Provident Financial Services(US:PFS)2023-03-01 20:08Part I Item 1. Business Provident Financial Services operates Provident Bank, focusing on deposit gathering and commercial lending, with a pending merger to create a $25 billion institution Company Overview and Strategic Transactions The company is growing via acquisitions, highlighted by a pending merger with Lakeland Bancorp and significant 2022 capital returns to shareholders - On September 26, 2022, the Company entered into a merger agreement with Lakeland Bancorp, Inc The combined institution is expected to have approximately $25 billion in total assets and $20 billion in total deposits1718 - In the pending merger, Lakeland shareholders will receive 0.8319 shares of the Company's common stock for each share of Lakeland common stock, representing an aggregate merger consideration of approximately $1.3 billion19 2022 Capital Management Activities | Activity | Amount | Details | | :--- | :--- | :--- | | Cash Dividends Paid | $72.0 million | - | | Stock Repurchases | $47.5 million | 2,045,762 shares at an average cost of $23.23 per share | | Remaining Repurchase Authorization | 1.1 million shares | As of December 31, 2022 | Provident Bank Operations The bank focuses on relationship banking to attract core deposits, grow its commercial loan portfolio, and generate non-interest income amid a competitive market - The Bank emphasizes acquiring and retaining core deposits (savings and demand accounts), which totaled $9.81 billion, or 92.9% of total deposits, at December 31, 202226 - Non-interest income was $87.8 million in 2022, slightly up from $86.8 million in 2021, driven by fee income, wealth management, and insurance services27 - The Bank operates in a highly competitive market with a high concentration of financial institutions, including large money center banks, community banks, and credit unions3233 Lending Activities The bank's lending focuses on commercial real estate, growing its total loan portfolio to $10.26 billion while managing interest rate risk Loan Portfolio Composition (at December 31) | Loan Type | 2022 Amount ($ thousands) | 2022 Percent | 2021 Amount ($ thousands) | 2021 Percent | | :--- | :--- | :--- | :--- | :--- | | Residential mortgage | $1,177,698 | 11.59% | $1,202,638 | 12.66% | | Commercial mortgage | $4,316,185 | 42.48% | $3,827,370 | 40.28% | | Multi-family mortgage | $1,513,818 | 14.90% | $1,364,397 | 14.36% | | Construction loans | $715,494 | 7.04% | $683,166 | 7.19% | | Commercial loans | $2,233,670 | 21.98% | $2,188,866 | 23.04% | | Consumer loans | $304,780 | 3.00% | $327,442 | 3.45% | | Total gross loans | $10,261,645 | 100.99% | $9,593,879 | 100.98% | - At December 31, 2022, 59.37% of the Bank's loan portfolio had a term to maturity of one year or less or had adjustable interest rates, reflecting a strategy to manage interest rate risk28 Loan Originations and Purchases (Year Ended December 31) | Activity | 2022 ($ thousands) | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :--- | :--- | :--- | | Total loans originated and purchased | $3,951,055 | $3,524,498 | $3,495,530 | | Total repayments | $3,237,837 | $3,694,738 | $2,603,058 | | Net increase (decrease) | $667,259 | ($241,266) | $2,490,005 | Asset Quality Asset quality remains strong with minimal net charge-offs, though non-performing assets increased slightly to 0.44% of total assets in 2022 Non-Performing Assets (at December 31) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total non-performing loans ($ thousands) | $58,509 | $48,027 | $87,090 | | Total non-performing assets ($ thousands) | $60,633 | $56,758 | $91,565 | | Non-performing assets as a % of total assets | 0.44% | 0.41% | 0.71% | | Non-performing loans to total loans | 0.57% | 0.50% | 0.89% | Allowance for Credit Losses Analysis (Year Ended December 31) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Balance at end of period ($ thousands) | $88,023 | $80,740 | $101,466 | | Provision charge (benefit) to operations ($ thousands) | $8,400 | ($24,300) | $29,711 | | Net charge-offs (recoveries) to average loans | 0.01% | (0.04)% | 0.06% | | Allowance for credit losses to total loans | 0.86% | 0.84% | 1.03% | - The company adopted the Current Expected Credit Loss (CECL) methodology on January 1, 2020, which requires estimating credit losses over the life of financial instruments based on historical experience, current conditions, and reasonable forecasts107 Investment Activities and Sources of Funds The investment strategy focuses on managing liquidity and risk, with funds primarily sourced from core deposits, loan repayments, and FHLBNY advances Investment Securities Portfolio (at December 31, 2022) | Security Type | Amortized Cost ($ thousands) | Fair Value ($ thousands) | | :--- | :--- | :--- | | Held-to-maturity