Provident Financial Services, Inc. — 2013 Form 10-K
Business context and period. The filing reports the fiscal year ended December 31, 2013, with comparisons primarily to 2012. Provident is a bank holding company operating The Provident Bank, a New Jersey community bank with 77 branches in northern and central New Jersey. Its lending strategy emphasizes commercial real estate, multifamily and commercial loans.
Financial results and position
- Profitability: Net income was $70.5 million, up 4.9% from $67.3 million; diluted EPS was $1.23 versus $1.18. Return on average assets was 0.97% and return on average equity was 7.08%.
- Interest income and margins: Net interest income declined to $216.0 million from $217.3 million. Net interest margin fell to 3.31% from 3.38%, and the average interest rate spread decreased to 3.19% from 3.25%. Lower asset yields were partly offset by loan growth and lower funding costs.
- Credit costs and asset quality: Provision for loan losses fell to $5.5 million from $16.0 million; net charge-offs declined to $11.2 million from $20.0 million. Non-performing loans were $76.7 million, or 1.48% of loans, versus $99.0 million, or 2.02%. Non-performing assets declined to $82.2 million, or 1.10% of assets, from $111.5 million, or 1.53%. The allowance was $64.7 million, 1.24% of loans, compared with $70.3 million, or 1.43%.
- Other income and expenses: Non-interest income rose to $44.2 million from $43.6 million, while non-interest expense was essentially unchanged at $148.8 million. The effective tax rate increased to 33.4% from 30.0%.
- Balance sheet: Total assets increased 2.8% to $7.49 billion. Net loans increased 6.1% to $5.13 billion. Deposits fell about 4.2% to $5.20 billion, while borrowed funds increased 49.9% to $1.20 billion. Stockholders’ equity was $1.01 billion.
- Cash flow: Operating activities provided $99.4 million; investing activities used $238.8 million; and financing activities provided $136.8 million. Cash and cash equivalents declined $2.6 million to $101.2 million.
- Capital and liquidity: The Bank was classified as well capitalized, with an 8.34% Tier 1 leverage ratio and 12.67% total risk-based capital ratio. Core deposits represented 84.5% of deposits, up from 82.4%. Management stated the Bank expected to have sufficient cash to meet funding needs.
Material changes versus 2012
- Loans grew, particularly multifamily loans, which increased approximately $204.9 million; commercial, commercial mortgage and construction balances also rose. Residential mortgage balances declined. Commercial-oriented loans increased to 66.3% of the portfolio from 62.4%.
- Deposit balances decreased as higher-cost time deposits ran off; borrowings rose to support loan growth and manage deposit outflows, including added longer-term wholesale funding.
- Credit quality improved overall, with lower non-performing loans and charge-offs. However, the allowance-to-loan ratio declined, and non-accrual troubled debt restructurings increased.
- Available-for-sale securities declined in fair value to $1.16 billion from $1.26 billion. Other comprehensive loss was $12.6 million, including unrealized securities losses.
- Net income included a $3.2 million income-tax charge from writing off a deferred tax asset related to non-qualified stock options that expired unused; this reduced EPS by $0.06. The company also recorded a $434,000 impairment charge on a previously impaired non-agency mortgage-backed security.
Outlook, commentary, risks and unusual items
- Acquisition: Provident announced a proposed merger of Team Capital Bank into The Provident Bank for consideration valued at approximately $122 million at announcement. The transaction required regulatory and Team Capital shareholder approvals; management anticipated closing in the second quarter of 2014. Expected benefits and integration remain subject to execution risks.
- Interest-rate exposure: The company’s 12-month simulation indicated net interest income would decline 7.3%, or about $16.0 million, under a gradual 300-basis-point rate increase; a 100-basis-point decline produced a modeled 0.8% decrease. An immediate, sustained 300-basis-point increase reduced modeled economic value of equity by 16.6%, or $203.7 million. These are model estimates, not forecasts.
- Key risks: The portfolio is concentrated in New Jersey and in real estate-related and commercial lending, which can carry greater credit risk than residential mortgages. Management cited economic weakness, real estate values, unemployment, commercial property vacancies, interest-rate movements, competitive pressures, regulatory changes, operational and cybersecurity risks, and possible securities impairments.
- Capital regulation: New regulatory capital rules were scheduled to take effect beginning January 1, 2015, with the capital conservation buffer phased in through 2019.
- Shareholder returns: The company paid $32.3 million in cash dividends and repurchased shares for $5.9 million in 2013. Its board stated it intended to review regular quarterly dividends, subject to financial and regulatory considerations. A $0.15 quarterly dividend was declared in January 2014.
- Audit and controls: The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether Team Capital approvals, closing, integration and expected transaction benefits materialized.
- Whether credit improvement continued, particularly in commercial and multifamily exposures, TDRs, and the allowance for loan losses.
- Whether higher wholesale borrowing and deposit outflows affected funding costs, liquidity and net interest margins.
- How actual earnings and capital respond to interest-rate changes compared with the company’s model scenarios.
- Whether the deferred-tax-asset write-off, securities impairment, and available-for-sale valuation changes have further effects.