Provident Financial Services, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Figures below are in U.S. dollars; financial statement amounts are generally shown in millions. The statements are unaudited.
Business context and financial position
Provident Financial Services is a bank holding company whose wholly owned subsidiary is Provident Bank. Total assets were $9.94 billion at June 30, 2019, up $212.5 million from December 31, 2018. Net loans were $7.23 billion; deposits were $6.87 billion; and borrowed funds were $1.51 billion. Stockholders’ equity was $1.39 billion.
Results and key metrics
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net interest income | $76.6 million | $74.3 million | $151.6 million | $147.6 million |
| Provision for loan losses | $9.5 million | $15.5 million | $9.7 million | $20.9 million |
| Non-interest income | $15.8 million | $13.8 million | $28.0 million | $27.1 million |
| Non-interest expense | $49.7 million | $48.8 million | $98.1 million | $95.7 million |
| Net income | $24.4 million | $19.2 million | $55.3 million | $47.2 million |
| Diluted EPS | $0.38 | $0.30 | $0.85 | $0.73 |
| Net interest margin | 3.42% | 3.33% | 3.41% | 3.31% |
For the six months, operating cash flow was $71.9 million versus $73.2 million in 2018; investing cash flow was negative $76.9 million versus positive $42.7 million; and financing cash flow was positive $70.0 million versus negative $164.8 million. Cash and cash equivalents rose $65.0 million during the first half to $207.7 million.
At June 30, the allowance for loan losses was $62.8 million, or 0.86% of loans, versus $55.6 million, or 0.77%, at year-end. Non-performing loans increased to $38.6 million (0.53% of loans) from $25.7 million (0.35%); non-performing assets were $40.2 million, or 0.40% of assets. The Bank’s total risk-based capital ratio was 12.66%; the Company’s was 13.05%. Core deposits were 88.7% of deposits.
Material changes and management commentary
- Net income rose year over year in both the quarter and first half. Higher net interest income and non-interest income, together with lower loan-loss provisions, contributed to the increase. Interest expense also rose, reflecting higher deposit and borrowing costs.
- Management attributed much of the 2019 provision to deterioration in two commercial credit relationships: a $5.7 million commercial-contractor relationship, fully reserved, and a $14.1 million syndicated franchise-operator exposure for which $3.3 million was provided.
- Q2 net interest margin benefited by about 10 basis points from $2.2 million of accelerated interest income when previously restructured loans were prepaid; the benefit was about 5 basis points for the first half.
- On April 1, Beacon Trust acquired certain assets of Tirschwell & Loewy, adding $822.4 million of assets under management. Acquisition cost was $21.6 million, including $15.0 million cash and $6.6 million contingent consideration; additional payments could reach $11.0 million if targets are met. The acquisition contributed to higher wealth-management income.
- Effective tax rates rose to 26.5% for Q2 and 23.0% for the first half, compared with 19.2% and 18.8%, respectively, in 2018. The company cited New Jersey tax guidance on REIT treatment in combined reporting.
- The company repurchased 243,912 shares in the first half, including shares withheld for taxes on stock awards. Stockholders received $44.3 million in cash dividends during the period.
Outlook, risks and unusual items
The filing provides no specific earnings or financial guidance. Management identified economic and real-estate conditions, borrower repayment capacity, credit quality, interest rates, deposit competition and funding costs, liquidity, acquisitions and integration, and regulatory or accounting changes as risks. The company said its allowance and deferred-tax-asset estimates involve significant judgment. It was assessing the expected-credit-loss standard (CECL), effective for the company beginning in 2020, and could not yet reasonably estimate its impact.
Interest-rate simulations estimated that a gradual 300-basis-point rate increase would reduce 12-month net interest income by 3.7%; an immediate, sustained 300-basis-point increase would reduce modeled present value of equity by 13.9%. Management cautioned that model assumptions may differ from actual results. Derivative agreements include default and capital-status termination provisions; the company reported a $35.3 million termination value for its net liability position and $35.0 million of collateral posted at June 30.
The company adopted lease accounting in 2019, recognizing a $44.5 million right-of-use asset and $45.6 million lease liability at June 30. Two commercial credit relationships drove elevated current-period provisions. Management stated that ongoing legal actions were not expected to materially adversely affect financial condition; the filing reported no changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the increase in non-performing loans and impaired commercial exposures leads to further provisions, charge-offs, or allowance growth.
- How much of earnings and margin performance reflects recurring operations versus the $2.2 million accelerated interest-income item and acquisition-related wealth fees.
- Deposit pricing, brokered-deposit growth, borrowing needs, and the effect of rising funding costs on future margins and liquidity.
- The eventual contingent consideration and integration results for the Tirschwell & Loewy acquisition, and the CECL adoption impact.
- Whether actual interest-rate and credit outcomes align with the filing’s model sensitivities and stated assumptions.