form8kexh_042613.htm

Christopher Martin, Chairman, President and Chief Executive Officer, commented, “Our first quarter earnings reflect continued solid performance, despite a tepid recovery in the economy and an ultra-competitive environment. Earnings benefitted from margin expansion from the trailing quarter and stable credit quality. With our market providing limited business lending opportunities, we maintained our conservative credit discipline and concentrated on relationship expansion. Expense management remains a key focus as we continue to seek out additional efficiencies within our operations.”

The Company’s loan portfolio increased $5.7 million during the three months ended March 31, 2013 to $4.91 billion. Loan growth was tempered by the repayment of $17.3 million on two shared national credits during the quarter. Loan originations totaled $348.3 million and loan purchases totaled $2.8 million for the three months ended March 31, 2013. The loan portfolio had net increases of $19.0 million in commercial and multi-family mortgage loans, $15.5 million in construction loans and $8.5 million in commercial loans, which were offset by decreases of $30.8 million in residential mortgage loans and $5.4 million in consumer loans. Commercial real estate, commercial and construction loans represented 63.2% of the loan portfolio at March 31, 2013, compared to 62.4% at December 31, 2012.

Total deposits decreased $151.7 million, or 2.8%, during the three months ended March 31, 2013 to $5.28 billion. Core deposits, which consist of savings and demand deposit accounts, decreased $109.9 million, or 2.5%, to $4.36 billion at March 31, 2013. The majority of the core deposit decrease was in demand and money market deposits and included certain expected outflows resulting from client tax planning considerations. Time deposits decreased $41.8 million, or 4.4%, to $915.7 million at March 31, 2013, with the majority of the decrease occurring in the 6-, 12- and 60-month maturity categories. Core deposits represented 82.6% of total deposits at March 31, 2013, compared to 82.4% at December 31, 2012. The Company remains focused on developing core deposit relationships, while strategically permitting the run-off of time deposits.

Stockholders’ equity increased $9.2 million, or 0.9% during the three months ended March 31, 2013, to $990.4 million, primarily due to net income earned for the period, partially offset by dividends paid to stockholders and common stock repurchases. Common stock repurchases for the three months ended March 31, 2013 totaled 55,666 shares at an average cost of $15.08 per share in connection with employee income tax withholding on stock-based compensation. At March 31, 2013, 4.1 million shares remained eligible for repurchase under the current authorization. At March 31, 2013, book value per share and tangible book value per share were $16.52 and $10.55, respectively, compared with $16.37 and $10.40, respectively, at December 31, 2012.

The net interest margin for the quarter ended March 31, 2013 decreased 9 basis points to 3.33% compared with 3.42% for the quarter ended March 31, 2012. The decrease in the net interest margin for the quarter ended March 31, 2013, compared with the same period last year, was primarily attributable to reductions in the weighted average yield on interest-earning assets, which declined 27 basis points to 3.92% for the quarter ended March 31, 2013, compared with 4.19% for the quarter ended March 31, 2012. The weighted average cost of interest-bearing liabilities declined 19 basis points to 0.71% for the quarter ended March 31, 2013, compared with 0.90% for the first quarter of 2012. The average cost of interest bearing deposits for the quarter ended March 31, 2013 was 0.44%, compared with 0.62% for the same period last year. Average non-interest bearing demand deposits totaled $819.5 million for the quarter ended March 31, 2013, compared with $670.1 million for the quarter ended March 31, 2012. The average cost of borrowed funds for the quarter ended March 31, 2013 was 2.24%, compared with 2.25% for the same period last year.

The Company’s net interest margin increased 4 basis points to 3.33% for the quarter ended March 31, 2013, from 3.29% for the quarter ended December 31, 2012. The increase in the net interest margin versus the trailing quarter was primarily attributable to reductions in the weighted average cost of interest-bearing liabilities. The weighted average cost of interest-bearing liabilities was 0.71% for the quarter ended March 31, 2013, compared with 0.77% for the trailing quarter. The weighted average yield on interest-earning assets was 3.92% for the quarter ended March 31, 2013, unchanged from the quarter ended December 31, 2012. The average cost of interest bearing deposits for the quarter ended March 31, 2013 was 0.44%, compared with 0.50% for the trailing quarter. The average cost of borrowed funds for the quarter ended March 31, 2013 was 2.24%, compared with 2.29% for the quarter ended December 31, 2012.

