Provident Financial Services, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited consolidated results for the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are to December 31, 2018. Provident is a bank holding company whose operations include banking and wealth management. Amounts below are in millions of dollars unless noted.
Key financial metrics
| Metric | Q1 2019 / Mar. 31, 2019 | Comparable / Dec. 31, 2018 |
|---|---|---|
| Net interest income | $75.0 | $73.3 in Q1 2018 |
| Net interest margin | 3.40% | 3.30% in Q1 2018 |
| Net income; diluted EPS | $30.9; $0.48 | $27.9; $0.43 in Q1 2018 |
| Interest income / interest expense | $92.4 / $17.4 | $86.3 / $13.1 in Q1 2018 |
| Provision for loan losses | $0.2 | $5.4 in Q1 2018 |
| Non-interest income / expense | $12.2 / $48.4 | $13.3 / $46.9 in Q1 2018 |
| Total assets | $9,802.6 | $9,725.8 |
| Loans, net of allowance | $7,168.5 | $7,195.0 |
| Deposits | $6,903.5 | $6,830.1 |
| Borrowed funds | $1,398.5 | $1,442.3 |
| Cash and cash equivalents | $197.9 | $142.7 |
| Stockholders’ equity | $1,373.8 | $1,359.0 |
Operating cash flow was $31.4 million, investing cash flow $22.7 million, and financing cash flow $1.1 million; cash and cash equivalents increased $55.2 million during the quarter. The allowance for loan losses was $55.4 million, or 0.77% of loans. Non-performing loans were $24.8 million (0.34% of loans), and non-performing assets were $26.1 million (0.27% of assets).
Material changes and management commentary
- Net income rose about 11% year over year. Management attributed the improvement primarily to higher net interest income and a much lower loan-loss provision, with asset quality improvement contributing to the latter.
- Net interest income increased $1.7 million; the 10-basis-point margin expansion reflected higher earning-asset yields and a slower increase in funding costs. Average loan balances declined $110 million year over year.
- Interest expense increased $4.4 million year over year, largely as deposit costs rose. Non-interest income fell $1.1 million, while non-interest expense rose $1.5 million; higher consulting, legal, compensation, and data-processing costs contributed to expense growth.
- The prior-year provision included the impact of a troubled commercial credit, including a $2.5 million specific reserve; the borrower had filed for bankruptcy, and the credit was charged off in Q2 2018. Q1 2019 net charge-offs were $0.4 million versus $3.1 million in Q1 2018.
- Deposits increased $73.3 million, including growth in brokered time deposits; borrowed funds declined $43.8 million as deposits replaced some wholesale funding. Core deposits were 88.3% of total deposits, down from 89.0% at year-end.
- The Bank’s reported capital ratios exceeded regulatory minimums: common equity Tier 1 12.20%, Tier 1 risk-based 12.20%, total risk-based 12.93%, and leverage 9.96%.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Interest-rate modeling projected that a gradual 300-basis-point increase over 12 months would reduce net interest income by 3.9%; an immediate, sustained 300-basis-point increase was modeled to reduce economic value of equity by 12.4%. Management notes these estimates depend on assumptions and may differ from actual results.
- Key stated risks include economic and real-estate weakness, borrower repayment capacity, interest-rate changes, funding availability and costs, competition, regulation, and acquisition integration. Management identifies the loan-loss allowance and deferred-tax-asset valuation as critical estimates.
- On April 1, 2019, Beacon Trust acquired certain assets and liabilities of Tirschwell & Loewy. The company was still determining acquisition-date consideration, including contingent consideration, goodwill, and intangible assets.
- Adoption of the lease standard on January 1, 2019 added a $44.9 million right-of-use asset and $46.1 million lease liability. Adoption of the expected-credit-loss standard (CECL) was still under evaluation; the company could not reasonably estimate its impact and noted it may increase credit-loss allowances.
- Management stated ordinary-course legal claims were not expected to have a material adverse impact and reported no material changes to previously disclosed risk factors. No clear quantified liquidity coverage measure is provided in the filing text.
Important facts for investors to verify
- Whether loan quality and the low current provision remain sustainable; review criticized/classified loans and impaired loans, which increased to $63.4 million from $50.7 million at year-end.
- Deposit mix, brokered-deposit growth, and funding costs, particularly as interest-bearing deposit costs rose to 0.78% from 0.47% year over year.
- Whether net interest margin gains persist as loan balances declined and funding costs increased; compare actual results with the filing’s interest-rate sensitivity assumptions.
- The eventual CECL transition effect and the final accounting and integration outcomes for the April 1 acquisition.
- Capital and shareholder returns: Q1 cash dividends were $29.0 million versus $13.6 million a year earlier; 77,968 shares were repurchased at an average $26.86, largely for stock-compensation tax withholding.