debt securities | $387,950 | $373,468 | | Available for sale debt securities | $2,058,487 | $1,803,548 | | Equity securities | $1,147 | $1,147 | | Total | $2,447,584 | $2,178,163 | - Primary sources of funds include deposits, principal and interest payments from loans and securities, FHLBNY advances, and proceeds from asset sales140 - Total deposits were $10.56 billion at December 31, 2022 Core deposits (savings, interest and non-interest bearing checking, and money market accounts) represented 92.9% of total deposits141142 - Borrowed funds increased to $1.34 billion at year-end 2022 from $626.8 million in 2021, primarily consisting of FHLBNY advances and repurchase agreements145150 Other Business Activities and Human Capital The company generates fee income through wealth management and insurance subsidiaries and emphasizes a diverse and supportive work environment for its employees - Wealth management services are provided through the wholly owned subsidiary, Beacon Trust Company, offering investment management, trust administration, and financial planning152 - Insurance brokerage services are offered through Provident Protection Plus, Inc, providing commercial and personal lines of insurance154 - As of December 31, 2022, the Company had 1,124 full-time and 29 part-time employees The company highlights its diverse workforce, with women holding 63% of managerial positions160164 Regulation, Supervision, and Taxation The company operates under extensive regulation from federal and state authorities and maintains a "well capitalized" status under all regulatory standards - The Company and the Bank are subject to extensive regulation by the New Jersey Department of Banking and Insurance, the FDIC, and the Federal Reserve Board Having exceeded $10 billion in assets, the company is also under the direct supervision of the Consumer Financial Protection Bureau (CFPB)167168169 Provident Bank Capital Ratios (as of December 31, 2022) | Ratio | Actual | Minimum Requirement | Well-Capitalized Requirement | | :--- | :--- | :--- | :--- | | Tier 1 leverage capital | 9.51% | 4.00% | 5.00% | | Common equity Tier 1 risk-based capital | 10.91% | 4.50% | 6.50% | | Tier 1 risk-based capital | 10.91% | 6.00% | 8.00% | | Total risk-based capital | 11.58% | 8.00% | 10.00% | - The company is subject to federal income tax and state taxes in New Jersey, Pennsylvania, and New York New Jersey enacted legislation requiring combined tax returns starting in 2019 and imposed a temporary surtax effective for tax years 2018 through 2023272274275 Item 1A. Risk Factors Key risks include merger integration with Lakeland, interest rate volatility, credit exposure in commercial real estate, and heightened regulatory scrutiny - Merger Risks: The pending merger with Lakeland faces risks such as failure to obtain regulatory approvals, integration difficulties, and the possibility of not realizing anticipated cost savings and benefits282289 - Economic and Interest Rate Risks: Changes in market interest rates significantly affect net interest income A rising rate environment could compress margins if liability costs reprice faster than asset yields An economic slowdown could also increase credit losses307308311 - Credit Risks: The company has significant exposure to commercial real estate (57.4% of total loans), commercial & industrial (22.0%), and construction loans (7.0%), which are sensitive to economic conditions and carry higher risk than residential mortgages315 - Regulatory and Compliance Risks: Operating in a highly regulated environment, the company is subject to extensive supervision Exceeding $10 billion in assets subjects it to stricter rules, including CFPB oversight and reduced debit card interchange fees317319 - Technology and Security Risks: The business is highly dependent on technology and third-party providers, exposing it to risks of cyber-attacks, data breaches, and system failures which could result in financial loss and reputational harm347355 Item 1B. Unresolved Staff Comments The company reports that there are no unresolved comments from the staff of the Securities and Exchange Commission (SEC) - There are no unresolved comments from the staff of the SEC to report277 Item 2. Properties The company operates 95 branch offices and leases its executive and administrative facilities, with a total net book value of $79.8 million for all properties - At December 31, 2022, the Bank operated 95 full-service branch offices in New Jersey, Pennsylvania, and New York278 - The aggregate net book value of premises and equipment was $79.8 million at December 31, 2022278 Item 3. Legal Proceedings Ongoing legal actions from the normal course of business are not expected to have a material adverse impact on the company's financial