Non-interest income totaled $9.9 million for the quarter ended March 31, 2013, a decrease of $2.8 million, or 21.9%, compared to the same period in 2012. Net gains on securities transactions decreased $1.7 million, totaling $511,000 for the three months ended March 31, 2013, compared with $2.2 million for the same period in 2012. For both the three months ended March 31, 2013 and 2012, the Company identified and strategically sold select securities which had a heightened risk of accelerated prepayment. The proceeds from these sales were reinvested in similar securities with more stable projected cash flows. Other income decreased $844,000 for the three months ended March 31, 2013, compared to the same period in 2012, primarily due to income recognized in the prior year quarter associated with the discontinuance of the Company’s debit card rewards program, a decrease in gains related to loan sales and an increase in net losses on the sale of foreclosed real estate. Additionally, fee income decreased $115,000 to $8.0 million for the three months ended March 31, 2013, from $8.1 million for the three months ended March 31, 2012, largely due to lower deposit-based fee revenue and a decrease in wealth management fees, partially offset by increased commercial loan prepayment fee income.

For the three months ended March 31, 2013, non-interest expense increased $155,000, or 0.4%, to $36.9 million, compared to $36.8 million for the three months ended March 31, 2012. Compensation and benefits increased $483,000 for the quarter ended March 31, 2013, compared to the quarter ended March 31, 2012, due to higher salary expense associated with annual merit increases, increased severance costs and increased incentive compensation accrual, partially offset by reduced employee medical and retirement benefit costs. Net occupancy expense increased $180,000 for the three months ended March 31, 2013, compared with the same period in 2012, primarily attributable to higher snow removal costs and increased depreciation expense related to branch renovations, partially offset by lower rent expense, a portion of which was due to branch consolidations in 2012. Partially offsetting these increases in non-interest expense, other operating expenses decreased $235,000, or 4.0%, to $5.6 million for the quarter ended March 31, 2013, from $5.9 million for the same period in 2012, due primarily to decreases in debit card processing costs, legal expenses, loan collection activity, and loan administration expenses. These decreases in other operating expenses were partially offset by valuation adjustments related to foreclosed real estate. Also, the amortization of intangibles decreased $228,000 for the three months ended March 31, 2013, compared with the same period in 2012, as a result of scheduled reductions in core deposit intangible amortization. FDIC insurance expense decreased $140,000, to $1.3 million for the three months ended March 31, 2013, from $1.4 million for the same period in 2012, primarily due to a lower assessment rate.

The Company’s total non-performing loans at March 31, 2013 were $99.1 million, or 2.02% of total loans, compared with $99.0 million, or 2.02% of total loans at December 31, 2012, and $120.3 million, or 2.58% of total loans at March 31, 2012. The $69,000 increase in non-performing loans at March 31, 2013, compared with the trailing quarter, was largely due to a $2.3 million increase in non-performing residential loans and a $470,000 increase in commercial mortgage loans, offset by a $1.9 million decrease in non-performing commercial loans and a $751,000 decrease in non-performing consumer loans. The increase in non-performing residential mortgage loans was largely attributable to a single $1.8 million loan the value of which is supported by a recent appraisal. As a result, the overall risk profile of the non-performing loan portfolio improved as higher-risk commercial non-performing loans decreased during the quarter. At March 31, 2013, impaired loans totaled $112.0 million with related specific reserves of $6.6 million, compared with impaired loans totaling $109.6 million with related specific reserves of $7.2 million at December 31, 2012. At March 31, 2012, impaired loans totaled $111.6 million with related specific reserves of $8.0 million.

At March 31, 2013, the Company’s allowance for loan losses was 1.43% of total loans, unchanged from December 31, 2012, and a decrease from 1.59% of total loans at March 31, 2012. The Company recorded a provision for loan losses of $1.5 million for the quarter ended March 31, 2013, compared with $5.0 million for the quarter ended March 31, 2012, as a result of year-over-year improvements in asset quality and stabilization of collateral values. For the three-month period ended March 31, 2013, the Company had net charge-offs of $1.8 million, compared with net charge-offs of $5.4 million for the same period in 2012. The allowance for loan losses at March 31, 2013 was $70.0 million, compared to $70.3 million at December 31, 2012.

