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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2002
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ______________________
Commission File Number: 0-25233
PROVIDENT BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Federal 06-1537499
- --------------------------------- ------------------------------------
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
400 Rella Blvd., Montebello, New York 10901
- ------------------------------------- ---------
(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
--------------
(Registrant's Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
-------
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of Class)
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
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.
As of December 18, 2002, there were issued and outstanding 7,995,262 shares
of the Registrant's common stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the closing
price of the common stock as of December 18, 2002, was $111,923,523.
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be
held in February 2003.
PROVIDENT BANCORP, INC.
FORM 10-K TABLE OF CONTENTS
September 30, 2002
PART I..................................................................................................................3
ITEM 1. BUSINESS.............................................................................................3
ITEM 2. PROPERTIES..........................................................................................35
ITEM 3. LEGAL PROCEEDINGS...................................................................................36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................36
PART II................................................................................................................36
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................................36
ITEM 6. SELECTED FINANCIAL DATA.............................................................................37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................................................51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................86
PART III...........................................................................................................86
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................................86
ITEM 11. EXECUTIVE COMPENSATION.............................................................................86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT & RELATED STOCKHOLDER MATTERS.......86
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................86
PART IV................................................................................................................87
ITEM 14. CONTROLS AND PROCEDURES............................................................................87
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................................88
SIGNATURES.............................................................................................................89
Certification of Chief Executive Officer...............................................................................90
Certification of Chief Financial Officer...............................................................................91
Exhibit 21.............................................................................................................92
Exhibit 23.1...........................................................................................................93
Exhibit 99.1...........................................................................................................94
PART I
ITEM 1. Business
- --------------------
Provident Bancorp, Inc.
Provident Bancorp, Inc. (the "Company") was organized at the direction
of the Board of Directors of Provident Bank (the "Bank") for the purpose of
acting as the stock holding company of the Bank. The Company's principal
business is overseeing and directing the business of the Bank. At September 30,
2002, the Company's assets consist primarily of its investment in all
outstanding capital stock of the Bank, and cash and securities totaling $ 7.1
million. At September 30, 2002, 3,581,512 shares, or 44.78%, of the Company's
outstanding common stock, par value $0.10 per share, were held by the public,
and 4,416,000 shares, or 55.22%, were held by Provident Bancorp, MHC, the
Company's parent mutual holding company (the "Mutual Holding Company").
Provident Bank
The Bank was organized in 1888 as a New York-chartered mutual savings
and loan association. It adopted a federal mutual charter in 1986 and
reorganized into the stock form of ownership in 1999 as part of its
reorganization into the mutual holding company structure. The Bank's deposits
are insured by the Savings Association Insurance Fund ("SAIF"), as administered
by the Federal Deposit Insurance Corporation ("FDIC"), up to the maximum amount
permitted by law. The Bank is engaged primarily in the business of offering
various FDIC-insured demand deposits and savings deposits to customers through
its 17 full-service banking offices, and using those deposits, together with
funds generated from operations and borrowings, to originate commercial real
estate and business loans, one- to four-family residential loans and consumer
loans. The Bank also invests in investment securities and mortgage-backed
securities. Additional products and services offered include internet banking
services for consumers, investment management and trust services for companies
and individuals, and mutual funds and annuities products for individuals.
Provident Municipal Bank
Provident Municipal Bank ("PMB") is a limited-purpose commercial bank
chartered in April 2002 as a wholly-owned subsidiary of Provident Bank. PMB is a
New York State-chartered institution, formed to accept deposits from
municipalities in the Company's market area. New York State law prohibits
government entities from depositing public funds with thrift institutions.
Provident Bancorp, MHC
The Mutual Holding Company was formed in January 1999 as part of the
Bank's mutual holding company reorganization. The Mutual Holding Company is
chartered under federal law and owns 55.22% of the outstanding common stock of
the Company as of September 30, 2002. By virtue of its ownership of a majority
of the outstanding shares, the Mutual Holding Company is able to elect all the
members of the Board of Directors of the Company and will generally be able to
affect significantly the outcome of all matters presented for consideration by
the shareholders of the Company.
During the fiscal year ended September 30, 2002, the Mutual
Holding Company contributed $557,000 to local charities. Although the Mutual
Holding Company intends to continue to contribute to local charities in the
future, it has no outstanding commitments to do so. The Mutual Holding Company
does not engage in any business activities other than owning the common stock of
the Company, investing in liquid assets and contributing to local charities.
3
Since its formation in January 1999, the Mutual Holding Company has
waived the receipt of approximately $2.6 million of cash dividends declared on
shares of the Company's common stock it owns. There can be no assurance that the
Mutual Holding Company will continue to waive the receipt of cash dividends in
any future period, and the Mutual Holding Company retains the right to accept
payment of future cash dividends on all of the Company's common stock it owns,
at its discretion.
Forward-Looking Statements
In addition to historical information, this annual report contains
forward-looking statements. For this purpose, any statements contained herein
(including documents incorporated herein by reference) that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believe", "anticipates", "plans", "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those contemplated by such forward-looking
statements. These important factors include, without limitation, the Company's
continued ability to originate quality loans, fluctuations in interest rates,
real estate conditions in the Company's lending areas, general and local
economic conditions, the Company's continued ability to attract and retain
deposits, the Company's ability to control costs, and the effect of new
accounting pronouncements and changing regulatory requirements. The Company
undertakes no obligation to publicly release the results of any revisions to
those forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Market Area
The Bank is an independent community bank offering a broad range of
services for businesses and individuals as an alternative to money center banks
in its market area. At September 30, 2002, the Bank's 17 full-service banking
offices consisted of 13 offices in Rockland County, New York and four offices in
contiguous Orange County, New York. Two of the Orange County offices are a
result of the Company's acquisition of The National Bank of Florida (New York),
which was completed in April 2002. The Bank's primary market for deposits is
currently concentrated around the areas where its full-service banking offices
are located. The Bank's primary lending area consists of Rockland and Orange
Counties as well as contiguous counties.
Rockland and Orange counties constitute a suburban market with a broad
employment base. They also serve as bedroom communities for nearby New York City
and other suburban areas including Westchester County and northern New Jersey.
Orange County is one of the two fastest growing counties in New York State. The
economic environment in Rockland, Orange and contiguous counties continues to be
favorable and has supported increased commercial and residential activity in
recent years.
The economy of the Bank's primary market areas is based on a mixture of
service, manufacturing and wholesale/retail trade. Other employment is provided
by a variety of industries and state and local governments. The diversity of the
employment base is evidenced by its many major employers. Additionally, Rockland
and Orange Counties have numerous small employers.
4
Lending Activities
General. The Bank originates commercial real estate loans, commercial
business loans and construction loans (collectively referred to as the
"commercial loan portfolio"). The Bank is also one of the largest originators in
its market area of fixed rate residential mortgage loans and adjustable rate
residential mortgage loans (ARMs) collateralized by one- to four-family
residential real estate. In addition, the Bank originates consumer loans such as
home equity lines of credit and homeowner loans. The Bank retains most of the
loans it originates, although from to time to time it may sell longer-term one-
to four- family residential loans and participations in some commercial loans.
Commercial Real Estate Lending. The Bank originates real estate loans
secured predominantly by first liens on commercial real estate and apartment
buildings. The commercial real estate properties are predominantly
non-residential properties such as office buildings, shopping centers, retail
strip centers, industrial and warehouse properties and, to a lesser extent, more
specialized properties such as churches, mobile home parks, restaurants and
motel/hotels. The Bank may, from time to time, purchase commercial real estate
loan participations. Loans secured by commercial real estate totaled $163.3
million, or 24.3% of the Bank's total loan portfolio at September 30, 2002, and
consisted of 336 loans outstanding with an average loan balance of approximately
$486,000, although there are a large number of loans with balances substantially
greater than this average. Substantially all of the Bank's commercial real
estate loans are secured by properties located in its primary market area.
Most commercial real estate loans are written as five-year adjustable
rate or ten-year fixed rate mortgages and typically have balloon maturities of
ten years. Margins generally range from 175 basis points to 300 basis points
above the applicable Federal Home Loan Bank advance rate. Amortization is
typically based on 15- to 20-year payout schedules.
In the underwriting of commercial real estate loans, the Bank generally
lends up to 75% of the property's appraised value on apartment buildings and
commercial properties. Decisions to lend are based on the economic viability of
the property and the creditworthiness of the borrower. In evaluating a proposed
commercial real estate loan, the Bank emphasizes primarily the ratio of the
property's projected net cash flow to the loan's debt service requirement
(generally requiring a ratio of at least 110%), computed after deduction for a
vacancy factor and property expenses deemed appropriate by the Bank. In
addition, a personal guarantee of the loan is generally required from the
principal(s) of the borrower. The Bank requires title insurance insuring the
priority of its lien, fire and extended coverage casualty insurance, and flood
insurance, if appropriate, in order to protect the Bank's security interest in
the underlying property.
Commercial real estate loans generally carry higher interest rates and
have shorter terms than those on one- to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
general economy.
5
Commercial Business Loans. In an effort to expand its customer account
relationships and develop a broader mix of assets, the Bank makes various types
of secured and unsecured commercial loans to customers in its market area for
the purpose of financing equipment acquisition, expansion, working capital and
other general business purposes. The terms of these loans generally range from
less than one year to seven years. The loans are either negotiated on a
fixed-rate basis or carry adjustable interest rates indexed to a lending rate
which is determined internally, or a short-term market rate index. The Bank may,
from time to time, purchase commercial business loan participations. At
September 30, 2002, the Bank had 616 commercial business loans outstanding with
an aggregate balance of $41.3 million, or 6.2% of the total loan portfolio. As
of September 30, 2002, the average commercial business loan balance was
approximately $67,000, although there are a large number of loans with balances
substantially greater than this average.
Commercial credit decisions are based upon a credit assessment of the
loan applicant. A determination is made as to the applicant's ability to repay
in accordance with the proposed terms as well as an overall assessment of the
risks involved. An evaluation is made of the applicant to determine character
and capacity to manage. Personal guarantees of the principals are generally
required. In addition to an evaluation of the loan applicant's financial
statements, a determination is made of the probable adequacy of the primary and
secondary sources of repayment to be relied upon in the transaction. Credit
agency reports of the applicant's credit history supplement the analysis of the
applicant's creditworthiness. Checking with other banks and trade investigations
may also be conducted. Collateral supporting a secured transaction is also
analyzed to determine its marketability. For small business loans and lines of
credit, generally those not exceeding $250,000, the Bank uses a credit scoring
system that enables the Bank to process the loan requests quickly and
efficiently. Commercial business loans generally bear higher interest rates than
residential loans, but they also involve a higher risk of default since their
repayment is generally dependent on the successful operation of the borrower's
business and the sufficiency of collateral, if any.
One- to Four-Family Real Estate Lending. The Bank offers conforming and
non-conforming, fixed-rate and adjustable-rate residential mortgage loans with
maturities of up to 30 years and maximum loan amounts generally of up to
$650,000. This portfolio totaled $366.1 million, or 54.6% of the Bank's total
loan portfolio at September 30, 2002.
The Bank currently offers both fixed- and adjustable-rate conventional
mortgage loans with terms of 10 to 30 years that are fully amortizing with
monthly or bi-weekly loan payments. One- to four-family residential mortgage
loans are generally underwritten according to Fannie Mae and Freddie Mac
guidelines, and loans that conform to such guidelines are referred to as
"conforming loans." The Bank generally originates both fixed-rate and ARM loans
in amounts up to the maximum conforming loan limits as established by Fannie Mae
and Freddie Mac secondary mortgage market standards, which are currently
$307,700 for single-family homes. Private mortgage insurance is generally
required initially for loans with loan-to-value ratios in excess of 80%. Loans
in excess of conforming loan limits, in amounts of up to $500,000, are also
generally underwritten to both Fannie Mae and Freddie Mac secondary mortgage
market standards. These loans are generally eligible for sale to various conduit
firms that specialize in the purchase of such non-conforming loans, although all
such loans originated in fiscal 2002, totaling $8.5 million, were retained in
the Bank's loan portfolio. The Bank also originates a limited number of loans in
excess of $500,000. In the year ended September 30, 2002, the Bank originated
$5.2 million in loans with principal amounts of $500,000 or above, with an
average loan size of $575,000, all of which were retained in the loan portfolio.
In the Bank's market area, due to its proximity to New York City, such larger
residential loans are not uncommon. The Bank's bi-weekly one- to four-family
residential mortgage loans result in shorter repayment schedules than
conventional monthly mortgage loans, and are repaid through an automatic
deduction from the borrower's savings or checking account, which enables the
Bank to avoid the cost of processing payments. As of September 30, 2002,
bi-weekly loans totaled $119.8 million, or 32.7% of the Bank's residential loan
portfolio.
The Bank actively monitors its interest rate risk position to determine the
desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and the Bank's capital and liquidity position, the Bank may
retain all of its newly originated longer term fixed-rate, fixed-term
residential mortgage loans or from time to time may decide to sell all or a
portion of such loans in the secondary mortgage market to government sponsored
enterprises such as Fannie Mae and Freddie Mac. The Bank retains the servicing
rights on a large majority of loans sold to generate fee income and reinforce
its commitment to customer service. For the year ended September 30, 2002, the
Bank sold $11.9 million of mortgage loans. As of September 30, 2002, loans
serviced for others totaled $73.6 million.
6
The Bank currently offers several ARM loan products secured by residential
properties with rates that adjust every six months to one year, after an initial
fixed-rate period ranging from six months to five years. After the initial term,
the interest rate on these loans is reset based upon a contractual spread or
margin above the average yield on U.S. Treasury securities, adjusted to a
constant maturity of six months to one year (the "U.S. Treasury Constant
Maturity Index"), as published weekly by the Federal Reserve Board and subject
to certain limitations on interest rate changes. ARM loans generally pose
different credit risks than fixed-rate loans primarily because the underlying
debt service payments of the borrowers rise as interest rates rise, thereby
increasing the potential for default. At September 30, 2002, the Bank's ARM
portfolio included $7.5 million in loans that re-price every six months, $27.4
million in loans that re-price once a year and $31.3 million in loans that
reprice periodically after an initial fixed-rate period ranging from three to
five years.
The Bank requires title insurance on all of its one- to four-family
mortgage loans, and also requires that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the lesser of the loan balance or the replacement cost of the
improvements. Loans with initial loan-to-value ratios in excess of 80% must have
private mortgage insurance, although occasional exceptions may be made. Nearly
all residential loans must have a mortgage escrow account from which
disbursements are made for real estate taxes and for hazard and flood insurance.
Construction Loans. The Bank originates land acquisition, development
and construction loans to builders in its market area. These loans totaled $17.0
million, or 2.5% of the Bank's total loan portfolio at September 30, 2002.
Acquisition loans are made to help finance the purchase of land
intended for further development, including single-family houses, multi-family
housing, and commercial income property. In some cases, the Bank may make an
acquisition loan before the borrower has received approval to develop the land
as planned. Loans for the acquisition of land are generally limited to the
Bank's most creditworthy customers. In general, the maximum loan-to-value ratio
for a land acquisition loan is 60% of the appraised value of the property. The
Bank also makes development loans to builders in its market area to finance
improvements to real estate, consisting mostly of single-family subdivisions,
typically to finance the cost of utilities, roads, sewers and other development
costs. Builders generally rely on the sale of single-family homes to repay
development loans, although in some cases the improved building lots may be sold
to another builder. The maximum amount loaned is generally limited to the cost
of the improvements. Advances are made in accordance with a schedule reflecting
the cost of the improvements.
The Bank also grants construction loans to area builders, often in
conjunction with development loans. These loans finance the cost of completing
homes on the improved property. The loans are generally limited to the lesser of
75% of the appraised value of the property or the actual cost of improvements.
Advances on construction loans are made in accordance with a schedule reflecting
the cost of construction. Repayment of construction loans on residential
subdivisions is normally expected from the sale of units to individual
purchasers. In the case of income-producing property, repayment is usually
expected from permanent financing upon completion of construction. The Bank
commits to provide the permanent mortgage financing on most of its construction
loans on income-producing property.
Land acquisition, development and construction lending exposes the Bank
to greater credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event the Bank makes an acquisition loan
on property that is not yet approved for the planned development, there is the
risk that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property.
Development and construction loans also expose the Bank to the risk that
improvements will not be completed on time in accordance with specifications and
projected costs. In addition, the ultimate sale or rental of the property may
not occur as anticipated.
7
Consumer Loans. The Bank originates a variety of consumer and other
loans, including homeowner loans, home equity lines of credit, new and used
automobile loans, and personal unsecured loans, including fixed-rate installment
loans and variable lines-of-credit. As of September 30, 2002, consumer loans
totaled $83.4 million, or 12.4% of the total loan portfolio.
At September 30, 2002, the largest group of consumer loans consisted of
$76.6 million of loans secured by junior liens on residential properties. The
Bank offers fixed-rate, fixed-term second mortgage loans, referred to as
homeowner loans, and also offers adjustable-rate home equity lines of credit. As
of September 30, 2002, homeowner loans totaled $36.9 million or 5.5% of the
Bank's total loan portfolio. The disbursed portion of home equity lines of
credit totaled $39.7 million, or 5.9% of the Bank's total loan portfolio at
September 30, 2002, with $18.4 million remaining undisbursed.
Other consumer loans include personal loans and loans secured by new or
used automobiles. As of September 30, 2002, these loans totaled $6.8 million, or
1.0% of the Bank's total loan portfolio. The Bank originates automobile loans
directly to its customers and has no outstanding agreement with automobile
dealerships to generate indirect loans. The Bank requires all borrowers to
maintain collision insurance on automobiles securing consumer loans, with the
Bank listed as loss payee. Personal loans also include secured and unsecured
installment loans for other purposes. Unsecured installment loans generally have
shorter terms than secured consumer loans, and generally have higher interest
rates than rates charged on secured installment loans with comparable terms.
The Bank's procedures for underwriting consumer loans include an
assessment of an applicant's credit history and the ability to meet existing
obligations and payments on the proposed loan. Although an applicant's
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral security, if any, to the
proposed loan amount.
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as automobiles. In addition, the
repayment of consumer loans depends on the borrower's continued financial
stability, as their repayment is more likely than a single family mortgage loan
to be adversely affected by job loss, divorce, illness or personal bankruptcy.
8
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio by type of loan at the dates indicated.
September 30,
-----------------------------------------------------------------------------
2002 2001 2000 1999
------------------ ------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
One- to four-family residential mortgage loans $ 366,111 54.6% $ 358,198 58.2% $ 343,871 57.5% $ 344,731 60.2%
--------- ----- --------- ----- --------- ----- --------- -----
Commercial real estate loans ................. 163,329 24.3 129,295 21.0 124,988 20.9 110,382 19.3
Commercial business loans .................... 41,320 6.2 31,394 5.1 27,483 4.6 30,768 5.4
Construction loans ........................... 17,020 2.5 19,490 3.2 29,599 5.0 19,147 3.3
--------- ----- --------- ----- --------- ----- --------- -----
Total commercial loans ..................... 221,669 33.0 180,179 29.3 182,070 30.5 160,297 28.0
--------- ----- --------- ----- --------- ----- --------- -----
Home equity lines of credit .................. 39,727 5.9 31,125 5.1 28,021 4.7 25,380 4.4
Homeowner loans .............................. 36,880 5.5 39,501 6.4 37,027 6.2 34,852 6.1
Other consumer loans ......................... 6,812 1.0 6,266 1.0 6,486 1.1 7,463 1.3
--------- ----- --------- ----- --------- ----- --------- -----
Total consumer loans ....................... 83,419 12.4 76,892 12.5 71,534 12.0 67,695 11.8
--------- ----- --------- ----- --------- ----- --------- -----
Total loans .................................. 671,199 100.0% 615,269 100.0% 597,475 100.0% 572,723 100.0%
Allowance for loan losses .................... (10,383) (9,123) (7,653) (6,202)
--------- ---------- ---------
Total loans, net ............................. $ 660,816 $ 606,146 $ 589,822 $ 566,521
========= ========= =========
September 30,
--------------------
1998
--------------------
Amount Percent
------ -------
(Dollars in thousands)
One- to four-family residential mortgage loans $ 290,334 62.0%
--------- -----
Commercial real estate loans ................. 71,149 15.1
Commercial business loans .................... 24,372 5.2
Construction loans ........................... 20,049 4.3
--------- -----
Total commercial loans ..................... 115,570 24.6
--------- -----
Home equity lines of credit .................. 26,462 5.7
Homeowner loans .............................. 27,208 5.8
Other consumer loans ......................... 8,999 1.9
--------- -----
Total consumer loans ....................... 62,669 13.4
--------- -----
Total loans .................................. 468,573 100.0%
Allowance for loan losses .................... (4,906)
----------
Total loans, net ............................. $ 463,667
==========
9
Loan Portfolio Maturities and Yields. The following table summarizes
the scheduled repayments of the Bank's loan portfolio at September 30, 2002.
Demand loans, loans having no stated repayment schedule or maturity, and
overdraft loans are reported as being due in one year or less.
One- to Four-Family Commercial Real Estate Commercial Business Construction (2)
------------------- ---------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Due During the Years Ending September 30,
- -----------------------------------------
2003 (1)..................... $ 11,205 7.03% $ 25,236 6.93% $29,133 6.10% $15,222 5.39%
2004 to 2007................. 33,627 6.94 50,789 7.36 9,244 7.47 1,722 5.58
-------- ------ ------- -------
2008 and beyond ............. 321,279 6.90 87,304 7.80 2,943 6.32 76 8.56
.........................Total $366,111 6.91% $163,329 7.53% $41,320 6.49% $17,020 5.42%
======== ======== ======= =======
Consumer Total
--------------- ---------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
Due During the Years Ending September 30,
- -----------------------------------------
2003 (1)..................... $ 47,035 5.57% $127,831 6.06%
2004 to 2007................. 17,229 8.24 112,611 7.35
2008 and beyond ............. 19,155 7.32 430,757 7.11
-------- --------
.........................Total $ 83,419 6.52% $671,199 6.95%
(1) Includes demand loans, loans having no stated repayment schedule or
maturity, and overdraft loans. (2) Includes land acquisition loans.
The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at September 30, 2002 that are contractually due after
September 30, 2003.
Due After September 30, 2003
Fixed Adjustable Total
(In thousands)
One- to four-family residential mortgage loans............ $ 287,069 $ 67,837 $ 354,906
----------- ------------ -----------
Commercial real estate loans.............................. 52,004 86,089 138,093
Commercial business loans................................. 9,460 2,727 12,187
Construction loans........................................ 226 1,572 1,798
----------- ----------- -----------
Total commercial loans........................... 61,690 90,388 152,078
----------- ----------- -----------
Consumer loans............................................ 36,384 --- 36,384
----------- ----------- -----------
Total loans...................................... $ 385,143 $ 158,225 $ 543,368
=========== =========== ===========
10
Loan Originations, Purchases, Sales and Servicing. While the Bank
originates both fixed-rate and adjustable-rate loans, its ability to generate
each type of loan depends upon borrower demand, market interest rates, borrower
preference for fixed- versus adjustable-rate loans, and the interest rates
offered on each type of loan by other lenders in the Bank's market area. This
includes competing banks, savings banks, credit unions, mortgage banking
companies and life insurance companies that may also actively compete for local
commercial real estate loans. Loan originations are derived from a number of
sources, including branch office personnel, existing customers, borrowers,
builders, attorneys, real estate broker referrals and walk-in customers.
The Bank's loan origination and sales activity may be adversely
affected by a rising interest rate environment that typically results in
decreased loan demand, while declining interest rates may stimulate increased
loan demand. Accordingly, the volume of loan origination, the mix of fixed and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines,
and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold,
the sales are conducted using standard Fannie Mae/Freddie Mac purchase contracts
and master commitments as applicable. One- to four-family mortgage loans may be
sold both to Fannie Mae and Freddie Mac on a non-recourse basis whereby
foreclosure losses are generally the responsibility of the purchaser and not the
Bank.
The Bank is a qualified loan servicer for both Fannie Mae and Freddie
Mac. The Bank's policy has been to retain the servicing rights for all loans
sold, and to continue to collect payments on the loans, maintain tax escrows and
applicable fire and flood insurance coverage, and supervise foreclosure
proceedings if necessary. The Bank retains a portion of the interest paid by the
borrower on the loans as consideration for its servicing activities.
11
The following table sets forth the loan origination, sale and repayment
activities of the Bank for the last three fiscal years. The Bank has not
purchased any loans in recent years.
