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PFS > SEC Filings for PFS > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for PROVIDENT FINANCIAL SERVICES INC

Form 10-Q for PROVIDENT FINANCIAL SERVICES INC


9-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

Certain statements contained herein are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.

The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date made. The Company also advises readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

The Company considers certain accounting policies to be critically important to the fair presentation of its financial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company's consolidated financial statements to these critical accounting policies, and the assumptions and estimates applied, could have a significant impact on its financial condition and results of operations. These assumptions, estimates and judgments made by management can be influenced by a number of factors, including the general economic environment. The Company has identified the following as critical accounting policies:

Adequacy of the allowance for loan losses

Goodwill valuation and analysis for impairment

Valuation of securities available for sale and impairment analysis

Valuation of deferred tax assets

The allowance for loan losses is a valuation account that reflects management's evaluation of the probable losses in the loan portfolio. The Company maintains the allowance for loan losses through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where management determines that the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for loan losses.

The Company's evaluation of the adequacy of the allowance for loan losses includes a review of all loans on which the collectibility of principal may not be reasonably assured. For residential mortgage and consumer loans, this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of financial performance, payment history and collateral values is conducted on a quarterly basis.


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When assigning a risk rating to a loan, management utilizes a nine point internal risk rating system. Loans deemed to be "acceptable quality" are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans deemed to be of "questionable quality" are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial and construction loans are rated individually and each lending officer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and the Credit Administration Department. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party and periodically, by the Credit Committee in the credit renewal or approval process.

Management assigns general valuation allowance ("GVA") percentages to each risk rating category for use in allocating the allowance for loan losses, giving consideration to historical loss experience by loan type and other qualitative or environmental factors such as trends and levels of delinquencies, impaired loans, charge-offs, recoveries, loan volume, as well as, the national and local economic trends and conditions. The appropriateness of these percentages is evaluated by management at least annually and monitored on a quarterly basis, with changes made when they are required. In the first quarter of 2012, management completed its most recent evaluation of the GVA percentages. As a result of that evaluation, GVA percentages applied to the indirect marine loan portfolio were increased to reflect an increase in historical loss experience.

As part of its evaluation of the adequacy of the allowance for loan losses, each quarter management prepares an analysis that categorizes the entire loan portfolio by certain risk characteristics such as loan type (residential mortgage, commercial mortgage, construction, commercial, etc.) and loan risk rating.

Management believes the primary risks inherent in the portfolio are a continued decline in the economy, generally, a continued decline in real estate market values, rising unemployment or a protracted period of unemployment at current elevated levels, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. Any one or a combination of these events may adversely affect borrowers' ability to repay the loans, resulting in increased delinquencies, loan losses and future levels of provisions. Accordingly, the Company has provided for loan losses at the current level to address the current risk in its loan portfolio. Management considers it important to maintain the ratio of the allowance for loan losses to total loans at an acceptable level given current economic conditions, interest rates and the composition of the portfolio.

Although management believes that the Company has established and maintained the allowance for loan losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy generally have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company's allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.

Additional critical accounting policies relate to judgments about other asset impairments, including goodwill, investment securities and deferred tax assets. Goodwill is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates.


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The Company qualitatively determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing Step 1 of the goodwill impairment test. If an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would be required to perform Step 1 of the assessment and then, if needed, Step 2 to determine whether goodwill is impaired. However, if it is more likely than not that the fair value of the reporting unit is more than its carrying amount, the entity does not need to apply the two-step impairment test. For this analysis, the Reporting Unit is defined as the Bank, which includes all core and retail banking operations of the Company but excludes the assets, liabilities, equity, earnings and operations held exclusively at the Company level. The guidance provides certain factors an entity should consider in its qualitative assessment in determining whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. The factors include:

Macroeconomic conditions, such as deterioration in economic condition and limited access to capital.

Industry and market considerations, such as increased competition, regulatory developments and decline in market-dependent multiples.

Cost factors, such as increased labor costs, cost of materials and other operating costs.

Overall financial performance, such as declining cash flows and decline in revenue or earnings.

