Provident Financial Services, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; fourth-quarter figures are also summarized. Provident is a bank holding company operating The Provident Bank, with 86 branches in New Jersey and eastern Pennsylvania. The May 30, 2014 acquisition of Team Capital Bank expanded the company’s footprint and materially increased assets, loans and deposits.
Financial performance and condition
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total income (net interest income plus non-interest income) | $280.1 million | $260.2 million |
| Net interest income | $238.9 million | $216.0 million |
| Provision for loan losses | $4.7 million | $5.5 million |
| Non-interest income | $41.2 million | $44.2 million |
| Non-interest expense | $170.0 million | $148.8 million |
| Net income | $73.6 million | $70.5 million |
| Diluted earnings per share | $1.22 | $1.23 |
| Net interest margin | 3.30% | 3.31% |
| Efficiency ratio | 60.70% | 57.18% |
| Return on average assets / equity | 0.92% / 6.75% | 0.97% / 7.08% |
Balance sheet at December 31, 2014: Total assets were $8.52 billion, net loans $6.02 billion, deposits $5.79 billion, borrowed funds $1.51 billion and stockholders’ equity $1.14 billion. The company reported $103.8 million of cash and cash equivalents. FY operating cash flow was $96.4 million, investing cash flow was negative $69.3 million and financing cash flow was negative $24.6 million.
Fourth quarter: Net interest income was $63.3 million, provision for loan losses $1.3 million, non-interest income $11.4 million, non-interest expense $42.3 million and net income $21.2 million, or $0.34 per diluted share. Fourth-quarter 2013 net income was $17.4 million, or $0.30 per diluted share.
Credit and capital: Non-performing assets were $59.0 million, or 0.69% of assets, versus $82.2 million, or 1.10%, a year earlier. Non-performing loans were 0.88% of loans; the allowance was $61.7 million, or 1.01% of loans, and equaled 114.63% of non-performing loans. The Bank’s Tier 1 leverage and total risk-based capital ratios were 8.38% and 11.98%; both the Bank and parent were reported as well capitalized.
Material changes and notable items
- Team Capital 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.
- Assets rose 13.8%, loans 17.1% and deposits 11.3% year over year, with growth substantially influenced by the acquisition. Borrowings increased 25.4% to $1.51 billion; management said longer-term wholesale funding was added to mitigate interest-rate risk.
- Net income rose 4.4%, but diluted EPS declined from $1.23 to $1.22. Net interest income increased with acquired assets and loan growth, while the margin edged down. Lower credit costs supported results.
- Non-interest expense increased $21.2 million, including $6.6 million of non-recurring Team Capital-related costs. Reported earnings also included a $788,000 after-tax non-cash pension settlement charge. Non-interest income fell 6.8%, principally reflecting lower commercial-loan prepayment fees and lower BOLI income.
- Core deposits were 85.7% of deposits, up from 84.5%. The company paid $36.1 million in dividends and repurchased $4.4 million of stock during 2014.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s stated strategy is profitable growth, relationship banking, core-deposit development, commercial-loan diversification and careful interest-rate-risk management.
- Interest-rate sensitivity modeling estimated that a gradual 300-basis-point rate increase would reduce 12-month net interest income by 4.0%, or $9.8 million; a 100-basis-point decrease would reduce it by 1.4%, or $3.5 million. An immediate, sustained 300-basis-point increase was estimated to reduce economic value of equity by 11.2%, or $146.7 million. These are model estimates subject to assumptions and uncertainty.
- Principal risks include interest-rate and liquidity exposure; credit losses, particularly in commercial real estate, multifamily, construction and commercial lending; geographic concentration in New Jersey and eastern Pennsylvania; competition; cybersecurity and operational risks; and regulatory change. Management warned that allowance estimates are judgmental and future provisions may be required.
- On January 5, 2015, Beacon announced a proposed acquisition of MDE Group and Acertus Capital Management, subject to regulatory approval and customary closing conditions. Management anticipated completion in the second quarter of 2015; realization of expected benefits and integration risks remain uncertain.
- Management identified a fourth-quarter material weakness in controls over qualitative factors used in the loan-loss allowance estimate, enhanced documentation and controls to remediate it, and reported controls effective at year-end. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
- Management stated ordinary-course legal claims were not expected to materially affect financial condition or results. Off-balance-sheet commitments and letters of credit totaled $1.21 billion; commitments may expire undrawn. The filing also reports a $21.2 million unrecognized tax liability related to tax bad-debt reserves.
Most important facts for investors to verify
- How much of loan, deposit and earnings growth reflects Team Capital, and how integration costs and acquired assets affect future performance.
- Whether asset-quality improvement continues and whether the $61.7 million allowance remains adequate as the commercial-oriented portfolio grows.
- Funding costs, borrowing levels and deposit retention, including the $568.5 million of certificates of deposit maturing within one year.
- Actual sensitivity to changing rates versus model estimates, and any impact on net interest margin, securities values and capital.
- Regulatory approval, closing, integration progress and financial contribution of the proposed MDE/Acertus acquisition.
- Remediation and ongoing effectiveness of controls over the loan-loss allowance, as well as any subsequent changes to reported results.