Provident Financial Services, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
The company and its wholly owned Provident Bank are a banking organization. This unaudited filing covers the quarter and six months ended June 30, 2013; balance-sheet comparisons are with December 31, 2012. Dollar amounts below are in millions unless stated otherwise.
Financial and operating results
- Quarter: Net income was $19.2 million, or $0.34 per diluted share, versus $16.0 million, or $0.28, in Q2 2012. Net interest income was $53.4 million (down 2.1%); non-interest income was $12.6 million (up 35.3%); and non-interest expense was $37.8 million, roughly unchanged. Provision for loan losses fell to $1.0 million from $3.5 million.
- Six months: Net income was $37.1 million, or $0.65 per diluted share, versus $34.4 million, or $0.60, in the first half of 2012. Net interest income was $107.3 million (down 1.9%); non-interest income was $22.6 million (up 2.3%); and non-interest expense was $74.8 million (up $0.2 million). Provision for loan losses fell to $2.5 million from $8.5 million.
- Margins: Net interest margin was 3.29% for Q2, down 10 basis points year over year, and 3.32% for the first half, down 9 basis points. Lower asset yields outweighed reduced funding costs. The quarterly efficiency ratio improved to 57.25% from 59.07%.
- Balance sheet and liquidity: Total assets were $7.27 billion, essentially unchanged from year-end. Gross loans were $5.00 billion, up about $95 million; deposits were $5.25 billion, down $179 million; and borrowed funds rose $166 million to $969 million. Cash and cash equivalents declined to $80.5 million from $103.8 million. Stockholders’ equity was $986.6 million.
- Cash flows, first half: Operating activities provided $47.3 million versus $55.4 million a year earlier; investing activities used $37.3 million versus $48.9 million; financing activities used $33.3 million versus providing $1.1 million. Cash and cash equivalents decreased $23.3 million to $80.5 million.
- Credit quality: Allowance for loan losses was $67.0 million, or 1.34% of loans, compared with $70.3 million, or 1.43%, at year-end. Non-performing loans declined to $88.8 million from $99.0 million; non-performing assets were $102.6 million, or 1.41% of assets. Impaired loans increased to $115.8 million from $109.6 million. Commercial real estate, commercial and construction loans made up 64.5% of the loan portfolio.
- Capital and shareholder returns: Bank regulatory capital ratios were 8.16% Tier 1 leverage, 11.16% Tier 1 risk-based and 12.41% total risk-based; each exceeded stated minimums. First-half dividends paid were $16.5 million, and the company repurchased 397,483 shares at an average $14.80 per share. Book value per share was $16.48; tangible book value per share was $10.52.
Material changes and notable items
- Earnings improved despite lower net interest income, primarily reflecting reduced loan-loss provisioning and higher non-interest income. Q2 non-interest income included a $1.5 million BOLI policy claim; higher commercial-loan prepayment fees and securities gains also contributed.
- Available-for-sale securities fell to $1.17 billion from $1.26 billion. The company recorded a $14.3 million after-tax first-half other comprehensive loss, largely from unrealized securities losses as market rates rose. Securities with unrealized losses increased substantially, but management concluded no other-than-temporary impairment existed and stated it did not intend, nor expect to be required, to sell the temporarily impaired securities before recovery.
- Deposit outflows, including cyclical municipal and customer tax-planning outflows, were partly offset by increased wholesale borrowing. Management said longer-term funding was added to mitigate interest-rate risk and short-term funding was used to manage deposit outflows.
- On July 17, 2013, 2.6 million non-qualified stock options expired. The company expected a $3.9 million income tax expense in Q3 2013 from writing off the related deferred tax asset.
Outlook, risks and contingencies
The filing provides no specific earnings or operating guidance. Management identifies economic and real-estate weakness, unemployment, commercial-property vacancies, rising interest rates, competition, regulatory changes, credit management and liquidity costs as risks. Its interest-rate model projected that a gradual 300-basis-point rate increase would reduce 12-month net interest income by 7.4%; an immediate, sustained 300-basis-point increase was projected to reduce the present value of equity by 15.3%. Management cautions that model results depend on assumptions and are not precise forecasts.
New regulatory capital rules issued in July 2013 are scheduled to apply to the Bank beginning January 1, 2015, with the capital conservation buffer phased in from 2016 through 2019. The company reported no material change in previously disclosed risk factors. Management said ordinary-course legal claims were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether continued margin compression and reliance on non-interest items such as the BOLI claim affect earnings sustainability.
- How deposit trends, municipal deposit seasonality and increased wholesale funding affect liquidity and funding costs.
- Whether improving non-performing loan measures continue, given higher impaired-loan balances, commercial-property exposure and the lower allowance balance.
- The effects of higher interest rates on securities values, accumulated other comprehensive income, net interest income and regulatory capital.
- The timing and realized impact of the expected $3.9 million Q3 tax expense related to expired options and implementation of the new capital rules.