Provident Financial Services(PFS) - 2021 Q4 - Annual Report

Part I Item 1. Business The company is a community-focused bank holding company operating in NJ, PA, and NY with an emphasis on commercial lending and wealth management Company and Bank Overview The company focuses on capital management and diversified services following the significant SB One Bancorp acquisition - On July 31, 2020, the Company completed its acquisition of SB One Bancorp, adding $2.20 billion in assets, $1.77 billion in loans, and $1.76 billion in deposits[14] 2021 Capital Management Activities | Metric | Value | | :--- | :--- | | Cash Dividends Paid | $71.5 million | | Shares Repurchased | 965,223 | | Average Repurchase Cost | $22.43 per share | | Total Repurchase Cost | $21.6 million | | Shares Remaining for Repurchase (as of Dec 31, 2021) | 3.2 million | Key Operational Highlights (as of Dec 31, 2021) | Metric | 2021 Value | 2020 Value | | :--- | :--- | :--- | | Non-Performing Assets | $56.8 million | $91.6 million | | Non-Performing Assets / Total Assets | 0.41% | 0.71% | | Core Deposit Accounts | $10.54 billion | $8.74 billion | | Core Deposits as % of Total Deposits | 93.8% | 88.9% | | Total Non-Interest Income | $86.8 million | $72.4 million | Market Area and Competition The company operates within a diversified but highly competitive market across New Jersey, Pennsylvania, and New York - The Bank operates 96 full-service banking offices across New Jersey, Pennsylvania, and New York, with lending activities concentrated in these areas[26] - The Bank faces intense competition from a high concentration of financial institutions, including large money center banks, community banks, and non-bank entities like mortgage and investment firms[29] Unemployment Rates in Key Markets (Year-End) | State | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | New Jersey | 6.3% | 7.6% | | Pennsylvania | 5.4% | 6.7% | | New York | 6.2% | 8.2% | Lending Activities The bank's lending strategy centers on a diversified portfolio with a primary focus on commercial real estate loans - To manage interest rate risk, the Bank generally sells fixed-rate residential mortgages with terms greater than 15 years and retains adjustable-rate mortgages and shorter-term fixed-rate loans[32][43] - The Bank participated in the Paycheck Protection Program (PPP), securing $681.9 million in loans for customers; as of December 31, 2021, $587.0 million of these loans had been forgiven[62] - The regulatory lending limit to a single borrower was $186.6 million as of December 31, 2021; the Bank's largest group exposure was $124.6 million[75][76] Loan Portfolio Composition (Net) at December 31, 2021 | Loan Category | Amount (in thousands) | Percent of Total | | :--- | :--- | :--- | | Commercial mortgage loans | $3,827,370 | 40.28% | | Commercial loans | $2,188,866 | 23.04% | | Multi-family mortgage loans | $1,364,397 | 14.36% | | Residential mortgage loans | $1,202,638 | 12.66% | | Construction loans | $683,166 | 7.19% | | Consumer loans | $327,442 | 3.45% | | Total Loans, Net | $9,500,884 | 100.00% | Asset Quality Asset quality improved significantly in 2021, driven by a decrease in non-performing assets and a negative provision for credit losses - The company adopted the CECL methodology on January 1, 2020, which replaced the incurred loss model with an expected loss model for recognizing credit losses[101] Non-Performing Assets Trend | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total non-performing loans | $48.0 million | $87.1 million | | Foreclosed assets | $8.7 million | $4.5 million | | Total non-performing assets | $56.8 million | $91.6 million | | % of total assets | 0.41% | 0.71% | | % of total loans | 0.50% | 0.89% | Analysis of Allowance for Credit Losses (ACL) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Balance at beginning of period | $101,466 | $55,525 | | Provision (benefit) charge | ($24,300) | $29,711 | | Net (recoveries) charge-offs | ($3,574) | $5,276 | | Balance at end of period | $80,740 | $101,466 | | ACL to total loans | 0.84% | 1.03% | Investment Activities The investment strategy focuses on managing liquidity and interest rate risk with a portfolio of high-quality securities - The investment strategy aims to maximize return while complementing the Bank's lending activities and managing interest rate risk; the policy does not permit below-investment-grade securities[121][122] Securities Portfolio Composition (Amortized Cost) | Security Type | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Held to Maturity | | | | State and municipal obligations | $415.7 million | $433.7 million | | Other HTM | $20.5 million | $27.4 million | | Available for Sale | | | | Mortgage-backed securities | $1,711.3 million | $910.4 million | | U.S. Treasury obligations | $196.9 million | $0 | | Other AFS | $150.0 million | $163.2 million | | Total (Amortized Cost) | $2,494.4 million | $1,524.7 million | Sources of Funds The company relies on low-cost core deposits as its primary funding source, complemented by borrowings and other funds - Core deposits grew to 93.8% of total deposits at Dec 31, 2021, up from 88.9% at Dec 31, 2020[139] - As part of the SB One acquisition, the company assumed subordinated debentures; the outstanding balance was $10.3 million at Dec 31, 2021, down from $25.1 million at year-end 2020[147][148][149] Borrowed Funds Summary | (In thousands) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | FHLBNY advances & line of credit | $510,014 | $1,076,036 | | Securities sold under repurchase agreements | $116,760 | $99,936 | | Total borrowed funds | $626,774 | $1,175,972 | Subsidiaries, Human Capital, and Regulation The company operates key subsidiaries and faces heightened regulatory oversight after crossing the $10 billion asset threshold - Key subsidiaries include Beacon Trust Company for wealth management and SB One Insurance Company Inc. for insurance brokerage services[150][156] - As of December 31, 2021, the Company had 1,119 full-time and 40 part-time employees; the company promotes diversity, with women holding 63% of managerial positions[157][161] - Exceeding $10 billion in assets in 2020 subjected the Company to increased supervision, including direct oversight by the Consumer Financial Protection Bureau (CFPB)[165][240] - Both the Company and the Bank were considered "well capitalized" under all applicable regulatory standards as of December 31, 2021[185][247] Item 