Other relevant entity-specific events, such as changes in management, strategy or customers, litigation and contemplation of bankruptcy.

Reporting unit events, such as selling or disposing a portion of a reporting unit and a change in composition of assets.

The Company completed its annual goodwill impairment test as of September 30, 2012. Based upon its qualitative assessment of goodwill, the Company concluded it was more likely than not that the fair value of the reporting unit exceeded its carrying amount, goodwill was not impaired and no further quantitative analysis (Step 1) is warranted.

The Company may, based upon its qualitative assessment, or at its option, perform the two-step process to evaluate the potential impairment of goodwill. If, based upon Step 1, the fair value of the Reporting Unit exceeds its carrying amount, goodwill of the Reporting Unit is considered not impaired. However, if the carrying amount of the Reporting Unit exceeds its fair value, an additional test must be performed. The second step test compares the implied fair value of the Reporting Unit's goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

At September 30, 2012, the carrying value of goodwill was $352.6 million. Management has evaluated potential goodwill impairment triggers and based upon its qualitative assessment of goodwill, has determined that goodwill is not impaired and no further analysis is warranted.

The Company's available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in Stockholders' Equity. Estimated fair values are based on market quotations or matrix pricing as discussed in Note 8 to the consolidated financial statements. Securities which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. The Company conducts a periodic review and evaluation of the securities portfolio to determine if any declines in the fair values of securities are other-than-temporary. In this evaluation, if such a decline were deemed other-than-temporary, the Company would measure the total credit-related component of the unrealized loss, and recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income. The fair value of the securities portfolio is significantly affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed-rate securities decreases and as interest rates fall, the fair value of fixed-rate securities increases. A lack of liquidity in certain sectors of the mortgage-backed securities market for certain securities and


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increases in delinquencies and foreclosures have resulted in limited trading activity and significant price declines, regardless of favorable movements in interest rates. The Company determines if it has the intent to sell these securities or if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. If either exists, the decline in value is considered other-than-temporary. In this evaluation, the Company did not recognize an other-than-temporary impairment charge on securities for the three months ended September 30, 2012 or 2011, respectively. For the nine months ended September 30, 2012, the Company did not recognize an OTTI charge on securities, while a $302,000 net OTTI charge was recorded for the nine months ended September 30, 2011.

The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities, utilization against carryback years and estimates of future taxable income. Such estimates are subject to management's judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. At September 30, 2012, the Company maintained a valuation allowance of $246,000, related to unused capital loss carryforwards.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2012 AND DECEMBER 31, 2011

Total assets increased $167.6 million to $7.26 billion at September 30, 2012, from $7.10 billion at December 31, 2011. The increase was primarily due to increases in net loans and cash and cash equivalents, partially offset by a decline in total securities.

Cash and cash equivalents increased $37.9 million to $107.6 million at September 30, 2012, from $69.6 million at December 31, 2011. These cash balances are expected to be deployed to fund loan originations, the repayment of borrowings and investment purchases.

Total investments decreased $35.9 million, or 2.0%, to $1.73 billion at September 30, 2012, from $1.76 billion at December 31, 2011. The decrease was primarily due to principal repayments on mortgage-backed securities, maturities of municipal and agency bonds and the sale of certain mortgage-backed securities which had a high risk of prepayment, partially offset by purchases of mortgage-backed and municipal securities.

Total loans increased $165.3 million, or 3.6%, during the nine months ended September 30, 2012, to $4.82 billion. Loan originations totaled $1.23 billion and loan purchases totaled $115.4 million for the nine months ended September 30, 2012. The loan portfolio had net increases of $162.9 million in commercial and multi-family mortgage loans, $22.6 million in consumer loans and $10.6 million in construction loans, which were partially offset by a $19.3 million decrease in residential mortgage loans and a $9.8 million decrease in commercial loans. Commercial real estate, commercial and construction loans represented 61.1% of the loan portfolio at September 30, 2012, compared to 59.8% at December 31, 2011.