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 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

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, 2013 (Unaudited) and December 31, 2012
(Dollars in Thousands)

Assets				March 31, 2013		December 31, 2012

Cash and due from banks			$	63,495	$	101,850
Short-term investments				1,212		1,973
		Total cash and cash equivalents		64,707		103,823

Securities available for sale, at fair value				1,215,540		1,264,002
Investment securities held to maturity (fair value of $355,144 at
	March 31, 2013 (unaudited) and $374,916 at December 31, 2012)			342,696		359,464
Federal Home Loan Bank Stock				40,675		37,543

Loans				4,910,355		4,904,699
	Less allowance for loan losses			70,034		70,348
		Net loans		4,840,321		4,834,351

Foreclosed assets, net				12,192		12,473
Banking premises and equipment, net				67,103		66,120
Accrued interest receivable				22,099		24,002
Intangible assets				357,477		357,907
Bank-owned life insurance				148,496		147,286
Other assets				75,469		76,724
		Total assets	$	7,186,775	$	7,283,695

Liabilities and Stockholders' Equity

Deposits:
	Demand deposits		$	3,435,629	$	3,556,011
	Savings deposits			925,274		914,787
	Certificates of deposit of $100,000 or more			304,917		324,901
	Other time deposits			610,761		632,572
		Total deposits		5,276,581		5,428,271

Mortgage escrow deposits				22,541		21,238
Borrowed funds				854,007		803,264
Other liabilities				43,201		49,676
		Total liabilities		6,196,330		6,302,449

Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued				—		—
Common stock, $0.01 par value, 200,000,000 shares authorized, 83,209,293 shares
	issued and 59,968,621 outstanding at March 31, 2013, and 59,937,955
	outstanding at December 31, 2012			832		832
Additional paid-in capital				1,022,386		1,021,507
Retained earnings				399,291		389,549
Accumulated other comprehensive income				6,053		7,716
Treasury stock				(386,737)		(386,270)
Unallocated common stock held by the Employee Stock Ownership Plan ("ESOP")				(51,380)		(52,088)
Common Stock acquired by the Directors' Deferred Fee Plan ("DDFP")				(7,275)		(7,298)
Deferred Compensation - DDFP				7,275		7,298
		Total stockholders' equity		990,445		981,246
		Total liabilities and stockholders' equity	$	7,186,775	$	7,283,695

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three Months Ended March 31, 2013 and 2012 (Unaudited)
(Dollars in Thousands, except per share data)

				Three Months Ended
				March 31,
				2013		2012
Interest income:
	Real estate secured loans		$	38,335	$	38,959
	Commercial loans			9,971		10,370
	Consumer loans			5,957		6,289
	Securities available for sale and Federal Home Loan Bank stock			6,192		8,332
	Investment securities held to maturity			2,839		2,918
	Deposits, Federal funds sold and other short-term investments			10		12
		Total interest income		63,304		66,880

Interest expense:
	Deposits			4,956		7,002
	Borrowed funds			4,453		5,041
		Total interest expense		9,409		12,043
		Net interest income		53,895		54,837
Provision for loan losses				1,500		5,000
		Net interest income after provision for loan losses		52,395		49,837

Non-interest income:
	Fees			7,960		8,075
	Bank owned life insurance			1,210		1,362
	Net gain on securities transactions			511		2,183
	Other income			264		1,108
		Total non-interest income		9,945		12,728

Non-interest expense:
	Compensation and employee benefits			20,991		20,508
	Net occupancy expense			5,206		5,026
	Data processing expense			2,622		2,588
	FDIC Insurance			1,250		1,390
	Amortization of intangibles			511		739
	Advertising and promotion expense			746		685
	Other operating expenses			5,620		5,855
		Total non-interest expenses		36,946		36,791
		Income before income tax expense		25,394		25,774
Income tax expense				7,566		7,346
		Net income	$	17,828	$	18,428

Basic earnings per share			$	0.31	$	0.32
Average basic shares outstanding				57,167,198		57,051,827

Diluted earnings per share			$	0.31	$	0.32
Average diluted shares outstanding				57,337,215		57,082,631

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Financial Highlights
(Dollars in Thousands, except share data) (Unaudited)

					At or for the
					Three Months Ended
					March 31,
					2013		2012
STATEMENTS OF INCOME:
Net interest income				$	53,895	$	54,837
Provision for loan losses					1,500		5,000
Non-interest income					9,945		12,728
Non-interest expense					36,946		36,791
Income before income tax expense					25,394		25,774
Net income					17,828		18,428
Diluted earnings per share					$0.31		$0.32
Interest rate spread					3.21%		3.29%
Net interest margin					3.33%		3.42%