1A. Risk Factors The company faces significant risks from interest rates, credit concentrations, heightened regulatory scrutiny, and operational challenges - Economic & Interest Rate Risks: The company's results are highly sensitive to changes in market interest rates, which affect net interest income and could be negatively impacted by a flattening yield curve[275][278] - Credit Risks: The loan portfolio has significant concentrations in commercial real estate (54.6%), commercial & industrial (23.0%), and construction (7.2%), which carry higher risk[280] - Regulatory Risks: As an institution with over $10 billion in assets, the company is subject to heightened regulation by the CFPB, increasing operating costs and compliance burdens[285][287][292] - Business & Operational Risks: The ongoing impact of the COVID-19 pandemic, geographic concentration, the planned cessation of LIBOR, and intense competition pose significant risks[293][300][304][313] - Technology & Security Risks: The company is highly dependent on technology and third-party providers, making it vulnerable to cyber-attacks, data breaches, and system failures[317][324] Item 1B. Unresolved Staff Comments The company reports no unresolved comments from the staff of the Securities and Exchange Commission - There are no unresolved comments from the staff of the SEC to report[329] Item 2. Properties The company operates 96 branch offices and leases its executive and administrative headquarters - At December 31, 2021, the Bank operated 96 full-service branch offices and several loan production offices; the aggregate net book value of premises and equipment was $80.6 million[330] Item 3. Legal Proceedings Ongoing legal actions are not expected to have a material adverse impact on the company's financial condition - Management does not expect ongoing legal actions and claims, which arise in the normal course of business, to have a material adverse impact on the Company's financial condition[332] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[333] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, with active dividend payments and share repurchases in 2021 - The company's common stock (NYSE: PFS) had approximately 4,735 stockholders of record as of February 1, 2022; a quarterly cash dividend of $0.24 per share was declared[336][337] - For the full year 2021, the company repurchased 965,223 shares at a total cost of $21.7 million; 3.2 million shares remained eligible for repurchase[342] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2021 | — | $— | | Nov 2021 | — | $— | | Dec 2021 | 289,843 | $23.43 | | Total Q4 | 289,843 | $23.43 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased substantially in 2021, driven by higher net interest income and a negative provision for credit losses - The significant increase in 2021 net income was primarily driven by a $53.5 million increase in net interest income and a negative provision for credit losses of $24.3 million[401] Financial Performance Summary | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Income | $167.9M | $97.0M | $112.6M | | Diluted EPS | $2.19 | $1.39 | $1.74 | | Net Interest Income | $366.0M | $312.6M | $298.0M | | Net Interest Margin | 3.00% | 3.05% | 3.35% | Financial Condition Highlights (Year-End) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $13.78 billion | $12.92 billion | | Total Loans | $9.58 billion | $9.82 billion | | Total Deposits | $11.23 billion | $9.84 billion | | Stockholders' Equity | $1.70 billion | $1.62 billion | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company manages its asset-sensitive balance sheet to mitigate interest rate risk, primarily through its lending strategies - The company's interest rate risk management strategy includes selling long-term fixed-rate residential mortgages while retaining shorter-term or adjustable-rate loans[432] Projected 12-Month Net Interest Income Sensitivity (as of Dec 31, 2021) | Rate Change (Basis Points) | Projected NII Change ($) | Projected NII Change (%) | | :--- | :--- | :--- | | +300 | +$22.4 million | +6.1% | | +200 | +$15.1 million | +4.1% | | +100 | +$7.6 million | +2.1% | | -100 | -$13.6 million | -3.7% | Economic Value of Equity (EVE) Sensitivity (as of Dec 31, 2021) | Rate Change (Basis Points) | Projected EVE Change ($) | Projected EVE Change (%) | | :--- | :--- | :--- | | +300 | +$214.3 million | +11.9% | | +200 | +$155.0 million | +8.6% | | +100 | +$88.5 million | +4.9% | | -100 | -$197.6 million | -10.9% | Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and the independent auditor's unqualified opinion for fiscal year 2021 - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting[446][458] - A critical audit matter identified was the assessment of the allowance for credit losses, due to the high degree of subjective and complex judgment involved[452][454] Consolidated Statement of Financial Condition Highlights | (In billions) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $13.78 | $12.92 | | Net Loans | $9.50 | $9.72 | | Total Deposits | $11.23 | $9.84 | | Total Liabilities | $12.08 | $11.30 | | Total Stockholders' Equity | $1.70 | $1.62 | Consolidated Statement of Income Highlights | (In millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net Interest Income | $366.0 | $312.6 | | Provision (benefit) for credit losses | ($24.3) | $29.7 | | Non-interest Income | $86.8 | $72.4 | | Non-interest Expense | $250.1 | $227.7 | | Net Income | $167.9 | $97.0 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure matters - None reported[775] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal controls over financial reporting were effective - The Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2021[776] - Management's assessment concluded that the Company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[780] Item 9B. Other Information The company reports no other information for this item - None[783] Part III Items 10-14 Required information on governance and compensation is incorporated by reference from the company's 2022 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders[787][788][789][793][794] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This item lists all financial statements, schedules, and exhibits filed with the annual report, including corporate governance documents and material agreements[797][800] Item 16. Form 10-K Summary This item is not applicable to the company - Not applicable[802]