condition - Management believes that ongoing legal actions and claims from the normal course of business are not expected to have a material adverse impact on the Company's financial condition and results of operations280 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable359 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 capital management through dividends and share repurchases, though its five-year return has underperformed peers - The Company's common stock trades on the New York Stock Exchange under the symbol "PFS"362 - In 2022, the Company repurchased 2,054,762 shares of its common stock at a cost of $47.5 million At year-end, 1.1 million shares remained eligible for repurchase under the current program368 - A quarterly cash dividend of $0.24 per common share was declared on January 27, 2023 The Board intends to maintain a regular quarterly dividend, subject to various factors363 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income rose to $175.6 million in 2022, driven by a 37 basis point expansion in net interest margin, partially offset by a higher provision for credit losses Overview and Strategy The company's strategy centers on profitable growth through quality commercial lending, expanding market share, and growing stable, low-cost core deposits - The Bank's strategy is to grow profitably by expanding customer relationships, maintaining credit quality, and managing interest rate risk372 - A key focus is on commercial lending, with commercial mortgage, multi-family, construction, and commercial loans accounting for 85.6% of the loan portfolio at December 31, 2022373 - The relationship banking strategy targets core accounts, with savings and demand deposits representing 92.9% of total deposits at December 31, 2022374375 Critical Accounting Policies The allowance for credit losses is the most critical accounting policy, involving significant management judgment under the forward-looking CECL methodology - The allowance for credit losses on loans is identified as a critical accounting policy, requiring complex judgments and estimates384387 - The Company adopted the CECL methodology on January 1, 2020, which requires estimating expected credit losses over the life of the loan portfolio based on past events, current conditions, and a reasonable and supportable forecast385 - The CECL model uses an externally developed economic forecast over a six-quarter period, followed by a four-quarter reversion to historical averages, and is approved by the Asset-Liability Committee388 Analysis of Net Interest Income Net interest income grew by $51.5 million in 2022 as the net interest margin expanded by 37 basis points due to higher yields on assets Net Interest Income and Margin Analysis | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Interest Income ($ thousands) | $417,552 | $366,023 | $312,570 | | Net Interest Rate Spread | 3.22% | 2.89% | 2.88% | | Net Interest Margin | 3.37% | 3.00% | 3.05% | - The increase in net interest income in 2022 was primarily driven by the favorable repricing of adjustable-rate loans and higher rates on new loan originations, which increased the yield on interest-earning assets by 46 basis points to 3.76%424425 - The average cost of interest-bearing liabilities increased by 13 basis points to 0.54% in 2022, reflecting the rising interest rate environment426 Comparison of Financial Condition (2022 vs. 2021) Total assets remained stable at $13.8 billion, with loan growth funded by a shift from cash and investments and an increase in borrowings - Total assets were stable at $13.8 billion at December 31, 2022409 - The loan portfolio grew by $667.3 million to $10.25 billion, driven by growth in commercial mortgage, multi-family, and commercial loans410 - Total deposits decreased by $671.0 million, while borrowed funds increased by $710.6 million, largely due to replacing $450.0 million of brokered demand deposits with FHLB borrowings419420 - Stockholders' equity decreased by $99.4 million, primarily due to an increase in unrealized losses on available for sale debt securities, dividends paid, and common stock repurchases421 Comparison of Operating Results Net income rose in 2022 due to higher net interest income, which offset a significant swing in the provision for credit losses Key Operating Results (Years Ended December 31) | Metric ($ millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Interest Income | $417.6 | $366.0 | $312.6 | | Provision for Credit Losses | $8.4 | ($24.3) | $29.7 | | Non-Interest Income | $87.8 | $86.8 | $72.4 | | Non-Interest Expense | $256.8 | $250.1 | $227.7 | | Net Income | $175.6 | $167.9 | $97.0 | | Diluted EPS | $2.35 | $2.19 | $1.39 | - 2022 vs 2021: The increase in net income was primarily due to higher net interest