Year Ended September 30,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(In thousands)
Unpaid principal balances at beginning of year....................... $ 615,269 $ 597,475 $ 572,723
--------- --------- ---------
Loans acquired in the acquisition of The National Bank of Florida.... 23,542 --- ---
--------- --------- ---------
Originations by type of loan Adjustable-rate:
One- to four-family............................................. 6,658 12,711 16,792
Commercial real estate.......................................... 31,416 7,827 22,463
Commercial business.................................................. 20,724 16,962 17,785
Construction.................................................... 9,691 5,803 15,630
Consumer........................................................ 19,431 12,055 12,886
--------- --------- ---------
Total adjustable-rate......................................... 87,920 59,558 85,556
--------- --------- ---------
Fixed-rate:
One- to four-family............................................. 84,210 50,209 16,328
Commercial real estate.......................................... 16,964 5,396 3,014
Commercial business............................................. 6,544 5,401 12,305
Construction.................................................... 1,373 4,570 3,675
Consumer........................................................ 17,384 19,163 14,589
--------- --------- ---------
Total fixed-rate.............................................. 126,475 84,739 49,911
--------- --------- ---------
Total loans originated and acquired............................. 237,937 139,297 135,467
Principal repayments................................................. (169,652) (121,129) (109,580)
Sales................................................................ (11,912) - (808)
Net (charge-offs) recoveries......................................... (177) 30 (259)
Net change in deferred loan fees and costs........................... (134) (186) 86
Transfers to real estate owned....................................... (132) (218) (154)
--------- ---------- ----------
Unpaid principal balances at end of year............................. 671,199 615,269 597,475
Allowance for loan losses............................................ (10,383) (9,123) (7,653)
---------- ---------- ----------
Net loans at end of year............................................. $ 660,816 $ 606,146 $ 589,822
========= ========= =========
12
Loan Approval Authority and Underwriting. The Bank has four levels of
lending authority beginning with the Board of Directors. The Board grants
lending authority to the Director Loan Committee, the majority of the members of
which are Directors. The Director Loan Committee, in turn, may grant authority
to the Management Loan Committee and individual loan officers. In addition,
designated members of management may grant authority to individual loan officers
up to specified limits. The lending activities of the Bank are subject to
written policies established by the Board. These policies are reviewed
periodically.
The Director Loan Committee may approve loans in accordance with
applicable loan policies, up to the limits established in the Bank's policy
governing loans to one borrower. This policy places limits on the aggregate
dollar amount of credit that may be extended to any one borrower and related
entities. Loans exceeding the maximum loan to one borrower limit described below
require approval by the Board of Directors. The Management Loan Committee may
approve loans of up to an aggregate of $650,000 to any one borrower and related
borrowers. Two loan officers with sufficient loan authority acting together may
approve loans up to $350,000. The maximum individual authority to approve an
unsecured loan is $50,000.
The Bank has established a risk rating system for its commercial
business loans, commercial real estate loans, and construction loans to
builders. The risk rating system assesses a variety of factors to rank the risk
of default and risk of loss associated with the loan. These ratings are
performed by commercial credit personnel who do not have responsibility for loan
originations. The Bank determines its maximum loans to one borrower based upon
the rating of the loan. The large majority of loans fall into three categories.
The maximum for the best-rated borrowers is $8.5 million, for the next group of
borrowers is $6.5 million, and for the third group is $3.5 million. Sublimits
apply based on reliance on any single property, and for commercial business
loans.
In connection with its residential and commercial real estate loans, in
general, the Bank requires property appraisals to be performed by independent
appraisers who are approved by the Board. Appraisals are then reviewed by the
appropriate loan underwriting areas of the Bank. Under certain conditions,
appraisals may not be required for loans under $250,000. The Bank also requires
title insurance, hazard insurance and, if indicated, flood insurance on property
securing its mortgage loans. Title insurance is not required for consumer loans
under $100,000, such as home equity lines of credit and homeowner loans.
Loan Origination Fees and Costs. In addition to interest earned on
loans, the Bank also receives loan origination fees. Such fees vary with the
volume and type of loans and commitments made, and competitive conditions in the
mortgage markets, which in turn respond to the demand and availability of money.
The Bank defers loan origination fees and costs, and amortizes such amounts as
an adjustment to yield over the term of the loan by use of the level-yield
method. Deferred loan origination costs (net of deferred fees) were $1.0 million
at September 30, 2002.
To the extent that originated loans have been sold with servicing
retained since January 1, 1997, the Bank has capitalized a mortgage servicing
asset at the time of the sale in accordance with applicable accounting standards
(currently Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities"). The capitalized amount is amortized thereafter (over the
period of estimated net servicing income) as a reduction of servicing fee
income. The unamortized amount is fully charged to income when loans are
prepaid. Asset recognition of servicing rights on sales of originated loans was
not permitted under accounting standards in effect prior to January 1,1997, when
the Bank sold the majority of the loans it presently services for others.
Originated mortgage servicing rights with an amortized cost of $193,000 are
included in other assets at September 30, 2002. See also Notes 3 and 6 of the
Notes to Consolidated Financial Statements.
13
Loans to One Borrower. At September 30, 2002, the five largest
aggregate amounts loaned to individual borrowers by the Bank (including any
unused lines of credit) consisted of secured and unsecured financing of $8.4
million, $8.4 million, $7.5 million, $7.1 million and $7.0 million. See
"REGULATION - Federal Regulation of Savings Institutions - Loans to One
Borrower" for a discussion of applicable regulatory limitations.
Delinquent Loans, Other Real Estate Owned and Classified Assets
Collection Procedures. A computer-generated late notice is sent by the
17th day of the month requesting the payment due plus the late charge that was
assessed. After the late notices have been mailed, accounts are assigned to a
collector for follow-up to determine reasons for delinquency and to review
payment options. Additional system-generated collection letters are sent to
customers every ten days. Notwithstanding ongoing collection efforts, all
consumer loans are fully charged-off after 120 days.
Loans Past Due and Non-performing Assets. Loans are reviewed on a
regular basis, and are placed on non-accrual status when either principal or
interest is 90 days or more past due. In addition, loans are placed on
non-accrual status when, in the opinion of management, there is sufficient
reason to question the borrower's ability to continue to meet contractual
principal or interest payment obligations. Interest accrued and unpaid at the
time a loan is placed on non-accrual status is reversed from interest income.
Interest payments received on non-accrual loans are not recognized as income
unless warranted based on the borrower's financial condition and payment record.
At September 30, 2002, the Bank had non-accrual loans of $5.0 million. The ratio
of non-performing loans to total loans was 0.74% at September 30, 2002.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses. At September 30, 2002, the
Bank had REO of $41,000, total non-performing assets (non-accrual loans and REO)
of $5.0 million, and a ratio of non-performing assets to total assets of 0.49%.
14
The following table sets forth certain information with respect to the
Bank's loan portfolio delinquencies at the dates indicated.
Loans Delinquent For
--------------------------------------------
60-89 Days 90 Days and Over Total
------------------ ---------------------- -------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ -------
(Dollars in thousands)
At September 30, 2002
One- to four-family............... 6 $ 577 22 $ 2,291 28 $ 2,868
Commercial real estate............ --- --- 3 2,492 3 2,492
Commercial business............... --- --- --- --- --- ---
Construction...................... --- --- --- --- --- ---
Consumer.......................... 7 37 14 171 21 208
--- -------- ---- -------- ----- --------
Total............................ 13 $ 614 39 $ 4,954 52 $ 5,568
== ======== ==== ======== ==== ========
At September 30, 2001
One- to four-family............... 9 $ 935 21 $ 1,684 30 $ 2,619
Commercial real estate............ 2 213 3 418 5 631
Commercial business............... --- --- --- --- --- ---
Construction...................... --- --- --- --- --- ---
Consumer ......................... 9 277 8 175 17 452
--- -------- ---- -------- --- --------
Total............................ 20 $ 1,425 32 $ 2,277 52 $ 3,702
== ======== ==== ======== ==== ========
At September 30, 2000
One- to four-family............... 14 $ 1,180 26 $ 2,496 40 $ 3,676
Commercial real estate............ 2 270 5 1,149 7 1,419
Commercial business............... --- --- --- --- --- ---
Construction...................... --- --- 1 27 1 27
Consumer.......................... 10 187 23 359 33 546
--- -------- ---- -------- ---- --------
Total............................ 26 $ 1,637 55 $ 4,031 81 $ 5,668
=== ======== ==== ======== ==== ========
Non-Performing Assets. The table below sets forth the amounts and
categories of the Bank's non-performing assets at the dates indicated. At each
date presented, the Bank had no troubled debt restructurings (loans for which a
portion of interest or principal has been forgiven and loans modified at
interest rates materially less than current market rates).
September 30,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- --------- --------- --------- ---------
(Dollars in thousands)
Non-accrual loans:
One- to four-family.............................. $ 2,291 $ 1,684 $ 2,496 $ 2,839 $ 2,965
Commercial real estate........................... 2,492 418 1,149 1,133 871
Commercial business.............................. --- --- --- 208 368
Construction..................................... --- --- 27 27 1,256
Consumer......................................... 171 175 359 429 647
------- -------- -------- -------- --------
Total non-performing loans...................... 4,954 2,277 4,031 4,636 6,107
------- -------- -------- -------- --------
Real estate owned:
One- to four-family.............................. 41 109 154 403 92
Commercial real estate........................... --- --- --- --- 274
------- -------- -------- -------- --------
Total real estate owned......................... 41 109 154 403 366
------- -------- -------- -------- --------
Total non-performing assets........................ $ 4,995 $ 2,386 $ 4,185 $ 5,039 $ 6,473
======= ======== ======== ======== ========
Ratios:
Non-performing loans to total loans.............. 0.74% 0.38% 0.67% 0.82% 1.32%
Non-performing assets to total assets............ 0.49 0.27 0.50 0.62 0.94
For the year ended September 30, 2002, gross interest income that would
have been recorded had the non-accrual loans at the end of the period remained
on accrual status throughout the period amounted to $371,000. Interest income
actually recognized on such loans totaled $83,000.
15
Classification of Assets. The Bank's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
that are considered to be of lesser quality as substandard, doubtful, or loss
assets. An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the savings institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets is not
warranted. Assets that do not expose the Bank to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated as special mention by management. As
of September 30, 2002, the Bank had $4.6 million of assets designated as special
mention.
When the Bank classifies assets as either substandard or doubtful, it
allocates a portion of the related general loss allowances to such assets as
deemed prudent by management. General loss allowances represent amounts that
have been established to recognize the inherent risk associated with lending
activities generally. When the Bank classifies problem assets as loss, it is
required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge-off such amount. The Bank's
determination as to the classification of its assets and the amount of its loss
allowances are subject to review by its regulatory agencies, which can order the
establishment of additional loss allowances. Management regularly reviews the
Bank's asset portfolio to determine whether any assets require classification in
accordance with applicable regulations. On the basis of management's review of
the Bank's assets at September 30, 2002, classified assets consisted of
substandard assets of $4.3 million (loans of $4.2 million and REO of $41,000)
and doubtful assets of $18,000 (loans). There was one loan in the amount of
$31,000 that was classified as loss at September 30, 2002.
Allowance for Loan Losses. The Bank provides for loan losses based on
the allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes provisions for
loan losses in order to maintain the allowance for loan losses in accordance
with generally accepted accounting principles. The allowance for loan losses
consists of amounts specifically allocated to non-performing loans and potential
problem loans (if any) as well as allowances determined for each major loan
category. Loan categories such as single-family residential mortgages and
consumer loans are generally evaluated on an aggregate or "pool" basis by
applying loss factors to the current balances of the various loan categories.
The loss factors are determined by management based on an evaluation of
historical loss experience, delinquency trends, volume and type of lending
conducted, and the impact of current economic conditions in the Bank's market
area. While management uses the best information available to make evaluations,
future adjustments to the allowance may be necessary if conditions differ
substantially from the information used in making the evaluations. In addition,
as an integral part of their examination process, the Bank's regulatory agencies
periodically review the allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on their judgments of
information available to them at the time of their examination.
At September 30, 2002, the allowance for loan losses was $10.4 million,
which equaled 1.55% of total loans and 209.6% of non-performing loans. For the
years ended September 30, 2002, 2001 and 2000, the Bank recorded net loan
charge-offs (recoveries) of $177,000, ($30,000) and $259,000, respectively.
Provisions for loan losses were $900,000, $1.4 million and $1.7 million during
the respective fiscal years.
16
The following table sets forth activity in the Bank's allowance for
loan losses for the years indicated.
Years Ended September 30,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- --------- ---------
(Dollars in thousands)
Balance at beginning of year........................... $ 9,123 $ 7,653 $ 6,202 $ 4,906 $ 3,779
------- ------- ------- -------- --------
Charge-offs:
One- to four-family.................................. --- (26) (168) (9) (13)
Commercial real estate............................... (31) (18) (1) --- (87)
Commercial business.................................. (130) (115) (6) (567) (10)
Construction......................................... --- --- --- --- (355)
Consumer............................................. (163) --- (195) (346) (200)
-------- ------- -------- --------- ---------
Total charge-offs.................................. (324) (159) (370) (922) (665)
-------- -------- -------- --------- ---------
Recoveries:
One- to four-family.................................. --- --- 24 --- ---
Commercial real estate............................... --- 147 --- 101 ---
Commercial business.................................. 40 42 24 194 ---
Construction......................................... --- --- --- 286 2
Consumer............................................. 107 --- 63 47 53
------- ------- ------- -------- --------
Total recoveries................................... 147 189 111 628 55
------- ------- ------- -------- --------
Net (charge-offs) recoveries.......................... (177) 30 (259) (294) (610)
Allowance recorded in acquisition of The National Bank
of Florida........................................... 537 --- --- ---
Provision for loan losses.............................. 900 1,440 1,710 1,590 1,737
------- ------- ------- -------- --------
Balance at end of year................................. $10,383 $ 9,123 $ 7,653 $ 6,202 $ 4,906
======= ======= ======= ======== ========
Ratios:
Net charge-offs to average loans outstanding........... 0.03% ----% 0.04% 0.06% 0.14%
Allowance for loan losses to non-performing loans...... 209.6 400.7 189.9 133.8 80.3
Allowance for loan losses to total loans............... 1.55 1.48 1.28 1.08 1.05
17
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category, and the percent of loans in each category to total loans
at the dates indicated. The allowance for loan losses allocated to each category
is not necessarily indicative of future losses in any particular category and
does not restrict the use of the allowance to absorb losses in other categories.
September 30,
--------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------------------------
Percent Percent Percent
of Losses of Losses of Losses
Loan in Each Loan in Each Loan in Each
Balances Category Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in thousands)
One- to four-family .... $ 3,315 $366,111 54.6% $ 2,638 $358,198 58.2% $ 2,423 $343,871 57.5%
Commercial real estate.. 4,275 163,329 24.3 3,930 129,295 21.0 3,210 124,988 20.9
Commercial business .... 925 41,320 6.2 841 31,394 5.1 481 27,483 4.6
Construction ........... 871 17,020 2.5 871 19,490 3.2 733 29,599 5.0
Consumer ............... 997 83,419 12.4 843 76,892 12.5 806 71,534 12.0
-------- ---- -------- -------- ----- -------- -------- -----
Total ............ $ 10,383 $671,199 100.0% $ 9,123 $615,269 100.0% $ 7,653 $597,475 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
September 30,
------------------------------------------------------------------
1999 1998
------------------------------------------------------------------
Percent Percent
of Losses of Losses
Loan in Each Loan in Each
Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in thousands)
One- to four-family ..... $ 2,091 $344,731 60.2% $ 1,320 $290,334 62.0%
Commercial real estate... 2,416 110,382 19.3 1,976 71,149 15.1
Commercial business ..... 254 30,768 5.4 376 24,372 5.2
Construction ............ 614 19,147 3.3 301 20,049 4.3
Consumer ................ 827 67,695 11.8 933 62,669 13.4
-------- -------- ----- --------
Total ............ $ 6,202 $572,723 100.0% $ 4,906 $468,573 100.0%
======== ======== ===== ======== ======== =====
18
Securities Activities
The Company's securities investment policy is established by the Board
of Directors. This policy dictates that investment decisions be made based on
the safety of the investment, liquidity requirements, potential returns, cash
flow targets, and consistency with the Company's interest rate risk management
strategy. The Board's asset/liability committee oversees the Company's
investment program and evaluates on an ongoing basis the Company's investment
policy and objectives. The chief financial officer, or the chief financial
officer acting with the chief executive officer, is responsible for making
securities portfolio decisions in accordance with established policies. The
Company's chief financial officer and chief executive officer have the authority
to purchase and sell securities within specific guidelines established by the
investment policy. In addition, all transactions are reviewed by the Board's
asset/liability committee at least quarterly.
The Company's current investment policy generally permits securities
investments in debt securities issued by the U.S. Government and U.S. Agencies,
municipal bonds, and corporate debt obligations, as well as investments in
preferred and common stock of government agencies and government sponsored
enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank
("FHLB") (federal agency securities). Securities in these categories are
classified as "investment securities" for financial reporting purposes. The
policy also permits investments in mortgage-backed securities, including
pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and
Ginnie Mae as well as collateralized mortgage obligations ("CMOs") issued or
backed by securities issued by these government agencies. Also permitted are
investments in securities issued or backed by the Small Business Administration,
privately issued mortgage-backed securities and asset-backed securities
collateralized by auto loans, credit card receivables, and home equity and home
improvement loans. The Company's current investment strategy uses a risk
management approach of diversified investing in fixed-rate securities with
short- to intermediate-term maturities, as well as adjustable-rate securities,
which may have a longer term to maturity. The emphasis of this approach is to
increase overall investment securities yields while managing interest rate risk.
SFAS No. 115 requires that, at the time of purchase, the Company
designate a security as held to maturity, available for sale, or trading,
depending on the Company's ability and intent. Securities available for sale are
reported at fair value, while securities held to maturity are reported at
amortized cost. The Company does not have a trading portfolio.
As of September 30, 2002, the Company's overall securities portfolio
had a carrying value of $292.9 million. In accordance with SFAS No. 115,
securities with a fair value of $206.1 million, or 20.1 % of total assets, were
classified as available for sale, while securities with an amortized cost of
$86.8 million, or 8.4% of total assets, were classified as held to maturity. The
estimated fair value of the held to maturity securities portfolio at September
30, 2002 was $90.7 million, which was $3.9 million greater than amortized cost.
Government Securities. At September 30, 2002, the Company held
government securities available for sale with a fair value of $113.3 million,
consisting primarily of U.S. Treasury and agency obligations with short- to
medium-term maturities (one to five years). While these securities generally
provide lower yields than other investments such as mortgage-backed securities,
the Company's current investment strategy is to maintain investments in such
instruments to the extent appropriate for liquidity purposes, as collateral for
borrowings, and for prepayment protection.
Corporate and Municipal Bonds. At September 30, 2002, the Company held
$32.1 million in corporate debt securities, at fair value, all of which were
classified as available for sale. Although corporate bonds may offer a higher
yield than that of a U.S. Treasury or agency security of comparable duration,
corporate bonds also may have a higher risk of default due to adverse changes in
the creditworthiness of the issuer. In recognition of this potential risk, the
Company's policy limits investments in corporate bonds to securities with
maturities of ten years or less and rated "A" or better by at least one
nationally recognized rating agency, and to a total investment of no more than
$2.0 million per issuer and a total corporate bond portfolio limit of $40.0
million. The policy also limits investments in municipal bonds
19
to securities with maturities of 20 years or less and rated AA or better by at
least one nationally recognized rating agency, and favors issues that are
insured. In addition, the policy imposes an investment limitation of $2.0
million per municipal issuer and a total municipal bond portfolio limit of 5% of
assets. At September 30, 2002, the Company held $16.4 million (at amortized
cost) in bonds issued by states and political subdivisions, all of which were
classified as held to maturity.
Equity Securities. At September 30, 2002, the Company's equity
securities available for sale had a fair value of $2.1 million and consisted of
stock issued by Freddie Mac and Fannie Mae, and certain other equity
investments. The Company also held $5.3 million (at cost) of FHLB of New York
common stock, a portion of which must be held as a condition of membership in
the Federal Home Loan Bank System, with the remainder held as a condition to
borrow under the FHLB advance program.
Mortgage-Backed Securities. The Company purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower credit risk as a result of the guarantees
provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase
liquidity. The Company invests primarily in mortgage-backed securities issued or
sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae. The Company also invests
to a lesser extent in securities backed by agencies of the U.S. Government. At
September 30, 2002, the Company's mortgage-backed securities portfolio totaled
$129.0 million, consisting of $58.6 million available for sale at fair value and
$70.4 million held to maturity at amortized cost. The total mortgage-backed
securities portfolio includes CMOs of $25.8 million, consisting of $21.5 million
available for sale at fair value and $4.3 million held to maturity at amortized
cost. The remaining mortgage-backed securities of $103.2 million were
pass-through securities, consisting of $37.1 million available for sale at fair
value and $66.1 million held to maturity at amortized cost.
Mortgage-backed securities are created by pooling mortgages and
issuing a security collateralized by the pool of mortgages with an interest rate
that is less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of the Company's
mortgage-backed securities are collateralized by single-family mortgages. The
issuers of such securities (generally U.S. Government agencies and government
sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool
and resell the participation interests in the form of securities to investors,
such as the Company, and guarantee the payment of principal and interest to
these investors. Investments in mortgage-backed securities involve a risk that
actual prepayments will be greater than the estimated life of the security,
which may require adjustments to the amortization of any premium or accretion of
any discount relating to such instruments, thereby affecting the net yield on
such securities. The Company reviews prepayment estimates for its
mortgage-backed securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the securities at issue and
current interest rates, and to determine the yield and estimated maturity of the
mortgage-backed securities portfolio.
A portion of the Company's mortgage-backed securities portfolio is
invested in CMOs or collateralized mortgage obligations, including Real Estate
Mortgage Investment Conduits ("REMICs"), backed by Fannie Mae and Freddie Mac.
CMOs and REMICs are types of debt securities issued by a special-purpose entity
that aggregates pools of mortgages and mortgage-backed securities and creates
different classes of securities with varying maturities and amortization
schedules, as well as a residual interest, with each class possessing different
risk characteristics. The cash flows from the underlying collateral are
generally divided into "tranches" or classes that have descending priorities
with respect to the distribution of principal and interest cash flows, while
cash flows on pass-through mortgage-backed securities are distributed pro rata
to all security holders. The Company's practice is to limit fixed-rate CMO
investments primarily to the early-to-intermediate tranches, which have the
greatest cash flow stability. Floating rate CMOs are purchased with emphasis on
the relative trade-offs between lifetime rate caps, prepayment risk, and
interest rates.
20
Available for Sale Portfolio. As of September 30, 2002, securities with
a fair value of $206.1 million, or 20.1% of total assets, were classified as
available for sale. Investment securities, consisting of U.S. Government and
agency securities, municipal bonds, and corporate debt obligations as well as
investments in preferred and common stock, made up $147.5 million of this total,
or 14.4% of total assets, with mortgage-backed securities totaling $58.6
million, or 5.7 % of total assets.
The following table sets forth the composition of the Company's
available for sale portfolio at the dates indicated.
September 30,
---------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------- ------- ------- -------- -------- --------
(In thousands)
Investment Securities:
U.S. Government securities............................ $21,199 $21,658 $22,125 $ 22,975 $ 33,004 $ 32,851
Federal agency obligations............................ 87,878 91,625 26,744 28,182 37,934 37,546
Corporate debt securities ............................ 30,079 32,144 48,367 50,872 30,975 30,588
State and municipal securities........................ --- --- --- --- 11,697 10,981
Equity securities..................................... 1,113 2,071 1,290 2,372 3,201 4,383
------- ------- ------- -------- -------- --------
Total investment securities available for sale........ 140,269 147,498 98,526 104,401 116,811 116,349
------- ------- -------- -------- -------- --------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae......................................... 20,076 21,121 18,225 18,815 17,767 17,723
Freddie Mac ....................................... 10,591 11,023 6,361 6,842 2,344 2,383
Other.............................................. 4,430 5,000 4,481 4,529 6,582 6,494
CMOs and REMICs.................................... 21,352 21,504 28,811 29,341 19,553 19,208
------- ------- ------- ------- -------- --------
Total mortgage-backed securities available for sale... 56,449 58,648 57,878 59,527 46,246 45,808
------- ------- ------- -------- -------- --------
Total securities available for sale................... $196,718 $206,146 $156,404 $163,928 $163,057 $162,157
======= ======= ======= ======= ======== ========
At September 30, 2002, the Company's available for sale U. S. Treasury
securities portfolio, at fair value, totaled $21.7 million, or 2.1% of total
assets, and the federal agency securities portfolio, at fair value, totaled
$91.6 million, or 8.9% of total assets. Of the combined U.S. Government and
agency portfolio, based on amortized cost, $21.2 million had maturities of one
year or less and a weighted average yield of 5.62%, and $86.8 million had
maturities of between one and five years and a weighted average yield of 4.53%.
The agency securities portfolio includes both non-callable and callable
debentures. The agency debentures are callable on a quarterly basis following an
initial holding period of from twelve to twenty-four months.
Available for sale corporate debt securities, at fair value, totaled
$32.1 million at September 30, 2002. These securities all had maturities of less
than five years, with a weighted average yield of 6.47%. Equity securities
available for sale at September 30, 2002 had a fair value of $2.1 million.
At September 30, 2002, $37.1 million of the Company's available for
sale mortgage-backed securities, at fair value, consisted of pass-through
securities, which totaled 3.6% of total assets. At the same date, the fair value
of the Company's available for sale CMO portfolio totaled $21.5 million, or 2.1%
of total assets, and consisted of CMOs issued by government sponsored agencies
such as Fannie Mae and Freddie Mac with a weighted average yield of 5.49%. The
Company owns both fixed-rate and floating-rate CMOs. The underlying mortgage
collateral for the Company's portfolio of CMO's available for sale at September
30, 2002 had contractual maturities of over ten years. However, as with
mortgage-backed pass-through securities, the actual maturity of a CMO may be
less than its stated contractual maturity due to prepayments of the underlying
mortgages and the terms of the CMO tranche owned.
