UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2005
or
For the transition period from to
Commission File Number: 001-31566
PROVIDENT FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
(201) 333-1000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES x NO ¨
As of May 2, 2005 there were 79,879,017 shares issued and 73,342,220 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 756,474 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under accounting principles generally accepted in the United States of America.
INDEX TO FORM 10-Q
Item Number
Consolidated Statements of Financial Condition as of March 31, 2005 (unaudited) and December 31, 2004
Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 (unaudited)
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2005 and 2004 (unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited)
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PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2005 (Unaudited) and December 31, 2004
(Dollars in thousands, except share data)
Cash and due from banks
Federal funds sold
Short-term investments
Total cash and cash equivalents
Investment securities (market value of $429,194 (unaudited) and $450,071 at March 31, 2005 and December 31, 2004, respectively)
Securities available for sale, at fair value
Federal Home Loan Bank (“FHLB”) stock
Loans
Less allowance for loan losses
Net loans
Foreclosed assets, net
Banking premises and equipment, net
Accrued interest receivable
Intangible assets
Bank-owned life insurance (“BOLI”)
Other assets
Total assets
Deposits:
Demand deposits
Savings deposits
Certificates of deposit of $100,000 or more
Other time deposits
Total deposits
Mortgage escrow deposits
Borrowed funds
Subordinated debentures
Other liabilities
Total liabilities
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, 79,879,017 shares issued and 72,585,746 shares outstanding at March 31, 2005 and 79,879,017 shares issued and 74,078,784 outstanding at December 31, 2004, respectively.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock, at cost
Unallocated common stock held by Employee Stock Ownership Plan (“ESOP”)
Common stock acquired by the Stock Award Plan (“SAP”)
Common stock acquired by the Directors’ Deferred Fee Plan (“DDFP”)
Deferred compensation – DDFP
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to unaudited consolidated financial statements.
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Consolidated Statements of Income
Three Months ended March 31, 2005 and 2004 (Unaudited)
(Dollars in thousands, except per share data)
Three months ended
March 31,
Interest income:
Real estate secured loans
Commercial loans
Consumer loans
Investment securities
Securities available for sale
Other short-term investments
Federal funds
Total interest income
Interest expense:
Deposits
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Fees
BOLI
Net (loss) gain on securities transactions
Net gain on sales of loans
Other income
Total non-interest income
Non-interest expense:
Compensation and employee benefits
Net occupancy expense
Amortization of intangibles
Data processing expense
Advertising and promotion expense
Other operating expenses
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Basic earnings per share
Average basic shares outstanding
Diluted earnings per share
Average diluted shares outstanding
4
Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2005 and 2004 (Unaudited)
(Dollars in Thousands)
COMMON
STOCK
ADDITIONAL
PAID-IN
CAPITAL
UNALLOCATED
ESOP
SHARES
AWARDS
UNDER SAP
ACQUIRED
BY DDFP
DEFERRED
COMPENSATION
DDFP
TREASURY
RETAINED
EARNINGS
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
TOTALSTOCKHOLDERS’
EQUITY
Balance at December 31, 2003
Comprehensive income:
Other comprehensive income:
Unrealized holding gain on securities arising during the period (net of tax of $3,430)
Reclassification adjustment for gains included in net income (net of tax of $174)
Total comprehensive income
Cash dividends paid
Purchase of treasury shares
Purchase of ESOP shares
Allocation of ESOP shares
Purchase of SAP shares
Allocation of SAP shares
Allocation of stock options
Balance at March 31, 2004
5
Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2005 and 2004 (Unaudited) (Continued)
Balance at December 31, 2004
Unrealized holding loss on securities arising during the period (net of tax of ($6,423))
Reclassification adjustment for losses included in net income (net of tax of ($54))
Distributions from DDFP
Purchases of treasury stock
Balance at March 31, 2005
6
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangibles
Decrease (increase) in deferred income taxes
Increase in cash surrender value of BOLI
Net amortization of premiums and discounts on securities
Accretion of net deferred loan fees
