Provident Financial Services(PFS) - 2020 Q4 - Annual Report

PART I Business Overview This section outlines the company's business, market, and key activities, including significant expansion from the 2020 SB One Bancorp acquisition - Provident Financial Services, Inc. became the holding company for Provident Bank on January 15, 2003, after the Bank's conversion to a New Jersey-chartered capital stock savings bank[14] - The July 31, 2020 acquisition of SB One Bancorp added $2.20 billion to total assets, $1.77 billion to total loans, and $1.76 billion to total deposits, plus 18 new banking offices and insurance brokerage services[15] Key Financial and Operational Highlights (2020) | Metric | Value | | :--------------------------------- | :--------------------------------- | | Non-performing assets | $91.6 million (0.71% of total assets) | | Core deposit accounts | $8.74 billion (88.9% of total deposits) | | Total non-interest income | $72.4 million | | Loan portfolio with adjustable rates/short-term maturity | 63.49% | | Securities portfolio | $1.62 billion (average life 3.93 years) | | Number of full-service banking offices | 99 | | Employees (full-time/part-time) | 1,155 / 45 | | Women in managerial positions | 62% | - The Bank emphasizes commercial real estate, multi-family, and commercial business loans to improve asset yields and manage interest rate risk, acknowledging their generally higher risk of loss[21][53] - The Bank focuses on acquiring and retaining core deposit accounts and expanding customer relationships to ensure a stable, inexpensive funding source[23][143] Risk Factors The company faces multiple risks in interest rate fluctuations, credit losses, regulatory changes, and operational vulnerabilities - Changes in market interest rates significantly affect net interest income; a rapid increase in short-term rates could negatively impact net interest margin if deposit costs rise faster than loan yields[279][280] - The adoption of CECL (Current Expected Credit Loss) methodology may increase the allowance for credit losses and the volatility of provisions for credit losses, as it requires measuring projected credit losses over the estimated life of assets[282] - Commercial real estate, commercial & industrial, and construction loans, constituting 50.8%, 26.4%, and 5.6% of the portfolio respectively at December 31, 2020, are considered higher risk and sensitive to economic conditions[283] - Exceeding $10 billion in total assets subjects the Company to increased regulation and supervision, including by the CFPB, higher FDIC premiums, and reduced debit card interchange fees, leading to increased operating costs[288] - The ongoing COVID-19 pandemic poses significant economic risks, including declining demand for services, increased loan delinquencies, reduced collateral values, and potential decreases in net interest margin and wealth management revenues[298][301] - Uncertainty surrounding the future of LIBOR, used for $2.27 billion of commercial loans, may lead to operational risks and differences in interest rate calculations if discontinued after 2021[309][310] - The Company is highly dependent on the security and efficacy of its technology systems, facing risks from cyber-attacks, data breaches, and technology failures that could disrupt business, lead to information misuse, and incur significant costs[324][325][328] Unresolved Staff Comments No unresolved comments from the staff of the SEC are reported - No unresolved comments from the staff of the SEC[333] Properties The Bank operated 99 branch offices across three states, with $75.9 million in premises and equipment - The Bank operates 99 full-service branch offices and several satellite loan production offices across New Jersey, Pennsylvania, and New York[334] Banking Premises and Equipment (December 31, 2020) | Metric | Value (in thousands) | | :--------------------------------- | :------------------- | | Aggregate net book value | $75,900 | Legal Proceedings Management does not expect current legal actions and claims to materially impact the Company's financial condition or operations - Management believes current legal actions and claims will not materially impact the Company's financial condition or results of operations[336] Mine Safety Disclosures This item is not applicable to the Company - Not applicable[337] PART II Market for Common Equity and Stockholder Matters This section details common stock trading, dividend policy, stock performance, and issuer share repurchase activities - As of February 1, 2021, there were 83,209,012 issued and 77,789,018 outstanding shares of common stock, with approximately 4,859 stockholders of record[339] - The Board of Directors declared a quarterly cash dividend of $0.23 per common share on January 29, 2021, paid on February 26, 2021[340] Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Programs | | :----------------------------------- | :--------------------- | :--------------------------- | :--------------------------------------------------- | | October 1, 2020 - October 31, 2020 | — | $— | — | | November 1, 2020 - November 30, 2020 | 517,215 | $14.86 | 517,215 | | December 1, 2020 - December 31, 2020 | 359,246 | $17.24 | 359,246 | | Total | 876,461 | $15.84 | 876,461 | - The Company repurchased 1.3 million shares of common stock at an average cost of $16.59, totaling $22.1 million in 2020; a new stock repurchase program was authorized for up to 3.9 million shares[18][344][345] Selected Financial Data This section presents selected five-year financial data, highlighting 