Provident Financial Services, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2021. Provident Financial Services is a bank holding company whose subsidiary, Provident Bank, conducts its banking business. Results include the effects of the July 2020 SB One Bancorp acquisition; comparisons with 2020 are therefore affected by the absence of SB One in the prior-year periods.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $90.9 million | $69.8 million | $180.9 million | $141.8 million |
| Non-interest income | $21.2 million | $14.4 million | $42.8 million | $31.4 million |
| Non-interest expense | $62.7 million | $55.3 million | $124.6 million | $109.4 million |
| Net income | $44.8 million | $14.3 million | $93.3 million | $29.2 million |
| Diluted EPS | $0.58 | $0.22 | $1.22 | $0.45 |
| Net interest margin | 2.99% | 2.94% | 3.02% | 3.06% |
- Credit provision and profitability: The company recorded a $10.7 million benefit (negative provision) for loan credit losses in Q2 and a $25.7 million benefit for the first half, versus provisions of $10.9 million and $25.6 million, respectively, in 2020. Management attributed the releases to a more favorable economic forecast and significant recoveries on a previously charged-off loan.
- Balance sheet at June 30: Total assets were $13.22 billion, up $297.2 million from December 31, 2020. Gross loans were $9.55 billion, down from $9.84 billion; net loans were $9.46 billion. Available-for-sale and held-to-maturity debt securities totaled approximately $1.99 billion.
- Funding and liquidity: Deposits rose $752.2 million to $10.59 billion, while borrowed funds fell $482.6 million to $693.3 million. Cash and cash equivalents increased $177.8 million to $710.2 million. First-half operating cash flow was $88.4 million; investing cash flow was negative $149.0 million and financing cash flow was positive $238.4 million.
- Credit quality: The allowance for loan losses was $81.0 million, or 0.85% of total loans, versus $101.5 million and 1.03% at year-end. Non-performing loans were $80.1 million (0.84% of loans), and non-performing assets were $82.4 million (0.62% of assets).
- Capital: Stockholders’ equity was $1.68 billion. At June 30, the company reported a 9.59% Tier 1 leverage ratio and a 12.32% total risk-based capital ratio; the Bank’s corresponding ratios were 9.05% and 11.66%. Both reported capital above applicable minimums.
Material changes versus the prior comparable period
- Net income rose substantially, supported by higher net interest income, the SB One acquisition’s added earning assets and businesses, and the swing from credit-loss provisions to benefits.
- Net interest income increased, while net interest margin edged up year over year in Q2 but declined for the first half. Lower funding costs helped offset lower yields on earning assets and securities.
- Non-interest income grew, including new insurance agency revenue from SB One and higher wealth management and fee income. Non-interest expense also increased, notably compensation, occupancy and FDIC insurance costs, partly reflecting SB One.
- Loans declined despite originations, primarily due to repayments and PPP forgiveness. Total PPP loans outstanding fell to $309.4 million from $473.2 million at year-end.
- Available-for-sale securities increased as the company purchased securities; unrealized losses increased in number, which management attributed to higher market interest rates.
Outlook, commentary and risks
- No numerical earnings or financial guidance is provided in the filing. Management cautions that interim results are not necessarily indicative of full-year results.
- COVID-19-related deferrals had fallen from a peak of $1.31 billion to $7.3 million as of July 16, 2021; all remaining deferred loans were reported as performing. The filing notes continuing uncertainty about the pandemic and economic recovery.
- Management identifies economic deterioration, falling real estate values, unemployment, commercial-property vacancies and interest-rate movements as risks to borrowers, credit losses and earnings. The allowance estimate depends on forecasts and significant judgment.
- Interest-rate modeling projected that a 300-basis-point increase would raise 12-month net interest income by 1.9%, while a 100-basis-point decrease would reduce it by 3.7%. An immediate, sustained 100-basis-point decline was modeled to reduce economic value of equity by 13.9%. Management cautions that these models depend on assumptions and are not precise forecasts.
- Legal proceedings arising in the ordinary course were not expected by management to have a material adverse impact. The company reported no changes to previously disclosed annual-report risk factors.
Key facts investors should verify
- How much of the earnings increase reflects the SB One acquisition, PPP fee accretion and credit-loss reserve releases, and whether these drivers are repeatable.
- Whether loan growth resumes as PPP forgiveness and repayments continue, and how commercial real estate and commercial loan concentrations perform.
- Whether the allowance for credit losses remains appropriate as economic forecasts change, including developments in criticized loans, non-performing assets and COVID-19 deferrals.
- How deposit growth, funding costs and securities yields affect future net interest margin and liquidity.
- The assumptions and sensitivity behind interest-rate risk modeling, particularly the modeled impact of falling rates.