Provident Financial Services, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are with December 31, 2010. The unaudited consolidated statements cover Provident Financial Services, Inc. and The Provident Bank. Unless stated otherwise, amounts below are in millions.
Financial performance and position
- Profitability: Net income was $12.9 million, up 15.6% from $11.2 million in Q1 2010. Basic and diluted EPS were both $0.23, versus $0.20.
- Income and margins: Net interest income rose 5.3% to $53.4 million as interest expense fell more than interest income. Net interest margin was 3.51%, up from 3.35% a year earlier and 3.44% in the preceding quarter. Non-interest income declined 10.5% to $7.2 million; total non-interest expense increased 1.7% to $35.4 million. Efficiency ratio improved to 58.32% from 59.14%.
- Credit costs: Provision for loan losses was $7.9 million, compared with $9.0 million in Q1 2010. Net charge-offs were $3.9 million, versus $10.8 million. The allowance was $72.7 million, or 1.63% of loans, compared with $68.7 million, or 1.56%, at year-end.
- Cash flow: Operating activities provided $28.7 million; investing activities provided $65.2 million; financing activities used $41.2 million. Cash and cash equivalents increased $52.7 million during the quarter to $105.0 million.
- Balance sheet and funding: Total assets were $6.794 billion, down 0.4% from year-end. Loans were $4.457 billion, up 1.1%; deposits were $4.888 billion, up 0.2%; borrowed funds were $923.3 million, down from $969.7 million. Stockholders’ equity was $926.1 million. Book value and tangible book value per share were $15.43 and $9.54.
- Capital: The Bank reported Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios of 7.43%, 11.17%, and 12.43%, respectively. Company ratios were 8.73%, 13.13%, and 14.38%. Both exceeded stated regulatory minimums.
Material changes and asset quality
- Net income improved primarily through a $2.7 million increase in net interest income and a $1.1 million reduction in provision expense. These benefits were partly offset by lower securities gains and higher income taxes.
- Loans increased $47.3 million from year-end, with growth concentrated in commercial and multifamily mortgages and residential mortgages; construction and consumer loans declined. Commercial real estate, commercial, and construction loans represented 55.8% of loans.
- Non-performing loans increased to $114.6 million, or 2.57% of loans, from $97.3 million, or 2.21%, at year-end. Non-performing assets rose to $117.0 million, or 1.72% of assets. Management attributed much of the increase to specific commercial mortgage and commercial loan relationships.
- Impaired loans rose to $67.8 million from $47.2 million at year-end. The filing reports 16 performing troubled debt restructurings totaling $11.7 million at quarter-end.
- Core deposits increased to $3.64 billion and represented 74.4% of deposits, up from 73.8%. Certificates of deposit declined $28.1 million as the company allowed certain higher-cost time deposits to run off.
Outlook, risks, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it intends to continue focusing on commercial lending and cultivating core deposit relationships; it also expected to deploy higher cash balances to fund loan originations and investment purchases.
- Management identified risks including economic weakness, declining real estate values, elevated unemployment, commercial-property vacancies, interest-rate changes, credit conditions, competition, regulation, and access to liquidity. Loan-loss estimates are particularly uncertain and could require additional provisions.
- Interest-rate modeling projected a 5.6% decline in 12-month net interest income under a gradual 300-basis-point rate increase, and a 2.0% decline under a 100-basis-point decrease. An immediate, sustained 300-basis-point increase was modeled to reduce economic value of equity by 19.9%. Management cautioned that model assumptions and actual outcomes may differ.
- The company recorded an $807,000 pre-tax impairment charge, or $524,000 after tax ($0.01 per share), associated with the anticipated sale of its former loan center. Administrative operations relocated on April 18, 2011; management expected operational efficiencies and lower occupancy expense.
- The securities portfolio included three below-investment-grade private-label mortgage-backed securities with $16.9 million amortized cost and $1.0 million unrealized losses. The company reported no other-than-temporary impairment charge for the quarter and said it did not intend, and was not likely to be required, to sell securities in temporary loss positions before recovery.
- Management stated that legal matters arising in the ordinary course were not expected to have a material adverse effect. It reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the rise in non-performing and impaired loans persists, particularly in commercial mortgage and commercial exposures, and how it affects charge-offs and the allowance.
- The adequacy of loan-loss reserves given economic uncertainty and the increase in classified and criticized loans.
- Performance and valuation of private-label mortgage-backed securities and the broader securities portfolio under changing rates and market liquidity.
- Whether core-deposit growth and lower funding costs can continue to support net interest margin as asset yields and interest rates change.
- Actual savings and sale proceeds from the loan-center relocation, and sensitivity of earnings and capital to interest-rate changes beyond the filing’s modeled scenarios.