Amortization of premiums on purchased loans, net
Proceeds from sales of foreclosed assets, net
Net gain on sale of loans
Net loss (gain) on securities available for sale
Decrease in accrued interest receivable
Decrease (increase) in other assets
Increase (decrease) in mortgage escrow deposits
Increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of loans
Proceeds from maturities, calls and paydowns of investment securities
Purchases of investment securities
Proceeds from sales of securities available for sale
Proceeds from maturities and paydowns of securities available for sale
Purchases of securities available for sale
Net decrease (increase) in loans
Purchases of premises and equipment, net
Net cash provided by investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Purchase of SAP shares, net
Purchase of treasury stock
Cash dividends paid to stockholders
Proceeds from FHLB Advances
Payments on FHLB Advances
Net (decrease) increase in Repurchase Agreements
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash paid during the period for:
Interest on deposits and borrowings
Non cash investing activities:
Transfer of loans receivable to foreclosed assets
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
A. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Provident Financial Services, Inc. and its wholly-owned subsidiaries, The Provident Bank and First Sentinel Capital Trust I and II (the “Company”). These interim consolidated financial statements reflect the acquisition of First Sentinel Bancorp, Inc. (“First Sentinel”) on July 14, 2004, and the related issuance of 18.5 million shares of the Company’s common stock in connection with the merger.
The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results of operations that may be expected for all of 2005.
Certain information and note disclosures normally included in financial statements and prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain prior period amounts have been reclassified to correspond with the current period presentations.
These unaudited consolidated financial statements should be read in conjunction with the December 31, 2004 Annual Report to Stockholders on Form 10-K.
B. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:
Per
Share
Amount
Basic earnings per share:
Income available to common stockholders
Dilutive DDFP shares
Dilutive common stock equivalents
Diluted earnings per share:
Anti-dilutive stock options and awards totaling 5,610,796 shares at March 31, 2005, were excluded from the earnings per share calculations.
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Note 2. Loans and Allowance for Loan Losses
Loans receivable at March 31, 2005 and December 31, 2004 are summarized as follows (in thousands):
Mortgage loans:
Residential
Commercial
Multi-family
Commercial construction
Total mortgage loans
Total other loans
Premium on purchased loans
Less: Discount on purchased loans
Less: Net deferred fees
The activity in the allowance for loan losses for the three months ended March 31, 2005 and 2004 is summarized as follows (in thousands):
Balance at beginning of period
Provision charged to operations
Recoveries of loans previously charged off
Loans charged off
Balance at end of period
Note 3. Deposits
Deposits at March 31, 2005 and December 31, 2004 are summarized as follows (in thousands):
2005
December 31,
2004
Money market accounts
NOW accounts
Non-interest bearing deposits
Certificates of deposit
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Note 4. Components of Net Periodic Benefit Cost
The Bank has a noncontributory defined benefit pension plan (the “Plan”) covering all of its employees who have attained age 21 with at least one year of service. The Plan was frozen on April 1, 2003. The Plan provides for 100% vesting after five years of service. The Plan’s assets are invested in group annuity contracts and investment funds managed by the Prudential Insurance Company and Allmerica Financial.
In addition to pension benefits, certain health care and life insurance benefits are made available to retired employees. The costs of such benefits are accrued based on actuarial assumptions from the date of hire to the date the employee is fully eligible to receive the benefits. On December 31, 2002, the Company eliminated the post-retirement benefits for employees with less than ten years of service.
Net periodic benefit costs for the three months ended March 31, 2005 and 2004 include the following components (in thousands):
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized transitional obligation
Amortization of the net loss
Net periodic benefit (increase) cost
The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it does not expect to contribute to its defined benefit pension plan in 2005. As of March 31, 2005, no contributions have been made.
