EXHIBIT 99.2
Selected Financial Information of The Provident Bank
As of September 30, 2002 and
For the Three and Nine Months Ended September 30, 2002
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Condition
September 30, 2002 (Unaudited) and December 31, 2001
(Dollars in Thousands)
Assets September 30, 2002 December 31, 2001
------------------- ------------------
Cash and due from banks $ 84,377 71,539
Federal funds sold 33,000 35,000
Short-term investments 10,549 864
------------------- ------------------
Total cash and cash equivalents 127,926 107,403
------------------- ------------------
Investment securities (market value of $126,039 120,295 112,951
(unaudited) and $114,042 at September 30,
2002 and December 31, 2001)
Securities available for sale, at fair value 780,341 494,716
Federal Home Loan Bank stock 11,514 12,555
Loans 1,993,400 2,016,545
Less allowance for loan losses 21,345 21,909
------------------- ------------------
Net loans 1,972,055 1,994,636
------------------- ------------------
Other real estate owned, net 123 --
Banking premises and equipment, net 43,384 42,213
Accrued interest receivable 15,067 15,331
Intangible assets 26,495 27,781
Bank owned life insurance 46,921 44,790
Other assets 18,137 17,341
------------------- ------------------
Total assets $ 3,162,258 2,869,717
=================== ==================
Liabilities and Equity
Deposits:
Demand deposits $ 652,055 546,639
Savings deposits 857,575 742,547
Certificates of deposit of $100,000 or more 167,510 132,614
Other time deposits 914,686 919,923
------------------- ------------------
Total deposits 2,591,826 2,341,723
Mortgage escrow deposits 9,122 13,753
Borrowed funds 216,666 195,767
Other liabilities 24,785 26,344
------------------- ------------------
Total liabilities 2,842,399 2,577,587
------------------- ------------------
Retained earnings 306,212 287,535
Accumulated other comprehensive income 13,647 4,595
------------------- ------------------
Total equity 319,859 292,130
Commitments and contingencies
------------------- ------------------
Total liabilities and equity $ 3,162,258 2,869,717
=================== ==================
See accompanying notes to unaudited consolidated financial statements.
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Income
Three and Nine Months ended September 30, 2002 and 2001 (Unaudited)
(Dollars in Thousands)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- --------- --------- --------
Interest income:
Mortgage loans $ 12,456 15,504 39,763 46,930
Commercial loans 15,730 15,590 16,231 18,383
Consumer loans 5,316 6,171 45,657 47,362
Investment securities 1,249 1,418 3,942 4,411
Securities available for sale 9,841 6,600 26,381 18,344
Other short-term investments 76 16 203 168
Federal funds 360 237 1,123 665
-------- --------- --------- --------
Total interest income 45,028 45,536 133,300 136,263
-------- --------- --------- --------
Interest expense:
Deposits 13,869 18,696 41,853 59,131
Borrowed funds 2,170 2,300 6,279 7,182
-------- --------- --------- --------
Total interest expense 16,039 20,996 48,132 66,313
-------- --------- --------- --------
Net interest income 28,989 24,540 85,168 69,950
Provision for loan losses 11,050 400 12,250 1,600
-------- --------- --------- --------
Net interest income after
provision for loan losses 17,939 24,140 72,918 68,350
-------- --------- --------- --------
Non-interest income:
Fees 4,351 3,695 12,705 11,590
Net gain (loss) on securities transactions (28) 26 967 82
Commissions 334 268 932 786
Bank owned life insurance 726 701 2,131 2,045
Other income 339 54 965 664
-------- --------- --------- --------
Total non-interest income 5,722 4,744 17,700 15,167
-------- --------- --------- --------
Non-interest expense:
Salaries and employee benefits 11,356 9,962 34,546 29,197
Net occupancy expense 3,256 3,034 9,834 8,968
Federal deposit insurance 104 104 311 309
Data processing expense 1,500 1,878 4,523 5,005
Advertising and promotion expense 568 1,332 2,274 2,580
Amortization of intangibles 774 1,069 2,489 3,108
Other operating expenses 3,435 2,793 11,642 9,121
-------- --------- --------- --------
Total non-interest expenses 20,993 20,172 65,619 58,288
-------- --------- --------- --------
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Income
Three and Nine Months ended September 30, 2002 and 2001 (Unaudited)
(Dollars in Thousands)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
Income before income tax expense (benefit)
and the cumulative effect of a change
in accounting principle $ 2,668 8,712 24,999 25,229
Income tax expense (benefit) (983) 2,850 5,803 7,977
---------- ----------- ----------- ----------
Income before the cumulative effect
of a change in accounting principle 3,651 5,862 19,196 17,252
Cumulative effect of a change in accounting principle,
net of tax of $0 - - (519) -
---------- ----------- ----------- ----------
Net income $ 3,651 5,862 18,677 17,252
========== =========== =========== ==========
See accompanying notes to unaudited consolidated financial statements.
