Provident Financial Services, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports quarterly results. Provident Financial Services is a bank holding company operating Provident Bank across New Jersey, eastern Pennsylvania and Queens, New York. The company completed its acquisition of SB One Bancorp on July 31, 2020.
Financial performance and position
Unless stated otherwise, amounts are in millions.
| Metric | 2020 | 2019 |
|---|---|---|
| Interest income | $363.3 | $371.5 |
| Net interest income | $312.6 | $298.0 |
| Non-interest income | $72.4 | $63.8 |
| Net income | $97.0 | $112.6 |
| Diluted EPS | $1.39 | $1.74 |
| Net interest margin | 3.09% | 3.35% |
| Efficiency ratio | 59.15% | 55.72% |
- Net interest income increased 4.9%, but net income declined 13.9%. Lower asset yields and increased credit provisions, operating expenses and share count weighed on results.
- Fourth-quarter net income was $40.6 million, or $0.53 per diluted share, versus $26.0 million, or $0.40 per diluted share, in Q4 2019. The quarter included a $2.3 million provision benefit, compared with a $2.9 million provision in Q4 2019.
- At year-end, total assets were $12.92 billion, net loans $9.72 billion, deposits $9.84 billion and stockholders’ equity $1.62 billion. The acquisition materially contributed to year-over-year balance-sheet growth.
- Operating cash flow was $106.9 million; investing cash use was $508.0 million and financing cash flow was $746.7 million. Cash and cash equivalents ended the year at $532.4 million, up from $186.7 million.
- Borrowed funds totaled $1.18 billion, up from $1.13 billion; subordinated debentures were $25.1 million, assumed in the SB One transaction. Core deposits were 88.9% of deposits. The filing states liquidity was managed daily and the Bank expected sufficient cash to meet funding requirements.
- The Bank was well capitalized: its year-end Tier 1 leverage and total risk-based capital ratios were 8.75% and 11.21%, respectively. Company ratios were 9.30% and 11.94%.
- The company paid $65.8 million in cash dividends and repurchased 1.3 million shares for $22.1 million during 2020. The Board authorized a subsequent repurchase program for up to approximately 3.9 million shares after the existing authorization is completed.
Material changes and notable items
- SB One acquisition: Added approximately $2.20 billion in assets, $1.77 billion in loans, $1.76 billion in deposits and 18 offices. Consideration was $180.8 million; $22.4 million of goodwill was recorded. 2020 included $6.3 million of acquisition and integration costs.
- Credit quality weakened: Non-performing assets rose to $91.6 million, or 0.71% of assets, from $42.9 million, or 0.44%. Non-performing loans increased to $87.1 million from $40.2 million. The company cited the pandemic and resulting uncertainty for borrowers.
- Reserves increased: The allowance for credit losses was $101.5 million, or 1.03% of loans, versus $55.5 million, or 0.76%. The 2020 figure reflects adoption of CECL, pandemic-related forecasts, and acquired SB One loans. Loan-loss provision was $29.7 million, compared with $13.1 million in 2019; net charge-offs declined to $5.3 million from $13.1 million.
- COVID-related loan deferrals/modifications outstanding or expected to need assistance declined from a peak of $1.31 billion to $207.4 million, including hotel, retail, multifamily and residential exposures. This balance included $49.2 million of hotel-secured loans.
- The company originated 1,287 PPP loans totaling $473.2 million at year-end; these loans are SBA-guaranteed and potentially forgivable.
- 2020 non-interest expense rose to $227.7 million from $201.6 million, including $1.4 million of direct COVID-related costs. Fee income fell $4.5 million, while wealth management income increased $3.2 million and insurance agency income contributed $3.5 million following the acquisition.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management describes a strategy of profitable growth, relationship banking, core-deposit growth and continued emphasis on commercial real estate, multifamily, construction and commercial lending.
- Management identifies pandemic developments, unemployment, property values, commercial-property vacancies and borrower repayment capacity as key uncertainties; further credit-loss provisions may be needed. Commercial real estate, multifamily, commercial and construction loans are significant exposures.
- The company’s year-end model projected net interest income up 2.6% ($8.8 million) under a gradual 300-basis-point rate increase, and down 2.8% ($9.5 million) under a 100-basis-point decrease. Management cautions that modeled assumptions may differ from actual outcomes.
- Total assets exceeded $10 billion, bringing additional regulatory oversight, including CFPB supervision, and potential higher compliance and FDIC costs and lower debit-card interchange income. Management also notes LIBOR transition risk; $2.27 billion of loans referenced LIBOR at year-end.
- Off-balance-sheet commitments and letters of credit totaled $1.99 billion. The filing says ordinary-course legal matters are not expected to materially affect financial condition or results.
- Auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether non-performing loans and pandemic-related deferrals continue to decline, particularly in commercial real estate, hotels, retail, student housing and restaurants.
- How CECL assumptions and economic forecasts affect allowance levels, provisions and earnings; the allowance is a significant estimate subject to uncertainty.
- Whether SB One integration delivers expected benefits and whether acquisition-related costs, goodwill and acquired-loan valuations change as purchase accounting is finalized.
- How net interest margin, deposit costs and the LIBOR transition evolve, alongside the impact of the company’s new regulatory scale and related expenses.
- Whether liquidity and capital remain adequate as commitments are drawn, deposits reprice or mature, and dividends and share repurchases continue.