Provident Financial Services, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. The company is a bank holding company whose principal subsidiary is The Provident Bank. This unaudited filing covers the quarter and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. Amounts below are in millions of dollars unless otherwise noted.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Interest income | $63.0 | $64.8 | $188.7 | $197.7 |
| Net interest income | $54.0 | $53.7 | $161.3 | $163.1 |
| Provision for loan losses | $1.2 | $3.5 | $3.7 | $12.0 |
| Non-interest income | $11.7 | $9.8 | $34.3 | $31.9 |
| Non-interest expense | $36.5 | $36.9 | $111.2 | $111.4 |
| Pre-tax income | $28.1 | $23.1 | $80.7 | $71.5 |
| Net income | $16.1 | $16.2 | $53.1 | $50.6 |
| Diluted earnings per share | $0.28 | $0.28 | $0.93 | $0.88 |
| Net interest margin | 3.28% | 3.31% | 3.30% | 3.38% |
Revenue and margins. The filing does not present a conventional revenue subtotal; net interest income plus non-interest income was $65.7 million for Q3 and $195.6 million for the first nine months. Net interest income rose slightly for the quarter but declined 1.1% year to date as lower asset yields outweighed lower funding costs. Q3 efficiency ratio improved to 55.48% from 58.10%.
Cash flow and liquidity. Operating cash flow was $83.6 million in the first nine months, compared with $83.6 million a year earlier; investing activities used $103.7 million and financing activities provided $11.6 million. Cash and cash equivalents ended at $95.3 million, down $8.5 million from year-end 2012. Deposits declined $172.6 million (3.2%) to $5.26 billion, while borrowed funds increased $213.2 million (26.5%) to $1.02 billion. Core deposits were 83.9% of deposits.
Balance sheet, credit and capital. Total assets were $7.34 billion, up $57.3 million from year-end. Loans grew 3.6% to $5.08 billion, led by multifamily and construction lending. The allowance for loan losses was $66.0 million, or 1.30% of loans, versus $70.3 million, or 1.43%, at year-end. Non-performing loans declined to $81.6 million (1.60% of loans) from $99.0 million; non-performing assets fell to $88.9 million (1.21% of assets) from $111.5 million. The company and bank exceeded stated minimum regulatory capital requirements: company total risk-based capital was 14.27%, and bank total risk-based capital was 12.74%.
Material changes and notable items
- Year-to-date net income increased 5.0%, although Q3 net income was nearly unchanged. The quarter’s higher pre-tax income was offset by increased income tax expense.
- A $3.9 million deferred tax asset related to non-qualified stock options expired unused in July. The write-off produced a $3.2 million income tax expense charge and a $735,000 equity charge. Effective tax rates were 42.7% for Q3 and 34.2% year to date; excluding the tax item, management reported rates of 31.3% and 30.2%, respectively.
- Credit costs improved: year-to-date provision was $3.7 million versus $12.0 million, and net charge-offs were $8.0 million versus $16.1 million.
- Available-for-sale securities declined to $1.15 billion from $1.26 billion at year-end. Accumulated other comprehensive income moved from positive $7.7 million to negative $5.6 million, largely reflecting unrealized securities losses as market rates rose. The company reported no other-than-temporary impairment charge.
- Stockholders’ equity rose 1.6% to $996.7 million. During the first nine months, the company repurchased 397,483 shares at an average $14.80 per share and paid $25.0 million in dividends.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management cited the prolonged low-rate environment and net interest margin compression, with loan growth and lower funding costs partly offsetting the pressure. Longer-term wholesale borrowings were added to manage interest-rate exposure, and shorter-term borrowings helped address cyclical municipal deposit outflows.
Interest-rate sensitivity modeling projected a 7.1% decline in 12-month net interest income under a gradual 300-basis-point increase, and a 15.2% decline in economic value of equity under an immediate, sustained 300-basis-point increase. Management cautioned that these models depend on assumptions and are not precise forecasts. Key risks include economic and real-estate conditions, borrower credit quality, deposit flows and funding costs, interest rates, securities-market liquidity and regulatory changes. The company identified no material change to previously disclosed risk factors; ordinary-course legal matters were not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and improved non-performing asset trends persist, particularly as commercial real estate, commercial and construction loans increased to 65.2% of the loan portfolio.
- Whether the allowance remains adequate as criticized and classified loans, collateral values and economic conditions evolve; the filing identifies this estimate as subject to significant judgment.
- Whether deposit outflows continue and are increasingly funded through borrowings, and how that affects liquidity and funding costs.
- How interest-rate changes affect net interest income, securities fair values and regulatory capital; the filing notes that model results rely on assumptions.
- Whether securities unrealized losses or private-label mortgage-backed securities produce future impairment charges. At quarter-end, 269 securities were in unrealized loss positions, versus 65 at year-end, but management concluded no other-than-temporary impairment existed.
- The impact of the one-time deferred-tax-asset write-off when assessing ongoing earnings and tax rates.