Provident Financial Services, Inc. — Q1 2018 Form 10-Q
Business context and period. Provident Financial Services, Inc. and its wholly owned bank subsidiary reported unaudited consolidated results for the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. The company is a bank whose primary revenue source is net interest income. Management cautions that quarterly results are not necessarily indicative of full-year 2018 results.
Key financial metrics
Amounts below are in millions except per-share data and percentages.
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Net interest income | $73.3 | $67.0 in Q1 2017 |
| Net interest margin | 3.30% | 3.11% in Q1 2017 |
| Non-interest income / expense | $13.3 / $46.9 | $12.5 / $46.1 in Q1 2017 |
| Provision for loan losses | $5.4 | $1.5 in Q1 2017 |
| Pre-tax income / income tax expense | $34.3 / $6.4 | $31.9 / $8.4 in Q1 2017 |
| Net income / diluted EPS | $27.9 / $0.43 | $23.5 / $0.37 in Q1 2017 |
| Total assets | $9,734.2 | $9,845.3 at Dec. 31, 2017 |
| Loans, gross / net | $7,291.1 / $7,228.6 | $7,325.7 / $7,265.5 at Dec. 31, 2017 |
| Deposits / borrowed funds | $6,756.6 / $1,590.1 | $6,714.2 / $1,742.5 at Dec. 31, 2017 |
| Cash and cash equivalents | $133.5 | $190.8 at Dec. 31, 2017 |
| Stockholders’ equity | $1,304.9 | $1,298.7 at Dec. 31, 2017 |
Net cash provided by operating activities was $32.2 million; investing activities provided $34.3 million; financing activities used $123.8 million. Cash and cash equivalents declined $57.3 million during the quarter. The effective tax rate was 18.6%, versus 26.3% in Q1 2017. Book value per share was $19.55 and tangible book value per share was $13.27.
Material changes versus comparable periods
- Net income rose 18.7% and diluted EPS increased from $0.37 to $0.43. Management attributed the improvement to loan and core-deposit growth, higher net interest margin, and lower tax expense following the Tax Cuts and Jobs Act; higher loan-loss provisions partly offset these gains.
- Net interest income increased $6.2 million. Interest income grew $8.4 million, while interest expense rose $2.2 million as deposit and borrowing costs increased.
- Quarter-end assets fell $111.0 million, primarily due to lower cash, loans, and investments. Gross loans declined 0.47%; commercial real estate, commercial, and construction loans were 78.2% of the portfolio.
- Deposits increased $42.4 million, including a $30.5 million increase in time deposits. Borrowed funds declined $152.4 million as deposits and lower asset-funding needs replaced wholesale funding in part.
- Allowance for loan losses increased to $62.5 million, or 0.86% of loans, from $60.2 million, or 0.82%. Non-performing loans rose to $45.9 million from $34.9 million; non-performing assets increased to $53.2 million from $41.8 million.
- Other comprehensive loss was $9.0 million, principally reflecting a $9.6 million after-tax unrealized loss on available-for-sale debt securities. The company linked the increase in securities in unrealized-loss positions to higher market interest rates and reported no other-than-temporary impairment.
Outlook, risks, contingencies, and unusual items
- No earnings guidance was provided. Management’s forward-looking statements identify risks including economic and competitive conditions, interest rates, regulation, credit and liquidity risks, acquisitions, and the availability and cost of funding.
- Loan credit trends weakened: net charge-offs were $3.1 million versus $1.2 million in Q1 2017. The provision increase primarily reflected deterioration in selected commercial credits, including a $15.4 million commercial borrower that filed for Chapter 7 liquidation on March 27, 2018. A $2.5 million specific reserve was recorded; management said the loan remains under review and additional reserves may be needed.
- Non-accrual loans increased, primarily from commercial loans. Total impaired loans were $68.3 million, including $37.4 million of performing troubled debt restructurings. Management identifies economic weakness, declining real-estate values, unemployment, commercial-property vacancies, and interest-rate increases as potential sources of further credit losses.
- Interest-rate modeling projected that a gradual 300-basis-point rate increase would reduce 12-month net interest income by 3.1% ($9.3 million); an immediate, sustained 300-basis-point increase was modeled to reduce economic value of equity by 12.9% ($194.2 million). Management cautions that model assumptions limit predictive precision.
- The Bank’s actual regulatory ratios exceeded stated minimums and the listed well-capitalized thresholds: Tier 1 leverage 9.24%, common equity Tier 1 11.35%, Tier 1 risk-based 11.35%, and total risk-based capital 12.17%. The company also reported that it exceeded minimum regulatory requirements.
- The company adopted several accounting standards in 2018, including revenue recognition, with no material impact reported. It is evaluating the expected-credit-loss standard (CECL), which may increase the allowance; the impact could not yet be reasonably estimated. Routine legal proceedings were not expected by management to have a material adverse financial impact, and no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Progress and recoveries on the $15.4 million Chapter 7 commercial credit, the adequacy of its $2.5 million reserve, and any subsequent provision or charge-off.
- Whether elevated non-performing loans, impaired loans, and net charge-offs persist, and how allowance coverage develops.
- Deposit pricing, retention, and mix—including promotional time deposits—and whether deposit-cost increases pressure margin despite loan yields.
- Actual sensitivity to higher rates versus the filing’s modeled NII and economic-value-of-equity scenarios.
- Impact of CECL implementation on credit-loss allowances and capital, once the company can estimate it.
- Changes in available-for-sale securities values and accumulated other comprehensive loss as market rates move.