Business context and reporting period
Provident Financial Services, Inc. (NYSE: PFS) filed this Form 10-K for the fiscal year ended December 31, 2021. The company is a bank holding company operating Provident Bank, with banking, lending, wealth management and insurance businesses concentrated in New Jersey, eastern Pennsylvania and Queens County, New York. The results include the full year after the July 2020 SB One Bancorp acquisition.
Key financial metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total assets, year-end | $13.78 billion | $12.92 billion |
| Total loans, net, year-end | $9.50 billion | $9.72 billion |
| Total deposits, year-end | $11.23 billion | $9.84 billion |
| Net interest income | $366.0 million | $312.6 million |
| Non-interest income | $86.8 million | $72.4 million |
| Net income | $167.9 million | $97.0 million |
| Diluted earnings per share | $2.19 | $1.39 |
| Net interest margin | 3.00% | 3.05% |
| Net interest rate spread | 2.89% | 2.88% |
| Allowance for credit losses / total loans | 0.84% | 1.03% |
Interest income was $402.3 million and interest expense was $36.3 million. The company recorded a $24.3 million benefit (negative provision) for loan credit losses, versus a $29.7 million provision in 2020. Non-interest expense rose to $250.1 million from $227.7 million; income tax expense was $59.2 million and the effective tax rate was 26.1%.
Operating cash flow was $158.2 million; investing cash flow was negative $717.9 million, largely reflecting securities purchases; financing cash flow was positive $739.9 million, principally from deposit growth. Cash and cash equivalents were $712.5 million at year-end. Borrowed funds were $626.8 million, down from $1.18 billion, and subordinated debentures were $10.3 million, down from $25.1 million. Stockholders’ equity was $1.70 billion.
Material changes versus 2020
- Net income rose 73%, benefiting from higher average earning assets, lower funding costs, increased non-interest income and the credit-loss benefit. Net interest margin nevertheless contracted five basis points, mainly as cash and securities balances grew and some adjustable-rate loans repriced downward.
- Non-interest income increased $14.4 million, including growth in wealth management and insurance agency income. Non-interest expense increased $22.3 million, partly reflecting acquired SB One staff, facilities and higher FDIC costs.
- Year-end loans declined $241.3 million, despite $3.52 billion of loan fundings, as repayments and PPP forgiveness were elevated. PPP balances fell to $94.9 million from $473.2 million.
- Deposits increased $1.40 billion, with savings and demand accounts reaching 93.8% of deposits. Borrowings declined $549.2 million, in part as maturing FHLB funding was replaced with lower-cost deposits.
- Non-performing assets fell to $56.8 million, or 0.41% of assets, from $91.6 million, or 0.71%. Net loan recoveries were $3.6 million, compared with $5.3 million of net charge-offs in 2020.
Outlook, risks and unusual items
The filing provides no specific earnings or growth guidance. Management describes a strategy of profitable growth, relationship banking, core-deposit expansion, commercial lending and active interest-rate-risk management. It expects to maintain a regular quarterly dividend, subject to financial, economic and regulatory considerations; the board declared a $0.24-per-share quarterly dividend in January 2022. The company paid $71.5 million in dividends and repurchased 965,223 shares for approximately $21.7 million during 2021.
Key risks include the concentrated commercial real estate, commercial and construction loan portfolios; local economic and property-market weakness; uncertainty from COVID-19 and variants; credit-loss estimate sensitivity to economic forecasts; interest-rate, liquidity and securities valuation exposure; competition; cybersecurity and third-party service-provider risks; regulatory costs associated with assets exceeding $10 billion; and the transition from LIBOR. Commercial real estate exposure was 471.4% of risk-based capital, a level management identified as subject to heightened supervisory attention, although portfolio growth did not meet the cited 50% supervisory scrutiny threshold.
Unusual items included the $24.3 million negative loan-loss provision, $11.3 million of PPP forgiveness fees recognized in interest income, and a $3.4 million reduction in the estimated T&L acquisition earn-out liability. Available-for-sale securities had $17.9 million of gross unrealized losses at year-end, attributed primarily to higher market interest rates. Management reported no material CARES Act loan deferrals at year-end. Legal proceedings were described as ordinary-course matters not expected to materially affect results. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether credit quality and the allowance remain adequate if economic conditions, property values or borrower performance weaken; the allowance is a significant estimate and audit focus.
- How the large commercial real estate and commercial loan concentrations, including criticized and classified balances, develop.
- Whether deposit growth persists and how funding costs, liquidity and net interest margin respond to changing rates.
- The effect of interest-rate movements on the $2.06 billion available-for-sale securities portfolio, equity and earnings.
- Progress on LIBOR transition for $1.94 billion of LIBOR-linked loans, and ongoing compliance, cybersecurity and third-party risks.
- That regulatory capital remained above minimums at year-end: the Bank’s total risk-based capital ratio was 11.53%, and the company reported it and the Bank as well capitalized.