PROFITABILITY:
Annualized return on average assets					1.00%		1.04%
Annualized return on average equity					7.32%		7.71%
Annualized non-interest expense to average assets					2.08%		2.08%
Efficiency ratio (1)					57.87%		54.45%

ASSET QUALITY:
Non-accrual loans				$	99,059	$	120,343
90+ and still accruing					—		—
Non-performing loans					99,059		120,343
Foreclosed assets					12,192		14,440
Non-performing assets					111,251		134,783
Non-performing loans to total loans					2.02%		2.58%
Non-performing assets to total assets					1.55%		1.89%
Allowance for loan losses				$	70,034	$	73,996
Allowance for loan losses to total non-performing loans					70.70%		61.49%
Allowance for loan losses to total loans					1.43%		1.59%

AVERAGE BALANCE SHEET DATA:
Assets				$	7,220,211	$	7,101,853
Loans, net					4,829,796		4,584,512
Earning assets					6,479,902		6,358,860
Core deposits					4,434,375		4,068,187
Borrowings					804,919		900,785
Interest-bearing liabilities					5,350,792		5,408,985
Stockholders' equity					987,984		961,136
Average yield on interest-earning assets					3.92%		4.19%
Average cost of interest-bearing liabilities					0.71%		0.90%

LOAN DATA:
Mortgage loans:
		Residential	$		1,234,173	$	1,297,437
		Commercial			1,349,565		1,262,756
		Multi-family			743,356		572,491
		Construction			135,611		118,714
Total mortgage loans					3,462,705		3,251,398
		Commercial loans			874,880		834,211
		Consumer loans			573,784		571,010
Total gross loans					4,911,369		4,656,619
	Premium on purchased loans				4,683		5,621
	Unearned discounts				(73)		(95)
Net deferred					(5,624)		(3,343)
Total loans				$	4,910,355	$	4,658,802

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Net Interest Margin Analysis
Quarterly Average Balances
(Unaudited) (Dollars in Thousands)

				March 31, 2013					December 31, 2012
				Average			Average		Average			Average
				Balance		Interest	Yield		Balance		Interest	Yield
	Interest-Earning Assets:
		Deposits	$	16,639	$	10	0.25%	$	37,442	$	24	0.25%
		Federal funds sold and
		other short-term investments		1,424		—	0.01%		1,738		—	0.14%
		Investment securities (1)		350,326		2,839	3.24%		350,890		2,912	3.32%
		Securities available for sale		1,243,647		5,764	1.85%		1,325,804		5,963	1.80%
		Federal Home Loan Bank stock		38,070		428	4.56%		37,811		435	4.58%
		Net loans: (2)
		Total mortgage loans		3,418,532		38,335	4.49%		3,380,309		38,903	4.55%
		Total commercial loans		839,389		9,971	4.78%		812,727		10,125	4.91%
		Total consumer loans		571,875		5,957	4.22%		579,063		6,241	4.29%
		Total net loans		4,829,796		54,263	4.51%		4,772,099		55,269	4.58%
		Total Interest-Earning Assets	$	6,479,902	$	63,304	3.92%	$	6,525,784	$	64,603	3.92%

	Non-Interest Earning Assets:
		Cash and due from banks		75,239					80,974
		Other assets		665,070					662,724
		Total Assets	$	7,220,211				$	7,269,482

	Interest-Bearing Liabilities:
		Demand deposits	$	2,696,385	$	1,954	0.29%	$	2,675,980	$	2,293	0.34%
		Savings deposits		918,535		267	0.12%		903,774		339	0.15%
		Time deposits		930,953		2,735	1.19%		980,682		3,056	1.24%
		Total Deposits		4,545,873		4,956	0.44%		4,560,436		5,688	0.50%
		Borrowed funds		804,919		4,453	2.24%		818,122		4,708	2.29%
		Total Interest-Bearing Liabilities	$	5,350,792	$	9,409	0.71%	$	5,378,558	$	10,396	0.77%

	Non-Interest Bearing Liabilities			881,435					898,549
		Total Liabilities		6,232,227					6,277,107
		Stockholders' equity		987,984					992,375
		Total Liabilities and Stockholders' Equity	$	7,220,211				$	7,269,482

	Net interest income				$	53,895				$	54,207

	Net interest rate spread						3.21%					3.15%
	Net interest-earning assets		$	1,129,110				$	1,147,226