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months ended September 30, 2002 and 2001 (Unaudited)
(Dollars in Thousands)
Nine-Months ended September 30,
-------------------------------
2002 2001
-------------- -------------
Cash flows from operating activities:
Net income $ 18,677 17,252
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of
intangibles 7,148 6,933
Provision for loan losses 12,250 1,600
Deferred tax benefit (3,385) (636)
Increase in cash surrender value of
bank owned life insurance (2,131) (2,045)
Net amortization of premiums and
discount on securities (291) (291)
Accretion of net deferred loan fees (811) (1,093)
Amortization of premiums on
purchased loans 632 1,154
Proceeds from sales of other real
estate owned, net 173 252
Net gain on investment securities
transactions -- (16)
Net gain on sale of loans (1,597) (1,263)
Proceeds from sale of loans 63,952 66,302
Net gain on securities
available for sale (967) (66)
Decrease in accrued
interest receivable 264 1,987
Increase in other assets (5,330) (1,205)
(Decrease) increase in mortgage
escrow deposits (4,631) 1,760
(Decrease) increase in other liabilities (1,559) 4,478
-------------- -------------
Net cash provided by
operating activities 82,394 95,103
-------------- -------------
Cash flows from investing activities:
Proceeds from maturities, calls and
paydowns of investment securities 114,018 54,142
Purchases of investment securities (121,417) (36,158)
Proceeds from sales of securities
available for sale 1,041 248
Proceeds from maturities and paydowns
of securities available for sale 92,027 95,795
Purchases of securities available for sale (362,521) (220,200)
Net increase in loans (52,141) (80,738)
Purchases of premises and equipment, net (3,880) (2,171)
-------------- -------------
Net cash used in
investing activities (332,873) (189,082)
-------------- -------------
Cash flows from financing activities:
Net increase in deposits $ 250,103 143,116
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months ended September 30, 2002 and 2001 (Unaudited)
(Dollars in Thousands)
Nine-Months ended September 30,
-------------------------------
2002 2001
------------ ------------
Proceeds from FHLB Advances 52,300 22,800
Payments on FHLB Advances (34,014) (29,628)
Net increase (decrease) in Retail
Repurchase Agreements 2,613 (1,829)
Net cash provided by
financing activities 271,002 134,459
------------ ------------
Net increase in
cash and cash equivalents 20,523 40,480
Cash and cash equivalents at beginning of period 107,403 67,302
------------ ------------
Cash and cash equivalents at end of period $ 127,926 107,782
============ ============
Cash paid during the period for:
Interest on deposits and borrowings $ 47,874 66,586
============ ============
Income taxes $ 11,400 9,417
============ ============
Noncash investing activities - transfer of loans
receivable to other real estate owned $ 296 60
============ ============
See accompanying notes to unaudited consolidated financial statements.
THE PROVIDENT BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of The Provident Bank (the "Bank") and its wholly-owned subsidiaries,
Provident Mortgage Corporation and Provident Investment Services, Inc., and its
majority owned subsidiary, PSB Funding, Inc.
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 and nine months ended
September 30, 2002 are not necessarily indicative of the results of operations
that may be expected for all of 2002.