2020 asset and deposit growth from acquisition and decreased net income Selected Financial Condition Data (2016-2020, in thousands) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Total assets | $12,919,741 | $9,808,578 | $9,725,769 | $9,845,274 | $9,500,465 | | Loans, net | 9,721,424 | 7,277,360 | 7,195,026 | 7,265,523 | 6,941,603 | | Deposits | 9,837,829 | 7,102,609 | 6,830,122 | 6,714,166 | 6,553,629 | | Stockholders' equity | 1,619,797 | 1,413,840 | 1,358,980 | 1,298,661 | 1,251,781 | Selected Operations Data (2016-2020, in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--------------------------------------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Interest income | $363,309 | $371,470 | $359,829 | $323,846 | $302,315 | | Net interest income | 312,570 | 297,973 | 300,676 | 278,202 | 258,567 | | Provision for loan losses | 29,719 | 13,100 | 23,700 | 5,600 | 5,400 | | Non-interest income | 72,431 | 63,794 | 58,676 | 55,697 | 55,393 | | Non-interest expense | 227,728 | 201,579 | 191,735 | 187,822 | 183,778 | | Net income | $96,951 | $112,633 | $118,387 | $93,949 | $87,802 | | Basic earnings per share | $1.39 | $1.74 | $1.82 | $1.46 | $1.38 | Selected Financial and Other Data (Performance Ratios, 2016-2020) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--------------------------------------- | :----- | :----- | :----- | :----- | :----- | | Return on average assets | 0.86 % | 1.15 % | 1.22 % | 0.99 % | 0.95 % | | Return on average equity | 6.49 | 8.07 | 8.93 | 7.28 | 7.12 | | Net interest margin | 3.09 | 3.35 | 3.39 | 3.21 | 3.11 | | Efficiency ratio | 59.15 | 55.72 | 53.36 | 56.25 | 58.54 | | Non-performing loans to total loans | 0.89 | 0.55 | 0.35 | 0.48 | 0.61 | | Allowance for credit losses to total loans | 1.03 | 0.76 | 0.77 | 0.82 | 0.88 | | Leverage capital | 9.30 | 10.34 | 10.24 | 9.65 | 9.25 | | Total risk based capital | 11.94 | 13.47 | 13.27 | 12.67 | 12.50 | Management's Discussion and Analysis Management discusses financial performance, condition, and the impact of the SB One acquisition, CECL, and COVID-19 on credit losses and capital - The Company's strategy focuses on profitable growth through credit quality, expanding market share, and managing interest rate risk, with an emphasis on commercial mortgage, multi-family, construction, and commercial loans[354][355] - The SB One Bancorp acquisition on July 31, 2020, significantly increased total assets by $2.20 billion, total loans by $1.77 billion (including $294.2 million in PCD loans), and total deposits by $1.76 billion, adding 18 banking offices[358] - The acquisition of Tirschwell & Loewy, Inc. on April 1, 2019, expanded the Company's wealth management business by $822.4 million in assets under management[361] - The adoption of ASU 2016-13 (CECL) on January 1, 2020, resulted in a $7.9 million increase to the allowance for credit losses and a $3.2 million liability for off-balance sheet credit exposures, recorded as an $8.3 million cumulative effect adjustment (net of taxes) to retained earnings[364][366] Net Interest Income and Margin (2018-2020, in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------- | :----------- | :----------- | :----------- | | Net interest income | $312,570 | $297,973 | $300,676 | | Net interest rate spread | 2.92 % | 3.10 % | 3.20 % | | Net interest margin | 3.09 % | 3.35 % | 3.39 % | - Total assets increased by $3.11 billion to $12.92 billion at December 31, 2020, primarily due to the SB One acquisition and $473.2 million in PPP loans[395] - The allowance for credit losses on loans increased by $45.9 million to $101.5 million at December 31, 2020 (1.03% of total loans), driven by CECL adoption, the economic forecast related to COVID-19, and additions from the SB One loan portfolio[400] - Total non-performing loans increased to $87.1 million (0.89% of total loans) at December 31, 2020, from $40.2 million (0.55%) in 2019, reflecting the pandemic's impact on borrower repayment ability[401] - Net income for 2020 was $97.0 million ($1.39 EPS), down from $112.6 million ($1.74 EPS) in 2019, largely due to increased provisions for credit losses related to CECL and COVID-19, partially offset by the SB One acquisition[411][412] - Total deposits increased by $2.74 billion to $9.84 billion in 2020, including $1.76 billion from SB One and $977.4 million in net organic growth, benefiting from PPP loan proceeds and government stimulus[407] - Stockholders' equity increased by $206.0 million to $1.62 billion in 2020, driven by common stock issuance for SB One, net income, and unrealized gains on available-for-sale securities, partially offset by dividends and CECL adjustment[410] Market Risk Disclosures The company's interest rate risk management is detailed, including projected impacts on net interest income and economic value of equity - The Company manages interest rate risk by originating adjustable-rate and shorter-term loans, investing in securities with shorter maturities, and using interest rate swaps[443] - The Asset/Liability Committee (ALCO) reviews the impact of interest rate changes on net interest income, net interest margin, net income, and economic value of equity monthly[444] Projected Net Interest Income Sensitivity (December 31, 2020, in thousands) | Change in Interest Rates (Basis Points) | Amount | Change | Percent Change | | :-------------------------------------- | :----------- | :----------- | :------------- | | -100 | $327,641 | $(9,514) | (2.8)% | | Static | $337,155 | — | — | | 100 | $339,812 | $2,657 | 0.8 | | 200 | $342,848 | $5,693 | 1.7 | | 300 | $345,963 | $8,808 | 2.6 | Economic Value of Equity Sensitivity (December 31, 2020, in thousands) | Change in Interest Rates (Basis Points) | Present Value of Equity | Change | Percent Change | | :-------------------------------------- | :---------------------- | :----------- | :------------- | | -100 | $1,198,562 | $(203,796) | (14.5)% | | Flat | $1,402,358 | — | — | | 100 | $1,470,471 | $68,113 | 4.9 % | | 200 | $1,519,475 | $117,117 | 8.4 % | | 300 | $1,554,020 | $151,662 | 10.8 % | Financial Statements and Supplementary Data Includes audited consolidated financial statements, independent auditor reports, and detailed notes on accounting policies, business combinations, and credit losses - KPMG LLP issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2020, and on the effectiveness of internal control over financial reporting as of December 31, 2020[455][456][470][471] - The Company changed its method of accounting for credit losses as of January 1, 2020, due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses (CECL)[457] - Critical audit matters identified include the assessment of the allowance for credit losses on loans evaluated on a collective basis and the fair value measurement of loans acquired in the SB One Bancorp acquisition, both involving significant subjective judgment[460][461][465] Consolidated Statements of Financial Condition (December 31, 2020 & 2019, in thousands) | Metric | 2020 | 2019 | | :--------------------------------------- | :----------- | :----------- | | Total assets | $12,919,741 | $9,808,578 | | Net loans | 9,721,424 | 7,277,360 | | Total deposits | 9,837,829 | 7,102,609 | | Total liabilities | 11,299,944 | 8,394,738 | | Total stockholders' equity | 1,619,797 | 1,413,840 | Consolidated Statements of Income (Years Ended December 31, 2020, 2019 & 2018, in thousands) | Metric | 2020 | 2019 | 2018 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Total interest income | $363,309 | $371,470 | $359,829 | | Total interest expense | 50,739 | 73,497 | 59,153 | | Net interest income | 312,570 | 297,973 | 300,676 | | Provision for credit losses | 29,719 | 13,100 | 23,700 | | Total non-interest income | 72,431 | 63,794 | 58,676 | | Total non-interest expenses | 227,728 | 201,579 | 191,735 | | Net income | $96,951 | $112,633 | $118,387 | Consolidated Statements of Cash Flows (Years Ended December 31, 2020, 2019 & 2018, in thousands) | Metric | 2020 | 2019 | 2018 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Net cash provided by operating activities | $106,911 | $136,925 | $155,719 | | Net cash provided by (used in) investing activities | $(507,984) | $42,867 | $46,705 | | Net cash (used in) provided by financing activities | $746,678 | $(135,705) | $(250,597) | | Net increase (decrease) in cash and cash equivalents | $345,605 | $44,087 | $(48,173) | Changes in Accountants and Disclosures No changes in or disagreements with accountants on accounting and financial disclosure are reported - No changes in or disagreements with accountants on accounting and financial disclosure[788] Controls and Procedures Disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes reported - The Company's disclosure controls and procedures were evaluated as effective as of December 31, 2020[788] - Management assessed and believes the Company's internal control over financial reporting was effective as of December 31, 2020, based on COSO criteria[792] - No material changes in internal control over financial reporting occurred during the last quarter of 2020[794] Other Information No other information is reported for disclosure - No other information to disclose[795] PART III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Stockholders[797] Executive Compensation Executive compensation information is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Stockholders[798] Security Ownership and Related Stockholder Matters Security ownership and related stockholder matters are incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Stockholders[799] Equity Compensation Plans (December 31, 2020) | Plan | Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights | Weighted Average Exercise Price | Number of Securities Remaining Available For Issuance Under Plan | | :------------------------------------------ | :---------------------------------------------------------------- | :------------------------------ | :------------------------------------------------------------- | | Equity compensation plans approved by stockholders | 596,441 | $17.96 | 2,009,578 | Related Transactions and Director Independence Information on related transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Stockholders[803] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Stockholders[804] PART IV Exhibits and Financial Statement Schedules Lists financial statements, schedules, and exhibits filed as part of the Form 10-K, including auditor reports and corporate documents - Includes reports of Independent Registered Public Accounting Firm on financial statements and internal control over financial reporting[807] - Consolidated Financial Statements (Statements of Financial Condition, Income, Comprehensive Income, Changes in Stockholders' Equity, Cash Flows) and Notes to Consolidated Financial Statements are included[807] - Various exhibits are filed, including the Agreement and Plan of Merger with SB One Bancorp, Certificate of Incorporation, Bylaws, Employment Agreements, and certifications[810][811][814] Form 10-K Summary A Form 10-K Summary is not applicable for this report - Not applicable[813]