21
Held to Maturity Portfolio. As of September 30, 2002, securities with
an amortized cost of $86.8 million, or 8.4% of total assets, were classified as
held to maturity. Mortgage-backed securities totaling $70.4 million, or 6.8% of
total assets, made up the majority of this portfolio. Investment securities,
consisting of municipal bonds, made up $16.4 million of this total, or 1.6% of
total assets.
The following table sets forth the composition of the Company's held to
maturity portfolio at the dates indicated.
September 30,
2002 2001 2000
------------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In Thousands)
Investment Securities:
State and municipal securities ........................... $16,409 17,325 $11,906 $12,160 $ 2,991 $ 2,957
Other ...................................................... -- -- -- 397 397
------- ------- ------- -------
Total investment securities held to maturity ........... 16,409 17,325 11,906 12,160 3,388 3,354
------- ------- ------- ------- ------- -------
Mortgage-Backed Securities:
Pass-through securities:
Ginnie Mae .............................................. 2,785 2,988 3,510 3,611 4,279 4,275
Fannie Mae ................................................. 28,600 30,177 23,616 24,421 16,578 16,440
Freddie Mac ................................................ 34,693 35,788 26,477 27,394 17,105 16,902
Other ...................................................... -- -- 1,491 1,542 2,283 2,343
CMOs and REMICs ............................................ 4,304 4,428 4,355 4,532 4,953 5,060
------- ------- ------- ------- ------- -------
Total mortgage-backed securities held to maturity..... 70,382 73,381 59,449 61,500 45,198 45,020
------- ------- ------- ------- ------- -------
Total securities held to maturity ..................... $86,791 $90,706 $71,355 $73,660 $48,586 $48,374
======= ======= ======= ======= ======= =======
At September 30, 2002, the Company's held to maturity mortgage-backed
securities portfolio totaled $70.4 million at amortized cost, consisting of:
$7.1 million with a weighted average yield of 5.12% and contractual maturities
within five years; $10.7 million with a weighted average yield of 6.37% and
contractual maturities of five to ten years; and $52.6 million with a weighted
average yield of 5.94% and contractual maturities of over ten years. CMOs of
$4.3 million are included in this portfolio. While the contractual maturity of
the CMOs' underlying collateral is greater than ten years, the actual period to
maturity of the CMOs may be shorter due to prepayments on the underlying
mortgages and the terms of the CMO tranche owned.
22
Portfolio Maturities and Yields. The composition and maturities of the
investment securities portfolio and the mortgage-backed securities portfolio at
September 30, 2002 are summarized in the following table. Maturities are based
on the final contractual payment dates, and do not reflect the impact of
prepayments or early redemptions that may occur.
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years More than Ten Years
--------------------- -------------------- --------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ----- -------- -------- -------- ----- --------- --------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae ......................... $ -- --% $ 3,644 6.24% $ 629 6.09% $25,370 5.90%
Freddie Mac ........................ -- -- 5,005 6.39 -- -- 13,130 5.38
Other .............................. -- -- -- -- 4,430 6.33 4,241 5.50
------- ---- -------- ---- ------- ---- ------- ----
Total ............................ -- -- 8,649 6.33 5,059 6.30 42,741 5.70
------- ---- -------- ---- ------- ---- ------- ----
Investment Securities
U.S. Gov't and agency securities.... 21,192 5.62 86,780 4.53 -- -- 1,105 2.71
Corporate debt securities .......... 6,015 5.91 24,064 6.61 -- -- -- --
Equity securities .................. -- -- -- -- -- -- 1,113 --
------- ---- -------- ---- ------- ---- ------- ----
Total ............................ 27,207 5.68 110,844 4.98 -- -- 2,218 1.35
------- ---- -------- ---- ------- ---- ------- ----
Total available for sale ............. $27,207 5.68% $119,493 5.08% $ 5,059 6.30% $44,959 5.49%
======= ==== ======== ==== ======= ==== ======= ====
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae ......................... $ -- --% $ 751 5.65% $ 1,945 6.42% $30,208 5.63%
Freddie Mae ........................ 25 6.76 5,904 4.80 7,540 6.19 21,224 6.24
Other .............................. -- -- 463 8.30 1,248 7.39 1,074 8.98
------- ---- -------- ---- ------- ---- ------- ----
Total ............................ 25 6.76 7,118 5.12 10,733 6.37 52,506 5.94
Investment Securities
State and municipal securities ..... 1,750 1.81 3,097 3.86 9,963 4.17 1,599 4.86
------- ---- -------- ---- ------- ---- ------- ----
Total held to maturity ............... $ 1,775 1.88% $ 10,215 4.74% $20,696 5.31% $54,105 5.91%
======= ==== ======== ==== ======= ==== ======= ====
Total Securities
-----------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
-------- --------- --------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae ......................... $ 29,643 $ 30,684 5.95%
Freddie Mac ........................ 18,135 18,613 5.66
Other .............................. 8,671 9,351 5.92
-------- -------- ----
Total ............................ 56,449 58,648 5.85
-------- -------- ----
Investment Securities
U.S. Gov't and agency securities.... 109,077 113,283 4.72
Corporate debt securities .......... 30,079 32,144 6.47
Equity securities .................. 1,113 2,071 --
Total ............................ 140,269 147,498 5.06
Total available for sale ............. $196,718 $206,146 5.28%
======== ======== ====
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae ......................... $ 32,904 $ 34,604 5.67%
Freddie Mae ........................ 34,693 35,788 5.98
Other .............................. 2,785 2,989 8.15
-------- -------- ----
Total ............................ 70,382 73,381 5.93
Investment Securities
State and municipal securities ..... 16,409 17,325 3.73
-------- -------- ----
Total held to maturity ............... $ 86,791 $ 90,706 5.51%
======== ======== ====
23
Sources of Funds
General. Deposits, borrowings, repayments and prepayments of loans and
securities, proceeds from sales of loans and securities, proceeds from maturing
securities and cash flows from operations are the primary sources of the Bank's
funds for use in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. Its deposit accounts consist of savings accounts, NOW
accounts, checking accounts, money market accounts, club accounts, certificates
of deposit and IRAs and other qualified plan accounts. The Bank provides
commercial checking accounts for small to moderately sized businesses, as well
as low-cost checking account services for low-income customers.
At September 30, 2002, the Bank's deposits totaled $799.6 million.
Interest-bearing deposits totaled $689.5 million, and non-interest-bearing
demand deposits totaled $110.1 million. NOW, savings and money market deposits
totaled $446.0 million at September 30, 2002. Also at that date, the Bank had a
total of $243.5 million in certificates of deposit, of which $186.2 million had
maturities of one year or less. Although the Bank has a significant portion of
its deposits in shorter-term certificates of deposit, management monitors
activity on these accounts and, based on historical experience and the Bank's
current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.
The Bank's deposits are obtained predominantly from the areas in which
its branch offices are located. It relies primarily on competitive pricing of
its deposit products, customer service and long-standing relationships with
customers to attract and retain these deposits. While certificates of deposit in
excess of $100,000 are accepted by the Bank, and may be subject to preferential
rates, it does not actively solicit such deposits as they are more difficult to
retain than core deposits. With the commencement of operations of its limited
purpose commercial bank subsidiary, PMB, in April 2002, the Company entered the
municipal deposit gathering business. Municipal time accounts (certificates of
deposit) are generally obtained through a bidding process, and tend to carry
higher average interest rates than similar term retail certificates of deposit.
Historically, the Bank has not used brokers to obtain deposits.
The following table sets forth the distribution of total deposit
accounts, by account type, at the dates indicated.
September 30,
2002 2001 2000
------------------------------- -------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------------------------------- -------------------------------- ----------------------------
(Dollars in thousands)
Demand deposits:
Retail .................... $ 54,399 6.8% --% $ 41,280 6.3% --% $ 38,145 6.3% --%
Commercial ................ 55,732 6.9 -- 33,081 5.1 -- 28,324 4.7 --
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total demand deposits...... 110,131 13.7 -- 74,361 11.4 -- 66,469 11.0 --
NOW deposits ................ 82,983 10.4 0.40 63,509 9.7 0.49 54,800 9.0 1.01
Savings deposits ............ 247,918 31.0 0.99 160,777 24.6 1.05 161,987 26.6 2.02
Money market deposits ....... 115,065 14.4 1.23 109,126 16.7 1.81 76,332 12.5 2.55
-------- ----- ---- -------- ----- ---- -------- ----- ----
556,097 69.5 0.76 407,773 62.4 1.00 359,588 59.1 1.61
Certificates of deposit ..... 243,529 30.5 2.64 245,327 37.6 4.63 249,388 40.9 5.83
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total deposits .............. $799,626 100.0% 1.33% $653,100 100.0% 2.31% $608,976 100.0% 3.34%
======== ===== ==== ======== ===== ==== ======== ====== ====
24
The following table sets forth, by interest rate ranges, information
concerning certificates of deposit at the dates indicated.
At September 30, 2002
----------------------------------------------------------------------------- Total at
Period to Maturity September 30,
----------------------------------------------------------------------------- -------------
Less than One to Two to More than Percent
Interest Rate Range One Year Two Years Three Years Three Years Total of Total 2001 2000
------------------- -------- ----------- ----------- ----------- ---------- ----------- ------- -------
(Dollars in thousands)
2.00% and below $106,824 $ 359 $ -- $ 19 $107,202 44.1% $ -- $ --
2.01% to 3.00% 54,775 18,039 287 -- 73,101 30.0 -- --
3.01% to 4.00% 5,733 14,489 4,963 2,188 27,373 11.2 108,161 2,350
4.01% to 5.00% 6,182 3,130 5,760 5,173 20,245 8.3 33,785 14,436
5.01% to 6.00% 4,236 151 1,840 336 6,563 2.7 30,416 155,499
6.01% and above 8,410 -- 635 -- 9,045 3.7 72,965 77,103
-------- -------- -------- -------- -------- ----- -------- --------
Total ...... $186,160 $ 36,168 $ 13,485 $ 7,716 $243,529 100.0% $245,327 $249,388
======== ======== ======== ======== ======== ======= ======== ========
The following table sets forth certificates of deposit by time remaining until
maturity as of September 30, 2002.
Maturity
---------------------------------------------------
Over 3 Over 6
3 Months to 6 to 12 Over 12
or Less Months Months Months Total
-------- ------------ --------- ------- ---------
(In Thousands)
Certificates of deposit less than $100,000............. $78,282 $37,419 $40,039 $49,227 $204,967
Certificates of deposit of $100,000 or more (1)........ 19,123 6,625 4,672 8,142 38,562
------- ------- ------- ------- -------
Total of certificates of deposit.................... $97,405 $44,044 $44,711 $57,369 $243,529
======= ======= ======= ======= ========
- -----------------------
(1) The weighted average interest rates for these accounts, by maturity period,
are 2.45% for 3 months or less; 2.05% for 3 to 6 months; 2.46% for
6 to 12 months; and 3.58% for over 12 months. The overall weighted average
interest rate for accounts of $100,000 or more was 2.65%.
Borrowings. At September 30, 2002, the Bank had $102.9 million of FHLB
borrowings, consisting of advances and repurchase agreements. FHLB borrowings
were $110.4 million as of September 30, 2001 and $122.0 million as of September
30, 2000. At September 30, 2002, the Bank had access to additional FHLB advances
of up to $235.0 million.
The following table sets forth information concerning balances and
interest rates on the Bank's FHLB advances and repurchase agreements at the
dates and for the periods indicated.
At or For the Years Ended September 30,
---------------------------------------
2002 2001 2000
------------ --------- ----------
(Dollars in thousands)
Balance at end of year............................................ $ 102,968 $110,427 $ 121,975
Average balance during year....................................... 113,446 113,975 122,315
Maximum outstanding at any month end.............................. 131,637 135,727 131,458
Weighted average interest rate at end of year..................... 4.08% 5.32% 6.36%
Average interest rate during year................................. 4.85% 5.98% 5.98%
25
Activities of Subsidiaries and Affiliated Entities
Provident Municipal Bank ("PMB") is a wholly-owned subsidiary of the
Bank. PMB is a New York State-chartered commercial bank, whose purpose is
limited to accepting municipal deposits and investing funds obtained into
investment securities. PMB began operations on April 19, 2002, and at September
30, 2002 had $8.8 million in deposits from municipal entities in the communities
served by the parent Bank.
Provest Services Corp. I is a wholly-owned subsidiary of the Bank
holding an investment in a limited partnership which operates an assisted-living
facility. A percentage of the units in the facility are for low-income
individuals. Provest Services Corp. II is a wholly-owned subsidiary of the Bank
which has engaged a third-party provider to sell annuities and mutual funds to
the Bank's customers. Through September 30, 2002, the activities of these
subsidiaries have had an insignificant effect on the Bank's consolidated
financial condition and results of operations. During fiscal 1999, the Bank
established Provident REIT, Inc., a wholly-owned subsidiary in the form of a
real estate investment trust ("REIT"). The REIT holds both residential and
commercial real estate loans.
At the time of the Company's initial public offering, approximately 46%
of the Company's common stock was sold to the public, and the remaining 54% was
retained by the Mutual Holding Company, the successor to the original mutual
savings and loan association. The accounts of the Mutual Holding Company are not
included in the Company's consolidated financial statements. The Mutual Holding
Company's primary activity is to hold its majority ownership interest in the
Company. The Mutual Holding Company waives the receipt of most cash dividends
with respect to its shares of the Company's common stock, but uses the proceeds
of those dividends it accepts principally to make charitable contributions in
the communities the Bank serves. In fiscal 2002, the Mutual Holding Company
accepted $500,000 in dividends and made charitable contributions of $557,000.
Competition
The Bank faces significant competition in both originating loans and
attracting deposits. The New York metropolitan area has a high concentration of
financial institutions, most of which are significantly larger institutions with
greater financial resources than the Bank, and many of which are competitors of
the Bank to varying degrees. The Bank's competition for loans comes principally
from commercial banks, savings banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Its most direct
competition for deposits has historically come from commercial banks, savings
banks and credit unions. The Bank faces additional competition for deposits from
non-depository competitors such as the mutual fund industry, securities and
brokerage firms and insurance companies. The Bank has emphasized personalized
banking and the advantage of local decision making in its banking business and
this strategy appears to have been well received in the Bank's market area. The
Bank does not rely on any individual, group, or entity for a material portion of
its deposits.
Employees
As of September 30, 2002, the Bank had 257 full-time employees and 35
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
26
Regulation
General. As a federally chartered, SAIF-insured savings bank, the Bank
is subject to examination, supervision and extensive regulation by the OTS and
the FDIC. This regulation and supervision establishes a comprehensive framework
of activities in which an institution can engage and is intended primarily for
the protection of the insurance fund and depositors. The Bank also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors. The FDIC also has examination
authority over the Bank in its role as the administrator of the SAIF. In
addition, the Bank's commercial bank subsidiary, PMB, is subject to examination
and regulation by the New York State Banking Department. The Bank's relationship
with its depositors and borrowers also is regulated to a great extent by both
federal and state laws, especially in such matters as the ownership of savings
accounts and the form and content of the Bank's mortgage documents. Any change
in such regulation, whether by the FDIC, OTS, the New York State Banking
Department, or Congress, could have a material adverse impact on the Company,
the Bank, PMB, and their respective activities and operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the HomeOwners Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus, and an additional 10% of unimpaired capital and surplus if
such loan is secured by readily marketable collateral, which is defined to
include certain financial instruments and bullion. The OTS by regulation has
amended the loans to one borrower rule to permit savings associations meeting
certain requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.
Qualified Thrift Lender Requirement. The HOLA requires savings
institutions to be qualified thrift lenders ("QTL"). To be a QTL, the Bank can
either satisfy the QTL test, or the Domestic Building and Loan Association
("DBLA") Test of the Internal Revenue Code of 1986, as amended (the "Code").
Under the QTL test, a savings bank is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments,"
primarily residential mortgages and related investments, including certain
mortgage-backed and related securities on a monthly basis in 9 out of every 12
months. Under the DBLA test, an institution must meet a "business operations
test" and a "60% of assets test". The business operations test requires the
business of a DBLA to consist primarily of acquiring the savings of the public
and investing in loans. An institution meets the public savings requirements
when it meets one of two conditions: (i) the institution acquires its savings in
conformity with OTS rules and regulations; or (ii) the general public holds more
than 75% of its deposits, withdrawable shares, and other obligations. The
general public may not include family or related business groups or persons who
are officers or directors of the institution.
27
The 60% of assets test requires that at least 60% of a DBLA's assets
must consist of assets that thrifts normally hold, except for consumer loans
that are not educational loans. The DBLA test does not include, as the QTL test
does to a limited or optional extent, mortgage loans originated and sold into
the secondary market and subsidiary investments. A savings bank that fails to be
a QTL must either convert to a bank charter or operate under certain
restrictions. As of September 30, 2002, the Bank met the QTL test.
Limitations on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. A "well capitalized" institution can, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year in an amount up to 100 percent of its net income during the
calendar year, plus its retained net income for the preceding two years. As of
September 30, 2002, the Bank was a "well-capitalized" institution.
Community Reinvestment Act and Fair Lending Laws. Savings associations
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to comply with the Fair Lending Laws
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received an
outstanding CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Affiliates. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any nonsavings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties", including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
the Director does not take action, the FDIC has authority to take such action
under certain circumstances.
28
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. If an institution fails to meet these standards, the appropriate federal
banking agency may require the institution to submit a compliance plan.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 4% tier 1 core capital ratio, a
4% tier 1 risk-based ratio, and an 8% total risk-based ratio. Tier 1 core
capital is defined as common stockholders' equity less investments in and
advances to "nonincludable" subsidiaries, goodwill and other intangible assets,
nonqualifying equity instruments, disallowed servicing assets, and other
disallowed assets; plus (minus) accumulated losses (gains) on certain
available-for-sale securities and cash flow hedges (net of taxes); plus
qualifying intangible assets, minority interest in includable consolidated
subsidiaries, and mutual institutions' nonwithdrawable deposit accounts.
Adjusted total assets is defined as total assets less assets of "nonincludable"
subsidiaries, goodwill and other intangible assets, disallowed servicing assets,
and other disallowed assets; plus (minus) accumulated losses (gains) on certain
available-for sale securities and cash flow hedges; plus qualifying intangible
assets. Total risk-based capital is defined as tier 1 (core) capital plus 45% of
net unrealized gains on available-for-sale equity securities, qualifying
subordinated debt and redeemable preferred stock, capital certificates,
nonwithdrawable deposit accounts not included in core capital, other equity
instruments and allowances for loan and lease losses; less equity investments
and other assets required to be deducted, low-level recourse deduction and
capital reduction for interest-rate risk exposure.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset.
At September 30, 2002, the Bank exceeded each of the OTS capital
requirements as summarized below. PMB is also subject to regulatory capital
requirements which it satisfied as of September 30, 2002.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ---------------------- -------------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio (1)
-------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Tangible capital.................. $ 84,307 8.45% $ 14,963 1.5% $ -- --%
Tier I core capital............... 84,307 8.45 39,901 4.0 49,875 5.0
Tier I risk-based capital......... 84,307 14.23 -- -- 35,552 6.0
Total risk-based capital.......... 91,747 15.48 47,403 8.0 59,254 10.0
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
29
Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective
Action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has total risk-based capital of less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that
is less than 3.0% is considered to be "significantly undercapitalized", and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized". Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized". The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized". In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
At September 30, 2002, the Bank was categorized as "well capitalized",
meaning that the Bank's total risk-based capital ratio exceeded 10.0%, Tier I
risk-based capital ratio exceeded 6.0%, leverage capital ratio exceeded 5.0%,
and the Bank was not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based
deposit insurance assessment system. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. The FDIC is
authorized to raise the assessment rates in certain circumstances. The FDIC has
exercised this authority several times in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank, as a federal association, is required to be a member of the
FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central
credit facility primarily for member institutions. The Bank, as a member of the
FHLB of New York, is required to acquire and hold shares of capital stock in
that FHLB in an amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. As of September 30, 2002, the Bank was in compliance with this
requirement. The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts. At
September 30, 2002, the Bank was in compliance with these reserve requirements.
30
Holding Company Regulation
General. The Mutual Holding Company and the Company are nondiversified
mutual savings and loan holding companies within the meaning of the HOLA. As
such, the Mutual Holding Company and the Company are registered with the OTS and
are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Holding Company and the Company and any nonsavings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, the Company and the Mutual Holding Company
are generally not subject to state business organizations law.
Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a Mutual Holding Company and a federally chartered
mid-tier holding company such as the Company may engage in the following
activities: (i) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act of
1956, unless the Director, by regulation, prohibits or limits any such activity
for savings and loan holding companies; or (B) in which multiple savings and
loan holding companies were authorized (by regulation) to directly engage on
March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a Mutual
Holding Company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (x) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.
The HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
The OTS has proposed new rules which would require savings and loan
holding companies to notify the OTS prior to engaging in transactions which (i)
when combined with other debt transactions engaged in during a 12-month period,
would increase the holding company's consolidated debt by 5% or more; (ii) when
combined with other asset acquisitions engaged in during a 12-month period,
would result in asset acquisitions of greater than 15% of the holding company's
consolidated assets; or (iii) when combined with any other transactions engaged
in during a 12-month period,
31
would reduce the holding company's ratio of consolidated tangible capital to
consolidated tangible assets by 10% or more during the 12-month period. The OTS
has proposed to exempt from these rule holding companies whose consolidated
tangible capital exceeds 10% following the transactions.
The OTS has also proposed new rules which would codify the manner in
which the OTS reviews the capital adequacy of savings and loan holding companies
and determines when a holding company must maintain additional capital. The OTS
is not currently proposing to establish uniform capital adequacy guidelines for
all savings and loan holding companies.
The Company and the Bank are unable to predict whether or when these
proposed regulations will be adopted, and what effect, if any, the adoption of
these regulations would have on their business.
Waivers of Dividends by the Mutual Holding Company. OTS regulations
require the Mutual Holding Company to notify the OTS of any proposed waiver of
its right to receive dividends. The OTS reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (i)
the Mutual Holding Company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the Mutual Holding Company's
members; (ii) for as long as the savings association subsidiary is controlled by
the Mutual Holding Company, the dollar amount of dividends waived by the Mutual
Holding Company are considered as a restriction to the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the Mutual Holding
Company is available for declaration as a dividend solely to the Mutual Holding
Company, and, in accordance with SFAS No. 5, where the savings association
determines that the payment of such dividend to the Mutual Holding Company is
probable, an appropriate dollar amount is recorded as a liability and (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under OTS capital distribution
regulations.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to undertake a conversion from mutual to stock
form ("Conversion Transaction"). In a Conversion Transaction a new holding
company would be formed as the successor to the Company (the "New Holding
Company"), the Mutual Holding Company's corporate existence would end, and
certain customers of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock ("Common Stock") held by stockholders of the Company other
than the Mutual Holding Company ("Minority Stockholders") would be automatically
converted into a number of shares of common stock of the New Holding Company
determined pursuant to an exchange ratio that ensures that after the Conversion
Transaction the percentage of the to-be outstanding shares of the New Holding
Company issued to Minority Stockholders in exchange for their Common Stock would
be equal to the percentage of the outstanding shares of Common Stock held by
Minority Stockholders immediately prior to the Conversion Transaction. The total
number of shares held by Minority Stockholders after the Conversion Transaction
would be affected by any purchases by such persons in the offering that would be
conducted as part of the Conversion Transaction.
Federal Securities Law
The common stock of the Company is registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act. Common stock of the Company held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Company may
not be resold without registration or unless sold in accordance with certain
resale restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
32
Recent Legislation
The USA PATRIOT Act. In response to the events of September 11, 2001,
the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, (the "USA PATRIOT Act"), was
signed into law on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i)
internal policies, procedures, and controls; (ii) specific
designation of an anti-money laundering compliance officer; (iii)
ongoing employee training programs; and (iv) an independent audit
function to test the anti-money laundering program.
o Section 326 authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations by October 26, 2002 that provide for minimum standards
with respect to customer identification at the time new accounts
are opened.
o Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific,
and, where necessary, enhanced due diligence policies, procedures,
and controls designed to detect and report money laundering.
o Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that
do not have a physical presence in any country), and will be
subject to certain record keeping obligations with respect to
correspondent accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
33
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into
law the Sarbanes-Oxley Act of 2002 (the "Act"), which implemented legislative
reforms intended to address corporate and accounting fraud. In addition to the
establishment of a new accounting oversight board that will enforce auditing,
quality control and independence standards and will be funded by fees from all
publicly traded companies, the Act places certain restrictions on the scope of
services that may be provided by accounting firms to their public company audit
clients. Any non-audit services being provided to a public company audit client
will require preapproval by the company's audit committee. In addition, the Act
makes certain changes to the requirements for partner rotation after a period of
time. The Act requires chief executive officers and chief financial officers, or
their equivalent, to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission, subject to civil and criminal penalties if
they knowingly or willingly violate this certification requirement. In addition,
under the Act, counsel will be required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
Under the Act, longer prison terms will apply to corporate executives
who violate federal securities laws; the period during which certain types of
suits can be brought against a company or its officers is extended; and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan "blackout" periods, and loans to company executives (other than
loans by financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in ownership in a company's securities
within two business days of the change.
