Provident Financial Services, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Provident Financial Services is a bank holding company whose subsidiary, The Provident Bank, provides banking services. This unaudited filing covers the three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012, and operating results are compared with Q1 2012. Amounts below are in U.S. dollars.
Key financial metrics
- Income and earnings: Combined interest and non-interest income was $73.2 million, versus $79.6 million in Q1 2012. Net interest income was $53.9 million, down 1.7%; net income was $17.8 million, down 3.3%, and diluted EPS was $0.31 versus $0.32. The $25.4 million of pre-tax income compared with $25.8 million.
- Margins and expenses: Net interest margin declined to 3.33% from 3.42%, as yields on earning assets fell faster than funding costs. Non-interest expense was $36.9 million, up 0.4%; the efficiency ratio rose to 57.87% from 54.45%. The effective tax rate was 29.8%, compared with 28.5%.
- Credit costs and asset quality: The loan-loss provision was $1.5 million, down from $5.0 million; net charge-offs were $1.8 million versus $5.4 million. The allowance was $70.0 million, or 1.43% of loans, versus $70.3 million and 1.43% at year-end. Non-performing loans were $99.1 million, or 2.02% of loans, essentially unchanged from year-end. Non-performing assets were $111.3 million, or 1.55% of assets. Loans 60–89 days past due decreased to $7.6 million from $26.1 million.
- Balance sheet and liquidity: Total assets decreased 1.3% to $7.19 billion. Loans were $4.91 billion, up $5.7 million from year-end. Deposits fell 2.8% to $5.28 billion; core deposits were 82.6% of deposits. Cash and cash equivalents declined to $64.7 million from $103.8 million. Borrowed funds increased 6.3% to $854.0 million, or 11.9% of assets.
- Cash flow: Operating activities provided $18.8 million, compared with $32.4 million in Q1 2012. Investing activities provided $50.3 million, versus using $39.6 million; financing activities used $108.3 million, versus providing $6.8 million. Cash and cash equivalents decreased $39.1 million during the quarter.
- Capital and equity: Stockholders’ equity was $990.4 million, up from $981.2 million at year-end. The Bank’s actual Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 8.03%, 11.19%, and 12.45%, respectively; each exceeded the stated regulatory minimum. The Company’s corresponding ratios were 9.16%, 12.76%, and 14.02%. Book value per share was $16.52 and tangible book value per share was $10.55.
Material changes versus comparable periods
- Lower interest income and a narrower net interest margin reduced net interest income, partly offset by lower deposit and borrowing costs and growth in average loans and lower-cost core deposits.
- Lower loan-loss provision and net charge-offs reflected management’s assessment of improved asset quality. Classified and criticized loans declined to $211.5 million from $228.6 million at year-end, although total non-performing loans remained broadly stable.
- Non-interest income fell 21.9%, principally because securities gains were $0.5 million versus $2.2 million and prior-year other income included a debit-card rewards program discontinuance item.
- Deposits declined while borrowings increased, with wholesale funding partly replacing deposit outflows. Management attributed much of the core deposit decline to demand and money-market outflows, including expected client tax-planning-related activity.
- Available-for-sale securities decreased to $1.22 billion from $1.26 billion; held-to-maturity securities declined to $342.7 million from $359.5 million. Other comprehensive loss was $1.7 million, compared with a $0.3 million loss in Q1 2012.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said the prolonged low-rate environment pressured asset yields and the margin; loan growth and lower-cost core deposits helped mitigate the effect.
- Management identified economic weakness, real-estate value declines, unemployment, commercial-property vacancies, and potential interest-rate increases as risks to borrowers’ repayment capacity and future credit costs. It emphasized that the allowance for loan losses is an estimate subject to significant judgment and possible change.
- Interest-rate models projected a 6.2% decline in 12-month net interest income under a gradual 300-basis-point rate increase, and an 18.9% decline in modeled present value of equity under an immediate, sustained 300-basis-point increase. Management cautioned that assumptions and actual outcomes may differ.
- The securities portfolio included private-label mortgage-backed securities and securities in unrealized-loss positions. The company reported no other-than-temporary impairment in Q1 2013, but noted market illiquidity and potential future impairment risk.
- Goodwill was $352.7 million; management concluded it was not impaired at March 31, 2013. The company maintained a $242,000 valuation allowance for unused capital-loss carryforwards.
- Management said ordinary-course legal claims were not expected to have a material adverse effect. It reported no material change to previously disclosed risk factors, and concluded disclosure controls were effective with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit outflows continue and whether increased wholesale borrowing affects funding costs and liquidity.
- Whether net interest margin stabilizes or continues to compress as asset yields and funding costs reprice.
- Trends in non-performing and classified loans, charge-offs, troubled debt restructurings, and the adequacy of the $70.0 million allowance.
- Potential sensitivity of securities values and modeled equity to interest-rate changes, and any subsequent impairment assessments.
- Whether the reported Q1 improvement in credit costs and cash flows persists; management cautions that quarterly results are not necessarily indicative of full-year 2013 results.