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PFS > SEC Filings for PFS > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for PROVIDENT FINANCIAL SERVICES INC

Form 10-Q for PROVIDENT FINANCIAL SERVICES INC


12-May-2014

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. Reference is made to the "Risk Factors" disclosure in the Company's Annual Report on Form 10-K for the year ended March 31, 2013. 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 have an obligation to update any such statements to reflect any subsequent events or circumstances after the date of this statement. Acquisition
On December 19, 2013, the Company entered into an agreement pursuant to which Team Capital Bank ("Team Capital") will merge with and into The Provident Bank, a subsidiary of the Company. Regulatory approvals for the transaction have been received. The transaction remains subject to the approval of Team Capital's stockholders at a special meeting scheduled to be held on May 23, 2014. At December 31, 2014 Team Capital had $943.6 million in assets and operated 12 full-service banking offices in Bucks, Northampton and Lehigh Counties in Pennsylvania and Essex, Somerset, Hunterdon and Warren Counties in New Jersey. 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 calculation of the allowance for loan losses is a critical accounting policy of the Company. 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. As part of the 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.


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. In addition, the Bank requires an annual review be performed for commercial and commercial real estate loans above certain dollar thresholds, depending on loan type, to help determine the appropriate risk rating 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 second quarter of 2013, management completed its most recent evaluation of the GVA percentages. As a result of that evaluation, GVA percentages applied to residential mortgage loans, first-lien home equity loans and commercial mortgage loans were reduced to reflect the decrease in the historical loss experience. In addition, multi-family loans were segregated from other commercial mortgage loans as a result of differing risk characteristics and were assigned GVA percentages accordingly. Multi-family GVAs were established at levels lower than when previously included with other commercial mortgage loans as a result of lower historical loss experience resulting from the diverse cash flow sources supporting these loans.
Management believes the primary risks inherent in the portfolio are a continued decline in the economy, generally a 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.
Management 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, 2013. Based upon its qualitative assessment of goodwill, the Company concluded it is more likely than not that the fair value of the reporting unit exceeds its carrying amount, goodwill was not impaired and no further quantitative analysis (Step 1) was 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.
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 7 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. Management 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, Management 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. For certain sectors of the mortgage-backed securities market there has been a lack of liquidity. 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 March 31, 2014 or 2013, respectively.
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 March 31, 2014, the Company maintained a valuation allowance of $242,000, related to unused capital loss carryforwards.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2014 AND DECEMBER 31, 2013 Total assets increased $13.5 million to $7.50 billion at March 31, 2014, from $7.49 billion at December 31, 2013, primarily due to an increase in total loans, partially offset by a decrease in total investments and cash and cash equivalents.
Total loans increased $63.0 million, or 1.2%, to $5.26 billion at March 31, 2014, from $5.19 billion at December 31, 2013. Loan originations totaled $360.9 million and loan purchases totaled $8.5 million for the three months ended March 31, 2014. The loan portfolio had net increases of $34.2 million in commercial loans, $29.1 million in construction loans, primarily multi-family construction, $10.1 million in multi-family mortgage loans, and $3.8 million in commercial mortgage loans, which were partially offset by net decreases of $8.8 million and $5.5 million in residential mortgage and consumer loans, respectively. Commercial real estate, commercial and construction loans represented 67.0% of the loan portfolio at March 31, 2014, compared to 66.3% at December 31, 2013.


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 March 31, 2014 was $7.0 million. Of this total, four loans totaling $493,000 were 90 days or more delinquent. General valuation reserves of 6.5%, or $32,000, were allocated to such loans at March 31, 2014.
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 $73.2 million and $37.1 million, respectively, at March 31, 2014. No SNCs were 90 days or more delinquent at March 31, 2014.
The Company had outstanding junior lien mortgages totaling $223.6 million at March 31, 2014. Of this total, 25 loans totaling $1.6 million were 90 days or more delinquent. General valuation reserves of 10.0%, or $166,000, were allocated to such loans which were 90 days or more delinquent at March 31, 2014. At March 31, 2014, the Company had outstanding indirect marine loans totaling $31.3 million. No indirect marine loans were 90 days or more delinquent at March 31, 2014. 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 March 31, 2014 and December 31, 2013 (in thousands):

                              March 31, 2014    December 31, 2013
Mortgage loans:
Residential                  $        21,985               23,011
Commercial                            18,919               18,662
Multi-family                             403                  403
Construction                               -                8,448
Total mortgage loans                  41,307               50,524
Commercial loans                      19,350               22,228
Consumer loans                         3,399                3,928
Total non-performing loans            64,056               76,680
Foreclosed assets                      6,558                5,486
Total non-performing assets  $        70,614               82,166

The following table sets forth information regarding the Company's 60-89 day delinquent loans as of March 31, 2014 and December 31, 2013 (in thousands):