The net periodic benefit costs for pension benefits and other post-retirement benefits for 2005 were calculated using January 1, 2004 census data, rolled forward to December 31, 2004. The actuarial assumptions were the same as those used for the 2004 net periodic benefit cost, except for a discount rate of 5.75%.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
Certain statements contained herein are not based on historical facts and 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 wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise 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 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 potential losses inherent 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 a worksheet. This worksheet 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 one through four, with a rating of one established for loans with minimal risk. Loans that are deemed to be of “questionable quality” are rated five (watch) or six (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated seven, eight or nine, respectively. Commercial mortgage, commercial and construction loans are rated individually and each lending officer is responsible for risk rating loans in his or her portfolio. These risk ratings are then reviewed by the department manager, the Chief Lending Officer and the Credit Administration Department. The risk ratings are then confirmed by the Loan Review Department of the Finance Division and they are periodically reviewed by the Credit Committee in the credit renewal or approval process.
Management believes the primary risks inherent in the portfolio are possible increases in interest rates, a decline in the economy, generally, and a decline in real estate market values. 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.
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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.
The provision for loan losses is established after considering the results of the review of delinquency and charge-off trends, the allowance for loan loss worksheet, the amount of the allowance for loan losses in relation to the total loan balance, loan portfolio growth, accounting principles generally accepted in the United States of America and regulatory guidance. This process has been applied consistently, and the Company has made minimal changes in the estimation methods and assumptions that have been used.
Although management believes that the Company has established and maintained the allowance for loan losses at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. 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. The Company engages an independent third party to perform an annual analysis to test the aggregate balance of goodwill for impairment. For purposes of goodwill impairment evaluation, The Provident Bank is identified as the reporting unit. Fair value of goodwill is determined in the same manner as goodwill recognized in a business combination and uses standard valuation methodologies, including a review of comparable transactions and discounted cash flow analysis. If the carrying amount of goodwill pursuant to this analysis were to exceed the implied fair value of goodwill, an impairment loss would be recognized. No impairment loss was required to be recognized for the three months ended March 31, 2005 or 2004.
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 published or securities dealers’ market prices. 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. If such a decline were deemed other than temporary, the Company would write down the security to fair value through a charge to current period operations. The market value of the securities portfolio is significantly affected by changes in interest rates. In general, as interest rates rise, the market value of fixed-rate securities decreases and as interest rates fall, the market value of fixed-rate securities increases. With significant changes in interest rates, the Company evaluates its intent and ability to hold securities to maturity or for a sufficient amount of time to recover the recorded amortized cost.
The determination of whether deferred tax assets will be realizable is predicated on 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.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2005 AND DECEMBER 31, 2004
Total assets at March 31, 2005 decreased $73.8 million, or 1.1%, to $6.36 billion compared to $6.43 billion at December 31, 2004, primarily as a result of reductions in securities, which were used to fund repayments of borrowings and common stock repurchases.
Securities available for sale, at fair value, decreased $100.4 million, or 7.1%, to $1.31 billion at March 31, 2005, compared to $1.41 billion at December 31, 2004. Investment securities held to maturity decreased $15.2 million, or 3.4%, to $430.4 million at March 31, 2005, compared to $445.6 million at December 31, 2004. The majority of the decline in the securities portfolios was attributable to investment maturities and amortization of mortgage-backed securities. In addition, the Company sold $11.7 million in longer-lived, lower coupon mortgage-backed securities during the quarter as part of its ongoing interest rate risk management process. The weighted average life of the Company’s available for sale securities portfolio was 2.9 years at March 31, 2005.
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Total net loans at March 31, 2005 decreased $28.6 million, or 0.8%, to $3.64 billion, compared to $3.67 billion at December 31, 2004. Residential mortgage loans decreased $34.1 million to $1.83 billion at March 31, 2005, compared to $1.87 billion at December 31, 2004. Residential mortgage loan originations of $21.0 million and purchases of $21.6 million were more than offset by repayments of $72.2 million and sales of $4.2 million for the three months ended March 31, 2005. In addition, commercial real estate loans, including multi-family and construction loans, decreased $7.2 million to $953.3 million at March 31, 2005, compared to $960.5 million at December 31, 2004. Partially offsetting the decline in real estate secured loans, commercial loans increased $1.3 million to $354.9 million at March 31, 2005 compared to $353.6 million at December 31, 2004. Furthermore, consumer loans increased $11.8 million to $526.0 million at March 31, 2005, compared to $514.3 million at December 31, 2004.