income, partially offset by a significant increase in the provision for credit losses compared to the prior year's negative provision422423424 - 2021 vs 2020: The substantial increase in net income was driven by a large negative provision for credit losses due to an improved economic forecast and a significant increase in net interest income, benefiting from the SB One acquisition433434435 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulation models showing the balance sheet is moderately asset-sensitive - The Company's primary market risk is interest rate risk, which it manages by focusing on adjustable-rate commercial loans and selling long-term fixed-rate residential mortgages453 Net Interest Income Sensitivity Analysis (as of December 31, 2022) | Change in Interest Rates (bps) | Projected Change in NII ($ thousands) | Projected % Change in NII | | :--- | :--- | :--- | | +300 | $8,767 | 1.9% | | +200 | $6,033 | 1.3% | | +100 | $3,214 | 0.7% | | Static | $0 | 0.0% | | -100 | ($3,602) | (0.8)% | Economic Value of Equity (EVE) Sensitivity Analysis (as of December 31, 2022) | Change in Interest Rates (bps) | Projected Change in EVE ($ thousands) | Projected % Change in EVE | | :--- | :--- | :--- | | +300 | $83,858 | 3.7% | | +200 | $67,644 | 3.0% | | +100 | $49,154 | 2.2% | | Flat | $0 | 0.0% | | -100 | ($925) | 0.0% | Item 8. Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, which received an unqualified opinion from the independent auditor KPMG LLP Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on the financial statements and internal controls, identifying the allowance for credit losses as a critical audit matter - The independent auditor, KPMG LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects465 - KPMG LLP also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2022466476 - The assessment of the allowance for credit losses (ACL) on loans was identified as a Critical Audit Matter due to the significant measurement uncertainty and the subjective, complex judgments required470472 Consolidated Financial Statements The financial statements show total assets of $13.78 billion and net income of $175.6 million for the year ended December 31, 2022 Consolidated Statement of Financial Condition (at December 31) | ($ in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $13,783,436 | $13,781,202 | | Net Loans | $10,160,860 | $9,500,884 | | Total Deposits | $10,563,024 | $11,234,012 | | Total Liabilities | $12,185,733 | $12,084,106 | | Total Stockholders' Equity | $1,597,703 | $1,697,096 | Consolidated Statement of Income (Year Ended December 31) | ($ in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Interest Income | $417,552 | $366,023 | $312,570 | | Provision for Credit Losses | $8,388 | ($24,339) | $29,719 | | Non-interest Income | $87,789 | $86,809 | $72,431 | | Non-interest Expense | $256,847 | $250,053 | $227,728 | | Net Income | $175,648 | $167,921 | $96,951 | Notes to Consolidated Financial Statements The notes detail key accounting policies, the pending Lakeland merger, loan portfolio analysis, and the company's well-capitalized regulatory status - Note 1 (Accounting Policies): The company adopted the CECL methodology for its allowance for credit losses on January 1, 2020, which requires a forward-looking estimate of expected losses519 - Note 3 (Business Combinations): Details the pending merger with Lakeland Bancorp, where Lakeland shareholders will receive 0.8319 shares of PFS common stock for each Lakeland share561563 - Note 7 (Loans and ACL): The allowance for credit losses was $88.0 million at year-end 2022 Impaired loans totaled $68.8 million, of which $26.0 million were Troubled Debt Restructurings (TDRs)591593 - Note 16 (Regulatory Capital): As of December 31, 2022, both the Company and the Bank were categorized as well-capitalized under all applicable regulatory guidelines672673 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 any matter of accounting principles or financial disclosure - None reported750 Item 9A. Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2022 - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2022751 - Management assessed the effectiveness of internal control over financial reporting and concluded it was effective as of December 31, 2022755 Part III Items 10-14 Information regarding directors, executive compensation, and corporate governance is incorporated by reference from the 2023 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 to be held on April 27, 2023761762763768769 Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including material contracts and certifications - This section lists all financial statements and exhibits filed with the Form 10-K, including merger agreements, corporate bylaws, and executive certifications772775