Certain information and note disclosures normally included in financial
statements and prepared in accordance with generally accepted accounting
principles have been condensed or omitted, pursuant to the rules and regulations
of the Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the December 31, 2001 audited consolidated financial statements and notes
thereto included in the Prospectus of Provident Financial Services, Inc. (the
"Holding Company") dated November 12, 2002, which is part of the Holding
Company's registration statement on Form S-1, as amended (Registration No.
333-98241)
Note 2. Comprehensive Income
For the three months periods ended September 30, 2002 and 2001, total
comprehensive income, representing net income plus or minus other items recorded
directly in equity, such as the change in unrealized gains or losses on
securities available for sale amounted to $9,291,000 and $11,858,000,
respectively. For the nine months ended September 30, 2002 and 2001, total
comprehensive income amounted to $27,729,000 and $24,379,000.
Note 3. Loans and Allowance for Loan Loss
Loans receivable at September 30, 2002 and December 31, 2001 are summarized as
follows (in thousands):
September 30, December 31,
2002 2001
------------- -------------
Mortgage loans:
Residential $ 697,206 795,442
Commercial 430,692 412,280
Multifamily 88,947 95,456
Commercial construction 102,555 80,717
------------ ------------
Total mortgage loans 1,319,400 1,383,895
------------ ------------
Mortgage warehouse loans 220,623 167,905
Commercial loans 165,228 141,491
Consumer loans 286,945 322,219
------------ ------------
Total loans 672,796 631,615
------------ ------------
Premium on purchased loans 2,318 2,566
Less net deferred fees 1,114 1,531
------------ ------------
$ 1,993,400 2,016,545
============ ============
The activity in the allowance for loan losses for the three and nine months
ended September 30, 2002 and 2001 (in thousands):
Three months ended Nine months ended
September 30 September 30
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Unaudied)
Balance at beginning of period $ 21,958 21,045 21,909 20,198
Provision charged to operations 11,050 400 12,250 1,600
Recoveries of loans previously charged
off 282 262 905 680
Loans charged off 11,945 70 13,719 841
---------- ---------- ---------- ----------
Balance at end of period
$ 21,345 21,637 21,345 21,637
========== ========== ========== ==========
Non-performing loans totaled $12.8 million at September 30, 2002 compared to
$8.1 million at December 31, 2001. This increase in non-performing loans was
attributable primarily to an increase of $8.7 million in mortgage warehouse
lines that were classified as non-performing in September 2002. During the
third quarter of 2002, a mortgage warehouse line of $20.6 million to a borrower
that had ceased doing business under allegations of fraud was reclassified into
the following categories: $7.3 million as substandard, $1.5 million as doubtful
and $11.8 million as a loss, which correspond to The Provident Bank's three
lowest ratings when it assigns a risk rating to a loan.
Note 4. Deposits
Deposits at September 30, 2002 and December 31, 2001 are summarized as follows
(in thousands):
September 30, December 31,
2002 2001
-------------- --------------
Savings deposits $ 857,575 $ 742,547
Money market accounts 94,565 79,482
Interest Bearing DDA 284,523 241,239
Non-interest bearing
deposits 272,967 225,918
Certificate of deposits 1,082,196 1,052,537
-------------- --------------
$ 2,591,826 $ 2,341,723
============== ==============
Note 5. Income Taxes
For the three and nine months ended September 30, 2002, the provision for income
taxes was impacted by lower taxable income as a result of the significant charge
off of an uncollectable loan in addition to an adjustment to deferred tax assets
for state taxes to reflect the current New Jersey corporate business tax rate of
9% from the previous rate of 3%.
Note 6. Plan of Conversion
On April 26, 2002, the Board of Managers of the Bank approved a Plan of
Conversion ("the Plan"), which provides for the conversion of the Bank from a
New Jersey-chartered mutual savings bank to a New Jersey- Chartered stock
savings bank, pursuant to the rules and regulations of the New Jersey Department
of Banking and Insurance and the Federal Deposit Insurance Corporation. As part
of the conversion, the Plan provided for the formation of the Holding Company,
which will own 100% of the common stock of the Bank following the conversion.