Retail loans, which consist of residential mortgages loans and consumer loans, such as fixed-rate home equity loans and lines of credit, totaled $2.36 billion and accounted for 64.3% of the loan portfolio at March 31, 2005 compared to $2.38 billion, or 64.4% of the portfolio at December 31, 2004. Commercial loans, consisting of commercial real estate, multi-family, construction, and commercial and industrial loans, totaled $1.31 billion, or 35.7% of the loan portfolio at March 31, 2005, compared to $1.33 billion, or 35.6% at December 31, 2004. The Company intends to continue to focus on the origination of commercial loans.
At March 31, 2005 and December 31, 2004, the allowance for loan losses totaled $33.8 million. Total non-performing loans were $5.6 million at March 31, 2005, compared to $6.2 million at December 31, 2004. Non-performing assets were $5.7 million and $6.3 million at March 31, 2005 and December 31, 2004, respectively. Total non-performing loans as a percentage of total loans were 0.15% at March 31, 2005, compared to 0.17% at December 31, 2004. The allowance for loan losses as a percentage of total loans was 0.92% at March 31, 2005, compared to 0.91% at December 31, 2004.
Cash and cash equivalents increased $72.5 million, or 44.3%, to $236.2 million at March 31, 2005, from $163.7 million at December 31, 2004, as a result of the reductions in investments and loans described above.
Total deposits increased $1.4 million from December 31, 2004, to $4.05 billion at March 31, 2005, with an $8.0 million increase in time deposits partially offset by a $6.5 million decrease in core deposits. Core deposits, which consist of all demand and savings deposits, represented 65.4% and 65.6% of total deposits at March 31, 2005 and December 31, 2004, respectively.
Borrowed funds decreased $56.6 million, or 4.9%, to $1.11 billion at March 31, 2005, from $1.17 billion at December 31, 2004, as proceeds from maturing investments and the amortization of mortgage-backed securities were used to pay off maturing liabilities.
Total stockholders’ equity decreased $23.7 million, or 2.1%, to $1.11 billion at March 31, 2005, compared to $1.14 billion at December 31, 2004. This decrease was primarily due to common stock repurchases totaling $27.1 million, an increase in the accumulated other comprehensive loss of $9.4 million, and cash dividends paid of $5.2 million, partially offset by net income of $15.0 million, and net amortization of stock-based compensation plans of $2.9 million. Common stock repurchases for the quarter ended March 31, 2005, totaled 1.5 million shares at an average cost of $18.04 per share. An additional 2.2 million shares remain eligible for repurchase under the current common stock repurchase authorization. At March 31, 2005, book value per share and tangible book value per share totaled $15.33 and $9.26, respectively.
Liquidity and Capital Resources. The Company’s primary sources of funds are deposits, FHLB advances, repurchase agreements, loan repayments, maturities of investments and cash flows from mortgage-backed securities. Scheduled loan amortization is a fairly predictable source of funds while loan and mortgage-backed securities prepayments and deposit flows are influenced by interest rates, local economic conditions and the competitive marketplace. Additional sources of liquidity that are available to the Company, should the need arise, are a $50.0 million overnight line of credit and a $50.0 million one month overnight repricing line of credit with the Federal Home Loan Bank of New York. As of March 31, 2005, the Company did not have any outstanding borrowings against the lines of credit.
Cash needs for the three months ended March 31, 2005, were provided for primarily from income and principal payments on loans, investments and mortgage-backed securities, sales of mortgage-backed securities, sales of residential mortgage loans and increases in deposits. The cash was used primarily to fund interest and operating expenses, current loan originations, common stock repurchases, and the repayment of borrowings.
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As of March 31, 2005, the Bank exceeded all regulatory capital requirements as follows:
Regulatory Tier 1 leverage capital
Tier 1 risk-based capital
Total risk-based capital
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
General. The Company reported net income of $15.0 million for the three months ended March 31, 2005, compared to $10.3 million for the same period in 2004. Basic and diluted earnings per share were $0.22 for the three months ended March 31, 2005, compared to basic and diluted earnings per share of $0.19 for the three months ended March 31, 2004. Annualized return on average assets was 0.95% for the three months ended March 31, 2005, compared with 0.98% for the same period in 2004. Annualized return on average equity improved to 5.34% for the three months ended March 31, 2005, compared with 5.06% for the same period in 2004. The three months earnings and per share data for 2005 reflect the inclusion of the operations of First Sentinel, which merged with the Company on July 14, 2004, and the related issuance of 18.5 million shares of the Company’s common stock.
