Provident Financial Services, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Provident Financial Services is the holding company for Provident Bank. This unaudited quarterly report covers the three and nine months ended September 30, 2016; balance-sheet changes are compared with December 31, 2015. Unless noted, figures below are in millions of dollars.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $65.0 | $62.5 | $192.0 | $186.1 |
| Non-interest income | $14.1 | $12.1 | $40.9 | $39.4 |
| Net income | $22.9 | $20.6 | $65.2 | $62.2 |
| Diluted earnings per share | $0.36 | $0.33 | $1.02 | $0.99 |
| Net interest margin | 3.05% | 3.13% | 3.10% | 3.18% |
- Total assets were $9.39 billion, up $478.3 million from year-end 2015. Loans were $6.89 billion, up 5.4%; investments totaled $1.58 billion.
- For the nine months, net interest income rose 3.1%. Management attributed growth to higher average loan balances and core deposits, partly offset by margin compression. The quarter’s net interest margin fell 8 basis points year over year as asset yields declined.
- Non-interest expense for the nine months increased to $136.6 million from $133.2 million, including higher compensation and data-processing costs; lower occupancy and intangible-amortization costs partly offset the increases.
- Cash and cash equivalents were $159.7 million at September 30, versus $102.2 million at year-end. Nine-month operating cash flow was $84.5 million, investing cash outflow $415.1 million, and financing cash inflow $388.1 million; cash increased $57.4 million.
- Deposits grew $603.5 million, or 10.2%, to $6.53 billion, primarily through municipal and commercial relationships. Core deposits were 89.8% of deposits. Borrowed funds declined $185.3 million, or 10.8%, to $1.52 billion, as deposit inflows replaced some wholesale funding.
- Stockholders’ equity was $1.24 billion. Bank regulatory capital ratios included 10.70% common equity Tier 1, 10.70% Tier 1 risk-based, and 11.58% total risk-based capital; the Bank exceeded applicable minimums.
Material changes and credit quality
- Commercial real estate, commercial, and construction loans rose to 74.6% of the portfolio from 72.1% at year-end, increasing concentration in those lending categories.
- Non-performing loans decreased to $40.0 million from $44.5 million; non-performing assets declined to $50.1 million from $55.1 million. The allowance for loan losses was $61.1 million, or 0.89% of loans, compared with $61.4 million, or 0.94%.
- Nine-month provision for loan losses was $4.2 million versus $3.1 million; net charge-offs were $4.5 million versus $4.4 million. No loans 90 days or more past due were still accruing at September 30.
- Non-interest income benefited from increased loan-sale gains and a $335,000 gain on a strategic branch deposit sale during the nine-month period. Wealth-management income rose year over year, partly reflecting the 2015 MDE acquisition; no contingent consideration liability for MDE was required at September 30, 2016.
- Cash dividends declared totaled $35.1 million for the nine months. The Company repurchased 147,237 shares at an average $18.46 per share; 3.2 million shares remained eligible under its authorization.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year 2016 results.
- Interest-rate modeling projected a 1.6% decline in 12-month net interest income under a gradual 300-basis-point rise, and a 3.3% decline under a 100-basis-point decline. An immediate, sustained 300-basis-point increase was modeled to reduce economic value of equity by 8.9%. These estimates depend on assumptions and are not forecasts.
- Management identifies economic weakness, falling real-estate values, unemployment, commercial-property vacancies, and interest-rate changes as potential sources of borrower stress and higher loan losses. Securities values are also sensitive to interest rates, liquidity, and credit spreads. No other-than-temporary securities impairment was recorded.
- Derivative contracts had a $20.4 million net liability termination value and $21.1 million of collateral posted. Certain agreements permit counterparties to terminate positions following specified defaults or loss of required capital status.
- The Company adopted ASU 2016-09 on share-based compensation; the reported tax benefit was $158,000 for the nine months. It is assessing the effects of new credit-loss, lease, and financial-instrument accounting standards.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. Routine legal claims were not expected to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and deposit growth remain sustainable without further net-interest-margin compression.
- Trends in criticized and non-performing commercial real-estate, commercial, and construction exposures, and whether the allowance remains adequate as charge-offs and provisions evolve.
- Deposit pricing, funding mix, and reliance on borrowed funds as rates and competition change.
- Actual sensitivity to interest-rate movements compared with the filing’s modeled results and assumptions.
- Future expenses, revenue contribution, and any contingent payment obligations associated with acquisitions, including MDE.