The Act also increases responsibilities and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term will be defined by the Securities and Exchange Commission) and if
not, why not. Under the Act, a company's registered public accounting firm will
be prohibited from performing statutorily mandated audit services for a company
if such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statements
materially misleading. The Act also requires the Securities and Exchange
Commission to prescribe rules requiring inclusion of any internal control report
and assessment by management in the annual report to shareholders. The Act
requires the company's registered public accounting firm that issues the audit
report to attest to and report on management's assessment of the company's
internal controls.
Although the Company anticipates that it will incur additional expense
in complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not expect that such compliance will have a
material impact on the Company's financial condition or results of operations.
34
ITEM 2. Properties
- ----------------------
Properties
As of September 30, 2002, the Bank leased ten properties, including its
headquarters location, from third parties. In addition, the Bank owns eight
properties. Following is a list of the Bank's locations:
Corporate Office, Commercial Lending Division, and Investment Management and
Trust Department
400 Rella Boulevard
Montebello, NY 10901
(845) 369-8040
Rockland County Branches: 26 North Middletown Road
(In the ShopRite Supermarket)
44 West Route 59 Pearl River, NY 10965
Nanuet, NY 10954 (845) 627-6170
(845) 627-6180
196 Route 59
38-40 New Main Street Suffern, NY 10901
Haverstraw, NY 10927 (845) 369-8360
(845) 942-3880
1633 Route 202
375 Route 303 at Kings Highway Pomona, NY 10970
Orangeburg, NY 10962 (845) 364-5690
(845) 398-4810
44 North Main Street
148 Route 9W (In the ShopRite Supermarket)
Stony Point, NY 10980 New City, NY 10956
(845) 942-3890 (845) 639-7650
179 South Main Street Orange County Branches:
New City, NY 10956
(845) 639-7750 125 Dolson Avenue
(In the ShopRite Supermarket)
72 West Eckerson Rd. Middletown, NY 10940
Spring Valley, NY 10977 (845) 342-5777
(845) 426-7230
153 Route 94
715 Route 304 (In the ShopRite Supermarket)
Bardonia, NY 10954 Warwick, NY 10990
(845) 623-6340 (845) 986-9540
1 Lake Road West 7 Edward J. Lempka Drive
Congers, NY 19020 Florida, NY 10921
(845) 267-2180 (845) 651-4091
71 Lafayette Avenue 1992 Route 284
Suffern, NY 10901 Slate Hill, NY 10973
(845) 369-8350 (845) 355-6181
35
ITEM 3. Legal Proceedings
- -----------------------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the Company's financial condition and results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
No matters were submitted to a vote of stockholders during the quarter
ended September 30, 2002.
PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The common stock of the Company is quoted on the Nasdaq National Market
under the symbol "PBCP." As of September 30, 2002, the Company had six
registered market makers, 3,109 stockholders of record (excluding the number of
persons or entities holding stock in street name through various brokerage
firms), and 7,997,512 shares outstanding. As of such date, the Mutual Holding
Company held 4,416,000 shares of the Company's common stock and stockholders
other than the Mutual Holding Company held 3,581,512 shares.
The following table sets forth market price and dividend information
for the common stock for the past two fiscal years.
Cash Dividends
Quarter Ended High Low Declared
----------------------- ---------------- ------------- -----------------
December 31, 2000 $ 16.63 $ 15.19 $ 0.04
March 31, 2001 17.81 15.75 0.05
June 30, 2001 21.52 17.00 0.06
September 30, 2001 21.65 17.65 0.07
December 31, 2001 29.64 21.58 0.08
March 31, 2002 28.90 26.50 0.10
June 30, 2002 28.97 26.50 0.11
September 30, 2002 29.15 27.69 0.12
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and depends on a number
of factors, including capital requirements, regulatory limitations on the
payment of dividends, the results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends will continue.
In accordance with regulations, the Mutual Holding Company waived
receipt of certain dividends declared by the Company, after obtaining OTS
approval to do so. In total, the Mutual Holding Company has waived receipt of
$2.6 million in dividends through September 30, 2002, including $1.3 million in
fiscal 2002 and $972,000 in fiscal 2001.
36
ITEM 6. Selected Financial Data
- -----------------------------------
The following financial condition data and operating data are derived
from the audited consolidated financial statements of the Company or, prior to
January 7, 1999, the Bank. Additional information is provided in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes included as Item 7 and
Item 8 of this report, respectively.
At September 30,
----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- -------- -------- --------
(In thousands)
Selected Financial Condition Data:
Total assets.............................................. $1,027,701 $ 881,260 $ 844,303 $ 814,518 $ 691,068
Loans, net................................................. 660,816 606,146 589,822 566,521 463,667
Securities available for sale.............................. 206,146 163,928 162,157 148,387 97,983
Securities held to maturity................................ 86,791 71,355 48,586 56,782 98,402
Deposits................................................... 799,626 653,100 608,976 586,640 573,174
Borrowings................................................. 102,968 110,427 127,571 117,753 49,931
Equity..................................................... 110,867 102,620 90,986 90,299 55,200
Years Ended September 30,
----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- -------- -------- --------
(In thousands)
Selected Operating Data:
Interest and dividend income.............................. $ 59,951 $ 60,978 $ 58,899 $ 52,267 $ 47,948
Interest expense.......................................... 17,201 26,244 26,034 21,589 20,880
--------- --------- ------ -------- --------
Net interest income....................................... 42,750 34,734 32,865 30,678 27,068
Provision for loan losses................................. 900 1,440 1,710 1,590 1,737
--------- --------- ------ -------- --------
Net interest income after provision for loan losses....... 41,850 33,294 31,155 29,088 25,331
Non-interest income....................................... 5,401 4,706 3,391 3,103 3,080
Non-interest expense (1)................................. 32,161 26,431 25,808 26,303 21,823
--------- --------- -------- --------- ---------
Income before income tax expense ......................... 15,090 11,569 8,738 5,888 6,588
Income tax expense........................................ 5,563 4,087 2,866 1,958 2,346
--------- --------- -------- -------- --------
Net income (1) .....................................$ 9,527 $ 7,482 $ 5,872 $ 3,930 $ 4,242
=========== ======== ========= ========= =========
(Footnotes on next page)
37
At or For the Years Ended September 30,
----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- -------- -------- --------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average
total assets)........................................... 0.99% 0.87% 0. 70% 0.52% 0.64%
Return on equity (ratio of net income to average equity).. 8.92 7.71 6.58 5.03 7.94
Average interest rate spread (2).......................... 4.33 3.56 3.51 3.66 3.79
Net interest margin (3)................................... 4.71 4.20 4.12 4.24 4.28
Efficiency ratio (4)...................................... 66.79 67.02 71.18 77.86 72.39
Non-interest expense to average total assets.............. 3.36 3.06 3.08 3.47 3.29
Average interest-earning assets to average interest-bearing
liabilities.............................................. 120.03 120.20 118.54 119.28 114.88
Per Share and Related Data:
Basic earnings per share (5).............................. $ 1.24 $ 0.98 $ 0.76 $ 0.40 --
Diluted earnings per share ............................ 1.22 0.97 0.76 0.40 --
Dividends per share ....................................... 0.41 0.22 0.15 0.06 --
Dividend payout ratio (6)................................. 33.06% 22.45% 19.74% 15.00% --
Book value per share (7).................................. $ 13.86 $ 12.79 $ 11.26 $ 10.91 --
Asset Quality Ratios:
Non-performing assets to total assets..................... 0.49% 0.27% 0.50% 0.62% 0.94%
Non-performing loans to total loans....................... 0.74 0.38 0.67 0.82 1.32
Allowance for loan losses to non-performing loans......... 209.6 400.7 189.9 133.8 80.3
Allowance for loan losses to total loans.................. 1.55 1.48 1.28 1.08 1.05
Capital Ratios:
Equity to total assets at end of year..................... 10.79% 11.64% 10.77% 11.09% 7.99%
Average equity to average assets.......................... 11.15 11.24 10.67 10.29 8.05
Tier 1 leverage ratio (Bank only)......................... 8.45 10.20 9.59 9.56 7.37
- -------------------------------
(1) Non interest expense for fiscal 1999 includes special charges totaling
approximately $1.5 million in connection with a computer system conversion
($1.1 million) and establishment of the employee stock ownership plan
("ESOP") ($371,000). Excluding these special charges, net income after
taxes would have been approximately $4.9 million for fiscal 1999.
(2) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted- average
cost of interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(4) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(5) Basic earnings per share for fiscal 1999 was computed for the nine-month
period following the stock offering based on net income of approximately
$3.2 million for that period and 8,041,018 average common shares.
(6) The dividend payout ratio represents dividends per share divided by basic
earnings per share. For fiscal 1999, the payout ratio is based on dividends
of $0.06 per share and nine-month earnings of $0.40 per share. Based on
six- month earnings of $0.29 per share for the third and fourth quarters of
fiscal 1999, the dividend payout ratio would have been 20.69%.
(7) Book value per share is based on total stockholders' equity and 7,997,512,
8,024,166, 8,077,800 and 8,280,000 outstanding common shares at September
30, 2002, 2001, 2000 and 1999, respectively. For this purpose, common
shares include unallocated ESOP shares but exclude treasury shares.
38
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
General
Provident Bank (the "Bank") is a federally chartered thrift institution
operating as a community bank and conducting business primarily in Rockland
County, New York. On January 7, 1999, the Bank completed its reorganization into
a mutual holding company structure. Provident Bancorp, Inc. (the "Company"),
which is the Bank's stock holding company, sold 3,864,000 shares or 46.67% of
its common stock to the public and issued 4,416,000 shares or 53.33% to
Provident Bancorp, MHC. As a result of the stock offering, the Company raised
net proceeds of approximately $37.1 million, prior to the purchase of stock by
the Employee Stock Ownership Plan (the "ESOP"). The ESOP, which did not purchase
shares in the offering, purchased 8% of the shares issued to the public, or
309,120 shares, in the open market during January and February 1999. The
financial condition and results of operations of the Company are discussed
herein on a consolidated basis with the Bank. Reference to the Company may
signify the Bank, depending on the context and time period.
The Company's results of operations depend primarily on its net
interest income, which is the difference between the interest income on its
earning assets, such as loans and securities, and the interest expense paid on
its deposits and borrowings. Results of operations are also affected by
non-interest income and expense, the provision for loan losses and income tax
expense. Non-interest income consists primarily of banking fees and service
charges, and gains (losses) on sales of securities available for sale. The
Company's non-interest expense consists primarily of salaries and employee
benefits, occupancy and office expenses, advertising and promotion expense and
data processing expenses. Results of operations are also significantly affected
by general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.
Critical Accounting Policies
Accounting policies considered critical to the Company's financial results
include the allowance for loan losses, accounting for goodwill and the
recognition of interest income. The methodology for determining the allowance
for loan losses is considered by management to be a critical accounting policy
due to the high degree of judgement involved, the subjectivity of the
assumptions utilized and the potential for changes in the economic environment
that could result in changes to the amount of the allowance for loan losses
considered necessary. Accounting for goodwill is considered to be a critical
policy because goodwill must be tested for impairment at least annually using a
"two-step" approach that involves the identification of reporting units and the
estimation of fair values. The estimation of fair values involves a high degree
of judgment and subjectivity in the assumptions utilized. Interest income on
loans, securities and other interest-earning assets is accrued monthly unless
management considers the collection of interest to be doubtful. Loans are placed
on nonaccrual status when payments are contractually past due 90 days or more,
or when management has determined that the borrower may be unable to meet
contractual principal or interest obligations. At such time, unpaid interest is
reversed by charging interest income. Interest payments received on nonaccrual
loans (including impaired loans) are recognized as income unless future
collections are doubtful. Loans are returned to accrual status when
collectibility is no longer considered doubtful (generally, when all payments
have been brought current).
39
Management Strategy
Management intends to continue the Bank's growth as an independent
community bank offering a broad range of customer-focused services as an
alternative to money center banks in its market area, positioning the Bank for
sustainable long-term growth. In recent years, management determined that
operating as a community bank rather than as a traditional thrift institution
would enhance the success of the Bank. As a result, management implemented a
business strategy that included: (i) creating an infrastructure for commercial
and consumer banking, including an experienced commercial loan department and
delivery systems to accommodate the needs of business and individual customers;
and (ii) placing a greater emphasis on commercial real estate and business
lending, as well as checking and other transaction accounts. Highlights of
management's business strategy are as follows:
Community Banking and Customer Service. As an independent community
bank, a principal objective of the Bank is to respond to the financial services
needs of its consumer and commercial customers. Management has implemented new
technologies to offer customers new financial products and services including PC
banking, cash management services and sweep accounts. Management intends to
continue to update the Bank's product offerings as market and regulatory
conditions permit. The Bank has also begun to offer asset management and trust
services and intends to offer personal financial planning services in the near
future. In addition, in order to service municipalities in the Company's market
area, the Bank formed Provident Municipal Bank, a limited-purpose commercial
bank authorized to accept municipal deposits.
Growing and Diversifying the Loan Portfolio. The Bank offers a broad
range of products to commercial businesses and real estate owners and
developers. Commercial and real estate loans improve the yield of the overall
loan portfolio, compared to a portfolio limited to fixed-rate, one- to
four-family residential loans, and shorten its average maturity. The Bank has
established experienced commercial loan and loan administration departments to
assure the continued growth and careful management of the quality of its assets.
Expanding the Retail Banking Franchise. Management intends to continue
to expand the retail banking franchise and to increase the number of households
served in the Bank's market area. Management's strategy is to deliver
exceptional customer service, which depends on up-to-date technology and
convenient access, as well as courteous personal contact from a trained and
motivated workforce. In addition, acknowledging the time pressures on the
two-income families typical to its market area, seven of the Bank's branch
offices are now open seven days a week. The Bank also has 23 full function
automated teller machines ("ATMs"), including 12 new, advanced-function ATMs
that deliver change to the penny, in addition to the more typical ATM functions.
The Bank participates in ATM networks that permit its customers to access their
accounts through ATMs worldwide. For Bank customers who meet certain credit
criteria, their ATM card also functions as a debit card, permitting them to use
the card to make purchases in a variety of locations and providing the Bank with
another source of fee income. The Bank fosters a sales culture in its branch
offices that emphasizes transaction accounts, the account most customers
identify with "their" bank.
On April 23, 2002, the Bank completed its acquisition of The National
Bank of Florida ("NBF"), a commercial bank in Orange County, New York. The
acquisition of NBF increased the Bank's total assets, total loans and total
deposits by $90.7 million, $23.5 million and $88.2 million, respectively. The
Bank acquired all of the outstanding common shares of NBF for cash of $28.1
million. The acquisition was accounted for as a purchase, resulting in good will
and other intangible assets of $15.3 million. Amounts attributable to NBF, which
was merged into the Bank, are included in the Company's consolidated financial
statements from the date of acquisition.
40
Analysis of Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them,
respectively.
The following table sets forth average balance sheets, average yields
and costs, and certain other information for the years ended September 30, 2002,
2001 and 2000. No tax-equivalent yield adjustments were made, as the effect
thereof was not material. All average balances are monthly average balances
which, in the opinion of management, are not materially different from daily
average balances. Non-accrual loans were included in the computation of average
balances, but have been reflected in the table as loans carrying a zero yield.
The yields set forth below include the effect of deferred fees, discounts and
premiums that are amortized or accreted to interest income or expense.
Years Ended September 30,
2002 2001
----------------------------------- ---------------------------------
Average Average
Outstanding Outstanding
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- --------- ---------- ----------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans (1) ........................... $630,710 $ 44,967 7.13% $590,298 $ 46,434 7.87%
Securities available for sale ....... 185,326 9,869 5.33 159,185 9,598 6.03
Securities held to maturity ......... 73,548 4,627 6.29 66,253 4,318 6.52
Other ............................... 18,138 488 2.69 10,983 628 5.72
------- -------- ---- -------- -------- ----
Total interest-earning assets ....... 907,722 59,951 6.60 826,719 60,978 7.38
Non-interest-earning assets ......... 50,192 -------- 36,624 --------
------- -------
Total assets ................... $957,914 $863,343
======== ========
Interest-bearing liabilities:
Savings deposits (2) ................ $227,143 2,289 1.01 $177,994 $ 2,898 1.63
Money market deposits ............... 106,133 1,435 1.35 86,717 2,245 2.59
NOW deposits ........................ 73,403 315 0.43 57,806 365 0.63
Certificates of deposit ............. 236,133 7,662 3.24 251,299 13,915 5.54
Borrowings .......................... 113,446 5,500 4.85 113,975 6,821 5.98
-------- ------ -------- -------- -----
Total interest-bearing liabilities . 756,258 17,201 2.27 687,791 26,244 3.82
Non-interest-bearing liabilities .... 94,869 ------ 78,547 --------
-------- --------
Total liabilities .............. 851,127 766,338
Stockholders' equity ................ 106,787 97,005
-------- --------
Total liabilities and
stockholders' equity .... $957,914 $863,343
======== ========
Net interest income ................. $ 42,750 $ 34,734
======== ========
Net interest rate spread (3) ....... 4.33 3.56
Net interest-earning assets (4) ..... $151,464 $138,928
======== ========
Net interest margin (5) ............. 4.71 4.20
Ratio of interest-earning assets
to interest-bearing liabilities 120.03% 120.20%
Years Ended September 30,
2000
---------------------------------
Average
Outstanding
Balance Interest Yield/Rate
----------- --------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans (1) ........................... $577,119 $ 45,043 7.80%
Securities available for sale ....... 159,287 9,719 6.10
Securities held to maturity ......... 52,515 3,549 6.76
Other ............................... 9,119 588 6.45
-------- --------
Total interest-earning assets ..... 798,040 58,899 7.38
Non-interest-earning assets ....... 38,770 --------
-------
Total assets ................... $836,810
========
Interest-bearing liabilities:
Savings deposits (2) ................ $177,077 $ 3,435 1.94
Money market deposits ............... 77,475 2,029 2.62
NOW deposits ........................ 52,052 470 0.90
Certificates of deposit ............. 244,279 12,787 5.23
Borrowings .......................... 122,315 7,313 5.98
-------- --------
Total interest-bearing liabilities . 673,198 26,034 3.87
Non-interest-bearing liabilities .... 74,316 --------
--------
Total liabilities .............. 747,514
Stockholders' equity ................ 89,296
--------
Total liabilities and
stockholders' equity .... $836,810
========
Net interest income ................. $ 32,865
========
Net interest rate spread (3) ....... 3.51
Net interest-earning assets (4) ..... $124,842
========
Net interest margin (5) ............. 4.12
Ratio of interest-earning assets
to interest-bearing liabilities 118.54%
- ------------------------------------
(1) Balances include the effect of net deferred loan origination fees and
costs, and the allowance for loan losses.
(2) Includes club accounts and interest-bearing mortgage escrow balances.
(3) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total
interest-earning assets.
41
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of the Company's
interest-earning assets and interest-bearing liabilities. Information is
provided for each category of interest-earning assets and interest-bearing
liabilities with respect to (i) changes attributable to changes in volume (i.e.,
changes in average balances multiplied by the prior-period average rate) and
(ii) changes attributable to rate (i.e., changes in average rate multiplied by
prior-period average balances). For purposes of this table, changes attributable
to both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
Years Ended September 30,
2002 vs. 2001 2001 vs. 2000
----------------------------------- -------------------------------------
Increase (Decrease) Total Increase Total
Due to Increase Due to Increase
---------------------- -------- ----------------------
Volume Rate (Decrease) Volume Rate (Decrease)
------ ----------- ------------ -------- ------------ ----------
(In thousands)
Interest-earning assets:
Loans ............................. $ 3,093 $ (4,560) $ (1,467) $ 1,060 $ 331 $ 1,391
Securities available for sale ..... 1,464 (1,193) 271 (6) (115) (121)
Securities held to maturity ....... 465 (156) 309 899 (130) 769
Other.............................. 290 (430) (140) 112 (72) 40
-------- --------- ----- ------- -------- ----------
Total interest-earning assets.. 5,312 (6,339) (1,027) 2,065 14 2,079
-------- --------- -------- ------- ------- ----------
Interest-bearing liabilities:
Savings deposits..................... 680 (1,289) (609) 23 (560) (537)
Money market deposits ............... 427 (1,237) (810) 239 (23) 216
NOW deposits ........................ 83 (133) (50) 48 (153) (105)
Certificates of deposit.............. (793) (5,460) (6,253) 369 759 1,128
Borrowings........................... (32) (1,289) (1,321) (492) - (492)
--------- ------- ----------- ------- -------
Total interest-bearing liabilities 365 (9,408) 9,043 187 23 210
-------- -------- ---------- -------- ------- ----------
Change in net interest income........ $ 4,947 $ 3,069 $ 8,016 $ 1,878 $ (9) $ 1,869
======== ======== ========== ======= ======== ==========
42
Comparison of Financial Condition at September 30, 2002 and September 30, 2001
Total Assets. Total assets as of September 30, 2002 were $1.028
billion, an increase of $146.4 million, or 16.6%, over total assets of $881.3
million at September 30, 2001. Total assets increased by $90.7 million in April
2002 as a result of the acquisition of NBF. Average total assets for the year
ended September 30, 2002 were $957.9 million, an increase of $94.6 million, or
11.0%, over average total assets of $863.3 million in fiscal 2001.
Securities. The total securities portfolio increased by $57.7
million, or 24.5%, to $292.9 million at September 30, 2002 from $235.3 million
at September 30, 2001. NBF securities retained in the portfolio totaled $18.3
million, most of which was classified as available for sale. NBF securities that
did not meet the rating guidelines established within the Company's investment
policy were sold shortly after the acquisition was completed. Securities
available for sale increased by $42.2 million, or 25.8%, primarily reflecting an
increase in U.S. Government and Agency securities. Available for sale
mortgage-backed securities declined slightly to $58.6 million at September 30,
2002 from $59.5 million at the previous year-end. Securities held to maturity
increased by $15.4 million, or 21.6%, to $86.8 million at September 30, 2002
from $71.4 million at September 30, 2001. Mortgage-backed securities held to
maturity increased by $10.9 million, while state and municipal securities held
to maturity increased by $4.5 million during the current fiscal year.
Net Loans. Net loans as of September 30, 2002 were $660.8 million, an
increase of $54.7 million, or 9.0%, over net loan balances of $606.1 million at
September 30, 2001. NBF net loans of $23.1 million were recorded at the
acquisition date. Including the addition of NBF commercial loans, the Bank
experienced fiscal 2002 growth of $41.5 million, or 23.0%, in the commercial
loan portfolio, which consists of commercial real estate, commercial business
and construction loans. Within the commercial portfolio, commercial business
loans contributed $9.9 million, or 23.9%, of the increase. These loans are made
primarily for the purpose of financing equipment acquisition or other general
small business purposes, and the increase is of significance in that the Company
actively pursues such loans in an effort to expand its customer account
relationships. Commercial real estate loans accounted for the largest portion of
the commercial loan portfolio growth, increasing by $34.0 million, or 26.3%.
This increase is a result of the Company's focus on generating high-quality real
estate transactions, which contribute good yields with relatively low risk.
Residential mortgage loans grew during fiscal 2002 as well, posting an increase
(net of heavy refinancing activity) of $7.9 million, or 2.2%, over balances at
September 30, 2001. Consumer loans grew to $83.4 million, up from $76.9 million
at September 30, 2001, an increase of $6.5 million, or 8.5 %. As the Company's
market area realized substantial increases in real estate values, its customers
took advantage of additional real estate equity, generating an $8.6 million
increase in home equity lines of credit. Average total loans were $630.7 million
in fiscal 2002, an increase of $40.4 million, or 6.9%, over average total loans
of $590.3 million in fiscal 2001. At September 30, 2002, non-performing loans
were 0.74% of total loans, compared to 0.38% at September 30, 2001.
Deposits. Deposits as of September 30, 2002 were $799.6 million, up
$146.5 million, or 22.4%, from September 30, 2001. NBF deposits of $88.2 million
were recorded at the acquisition date. The Company's deposit mix has shifted
along with its deposit growth. Transaction accounts (demand and NOW deposits)
represented 24% of deposits at September 30, 2002, compared to 21% at September
30, 2001. Similarly, savings and money market account balances, which totaled
$363.0 million at September 30, 2002, represented 45% of deposits at that date,
compared to 41% at the prior year end. Certificates of deposit declined to 31%
of deposits at September 30, 2002 from 38% a year ago. This shift in mix to
lower cost transaction and savings accounts had a positive impact on earnings in
fiscal 2002.
Borrowings. Total borrowings decreased by $7.5 million, or 6.8%,
to $103.0 million at September 30, 2002 from $110.4 million at September 30,
2001. The significant deposit growth was sufficient to fund increases in the
securities and loan portfolios, and the Company was therefore able to pay down
its borrowings.
