Provident Financial Services, Inc. — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023; comparisons are primarily with FY 2022. Provident Financial Services (NYSE: PFS) is a bank holding company operating through Provident Bank, with 94 branches across New Jersey, eastern Pennsylvania, and parts of New York. The filing was signed February 28, 2024.
Financial performance and condition
| Metric | FY 2023 / year-end | FY 2022 / comparison |
|---|---|---|
| Net income | $128.4 million | $175.6 million |
| Basic / diluted EPS | $1.72 / $1.71 | $2.35 / $2.35 |
| Net interest income | $399.5 million | $417.6 million |
| Net interest margin | 3.16% | 3.37% |
| Interest and dividend income | $615.8 million | $466.2 million |
| Interest expense | $216.4 million | $48.6 million |
| Provision for loan credit losses | $27.9 million | $8.4 million |
| Non-interest income | $79.8 million | $87.8 million |
| Non-interest expense | $275.6 million | $256.8 million |
| Total assets | $14.21 billion | $13.78 billion |
| Total loans, net | $10.77 billion | $10.16 billion |
| Total deposits | $10.29 billion | $10.56 billion |
| Borrowed funds | $1.97 billion | $1.34 billion |
| Stockholders’ equity | $1.69 billion | $1.60 billion |
Interest and dividend income plus non-interest income totaled approximately $695.6 million, versus $554.0 million in 2022. Higher asset yields did not offset the sharp rise in funding costs: average interest expense on interest-bearing liabilities increased to 2.24% from 0.54%, and the spread contracted to 2.63% from 3.22%. The effective income tax rate was 27.0%, versus 26.8%.
Cash provided by operating activities was $173.4 million, compared with $200.3 million. Investing activities used $469.6 million, primarily reflecting net loan growth; financing activities provided $290.0 million. Cash and cash equivalents ended the year at $180.3 million, versus $186.5 million.
Net loans grew $605.6 million. Deposit balances declined $270.5 million, while borrowed funds rose $632.7 million and reached 13.9% of assets. The Bank had $450 million outstanding under the Federal Reserve Bank Term Funding Program (BTFP) at year-end. Reported available borrowing capacity was $1.48 billion at the FHLBNY and $1.22 billion at the FRBNY.
The Bank reported regulatory capital ratios of 9.84% Tier 1 leverage, 11.12% common equity Tier 1, and 11.95% total risk-based capital; the Company’s corresponding ratios were 10.22%, 11.45%, and 12.39%. Both were reported as well capitalized.
Material changes and notable items
- Net income fell 26.9% and diluted EPS declined from $2.35 to $1.71, principally reflecting lower net interest income, a higher credit-loss provision, and increased expenses.
- Loan interest income rose with higher rates and loan growth, but deposit and borrowing costs increased substantially. Average borrowings rose $880.3 million to $1.64 billion.
- The loan-loss allowance increased to $107.2 million, or 0.99% of loans, from $88.0 million, or 0.86%. Net charge-offs were $8.1 million, versus $1.1 million.
- Non-performing assets were $61.3 million, or 0.43% of assets, compared with $60.6 million, or 0.44%. Non-performing loans declined to $49.6 million from $58.5 million, while foreclosed assets increased to $11.7 million from $2.1 million.
- Core savings and demand deposits fell to $9.20 billion, 89.4% of deposits, from $9.81 billion, 92.9%. Estimated uninsured and uncollateralized deposits were $2.52 billion, or 24.5% of deposits; estimated uninsured deposits including collateralized balances were $5.16 billion.
- Available-for-sale securities had a year-end fair value of $1.69 billion against amortized cost of $1.90 billion, an unrealized loss of approximately $211.7 million before tax. Accumulated other comprehensive loss improved to $141.1 million from $165.0 million.
- Dividends paid totaled $72.4 million. The company repurchased 71,781 shares for $1.7 million, all in connection with tax withholding on vested stock compensation.
Outlook, risks, and contingencies
- Lakeland merger: The pending stock-for-stock combination had received shareholder approvals but still required regulatory approvals and other closing conditions. The agreement was extended to March 31, 2024. Lakeland shareholders are to receive 0.8319 PFS shares per share; expected ownership of the combined company is approximately 58% PFS and 42% Lakeland. The filing describes no earnings or financial guidance.
- Merger-related exposure: PFS reported $7.8 million of merger costs in 2023 and warned of integration costs, delayed or unavailable approvals, potential failure to realize benefits, and a possible $50 million termination fee under specified circumstances. The combined bank is also expected to assume Lakeland Bank’s DOJ consent-order obligations, including lending, community investment, outreach, and branch commitments.
- Credit and concentration risk: Commercial real estate, multifamily, construction, and commercial lending form a large share of the portfolio. Management cited weaker commercial-property-price assumptions as the main driver of the higher provision. CRE exposure was 489.6% of risk-based capital, drawing elevated regulatory attention. Risks include refinancing, vacancies, falling property values, construction delays, and borrower distress.
- Rate, funding, and securities risk: Management noted that elevated rates and deposit competition can pressure margins and liquidity. At year-end, the company estimated a 0.4% increase in 12-month net interest income under a gradual 100-basis-point rate increase, but a 2.6% decline under a 300-basis-point decrease. These are model estimates, not forecasts, and rely on assumptions about deposit repricing and loan prepayments.
- Other matters: A putative class action alleges improper overdraft fees. PFS denies the allegations and is defending the case; it recorded a $3.0 million contingent litigation reserve in Q4 2023, while the outcome and potential additional exposure remain uncertain. FDIC insurance costs increased, including a $775,000 special assessment. Management cited economic, regulatory, cyber, third-party, climate, and local-market risks.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter due to estimation uncertainty and reliance on economic forecasts and model assumptions.
Investor verification priorities
- Verify the Lakeland merger’s regulatory status, any new conditions or extensions, ultimate completion terms, and expected integration costs and benefits.
- Track deposit trends, uninsured deposit levels, deposit pricing, wholesale funding usage, BTFP repayment or replacement, and available contingent liquidity.
- Review CRE and construction exposures—including office and rent-stabilized multifamily loans—alongside criticized loans, maturities, refinancing outcomes, and collateral values.
- Assess whether the $107.2 million allowance adequately reflects credit performance and updated commercial real-estate forecasts; compare provisions and charge-offs in subsequent periods.
- Monitor net interest margin and funding costs as rates and customer deposit behavior change, and compare actual results with the filing’s sensitivity-model assumptions.
- Follow the overdraft-fee litigation and any changes to the recorded reserve or disclosure of potential loss.