs, especially the $347.6 million of FHLB advances due within one year, alongside deposit composition and outflows.
- How much of earnings growth reflects SB One, PPP fee accretion, market-related wealth-management income and other nonrecurring items.