Provident Financial Services, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Provident Financial Services, Inc. is a bank holding company operating through The Provident Bank. This unaudited filing covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. Dollar figures below are in millions unless noted.
Financial performance and condition
- Profitability: Q3 net income was $20.6 million, up 8.3% year over year; diluted EPS was $0.33 versus $0.30. Nine-month net income was $62.2 million, up 18.7%; diluted EPS was $0.99 versus $0.88.
- Net interest income and margin: Q3 net interest income was $62.5 million, down $0.4 million; nine-month net interest income was $186.1 million, up 6.0%. Net interest margin compressed to 3.13% from 3.30% in Q3 and to 3.18% from 3.27% for the nine-month period.
- Other revenue and expenses: Non-interest income was $12.1 million in Q3, up 7.1%, and $39.4 million year to date, up 32.3%, including higher wealth-management and fee income. Non-interest expense fell 4.8% to $43.6 million in Q3 but rose 4.3% to $133.2 million year to date.
- Credit costs and asset quality: Provision for loan losses was $1.4 million for Q3 and $3.1 million year to date. At September 30, the allowance was $60.5 million, or 0.94% of loans, versus $61.7 million, or 1.01%, at year-end. Non-performing loans declined to $39.6 million from $53.9 million; non-performing assets were $49.8 million, or 0.56% of assets, versus $59.0 million, or 0.69%.
- Balance sheet and funding: Total assets increased 3.9% to $8.86 billion. Loans rose 5.7% to $6.43 billion. Deposits increased 0.6% to $5.83 billion, with core deposits at 87.0% of deposits. Borrowed funds increased 16.6% to $1.76 billion, or 19.9% of assets. Cash and cash equivalents were $128.4 million, up from $103.8 million at year-end. Stockholders’ equity was $1.18 billion.
- Cash flow: For the nine months, operating activities provided $85.9 million; investing activities used $317.0 million, principally reflecting loan growth; financing activities provided $255.7 million. Cash and cash equivalents increased $24.7 million.
- Capital: The Bank reported actual ratios of 8.28% Tier 1 leverage, 10.63% common equity Tier 1 and 11.56% total risk-based capital, above the stated minimums. The Company’s corresponding ratios were 9.09%, 11.67% and 12.60%.
Material changes and notable items
- Loan growth was concentrated in multi-family, commercial mortgage, construction and commercial lending. Commercial real estate, commercial and construction loans together represented 71.5% of the portfolio, up from 69.4% at year-end.
- Provident acquired investment advisory firms MDE and Acertus on April 1, 2015. The transaction added $20.1 million of goodwill and a $7.0 million customer-relationship intangible; contingent consideration was initially valued at $2.0 million and may reach a maximum of $12.5 million based on future revenue targets.
- Q3 expense comparisons benefited from prior-year Team Capital integration costs, including $2.1 million of core-system termination costs and $0.9 million of severance and retention expense in Q3 2014. Prior-year nine-month results also included a $1.3 million non-cash pension settlement charge.
- Foreclosed assets increased to $10.1 million from $5.1 million at year-end, partly offsetting the improvement in non-performing loans.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management attributed results to loan and non-interest-bearing deposit growth, higher non-interest income and improved asset quality, partly offset by net interest margin compression.
- Interest-rate modeling projected a 3.1% decline in twelve-month net interest income under a gradual 300-basis-point rate increase, and a 1.5% decline under a 100-basis-point decrease. An immediate, sustained 300-basis-point increase was modeled to reduce economic value of equity by 11.6%. Management cautions that these simulations depend on assumptions and are not precise forecasts.
- Key stated risks include credit quality and collateral values, economic and real-estate conditions, interest-rate and liquidity movements, competition, regulation, and acquisition integration. Management identifies the loan-loss allowance, goodwill, securities and deferred-tax-asset valuations as significant estimates. No securities impairment charge was recorded; management concluded goodwill was not impaired.
- Derivative counterparties may have termination rights under specified default or capital-status provisions. At September 30, derivative net liability termination value was $7.1 million and collateral posted was $6.7 million. Management said ordinary-course legal claims were not expected to materially affect financial condition; no material risk-factor changes were reported.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting.
Investor facts to verify
- Whether margin compression continues and how loan yields and funding costs evolve.
- Whether loan growth, especially in commercial real estate, commercial and construction exposures, is accompanied by stable credit quality and adequate reserves.
- How much borrowed-fund reliance changes, and whether deposit growth sustains liquidity and funding needs.
- MDE’s contribution to wealth-management revenue and the eventual contingent consideration payable against its performance targets.
- Actual results versus the filing’s interest-rate sensitivity scenarios, noting their stated modeling limitations.