Provident Financial Services, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Provident Financial Services, Inc. and its wholly owned subsidiary, Provident Bank, reported unaudited consolidated results for the three months ended March 31, 2017. The company is a bank holding company with a loan portfolio concentrated in real estate and commercial lending.
Financial performance and position
- Profitability: Net income was $23.5 million, or $0.37 per diluted share, versus $21.0 million, or $0.33, in Q1 2016. Income before taxes rose to $31.9 million from $29.7 million. The effective tax rate declined to 26.3% from 29.4%.
- Net interest income and margin: Net interest income increased to $67.0 million from $63.1 million. Net interest margin was 3.11%, unchanged year over year. Interest income increased to $77.9 million; interest expense was $10.9 million, broadly unchanged.
- Non-interest items: Non-interest income decreased to $12.5 million from $13.0 million, while non-interest expense increased to $46.1 million from $44.9 million. The $1.2 million reduction in income tax expense from excess stock-compensation tax benefits supported quarterly earnings.
- Credit costs: The loan-loss provision was $1.5 million, unchanged year over year. Net charge-offs were $1.2 million, compared with $0.7 million in Q1 2016. The allowance was $62.2 million, or 0.89% of loans, versus $61.9 million, or 0.88%, at year-end 2016.
- Cash flow: Operating activities provided $24.4 million, investing activities used $5.7 million, and financing activities used $4.9 million. Cash and cash equivalents increased $13.8 million during the quarter to $158.1 million.
- Balance sheet and liquidity: Total assets were $9.51 billion, versus $9.50 billion at December 31, 2016. Loans were $7.00 billion, down $5.4 million; deposits were $6.53 billion, down $23.8 million. Core deposits were 89.6% of deposits. Borrowed funds rose $27.8 million to $1.64 billion, or 17.3% of assets, as wholesale funding replaced deposit outflows. Stockholders’ equity was $1.27 billion.
- Capital: At March 31, the Bank’s common equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 11.04%, 11.04%, and 11.91%, respectively. The company reported that the Bank and holding company exceeded applicable regulatory minimums.
Material changes versus comparable periods
- Net income increased about 12% year over year, with management citing growth in average loans and core deposits and the stock-compensation tax benefit.
- Average loans increased $416.9 million year over year to $6.92 billion, although the quarter-end loan balance edged down from year-end. Commercial, commercial real estate, and construction loans represented 75.7% of loans, up from 75.3%.
- Non-performing loans declined to $40.5 million, or 0.58% of loans, from $42.4 million, or 0.61%, at year-end. Non-performing assets were $48.2 million, or 0.51% of assets, versus $50.4 million, or 0.53%.
- Fee income and wealth management income were lower year over year; higher compensation, occupancy, and data-processing costs contributed to the increase in non-interest expense.
- Compared with Q1 2016, operating cash flow was lower ($24.4 million versus $27.8 million), while investing cash outflow was substantially smaller ($5.7 million versus $106.2 million). Financing cash flow shifted from a $84.3 million inflow to a $4.9 million outflow.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year 2017 results.
- Interest-rate sensitivity modeling estimated that a gradual 300-basis-point rate increase would reduce 12-month net interest income by 2.4%; a 100-basis-point decrease would reduce it by 4.1%. An immediate, sustained 300-basis-point increase was modeled to reduce economic value of equity by 10.6%. Management notes that these are estimates based on assumptions, not forecasts.
- Management identifies economic weakness, declining real estate values, unemployment, commercial-property vacancies, and interest-rate changes as factors that could increase credit losses and provision needs. The loan portfolio’s real-estate and commercial concentration is a material exposure.
- Unrealized securities losses were attributed primarily to interest rates and credit spreads. The company reported no other-than-temporary impairment and stated it did not intend, and was not likely required, to sell securities in temporary loss positions before recovery.
- Legal claims arising in the ordinary course of business were not expected by management to have a material adverse effect. The company reported no material changes to previously disclosed risk factors and said disclosure controls were effective.
- Management stated that it was assessing the effects of recently issued accounting standards, including the expected-credit-loss standard. No quantified adoption impact was provided.
Most important facts for investors to verify
- Whether the $1.2 million stock-compensation tax benefit is nonrecurring and how results compare excluding it.
- Trends in core deposits, wholesale borrowing, funding costs, and liquidity as deposit balances shift.
- Credit quality and reserve adequacy, including commercial real estate exposure, non-performing loans, net charge-offs, and criticized loans.
- Realized net interest margin and earnings sensitivity versus the filing’s interest-rate model assumptions.
- Future costs or balance-sheet effects from new accounting standards, particularly expected credit losses.