Provident Financial Services, Inc. — FY 2010 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2010, with comparisons primarily to 2009. Provident is a bank holding company operating The Provident Bank, a community bank with 81 branches in northern and central New Jersey. Its lending and deposit-gathering are concentrated in that region.
Financial performance and condition
- Profitability: Net income was $49.7 million, or $0.88 per diluted share, versus a net loss of $121.8 million, or $2.16 per share, in 2009. The prior-year loss included a $152.5 million goodwill impairment charge.
- Interest income and margins: Net interest income rose 15.4% to $209.0 million; interest income declined 2.1% to $286.5 million while interest expense fell 30.5% to $77.6 million. Net interest margin increased to 3.45% from 3.06%, and the average interest-rate spread rose to 3.27% from 2.82%.
- Other income and expenses: Non-interest income was $31.6 million, essentially unchanged. Non-interest expense was $138.7 million, down $5.8 million excluding the 2009 goodwill charge. 2010 included a $1.5 million premises impairment charge related to the planned administrative-office relocation.
- Credit costs and asset quality: The loan-loss provision increased to $35.5 million from $30.3 million. Net charge-offs rose to $27.5 million from $17.2 million. Non-performing loans were $97.3 million, or 2.21% of loans, versus $84.5 million, or 1.93%; non-performing assets were $100.1 million, or 1.47% of assets, versus $90.9 million, or 1.33%. The allowance for loan losses was $68.7 million, 1.56% of loans, compared with $60.7 million, or 1.39%.
- Balance sheet: Total assets were $6.82 billion, down 0.2%. Gross loans increased to $4.40 billion from $4.38 billion; net loans were $4.34 billion. Deposits decreased 0.4% to $4.88 billion, while core deposits rose to $3.60 billion, or 73.8% of deposits, from $3.39 billion, or 69.2%. Securities totaled about $1.72 billion.
- Debt and capital: Borrowed funds declined to $969.7 million from $999.2 million. Stockholders’ equity increased to $921.7 million from $884.6 million. The Bank was well capitalized, with a 7.19% Tier 1 leverage ratio, 10.91% Tier 1 risk-based capital ratio and 12.17% total risk-based capital ratio. The Company’s respective ratios were 8.57%, 13.00% and 14.26%.
- Cash flow and liquidity: Net cash provided by operating activities was $92.3 million, compared with $23.5 million in 2009. Investing activities used $88.5 million and financing activities used $75.3 million; cash and cash equivalents declined $71.5 million to $52.2 million. Management said it expected sufficient cash to meet funding needs. Unfunded loan commitments and letters of credit totaled $732.2 million; certificates of deposit of $819.5 million were due within one year.
- Shareholder returns: Cash dividends totaled $25.0 million, and the Company repurchased 17,700 shares for $193,000 during 2010. The quarterly dividend was $0.11 per share; management said it intended to review dividends quarterly, subject to financial, economic and regulatory factors.
Material changes versus 2009
- Results returned to profit, principally reflecting higher net interest income and the absence of the prior-year goodwill impairment. The 2010 net income comparison also reflects higher loan-loss provisions and income taxes.
- Lower funding costs supported the margin improvement: interest expense fell as rates declined and funding shifted toward lower-cost core deposits; average borrowings also decreased.
- Credit quality weakened further: non-performing loans, non-performing assets and net charge-offs all increased. Residential and commercial non-performing loans rose, although non-performing commercial mortgage and construction loans declined.
- The loan mix continued shifting toward commercial lending: commercial loans, including commercial real estate, multi-family and construction, were 55.6% of loans versus 52.5% in 2009. Multi-family and commercial mortgage balances grew; residential and construction balances fell.
- Core deposits increased while certificates of deposit declined, and borrowed funds were reduced. Total deposits were slightly lower year over year.
Outlook, commentary and risks
- The filing provides no numerical earnings or revenue guidance. Management’s stated strategy is profitable growth, relationship banking, greater core-deposit funding, continued commercial-loan diversification and careful interest-rate-risk management.
- Management identified continued economic weakness, real-estate price declines, elevated unemployment, rising commercial-property vacancies and possible rate increases as risks to borrower repayment and future credit costs. The company’s geographic concentration in New Jersey and its growing commercial real-estate and business-loan exposure heighten these risks.
- Interest-rate sensitivity modeling estimated that a gradual 300-basis-point rate increase would reduce projected 12-month net interest income by 6.1%, or $13.3 million; an immediate, sustained 300-basis-point increase would reduce modeled economic value of equity by 20.6%, or $234.8 million. The filing cautions that model assumptions may differ from actual outcomes.
- Other material uncertainties include competition for loans and deposits, liquidity and funding availability, securities-market valuation and potential impairment, regulatory changes under the Dodd-Frank Act, and the adequacy of loan-loss reserves. The Company held $93.7 million of privately issued CMOs; it recorded $170,000 of securities impairment losses in 2010 and reported $346.3 million of goodwill with no further impairment indicated in its 2010 annual test.
- The Company reported an unqualified audit opinion and effective internal control over financial reporting. Management said pending legal claims in the ordinary course were not expected to have a material adverse effect.
Investor verification priorities
- Track non-performing loans, charge-offs, criticized and classified credits, collateral values, and whether the $68.7 million allowance remains adequate.
- Review concentration and performance in commercial real estate, multi-family, construction, and shared national credit exposures, including the largest troubled relationships.
- Test deposit retention and repricing, near-term certificate maturities, borrowing levels, and liquidity against the $732.2 million in commitments.
- Compare actual net interest income and capital sensitivity with management’s rate-shock models and monitor effects of regulatory changes on funding costs and capital.
- Assess the sustainability of the 2010 earnings rebound, excluding one-time items and considering the $152.5 million 2009 goodwill charge and the 2010 premises impairment.