Provident Financial Services, Inc. — Q2 2010 Form 10-Q
Business context and period: Bank holding company and parent of The Provident Bank. This unaudited filing covers the quarter and six months ended June 30, 2010; balance-sheet comparisons are with December 31, 2009. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Profit: Q2 net income was $12.9 million, or $0.23 per diluted share, versus $6.3 million, or $0.11, a year earlier. First-half net income was $24.1 million, or $0.43 per share, versus a $137.3 million loss, or $2.44 per share, in 2009.
- Revenue and margin: Q2 net interest income rose 20.8% to $52.1 million; first-half net interest income rose 18.2% to $102.9 million. Q2 non-interest income was $8.0 million, down from $8.9 million; first-half non-interest income was $16.0 million, slightly above $15.8 million. Net interest margin was 3.48% for Q2, up from 2.96% a year earlier, and 3.42% for the first half versus 3.03%.
- Credit costs: Provision for loan losses was $9.0 million in Q2 and $18.0 million in the first half, up from $5.8 million and $11.6 million, respectively, in 2009. First-half net charge-offs were $17.3 million versus $7.3 million.
- Cash flow: First-half net cash from operating activities was $46.8 million; investing activities provided $149.1 million and financing activities used $47.6 million. Cash and equivalents increased $148.2 million to $272.0 million. These figures reflect bank cash flows, not a conventional free-cash-flow measure.
- Balance sheet and liquidity: Total assets were $6.82 billion, down $12.7 million from year-end. Net loans were $4.27 billion, down 1.3%; deposits were $4.91 billion, nearly unchanged. Core deposits increased 4.1% to $3.53 billion and represented 71.9% of deposits. Borrowed funds declined 4.4% to $955.3 million. The company reported no borrowings on its two $100 million FHLB-NY credit lines.
- Capital and shareholder returns: Stockholders’ equity was $911.0 million, up 2.9%; book value per share was $15.20 and tangible book value was $9.26. The Bank’s Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 6.99%, 10.74%, and 11.99%; the company’s respective ratios were 8.39%, 12.89%, and 14.14%. First-half cash dividends were $13.3 million.
Material changes versus comparable periods
- Lower funding costs drove higher net interest income: Q2 interest expense fell 31.8% year over year, while interest income was slightly lower. The Q2 average cost of interest-bearing deposits fell to 1.13% from 1.93%.
- First-half 2010 earnings contrast with the prior-year reported loss, which included a $152.5 million non-cash goodwill impairment charge. Excluding that charge, the filing reports 2009 first-half net operating income of $15.2 million, or $0.27 per share.
- Non-performing loans increased to $93.2 million, or 2.15% of loans, from $84.5 million, or 1.93%, at year-end. Non-performing assets rose to $97.9 million from $90.9 million. The allowance was $61.5 million, or 1.42% of loans, versus 1.39% at year-end.
- Loan mix shifted toward commercial real estate, multi-family, construction, and commercial lending: those categories were 53.8% of loans, versus 52.5% at year-end. Total loans declined 1.3%.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management says results for the first half are not necessarily indicative of full-year 2010 results.
- Management identifies economic weakness, declining real-estate values, unemployment, commercial property vacancies, and possible interest-rate increases as credit risks. It increased general valuation allowance percentages for marine loans after reviewing loss experience. The allowance remains a significant estimate subject to uncertainty and potential regulatory adjustment.
- Interest-rate modeling estimated that a 300-basis-point rate rise would reduce 12-month net interest income by 3.6% ($7.3 million); an immediate, sustained 300-basis-point rise would reduce modeled present value of equity by 18.0% ($222.3 million). Management cautions that model assumptions limit predictive precision.
- The securities portfolio included $1.26 billion of available-for-sale securities and $332.0 million held to maturity. The company recorded $170,000 of net impairment charges in the first half. Management cited private-label mortgage-backed securities and limited market liquidity as potential impairment risks, while stating it did not expect to be forced to sell temporarily impaired securities before recovery.
- The Dodd-Frank Act, signed July 21, 2010, was identified as a new regulatory risk that could increase operating, compliance, assessment, or funding costs; impacts remained uncertain. Ordinary-course legal claims were not expected by management to have a material adverse effect.
- Q2 2009 results included a $3.1 million FDIC special assessment. Q2 2010 compensation expense included severance related to retail-network realignment. The company also reported a $3.1 million OTTI on a private-label mortgage-backed security, of which $170,000 was charged to earnings and $2.9 million to other comprehensive income.
Most important facts for investors to verify
- Whether rising non-performing loans and first-half charge-offs require further provisioning, and how credit quality evolves in commercial and residential portfolios.
- Whether improved net interest margin can persist as deposit costs and asset yields reprice, and under the rate scenarios described in the filing.
- The credit quality, valuation assumptions, and future impairment exposure of private-label mortgage-backed securities and collateral-dependent impaired loans.
- The eventual costs and competitive effects of Dodd-Frank implementation, including deposit insurance assessments and demand-deposit interest rules.
- Whether reported liquidity and capital ratios remain adequate under adverse credit, market, or funding conditions.