The Bank has received approval of the Plan from the New Jersey Commissioner of
Banking and Insurance. The Federal Deposit Insurance Corporation has notified
the Bank of its intention to issue a letter of non-objection to the Plan and the
Federal Reserve Board has approved the establishment of the Holding Company. The
Plan is subject to the approval of its depositors. A Special Meeting of
Depositors has been scheduled for January 7, 2003 to vote on the Plan.
Upon the consummation of the conversion, the legal existence of the Bank shall
not terminate, but the Bank in stock form shall be a continuation of the Bank in
mutual form. The stock Bank shall have, hold and enjoy the same in its own right
as fully and to the same extent as the same was possessed, held and enjoyed by
the mutual Bank. At the effective time of the conversion the stock Bank shall
continue to have and succeed to all the rights, obligations and relations of the
mutual Bank.
In connection with the Bank's commitment to its community, the Plan provides for
the establishment of a charitable foundation as part of the conversion. The
Holding Company intends to donate to the foundation cash and a number of
authorized but unissued shares of common stock in an aggregate amount up to 6%
of the value of the shares of common stock sold in the conversion, up to a
maximum of $24 million. The Holding Company will recognize an expense
equal to the cash and fair value of the stock in the quarter in which the
contribution occurs, which is expected to be the first quarter of 2003. This
expense will reduce earnings and could have a material impact on the Holding
Company's earnings for the first quarter of 2003 and for all of 2003.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the offering. If the conversion transaction is not completed, all costs
will be charged to expense. As of September 30, 2002, approximately $756,222 of
conversion costs had been deferred.
Note 7. Impact of Recent Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 147, "Acquisitions of
Certain Financial Institutions - an amendment to FASB Statements No. 72 and 144
and FASB Interpretation No. 9."
This statement removes acquisitions of financial institutions from the scope of
both Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." The
provisions of SFAS No. 147 that relate to the application of the purchase method
of accounting apply to all acquisitions of financial institutions, except
transactions between two or more mutual enterprises. SFAS No. 147 clarifies that
a branch acquisition that meets the definition of a business should be accounted
for as a business combination, otherwise the transaction should be accounted for
as an acquisition of net assets that does not result in the recognition of
goodwill. The provisions of SFAS No. 147 are effective October 1, 2002. The Bank
has previously purchased deposits of other financial institutions and recorded a
core deposit intangible. This Statement will have no effect on the accounting or
amortization of the recorded intangible asset.
On July 20, 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangilble Assets." Statement No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized but instead tested
for impairment at least annually in accordance with the provisions of Statement
No. 142. Statement No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Bank adopted Statement No. 142 effective January 1, 2002. As of December 31,
2001, the Bank had goodwill in the amount of $20.0 million as a result of the
acquisition of financial institutions for which the amortization ceased upon the
adoption of Statement No. 142 and $519,000 resulting from the acquisition of a
mortgage banking company in 2001. At June 30, 2002, the Bank determined that the
carrying amount of $519,000 of goodwill related to the acquisition of the
mortgage banking company was impaired, and recognized the impairment charge as a
cumulative effect of a change in accounting principle in accordance with
Statement No. 142. In addition, at December 31, 2001, the Bank had $3.3 million
in intangible assets with definite useful lives that continued to be amortized
upon the adoption of SFAS No. 142.
If Statement No. 142 had been adopted on January 1, 2001, net income would have
increased as a result of ceasing the amortization of goodwill by $878,000 for
the nine months ended September 30, 2001, and by $293,000 for the three months
ended September 30, 2001.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental
provisions of the Statement. The Statement is effective for fiscal years
beginning after December 15, 2001. The initial adoption of this standard did not
have a significant impact on our financial statements.
Management's Discussion and Analysis
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
Total assets increased by $292.5 million, or 10.2% to $3.16 billion at
September 30, 2002 compared to $2.87 billion at December 31, 2001. This increase
was primarily due to an increase in the investment portfolio.