43
Stockholders' Equity. Stockholders' equity increased by $8.3 million to
$110.9 million at September 30, 2002, compared to $102.6 million at September
30, 2001. In addition to net income of $9.5 million for the current fiscal year,
equity increased by $1.2 million for the change in after-tax net unrealized
gains on securities available for sale. The allocation of ESOP shares and the
vesting of shares issued under the Company's recognition and retention plan,
increased equity by a total of $1.5 million. Partially offsetting these
increases were cash dividends and purchases of treasury stock, which reduced
stockholders' equity by $1.9 million and $2.0 million, respectively.
During fiscal 2002, the Company repurchased 69,317 shares of its common
stock. The Company has repurchased a total of 330,551 shares under its two
previously announced repurchase programs, which authorized total repurchases of
up to 376,740 shares. Net of stock option-related reissuances, a total of
282,488 treasury shares were held by the Company at September 30, 2002.
Comparison of Operating Results for the Years Ended September 30, 2002 and
September 30, 2001
Net income for the year ended September 30, 2002 was $9.5 million, an
increase of $2.0 million, or 27.3%, compared to net income of $7.5 million in
fiscal 2001. Basic and diluted earnings per share increased to $1.24 and $1.22,
respectively, for the 2002 fiscal year compared to $0.98 and $0.97,
respectively, for fiscal 2001. The increase in net income reflects an $8.0
million or 23.1% increase in net interest income, a $695,000 or 14.8% increase
in non-interest income and a $540,000 decrease in the provision for loan losses,
offset in part by increases of $5.7 million or 21.7% in non-interest expense and
$1.5 million or 36.1% in income tax expense.
Interest Income. Interest income for the fiscal year ended September
30, 2002 declined slightly to $60.0 million, a decrease of $1.0 million, or 1.7%
compared to the prior year. The small decrease was primarily due to lower
average yields on loans and securities, offset in large part by higher average
balances in both asset classes, due, in part, to the NBF acquisition. Average
interest-earning assets for the year ended September 30, 2002 were $907.7
million, an increase of $81.0 million, or 9.8%, over average interest-earning
assets for the year ended September 30, 2001 of $826.7 million. Average loan
balances grew by $40.4 million and average balances of securities and other
earning assets increased by $40.6 million. Average yields on interest earning
assets fell by 78 basis points to 6.60% for the year ended September 30, 2002,
from 7.38% for the year ended September 30, 2001. Lower market interest rates
were the primary reason for the decline in asset yields. Lower yields were also
due, in part, to the change in interest-earning asset mix, as the Company
maintained high balances in cash and short-term securities in the weeks before
and after the acquisition of NBF.
Total interest income on loans for the year ended September 30, 2002
declined to $45.0 million, down 3.2% from $46.4 million for the prior fiscal
year. Interest income on the commercial loan portfolio for the year ended
September 30, 2002 decreased to $14.2 million, down 4.1% from commercial loan
interest income of $14.8 million for the prior fiscal year. The average
commercial loan portfolio (commercial real estate, commercial business and
construction loans) grew $17.1 million to $189.5 million, but the impact of that
increase was more than offset by a 110 basis point decline in average yield. The
lower average yield was due, in part, to the effect on commercial business loans
of the significantly lower average prime rate of 4.86% in fiscal 2002 compared
to 6.57% in fiscal 2001. The consumer loan category saw interest income decline
by $1.0 million, or 17.4% for the year. The Company's fixed-rate consumer loans
have short average maturities, and its adjustable-rate consumer loans float with
the prime rate. Income earned on residential mortgage loans was $26.0 million
for the year ended September 30, 2002, up 0.6% from the prior year, as yields
declined by 34 basis points to 7.15% from 7.49%, reflecting the impact of lower
market rates and refinancing activity, while average balances increased.
Interest income on securities and other earning assets increased to
$15.0 million for the year ended September 30, 2002, compared to $14.5 million
for the prior year. Average balances of securities and other earning assets grew
by $40.6 million, or 17.2% to $277.0 million, which more than offset a 74 basis
point decline in yields.
44
Interest Expense. Interest expense for the fiscal year ended September
30, 2002 fell by $9.0 million to $17.2 million, a decrease of 34.5% compared to
interest expense of $26.2 million for fiscal 2001. The sharp decrease was
primarily due to lower rates paid on interest-bearing deposits and borrowings,
as well as to lower average balances in certificate of deposit accounts and a
higher concentration of non-interest-bearing and low interest-bearing deposits
in fiscal 2002. Average rates paid on interest-bearing liabilities (deposits and
borrowings) for the year ended September 30, 2002 declined by 155 basis points
to 2.27% from 3.82% last year. The average interest rate paid on certificates of
deposit fell by 230 basis points to 3.24% for the year ended September 30, 2002,
from 5.54% for the prior year. For the year ended September 30, 2002, average
balances of lower-cost savings and money market accounts increased by $49.1
million and $19.4 million, respectively, while average balances of certificates
of deposit declined by $15.2 million compared to the year ended September 30,
2001. The average interest rates paid on savings and money market accounts fell
by 62 and 124 basis points to 1.01% and 1.35%, respectively, for the year ended
September 30, 2002, from 1.63% and 2.59% for the prior year. Interest expense on
borrowings declined by $1.3 million, primarily due to the 113 basis point
decrease in the average rate to 4.85% in fiscal 2002 from 5.98% in fiscal 2001.
Net Interest Income. Net interest income for the year ended September
30, 2002 increased to $42.7 million, compared to $34.7 million for the year
ended September 30, 2001, an increase of $8.0 million or 23.1%. Net interest
income increased due to a $12.6 million increase in average net earning assets
to $151.5 million, from $138.9 million, as well as to a 77 basis point increase
in net interest rate spread, to 4.33%, from 3.56% in the prior year. Net
interest margin increased to 4.71% for the year ended September 30, 2002, up
from 4.20% in the prior year.
The significant increase in net interest income in fiscal 2002 is due,
in large part, to the relative changes in the yield and cost of the Company's
assets and liabilities as a result of decreasing market interest rates in
calendar 2001 and 2002. This decrease in market interest rates has reduced the
Company's cost of interest-bearing liabilities faster and to a greater extent
than the rates on its interest-earning assets such as loans and securities.
However, even in the current rate environment, this trend is not likely to
continue, as average yields on assets such as residential mortgage and consumer
loans have more recently declined at an accelerated pace. The presently high net
interest margins could come under near-term pressure in both rising rate and
falling rate scenarios. Should market interest rates increase with an economic
recovery, the cost of the Company's interest-bearing liabilities would likely
increase faster than the rates on its interest-earning assets. In addition, the
impact of rising rates could be compounded if deposit customers move funds from
savings accounts back to higher-rate certificate of deposit accounts. Should
market interest rates continue to fall, management anticipates that the rates on
interest-earning assets would likely decline to a greater extent than the cost
of interest-bearing liabilities, as the latter rates may have reached market
minimums.
Provision for Loan Losses. The Company records provisions for loan
losses, which are charged to earnings, in order to maintain the allowance for
loan losses at a level representing probable loan losses inherent in the
existing portfolio. In determining the allowance for loan losses, management
considers past loss experience, evaluations of real estate collateral, current
economic conditions, volume and type of lending, 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. Management
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses in order to maintain the allowance at the required level. Due to
the Company's stable asset quality, continued favorable loss experience and
comparatively low level of non-performing loans, management determined that it
was appropriate to reduce the loan loss provision to $900,000 for fiscal 2002
compared to a provision of $1.4 million in fiscal 2001.
Non-Interest Income. Non-interest income for the fiscal year ended
September 30, 2002 was $5.4 million compared to $4.7 million for the fiscal year
ended September 30, 2001, an increase of $695,000, or 14.8%. This increase was
primarily attributable to an increase of $646,000, or 18.2%, in banking fees and
service charges, reflecting increases in transaction account volumes and the use
of debit cards for which fee income increased by $231,000, or 196.0%. Also, the
Company's trust services grew during 2002, generating fee income of $139,000 for
the current year compared to $66,000 for the prior year, an increase of $73,000,
or 110.6%. Sales of securities available for sale and residential mortgage loans
resulted in a combined gain of $607,000 in fiscal 2002 compared to $531,000 in
fiscal 2001, an increase of $76,000.
45
Non-Interest Expense. Non-interest expense for the fiscal year ended
September 30, 2002 was $32.2 million, a $5.8 million, or 21.7%, increase over
expenses of $26.4 million for the fiscal year ended September 30, 2001. The
increase was primarily attributable to an increase in compensation and employee
benefits of $3.1 million, or 22.1%, relating to annual merit raises, the
addition of former NBF employees who continue to staff the two former NBF
branches, and increased staffing for a new branch opened by the Company prior to
the NBF acquisition. Additional occupancy and data processing costs were also
attributable largely to the addition of these three new branches, growing by
$547,000 and $329,000, respectively, over fiscal 2001. Other non-interest
expenses were $1.3 million higher than the prior year, reflecting growth in the
Company's business as well as a charge of $240,000 in the current year to
resolve a reconciliation issue relating to refinanced residential mortgage
loans. Expenses associated with the integration of NBF totaled $531,000 for the
current year. Amortization of the core deposit intangible recorded in the NBF
acquisition totaled $286,000 for the current year, a decrease of $73,000
compared to similar expenses in the prior year, which represented the final
amortization of intangible assets associated with two 1996 branch acquisitions.
Excluding the merger integration expenses and the amortization of intangibles,
non-interest expenses for the year ended September 30, 2002 would have been
$31.3 million, a 20.2% increase over fiscal 2001.
Income Taxes. Income tax expense was $5.6 million for the fiscal
year ended September 30, 2002 compared to $4.1 million for fiscal 2001,
representing effective tax rates of 36.9% and 35.3%, respectively. The higher
effective tax rate in fiscal 2002 primarily reflects a higher level of
non-deductible ESOP expenses and the effect of graduated federal tax rates.
Comparison of Operating Results for the Years Ended September 30, 2001 and
September 30, 2000
Net income for the year ended September 30, 2001 was $7.5 million, an
increase of $1.6 million, or 27.4%, compared to net income of $5.9 million for
the year ended September 30, 2000. Basic and diluted earnings per share
increased to $0.98 and $0.97, respectively, for the 2001 fiscal year compared to
$0.76 for fiscal 2000. The growth and changes in mix of assets and liabilities
provided a 5.7% increase in net interest income, to $34.7 million from $32.9
million. Non-interest income grew by 38.8%, to $4.7 million from $3.4 million,
while non-interest expense increased by $623,000, or 2.4%.
Interest Income. Interest income for the fiscal year ended September
30, 2001 grew by $2.1 million, or 3.5%, over the prior fiscal year to $61.0
million, primarily due to increased loan and securities volumes. Average
interest-earning assets for the fiscal year ended September 30, 2001 were $826.7
million, an increase of $28.7 million, or 3.6%, compared to average
interest-earning assets in the fiscal year ended September 30, 2000 of $798.0
million. Average loan balances grew by $13.2 million, while the average balances
of securities and other earning assets increased by a combined $15.5 million.
Although market interest rates declined significantly during fiscal 2001, the
average yield on total earning assets remained the same as the prior year. The
average yield on loans increased by 7 basis points to 7.87%, from 7.80%,
reflecting the higher rates in effect when the loans were originated, as many of
these loans carry fixed rates. The average yield on securities, which have
shorter average maturities, declined somewhat during fiscal 2001, leaving the
average earning asset yield unchanged on an overall basis.
Interest Expense. Interest expense increased by $210,000, or 0.8%, to
$26.2 million for the year ended September 30, 2001 from $26.0 million for the
year ended September 30, 2000. This was the net result of a $14.6 million or
2.2% increase in the average balance of total interest-bearing liabilities in
fiscal 2001 compared to fiscal 2000, offset by a five basis point decrease in
the average rate paid on such liabilities over the same period.
46
Interest expense on savings and NOW accounts decreased in fiscal 2001
by $537,000 and $105,000, respectively, attributable to declines in the average
rates paid of 31 basis points and 27 basis points, respectively. Partially
offsetting the lower interest expense on savings and NOW accounts was an
increase of $216,000 in interest expense on money market deposits to $2.2
million from $2.0 million. This increase was due to a $9.2 million increase in
the average balance to $86.7 million from $77.5 million, which was partially
offset by a three basis point decrease in the average rate paid to 2.59% from
2.62%.
Interest expense on certificates of deposit increased by $1.1
million to $13.9 million from $12.8 million, due to a 31 basis point increase in
the average rate paid to 5.54% from 5.23%, as well as a $7.0 million increase in
the average balance to $251.3 million from $244.3 million. The increase in
average rate paid occurred despite the large decline in market interest rates,
as certificates of deposit added to the portfolio from June through December of
2000 were booked at relatively high rates.
Interest expense on borrowings from the FHLB decreased by $492,000 due
to a decrease of $8.3 million in the average balance to $114.0 million from
$122.3 million.
Net Interest Income. For the years ended September 30, 2001 and 2000,
net interest income was $34.7 million and $32.9 million, respectively. The $1.9
million increase in net interest income was primarily attributable to a $14.1
million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), to $138.9 million from $124.8 million, combined
with a five basis point increase in the net interest rate spread to 3.56% from
3.51%. The Company's net interest margin increased to 4.20% in the year ended
September 30, 2001 from 4.12% in the year ended September 30, 2000.
Provision for Loan Losses. The Company records provisions for loan
losses, which are charged to earnings, in order to maintain the allowance for
loan losses at a level representing probable loan losses inherent in the
existing portfolio. Due to the steadily improving asset quality and the growing
coverage ratio of the allowance for loan losses to non-performing loans,
management determined that it was appropriate to reduce the loan loss provision
to $1.4 million for fiscal 2001 compared to a provision of $1.7 million in
fiscal 2000.
Non-Interest Income. Non-interest income for the fiscal year ended
September 30, 2001 was $4.7 million, an increase of $1.3 million over
non-interest income for the fiscal year ended September 30, 2000, primarily
reflecting higher collection of service charges on deposits, fees on asset
management and trust services, and other fee income, which together increased by
$561,000, or 20.3%. The Company also recorded gains on sales of securities of
$531,000 for the current year, compared to only $9,000 of such gains for fiscal
2000. Other non-interest income increased by $263,000 over the prior fiscal
year, including a $118,000 gain recognized in connection with the final
repayment of a construction loan.
Non-Interest Expense. Non-interest expenses for the fiscal year ended
September 30, 2001 totaled $26.4 million, or $623,000 more than expenses of
$25.8 million for the fiscal year ended September 30, 2000. Compensation expense
increased by $620,000, and occupancy and office operations increased by
$456,000, both related partially to the opening of the new branch in Bardonia
and preparation for opening a new supermarket branch in New City, which began
operations in October 2001. Compensation expense also grew due to normal annual
merit increases and staff additions. Also, advertising and promotion expenses
increased by $411,000, or $37.5%, related to the opening of the new branches and
the introduction of the Bank's new product lines. In addition, other expenses in
the current fiscal year were higher by $335,000, or 7.8%, primarily because
expenses in fiscal 2000 were reduced by the reversal of $318,000 in accruals
made in fiscal 1999 for operational losses that did not materialize as
originally expected. These increases were partially offset by fiscal 2001's
decrease of $1.3 million in the amortization of intangible assets arising from
branch purchases, as the amounts associated with 1996 branch purchases became
fully amortized in fiscal 2001.
47
Income Taxes. Income tax expense was $4.1 million for the fiscal year
ended September 30, 2001 compared to $2.9 million for fiscal 2000, representing
effective tax rates of 35.3% and 32.8%, respectively. The higher effective tax
rate in fiscal 2001 primarily reflects a lower level of state tax benefits from
the REIT subsidiary in relation to total pre-tax income.
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, borrowings,
proceeds from principal and interest payments on loans and securities, and
proceeds from the sale of securities and, to a lesser extent, fixed-rate
mortgage loans. Maturities and scheduled amortization of loans and securities,
as well as proceeds from borrowings, are predictable sources of funds. Other
funding sources, however, such as deposit inflows, mortgage prepayments and
mortgage loan sales are greatly influenced by market interest rates, economic
conditions and competition.
The Company's cash flows are derived from operating activities,
investing activities and financing activities as reported in the Consolidated
Statements of Cash Flows in Item 8. The primary investing activities are the
origination of both residential one- to four-family and commercial real estate
loans, and the purchase of investment securities and mortgage-backed securities.
During the years ended September 30, 2002, 2001 and 2000, the Company's loan
originations totaled $214.4 million, $139.3 million and $135.5 million,
respectively. Purchases of securities available for sale totaled $72.6 million,
$51.4 million and $35.7 million for the years ended September 30, 2002, 2001 and
2000, respectively. Purchases of securities held to maturity totaled $35.3
million, $30.4 million and $4.7 million for the years ended September 30, 2002,
2001 and 2000, respectively. These activities were funded primarily by deposit
growth (a financing activity), and by principal repayments on loans and
securities. Loan origination commitments totaled $62.3 million at September 30,
2002, comprised of $26.0 million at adjustable or variable rates and $36.3
million at fixed rates. Unused lines of credit granted to customers were $63.1
million at September 30, 2002. The Company anticipates that it will have
sufficient funds available to meet current loan commitments and lines of credit.
Deposit flows are generally affected by the level of interest rates,
the interest rates and products offered by local competitors, and other factors.
The net increase in total deposits was $58.5 million, $44.1 million and $22.3
million for the years ended September 30, 2002, 2001 and 2000, respectively.
Certificates of deposit that are scheduled to mature in one year or less from
September 30, 2002 totaled $186.2 million. Based upon prior experience and
current pricing strategy, management believes that a significant portion of such
deposits will remain with the Bank.
The Company monitors its liquidity position on a daily basis, and any
excess short-term liquidity is usually invested in overnight federal funds sold.
The Company generally remains fully invested and meets additional funding
requirements through FHLB borrowings (a financing activity), which amounted to
$103.0 million at September 30, 2002, including $30.3 million with a scheduled
maturity of less than one year.
At September 30, 2002, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $84.3 million, or 8.45% of
adjusted assets (which is above the required level of $39.9 million, or 4.0%)
and a total risk-based capital level of $91.7 million, or 15.48% of
risk-weighted assets (which is above the required level of $47.4 million, or
8.0%). These capital requirements, which are applicable to the Bank only, do not
consider additional capital retained by the Company. See Note 15 of the Notes to
Consolidated Financial Statements in Item 8 for additional information
concerning the Bank's capital requirements.
Recent Accounting Standards
Several recently-issued financial accounting standards will become
effective for the Company in fiscal 2003, as described in Note 19 of the Notes
to Consolidated Financial Statements in Item 8. Management does not expect that
the adoption of any of these standards will have a significant effect on the
Company's consolidated financial statements.
48
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
Management of Interest Rate Risk
The Company's most significant form of market risk is interest rate
risk. The general objective of the Company's interest rate risk management is to
determine the appropriate level of risk given the Company's business strategy,
and then manage that risk in a manner that is consistent with the Company's
policy to reduce the exposure of the Company's net interest income to changes in
market interest rates. The Bank's asset/liability management committee ("ALCO"),
which consists of senior management, evaluates the interest rate risk inherent
in certain assets and liabilities, the Company's operating environment, and
capital and liquidity requirements, and modifies lending, investing and deposit
gathering strategies accordingly. A committee of the Board of Directors reviews
the ALCO's activities and strategies, the effect of those strategies on the
Company's net interest margin, and the effect that changes in market interest
rates would have on the value of the Company's loan and securities portfolios.
The Company actively evaluates interest rate risk concerns in
connection with its lending, investing, and deposit activities. The Company
emphasizes the origination of residential monthly and bi-weekly fixed-rate
mortgage loans, residential and commercial adjustable-rate mortgage loans, and
consumer loans. Depending on market interest rates and the Company's capital and
liquidity position, the Company may retain all of its newly originated
fixed-rate, fixed-term residential mortgage loans or may sell all or a portion
of such longer-term loans on a servicing-retained basis. The Company also
invests in short-term securities, which generally have lower yields compared to
longer-term investments. Shortening the maturities of the Company's
interest-earning assets by increasing investments in shorter-term loans and
securities helps to better match the maturities and interest rates of the
Company's assets and liabilities, thereby reducing the exposure of the Company's
net interest income to changes in market interest rates. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer term, fixed-rate loans and investments. The
Company has purchased interest rate caps with a notional amount of $50.0 million
to reduce the variability of cash flows from potentially higher interest
payments associated with upward interest rate repricings on a portion of its
certificate of deposit accounts and borrowings. These interest rate caps have
not had a significant financial impact on the Company because interest rate
levels have remained below the cap levels at substantially all times since
inception of the agreements, which expire in fiscal 2003.
Management monitors interest rate sensitivity primarily through the use
of a model that simulates net interest income under varying interest rate
assumptions. Management also evaluates this sensitivity using a model that
estimates the change in the Bank's net portfolio value ("NPV") over a range of
interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. Both models assume
estimated loan prepayment rates, reinvestment rates and deposit decay rates
which seem most likely based on historical experience during prior interest rate
changes.
49
The table below sets forth, as of September 30, 2002, the estimated
changes in the Company's NPV and its net interest income that would result from
the designated instantaneous changes in the U.S. Treasury yield curve.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results.
NPV Net Interest Income
------------------------------------------------------- -----------------------------------------------
Estimated Increase Increase (Decrease) in
Change in (Decrease) in NPV Estimated Estimated Net Interest Income
Interest Rates Estimated ------------------ Net Interest ------------------------------
(basis points) NPV Amount Percent Income Amount Percent
-------------- ---------- ------- -------- -------------- --------- -------------
(Dollars in thousands)
+300 $ 114,232 $ (37,040) (24.5)% $ 41,963 $ (4,174) (9.0)%
+200 130,120 (21,152) (14.0) 43,102 (3,035) (6.6)
+100 143,944 (7,328) (4.8) 45,195 (942) (2.0)
0 151,272 -- -- 46,137 -- --
-100 152,323 1,051 0.7 46,442 305 0.7
-200 155,840 4,568 3.0 44,927 (1,210) (2.6)
The table set forth above indicates that at September 30, 2002, in the
event of an abrupt 100 basis point decrease in interest rates, the Company would
be expected to experience a 0.7 % increase in both NPV and net interest income.
In the event of an abrupt 200 basis point increase in interest rates, the
Company would be expected to experience a 14% decrease in NPV, and a 6.6%
decline in net interest income.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV and net interest income
requires making certain assumptions that may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. The
NPV and net interest income table presented above assumes that the composition
of the Company's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and,
accordingly, the data does not reflect any actions management may undertake in
response to changes in interest rates. The table also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or the repricing characteristics of
specific assets and liabilities. Accordingly, although the NPV and net interest
income table provides an indication of the Company's sensitivity to interest
rate changes at a particular point in time, such measurements are not intended
to and do 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.
50
ITEM 8. Financial Statements and Supplementary Data
- -------------------------------------------------------
The following are included in this item:
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition as of September
30, 2002 and 2001
(C) Consolidated Statements of Income for the years ended September
30, 2002, 2001 and 2000
(D) Consolidated Statements of Changes in Stockholders' Equity for
the years ended September 30, 2002, 2001 and 2000
(E) Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000
(F) Notes to Consolidated Financial Statements
The supplementary data required by this item (selected quarterly
financial data) is provided in Note 21 of the Notes to Consolidated Financial
Statements.
51
Independent Auditors' Report
The Board of Directors and Stockholders
Provident Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Provident Bancorp, Inc. and subsidiary (the "Company") as of September 30,
2002 and 2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Provident Bancorp,
Inc. and subsidiary as of September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
- ----------------
KPMG LLP
Stamford, Connecticut
October 25, 2002
52
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 2002 and 2001
(Dollars in thousands, except per share data)
Assets 2002 2001
--------------- -----------------
Cash and due from banks $ 35,093 $ 16,447
Securities (including $29,624 and $41,690 pledged as collateral
for borrowings in 2002 and 2001, respectively):
Available for sale, at fair value (note 4) 206,146 163,928
Held to maturity, at amortized cost (fair value of $90,706 in
2002 and $73,660 in 2001) (note 5) 86,791 71,355
--------------- -----------------
Total securities 292,937 235,283
--------------- -----------------
Loans (note 6):
One- to four-family residential mortgage loans 366,111 358,198
Commercial real estate, commercial business and construction loans 221,669 180,179
Consumer loans 83,419 76,892
Allowance for loan losses (10,383) (9,123)
--------------- -----------------
Total loans, net 660,816 606,146
--------------- -----------------
Accrued interest receivable (note 7) 5,491 5,597
Federal Home Loan Bank ("FHLB") stock, at cost 5,348 5,521
Premises and equipment, net (note 8) 11,071 8,917
Goodwill (note 2) 13,540 --
Core deposit intangible, net (note 2) 1,501 --
Other assets (notes 6, 11 and 12) 1,904 3,349
--------------- -----------------
Total assets $ 1,027,701 $ 881,260
=============== =================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $ 799,626 $ 653,100
FHLB borrowings (note 10) 102,968 110,427
Mortgage escrow funds (note 6) 3,747 6,197
Other (note 11) 10,493 8,916
--------------- -----------------
Total liabilities 916,834 778,640
--------------- -----------------
Commitments and contingencies (notes 16 and 17)
Stockholders' equity (notes 1 and 15):
Preferred stock (par value $0.10 per share; 10,000,000 shares authorized;
None issued or outstanding) -- --
Common stock (par value $0.10 per share; 20,000,000 shares authorized;
8,280,000 shares issued; 7,997,512 shares and 8,024,166 shares
Outstanding in 2002 and 2001, respectively) 828 828
Additional paid-in capital 36,696 36,535
Unallocated common stock held by employee stock ownership
Plan ("ESOP") (note 12) (1,974) (2,350)
Common stock awards under recognition and retention plan
("RRP") (note 12) (1,108) (1,729)
Treasury stock, at cost (282,488 shares in 2002 and 255,834 shares
in 2001) (note 15) (5,874) (4,298)
Retained earnings 76,727 69,252
Accumulated other comprehensive income, net of taxes (note 13) 5,572 4,382
--------------- -----------------
Total stockholders' equity 110,867 102,620
--------------- -----------------
Total liabilities and stockholders' equity $ 1,027,701 $ 881,260
=============== =================
See accompanying notes to consolidated financial statements.
