Provident Financial Services, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless otherwise noted. Figures are in U.S. dollars; financial statement amounts are generally in millions.
Business context and financial position
Provident is a bank holding company whose loan portfolio is predominantly commercial real estate, multifamily, commercial and construction lending. The company reported total assets of $14.03 billion at June 30, 2023, up $246.2 million from year-end 2022. Loans rose $281.6 million to $10.53 billion, while deposits declined $301.9 million to $10.26 billion.
Results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $149.9 | $106.3 | $293.5 | $207.3 |
| Net interest income | $99.1 | $99.5 | $207.4 | $194.0 |
| Provision for loan credit losses | $10.4 | $3.0 | $16.4 | $(3.4) benefit |
| Non-interest income | $19.4 | $20.9 | $41.5 | $41.1 |
| Non-interest expense | $64.5 | $63.8 | $134.0 | $125.7 |
| Net income | $32.0 | $39.2 | $72.5 | $83.2 |
| Diluted earnings per share | $0.43 | $0.53 | $0.97 | $1.11 |
Net interest margin was 3.11% for Q2, down 10 basis points year over year, and 3.29% for the first half, up 18 basis points. Q2 interest expense rose sharply as deposit and borrowing costs increased; the average cost of interest-bearing liabilities was 2.13%, versus 0.31% a year earlier. Q2 income before taxes was $43.6 million and the effective tax rate was 26.7%.
At June 30, cash and cash equivalents were $208.9 million. Borrowed funds increased $512.3 million from year-end to $1.85 billion, or 13.2% of assets. Stockholders’ equity was $1.64 billion. The allowance for credit losses was $102.1 million, equal to 0.97% of loans. Available-for-sale securities had $248.1 million of gross unrealized losses; accumulated other comprehensive loss was $162.5 million.
For the first six months, operating cash flow was $85.4 million, investing cash outflow was $244.4 million, and financing cash inflow was $181.4 million. Cash and cash equivalents increased $22.4 million to $208.9 million, including restricted cash.
Changes versus prior periods
- Q2 net income declined $7.2 million year over year, while first-half net income fell $10.7 million. Management attributed the pressure principally to higher funding costs and increased credit-loss provisions; Q2 merger costs were $2.0 million and first-half costs were $3.1 million.
- First-half net interest income increased $13.4 million, supported by higher loan yields and loan growth, but Q2 net interest income slipped $0.4 million as deposit and borrowing costs rose and lower-cost deposits declined.
- Deposits fell $301.9 million from year-end, including a $570.8 million decrease in savings and demand accounts, partly offset by a $268.9 million increase in time deposits. Insured cash sweep deposits increased to $382.9 million from $58.9 million.
- Non-performing loans decreased to $45.9 million, or 0.44% of loans, from $58.5 million, or 0.57%, at year-end. Foreclosed assets rose to $13.7 million from $2.1 million; total non-performing assets were $59.6 million.
Outlook, risks and unusual items
The filing provides no specific earnings or financial guidance. Management reported that its CECL forecast incorporated worsening economic conditions and projected commercial property-price indices, driving higher provisions. A more pessimistic commercial real estate price-index scenario would have increased the provision by $6.5 million and the loan allowance coverage ratio from 97 to 103 basis points.
Liquidity and funding remain important focus areas amid deposit outflows. At June 30, the Bank reported $3.82 billion of on-balance-sheet liquidity and borrowing capacity, equal to 140% of estimated uninsured and uncollateralized deposits of $2.72 billion. Available FHLBNY and FRBNY borrowing capacity was $1.31 billion and $1.69 billion, respectively. The Bank had pledged approximately $521 million of unencumbered securities to the Federal Reserve Bank of New York’s Bank Term Funding Program and had not drawn on the facility.
The pending Lakeland Bancorp merger had board and shareholder approval. Lakeland shares are to be exchanged for 0.8319 shares of Provident common stock, plus cash for fractional shares; completion timing and final consideration depend on closing. Forward-looking risks include merger completion and integration, deposit and funding costs, interest-rate movements, commercial real estate values, credit performance and the broader economic and banking environment. Management said routine legal proceedings are not expected to have a material adverse impact. The company reported that disclosure controls were effective.
In an unusual post-quarter disclosure, an August 2, 2023 transition agreement provided for a senior executive’s employment to end after the merger-related transition period, with a potential $875,000 bonus and $1.65 million severance, subject to stated conditions.
Important facts for investors to verify
- Whether deposit trends, deposit mix and funding costs stabilize, and how much borrowing is required to fund the balance sheet.
- Credit quality in commercial real estate and commercial lending, including foreclosed assets, criticized loans, non-performing balances and future CECL assumptions.
- The continuing effect of interest-rate changes on net interest margin and earnings; the company’s model estimates a 0.5% increase in 12-month net interest income under a +200-basis-point ramp and a 0.8% decrease under a −200-basis-point ramp.
- Merger closing, integration costs and execution of the disclosed transition arrangements.
- Liquidity and capital figures, including uninsured-deposit estimates, available borrowing capacity and regulatory capital ratios; reported Bank ratios included 11.20% CET1 and 12.00% total risk-based capital.