Provident Financial Services, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company is a bank holding company whose subsidiary is The Provident Bank. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $63.0 million | $54.0 million | $175.6 million | $161.3 million |
| Provision for loan losses | $1.5 million | $1.2 million | $3.4 million | $3.7 million |
| Non-interest income | $11.3 million | $11.7 million | $29.8 million | $34.3 million |
| Non-interest expense | $45.8 million | $36.5 million | $127.7 million | $111.2 million |
| Net income | $19.0 million | $16.1 million | $52.4 million | $53.1 million |
| Diluted EPS | $0.30 | $0.28 | $0.88 | $0.93 |
| Net interest margin | 3.30% | 3.28% | 3.27% | 3.30% |
- Q3 pretax income fell to $26.9 million from $28.1 million, but net income rose as income tax expense declined to $7.9 million from $12.0 million. The effective tax rate was 29.4%, versus 42.7%.
- For the first nine months, net income declined 1.4% and diluted EPS fell from $0.93 to $0.88. The effective tax rate was 29.4%, versus 34.2%.
- Net cash provided by operating activities was $68.1 million for the nine months, compared with $83.6 million a year earlier. Cash and cash equivalents ended the period at $88.8 million, down from $101.2 million at December 31, 2013.
Financial position and material changes
- Total assets were $8.42 billion at September 30, up $931.2 million from year-end. Total loans were $5.97 billion, up 14.8%; total deposits were $5.73 billion, up $525.5 million.
- The May 30 acquisition of Team Capital Bank added approximately $964.0 million of assets, $631.2 million of loans and $769.9 million of deposits. Consideration was $115.1 million, including $31.6 million cash and 4.9 million shares valued at $83.5 million. The deal added 12 banking offices.
- Borrowed funds increased 23.8% to $1.49 billion; management said longer-term wholesale funding was added to mitigate interest-rate risk. Borrowed funds were 17.7% of assets, versus 16.1% at year-end.
- Stockholders’ equity increased to $1.13 billion, including the acquisition share issuance. Book value per share was $17.40 and tangible book value was $11.16.
- The Bank’s actual regulatory capital ratios were 8.22% Tier 1 leverage, 10.94% Tier 1 risk-based and 12.00% total risk-based. Company ratios were 9.05%, 12.04% and 13.10%, respectively; each exceeded the stated minimums.
Credit quality, costs and unusual items
- Non-performing loans decreased to $64.1 million, or 1.07% of loans, from $76.7 million, or 1.48%, at year-end. Non-performing assets were $70.4 million, or 0.84% of assets, compared with $82.2 million, or 1.10%.
- The allowance for loan losses was $63.3 million, or 1.06% of loans, versus $64.7 million, or 1.24%, at year-end. The filing attributes the lower coverage ratio largely to acquired Team Capital loans recorded at fair value without an associated allowance. Nine-month net charge-offs were $4.7 million, down from $8.0 million.
- Team Capital-related non-recurring items reduced earnings by $2.2 million after tax in Q3 and $3.5 million after tax for the nine-month period. Non-interest expense included $3.7 million of acquisition-related costs in Q3 and $6.0 million year to date.
- A non-cash pension settlement charge reduced earnings by $790,000 after tax, following lump-sum distributions to vested terminated employees. The company paid $4.3 million in distributions during the first nine months.
- Commercial real estate, commercial and construction loans represented 69.0% of the loan portfolio, up from 66.3% at year-end. Classified and criticized loans increased to $212.1 million from $189.0 million, mainly reflecting growth in commercial loans.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Interest-rate modeling projected a 5.3% decrease in 12-month net interest income under a gradual 300-basis-point rate increase, and a 1.4% decrease under a 100-basis-point decline. An immediate, sustained 300-basis-point increase was projected to reduce present value of equity by 12.8%. Management notes that model assumptions limit predictive precision.
- Management identifies economic deterioration, real-estate value declines, unemployment, commercial-property vacancies and interest-rate changes as risks to borrower repayment and credit losses. Other stated risks include competition, regulation, acquisition integration, funding availability and market conditions.
- The company reported no securities other-than-temporary impairment at September 30, 2014. It stated it did not intend, and was not more likely than not required, to sell securities in temporary loss positions before recovery.
- Routine legal claims were not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- The company’s interest-rate derivatives were customer-related matched transactions, not designated as hedges. The filing reports $860,000 termination value for derivatives in a net liability position and $590,000 of collateral posted.
Important facts for investors to verify
- How much of loan, deposit and earnings growth reflects the Team Capital acquisition, and how integration costs and expected synergies develop.
- Whether the allowance remains adequate as acquired loans season, given coverage declined to 1.06% and commercial-related lending grew as a share of the portfolio.
- Trends in classified loans, non-performing assets, charge-offs and acquired credit-impaired loan performance.
- Whether higher borrowing levels and modeled interest-rate sensitivity affect future funding costs, net interest margin and capital.
- The sustainability of earnings after acquisition and pension-related charges, alongside lower commercial-loan prepayment fees and reduced year-to-date net income.