Provident Financial Services, Inc. — Q3 2011 Form 10-Q
Business context and period. Unaudited consolidated results for the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods; balance-sheet comparisons are to December 31, 2010. The company operates through The Provident Bank. Beacon Trust and Beacon Global Asset Management were acquired on August 11, 2011; reported results include 51 days of Beacon operations.
Key financial results
Amounts are in millions of dollars, except per-share data and ratios.
- Q3 earnings: Net interest income was $54.5 million, up 2.7% year over year; net income was $15.6 million, up 15.6%, and diluted EPS was $0.27 versus $0.24.
- Nine-month earnings: Net interest income was $162.1 million, up 3.9%; net income was $42.5 million, up 13.0%, and diluted EPS was $0.75 versus $0.66.
- Revenue and expenses: Q3 total interest income was $69.2 million, down from $71.9 million, while interest expense declined to $14.7 million from $18.9 million. Non-interest income was $8.7 million, up $0.8 million; non-interest expense was $35.0 million, up 2.6%. For the nine months, non-interest income was $23.9 million and expense was $106.2 million.
- Credit costs and margin: Loan-loss provision was $7.5 million in Q3 and $22.9 million year to date, lower than the comparable 2010 amounts of $8.6 million and $26.6 million. Net interest margin was 3.50% in Q3, unchanged year over year, and 3.51% year to date versus 3.45%.
- Balance sheet and funding: Assets were $7.00 billion, up 2.5% since year-end; loans were $4.57 billion, up 3.6%; deposits were $5.07 billion, up 4.0%. Borrowed funds declined 5.9% to $912.6 million. Cash and cash equivalents were $124.0 million, versus $52.2 million at year-end. Stockholders’ equity was $949.4 million.
- Credit quality: Allowance for loan losses was $73.7 million, or 1.61% of loans, versus $68.7 million, or 1.56%, at year-end. Non-performing loans rose to $125.3 million, or 2.74% of loans, from $97.3 million, or 2.21%; non-performing assets rose to $132.2 million, or 1.89% of assets, from $100.1 million, or 1.47%. The filing cites increases in commercial mortgage and commercial problem loans.
- Cash flow and capital: Nine-month operating cash flow was $69.6 million, investing cash use was $113.5 million, and financing cash provided was $115.7 million. The Bank reported Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios of 7.43%, 10.92%, and 12.17%, respectively; all exceeded stated minimums.
Material changes and management commentary
- Profit improvement reflected lower funding costs and reduced loan-loss provisions, partly offset by higher operating expenses and lower interest income. Funding costs benefited from deposit repricing and a shift toward lower-cost core deposits; asset yields continued to decline.
- Core deposits increased to 76.8% of total deposits from 73.8% at year-end, while time deposits and borrowings declined. Management said excess cash was expected to fund loan originations and securities purchases and repay maturing borrowings.
- Beacon’s preliminary purchase accounting included $7.1 million of goodwill and a $2.4 million core relationship intangible. Additional cash consideration of up to $10.5 million may be payable based on Beacon’s performance over the three years after closing; purchase-price allocation remained subject to revision.
- Non-interest expenses included an $807,000 premises impairment charge and approximately $125,000 of Hurricane Irene damage costs. Relocation and carrying costs for former facilities also increased occupancy expense.
- The company repurchased 220,805 shares in Q3 at an average $11.62 per share; 1.9 million shares remained eligible under the program. Nine-month cash dividends were $21.2 million.
Outlook, risks and contingencies
- No specific earnings or operating guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year 2011 results.
- Management identified economic weakness, real-estate value declines, unemployment, commercial-property vacancies, interest-rate changes, and borrower repayment capacity as material credit risks. The allowance estimate is subject to significant judgment and may require future additions.
- The securities portfolio includes private-label mortgage-backed securities; seven such securities were below investment grade, with $30.0 million amortized cost and $1.8 million unrealized losses. Management reported no other-than-temporary impairment at September 30, 2011, but warned that market illiquidity and credit deterioration could lead to future impairment.
- Interest-rate models projected net interest income down 2.7% under a 300-basis-point rise and down 2.8% under a 100-basis-point decline. An immediate, sustained 300-basis-point increase was projected to reduce economic value of equity by 10.2%; management emphasized that model estimates have limitations.
- The company said ordinary-course legal claims were not expected to have a material adverse effect, and reported no material change in previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the increase in non-performing loans, impaired loans, and troubled debt restructurings persists, and whether reserves remain adequate.
- Performance of the Beacon businesses, final purchase accounting, and any contingent consideration payable.
- Developments in private-label mortgage-backed securities, unrealized losses, and any subsequent impairment charges.
- Ability to sustain net interest margin as asset yields and funding costs reprice, and actual sensitivity versus the filing’s modeled interest-rate scenarios.
- Progress in selling former facilities and any continuing occupancy costs or related charges.