Provident Financial Services, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. The company is a bank holding company whose principal subsidiary is The Provident Bank. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior date |
|---|---|---|
| Net interest income | $54.8 | $53.4 in Q1 2011 |
| Non-interest income | $12.7 | $7.2 in Q1 2011 |
| Net income | $18.4; diluted EPS $0.32 | $12.9; diluted EPS $0.23 in Q1 2011 |
| Net interest margin | 3.42% | 3.51% in Q1 2011; 3.39% in Q4 2011 |
| Operating cash flow | $32.4 | $28.7 in Q1 2011 |
| Total assets | $7,121.1 | $7,097.4 at December 31, 2011 |
| Net loans / allowance | $4,584.8 / $74.0 | $4,579.2 / $74.4 at December 31, 2011 |
| Deposits | $5,194.9 | $5,156.6 at December 31, 2011 |
| Borrowed funds | $893.1 | $920.2 at December 31, 2011 |
| Stockholders’ equity | $965.5 | $952.5 at December 31, 2011 |
- Pre-tax income was $25.8 million and income tax expense was $7.3 million; the effective tax rate was 28.5%, versus 25.5% in Q1 2011.
- Non-interest expense was $36.8 million, up 4.1% year over year. The efficiency ratio improved to 54.45% from 58.32%.
- Cash and cash equivalents were $69.3 million at quarter-end. Q1 cash flows were $32.4 million from operations, negative $39.6 million from investing, and positive $6.8 million from financing.
- Core deposits were $4.11 billion, or 79.0% of deposits, compared with 78.1% at year-end. Borrowed funds were 12.5% of assets, down from 13.0%.
- Bank regulatory capital ratios were 7.66% Tier 1 leverage, 11.42% Tier 1 risk-based, and 12.67% total risk-based. The company reported ratios of 8.86%, 13.21%, and 14.46%, respectively; both exceeded stated minimums.
Material changes and management commentary
- Net income rose about 42.5% year over year. Management attributed the improvement chiefly to a $2.9 million lower loan-loss provision, $2.2 million in securities gains, and $1.4 million higher net interest income.
- Net interest income increased 2.6% as average loans and lower-cost core funding grew, while interest expense fell 24.9%. Margin nevertheless declined year over year as asset yields fell faster than funding costs.
- Non-interest income rose 77.5%, including higher commercial loan prepayment and wealth-management fees following the 2011 Beacon acquisition, securities-sale gains, and other income related in part to discontinuing the debit-card rewards program.
- Loans grew modestly to $4.66 billion gross. Commercial and multi-family mortgage loans increased, while commercial and residential mortgage balances declined. Core deposits grew as time deposits and wholesale borrowings ran off.
- The allowance was 1.59% of total loans, compared with 1.60% at year-end. Non-performing loans decreased to $120.3 million, or 2.58% of loans, from $122.5 million, or 2.63%. Non-performing assets were $134.8 million, or 1.89% of assets.
- Common dividends paid were $7.3 million; the company repurchased 139,845 shares at an average $13.86 per share. Book value per share was $16.04 and tangible book value per share was $10.06.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year 2012 results.
- Management identified economic weakness, real-estate values, unemployment, commercial-property vacancies, and possible interest-rate increases as credit risks that could raise delinquencies, losses, and provisions. The allowance is a significant estimate subject to short-term change.
- Interest-rate simulations projected 12-month net interest income down 4.8% under a gradual 300-basis-point rate increase and down 3.2% under a 100-basis-point decrease. An immediate, sustained 300-basis-point increase projected economic value of equity down 16.6%. Management noted that model assumptions may differ from actual outcomes.
- At March 31, 46 securities were in an unrealized loss position, versus 24 at year-end. Four were private-label mortgage-backed securities with $13.8 million amortized cost and $739,000 unrealized losses; three were below investment grade. The company reported no other-than-temporary impairment and stated it did not intend, and was not more likely than not required, to sell loss-position securities before recovery.
- There were 79 impaired loans totaling $111.6 million, including 57 troubled debt restructurings (TDRs) totaling $74.0 million. Five previously modified TDRs totaling $835,000 subsequently defaulted during the quarter.
- The Beacon acquisition may require up to $10.5 million of additional cash consideration, contingent on performance during the three years after closing. The filing describes ordinary-course legal matters that management does not expect to materially adversely affect results. No material change to previously disclosed risk factors was reported.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported. The company adopted new fair-value and comprehensive-income presentation guidance; management reported no material financial-statement effect from the fair-value guidance.
Important facts for investors to verify
- Whether improved credit trends persist, particularly given $5.4 million of net charge-offs in Q1 versus $3.9 million a year earlier, and the growth in impaired loans and TDRs.
- Whether the $2.2 million securities gain and other unusual income items are repeatable; assess earnings excluding these items and Beacon-related contributions.
- How margin, funding costs, and loan yields respond to rate changes, and whether actual outcomes align with the filing’s sensitivity models.
- Credit quality and valuation exposure in private-label mortgage-backed securities, foreclosed assets, and criticized commercial real-estate and commercial loans.
- Potential Beacon contingent consideration, ongoing repurchases and dividends, and the company’s ability to sustain capital and liquidity while funding growth.