PROVIDENT FINANCIAL SERVICES INC quarterly report, Q1 FY2024

Abrir documento

Provident Financial Services, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Figures are in U.S. dollars. The filing cautions that quarterly results are not necessarily indicative of full-year results.

Financial performance

  • Net income: $32.1 million, down 20.9% from $40.5 million in Q1 2023. Diluted EPS was $0.43 versus $0.54.
  • Interest income and revenue: Interest and dividend income rose 14.1% to $163.9 million. Net interest income fell 13.5% to $93.7 million as interest expense more than doubled to $70.2 million from $35.2 million. Non-interest income decreased to $20.8 million from $22.2 million.
  • Net interest margin: 2.87%, down 61 basis points year over year. Average yield on interest-earning assets rose 43 basis points to 5.06%, while the average cost of interest-bearing liabilities rose 126 basis points to 2.80%.
  • Credit costs: Loan-loss provision was $0.2 million, versus $6.0 million in Q1 2023. Net charge-offs were $1.0 million versus $0.7 million. Allowance for credit losses was $106.4 million, or 0.98% of loans, compared with 0.99% at year-end.
  • Expenses and taxes: Non-interest expense increased 2.6% to $71.3 million. Merger-related expense was $2.2 million, versus $1.1 million. Income tax expense was $10.9 million; the effective tax rate declined to 25.3% from 26.3%.
  • Cash flow: Operating cash provided was $41.4 million, down from $58.1 million; investing activities provided $54.6 million, versus $19.5 million; financing activities used $117.9 million, versus $30.2 million. Cash and cash equivalents decreased $21.9 million to $158.4 million.

Financial position and material changes

  • Assets and loans: Total assets were $14.13 billion, down $79.9 million from year-end. Loans were $10.84 billion, down $31.0 million. Commercial real estate, multifamily, commercial and construction loans represented 86.7% of the loan portfolio; CRE, multifamily and construction loans totaled $6.90 billion.
  • Deposits and borrowings: Deposits fell $193.6 million to $10.10 billion, including declines in brokered and municipal deposits. Borrowed funds rose $88.1 million to $2.06 billion, or 14.6% of assets; this included $550 million under the Federal Reserve Bank Term Funding Program. Certificates of deposit totaling $881.1 million mature within one year.
  • Liquidity and capital: Management reported borrowing capacity of $1.72 billion at the FHLB and $1.33 billion at the FRB. Estimated uninsured, uncollateralized deposits were $2.49 billion, or 24.7% of deposits; total estimated uninsured deposits, including collateralized deposits, were $5.25 billion. The Bank’s actual ratios were 9.91% Tier 1 leverage, 11.50% common equity Tier 1, and 12.36% total risk-based capital. The filing reports that the Bank and Company exceeded current minimum regulatory capital requirements.
  • Investment marks: Available-for-sale securities had fair value of $1.67 billion and gross unrealized losses of $225.7 million. AOCI declined by $10.5 million during the quarter, principally reflecting securities losses. Management attributed the increase in securities in unrealized-loss positions to higher market interest rates.
  • Credit quality: Non-performing loans were $47.6 million, or 0.44% of loans, down from $49.6 million at year-end; non-performing assets were $58.9 million, or 0.42% of assets. The filing reports 954 available-for-sale and held-to-maturity securities in unrealized-loss positions, up from 808 at year-end.

Outlook, risks and unusual items

  • Management outlook: The filing provides no earnings or margin guidance. Management said it expects to retain a significant share of time deposits maturing within one year and expects sufficient cash to meet funding requirements.
  • Interest-rate sensitivity: The company described its position as slightly asset-sensitive. Its model projected a 0.1% increase in 12-month net interest income with a gradual 100-basis-point rate increase, and a 2.8% decrease with a gradual 300-basis-point decline. An immediate, sustained 300-basis-point decline projected a 17.7% reduction in economic value of equity. Management cautions that model assumptions limit predictive precision.
  • Lakeland merger: Regulatory approvals were received subject to conditions. Before closing, the company must issue $200 million of qualifying Tier 2 subordinated debt. For three years after closing, the Bank must maintain specified minimum capital ratios and CRE concentrations within regulatory conditions. The proposed exchange is 0.8319 Provident shares per Lakeland share; the combined company was projected to have approximately $25 billion of assets. Completion, integration, regulatory conditions and related costs remain risks.
  • Credit and market risks: Management highlights CRE exposure, economic deterioration, property-value declines, higher vacancy, unemployment and interest-rate changes as potential sources of borrower stress and additional provisions. A $6.2 million higher provision would have resulted, according to management, if the model had used unadjusted baseline CRE property-price forecasts.
  • Contingency: A pending class action alleges improper overdraft fees. The Bank denies the allegations and is defending the matter; a $3.0 million estimated litigation reserve was recorded in Q4 2023. The ultimate outcome and any reasonably possible loss range remain uncertain.
  • Other comparability items: Q1 2023 included a $2.0 million gain on sale of a foreclosed commercial property. Q1 2024 BOLI income included a benefit claim; FDIC expense included a $0.2 million special assessment.

Important facts for investors to verify

  • Merger closing progress, issuance of the required $200 million subordinated debt, and the combined company’s capital and CRE concentration conditions.
  • Deposit trends, deposit pricing and retention at maturity; uninsured deposit levels; and reliance on wholesale borrowing and the BTFP.
  • CRE performance by property type and geography, criticized/classified loans, delinquencies, non-accrual loans, charge-offs and allowance assumptions.
  • Net interest margin and funding-cost trends, especially if rates or competitive deposit pricing remain elevated.
  • Unrealized securities losses and sensitivity of reported capital and equity to interest-rate changes; the company elected to exclude certain AFS unrealized gains and losses from regulatory capital calculations.
  • Developments in the overdraft-fee litigation and whether the existing reserve remains appropriate.