Net loans decreased $22.6 million or 1.13% to $1.97 billion at September
30, 2002 from $1.99 billion at December 31, 2001. Residential real estate loans
decreased $98.2 million or 12.4% to $697.2 million at September 30, 2002 from
$795.4 million at December 31, 2001. This decrease was primarily attributable to
declines in long-term interest rates which resulted in high levels of refinance
and repayment activity. Residential real estate loan repayments totaled $210.2
million for the nine-month period ended September 30, 2002 compared to $168.7
million for the six months ended June 30, 2002 and $245.7 million for the year
ended December 31, 2001. Residential mortgage loan originations for the nine
months ended September 30, 2002 were $202.7 million compared to $215.9 million
for the year ended December 31, 2001. Sales of long term fixed rate mortgages
totaled $64.0 million for the nine-month period ended September 30, 2002
compared to $43.3 million for the six months ended June 30, 2002 and $80.7
million for the year ended December 31, 2001. Commercial real estate loans
increased $18.4 million or 4.47% at September 30, 2002 to $430.7 million
compared to $412.3 million at December 31, 2001. Construction loans increased
$21.8 million or 27.1% to $102.6 million at September 30, 2002 compared to $80.7
million at December 31, 2001. Commercial loans increased $23.7 million or 16.8%
to $165.2 million at September 30, 2002 compared to $141.5 million at December
31, 2001. Consumer loans decreased $35.3 million or 11.0% to $286.9 million at
September 30, 2002 from $322.2 million at December 31, 2001.
Non-performing loans totaled $12.8 million at September 30, 2002 compared
to $8.1 million at December 31, 2001. This increase in non-performing loans was
attributable primarily to an increase of $8.7 million in mortgage warehouse
lines that were classified as non-performing in September 2002. In September
2002, management learned of an investigation by the Federal Bureau of
Investigation into alleged fraudulent activity involving one of our mortgage
warehouse borrowers. The borrower's business operations have ceased and, upon
our application, a permanent receiver has been appointed by the courts. Based on
management's assessment of the known facts, at September 30, 2002 the
outstanding mortgage warehouse line of $20.6 million was reclassified into the
following categories: $7.3 million as substandard, $1.5 million as doubtful and
$11.8 million as a loss, which correspond to The Provident Bank's three lowest
ratings when it assigns a risk rating to a loan. Non-performing loans as a
percentage of total loans increased to 0.64% at September 30, 2002 from 0.40% at
December 31, 2001.
The calculation of the allowance for loan losses is a critical accounting
policy of The Provident Bank. Provisions for loan losses will continue to be
based upon our assessment of the overall loan portfolio and the underlying
collateral, trends in non-performing loans, current economic conditions and
other relevant factors in order to maintain the allowance for loan losses at
adequate levels to provide for estimated losses. Although management uses the
best
information available, the level of the allowance for loan losses remains an
estimate which is subject to significant judgment and short-term change.
The investment portfolio increased $293.0 million or 48.2% to $900.6
million at September 30, 2002 compared to $607.7 million at December 31, 2001.
The largest portion of this increase was in the available for sale portfolio
which increased $285.6 million or 57.7% to $780.3 million at September 30, 2002
from $494.7 million at December 31, 2001. Available for sale U.S. Agency
collateralized mortgage obligations increased $212.9 million or 66.3% during the
period. Available for sale corporate and other securities increased $57.5
million or 54.4% during the period. The increase in investment securities was
attributable to increases in loan and mortgage backed securities principal
prepayments and deposit inflows.
Total deposits increased $250.1 million or 10.7% to $2.59 billion at
September 30, 2002 from $2.34 billion at December 31, 2001. Core deposits
increased $220.4 million or 17.1% during the period. Savings accounts increased
$115.0 million or 15.5% during the period and demand deposit accounts increased
$105.4 million or 19.3% during the period. Continued volatility in the financial
markets and competitive pricing has contributed to the increase in deposits.
Federal Home Loan Bank borrowings increased $18.3 million or 12.6% to
$163.0 million at September 30, 2002 from $144.7 million at December 31, 2001.
Retail repurchase agreements increased $2.6 million or 5.1% during the period.