	Net interest margin (3)						3.33%					3.29%
	Ratio of interest-earning assets to
	total interest-bearing liabilities			1.21	x				1.21	x

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Net Interest Margin Analysis
Average Year to Date Balances
(Unaudited) (Dollars in Thousands)

			March 31, 2013					March 31, 2012
			Average			Average		Average			Average
			Balance		Interest	Yield		Balance		Interest	Yield
Interest-Earning Assets:
	Deposits	$	16,639	$	10	0.25%	$	19,412	$	12	0.25%
	Federal funds sold and
	other short-term investments		1,424		—	0.01%		1,264		—	0.03%
	Investment securities (1)		350,326		2,839	3.24%		343,703		2,918	3.40%
	Securities available for sale		1,243,647		5,764	1.85%		1,370,978		7,852	2.29%
	Federal Home Loan Bank stock		38,070		428	4.56%		38,991		480	4.95%
	Net loans: (2)
	Total mortgage loans		3,418,532		38,335	4.49%		3,201,705		38,959	4.84%
	Total commercial loans		839,389		9,971	4.78%		818,192		10,370	5.05%
	Total consumer loans		571,875		5,957	4.22%		564,615		6,289	4.48%
	Total net loans		4,829,796		54,263	4.51%		4,584,512		55,618	4.83%
	Total Interest-Earning Assets	$	6,479,902	$	63,304	3.92%	$	6,358,860	$	66,880	4.19%

Non-Interest Earning Assets:
	Cash and due from banks		75,239					79,586
	Other assets		665,070					663,407
	Total Assets	$	7,220,211				$	7,101,853

Interest-Bearing Liabilities:
	Demand deposits	$	2,696,385	$	1,954	0.29%	$	2,507,930	$	2,783	0.45%
	Savings deposits		918,535		267	0.12%		890,165		374	0.17%
	Time deposits		930,953		2,735	1.19%		1,110,105		3,845	1.39%
	Total Deposits		4,545,873		4,956	0.44%		4,508,200		7,002	0.62%
	Borrowed funds		804,919		4,453	2.24%		900,785		5,041	2.25%
	Total Interest-Bearing Liabilities	$	5,350,792	$	9,409	0.71%	$	5,408,985	$	12,043	0.90%

Non-Interest Bearing Liabilities			881,435					731,732
	Total Liabilities		6,232,227					6,140,717
	Stockholders' equity		987,984					961,136
	Total Liabilities and Stockholders' Equity	$	7,220,211				$	7,101,853

Net interest income				$	53,895				$	54,837

Net interest rate spread						3.21%					3.29%
Net interest-earning assets		$	1,129,110				$	949,875

Net interest margin (3)						3.33%					3.42%
Ratio of interest-earning assets to
total interest-bearing liabilities			1.21	x				1.18	x


	(1) Average outstanding balance amounts shown are amortized cost.
	(2) Average outstanding balance are net of the allowance for loan losses, deferred loan fees and expenses, loan premium and discounts and include non-accrual loans.
	(3) Annualized net interest income divided by average interest-earning assets.

The following table summarizes the quarterly net interest margin for the previous five quarters.

	3/31/13	12/31/12	9/30/12	6/30/12	3/31/12
	1st Qtr.	4th Qtr.	3rd Qtr.	2nd Qtr.	1st Qtr.
Interest-Earning Assets:
Securities	2.19%	2.13%	2.17%	2.42%	2.54%
Net loans	4.51%	4.58%	4.68%	4.76%	4.83%
Total interest-earning assets	3.92%	3.92%	3.99%	4.11%	4.19%

Interest-Bearing Liabilities:
Total deposits	0.44%	0.50%	0.54%	0.58%	0.62%
Total borrowings	2.24%	2.29%	2.32%	2.20%	2.25%
Total interest-bearing liabilities	0.71%	0.77%	0.82%	0.85%	0.90%

Interest rate spread	3.21%	3.15%	3.17%	3.26%	3.29%
Net interest margin	3.33%	3.29%	3.31%	3.39%	3.42%

Ratio of interest-earning assets to interest-bearing liabilities	1.21x	1.21x	1.20x	1.18x	1.18x

Notes

(1) Efficiency Ratio Calculation
			Three Months Ended
			March 31,
			2013		2012
	Net interest income	$	53,895	$	54,837
	Non-interest income		9,945		12,728
	Total income	$	63,840	$	67,565

	Non-interest expense	$	36,946	$	36,791

	Expense/income		57.87%		54.45%