Provident Financial Services, Inc. — 2015 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2015. Provident is a bank holding company operating The Provident Bank, with 87 branches in New Jersey and eastern Pennsylvania. It provides retail and commercial banking and wealth-management services. Results are compared primarily with 2014.
Financial and operating results
- Revenue and earnings: Net interest income was $249.9 million, up 4.6%; non-interest income was $55.2 million, up 34.1%. Together, these amounted to $305.1 million in net interest and non-interest income. Net income rose 13.7% to $83.7 million; diluted EPS was $1.33, versus $1.22.
- Margins and returns: Net interest margin declined to 3.20% from 3.30%, and the average net interest rate spread fell to 3.07% from 3.18%. Return on average assets was 0.96% (0.92% in 2014); return on average equity was 7.12% (6.75%). The efficiency ratio improved to 59.19% from 60.70%.
- Credit costs and asset quality: Provision for loan losses decreased to $4.4 million from $4.7 million; net charge-offs fell to $4.7 million from $7.6 million. Non-performing assets were $55.1 million, or 0.62% of assets, versus $59.0 million, or 0.69%. The allowance was $61.4 million, 0.94% of loans, compared with $61.7 million, 1.01%.
- Balance sheet and funding: Total assets were $8.91 billion, up 4.6%; net loans were $6.48 billion, up 7.5%; deposits were $5.92 billion, up 2.3%; and stockholders’ equity was $1.20 billion, up 4.5%. Core deposits were 87.5% of deposits. Borrowed funds increased 13.1% to $1.71 billion, equal to 19.2% of assets.
- Cash flow: Operating cash flow was $114.9 million, compared with $108.1 million in 2014. Investing activities used $408.7 million, largely reflecting loan growth; financing activities provided $292.3 million, including deposit growth and borrowing. Cash and cash equivalents ended the year at $102.2 million, down $1.5 million.
- Capital and shareholder returns: The Bank was well capitalized, with an 8.42% Tier 1 leverage ratio and 11.53% total risk-based capital ratio. The Company paid $41.3 million in dividends and repurchased 108,589 shares for $2.0 million during 2015.
Material changes versus 2014
- Loan growth was led by multi-family, commercial, and construction lending; commercial-oriented loans rose to 72.1% of the portfolio from 69.4%. Consumer loans declined.
- Net interest income increased with average loan growth, but margin compression continued. Average interest-earning assets grew 8.0%, while their average yield fell to 3.73% from 3.86%.
- Non-interest income increased, notably wealth-management income, which rose to $16.8 million from $9.4 million. The April 2015 MDE acquisition contributed $7.0 million in fees.
- Non-interest expense rose to $180.6 million from $170.0 million, including higher compensation, occupancy, and intangible amortization costs. Prior-year expenses included Team Capital acquisition-related items.
- Asset quality improved overall, although non-performing commercial loans increased to $23.9 million from $12.3 million, and foreclosed assets rose to $10.5 million from $5.1 million.
Outlook, risks, and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management describes continued emphasis on commercial real estate, multi-family and commercial lending, core-deposit relationships, and careful interest-rate and credit-risk management. The Company planned to review dividends quarterly and stated its intention to maintain a regular quarterly dividend, subject to financial, economic, and regulatory factors.
- Interest-rate exposure: The Company’s model projected net interest income would decline 2.5%, or $6.2 million, under a gradual 300-basis-point rate increase over 12 months; a 100-basis-point decrease projected a 2.3%, or $5.7 million, decline. An immediate, sustained 300-basis-point increase was projected to reduce economic value of equity 10.3%, or $136.8 million. These are model estimates, not forecasts.
- Key risks: Interest-rate and funding-cost changes; concentration in New Jersey and eastern Pennsylvania; commercial real estate, construction, and business credit exposure; real-estate values and local economic conditions; liquidity and competition; cybersecurity and operational risks; regulatory and capital changes; and possible impairment of goodwill or other intangibles. Management cautions that loan-loss estimates are uncertain and additional provisions may be needed.
- Acquisition and contingencies: MDE was acquired in April 2015; the Company recorded $18.3 million of goodwill, a $7.0 million customer-relationship intangible, and a $338,000 contingent-consideration liability. Potential additional cash consideration is capped at $12.5 million and depends on future revenue targets. Management said ordinary-course legal claims were not expected to have a material adverse effect. The Company also disclosed $1.15 billion of off-balance-sheet commitments, including lending commitments and letters of credit.
- Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2015.
Important facts for investors to verify
- Whether margin compression persists and whether asset yields keep pace with deposit and borrowing costs.
- Credit performance in commercial, multi-family, construction, and commercial-loan exposures, including the disclosed defaulted health-and-fitness-club relationship.
- Funding mix and refinancing/liquidity needs as borrowings rise; review deposit maturities, collateral pledged, and undrawn commitments.
- How much of the increase in wealth-management fees is recurring, and whether MDE achieves the revenue targets tied to contingent consideration.
- Capital headroom, dividend capacity, and the effect of the phased-in capital conservation buffer and other regulatory requirements.
- Goodwill of $411.6 million and the assumptions supporting impairment testing; also track unrealized securities losses and interest-rate sensitivity.