Provident Financial Services, Inc. — Q1 2020 Form 10-Q
Business context and period: Provident Financial Services, Inc. is a bank holding company whose principal subsidiary is Provident Bank. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Results reflect the early effects of the COVID-19 pandemic and adoption of the current expected credit loss (CECL) standard on January 1, 2020.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $72.0 million | $75.0 million in Q1 2019 |
| Provision for credit losses | $14.7 million on loans; $1.0 million on off-balance-sheet exposures | $0.2 million on loans in Q1 2019 |
| Net income; diluted EPS | $14.9 million; $0.23 | $30.9 million; $0.48 in Q1 2019 |
| Net interest margin | 3.20% | 3.40% in Q1 2019 |
| Non-interest income / expense | $17.0 million / $54.1 million | $12.2 million / $48.4 million in Q1 2019 |
| Assets | $10.08 billion | $9.81 billion at December 31, 2019 |
| Gross loans; allowance for credit losses | $7.37 billion; $75.1 million (1.02% of loans) | $7.34 billion; $55.5 million (0.76%) before CECL adoption |
| Deposits; borrowed funds | $7.21 billion; $1.21 billion | $7.10 billion; $1.13 billion at December 31, 2019 |
| Cash and cash equivalents | $370.6 million | $186.7 million at December 31, 2019 |
| Stockholders’ equity | $1.41 billion | $1.41 billion at December 31, 2019 |
- Q1 operating cash flow was $33.4 million, versus $31.4 million in Q1 2019. Investing activities used $27.0 million; financing activities provided $177.5 million, including $632.6 million of long-term borrowing proceeds, $300.2 million of repayments, and a net $243.8 million decrease in short-term borrowings. Cash increased $183.8 million during the quarter.
- Core deposits were $6.51 billion, or 90.3% of deposits. The quarter-end regulatory capital ratios exceeded minimums: Bank total risk-based capital was 11.98%, and Company total risk-based capital was 13.12%. The Bank’s common equity Tier 1 ratio was 11.17%.
Material changes versus comparable periods
- Net income fell about 52% year over year, as lower net interest income and higher operating costs compounded a substantial increase in credit-loss provisions. Management attributed the reserve build primarily to the weaker economic outlook associated with COVID-19.
- Net interest income declined $3.0 million, and net interest margin contracted 20 basis points. Asset yields fell more than funding costs: the average yield on interest-earning assets decreased 28 basis points, while the average cost of interest-bearing liabilities decreased 9 basis points.
- Non-interest income rose $4.8 million, led by higher wealth-management fees following the T&L acquisition and higher loan-level swap fees. Non-interest expense increased $5.7 million, including higher compensation and other operating costs.
- CECL adoption increased the loan allowance by $7.9 million and established a $3.2 million off-balance-sheet credit-loss liability. The combined after-tax cumulative adjustment reduced retained earnings by $8.3 million. Q1 credit provisions are separate from this adoption adjustment.
- Non-performing loans declined to $35.3 million from $40.2 million at year-end, while non-performing assets declined to $39.6 million from $42.9 million. Loan balances increased $39.2 million during the quarter.
Outlook, risks, contingencies and unusual items
- COVID-19 and credit exposure: Management said the full impact was uncertain and identified risks including increased delinquencies, defaults, foreclosures and credit losses; declining collateral values; weaker net interest margin in a near-zero-rate environment; and reduced wealth-management revenue. The company’s Q1 provision reflects an updated economic forecast, but future reserve needs remain uncertain.
- Borrower assistance and PPP: As of April 28, 2020, the company reported payment deferrals for 638 borrowers with $889.0 million in principal balances, and 820 PPP loans totaling $377.5 million. These are post-quarter-end figures.
- SB One merger: The March 11, 2020 agreement provides for 1.357 Provident shares per SB One share, plus cash for fractional shares. The transaction was expected to close in Q3 2020, subject to regulatory and SB One shareholder approvals. Q1 included $463,000 of related costs. Integration and realization of expected benefits are risks.
- Interest-rate sensitivity: The company’s model projected that a 100-basis-point rate decline would reduce 12-month net interest income by 3.0% ($8.2 million); a 300-basis-point increase would raise it by 0.5% ($1.4 million). A sustained 100-basis-point decline was modeled to reduce economic value of equity by 11.7%. Management cautioned that model assumptions limit precision.
- Other items: T&L’s acquired business performance was adversely affected by COVID-related market declines; its contingent-consideration liability remained $9.4 million, with maximum potential payments of $11.0 million. The company repurchased 286,816 shares during Q1. It elected the five-year regulatory-capital transition for CECL. Management reported effective disclosure controls; internal financial controls were modified for CECL adoption. Ordinary-course legal proceedings were not expected to have a material adverse impact.
Important facts for investors to verify
- How subsequent credit performance, borrower deferrals and economic forecasts affect provisions, charge-offs, non-performing loans and the allowance under CECL.
- Whether pandemic conditions further compress net interest margin, weaken asset yields or reduce deposits, liquidity and capital flexibility.
- Progress and approvals for the SB One merger, its final consideration value, integration costs and realization of anticipated benefits.
- Post-quarter developments in PPP lending and borrower assistance, and the associated funding, credit and operational effects.
- Whether T&L’s assets under management and contingent consideration change, and whether lower market values create impairment or other valuation effects.