Provident Financial Services, Inc. — Q2 2016 Form 10-Q
Business context and period: The company is a bank holding company operating through The Provident Bank. This unaudited filing covers the quarter and six months ended June 30, 2016; balance-sheet comparisons are with December 31, 2015. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $63.9 | $61.7 | $127.0 | $123.6 |
| Provision for loan losses | $1.7 | $1.1 | $3.2 | $1.7 |
| Non-interest income | $13.8 | $16.9 | $26.8 | $27.2 |
| Non-interest expense | $45.9 | $46.1 | $90.8 | $89.6 |
| Net income | $21.4 | $21.8 | $42.3 | $41.6 |
| Diluted EPS | $0.34 | $0.35 | $0.67 | $0.66 |
- Q2 net interest margin was 3.11%, down 6 basis points year over year; the six-month margin was also 3.11%, down 9 basis points. Management attributed higher net interest income to loan and core-deposit growth, partly offset by margin compression.
- Q2 net income declined about 2% year over year, as lower non-interest income offset higher net interest income. First-half net income increased about 1.8%.
- Effective tax rates were 29.1% for Q2 and 29.3% for the first half, below the comparable 2015 rates of 30.6% and 30.2%, respectively.
- Six-month operating cash flow was $57.0; investing used $287.6 and financing provided $245.9. Cash and cash equivalents rose $15.3 to $117.5.
- At June 30, total assets were $9.23 billion, up $315.1 million from year-end. Loans were $6.78 billion, up 3.7%; deposits were $6.23 billion, up 5.2%. Borrowed funds were $1.67 billion, down $42.4 million, and stockholders’ equity was $1.23 billion.
- Core deposits were $5.50 billion, 88.2% of deposits. Borrowed funds were 18.0% of assets, down from 19.2% at year-end. The filing does not provide a single general liquidity ratio.
- Bank regulatory capital ratios were 8.43% Tier 1 leverage, 10.56% common equity Tier 1 and 11.44% total risk-based capital; all exceeded applicable minimums, including the stated conservation-buffer requirements.
Material changes and credit quality
- Loan growth was led by multifamily mortgages, commercial mortgages and commercial loans. Commercial real estate, commercial and construction loans made up 73.5% of the portfolio, up from 72.1% at year-end.
- The allowance for loan losses was $60.9 million, or 0.90% of loans, versus $61.4 million, or 0.94%, at year-end. First-half provision was $3.2 million and net charge-offs were $3.7 million.
- Non-performing loans were $43.0 million, or 0.63% of loans, down from $44.5 million, or 0.68%, at year-end. Non-performing assets were $53.5 million, or 0.58% of assets. Impaired loans totaled $45.3 million; 115 performing troubled-debt-restructuring loans totaled $21.3 million.
- Available-for-sale securities increased to $1.01 billion. Accumulated other comprehensive income improved to $7.1 million from a $2.5 million loss at year-end, mainly reflecting securities gains. Management reported no other-than-temporary impairment charge and said securities in temporary loss positions were not expected to require sale before recovery.
Outlook, commentary and risks
- The filing gives no specific earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management identified economic weakness, declining real estate values, unemployment, commercial property vacancies and possible interest-rate increases as factors that could pressure borrowers and increase future provisions.
- Interest-rate models projected 12-month net interest income down 1.9% under a gradual 300-basis-point rate increase and down 2.7% under a 100-basis-point decrease. An immediate, sustained 300-basis-point increase was modeled to reduce present value of equity by 8.8%. These are model estimates subject to assumptions about rates, prepayments and deposit behavior.
- The 2015 MDE acquisition’s contingent consideration could reach a contractual maximum of $12.5 million if revenue targets are met; based on projected revenue, no liability was recorded at June 30, 2016.
- Management said there were no material changes to previously disclosed risk factors. Ordinary-course legal matters were not expected to have a material adverse financial impact. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and deposit inflows continue without further compression in net interest margin or higher funding costs.
- Trends in commercial real estate and commercial credit quality, including non-accruals, classified loans, charge-offs and allowance adequacy.
- How wealth-management income, loan-related swap fees and other non-interest income develop; Q2 non-interest income fell 18.4% year over year.
- The assumptions and sensitivity limits behind the interest-rate simulations, and any changes in regulatory capital or available liquidity.
- Future MDE revenue performance and any resulting contingent-consideration obligation.