Net Interest Income. Total net interest income increased $12.8 million, or 37.1%, to $47.2 million for the quarter ended March 31, 2005, compared to $34.4 million for the quarter ended March 31, 2004. Interest income for the first quarter of 2005 increased $22.0 million, or 46.8%, to $69.0 million, compared to $47.0 million for the same period in 2004. Interest expense increased $9.2 million, or 73.2%, to $21.8 million for the quarter ended March 31, 2005, compared to $12.6 million for the quarter ended March 31, 2004. The changes in interest income and expense for the three months ended March 31, 2005, versus the comparable 2004 period are largely attributable to increases in earning assets and interest-bearing liabilities due to internal growth and the First Sentinel acquisition, and to a lesser extent, increases in market interest rates.
The Company’s net interest margin decreased 12 basis points to 3.38% for the quarter ended March 31, 2005, compared to 3.50% for the quarter ended March 31, 2004, and equaled the trailing quarter net interest margin of 3.38%. The net interest spread was 3.09% for the quarter ended March 31, 2005, compared with 3.12% for the same period in 2004 and 3.11% for the trailing quarter.
The average yield on interest-earning assets increased 18 basis points to 4.97% for the quarter ended March 31, 2005, compared to 4.79% for the comparable quarter in 2004. Compared to the trailing quarter, the yield on interest-earning assets increased seven basis points from 4.90%.
The average balance of net loans increased $1.45 billion, or 65.8%, to $3.65 billion for the quarter ended March 31, 2005, compared to $2.20 billion for the comparable quarter in 2004. Income on all loans secured by real estate increased $15.1 million, or 65.2%, to $38.3 million for the three months ended March 31, 2005, compared to $23.2 million for the three months ended March 31, 2004. Interest income on commercial loans increased $1.1 million, or 27.4%, to $5.0 million for the quarter ended March 31, 2005, compared to $3.9 million for the quarter ended March 31, 2004. Consumer loan interest income increased $2.6 million, or 56.4%, to $7.3 million for the quarter ended March 31, 2005, compared to $4.6 million for the quarter ended March 31, 2004.
Interest income on investment securities held to maturity decreased $710,000, or 13.8%, to $4.4 million for the quarter ended March 31, 2005, compared to $5.1 million for the quarter ended March 31, 2004. Average investment securities held to maturity totaled $439.9 million for the quarter ended March 31, 2005, compared with $515.6 million for the same period last year. Interest income on securities available for sale increased $3.9 million, or 40.1%, to $13.8 million for the quarter ended March 31, 2005, compared to $9.8 million for the quarter ended March 31, 2004. Average securities available for sale were $1.41 billion for the three months ended March 31, 2005, compared with $1.11 billion for the same period in 2004.
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The average cost of interest-bearing liabilities increased 21 basis points to 1.88% for the quarter ended March 31, 2005 compared to 1.67% for the quarter ended March 31, 2004, and compared to the trailing quarter, the average cost of interest-bearing liabilities increased nine basis points from 1.79%.
The average balance of interest-bearing core deposit accounts increased $729.3 million, or 51.9%, to $2.13 billion for the quarter ended March 31, 2005, compared to $1.40 billion for the quarter ended March 31, 2004. Average time deposit account balances increased $454.4 million, or 48.3%, to $1.40 billion for the quarter ended March 31, 2005, compared to $941.5 million for the same period in 2004. Interest paid on deposit accounts increased $5.0 million, or 64.1%, to $12.9 million for the quarter ended March 31, 2005, compared to $7.9 million for the quarter ended March 31, 2004.