The Company does not originate or purchase sub-prime or option ARM loans. Prior to September 30, 2008, the Company originated "Alt-A" mortgages in the form of stated income loans with a maximum loan-to-value ratio of 50% on a limited basis. The balance of these "Alt-A" loans at September 30, 2012 was $9.6 million. Of this total, 8 loans totaling $1.2 million were 90 days or more delinquent. General valuation reserves of 6.5%, or $77,000, were allocated to the loans which were 90 days or more delinquent at September 30, 2012.

The Company participates in loans originated by other banks, including participations designated as Shared National Credits ("SNCs"). The Company's gross commitments and outstanding balances as a participant in SNCs were $69.2 million and $44.4 million, respectively, at September 30, 2012. The Company's participations in SNCs included two relationships classified as substandard (rated 7) under the Company's loan risk rating system with gross commitments and outstanding balances of $16.6 million at September 30, 2012. Of these adversely classified SNCs, one relationship consisted of a commercial construction loan and the other was a commercial mortgage loan. Both properties are located in New York City. All of the Company's SNCs were current as to the payment of principal and interest at September 30, 2012.


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The Company had outstanding junior lien mortgages totaling $256.7 million at September 30, 2012. Of this total, 43 loans totaling $3.5 million were 90 days or more delinquent. General valuation reserves of 10%, or $350,000, were allocated to the loans which were 90 days or more delinquent at September 30, 2012.

The Company had outstanding indirect marine loans totaling $44.2 million at September 30, 2012. Of this total, 2 loans totaling $245,000 were 90 days or more delinquent. General valuation reserves of 60%, or $147,000 were allocated to the loans which were 90 days or more delinquent at September 30, 2012. Marine loans are currently made only on a direct, limited accommodation basis to existing customers.

The following table sets forth information regarding the Company's non-performing assets as of September 30, 2012 and December 31, 2011 (in thousands):

                                     September 30, 2012       December 31, 2011
      Mortgage loans:
      Residential                   $             31,655                  40,386
      Commercial                                  30,833                  29,522
      Multi-family                                   322                     997
      Construction                                10,626                  11,018

      Total mortgage loans                        73,436                  81,923
      Commercial loans                            26,618                  32,093
      Consumer loans                               5,632                   8,533

      Total non-performing loans                 105,686                 122,549
      Foreclosed assets                           13,900                  12,802

      Total non-performing assets   $            119,586                 135,351

The following table sets forth information regarding the Company's 60-89 day delinquent loans as of September 30, 2012 and December 31, 2011 (in thousands):

                                       September 30, 2012       December 31, 2011
   Mortgage loans:
   Residential                        $              8,426                   7,936
   Commercial                                          672                   1,155
   Multi-family                                        123                      -
   Construction                                         -                       -

   Total mortgage loans                              9,221                   9,091
   Commercial loans                                    261                     526
   Consumer loans                                    1,591                   1,908

   Total 60-89 day delinquent loans   $             11,073                  11,525

At September 30, 2012, the allowance for loan losses totaled $70.3 million, or 1.46% of total loans, compared with $74.4 million, or 1.60% of total loans at December 31, 2011. Total non-performing loans were $105.7 million, or 2.19% of total loans at September 30, 2012, compared to $122.5 million, or 2.63% of total loans at December 31, 2011.

The decrease in non-performing loans at September 30, 2012, compared with December 31, 2011, was largely due to a $8.7 million decrease in non-performing residential loans, a $5.5 million decrease in non-performing commercial loans and a $2.9 million decrease in non-performing consumer loans, partially offset by a $1.3 million increase in non-performing commercial mortgage loans.

At September 30, 2012, the Company held $13.9 million of foreclosed assets, compared with $12.8 million at December 31, 2011. Foreclosed assets at September 30, 2012 are carried at fair value based on recent appraisals and valuation estimates, less estimated selling costs. Foreclosed assets at September 30, 2012 consisted of $6.5 million of commercial real estate, $5.9 million of residential real estate, $498,000 of marine vessels and $339,000 of commercial loans.


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Non-performing assets totaled $119.6 million, or 1.65% of total assets at September 30, 2012, compared to $135.4 million, or 1.91% of total assets at December 31, 2011.

