Provident Financial Services, Inc. — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017; comparisons are primarily with FY2016. Provident is a bank holding company operating Provident Bank across northern and central New Jersey and eastern Pennsylvania.
Financial performance and condition
| Metric | FY2017 / year-end | FY2016 / comparison |
|---|---|---|
| Total assets | $9.85 billion | $9.50 billion; up 3.6% |
| Total loans, net | $7.27 billion | $6.94 billion; up 4.7% |
| Deposits | $6.71 billion | $6.55 billion; up 2.4% |
| Borrowed funds | $1.74 billion | $1.61 billion; up 8.0% |
| Stockholders’ equity | $1.30 billion | $1.25 billion; up 3.7% |
| Net interest income | $278.2 million | $258.6 million; up 7.6% |
| Net interest margin | 3.21% | 3.11% |
| Net income | $93.9 million | $87.8 million; up 7.0% |
| Basic / diluted EPS | $1.46 / $1.45 | $1.38 / $1.38 |
| Cash from operations | $117.2 million | $127.3 million |
Total income, defined as net interest income plus non-interest income, was $333.9 million, versus $314.0 million in 2016. Non-interest income was $55.7 million, approximately flat; non-interest expense rose to $187.8 million from $183.8 million. The efficiency ratio improved to 56.25% from 58.54%. Return on average assets was 0.99% and return on average equity was 7.28%.
Core deposits were $6.08 billion, or 90.5% of deposits. Year-end cash and cash equivalents were $190.8 million, up from $144.3 million. The Bank’s total risk-based capital ratio was 11.95% and leverage ratio was 9.07%; it was reported as well capitalized. No cash-flow guidance was provided.
Material changes and notable items
- Loan growth was concentrated in commercial mortgage, construction and commercial lending. Commercially oriented loans represented 77.9% of the portfolio, up from 75.3%; residential and consumer loans declined in aggregate.
- Asset quality improved: non-performing assets fell to $41.8 million, or 0.42% of assets, from $50.4 million, or 0.53%. Non-performing loans declined to $34.9 million (0.48% of loans) from $42.4 million (0.61%).
- Net charge-offs increased to $7.3 million from $4.9 million. The allowance for loan losses declined to $60.2 million, or 0.82% of loans, from $61.9 million, or 0.88%; provision expense was $5.6 million.
- The Tax Cuts and Jobs Act triggered a $3.9 million additional 2017 tax expense as deferred taxes were remeasured. The effective tax rate rose to 33.1% from 29.6%; the federal corporate rate was scheduled to fall to 21% effective 2018.
- Net interest income benefited from loan growth, higher asset yields and margin expansion; interest expense increased 4.3% as deposit costs rose, partly offset by lower-cost core funding.
- The Company sold and leased back 12 branches in December 2017 for net proceeds of $20.7 million. A $6.2 million gain is being recognized over the 10-year lease terms as a reduction of rent expense, rather than immediately.
- Cash dividends totaled $60.0 million, including a $0.15-per-share special dividend in the fourth quarter. The regular quarterly dividend was $0.20 per share. The Company repurchased 45,123 shares for $1.2 million, largely for employee tax withholding.
Outlook, risks and contingencies
Management’s stated strategy is to grow profitably through relationship banking, core-deposit growth and continued emphasis on commercial lending, while monitoring credit quality and interest-rate risk. The filing provides no specific earnings or growth guidance. Management expects to retain a significant share of certificates of deposit maturing within one year and states that the Bank manages liquidity daily.
- Interest-rate sensitivity: The Company’s model projected net interest income would decline 3.8%, or $11.2 million, under a gradual 300-basis-point rate increase over 12 months; an immediate, sustained 300-basis-point increase reduced modeled economic value of equity by 13.1%, or $191.0 million. These are model estimates, not forecasts.
- Commercial real estate concentration: CRE loans equaled 453% of risk-based capital. The portfolio had not grown 50% or more over the preceding 36 months, but management noted potential supervisory scrutiny or lending constraints.
- Approaching $10 billion in assets: Year-end assets were $9.85 billion. Crossing the threshold could bring increased regulatory, compliance and operating costs, as well as reduced debit-card interchange income.
- Credit and geographic risk: Commercial, multifamily and construction lending carries greater risk than residential mortgages; lending is concentrated in New Jersey and eastern Pennsylvania. Management identified local economic weakness, real-estate values, unemployment and commercial-property vacancies as potential loss drivers.
- Liquidity and funding: Borrowed funds increased to $1.74 billion. Loan commitments and letters of credit totaled $1.98 billion; these may not all be drawn. Certificates of deposit due within one year totaled $424.4 million.
- Other risks and contingencies: The filing discusses cybersecurity, competition, regulatory changes, possible impairment of $411.6 million in goodwill, and uncertainty over a proposed New Jersey state bank and potential municipal-deposit effects. Management said ordinary-course legal claims were not expected to materially affect results.
- Accounting change: The expected-credit-loss standard (CECL) was scheduled to take effect in 2020; the Company could not yet reasonably estimate the impact and noted adoption may increase credit-loss allowances.
Most important facts for investors to verify
- Confirm the quality and sustainability of loan growth, particularly commercial real estate, construction and commercial exposures, and monitor large borrower concentrations.
- Track non-performing loans, charge-offs, TDRs and allowance coverage; reconcile the improved non-performing ratios with higher 2017 net charge-offs.
- Assess funding costs and liquidity as borrowings rise and certificates of deposit mature, including possible effects of crossing $10 billion in assets.
- Evaluate actual margin and earnings effects of changing interest rates against the filing’s model assumptions and sensitivity estimates.
- Separate recurring earnings from the $3.9 million Tax Act charge, deferred branch-sale gain recognition and the special dividend; verify the effect of the lower federal tax rate in subsequent periods.
- Review audited financial statements and cash-flow details. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting; operating cash flow was $117.2 million in 2017.