Provident Financial Services, Inc. (PFS) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Amounts below are in millions unless stated otherwise. The filing covers Provident Financial Services and its wholly owned subsidiary, Provident Bank.
Financial performance and position
- Revenue and earnings: Net interest income was $108.3, up 14.6% from $94.5 a year earlier. Net income fell to $40.5 from $44.0; diluted EPS was $0.54 versus $0.58. Total non-interest income was $22.2, up from $20.1.
- Interest margin: Net interest margin increased to 3.48% from 3.02%. Interest income rose to $143.6 from $101.0, while interest expense increased to $35.2 from $6.5, reflecting sharply higher deposit and borrowing costs.
- Credit costs: The Company recorded a $6.0 loan-loss provision, compared with a $6.4 provision benefit in Q1 2022, and a $0.7 provision for off-balance-sheet exposures versus a $2.4 benefit. The loan allowance was $92.8, or 0.91% of loans, compared with $88.0, or 0.86%, at year-end.
- Expenses and profitability: Non-interest expense rose to $69.5 from $61.9. The effective tax rate was 26.3%, versus 25.7%. Net income was affected by higher funding costs, credit provisions, compensation, FDIC insurance expense and merger-related costs.
- Assets and loans: Total assets were $13.78 billion, broadly unchanged from year-end. Loans were $10.22 billion, down $24.7 from $10.25 billion. Commercial real estate, commercial and construction loans represented 85.6% of the loan portfolio.
- Credit quality: Non-performing loans decreased to $35.5 (0.35% of loans) from $58.5 (0.57%). Non-performing assets were $49.2 (0.36% of assets), down from $60.6, but foreclosed assets increased to $13.7 from $2.1. Net charge-offs were $0.7, compared with net recoveries of $1.9 a year earlier.
- Deposits, borrowings and liquidity: Deposits declined $265.7 to $10.30 billion; borrowed funds increased $247.4 to $1.58 billion. Cash and cash equivalents were $233.9. The Bank reported $3.59 billion of on-balance-sheet liquidity and borrowing capacity, equal to 130% of estimated uninsured and uncollateralized deposits of $2.77 billion. It had not drawn on the Bank Term Funding Program.
- Cash flow: Operating activities provided $58.1; investing activities provided $19.5; financing activities used $30.2. Cash, cash equivalents and restricted cash increased $47.3 to $233.9.
- Capital: At March 31, the Bank’s common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios were 11.30%, 11.30% and 12.06%, respectively. The Company reported corresponding ratios of 11.66%, 11.78% and 12.53%.
Material changes and notable items
- Higher loan yields and market rates lifted interest income and margin, but deposit costs and reliance on borrowings also rose substantially. Average interest-bearing deposit cost increased to 1.39% from 0.25%; average borrowing cost increased to 2.48% from 0.86%.
- Deposit mix shifted: savings and demand balances declined, while time deposits increased. The Company said some customers moved balances into its insured cash sweep product, which rose to $198.8 from $58.9.
- Available-for-sale securities had gross unrealized losses of $227.7 at March 31; accumulated other comprehensive loss was $148.1, improved from $165.0 at year-end. The filing says unrealized gains and losses are excluded from regulatory capital under the Company’s election.
- Q1 non-interest income included an additional $2.0 gain related to the 2022 sale of a foreclosed commercial property, from proceeds held in escrow. The Company also recorded $1.1 of costs related to its pending merger with Lakeland Bancorp; the merger remained subject to completion risks described in the filing.
- The Company adopted ASU 2022-02 on January 1, 2023. Adoption reduced the allowance by $0.6 and increased retained earnings by $0.4, net of tax.
Outlook, commentary and risks
- The filing provides no specific earnings, revenue or margin guidance. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Management cited a worsening economic forecast and deterioration in projected commercial property prices as reasons for higher credit provisions. A more pessimistic “next-cycle recession” forecast would have increased the provision by $10.7 and the allowance coverage ratio to 1.01%, versus the reported 0.91%.
- Management described the Company as slightly asset-sensitive. Its model projected 12-month net interest income up 2.5% under a gradual 300-basis-point rate increase and down 1.0% under a gradual 100-basis-point decrease. Management cautioned that model assumptions may differ from actual results.
- Risks highlighted include deposit outflows and depositor confidence following bank failures, potentially higher-cost or insufficient funding, interest-rate and securities valuation risk, commercial real estate and broader credit risk, regulatory changes and FDIC assessment costs, and the pending Lakeland merger’s execution, expense and integration risks.
- The Company reported that it exceeded applicable minimum regulatory capital requirements. Management said ordinary-course legal claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Subsequent deposit trends, uninsured-deposit levels, borrowing usage and liquidity coverage, including whether the reported $3.59 billion of available liquidity remains accessible on comparable terms.
- Deposit pricing and mix, borrowing costs, and whether net interest margin can be sustained as funding competition and rates change.
- Commercial real estate exposure, criticized and classified loans, foreclosed assets, delinquencies and any further changes to credit-loss assumptions or provisions.
- The extent and potential effects of unrealized securities losses, including liquidity implications if securities must be sold.
- Progress, regulatory approvals, costs and expected benefits of the Lakeland merger; the filing does not provide a quantified updated outlook.
- Confirm the reported cash-flow and liquidity figures and review subsequent filings for any material developments after March 31, 2023.