Total equity increased $27.7 million or 9.5% to $319.9 million at September
30, 2002 from $292.1 million at December 31, 2001. Retained earnings increased
$18.7 million or 7.5% during the nine month period. After tax unrealized gains
on investment securities increased $9.1 million or 197.0% during the nine month
period. Yields in the two- and five-year maturity sector of the Treasury yield
curve have fallen approximately 134 and 174 basis points, respectively, since
year end 2001, resulting in an increase in the value of the investment
portfolio.
Comparison of Operating Results for the Three Months Ended September 30, 2002
and September 30, 2001
General. Net income for the three months ended September 30, 2002 was $3.7
million, a decrease of $2.2 million or 37.7% compared to net income of $5.9
million for the three months ended September 30, 2001. This decrease in net
income was attributable to an $11.1 million charge to operations for the
provision for loan losses resulting from a $20.6 million mortgage warehouse loan
of which $11.8 million was classified as loss. Return on average assets was
0.47% for the three months ended September 30, 2002 compared to 0.85% for the
three months ended September 30, 2001. Return on average equity was 4.65% for
the three months ended September 30, 2002 compared to 8.33% for the three months
ended September 30, 2001.
Net Interest Income. Net interest income for the three month period was
$29.0 million, an increase of $4.4 million or 18.1% over net interest income of
$24.6 million for the three month period ended September 30, 2001. The net
interest rate spread, the difference between the yield on average interest
earning assets and the cost of average interest bearing liabilities, for the
three month period ended September 30, 2002 and September 30, 2001 was 3.60% and
3.38% respectively. The net interest margin for the three month period ended
September 30, 2002 was 3.98% compared to 3.88% for the three month period ended
September 30, 2001.
Interest income declined $508,000 or 1.1% for the three month period ended
September 30, 2002 to $45.0 million compared to $45.5 million for the three
month period ended September 30, 2001. This decrease was attributable to cash
flows from deposits and principal repayments on loans and investments that are
being reinvested at lower interest rates. The average yield on interest earning
assets decreased to 6.17% for the three month period ending September 30, 2002
from 7.20% for the comparative period in 2001.
Interest expense decreased $5.0 million or 23.6% to $16.0 million for the
three-month period ended September 30, 2002 from $21.0 million for the
comparable period. This decrease was attributable to the decline in short-term
interest rates. The cost of our interest bearing liabilities decreased to 2.57%
for the three months ended September 30, 2002 from 3.82% for the three months
ended September 30, 2001.
Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level management considers necessary to absorb probable incurred credit losses
in the loan portfolio. In determining the level of the allowance for loan
losses, management considers past and current loss experience, 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 provision
for loan losses in order to maintain the adequacy of the allowance. Due to the
reclassification of the $20.6 million mortgage warehouse line to a mortgage
warehouse borrower that has ceased doing business under allegations of fraud,
the loan loss provision for the quarter ended September 30, 2002 was $11.1
million, an increase of $10.7 million from the provision of $400,000 for the
quarter ended September 30, 2001. In accordance with our lending policies, on
September 30, 2002, a charge of $11.8 million was taken against the allowance
for loan losses. The allowance for loan losses was $21.3 million or 1.07% of
total loans at September 30, 2002 compared to $21.6 million or 1.09% at
September 30, 2001. Net charge offs for the three months ended September 30,
2002 were $11.7 million compared to a net recovery of $179,000 for the three
months ended September 30, 2001.
Non-Interest Income. Non-interest income consists primarily of fee income
on deposit accounts, loan servicing fee income and increases in the cash
surrender value of bank owned life insurance. Non-interest income increased
$978,000 or 20.6% to $5.7 million for the three months ended September 30, 2002
compared to $4.7 million for the three months ended September 30, 2001. This
increase was attributable to an increase of $434,000 in net gains on loan sales,
an increase of $254,000 in miscellaneous retail fees and an increase of $209,000
in net profits on the sale of other assets.