53
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
2002 2001 2000
---------------- ---------------- ----------------
Interest and dividend income:
Loans $ 44,967 $ 46,434 $ 45,043
Securities 14,496 13,916 13,268
Other earning assets 488 628 588
---------------- ---------------- ----------------
Total interest and dividend income 59,951 60,978 58,899
---------------- ---------------- ----------------
Interest expense:
Deposits (note 9) 11,701 19,423 18,721
Borrowings 5,500 6,821 7,313
---------------- ---------------- ----------------
Total interest expense 17,201 26,244 26,034
---------------- ---------------- ----------------
Net interest income 42,750 34,734 32,865
Provision for loan losses (note 6) 900 1,440 1,710
---------------- ---------------- ----------------
Net interest income after provision for loan
losses 41,850 33,294 31,155
---------------- ---------------- ----------------
Non-interest income:
Banking fees and service charges 4,201 3,555 3,025
Net gain on sales of securities available for sale (note 4) 461 531 9
Other (note 6) 739 620 357
---------------- ---------------- ----------------
Total non-interest income 5,401 4,706 3,391
---------------- ---------------- ----------------
Non-interest expense:
Compensation and employee benefits (note 12) 17,246 14,129 13,509
Occupancy and office operations (note 17) 4,808 4,261 3,805
Advertising and promotion 1,470 1,507 1,096
Data processing 1,890 1,561 1,494
Merger integration costs (note 2) 531 -- --
Amortization of intangible assets (notes 2 and 3) 286 359 1,625
Other 5,930 4,614 4,279
---------------- ---------------- ----------------
Total non-interest expense 32,161 26,431 25,808
---------------- ---------------- ----------------
Income before income tax expense 15,090 11,569 8,738
Income tax expense (note 11) 5,563 4,087 2,866
---------------- ---------------- ----------------
Net income $ 9,527 $ 7,482 $ 5,872
================ ================ ================
Earnings per common share (note 14):
Basic $ 1.24 $ 0.98 $ 0.76
Diluted 1.22 0.97 0.76
================ ================ ================
See accompanying notes to consolidated financial statements.
54
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity Years
Ended September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Additional Unallocated Common
Common Paid-in ESOP Stock Awards Treasury Retained
Stock Capital Shares Under RRP Stock Earnings
--------- ---------- ------------- -------------- ---------- ---------
Balance at September 30, 1999 $ 828 $ 36,262 $(3,102) $ -- $ -- $57,754
Net income -- -- -- -- -- 5,872
Other comprehensive income (note 13) -- -- -- -- -- --
Total comprehensive
income
Cash dividends paid ($0.15 per common share) -- -- -- -- -- --
Purchases of treasury stock (202,200 shares) -- -- -- -- (3,203) --
ESOP shares allocated or committed to be
released for allocation -- 94 376 -- -- --
Awards of RRP shares -- -- -- (2,995) -- --
Vesting of RRP shares -- -- -- 689 -- --
--------- ------- --------- --------- -------
Balance at September 30, 2000 828 36,356 (2,726) (2,306) (3,203) 62,577
Net income -- -- -- -- -- 7,482
Other comprehensive income (note 13) -- -- -- -- -- --
Total comprehensive
income
Cash dividends paid ($0.22 per common share) -- -- -- -- -- (807)
Purchases of treasury stock (59,034 shares) -- -- -- -- (1,155) --
ESOP shares allocated or committed to be
released for allocation -- 179 376 -- -- --
Vesting of RRP shares -- -- -- 577 -- --
Stock option transactions -- -- -- -- 60 --
--------- ------- --------- --------- -------
Balance at September 30, 2001 828 36,535 (2,350) (1,729) (4,298) 69,252
Net income -- -- -- -- -- 9,527
Other comprehensive income (note 13) -- -- -- -- -- --
Total comprehensive
income
Cash dividends paid ($0.41 per common share) -- -- -- -- -- --
Purchases of treasury stock (69,317 shares) -- -- -- -- (1,971) --
ESOP shares allocated or committed to be
released for allocation -- 459 376 -- -- --
Vesting of RRP shares -- -- -- 621 -- --
Stock option and other equity transactions -- (298) -- -- 395 (117)
--------- ------- --------- --------- -------
Balance at September 30, 2002 $ 828 $ 36,696 $(1,974) $ (1,108) $ (5,874) $76,727
======= ========= ======= ========= ========= =======
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
------------- -------------
Balance at September 30, 1999 $ (1,443) $ 90,299
Net income -- 5,872
Other comprehensive income (note 13) 903 903
---------
Total comprehensive
income $ 6,775
Cash dividends paid ($0.15 per common share) (1,049) (1,049)
Purchases of treasury stock (202,200 shares) -- (3,203)
ESOP shares allocated or committed to be
released for allocation -- 470
Awards of RRP shares -- (2,995)
Vesting of RRP shares -- 689
--------- ---------
Balance at September 30, 2000 (540) 90,986
Net income -- 7,482
Other comprehensive income (note 13) 4,922 4,922
-------
Total comprehensive
income $ 12,404
Cash dividends paid ($0.22 per common share) -- (807)
Purchases of treasury stock (59,034 shares) -- (1,155)
ESOP shares allocated or committed to be
released for allocation -- 555
Vesting of RRP shares -- 577
Stock option transactions -- 60
--------- ---------
Balance at September 30, 2001 4,382 102,620
Net income -- 9,527
Other comprehensive income (note 13) 1,190 1,190
---------
Total comprehensive
income $ 10,717
Cash dividends paid ($0.41 per common share) (1,935) (1,935)
Purchases of treasury stock (69,317 shares) -- (1,971)
ESOP shares allocated or committed to be
released for allocation -- 835
Vesting of RRP shares -- 621
Stock option and other equity transactions -- (20)
--------- ---------
Balance at September 30, 2002 $ 5,572 $ 110,867
========= =========
See accompanying notes to consolidated financial statements
55
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 9,527 $ 7,482 $ 5,872
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900 1,440 1,710
Depreciation and amortization of premises
and equipment 1,876 1,741 1,625
Amortization of intangible assets 286 359 1,625
Net amortization of premiums and discounts
on securities 383 109 85
ESOP and RRP expense 1,456 1,132 1,159
Originations of loans held for sale (11,912) -- (361)
Proceeds from sales of loans held for sale 12,058 -- 808
Net gain on sales of securities available for sale (461) (531) (9)
Deferred income tax (benefit) expense (1,172) 1,897 (642)
Net changes in accrued interest receivable
and payable (428) (786) 992
Other adjustments (principally net changes in other
assets and other liabilities) 2,156 133 (640)
---------------- ---------------- ----------------
Net cash provided by operating activities 14,669 12,976 12,224
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of securities:
Available for sale (73,491) (51,368) (35,746)
Held to maturity (34,411) (30,366) (4,710)
Proceeds from maturities, calls and other principal
payments on securities:
Available for sale 29,907 29,743 17,439
Held to maturity 22,083 19,396 12,869
Proceeds from sales of securities available for sale 56,049 17,291 6,010
Loan originations (202,483) (139,297) (135,467)
Loan principal payments 169,652 121,129 109,580
Purchase of The National Bank of Florida, net of cash
and cash equivalents acquired (6,000) -- --
Redemption (purchase) of FHLB stock 173 1,502 (847)
Purchases of premises and equipment (2,382) (1,706) (2,345)
Other investing activities -- 259 350
---------------- ---------------- ----------------
Net cash used in investing activities (40,903) (33,417) (32,867)
---------------- ---------------- ----------------
Cash flows from financing activities:
Net increase in deposits 58,417 44,124 22,336
Net (decrease) increase in borrowings (7,459) (17,144) 9,818
Net (decrease) increase in mortgage escrow funds (2,450) 226 (4,518)
Treasury shares purchased (1,971) (1,155) (3,203)
Stock option transactions 278 60 --
Shares purchased for RRP awards -- (1,201) (1,794)
Cash dividends paid (1,935) (807) (1,049)
---------------- ---------------- ----------------
Net cash provided by financing activities 44,880 24,103 21,590
---------------- ---------------- ----------------
56
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Net increase in cash and cash equivalents $ 18,646 $ 3,662 $ 947
Cash and cash equivalents at beginning of year 16,447 12,785 11,838
-------- -------- --------
Cash and cash equivalents at end of year $ 35,093 $ 16,447 $ 12,785
======== ======== ========
Supplemental information:
Interest payments $ 17,735 $ 26,928 $ 25,382
Income tax payments 7,752 3,110 4,185
Securities transferred from available for sale to held to
maturity -- 11,865 --
Loans transferred to real estate owned 132 218 154
======== ======== ========
Acquisition of The National Bank of Florida, accounted for using the
purchase method:
Fair value of assets acquired $121,186 $ -- $ --
Fair value of liabilities assumed 93,086 -- --
-------- -------- --------
Cash paid for common stock $ 28,100 $ -- $ --
======== ======== ========
See accompanying notes to consolidated financial statements.
57
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(1) Reorganization and Stock Offering
On January 7, 1999, Provident Bank (the "Bank") completed its
reorganization into a mutual holding company structure (the
"Reorganization"). As part of the Reorganization, the Bank converted from
a federally-chartered mutual savings bank to a federally-chartered stock
savings bank (the "Conversion"). The Bank became the wholly-owned
subsidiary of Provident Bancorp, Inc., which became the majority-owned
subsidiary of Provident Bancorp, MHC (the "Mutual Holding Company").
Collectively, Provident Bancorp, Inc. and the Bank are referred to herein
as "the Company".
Provident Bancorp, Inc. issued a total of 8,280,000 common shares on
January 7, 1999, consisting of 3,864,000 shares (or 46.67%) sold to the
public (the "Offering") and 4,416,000 shares (or 53.33%) issued to the
Mutual Holding Company. The net proceeds from the sale of shares to the
public amounted to $37,113. Provident Bancorp, Inc. utilized net proceeds
of $24,000 to make a capital contribution to the Bank. The Company's
employee stock ownership plan ("ESOP") purchased 309,120 shares (or 8% of
the number of shares sold in the Offering) in open market transactions,
during January and February 1999, at a total cost of $3,760.
At September 30, 2002, the Mutual Holding Company owned 4,416,000 (or
55.22%) of the outstanding common shares of Provident Bancorp, Inc. and
the remaining 3,581,512 shares (or 44.78%) were owned by other
shareholders.
(2) Acquisition of The National Bank of Florida
On April 23, 2002, the Company consummated its acquisition of The
National Bank of Florida ("NBF"), which was merged with and into the
Bank, in an all-cash transaction. The Company acquired 100% of the
outstanding common stock of NBF for $28,100, pursuant to an Agreement and
Plan of Merger entered into during November 2001. The acquisition was
made to further the Company's strategic objective of expanding its retail
and commercial banking market share in Orange County, New York, where NBF
conducted its operations.
The NBF acquisition was accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations. Accordingly, the assets acquired
and liabilities assumed were recorded by the Company at their fair values
at the acquisition date. The total acquisition cost (including direct
transaction costs) exceeded the fair value of the net assets acquired by
$15,327. This amount was recognized as intangible assets, consisting of
goodwill of $13,540 (none of which is tax deductible) and a core deposit
intangible of $1,787.
The core deposit intangible represents the estimated value of acquired
depositor relationships, principally attributable to the relatively
low-cost funding provided by such deposits. Amortization expense for the
core deposit intangible was $286 for the period from the acquisition date
through September 30, 2002, representing the accumulated amortization at
that date. Scheduled core deposit amortization expense is $438 for fiscal
2003, $301 for fiscal 2004, $220 for fiscal 2005, $164 for fiscal 2006,
$123 for fiscal 2007 and $255 for later years.
Costs incurred by the Company to integrate the operations of NBF into the
Bank amounted to $531 and are included in non-interest expense for the
year ended September 30, 2002.
58
The following is a summary of the fair values of the assets acquired and
liabilities assumed at the acquisition date (in thousands):
Assets acquired:
Cash and cash equivalents $ 24,286
Securities 55,809
Loans, net 23,112
Goodwill 13,540
Core deposit intangible 1,787
Other 2,652
---------
121,186
---------
Liabilities assumed:
Deposits 88,182
Other 4,904
---------
93,086
---------
Cash paid for NBF common stock $ 28,100
=========
Amounts attributable to NBF are included in the Company's consolidated
financial statements from the date of acquisition. Pro forma combined
operating results for the fiscal years ended September 30, 2002 and 2001,
as if NBF had been acquired at the beginning of those periods, have not
been presented since the NBF acquisition would not materially affect such
results.
(3) Summary of Significant Accounting Policies
The Bank is a community bank offering financial services to individuals
and businesses primarily in Rockland County, New York and contiguous
areas such as Orange County, New York. The Bank's principal business is
accepting deposits and, together with funds generated from operations and
borrowings, investing in various types of loans and securities. The Bank
is a federally-chartered savings bank and its deposits are insured up to
applicable limits by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation ("FDIC"). The Office of Thrift
Supervision ("OTS") is the primary regulator for the Bank, Provident
Bancorp, Inc. and the Mutual Holding Company.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Provident
Bancorp, Inc., the Bank, and the Bank's wholly-owned subsidiaries. These
subsidiaries are (i) Provident Municipal Bank ("PMB") which is a
limited-purpose, New York State-chartered commercial bank formed to
accept deposits from municipalities in the Company's market area, (ii)
Provident REIT, Inc. which is a real estate investment trust that holds a
portion of the Company's real estate loans, (iii) Provest Services Corp.
I which has invested in a low-income housing partnership, and (iv)
Provest Services Corp. II which has engaged a third-party provider to
sell mutual funds and annuities to the Bank's customers. Intercompany
transactions and balances are eliminated in consolidation. The accounts
of the Mutual Holding Company are not included in the consolidated
financial statements.
59
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America. In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expense. Actual results could
differ significantly from these estimates. An estimate that is
particularly susceptible to significant near-term change is the allowance
for loan losses, which is discussed below.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation. For purposes of reporting cash flows, cash
equivalents (if any) include highly-liquid, short-term investments such
as overnight federal funds.
Securities
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, requires entities to classify securities among three
categories -- held to maturity, trading, and available for sale.
Management determines the appropriate classification of the Company's
securities at the time of purchase.
Held-to-maturity securities are limited to debt securities for which
management has the intent and the Company has the ability to hold to
maturity. These securities are reported at amortized cost.
Trading securities are debt and equity securities held principally for
the purpose of selling them in the near term. These securities are
reported at fair value, with unrealized gains and losses included in
earnings. The Company does not engage in security trading activities.
All other debt and marketable equity securities are classified as
available for sale. These securities are reported at fair value, with
unrealized gains and losses (net of the related deferred income tax
effect) excluded from earnings and reported in a separate component of
stockholders' equity (accumulated other comprehensive income or loss).
Available-for-sale securities include securities that management intends
to hold for an indefinite period of time, such as securities to be used
as part of the Company's asset/liability management strategy or
securities that may be sold in response to changes in interest rates,
changes in prepayment risks, the need to increase capital, or similar
factors.
Premiums and discounts on debt securities are recognized in interest
income on a level-yield basis over the period to maturity. The cost of
securities sold is determined using the specific identification method.
Unrealized losses are charged to earnings when management determines that
the decline in fair value of a security is other than temporary.
Loans
Loans (other than loans held for sale) are reported at amortized cost
less the allowance for loan losses. Mortgage loans originated and held
for sale in the secondary market (if any) are reported at the lower of
aggregate cost or estimated market value. Market value is estimated based
on outstanding investor commitments or, in the absence of such
commitments, based on current investor yield requirements. Net unrealized
losses, if any, are recognized in a valuation allowance by a charge to
earnings.
A loan is placed on non-accrual status when management has determined
that the borrower may be unable to meet contractual principal or interest
obligations, or when payments are 90 days or more past due. Accrual of
interest ceases and, in general, uncollected past due interest (including
interest applicable to prior years, if any) is reversed and charged
against current interest income. Interest payments received on
non-accrual loans, including impaired loans under SFAS No. 114, are not
recognized as income unless warranted based on the borrower's financial
condition and payment record.
The Company defers non-refundable loan origination and commitment fees,
and certain direct loan origination costs, and amortizes the net amount
as an adjustment of the yield over the contractual term of the loan. If a
loan is prepaid or sold, the net deferred amount is recognized in the
statement of income at that time.
60
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
losses charged to earnings. Losses on loans (including impaired loans)
are charged to the allowance for loan losses when management believes
that the collection of principal is unlikely. Recoveries of loans
previously charged-off are credited to the allowance when realized.
The allowance for loan losses is an amount that management believes is
necessary to absorb probable losses on existing loans that may become
uncollectable, based on evaluations of the collectability of the loans.
Management's evaluations, which are subject to periodic review by the
OTS, take into consideration factors such as the Company's past loan loss
experience, changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans and
collateral values, and current economic conditions that may affect the
borrowers' ability to pay. Future adjustments to the allowance for loan
losses may be necessary based on changes in economic and real estate
market conditions, further information obtained regarding known problem
loans, results of regulatory examinations, the identification of
additional problem loans, and other factors.
In accordance with SFAS No. 114, Accounting by Creditors for Impairment
of a Loan, the Company considers a loan to be impaired when, based on
current information and events, it is probable that it will be unable to
collect all principal and interest contractually due. SFAS No. 114
applies to loans that are individually evaluated for collectability in
accordance with the Company's ongoing loan review procedures (principally
commercial real estate, commercial business and construction loans). The
standard does not generally apply to smaller-balance homogeneous loans
that are collectively evaluated for impairment, such as residential
mortgage loans and consumer loans. Under SFAS No. 114, creditors are
permitted to report impaired loans based on one of three measures -- the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. If the
measure of an impaired loan is less than its recorded investment, an
impairment loss is recognized as part of the allowance for loan losses.
Mortgage Servicing Assets
The cost of an originated mortgage loan that is sold with servicing
retained is allocated between the loan and the servicing right. The cost
allocated to the retained servicing right is capitalized as a separate
asset and amortized thereafter in proportion to, and over the period of,
estimated net servicing income. Capitalized mortgage servicing rights are
assessed for impairment based on the fair value of those rights, and
impairment losses are recognized in a valuation allowance by charges to
income.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank ("FHLB") of New York, the Bank
is required to hold a certain amount of FHLB stock. This stock is a
non-marketable equity security under SFAS No. 115 and, accordingly, is
reported at cost.
Premises and Equipment
Premises and equipment are reported at cost, less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related
assets which range from 3 to 40 years. Leasehold improvements are
amortized on a straight-line basis over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is
shorter. Routine holding costs are charged to expense as incurred, while
significant improvements are capitalized.
Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill recorded in the NBF acquisition is not amortized to expense, but
instead is evaluated for impairment at least annually. The core deposit
intangible recorded in the NBF acquisition is amortized to expense using
an accelerated method over its estimated life of approximately nine
years, and is evaluated for impairment at least annually. Impairment
losses on intangible assets are charged to expense if and when they
occur.
61
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Core deposit intangibles recorded in the Company's 1996 branch
acquisitions became fully amortized during fiscal 2001, prior to the
effective date of SFAS No. 142. Amortization expense for these intangible
assets was $359 in fiscal 2001 and $1,625 in fiscal 2000.
Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded
initially at estimated fair value less expected sales costs, with any
resulting writedown charged to the allowance for loan losses. Subsequent
valuations are performed by management, and the carrying amount of a
property is adjusted by a charge to expense to reflect any subsequent
declines in estimated fair value. Fair value estimates are based on
recent appraisals and other available information. Routine holding costs
are charged to expense as incurred, while significant improvements are
capitalized. Gains and losses on sales of real estate owned are
recognized upon disposition.
Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities to
a counterparty under an agreement to repurchase the identical securities
at a fixed price on a future date. These agreements are accounted for as
secured financing transactions since the Company maintains effective
control over the transferred securities and the transfer meets other
specified criteria. Accordingly, the transaction proceeds are recorded as
borrowings and the underlying securities continue to be carried in the
Company's securities portfolio. Disclosure of the pledged securities is
made in the consolidated statements of financial condition if the
counterparty has the right by contract to sell or repledge such
collateral.
Income Taxes
Deferred taxes are recognized for the estimated future tax effects
attributable to "temporary differences" between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax laws or rates is
recognized in income tax expense in the period that includes the
enactment date of the change.
A deferred tax liability is recognized for all temporary differences that
will result in future taxable income. A deferred tax asset is recognized
for all temporary differences that will result in future tax deductions,
subject to reduction of the asset by a valuation allowance in certain
circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more
likely than not that some portion or all of the deferred tax asset will
not be realized. The valuation allowance is subject to ongoing adjustment
based on changes in circumstances that affect management's judgment about
the realizability of the deferred tax asset. Adjustments to increase or
decrease the valuation allowance are charged or credited, respectively,
to income tax expense.
Interest Rate Cap Agreements
Interest rate cap agreements are accounted for in accordance with SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which the Company adopted as of October 1, 2000. These agreements are
cash flow hedges since they are used to reduce the variability of cash
flows from potentially higher interest payments associated with upward
interest rate repricings on a portion of the Company's certificate of
deposit accounts and borrowings. In accordance with SFAS No. 133, the
interest rate cap agreements are reported at fair value. Changes in fair
value attributable to time value are reported in interest expense, while
changes attributable to intrinsic value are reported in accumulated other
comprehensive income until earnings are affected by the variability in
cash flows of the hedged liabilities. In fiscal 2000, prior to the
adoption of SFAS No. 133, payments (if any) due from the counterparties
to the agreements were recognized as a reduction of interest expense and
premiums paid by the Company were amortized on a straight-line basis to
interest expense.
62
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Stock-Based Compensation Plans
Compensation expense is recognized for the Company's ESOP equal to the
fair value of shares that have been allocated or committed to be released
for allocation to participants. Any difference between the fair value of
the shares at that time and the ESOP's original acquisition cost is
charged or credited to stockholders' equity (additional paid-in capital).
The cost of ESOP shares that have not yet been allocated or committed to
be released for allocation is deducted from stockholders' equity.
The Company accounts for its stock option plan in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. Accordingly, compensation expense is recognized only
if the exercise price of an option is less than the fair value of the
underlying stock at the grant date. SFAS No. 123, Accounting for
Stock-Based Compensation, encourages entities to recognize the fair value
of all stock-based awards (measured at the grant date) as compensation
expense over the vesting period. Alternatively, SFAS No. 123 allows
entities to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosures of net income and earnings per share as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and
provide these pro forma disclosures.
The recognition and retention plan ("RRP") is also accounted for in
accordance with APB Opinion No. 25. The fair value of the shares awarded,
measured at the grant date, is recognized as unearned compensation (a
deduction from stockholders' equity) and amortized to compensation
expense as the shares become vested. Tax benefits attributable to any tax
deductions that are greater than the amount of compensation expense
recognized for financial statement purposes are credited to additional
paid-in capital.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income
applicable to common stock by the weighted average number of common
shares outstanding during the period. Diluted EPS is computed in a
similar manner, except that the weighted average number of common shares
is increased to include incremental shares (computed using the treasury
stock method) that would have been outstanding if all potentially
dilutive stock options and unvested RRP shares were exercised or became
vested during the period. For purposes of computing both basic and
diluted EPS, outstanding shares include all shares issued to the Mutual
Holding Company, but exclude unallocated ESOP shares.
Segment Information
Public companies are required to report certain financial information
about significant revenue-producing segments of the business for which
such information is available and utilized by the chief operating
decision maker. As a community-oriented financial institution,
substantially all of the Company's operations involve the delivery of
loan and deposit products to customers. Management makes operating
decisions and assesses performance based on an ongoing review of these
community banking operations, which constitute the Company's only
operating segment for financial reporting purposes.