Average borrowings, including the subordinated debentures assumed through the First Sentinel acquisition, increased $480.0 million, or 69.7%, to $1.17 billion for the quarter ended March 31, 2005, compared to $688.5 million for the quarter ended March 31, 2004. Interest paid on such borrowed funds increased $4.2 million, or 88.3%, to $8.9 million for the quarter ended March 31, 2005, from $4.7 million for the quarter ended March 31, 2004.
Provision for Loan Losses. The Company establishes provisions for loan losses, which are charged to income, in order to maintain the allowance for loan losses at a level management considers adequate to absorb probable credit losses inherent in the loan portfolio. In determining the level of the allowance for loan losses, management considers past and current loss experiences, evaluation of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay the loan and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or events change. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses in order to maintain the adequacy of the allowance.
The Company did not record a provision for loan losses for the quarter ended March 31, 2005, compared to $600,000 for the quarter ended March 31, 2004. The reduction in the provision for loan losses for the quarter ended March 31, 2005, compared with the same period in 2004, was attributable to improvements in asset quality. The Company had net recoveries for the quarter ended March 31, 2005 of $71,000, compared to net charge-offs of $611,000 for the quarter ended March 31, 2004. The allowance for loan losses was $33.8 million, or 0.92% of total loans at March 31, 2005, compared to $33.8 million, or 0.91% of total loans at December 31, 2004 and $20.6 million, or 0.91% of total loans at March 31, 2004. At March 31, 2005, the allowance for loan losses as a percentage of non-performing loans increased to 605.3% from 545.1% at December 31, 2004 and 470.6% at March 31, 2004.
Non-Interest Income.Non-interest income decreased $1.5 million, or 19.4%, to $6.2 million for the quarter ended March 31, 2005, compared to $7.7 million for the same period in 2004. Gains on sales of loans totaled $70,000 for the quarter ended March 31, 2005, compared with $1.3 million for the same period in 2004. In the first quarter of 2004, the Company sold $71.8 million of 20- and 30-year fixed-rate residential mortgage loans as part of an ongoing strategy to reduce interest rate risk. Also contributing to the decline in non-interest income, the Company realized net losses on sales of securities of $131,000 for the three months ended March 31, 2005, compared with net gains of $427,000 for the same period in 2004. Securities sales and related gains and losses are dependent on market conditions and interest rate risk management and liquidity needs. Partially offsetting these decreases, income from appreciation in the cash surrender value of BOLI increased $309,000 to $1.3 million for the quarter ended March 31, 2005, compared to $987,000 for the same period in 2004. The increase in BOLI income was primarily attributable to the addition of $30.0 million of BOLI from the First Sentinel acquisition.
Non-Interest Expense. Non-interest expense increased $4.7 million, or 17.7%, to $31.4 million for the quarter ended March 31, 2005, compared to $26.7 million for the quarter ended March 31, 2004. For the three months ended March 31, 2005, compensation and benefits expense increased $2.6 million compared with the same period in 2004, primarily as a result of the addition of staff from the First Sentinel acquisition. The Company employed 915 full-time equivalent employees at March 31, 2005, compared with 703 full-time equivalent employees at March 31, 2004. Amortization of intangibles increased $1.6 million for the quarter ended March 31, 2005, compared with the same period in 2004, primarily as a result of amortization of the core
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deposit intangible recorded in connection with the First Sentinel acquisition. Additional increases in occupancy expense of $1.1 million and data processing expense of $280,000 for the quarter ended March 31, 2005, compared with the same period in 2004, were also due primarily to the acquisition and integration of First Sentinel’s operations. As a result of the First Sentinel acquisition, the Company added 22 full-service branch locations, including the former headquarters building, which now serves as the Provident Loan Center.