Non-Interest Expense. Non-interest expense increased $821,000 or 4.07% to
$21.0 million for the three month period ended September 30, 2002 compared to
$20.2 million for the three months ended September 30, 2001. This increase was
attributable to a $1.4 million increase in salaries and benefits, and a $441,000
increase in consulting expense which was offset by a $381,000 decrease in data
processing expense and a $766,000 decrease in advertising and promotion expense.
Income Tax Expense. Income tax expense decreased $3.8 million to a net
benefit of $983,000 for the three month period ended September 30, 2002 compared
to $2.9 million for the three month period ended September 30, 2001. The
decrease in income tax expense is attributable to lower taxable income as a
result of the charge off of a portion of the $20.6 million mortgage warehouse
line to a mortgage warehouse borrower that has ceased doing business under
allegations of fraud. Additionally, an adjustment to deferred tax assets for
state taxes to reflect the current New Jersey corporate business tax rate of 9%
from the previous rate of 3% resulted in a tax benefit of $1.0 million. It is
expected that the increase in the New Jersey Corporate Business tax rate will
increase the Bank's effective tax rate in future periods.
Comparison of Operating Results for the Nine Months Ended September 30, 2002 and
September 30, 2001
General. Net income for the nine months ended September 30, 2002 was $18.7
million, an increase of $1.4 million or 8.3% compared to net income of $17.3
million for the nine months ended September 30, 2001. The increase in net income
was attributable to increases in net interest income and other non-interest
income that was offset by a $12.3 million charge to operations for the provision
for loan losses and a goodwill impairment charge of $519,000 as a cumulative
effect of a change in accounting principle. Return on average assets for the
nine months ended September 30, 2002 was 0.83% compared to 0.85% for the nine
months ended September 30, 2001. Return on average equity was 8.29% for the nine
months ended September 30, 2002 compared to 8.43% for the nine months ended
September 30, 2001.
Net Interest Income. Net interest income for the nine months ended
September 30, 2002 was $85.2 million, an increase of $15.2 million or 21.8% over
net interest income of $70.0 million for the nine months period ended September
30, 2001. The net interest rate spread, the difference between the yield on
average interest earning assets and the cost of average interest bearing
liabilities, for the nine-month period ended September 30, 2002 and September
30, 2001 was 3.66% and 3.14% respectively. The net interest margin for the nine
month period ended September 30, 2002 was 4.03% compared to 3.68% for the nine
month period ended September 30, 2001.
Interest income decreased $3.0 million or 2.2% for the nine-month period
ended September 30, 2002 to $133.3 million compared to $136.3 million for the
nine month period ended September 30, 2001. This decrease was attributable to
the reinvestment of cash flows from deposits and loan repayments at lower
current interest rates. The yield on interest earning assets decreased to 6.31%
for the nine month period ending September 30, 2002 from 7.17% for the
comparative period in 2001.
Interest expense decreased $18.2 million or 27.4% to $48.1 million for the
nine months ended September 30, 2002 compared to $66.3 million for the nine
months ended September 30, 2001. This decline was attributable to the decline in
interest rates during the period. The cost of interest bearing liabilities
decreased to 2.65% for the nine months ended September 30, 2002 from 4.03% for
the nine months ended September 30, 2001.
Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level management considers necessary to absorb probable incurred credit losses
in the loan portfolio. In determining the level of the allowance for loan
losses, management considers past and current loss experience, 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 provision
for loan losses in order to maintain the adequacy of the allowance. Due to the
reclassification of the $20.6 million mortgage warehouse line to a mortgage
warehouse borrower that has ceased doing business under allegations of fraud,
the loan loss provision for the nine months ended September 30, 2002 was $12.3
million, an increase of $10.7 million from the provision of $1.6 million for the
nine month period ended September 30, 2001. In accordance with our lending
policies, on September 30, 2002, a charge of $11.8 million was taken against the
allowance for loan losses. The allowance for loan losses was $21.3 million or
1.07% of total loans at September 30, 2002 compared to $21.6 million or 1.09% of
total loans at September 30, 2001. Net charge offs for the nine months ended
September 30, 2002 were $12.8 million compared to net charge offs of $159,000
for the nine months ended September 30, 2001. The allowance for loan losses as a
percentage of non-performing loans was 166.94% at September 30, 2002 compared to
372.13% at September 30, 2001.
