Provident Financial Services, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Provident Financial Services is a bank holding company whose principal subsidiary is The Provident Bank. This unaudited filing covers the quarter and nine months ended September 30, 2012; balance-sheet changes are measured against December 31, 2011. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $53.7 | $54.5 | $163.1 | $162.1 |
| Provision for loan losses | $3.5 | $7.5 | $12.0 | $22.9 |
| Non-interest income | $9.8 | $8.7 | $31.9 | $23.9 |
| Non-interest expense | $36.9 | $35.0 | $111.4 | $106.2 |
| Net income | $16.2 | $15.6 | $50.6 | $42.5 |
| Diluted EPS | $0.28 | $0.27 | $0.88 | $0.75 |
- Revenue and margins: Net interest income plus non-interest income was $63.5 million in Q3 and $195.0 million year to date. Net interest margin was 3.31% in Q3, down from 3.50% a year earlier and 3.39% in Q2; year-to-date margin was 3.38% versus 3.51%. Management attributed compression chiefly to declining asset yields and a flatter yield curve.
- Balance sheet: Total assets rose 2.4% from year-end to $7.26 billion. Loans increased 3.6% to $4.82 billion, led by commercial and multifamily mortgages. Deposits grew 4.2% to $5.37 billion; core deposits were 81.3% of deposits versus 78.1% at year-end. Borrowed funds declined 9.3% to $834.4 million.
- Credit quality: Non-performing loans fell to $105.7 million, or 2.19% of loans, from $122.5 million, or 2.63%, at year-end. Non-performing assets declined to $119.6 million, or 1.65% of assets, from $135.4 million, or 1.91%. The allowance was $70.3 million, equal to 1.46% of loans, versus $74.4 million and 1.60% at year-end. Year-to-date net charge-offs were $16.1 million.
- Cash flow: For the first nine months, operating activities provided $83.6 million, investing activities used $154.2 million and financing activities provided $108.4 million. Cash and cash equivalents increased $37.9 million to $107.6 million.
- Capital and shareholder returns: Stockholders’ equity was $988.5 million; book value per share was $16.43 and tangible book value per share $10.48. The Bank’s regulatory capital ratios included 7.89% Tier 1 leverage and 12.80% total risk-based capital, above stated minimums. The company paid $23.1 million in dividends and repurchased $5.6 million of stock year to date; no shares were repurchased in Q3.
Material changes and management commentary
- Year-to-date net income increased 19.1%, primarily reflecting lower loan-loss provisions and higher non-interest income. Q3 net income increased 3.8% year over year.
- Lower interest expense partly offset falling interest income. Q3 net interest income declined 1.4%; year-to-date it increased 0.6%, supported by loan growth and lower-cost core funding.
- Year-to-date non-interest income grew 33.5%, including higher wealth-management fees following the 2011 Beacon acquisition, commercial loan prepayment fees, securities gains and income from termination of a debit-card rewards program. Expense rose 4.9%, including higher compensation, Beacon-related costs, and non-performing-asset expenses.
- Management reported no formal financial guidance in the supplied filing. It said cash balances were expected to fund loan originations, borrowing repayments and investment purchases, and continued to emphasize core deposit growth and time-deposit runoff.
Risks, contingencies and unusual items
- On October 29–30, 2012, Hurricane Sandy caused unprecedented damage and business interruption in parts of the company’s market area. The filing said the impact was not yet determinable and could affect borrower collateral, repayment capacity, non-performing loans and future earnings.
- Management identified economic weakness, real-estate values, unemployment, commercial-property vacancies, interest rates and credit-market conditions as risks to borrowers and the allowance estimate. The allowance is a significant estimate subject to uncertainty and possible revision.
- The securities portfolio included private-label mortgage-backed securities; two were in unrealized-loss positions, one below investment grade. The company reported no other-than-temporary impairment at September 30, 2012, but cited market illiquidity and potential future impairment risk.
- Interest-rate modeling projected a 5.0% reduction in 12-month net interest income under a gradual 300-basis-point increase, and a 15.3% reduction in modeled economic value of equity under an immediate, sustained 300-basis-point increase. Management cautioned that model assumptions may differ from actual outcomes.
- Beacon’s acquisition consideration may include up to $10.5 million contingent on acquired-business performance over three years. The company finalized the purchase-price allocation during Q3 2012.
- The company is involved in ordinary-course legal matters, which management did not expect to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Key facts for investors to verify
- Whether the improvement in non-performing loans and lower provisions is sustainable, and how charge-offs, impaired loans and troubled debt restructurings evolve.
- Whether loan and core-deposit growth can offset continued net interest margin compression and lower asset yields.
- The realized effect of Hurricane Sandy on borrowers, collateral, operations and subsequent-period credit costs.
- Potential valuation or impairment changes in private-label mortgage-backed securities and the assumptions behind the loan-loss allowance.
- Progress on Beacon integration, related costs and any contingent acquisition payment; also monitor expense growth and efficiency, which worsened to 58.10% from 55.39% year over year in Q3.