Partially offsetting these increases, advertising and promotions expense declined $673,000 for the quarter ended March 31, 2005, compared with the same period in 2004, as the Company continued to focus its efforts on expense management. The Company’s annualized non-interest expense as a percentage of average assets improved to 1.98% for the quarter ended March 31, 2005, compared with 2.54% for the same period in 2004. The efficiency ratio (non-interest expense divided by the sum of net interest income and non-interest income) improved to 58.8% for the quarter ended March 31, 2005, compared with 63.4% for the same period in 2004.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Analysis. Interest rate risk is the exposure of a Bank’s current and future earnings and capital arising from adverse movements in interest rates. The Company’s most significant risk exposure is interest rate risk. The guidelines of the Company’s interest rate risk policy seek to limit the exposure to changes in interest rates that affect the underlying economic value of assets and liabilities, earnings and capital. To minimize interest rate risk, 20- and 30-year fixed-rate mortgage loans may be sold at origination. Commercial real estate loans generally have interest rates that reset in five years, and other commercial loans such as construction loans and commercial lines of credit reset with changes in the prime rate, the federal funds rate or LIBOR. Investment securities purchases generally have maturities of five years or less, and mortgage-backed securities have weighted average lives between three and five years.
The Asset/Liability Committee meets on a monthly basis to review the impact of interest rate changes on net interest income, net interest margin, net income and the economic value of equity. The Asset/Liability Committee reviews a variety of strategies that project changes in asset or liability mix, various interest rate scenarios and the impact of those changes on projected net interest income and net income.
The Company’s strategy for liabilities has been to maintain a stable core-funding base by focusing on core deposit account acquisition and increasing products and services per household. A consistent focus on core deposit accounts has led to a shift in the funding base to less interest rate sensitive liabilities. The Company’s ability to retain maturing certificate of deposit accounts is the result of its strategy to remain competitively priced within its marketplace, typically within the upper quartile of rates offered by its competitors. Pricing strategy may vary depending upon current funding needs and the ability of the Company to fund operations through alternative sources, primarily by accessing short-term lines of credit with the FHLB during periods of pricing dislocation.
Quantitative Analysis. Current and future sensitivity to changes in interest rates are measured through the use of balance sheet and income simulation models. The analyses capture changes in net interest income using flat rates as a base, a most likely rate forecast and rising and declining interest rate forecasts. Changes in net interest income and net income for the forecast period, generally twelve to twenty-four months, are measured and compared to limits for acceptable change.
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The following sets forth the results of a twelve-month net interest income projection model as of March 31, 2005 (dollars in thousands):
Change in Interest Rates in
Basis Points (Rate Ramp)
Dollar
Change
Percent
-100
Static
+100
+200
The preceding table indicates that as of March 31, 2005, in the event of a 200 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, net interest income would decrease 10.9%, or $20.8 million. In the event of a 100 basis point decrease in interest rates, net interest income is projected to increase 4.5%, or $8.4 million.
Due to the difficulty in accurately predicting the sensitivity of interest bearing deposits to changes in interest rates, the assumptions made in the model regarding deposit repricing reflect a “worst case” scenario. The model assumes that all interest-bearing deposits, including products with no defined maturity such as passbook savings, statement savings, interest-bearing checking, and money market accounts, will reprice the full monthly incremental amount for each rate ramp scenario. Although this is unlikely to happen, management believes this is an objective methodology to use in measuring interest rate risk.
Another measure of interest rate sensitivity is to model changes in economic value of equity through the use of immediate and sustained interest rate shocks. The following table illustrates the result of the economic value of equity model as of March 31, 2005 (dollars in thousands):
Change in
Interest Rates
(Basis Points)
Flat
The above table indicates that as of March 31, 2005, in the event of an immediate and sustained 200 basis point increase in interest rates, the present value of equity is projected to decrease 11.3%, or $148.9 million. If rates were to decrease 100 basis points, the model forecasts a 4.0%, or $52.8 million increase in the present value of equity.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the use of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions to be reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.
Item 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule
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13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) were evaluated at the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal actions and claims arising in the normal course of business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition and results of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(b) AveragePrice Paid per
(d) Maximum Number ofShares that May Yet
Be Purchased under thePlans or Programs (1)
January 1, 2005 through January 31, 2005
February 1, 2005 through February 28, 2005
March 1, 2005 through March 31, 2005
Total
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Item 6. Exhibits.
The following exhibits are filed herewith:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ Paul M. Pantozzi
/s/ Linda A. Niro
/s/ Thomas M. Lyons
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