Non-Interest Income. Non-interest income consists mainly of fee income on
deposit accounts, loan servicing fee income and increases in the cash surrender
value of bank owned life insurance. Non-interest income increased $2.5 million
or 16.7% to $17.7 million for the nine months ended September 30, 2002 compared
to $15.2 million for the nine months ended September 30, 2001. This increase was
attributable to a $334,000 increase in net gains on loan sales, an increase of
$473,000 in net gains on the sale of other assets, an increase of $578,000 in
miscellaneous fees and an increase of $885,000 in realized gains on securities.
Non-Interest Expense. Non-interest expense increased $7.3 million or 12.6%
to $65.6 million for the nine months ended September 30, 2002 compared to $58.3
million for the nine months ended September 30, 2001. The increase in
non-interest expense was primarily attributable to increases of $3.2 million in
salaries and commissions, $2.1 million in benefit expenses and $1.4 million in
consulting expenses related to employee training and education programs and the
implementation of a customer relationship management system.
Income Tax Expense. Income tax expense decreased $2.2 million or 27.3% to
$5.8 million for the nine months ended September 30, 2002 resulting in an
effective tax rate of 23.2%, compared to $8.0 million for the nine months ended
September 30, 2001 resulting in an effective
tax rate of 31.6%. The decrease in income tax expense was attributable to lower
taxable income as a result of the charge off of uncollectable loans.
Additionally, an adjustment to deferred tax assets for state taxes to reflect
the current New Jersey corporate business tax rate of 9% from the previous rate
of 3% resulted in a tax benefit of $1.0 million. It is expected that the
increase in the New Jersey Corporate Business tax rate will increase the Bank's
effective tax rate in future periods.
Liquidity and Capital Resources
Our sources of funds are primarily from deposits, scheduled amortization of
loans, loan prepayments, scheduled maturities of investments and cash flows from
mortgage-backed securities. Scheduled loan amortizations are fairly predicable
sources of funds while loan and mortgage-backed securities prepayments and
deposit flows are influenced by interest rates, local economic conditions and
the competitive marketplace. An additional source of liquidity that is available
to us should the need arise, is our ability to borrow funds against a $100
million overnight line of credit from the Federal Home Loan Bank of New York.
As of September 30, 2002 and December 31, 2001, we did not have any
outstanding borrowings against our overnight line of credit. As of September 30,
2002, we had $216.7 million in borrowed funds, and increase of $20.9 million
from $195.8 million at December 31, 2001. As of September 30, 2002, Federal Home
Loan Bank advances totaled $163.0 million, an increase of $18.3 million from
$144.7 million at December 31, 2001. As of September 30, 2002, retail repurchase
agreements outstanding totaled $53.7 million, an increase of $2.6 million from
$51.1 million at December 30, 2001.
Our cash needs for the nine months ended September 30, 2002 were provided
primarily from principal payments on loans and mortgage backed securities and
increases in deposits. The cash was used primarily to fund loan originations and
the purchase of securities for the investment portfolio. For the nine months
ended September 30, 2001 cash needs were primarily satisfied by principal
payments on loans and increases in deposits. The cash was used primarily to fund
loan originations and the purchase of securities for the investment portfolio.
As of September 30, 2002, The Provident Bank exceeded all regulatory
capital requirements. Our leverage (Tier 1) capital ratio was 9.22% at September
30, 2002. FDIC regulations currently require banks to maintain a minimum
leverage ratio of Tier 1 capital to adjusted total assets of 4.0%. Our total
risk based capital ratio was 14.50% at September 30, 2002. Under current
regulations, the minimum required ratio of total capital to risk adjusted assets
is 8.0%. A bank is considered to be well-capitalized if it has a leverage if it
has a leverage (Tier 1) capital ratio of at least 5.0% and a risk based capital
ratio of at least 10.0%. As of September 30, 2002, The Provident Bank exceeded
the requirements to be considered well-capitalized.