Business Context and Reporting Period
This Form 8-K, dated June 16, 2020, reports on Provident Financial Services, Inc. ("Provident") and its proposed merger with SB One Bancorp ("SB One"). The filing serves as a supplement to the definitive proxy statement/prospectus filed on May 8, 2020. The primary event is the resolution of two shareholder lawsuits (the "Merger Litigation") challenging the merger disclosures. To avoid litigation costs and delays, the companies agreed to make additional disclosures, leading to the dismissal of the lawsuits with prejudice to the individual plaintiffs.
Key Financial Metrics and Projections
The filing does not contain historical revenue, profit, or cash flow statements for the reporting period. Instead, it provides updated prospective financial information and merger impact analysis utilized by the financial advisor, KBW:
- SB One EPS Estimates: $2.51 for 2020 and $2.78 for 2021 (consensus analyst GAAP estimates).
- Provident EPS Estimates: $1.63 for 2020 and $1.65 for 2021 (consensus analyst GAAP estimates).
- Provident Asset Estimates: $10.2 billion (2020) and $10.6 billion (2021).
- Merger Accretion: The merger is projected to be accretive to Provident's estimated EPS by approximately 2.4% in 2020 and 9.1% in 2021.
- Merger Dilution: The merger is projected to be dilutive to Provident's estimated tangible book value per share by approximately 1.9% at closing (as of September 30, 2020).
- Capital Ratios: Pro forma capital ratios (Tangible Common Equity to Tangible Assets, Leverage, CET1, Tier 1, and Total Risk-based Capital) are projected to decrease by 41 to 63 basis points at closing.
- Cost Savings: Estimated at 30% of projected SB One non-interest expenses, with 25% phased in during fiscal 2020.
Material Changes and Litigation Resolution
The material change reported is the settlement of the Gomez and Parshall merger litigation. Plaintiffs alleged the proxy statement contained materially incomplete disclosures. The companies agreed to provide supplemental disclosures regarding prospective financial information, cost savings, and advisor fees. This agreement mooted the plaintiffs' disclosure claims, resulting in the dismissal of the lawsuits. The companies explicitly denied any wrongdoing or violation of law, stating the disclosures were made solely to eliminate litigation burdens and avoid delays to the merger closing.
Guidance, Outlook, and Risks
Outlook and Management Commentary: Management maintains that the merger remains on track and the additional disclosures do not affect the merger consideration or the timing of the shareholder meeting. The financial advisor's analysis assumes a tangible common equity to tangible asset ratio of 9.00% for both entities to calculate excess cash flows.
Risks and Contingencies: The filing highlights significant risks, including:
- COVID-19 Impact: Adverse effects on demand, loan delinquencies, collateral values, and net interest margins due to the pandemic and near-zero interest rates.
- Integration Risks: Potential failure to realize cost savings, deposit attrition, and business disruption.
- Market Risks: Competition, economic slowdown, and potential goodwill write-downs for Provident due to stock price declines.
- Advisor Fees: SB One agreed to pay KBW a fee of 1.20% of the aggregate merger consideration ($250,000 upfront, balance contingent on closing). KBW also received approximately $510,000 from SB One and $450,000 from Provident for prior services within the last two years.
Investor Verification Checklist
- Verify the final approval of the merger by SB One shareholders at the annual meeting.
- Review the full definitive proxy statement/prospectus to understand the complete context of the "Additional Disclosures."
- Monitor the actual realization of the projected 30% cost savings and EPS accretion post-merger.
- Assess the impact of the projected 1.9% dilution to tangible book value per share on long-term shareholder value.
- Track the companies' capital ratios post-closing to ensure they remain above regulatory minimums given the projected basis point decreases.