Other assets decreased $5.5 million, or 7.0%, to $73.3 million at September 30, 2012, from $78.8 million at December 31, 2011, primarily due to the amortization of prepaid FDIC insurance and an increase in income tax accruals.

Total deposits increased $217.1 million, or 4.2%, during the nine months ended September 30, 2012 to $5.37 billion. Core deposits, consisting of savings and demand deposit accounts, increased $338.3 million, or 8.4%, to $4.37 billion at September 30, 2012. Partially offsetting this increase, time deposits decreased $121.2 million, or 10.7%, to $1.01 billion at September 30, 2012, with the majority of the decrease occurring in the 24-month and shorter maturity categories. The Company remains focused on developing core deposit relationships, while strategically permitting the run-off of time deposits. Core deposits represented 81.3% of total deposits at September 30, 2012, compared to 78.1% at December 31, 2011.

Borrowed funds were reduced $85.8 million, or 9.3% during the nine months ended September 30, 2012, to $834.4 million, as core deposit growth continued to replace wholesale funding. Borrowed funds represented 11.5% of total assets at September 30, 2012, a reduction from 13.0% at December 31, 2011.

Total stockholders' equity increased $36.1 million, or 3.8%, to $988.5 million at September 30, 2012. This increase was due to net income of $50.6 million, a $5.4 million increase due to shares issued through the Company's dividend reinvestment plan, a net increase due to the allocation of shares to stock-based compensation plans of $5.3 million and a net increase of $3.4 million in other comprehensive income, partially offset by $23.1 million in cash dividends and common stock repurchases of $5.6 million. At September 30, 2012, book value per share and tangible book value per share were $16.43 and $10.48, respectively, compared with $15.88 and $9.87, respectively, at December 31, 2011. Common stock repurchases for the nine months ended September 30, 2012, totaled 408,000 shares at an average cost of $13.81 per share. No shares were repurchased during the quarter ended September 30, 2012. As of September 30, 2012, 1.4 million shares remained eligible for repurchase under the current stock repurchase program authorized by the Company's Board of Directors.

Liquidity and Capital Resources. Liquidity refers to the Company's ability to generate adequate amounts of cash to meet financial obligations to its depositors, to fund loans and securities purchases, deposit outflows and operating expenses. Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of investments, cash flows from mortgage-backed securities and the ability to borrow funds from the FHLB-NY and approved broker dealers.

Cash flows from loan payments and maturing investment securities are fairly predictable sources of funds. Changes in interest rates, local economic conditions and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows.

As of September 30, 2012, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:

                                                      At September 30, 2012
                                               Required                   Actual
                                          Amount       Ratio        Amount        Ratio
                                                     (Dollars in thousands)
    Bank:
    Regulatory Tier 1 leverage capital   $ 272,906       4.00 %    $ 538,264        7.89 %
    Tier 1 risk-based capital              186,478       4.00        538,264       11.55
    Total risk-based capital               372,956       8.00        596,684       12.80

    Company:
    Regulatory Tier 1 leverage capital   $ 272,885       4.00 %    $ 618,706        9.07 %
    Tier 1 risk-based capital              186,456       4.00        618,706       13.27
    Total risk-based capital               372,912       8.00        677,122       14.53


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COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

General. The Company reported net income of $16.2 million, or $0.28 per basic and diluted share for the three months ended September 30, 2012, compared to net income of $15.6 million, or $0.27 per basic and diluted share for the three months ended September 30, 2011. For the nine months ended September 30, 2012, the Company reported net income of $50.6 million, or $0.89 per basic share and $0.88 per diluted share, compared to net income of $42.5 million, or $0.75 per basic and diluted share for the same period last year.

The improvement in earnings for the third quarter and year-to-date period ended September 30, 2012, was largely attributable to the continued improvement in asset quality and related reductions in the provision for loan losses, while growth in both average loans outstanding and average lower-costing core deposits have mitigated compression in the net interest margin.

Net Interest Income. Total net interest income decreased $741,000 or 1.4%, to $53.7 million for the quarter ended September 30, 2012, from $54.5 million for the quarter ended September 30, 2011. For the nine months ended September 30, 2012, total net interest income increased $1.1 million, or 0.6%, to $163.1 . . .

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