63
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(4) Securities Available for Sale
The following is a summary of securities available for sale at
September 30, 2002 and 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
September 30, 2002
- ----------------------------
Mortgage-Backed Securities
Fannie Mae $ 29,643 $ 1,046 $ (5) $ 30,684
Freddie Mac 18,135 483 (5) 18,613
Other 8,671 680 -- 9,351
--------- --------- --------- ---------
56,449 2,209 (10) 58,648
--------- --------- --------- ---------
Investment Securities
U.S. Government and
Agency securities 109,077 4,206 -- 113,283
Corporate debt securities 30,079 2,065 -- 32,144
Equity securities 1,113 1,060 (102) 2,071
--------- --------- --------- ---------
140,269 7,331 (102) 147,498
--------- --------- --------- ---------
Total available for sale $ 196,718 $ 9,540 $ (112) $ 206,146
========= ========= ========= =========
September 30, 2001
---------
Mortgage-Backed Securities
Fannie Mae $ 21,525 $ 613 $ -- $ 22,138
Freddie Mac 26,875 883 (9) 27,749
Other 9,478 162 -- 9,640
--------- --------- --------- ---------
57,878 1,658 (9) 59,527
--------- --------- --------- ---------
Investment Securities
U.S. Government and
Agency securities 48,869 2,288 -- 51,157
Corporate debt securities 48,367 2,505 -- 50,872
Equity securities 1,290 1,143 (61) 2,372
--------- --------- --------- ---------
98,526 5,936 (61) 104,401
--------- --------- --------- ---------
Total available for sale $ 156,404 $ 7,594 $ (70) $ 163,928
========= ========= ========= =========
Equity securities principally consist of Freddie Mac and Fannie Mae
common and preferred stock.
64
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of
investment securities available for sale (other than equity securities)
at September 30, 2002, by remaining period to contractual maturity.
Actual maturities may differ because certain issuers have the right to
call or prepay their obligations.
Amortized Fair
Cost Value
-------- --------
Remaining period to contractual maturity:
Less than one year $ 27,207 $ 27,802
One to five years 110,844 116,515
Greater than ten years 1,105 1,110
-------- --------
Total $139,156 $145,427
======== ========
Proceeds from sales of securities available for sale during the years
ended September 30, 2002, 2001 and 2000 totaled $56,049, $17,291 and
$6,010, respectively. These sales resulted in gross realized gains of
$744 and gross realized losses of $283 in fiscal 2002, and gross realized
gains of $531 and $9 in fiscal 2001 and fiscal 2000, respectively.
The Company transferred securities with a fair value of $11,865 from its
available-for-sale portfolio to its held-to-maturity portfolio during the
year ended September 30, 2001, based on management's evaluation of the
respective portfolios and the Company's investment policy and strategies.
The securities were assigned a new cost basis in the held-to-maturity
portfolio equal to their fair value at the transfer date. The net
unrealized loss of $146 at the transfer date and the related discounts
are being amortized as offsetting yield adjustments over the terms of the
securities.
Securities with carrying amounts of $29,624 and $41,690 were pledged as
collateral for borrowings under securities repurchase agreements at
September 30, 2002 and 2001, respectively. At September 30, 2002 and
2001, U.S. Government securities with carrying amounts of $15,656 and
$4,772, respectively, were pledged as collateral for municipal deposits
and other purposes.
65
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(5) Securities Held to Maturity
The following is a summary of securities held to maturity at September 30,
2002 and 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- -------- -------
September 30, 2002
--------------------------
Mortgage-Backed Securities
Fannie Mae $32,904 $ 1,700 $ -- $34,604
Freddie Mac 34,693 1,116 (21) 35,788
Other 2,785 204 -- 2,989
------- ------- -------- -------
70,382 3,020 (21) 73,381
Investment Securities
State and municipal securities 16,409 916 -- 17,325
------- ------- -------- -------
Total held to maturity $86,791 $ 3,936 $ (21) $90,706
======= ======= ======== =======
September 30, 2001
-------
Mortgage-Backed Securities
Fannie Mae $27,971 $ 983 $ (1) $28,953
Freddie Mac 26,477 917 -- 27,394
Other 5,001 152 -- 5,153
------- ------- -------- -------
59,449 2,052 (1) 61,500
Investment Securities
State and municipal securities 11,906 254 -- 12,160
------- ------- -------- -------
Total held to maturity $71,355 $ 2,306 $ (1) $73,660
======= ======= ======== =======
The following is a summary of the amortized cost and fair value of
investment securities held to maturity at September 30, 2002, by
remaining period to contractual maturity. Actual maturities may differ
because certain issuers have the right to call or repay their
obligations.
Amortized Fair
Cost Value
------- -------
Remaining period to contractual maturity:
Less than one year $ 1,750 $ 1,750
One to five years 3,097 3,287
Five to ten years 9,963 10,600
Greater than ten years 1,599 1,688
------- -------
Total $16,409 $17,325
======= =======
66
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
There were no sales of securities held to maturity during the years ended
September 30, 2002, 2001 and 2000.
(6) Loans
The components of the loan portfolio were as follows at September 30:
2002 2001
--------- ---------
One- to four-family residential mortgage loans:
Fixed rate $ 299,851 $ 278,668
Adjustable rate 66,260 79,530
--------- ---------
366,111 358,198
--------- ---------
Commercial real estate loans 163,329 129,295
Commercial business loans 41,320 31,394
Construction loans 17,020 19,490
--------- ---------
221,669 180,179
--------- ---------
Consumer loans:
Home equity lines of credit 39,727 31,125
Homeowner loans 36,880 39,501
Other consumer loans 6,812 6,266
--------- ---------
83,419 76,892
--------- ---------
Total loans 671,199 615,269
Allowance for loan losses (10,383) (9,123)
--------- ---------
Total loans, net $ 660,816 $ 606,146
========= =========
Total loans include net deferred loan origination costs of $1,048 and
$914 at September 30, 2002 and 2001, respectively.
67
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
A substantial portion of the Company's loan portfolio is secured by residential
and commercial real estate located in Rockland County, New York and contiguous
areas such as Orange County, New York. The ability of the Company's borrowers to
make principal and interest payments is dependent upon, among other things, the
level of overall economic activity and the real estate market conditions
prevailing within the Company's concentrated lending area. Commercial real
estate and construction loans are considered by management to be of somewhat
greater credit risk than loans to fund the purchase of a primary residence due
to the generally larger loan amounts and dependency on income production or sale
of the real estate. Substantially all of these loans are collateralized by real
estate located in the Company's primary market area.
The principal balances of non-accrual loans were as follows at September 30:
2002 2001 2000
------ ------ ------
One- to four-family residential
mortgage loans $2,291 $1,684 $2,496
Commercial real estate loans 2,492 418 1,149
Construction loans -- -- 27
Consumer loans 171 175 359
------ ------ ------
Total non-accrual loans $4,954 $2,277 $4,031
====== ====== ======
Had the non-accrual loans at September 30 remained on accrual status throughout
the respective years, gross interest income of $371, $165 and $337 would have
been recognized in fiscal 2002, 2001 and 2000, respectively. Interest income
actually recognized on such loans (including income recognized on a cash basis)
totaled $83, $13 and $77 in fiscal 2002, 2001 and 2000, respectively.
The Company's total recorded investment in impaired loans, as defined by SFAS
No. 114, was $588 and $358 at September 30, 2002 and 2001, respectively.
Substantially all of these loans were collateral-dependent loans measured based
on the fair value of the collateral. The Company determines the need for an
allowance for loan impairment under SFAS No. 114 on a loan-by-loan basis. An
impairment allowance was not required at September 30, 2002 and 2001 due to the
adequacy of collateral values. The Company's average recorded investment in
impaired loans was $473, $768 and $1,196 during the years ended September 30,
2002, 2001 and 2000, respectively.
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
2002 2001 2000
-------- -------- --------
Balance at beginning of year $ 9,123 $ 7,653 $ 6,202
Provision for loan losses 900 1,440 1,710
Charge-offs (324) (159) (370)
Recoveries 147 189 111
Allowance recorded in NBF acquisition 537 -- --
-------- -------- --------
Balance at end of year $ 10,383 $ 9,123 $ 7,653
======== ======== ========
Real estate owned properties are included in other assets at net carrying
amounts of $41 and $109 at September 30, 2002 and 2001, respectively. Provisions
for losses and other activity in the allowance for losses on real estate owned
were insignificant during the years ended September 30, 2002, 2001 and 2000.
68
Certain residential mortgage loans originated by the Company are sold in
the secondary market. Other non-interest income includes net gains on such
sales of $146 in fiscal 2002, none in fiscal 2001 and $28 in fiscal 2000.
There were no loans held for sale at September 30, 2002 and 2001. Other
assets at September 30, 2002 and 2001 include capitalized mortgage
servicing rights with an amortized cost of $193 and $201, respectively,
which approximated fair value.
The Company generally retains the servicing rights on mortgage loans sold.
Servicing loans for others involves collecting payments, maintaining escrow
accounts, making remittances to investors and, if necessary, processing
foreclosures. Mortgage loans serviced for others totaled approximately
$73,600, $86,700 and $98,500 at September 30, 2002, 2001 and 2000,
respectively. These amounts include loans sold with recourse (approximately
$838 at September 30, 2002) for which management does not expect the
Company to incur any significant losses. Mortgage escrow funds include
balances of $879 and $1,416 at September 30, 2002 and 2001, respectively,
related to loans serviced for others.
(7) Accrued Interest Receivable
The components of accrued interest receivable were as follows at
September 30:
2002 2001
-------- --------
Loans $ 2,561 $ 2,971
Securities 2,930 2,626
-------- --------
Total accrued interest receivable $ 5,491 $ 5,597
======== ========
(8) Premises and Equipment
Premises and equipment are summarized as follows at September 30:
2002 2001
-------- --------
Land and land improvements $ 1,368 $ 1,090
Buildings 6,802 4,775
Leasehold improvements 4,600 4,163
Furniture, fixtures and equipment 10,895 9,607
-------- --------
23,665 19,635
Accumulated depreciation and amortization (12,594) (10,718)
-------- --------
Total premises and equipment, net $ 11,071 $ 8,917
======== ========
(9) Deposits
Deposit balances and weighted average interest rates are summarized as
follows at September 30:
2002 2001
-------------------- ---------------------
Amount Rate Amount Rate
-------------------- -------- -----
Demand deposits:
Retail $ 54,399 --% $ 41,280 --%
Commercial 55,732 -- 33,081 --
NOW deposits 82,983 0.40 63,509 0.49
Savings deposits 247,918 0.99 160,777 1.05
Money market deposits 115,065 1.23 109,126 1.81
Certificates of deposit 243,529 2.64 245,327 4.63
-------- ----
Total deposits $799,626 1.33% $653,100 2.31%
======== ========
Municipal deposits held by PMB totaled $8,800 at September 30, 2002.
69
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Certificates of deposit at September 30 had remaining periods to
contractual maturity as follows:
2002 2001
-------- --------
Remaining period to contractual maturity:
Less than one year $186,160 $218,850
One to two years 36,168 20,433
Two to three years 13,485 2,499
Greater than three years 7,716 3,545
-------- --------
Total certificates of deposit $243,529 $245,327
======== ========
Certificate of deposit accounts with a denomination of $100 or more
totaled $38,562 and $32,660 at September 30, 2002 and 2001, respectively.
The FDIC generally insures depositor accounts up to $100 as defined in the
applicable regulations.
Interest expense on deposits is summarized as follows for the years ended
September 30:
2002 2001 2000
------- ------- -------
Savings deposits $ 2,289 $ 2,898 $ 3,435
Money market and NOW deposits 1,750 2,610 2,499
Certificates of deposit 7,662 13,915 12,787
------- ------- -------
Total interest expense $11,701 $19,423 $18,721
======= ======= =======
(10) FHLB Borrowings
The Company's FHLB borrowings and weighted average interest rates are
summarized as follows at September 30:
2002 2001
-------------------------- --------------------------
Amount Rate Amount Rate
-------- -------- -------- --------
By type of borrowing:
Advances $ 72,968 3.63% 70,677 5.39%
Repurchase agreements 30,000 5.17 39,750 5.18
-------- --------
Total borrowings $102,968 4.08% $110,427 5.32%
========= ========
By remaining period to maturity:
Less than one year $ 30,319 3.24% $ 39,950 6.20%
One to two years 20,000 5.02 20,477 4.73
Two to three years 15,000 2.69 15,000 5.43
Three to four years 8,000 4.72 10,000 3.74
Four to five years 9,649 4.69 -- --
Greater than five years 20,000 4.88 25,000 4.96
-------- --------
Total borrowings $102,968 4.08% $110,427 5.32%
======== ========
70
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
As a member of the FHLB of New York, the Bank may borrow in the form of
term and overnight FHLB advances up to 30% of its total assets, or
approximately $308,000 at September 30, 2002. The Bank's unused FHLB
borrowing capacity was approximately $235,000 at that date. FHLB advances
are secured by the Bank's investment in FHLB stock and by a blanket
security agreement. This agreement requires the Bank to maintain as
collateral certain qualifying assets (such as securities and residential
mortgage loans) not otherwise pledged. The Bank satisfied this collateral
requirement at September 30, 2002 and 2001.
Securities repurchase agreements had weighted average remaining terms to
maturity of approximately 4.3 years and 5.3 years at September 30, 2002
and 2001, respectively. Average borrowings under securities repurchase
agreements were $34,479, $36,417 and $40,515 during the years ended
September 30, 2002, 2001 and 2000, respectively, and the maximum
outstanding month-end balance was $39,750, $39,750 and $44,750,
respectively.
FHLB borrowings of $35,000 at September 30, 2002 are callable quarterly,
at the discretion of the FHLB. These borrowings have a weighted average
remaining term to the contractual maturity dates of approximately 4 years
and a weighted average interest rate of 5.11% at September 30, 2002.
(11) Income Taxes
Income tax expense consists of the following for the years ended
September 30:
2002 2001 2000
------- ------- -------
Current tax expense:
Federal $ 5,872 $ 1,839 $ 3,214
State 863 351 294
------- ------- -------
6,735 2,190 3,508
------- ------- -------
Deferred tax (benefit) expense:
Federal (918) 1,800 (472)
State (254) 97 (170)
------- ------- -------
(1,172) 1,897 (642)
------- ------- -------
Total income tax expense $ 5,563 $ 4,087 $ 2,866
======= ======= =======
Actual income tax expense differs from the tax computed based on pre-tax
income and the applicable statutory Federal tax rate, for the following
reasons:
2002 2001 2000
------- ------- -------
Tax at Federal statutory rate $ 5,282 $ 3,933 $ 2,971
State income taxes, net of Federal tax benefit 396 296 82
Tax-exempt interest (193) (148) (139)
Non-deductible portion of ESOP expense 161 61 32
Low-income housing tax credits (72) (72) (72)
Other, net (11) 17 (8)
------- ------- -------
Actual income tax expense $ 5,563 $ 4,087 $ 2,866
======= ======= =======
Effective income tax rate 36.9% 35.3% 32.8%
======= ======= =======
71
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at September 30 are summarized below. The net
amount is reported in other assets or other liabilities in the
consolidated statements of financial condition.
2002 2001
------- -------
Deferred tax assets:
Allowance for loan losses $ 4,226 $ 3,516
Deferred compensation 1,924 1,389
Core deposit intangibles 1,132 1,904
Depreciation of premises and equipment 540 448
Other 150 164
------- -------
Total deferred tax assets 7,972 7,421
------- -------
Deferred tax liabilities:
Net unrealized gain on securities available for sale (3,720) (2,954)
Undistributed earnings of subsidiary not consolidated for tax
return purposes (Provident REIT, Inc.) (3,067) (3,193)
Purchase accounting fair value adjustments (578) --
Prepaid pension costs (484) (394)
Other (604) (509)
------- -------
Total deferred tax liabilities (8,453) (7,050)
------- -------
Net deferred tax (liability) asset $ (481) $ 371
======= =======
Based on management's consideration of historical and anticipated future
pre-tax income, as well as the reversal period for the items giving rise
to the deferred tax assets and liabilities, a valuation allowance for
deferred tax assets was not considered necessary at September 30, 2002
and 2001.
The Bank is subject to special provisions in the Federal and New York
State tax laws regarding its allowable tax bad debt deductions and
related tax bad debt reserves. Tax bad debt reserves consist of a defined
"base-year" amount, plus additional amounts accumulated after the base
year. Deferred tax liabilities are recognized with respect to reserves
accumulated after the base year, as well as any portion of the base-year
amount that is expected to become taxable (or recaptured) in the
foreseeable future. The Bank's base-year tax bad debt reserves were
$4,600 for Federal tax purposes and $31,600 for New York State tax
purposes at September 30, 2002. Associated deferred tax liabilities of
$3,400 have not been recognized since the Company does not expect that
the base-year reserves will become taxable in the foreseeable future.
Under the tax laws, events that would result in taxation of certain of
these reserves include (i) redemptions of the Bank's stock or certain
excess distributions by the Bank to Provident Bancorp, Inc. and (ii)
failure of the Bank to maintain a specified qualifying-assets ratio or
meet other thrift definition tests for New York State tax purposes.
72
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(12) Employee Benefit Plans and Stock-Based Compensation Plans
Pension Plan
The Company has a non-contributory defined benefit pension plan covering
substantially all of its employees. Employees who are twenty-one years of
age or older and have worked for the Company for one year are eligible to
participate in the plan. The Company's funding policy is to contribute
annually an amount sufficient to meet statutory minimum funding
requirements, but not in excess of the maximum amount deductible for
Federal income tax purposes. Contributions are intended to provide not
only for benefits attributed to service to date, but also for benefits
expected to be earned in the future.
The following is a summary of changes in the projected benefit obligation
and fair value of plan assets, together with a reconciliation of the
funded status to the amount of prepaid pension costs reported in other
assets in the consolidated statements of financial condition:
2002 2001
------- -------
Changes in projected benefit obligation:
Beginning of year $ 6,889 $ 5,421
Service cost 430 465
Interest cost 490 427
Actuarial (gain) loss (427) 640
Acquisition of NBF 1,875 --
Benefits paid (125) (64)
------- -------
End of year 9,132 6,889
------- -------
Changes in fair value of plan assets:
Beginning of year 6,385 7,459
Actual loss on plan assets (895) (1,150)
Employer contributions 600 140
Acquisition of NBF 1,922 --
Benefits paid (125) (64)
------- -------
End of year 7,887 6,385
------- -------
Funded status at end of year (1,245) (504)
Unrecognized net actuarial loss 2,555 1,500
Unrecognized prior service cost (70) (82)
Unrecognized net transition obligation 62 86
------- -------
Prepaid pension costs $ 1,302 $ 1,000
======= =======
A discount rate of 6.75% and a rate of increase in future compensation
levels of 5.0% were used in determining the actuarial present value of
the projected benefit obligation at September 30, 2002 (7.25% and 5.5%,
respectively, at September 30, 2001). The long-term rate of return on
plan assets was 8.0% for fiscal 2002 and 2001.
73
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The components of the net periodic pension expense were as follows for
the years ended September 30:
2002 2001 2000
----- ----- -----
Service cost $ 430 $ 465 $ 515
Interest cost 490 427 409
Expected return on plan assets (598) (600) (539)
Amortization of prior service cost (14) (14) (14)
Amortization of net transition obligation 26 26 26
Recognized net actuarial loss (gain) 12 (2) --
----- ----- -----
Net periodic pension expense $ 346. $ 302 $ 397
===== ===== =====
The Company has also established a non-qualified Supplemental Executive
Retirement Plan to provide certain executives with supplemental
retirement benefits in addition to the benefits provided by the pension
plan. The periodic pension expense for the supplemental plan amounted to
$90, $59 and $54 for the years ended September 30, 2002, 2001 and 2000,
respectively. The actuarial present value of the projected benefit
obligation was $555 and $426 at September 30, 2002 and 2001,
respectively, all of which is unfunded.
Other Postretirement Benefits Plan
The Company's postretirement health care plan, which is unfunded,
provides optional medical, dental and life insurance benefits to
retirees. In accordance with SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, the cost of postretirement
benefits is accrued over the years in which employees provide services to
the date of their full eligibility for such benefits. As permitted by
SFAS No. 106, the Company has elected to amortize the transition
obligation for accumulated benefits as an expense over a 20-year period.
The periodic expense recognized for this plan was $32, $37 and $39 for
the years ended September 30, 2002, 2001 and 2000, respectively.
Employee Savings Plans
The Company also sponsors a defined contribution plan established under
Section 401(k) of the Internal Revenue Code. Eligible employees may elect
to contribute up to 10% of their compensation to the plan. The Company
currently makes matching contributions equal to 50% of a participant's
contributions up to a maximum matching contribution of 3% of
compensation. Voluntary and matching contributions are invested, in
accordance with the participant's direction, in one or a number of
investment options. Savings plan expense was $206, $184 and $180 for the
years ended September 30, 2002, 2001 and 2000, respectively. A
supplemental savings plan has also been established for certain senior
officers. Expense recognized for this plan was $68, $62 and $53 for the
years ended September 30, 2002, 2001 and 2000, respectively.
Employee Stock Ownership Plan
In connection with the Reorganization and Offering, the Company
established an ESOP for eligible employees who meet certain age and
service requirements. The ESOP borrowed $3,760 from Provident Bancorp,
Inc. and used the funds to purchase 309,120 shares of common stock in the
open market subsequent to the Offering. The Bank makes periodic
contributions to the ESOP sufficient to satisfy the debt service
requirements of the loan which has a ten-year term and bears interest at
the prime rate. The ESOP uses these contributions, and any dividends
received by the ESOP on unallocated shares, to make principal and
interest payments on the loan.
ESOP shares are held by the plan trustee in a suspense account until
allocated to participant accounts. Shares released from the suspense
account are allocated to participants on the basis of their relative
compensation in the year of allocation. Participants become vested in the
allocated shares over a period not to exceed five years. Any forfeited
shares are allocated to other participants in the same proportion as
contributions.
74
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
ESOP expense was $835, $555 and $470 for the years ended September 30,
2002, 2001 and 2000, respectively. Through September 30, 2002, a
cumulative total of 146,582 shares have been allocated to participants or
committed to be released for allocation. The cost of ESOP shares that
have not yet been allocated to participants or committed to be released
for allocation is deducted from stockholders' equity (162,538 shares with
a cost of $1,974 and a fair value of approximately $4,600 at September
30, 2002).
Recognition and Retention Plan
In February 2000, the Company's stockholders approved the Provident Bank
2000 Recognition and Retention Plan (the "RRP"). The principal purpose of
the RRP is to provide executive officers and directors a proprietary
interest in the Company in a manner designed to encourage their continued
performance and service. A total of 193,200 shares were awarded under the
RRP in February 2000, and the grant-date fair value of these shares
($2,995) was charged to stockholders' equity. The awards vest at a rate
of 20% on each of five annual vesting dates, the first of which was
September 30, 2000. RRP expense was $621, $577 and $689 for the years
ended September 30, 2002, 2001 and 2000, respectively.
Stock Option Plan
The stockholders also approved the Provident Bank 2000 Stock Option Plan
(the Stock Option Plan) in February 2000. A total of 386,400 shares of
authorized but unissued common stock has been reserved for issuance under
the Stock Option Plan, although the Company may also fund option
exercises using treasury shares. Options have a ten-year term and may be
either non-qualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock at an
exercise price equal to the fair market value of the stock on the grant
date.
The following is a summary of activity in the Stock Option Plan:
Shares Subject to Weighted Average
Option Exercise Price
-------------------- --------------------
Granted in February 2000 366,650 $15.50
Forfeited (11,250) 15.50
-------------------- --------------------
Outstanding at September 30, 2000 355,400 15.50
Granted 5,451 21.15
Exercised (10,851) 15.50
Forfeited (1,200) 15.50
-------------------- --------------------
Outstanding at September 30, 2001 348,800 15.59
Granted 44,331 25.97
Exercised (86,994) 16.43
Forfeited (3,100) 15.50
-------------------- --------------------
Outstanding at September 30, 2002 303,037 $16.87
==================== ====================
Options exercisable at September 30, 2002, 2001 and 2000 totaled 157,463,
137,815 and 71,080, respectively, with a weightd average exercise price of
approximately $16.70, $15.50 and $15.50 per share, respectively. These
options had weighted average remaining terms of 7.4 years, 8.4 years and
9.4 years at the respective dates. There were 35,300 shares available for
future option grants at September 30, 2002.
75
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
In accordance with the provisions of APB Opinion No. 25 related to fixed
stock options, compensation expense is not recognized with respect to the
Company's options since the exercise price equals the fair value of the
common stock at the grant date. Under the alternative fair-value-based
method defined in SFAS No. 123, the grant-date fair value of fixed stock
options is recognized as expense over the vesting period. The estimated
per-share fair value of options granted in fiscal 2002, 2001 and 2000 was
$7.06, $5.80 and $5.90, respectively, using the Black-Scholes
option-pricing model with assumptions as follows for the respective years:
dividend yields of 1.4%, 1.3% and 1.0%; expected volatility rates of 22.4%,
22.7% and 22.0%; risk-free interest rates of 4.2%, 3.9% and 6.6%; and
expected option lives of approximately 6 years, 7 years and 8 years. Had
the fair-value-based method of SFAS No. 123 been applied to the options
granted, net income would have been approximately $9,000, $7,100 and $5,300
for the years ended September 30, 2002, 2001 and 2000, respectively. Basic
and diluted earnings per common share would have been $1.17 and $1.15,
respectively, for fiscal 2002; $0.93 and $0.92, respectively, for fiscal
2001; and $0.68 and $0.68, respectively, for fiscal 2000.
(13) Comprehensive Income
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net
unrealized gain or loss on securities available for sale. The Company has
reported its comprehensive income in the consolidated statements of
changes in stockholders' equity.
