Provident Financial Services, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with FY2010. The company is a bank holding company operating The Provident Bank, with 82 branches concentrated in northern and central New Jersey.
Financial performance and position
| Metric | FY2011 / Dec. 31, 2011 | FY2010 / Dec. 31, 2010 |
|---|---|---|
| Total assets | $7.10 billion | $6.82 billion |
| Net loans | $4.58 billion | $4.34 billion |
| Deposits | $5.16 billion | $4.88 billion |
| Borrowed funds | $920.2 million | $969.7 million |
| Stockholders’ equity | $952.5 million | $921.7 million |
| Interest income | $275.7 million | $286.5 million |
| Net interest income | $216.0 million | $209.0 million |
| Net interest margin | 3.49% | 3.45% |
| Provision for loan losses | $28.9 million | $35.5 million |
| Non-interest income | $32.5 million | $31.6 million |
| Non-interest expense | $142.4 million | $138.7 million |
| Net income / diluted EPS | $57.3 million / $1.01 | $49.7 million / $0.88 |
| Operating cash flow | $93.8 million | $92.3 million |
Net income rose 15.4%. Lower funding costs more than offset lower yields on earning assets: interest expense declined 23.0%, while interest income fell 3.8%. Net interest income increased 3.4%; return on average assets was 0.83%, return on average equity 6.09%, and the efficiency ratio 57.31%.
Cash and cash equivalents ended the year at $69.6 million, up from $52.2 million. Investing activities used $279.4 million, principally reflecting loan growth and securities activity; financing activities provided $203.0 million, including deposit growth. Core deposits were $4.03 billion, or 78.1% of deposits, versus 73.8% a year earlier. The company reported no brokered deposits.
The Bank was well capitalized: Tier 1 leverage ratio was 7.42%, Tier 1 risk-based capital 10.88%, and total risk-based capital 12.13%. Company-level ratios were 8.74%, 12.80%, and 14.05%, respectively.
Material changes and credit quality
- Loans grew 5.5%; commercial-oriented loans rose to 59.8% of the portfolio from 55.6%. Multifamily loans increased to $564.1 million from $387.2 million, while residential mortgages declined to $1.31 billion from $1.39 billion.
- Deposits increased 5.7%, driven by core balances; certificates of deposit declined 11.7%. Borrowed funds decreased 5.1% as deposit growth replaced some wholesale funding.
- Credit measures worsened despite lower annual provision and net charge-offs. Non-performing loans increased to $122.5 million, or 2.63% of loans, from $97.3 million, or 2.21%. Non-performing assets rose to $135.4 million, or 1.91% of assets, from $100.1 million, or 1.47%.
- Foreclosed assets rose to $12.8 million from $2.9 million. The allowance for loan losses increased to $74.4 million, equal to 1.60% of loans, from $68.7 million, or 1.56%; coverage of non-performing loans fell to 60.67% from 70.66%.
- Impaired loans totaled $103.2 million, compared with $47.7 million. The filing reports $48.9 million of TDRs in the business discussion; note disclosures also report $63.1 million of TDRs, reflecting different stated populations. Verify the detailed TDR definitions and reconciliation.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance is provided. Management’s stated strategy is to grow profitably, expand commercial and multifamily lending and core customer relationships, and manage interest-rate risk.
- Management identifies New Jersey economic and real-estate conditions, elevated unemployment, borrower repayment capacity, commercial-property vacancies, loan concentrations, and allowance-estimation uncertainty as key risks. The Bank’s local concentration and growing commercial loan mix increase exposure to adverse regional or property-market developments.
- Interest-rate simulations estimated net interest income would decline 4.2% ($9.1 million) under a gradual 300-basis-point increase and 3.9% ($8.4 million) under a 100-basis-point decrease. An immediate, sustained 300-basis-point increase was estimated to reduce economic value of equity 14.1% ($173.9 million). These are model estimates, not forecasts.
- The August 2011 Beacon wealth-management acquisition contributed $7.1 million of goodwill and a $2.4 million customer-relationship intangible. Additional cash consideration of up to $10.5 million may be payable based on performance over three years.
- Goodwill was $353.3 million; the 2011 annual impairment assessment found no impairment. The company recorded $302,000 of securities impairment losses in earnings in 2011. Six below-investment-grade private-label mortgage-backed securities had $23.2 million amortized cost and $1.9 million unrealized losses; management said it did not intend, and was not more likely than not required, to sell them before recovery.
- Cash dividends totaled $26.8 million and share repurchases cost $4.1 million. The Board stated it intended to maintain a regular quarterly dividend, subject to financial, economic, and regulatory considerations.
- Management said routine legal claims were not expected to materially affect results. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether rising non-performing assets, impaired loans, foreclosures, and the declining allowance-to-non-performing-loan coverage signal further credit costs.
- The detailed TDR balances and classifications, including the apparent difference between $48.9 million and $63.1 million disclosed in different sections.
- Loan concentration, collateral values, and borrower performance in commercial real estate, multifamily, construction, and shared national credit exposures.
- Assumptions underlying interest-rate sensitivity, deposit repricing, securities prepayments, and the valuation of private-label mortgage-backed securities.
- Beacon’s contribution to fee income and results, potential earnout payments, and the carrying value and impairment sensitivity of goodwill.
- Near-term certificate-of-deposit maturities ($755.1 million within one year), liquidity sources, and the sustainability of dividends and capital levels.