Provident Financial Services, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated results cover Provident Financial Services and The Provident Bank. Unless otherwise stated, amounts are in U.S. dollars.
Business context and key financial metrics
The Company completed its acquisition of Team Capital Bank on May 30, 2014. The transaction added approximately $964.0 million of assets, including $631.4 million of loans and $769.9 million of deposits, and expanded the Company into 12 additional banking offices in Pennsylvania and New Jersey.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $57.4 million | $53.4 million | $112.6 million | $107.3 million |
| Provision for loan losses | $1.5 million | $1.0 million | $1.9 million | $2.5 million |
| Non-interest income | $10.3 million | $12.6 million | $18.4 million | $22.6 million |
| Non-interest expense | $43.7 million | $37.8 million | $81.9 million | $74.8 million |
| Net income | $16.4 million | $19.2 million | $33.4 million | $37.1 million |
| Diluted earnings per share | $0.28 | $0.34 | $0.57 | $0.65 |
| Net interest margin | 3.24% | 3.29% | 3.25% | 3.32% |
At June 30, 2014, total assets were $8.45 billion, net loans were $5.85 billion, deposits were $5.84 billion, borrowed funds were $1.42 billion, and stockholders’ equity was $1.12 billion. Cash and cash equivalents were $132.4 million. For the first half, operating cash flow was $37.7 million; investing activities provided $44.6 million, mainly reflecting acquisition-related cash and investment flows; financing activities used $51.0 million. The allowance for loan losses was $63.9 million, or 1.08% of loans.
Bank regulatory capital ratios were 8.72% Tier 1 leverage, 10.79% Tier 1 risk-based, and 11.85% total risk-based. Company ratios were 9.60%, 11.88%, and 12.95%, respectively; all exceeded the minimum requirements shown in the filing.
Material changes versus comparable periods
- Net income declined 15.0% year over year in Q2 and 9.9% for the six-month period; diluted EPS fell from $0.34 to $0.28 and from $0.65 to $0.57, respectively.
- Net interest income increased, benefiting from acquired assets, but margin narrowed 5 basis points for Q2 and 7 basis points year to date. Management cited lower asset yields and interest-rate margin compression.
- Non-interest income fell 18.3% both for Q2 and year to date, reflecting lower commercial-loan prepayment fees, lower bank-owned life insurance income, and weaker securities transaction results.
- Non-interest expense rose $5.9 million in Q2 and $7.1 million year to date, including Team Capital-related costs, higher compensation and occupancy expense, and a pension settlement charge.
- Compared with December 31, 2013, total loans increased 13.8% to $5.91 billion, including acquired loans. Deposits increased $635.6 million, while borrowings rose $215.0 million. The allowance-to-loans ratio declined from 1.24% to 1.08%, largely because acquired loans were recorded at fair value without a corresponding allowance.
- Credit indicators improved: non-performing loans declined to $65.4 million, or 1.11% of loans, from $76.7 million, or 1.48%; non-performing assets fell to $72.3 million, or 0.86% of assets, from $82.2 million, or 1.10%.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Results for the first half are not necessarily indicative of full-year 2014 results.
- Q2 and first-half earnings included acquisition-related non-recurring items that reduced net income by $1.2 million and $1.3 million, respectively. A separate non-cash pension charge reduced earnings by $790,000 after tax.
- Management identifies economic weakness, declining real-estate values, unemployment, commercial-property vacancies, and rising rates without corresponding economic improvement as potential credit risks. Loan-loss allowance estimates are judgmental and may change.
- Interest-rate modeling estimated that a gradual 300-basis-point rate increase would reduce projected 12-month net interest income by 5.6%; an immediate, sustained 300-basis-point increase would reduce modeled economic value of equity by 12.3%. Management cautions that model assumptions limit predictive precision.
- Temporary unrealized losses affected securities; the Company reported no other-than-temporary impairment at June 30, 2014 and said it did not intend, nor expect to be required, to sell securities in temporary loss positions before recovery. A held-to-maturity security was sold in response to issuer credit deterioration.
- Goodwill from Team Capital remains subject to purchase-accounting adjustments for up to one year after acquisition. The Company stated that pending legal actions in the ordinary course were not expected to have a material adverse impact; it reported no material change in previously disclosed risk factors.
- New bank capital rules were scheduled to take effect for the Bank beginning January 1, 2015, with the capital conservation buffer phased in from 2016 through 2019.
Important facts for investors to verify
- How quickly the Company can integrate Team Capital and realize expected benefits, while tracking purchase-accounting adjustments and acquisition expenses.
- Whether net interest margin and core deposit trends stabilize as acquired assets and funding are integrated, and how longer-term borrowings affect interest-rate sensitivity.
- Credit quality and reserve adequacy, especially given the lower allowance-to-loans ratio after acquisition and the growth in commercial real estate and commercial lending.
- Whether non-interest income recovers from reduced loan prepayment fees and lower bank-owned life insurance claims, and whether elevated expenses persist.
- Capital levels and compliance with the upcoming regulatory capital framework; also monitor the effects of securities valuation changes on capital.