The components of other comprehensive income are summarized as follows
for the years ended September 30:
2002 2001 2000
------------- ------------- -------------
Net unrealized holding gain arising during the
year on securities available for sale, net of
related income taxes of $(950), $(3,526)
and $(606), respectively $ 1,429 $ 5,289 $ 908
Reclassification adjustment for net realized
gains included in net income, net of related
income taxes of $184, $212 and $4 in 2002,
2001 and 2000, respectively (277) (319) (5)
------------- ------------- -------------
1,152 4,970 903
Net unrealized gain (loss) on derivatives, net
of related income taxes of $26 and $32 in
2002 and 2001, respectively (note 16) 38 (48) --
------------- ------------- -------------
Other comprehensive income $ 1,190 $ 4,922 $ 903
============= ============= =============
The Company's accumulated other comprehensive income included in
stockholders' equity at September 30, 2002 and 2001 consists of (i) the
after-tax net unrealized gain of $5,582 and $4,430, respectively, on
securities available for sale, and (ii) the after-tax net unrealized loss
of $10 and $48, respectively, on derivatives accounted for as cash flow
hedges.
76
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(14) Earnings Per Common Share
The following is a summary of the calculation of earnings per share
("EPS") for the years ended September 30:
2002 2001 2000
------ ------ ------
(In thousands, except per share data)
Net income $9,527 $7,482 $5,872
====== ====== ======
Weighted average common shares outstanding
for computation of basic EPS (1) 7,702 7,661 7,773
Common-equivalent shares due to the dilutive
effect of stock options and RRP awards (2) 118 50 --
------ ------ ------
Weighted average common shares for
computation of diluted EPS 7,820 7,711 7,773
====== ====== ======
Earnings per common share:
Basic $ 1.24 $ 0.98 $ 0.76
Diluted 1.22 0.97 0.76
====== ====== ======
(1) Includes all shares issued to the Mutual Holding Company, but excludes
unallocated ESOP shares. (2) Represents incremental shares computed using the
treasury stock method.
(15) Stockholders' Equity
Regulatory Capital Requirements
OTS regulations require savings institutions to maintain a minimum ratio
of tangible capital to total adjusted assets of 1.5%, a minimum ratio of
Tier 1 (core) capital to total adjusted assets of 4.0%, and a minimum
ratio of total (core and supplementary) capital to risk-weighted assets
of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories -- well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a Tier 1 (core) capital ratio of at least
5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors. These
capital requirements apply only to the Bank, and do not consider
additional capital retained by Provident Bancorp, Inc.
Management believes that, as of September 30, 2002 and 2001, the Bank met
all capital adequacy requirements to which it was subject. Further, the
most recent OTS notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations. There have
been no conditions or events since that notification that management
believes have changed the Bank's capital classification.
77
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The following is a summary of the Bank's actual regulatory capital
amounts and ratios at September 30, 2002 and 2001, compared to the OTS
requirements for minimum capital adequacy and for classification as a
well-capitalized institution. PMB is also subject to certain regulatory
capital requirements which it satisfied as of September 30, 2002.
OTS Requirements
---------------------------------------------------------
Bank Actual Minimum Capital Adequacy Classification as Well
Capitalized
-------------------------- ---------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----------- ------------ ------------ ------------ ------------
September 30, 2002:
Tangible capital $ 84,307 8.5% $ 14,963 1.5% $ -- --%
Tier 1 (core) capital 84,307 8.5 39,901 4.0 49,875 5.0
Risk-based
capital:
Tier 1 84,307 14.2 -- -- 35,552 6.0
Total 91,747 15.5 47,403 8.0 59,254 10.0
============= =========== ============ ============ ============ ============
September 30, 2001:
Tangible capital $ 88,526 10.2% $ 13,015 1.5% $ -- --%
Tier 1 (core) capital 88,526 10.2 34,706 4.0 43,383 5.0
Risk-based
capital:
Tier 1 88,526 16.9 -- -- 31,404 6.0
Total 95,100 18.2 41,873 8.0 52,341 10.0
============= =========== ============ ============ ============ ============
Tangible and Tier 1 capital amounts represent the stockholder's equity of
the Bank, less intangible assets and after-tax net unrealized gains on
securities available for sale. Total capital represents Tier 1 capital
plus the allowance for loan losses up to a maximum amount equal to 1.25%
of risk-weighted assets.
Dividend Payments
Under OTS regulations, savings associations such as the Bank generally
may declare annual cash dividends up to an amount equal to the sum of net
income for the current year and net income retained for the two preceding
years. Dividend payments in excess of this amount require OTS approval.
The Bank paid cash dividends of $2,000 to Provident Bancorp, Inc. during
the year ended September 30, 2000 (none during the years ended September
30, 2002 and 2001).
Unlike the Bank, Provident Bancorp, Inc. is not subject to OTS regulatory
limitations on the payment of dividends to its shareholders. The Mutual
Holding Company waived the receipt of cash dividends with respect to its
shares of Provident Bancorp, Inc. amounting to $1,310 in fiscal 2002,
$972 in fiscal 2001 and $309 in fiscal 2000, for a cumulative total of
$2,591 through September 30, 2002.
Stock Repurchase Programs
The Company completed a stock repurchase program during the year ended
September 30, 2000, purchasing 193,200 common shares for the treasury at
a total cost of $3,061. In July 2000, the Company announced a second
repurchase program to acquire up to 5%, or approximately 185,000, of its
publicly-traded shares as market conditions warrant. A total of 137,351
shares have been purchased for the treasury under the second program
through September 30, 2002 at a total cost of $3,268.
78
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Liquidation Rights
All depositors who had liquidation rights with respect to the Bank as of
the effective date of the Reorganization continue to have such rights
solely with respect to the Mutual Holding Company, as long as they
continue to hold deposit accounts with the Bank. In addition, all persons
who become depositors of the Bank subsequent to the Reorganization will
have liquidation rights with respect to the Mutual Holding Company.
(16) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to
off-balance-sheet financial instruments that involve, to varying degrees,
elements of credit risk and interest rate risk in addition to the amounts
recognized in the consolidated financial statements. The contractual or
notional amounts of these instruments, which reflect the extent of the
Company's involvement in particular classes of off-balance-sheet
financial instruments, are summarized as follows at September 30:
2002 2001
----------- ----------
Lending-related instruments:
Loan origination commitments:
Fixed-rate loans $ 36,285 $ 9,983
Adjustable-rate loans 26,048 2,282
Unused lines of credit 63,091 37,748
Standby letters of credit 6,862 6,716
Interest rate risk management:
Interest rate cap agreements 50,000 50,000
========== ==========
Lending-Related Instruments
The contractual amounts of loan origination commitments, unused lines of
credit and standby letters of credit represent the Company's maximum
potential exposure to credit loss, assuming (i) the instruments are fully
funded at a later date, (ii) the borrowers do not meet the contractual
payment obligations, and (iii) any collateral or other security proves to
be worthless. The contractual amounts of these instruments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully
drawn upon. Substantially all of these lending-related instruments have
been entered into with customers located in the Company's primary market
area described in note 6.
Loan origination commitments are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments have fixed expiration dates (generally ranging
up to 60 days) or other termination clauses, and may require payment of a
fee by the customer. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral, if any,
obtained by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral varies but may
include mortgages on residential and commercial real estate, deposit
accounts with the Company, and other property. The Company's fixed-rate
loan origination commitments at September 30, 2002 provide for interest
rates ranging principally from 5.00% to 6.87%.
Unused lines of credit are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Lines of credit generally have fixed expiration dates or
other termination clauses. The amount of collateral obtained, if deemed
necessary by the Company, is based on management's credit evaluation of
the borrower.
Standby letters of credit are conditional commitments issued by the
Company to assure the performance of financial obligations of a customer
to a third party. These commitments are primarily issued in favor of
local municipalities to support the obligor's completion of real estate
development projects. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers.
79
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Interest Rate Cap Agreements
At September 30, 2002 and 2001, the Company was a party to two interest
rate cap agreements with a total notional amount of $50,000 and maturity
dates in March and April 2003. These agreements were entered into to
reduce the variability of cash flows from potentially higher interest
payments associated with upward interest rate repricings on a portion of
the Company's certificate of deposit accounts and borrowings. The
counterparties to the agreements are obligated to make payments to the
Company, based on the notional amounts, to the extent that the
three-month LIBOR rate exceeds specified levels during the term of the
agreements. These specified rate levels are 8.25% and 6.50% for interest
rate cap agreements with notional amounts of $30,000 and $20,000,
respectively.
The Company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as of October 1, 2000, and recorded an after-tax
transition adjustment of $41 to recognize the interest rate cap
agreements at fair value. The Company's interest rate cap agreements are
accounted for as cash flow hedges under SFAS No. 133 and are reported at
fair value, which was insignificant at both September 30, 2002 and 2001.
Interest expense for the years ended September 30, 2002 and 2001 includes
charges of $68 and $157, respectively, for the effect of the interest
rate cap agreements. The remaining amount reported in accumulated other
comprehensive income with respect to these agreements at September 30,
2002 will be reclassified into earnings during fiscal 2003.
(17) Commitments and Contingencies
Certain premises and equipment are leased under operating leases with
terms expiring through 2025. The Company has the option to renew certain
of these leases for terms of up to five years. Future minimum rental
payments due under non-cancelable operating leases with initial or
remaining terms of more than one year at September 30, 2002 are $2,005
for fiscal 2003, $2,070 for fiscal 2004, $1,870 for fiscal 2005, $1,329
for fiscal 2006, $1,279 for fiscal 2007 and a total of $3,382 for later
years. Occupancy and office operations expense includes net rent expense
of $1,137, $1,076 and $1,008 for the years ended September 30, 2002, 2001
and 2000, respectively.
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. Management, after consultation with
legal counsel, does not anticipate losses on any of these claims or
actions that would have a material adverse effect on the consolidated
financial statements.
(18) Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information for those financial
instruments for which it is practicable to estimate fair value, whether
or not such financial instruments are recognized in the consolidated
statements of financial condition. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
Quoted market prices are used to estimate fair values when those prices
are available, although active markets do not exist for many types of
financial instruments. Fair values for these instruments must be
estimated by management using techniques such as discounted cash flow
analysis and comparison to similar instruments. These estimates are
highly subjective and require judgments regarding significant matters,
such as the amount and timing of future cash flows and the selection of
discount rates that appropriately reflect market and credit risks.
Changes in these judgments often have a material effect on the fair value
estimates. Since these estimates are made as of a specific point in time,
they are susceptible to material near-term changes. Fair values disclosed
in accordance with SFAS No. 107 do not reflect any premium or discount
that could result from the sale of a large volume of a particular
financial instrument, nor do they reflect possible tax ramifications or
estimated transaction costs.
80
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The following is a summary of the carrying amounts and estimated fair
values of financial assets and liabilities at September 30 (none of which
were held for trading purposes):
2002 2001
------------------------------------ -------------------------------------
Estimated Fair Estimated Fair
Carrying Amount Value Carrying Amount Value
---------------- ----------------- ----------------- -----------------
Financial assets:
Cash and due from banks $ 35,093 $ 35,093 $ 16,447 $ 16,447
Securities available for sale 206,146 206,146 163,928 163,928
Securities held to maturity 86,791 90,706 71,355 73,660
Loans 660,816 678,927 606,146 624,020
Accrued interest receivable 5,491 5,491 5,597 5,597
FHLB stock 5,348 5,348 5,521 5,521
Financial liabilities:
Deposits 799,626 802,040 653,100 655,675
FHLB borrowings 102,968 106,308 110,427 113,970
Mortgage escrow funds 3,747 3,747 6,197 6,197
================ ================= ================= =================
The following paragraphs summarize the principal methods and assumptions
used by management to estimate the fair value of the Company's financial
instruments.
Securities
The estimated fair values of securities were based on quoted market
prices.
Loans
Fair values were estimated for portfolios of loans with similar financial
characteristics. For valuation purposes, the total loan portfolio was
segregated into adjustable-rate and fixed-rate categories. Fixed-rate
loans were further segmented by type, such as residential mortgage,
commercial mortgage, commercial business and consumer loans. Loans were
also segmented by maturity dates.
Fair values were estimated by discounting scheduled future cash flows
through estimated maturity using a discount rate equivalent to the
current market rate on loans that are similar with regard to collateral,
maturity and the type of borrower. The discounted value of the cash flows
was reduced by a credit risk adjustment based on loan categories. Based
on the current composition of the Company's loan portfolio, as well as
past experience and current economic conditions and trends, the future
cash flows were adjusted by prepayment assumptions that shortened the
estimated remaining time to maturity and therefore affected the fair
value estimates.
Deposits
In accordance with SFAS No. 107, deposits with no stated maturity (such
as savings, demand and money market deposits) were assigned fair values
equal to the carrying amounts payable on demand. Certificates of deposit
were segregated by account type and original term, and fair values were
estimated by discounting the contractual cash flows. The discount rate
for each account grouping was equivalent to the current market rates for
deposits of similar type and maturity.
These fair values do not include the value of core deposit relationships
that comprise a significant portion of the Company's deposit base.
Management believes that the Company's core deposit relationships provide
a relatively stable, low-cost funding source that has a substantial value
separate from the deposit balances.
81
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
FHLB Borrowings
Fair values of FHLB borrowings were estimated by discounting the
contractual cash flows. A discount rate was utilized for each outstanding
borrowing equivalent to the then-current rate offered by the FHLB on
borrowings of similar type and maturity.
Other Financial Instruments
The other financial assets and liabilities listed in the preceding table
have estimated fair values that approximate the respective carrying
amounts because the instruments are payable on demand or have short-term
maturities and present relatively low credit risk and interest rate risk.
The fair values of the Company's off-balance-sheet financial instruments
described in note 16 were estimated based on current market terms
(including interest rates and fees), considering the remaining terms of
the agreements and the credit worthiness of the counterparties. At
September 30, 2002 and 2001, the estimated fair values of these
instruments approximated the related carrying amounts, which were
insignificant.
(19) Recent Accounting Standards
The following financial accounting standards will become effective for
the Company during fiscal 2003. Management does not expect that the
adoption of any of these standards will have a significant effect on the
Company's consolidated financial statements.
SFAS No. 143, Accounting for Asset Retirement Obligations, is effective
for financial statements issued for fiscal years beginning after June 15,
2002 and addresses obligations associated with the retirement of tangible
long-lived assets and the related asset retirement costs. SFAS No. 143
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The related asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, is effective for fiscal years beginning after December 15, 2001.
The standard addresses financial accounting and reporting for the
impairment or disposal of long-lived assets, and is generally consistent
with the prior requirements of SFAS No. 121.
SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections, updates, clarifies
and simplifies several existing accounting pronouncements. Among other
things, SFAS No. 145 eliminates the requirement in SFAS No. 4 to report
gains and losses from extinguishments of debt as extraordinary items, net
of related income taxes.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires that a liability be recognized for these costs only
when incurred, while existing practice calls for recognition of a
liability when an entity commits to an exit plan. This statement is
effective for exit or disposal activities initiated after December 31,
2002.
SFAS No. 147, Acquisitions of Certain Financial Institutions, eliminates
the requirement to amortize an excess of fair value of liabilities
assumed over the fair value of assets acquired in certain acquisitions of
financial institutions. SFAS No. 147 also amends SFAS No. 144 to include
in its scope long-term customer relationship intangible assets of
financial institutions, such as core deposit intangibles.
82
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(20) Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition of
Provident Bancorp, Inc. at September 30, 2002 and 2001, and the related
condensed statements of income and cash flows for the years ended
September 30, 2002, 2001 and 2000:
At September 30,
--------------------------------
2002 2001
--------------- --------------
Condensed Statements of Financial Condition
-------------------------------------------
Assets:
Cash $ 641 $ 2,847
Securities available for sale 6,466 6,510
Loan receivable from ESOP 2,256 2,632
Investment in Provident Bank 102,805 90,419
Other assets 195 305
--------------- --------------
Total assets $ 112,363 $ 102,713
=============== ==============
Liabilities $ 1,496 $ 93
Stockholders' equity 110,867 102,620
--------------- --------------
Total liabilities and stockholders' equity $ 112,363 $ 102,713
=============== ==============
83
Year Ended September 30,
---------------------------------------------
2002 2001 2000
------- ------- -------
Condensed Statements of Income
Interest income $ 450 $ 626 $ 902
Dividends from Provident Bank -- -- 2,000
Gain on sales of securities available for sale 123 431 --
Non-interest expense (226) (180) (180)
Income tax expense (134) (338) (279)
------- ------- -------
Income before equity in undistributed earnings of Provident
Bank 213 539 2,443
Equity in undistributed earnings of Provident Bank 9,314 6,943 3,429
------- ------- -------
Net income $ 9,527 $ 7,482 $ 5,872
======= ======= =======
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income $ 9,527 $ 7,482 $ 5,872
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed earnings of Provident Bank (9,314) (6,943) (3,429)
Other adjustments, net 755 (674) (781)
------- ------- -------
Net cash provided by (used in) operating
activities 968 (135) 1,662
------- ------- -------
Cash flows from investing activities:
Purchases of securities available for sale (2,296) (2,431) (1,008)
Proceeds from sales of securities available for sale 2,374 6,810 984
ESOP loan principal repayments 376 376 376
------- ------- -------
Net cash provided by investing activities 454 4,755 352
------- ------- -------
Cash flows from financing activities:
Treasury shares purchased (1,971) (1,155) (3,203)
Cash dividends paid (1,935) (807) (1,049)
Stock option transactions 278 60 --
------- ------- -------
Net cash used in financing activities (3,628) (1,902) (4,252)
------- ------- -------
Net (decrease) increase in cash (2,206) 2,718 (2,238)
Cash at beginning of year 2,847 129 2,367
------- ------- -------
Cash at end of year $ 641 $ 2,847 $ 129
======= ======= =======
84
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(21) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations
for the years ended September 30, 2002 and 2001:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended September 30, 2002
Interest and dividend income $14,761 $14,558 $15,010 $15,622
Interest expense 4,791 4,192 4,217 4,001
------- ------- ------- -------
Net interest income 9,970 10,366 10,793 11,621
Provision for loan losses 225 175 200 300
Non-interest income 1,284 1,230 1,338 1,549
Non-interest expense 7,153 7,270 8,479 9,259
------- ------- ------- -------
Income before income tax expense 3,876 4,151 3,452 3,611
Income tax expense 1,350 1,550 1,309 1,354
------- ------- ------- -------
Net income $ 2,526 $ 2,601 $ 2,143 $ 2,257
======= ======= ======= =======
Earnings per common share:
Basic $ 0.33 $ 0.34 $ 0.28 $ 0.29
Diluted 0.32 0.33 0.27 0.29
======= ======= ======= =======
Year Ended September 30, 2001
Interest and dividend income $15,369 $15,361 $15,155 $15,093
Interest expense 7,061 6,921 6,412 5,850
------- ------- ------- -------
Net interest income 8,308 8,440 8,743 9,243
Provision for loan losses 360 360 360 360
Non-interest income 1,051 1,023 1,477 1,155
Non-interest expense 6,125 6,739 6,664 6,903
------- ------- ------- -------
Income before income tax expense 2,874 2,364 3,196 3,135
Income tax expense 999 799 1,092 1,197
------- ------- ------- -------
Net income $ 1,875 $ 1,565 $ 2,104 $ 1,938
======= ======= ======= =======
Earnings per common share:
Basic $ 0.24 $ 0.20 $ 0.27 $ 0.25
Diluted 0.24 0.20 0.27 0.25
======= ======= ======= =======
85
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
- ---------------------------------------------------------------
The "Proposal I - Election of Directors" section of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held in February 2003
(the "Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
- -------------------------------
The Company does not have any equity compensation program that was not
approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of September 30, 2002,
regarding equity compensation to directors and executive officers of the Company
that has been approved by stockholders.
================================== ========================= ================== ==========================
Equity compensation plans Number of securities to Number of securities
approved by be Weighted average remaining available for
stockholders Issued upon exercise of exercise price issuance
outstanding options and under plan
rights
---------------------------------- ------------------------- ------------------ --------------------------
Stock Option Plan 255,532 $ 17.01 35,300
---------------------------------- ------------------------- ------------------ --------------------------
Recognition and Retention Plan 77,283 Not Applicable 0
(1)
---------------------------------- ------------------------- ------------------ --------------------------
Total (2) 332,815 $ 17.01 35,300
================================== ========================= ================== ==========================
(1) Represents shares that have been granted but have not yet vested.
(2) Weighted average exercise price represents Stock Option Plan only,
since RRP shares have no exercise price.
The "Proposal I - Election of Directors" section of the Proxy Statement
is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management &
- --------------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
The "Proposal I - Election of Directors" section of the Proxy Statement
is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The "Transactions with Certain Related Persons" section of the Proxy
Statement is incorporated herein by reference.
86
PART IV
ITEM 14. Controls and Procedures
- ------------------------------------
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-14(c) under the Exchange Act) was
evaluated as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures were effective in timely
alerting them to the material information relating to the Company (or the
Company's consolidated subsidiaries) required to be included in its periodic SEC
filings.
(b) Changes in internal controls.
There were no significant changes made in the Company's internal
controls during the period covered by this report or, to their knowledge, in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
87
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
..------------------------------------------------------------------------
(a) (1) Financial Statements
--------------------
The financial statements filed in Item 8 of this Form 10-K are
as follows:
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition as of
September 30, 2002 and 2001
(C) Consolidated Statements of Income for the years ended
September 30, 2002, 2001 and 2000
(D) Consolidated Statements of Changes in Stockholders'
Equity for the years ended September 30, 2002, 2001,
and 2000
(E) Consolidated Statements of Cash Flows for the years
ended September 30, 2002, 2001 and 2000
(F) Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the
required information is inapplicable or has been included in
the Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter
ended September 30, 2002.
(c) Exhibits
--------
3.1 Stock Holding Company Charter of Provident Bancorp,
Inc. (incorporated herein by reference to the
Company's Registration Statement on Form S-1,
file No. 333-63593 (the "S-1")
3.2 Bylaws of Provident Bancorp, Inc. (incorporated
herein by reference to the S-1)
4 Form of Stock Certificate of Provident Bancorp, Inc.
(incorporated herein by reference to the S-1)
10.1 Form of Employee Stock Ownership Plan (incorporated
herein by reference to the S-1)
10.2 Employment Agreement with George Strayton, as amended
(incorporated herein by reference to the S-1)
10.3 Form of Employment Agreement (incorporated
herein by reference to the S-1)
10.4 Deferred Compensation Agreement (incorporated herein
by reference to the S-1)
10.5 Supplemental Executive Retirement Plan, as amended
(incorporated herein by reference to the S-1)
10.6 Management Incentive Program (incorporated herein by
reference to the S-1)
10.7 1996 Long-Term Incentive Plan for Officers and
Directors, as amended (incorporated herein by
reference to the S-1)
10.8 Provident Bank Stock Option Plan (incorporated herein
by reference to the Company's Proxy Statement for the
2000 Annual Meeting of Stockholders, filed with the
SEC on January 18, 2000)
10.9 Provident Bank Recognition and Retention Plan
(incorporated herein by reference to the Company's
Proxy Statement for the 2000 Annual Meeting of
Stockholders, filed with the SEC on January 18, 2000)
21 Subsidiaries of the Company
23.1 Consent of KPMG LLP
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
amended by Section 906 of the Sarbanes-Oxley
Act of 2002
88
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Provident Bancorp, Inc.
Date: December 27, 2002 By: \s\ George Strayton
----------------------------------
George Strayton
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: \s\ George Strayton By: \s\ Katherine Dering
---------------------------------- ----------------------------
George Strayton Katherine Dering
President, Chief Executive Officer Chief Financial Officer and
and Director Senior Vice President
Date: December 27 ,2002 Date: December 27, 2002
By: \s\ William F. Helmer By: \s\ Dennis L. Coyle
---------------------------------- ----------------------------
William F. Helmer Dennis L. Coyle,
Chairman of the Board Vice Chairman
Date: December 27, 2002 Date: December 27, 2002
By: \s\ Judith Hershaft By: \s\ Thomas F. Jauntig, Jr.
---------------------------------- ----------------------------
Judith Hershaft, Director Thomas F. Jauntig, Jr.,
Director
Date: December 27, 2002 Date: December 27, 2002
By: \s\ Donald T. McNelis By: \s\ Richard A. Nozell
---------------------------------- ----------------------------
Donald T. McNelis, Director Richard A. Nozell, Director
Date: December 27, 2002 Date: December 27, 2002
By: \s\ William R. Sichol, Jr. By: \s\ Burt Steinberg
---------------------------------- ----------------------------
William R. Sichol, Jr., Director Burt Steinberg, Director
Date: December 27, 2002 Date: December 27, 2002
By: \s\ F. Gary Zeh
----------------------------------
F. Gary Zeh, Director
Date: December 27, 2002
89
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, George Strayton, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Provident Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
December 27, 2002 /s/ George Strayton
------------------ -------------------------------------
Date George Strayton
President and Chief Executive Officer
90
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Katherine A. Dering, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of Provident Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
December 27, 2002 /s/ Katherine A. Dering
------------------ -------------------------
Date Katherine A. Dering
Senior Vice President and
Chief Financial Officer
91