                                    March 31, 2014     December 31, 2013
Mortgage loans:
Residential                        $          5,429                5,062
Commercial                                        -                  318
Total mortgage loans                          5,429                5,380
Commercial loans                                 43                   77
Consumer loans                                1,807                2,194
Total 60-89 day delinquent loans   $          7,279                7,651

At March 31, 2014, the allowance for loan losses totaled $63.4 million, or 1.21% of total loans, compared with $64.7 million, or 1.24% of total loans at December 31, 2013. Total non-performing loans were $64.1 million, or 1.22% of total loans at March 31, 2014, compared to $76.7 million, or 1.48% of total loans at December 31, 2013. The $12.6 million decrease in non-performing loans at March 31, 2014, compared with the trailing quarter, was due to an $8.4 million decrease in non-performing construction loans, a $2.9 million decrease in non-performing commercial loans, a $1.0 million decrease in non-performing residential loans and a $529,000 decrease in non-performing consumer loans, partially offset by a $256,000 increase in non-performing commercial mortgage loans.
At March 31, 2014, the Company held $6.6 million of foreclosed assets, compared with $5.5 million at December 31, 2013. Foreclosed assets at March 31, 2014, consisted primarily of $4.0 million of commercial real estate and $2.5 million of residential real estate.


Non-performing assets totaled $70.6 million, or 0.94% of total assets at March 31, 2014, compared to $82.2 million, or 1.10% of total assets at December 31, 2013.
Total investments decreased $26.3 million, or 1.7%, to $1.55 billion at March 31, 2014, from $1.57 billion at December 31, 2013, largely due to principal repayments on mortgage-backed securities, maturities of municipal and agency bonds, and the sale of certain mortgage-backed securities, partially offset by purchases of mortgage-backed and municipal securities.
Cash and cash equivalents decreased $19.6 million to $81.7 million at March 31, 2014, from $101.2 million at December 31, 2013. The decline in cash was attributable to an increase in total loans and a decrease in total deposits, partially offset by a decrease in total investments and an increase in total borrowings.
Total deposits decreased $11.1 million, or 0.2%, during the three months ended March 31, 2014 to $5.19 billion. Time deposits decreased $37.7 million, or 4.7%, to $769.1 million at March 31, 2014, with the majority of the decrease occurring in the 12-, 24- and 60-month maturity categories. The decrease in time deposits was partially offset by a $26.6 million, increase in core deposits. At March 31, 2013, core deposits, which consist of savings and demand deposit accounts, totaled $4.42 billion, compared to $4.40 billion at March 31, 2013. Within the core deposit category, non-interest bearing demand deposits increased $10.3 million, or 1.2%, to $875.5 million at March 31, 2014. Core deposits represented 85.2% of total deposits at March 31, 2014, compared to 84.5% at December 31, 2013.
Borrowed funds increased $16.3 million, or 1.4% during the three months ended March 31, 2014, to $1.22 billion, as longer-term wholesale funding was added to mitigate interest rate risk, and shorter-term wholesale funding was used to manage the cyclical outflow of municipal deposits. Borrowed funds represented 16.3% of total assets at March 31, 2014, an increase from 16.1% at December 31, 2013.

Stockholders' equity increased $10.6 million, or 1.0% during the three months ended March 31, 2014, to $1.02 billion, due to net income earned for the period and an increase in unrealized gains on securities available for sale, partially offset by dividends paid to stockholders. Common stock repurchases for the three months ended March 31, 2014 totaled 231,575 shares at an average cost of $16.75 per share. At March 31, 2014, 3.5 million shares remained eligible for repurchase under the current stock repurchase program authorized by the Company's Board of Directors. At March 31, 2014, book value per share and tangible book value per share were $17.06 and $11.11, respectively, compared with $16.87 and $10.92, respectively, at December 31, 2013.
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 March 31, 2014, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:

                                                   March 31, 2014
                                          Required                Actual
                                       Amount     Ratio      Amount      Ratio
                                               (Dollars in thousands)
Bank:
Regulatory Tier 1 leverage capital   $ 284,756    4.00 %   $ 602,759     8.47 %
Tier 1 risk-based capital              207,248    4.00       602,759    11.63
Total risk-based capital               414,495    8.00       666,179    12.86

Company:
Regulatory Tier 1 leverage capital     284,757    4.00       667,501     9.38
Tier 1 risk-based capital              207,246    4.00       667,501    12.88
Total risk-based capital               414,493    8.00       730,921    14.11

In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-


Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Additional constraints will also be imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
General. The Company reported net income of $17.0 million, or $0.30 per basic and diluted share for the three months ended March 31, 2014, compared to net income of $17.8 million, or $0.31 per basic and diluted share for the three months ended March 31, 2013. The decline in earnings for the first quarter 2014 compared to the prior year period was largely attributable to a decline in commercial loan prepayment fees, lower gains on the sale of securities and increased operating costs, a portion of which were due to unusually high . . .

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