Provident Financial Services, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company is a bank holding company whose wholly owned subsidiary is Provident Bank. Unaudited results are consolidated.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $73.5 million | $75.8 million | $225.1 million | $223.3 million |
| Provision for loan losses | $0.5 million | $1.0 million | $10.2 million | $21.9 million |
| Non-interest income | $18.0 million | $15.9 million | $46.1 million | $43.1 million |
| Non-interest expense | $49.7 million | $46.7 million | $147.8 million | $142.4 million |
| Net income | $31.4 million | $35.5 million | $86.7 million | $82.6 million |
| Diluted EPS | $0.49 | $0.54 | $1.34 | $1.27 |
- Q3 net interest margin was 3.23%, down from 3.38% a year earlier; nine-month margin was 3.35%, versus 3.33% in 2018. The nine-month comparison included $2.2 million of interest recognized on prepayment of previously non-accrual loans in Q2.
- Total assets were $9.92 billion at September 30, up $192.6 million from year-end 2018. Loans were $7.27 billion; deposits were $6.96 billion; borrowed funds were $1.38 billion.
- Cash and cash equivalents were $260.9 million, compared with $142.7 million at December 31, 2018. For the nine months, operating cash flow was $108.6 million, investing cash flow was $19.7 million, and financing cash flow was negative $10.1 million.
- Stockholders’ equity was $1.40 billion. Book value per share was $21.26 and tangible book value per share was $14.60.
- At September 30, the Bank’s total risk-based capital ratio was 12.53%; its Tier 1 leverage ratio was 9.56%. The company reported that both it and the Bank exceeded applicable minimum regulatory capital requirements.
Material changes and operating developments
- Q3 net income fell from 2018, chiefly as higher deposit and borrowing costs compressed net interest margin; the company said growth in interest-earning asset yield partly offset this pressure. Nine-month net income increased, supported by higher net interest income and a lower loan-loss provision.
- Deposit interest expense increased $3.9 million in Q3 and $12.9 million for the first nine months. The average cost of interest-bearing deposits rose to 0.87% in Q3 from 0.60% a year earlier. Nine-month average borrowing cost rose to 2.13% from 1.81%.
- Wealth management income rose to $6.1 million in Q3 and $16.4 million for nine months, primarily reflecting the April acquisition of certain assets of Tirschwell & Loewy. The transaction added approximately $822 million of assets under management; total acquisition cost was $21.6 million, including $6.6 million of contingent consideration.
- Non-performing loans increased to $40.0 million, or 0.55% of loans, from $25.7 million, or 0.35%, at year-end. Non-performing assets were $41.5 million, or 0.42% of assets. The allowance for loan losses was $57.3 million, equal to 0.79% of loans, versus $55.6 million and 0.77% at year-end.
- The nine-month provision reflected deterioration in several commercial credit relationships, including a $5.7 million commercial contractor relationship that was charged off in Q3. Net charge-offs were $8.4 million for the nine months, down from $28.2 million in 2018.
- Deposits increased $131.2 million from year-end, while borrowings declined $62.2 million as deposit inflows partly replaced wholesale funding. Core deposits were 87.9% of total deposits, down from 89.0% at year-end; the increase in time deposits included growth in brokered deposits.
- The company repurchased 916,326 shares during the first nine months at an average cost of $23.81; 1.6 million shares remained authorized for repurchase at quarter-end.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management identified credit quality and loan-loss estimates as important areas of judgment. Cited portfolio risks include economic or real estate deterioration, unemployment, commercial property vacancies and interest-rate changes. Non-performing commercial loans and classified or criticized loans increased during the period.
- Interest-rate modeling projected a 1.2% reduction in 12-month net interest income under a gradual 300-basis-point rate increase; an immediate, sustained 300-basis-point increase was projected to reduce present value of equity by 11.3%. Management cautioned that model assumptions and actual outcomes may differ.
- The company expected to adopt the current expected credit loss standard in 2020 and said the impact could not yet be reasonably estimated; adoption could increase the allowance for credit losses.
- The New Jersey tax treatment of real estate investment trusts contributed to a higher effective tax rate: 24.0% for Q3 and 23.4% for nine months, compared with 19.5% and 19.1% in 2018.
- Adoption of lease accounting added $43.5 million of right-of-use assets and $44.6 million of lease liabilities at quarter-end. T&L’s contingent consideration may require additional cash payments, up to $11.0 million, if specified targets are met.
- Management stated that ordinary-course legal claims were not expected to materially adversely affect financial condition; disclosed risk factors were unchanged from the 2018 Form 10-K.
Important facts for investors to verify
- Whether elevated non-performing commercial loans and impaired-loan balances lead to further charge-offs, provisions or allowance increases.
- Whether deposit pricing and funding mix continue to pressure net interest margin, particularly as brokered and time deposits grow.
- How much of nine-month earnings growth is sustainable after excluding the $2.2 million non-accrual loan prepayment interest benefit and considering higher expenses and taxes.
- The performance and retention of T&L’s acquired assets under management, and any contingent consideration ultimately payable.
- The eventual adoption impact of expected-credit-loss accounting and the sensitivity of management’s estimates to economic and collateral conditions.