SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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)
United States of America 06-1537499
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
----------------------- ------------------
$0.10 per share 7,969,302
as of May 7, 2003
1
PROVIDENT BANCORP, INC.
QUARTERLY PERIOD ENDED MARCH 31, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
March 31, 2003 and September 30, 2002 3-4
Consolidated Statements of Income for the Three Months and
Six Months Ended March 31, 2003 and 2002 5
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2003 and 2002 6-7
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2003 and 2002 8-9
Consolidated Statements of Comprehensive Income for the
Three Months and Six Months Ended March 31, 2003 and 2002 10
Notes to Consolidated Financial Statements 11-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-32
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 32
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 35
Signature 36
Exhibit 99.1 37
Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 38-41
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
At At
Assets March 31, 2003 September 30, 2002
- ------ -------------- ------------------
Cash and due from banks $ 31,861 $ 35,093
Securities (Note 7):
Available for sale, at fair value (amortized cost of
$227,437 at March 31, 2003 and $196,718 at
September 30, 2002) 234,906 206,146
Held to maturity, at amortized cost (fair value of $96,805
at March 31, 2003 and $90,706 at September 30, 2002) 93,289 86,791
Regulatory Securities, at cost 5,970 5,348
----------- -----------
Total securities 334,165 298,285
----------- -----------
Loans (Notes 5) 690,593 671,199
Allowance for loan losses (Note 3) (10,901) (10,383)
----------- -----------
Total loans, net 679,692 660,816
----------- -----------
Accrued interest receivable, net 5,168 5,491
Premises and equipment, net 11,344 11,071
Goodwill (Note 4) 13,540 13,540
Bank owned life insurance 12,161 --
Other assets 3,322 3,405
----------- -----------
Total assets $ 1,091,253 $ 1,027,701
=========== ===========
(Continued)
3
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED
(Unaudited)
(Dollars in thousands, except per share data)
At At
Liabilities and Stockholders' Equity March 31, 2003 September 30, 2002
- ------------------------------------ -------------- ------------------
Liabilities:
Deposits (Note 6):
Non interest bearing $ 122,817 $ 110,131
Interest bearing 717,784 689,495
----------- -----------
Total deposits 840,601 799,626
Borrowings 119,388 102,968
Mortgage escrow funds 7,645 3,747
Other 10,074 10,493
----------- -----------
Total liabilities 977,708 916,834
----------- -----------
Stockholders' equity:
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; 7,972,102 and 7,997,512 shares
outstanding at March 31, 2003 and September 30, 2002,
respectively) 828 828
Additional paid-in capital 36,979 36,696
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (147,082 shares at March 31, 2003
and 162,538 shares at September 30, 2002, respectively) (1,785) (1,974)
Common stock awards under recognition and retention plan ("RRP") (852) (1,108)
Treasury stock, at cost (307,898 shares at March 31, 2003 and
282,488 shares at September 30, 2002, respectively) (6,854) (5,874)
Retained earnings 80,819 76,727
Accumulated other comprehensive income 4,410 5,572
----------- -----------
Total stockholders' equity 113,545 110,867
----------- -----------
Total liabilities and stockholders' equity $ 1,091,253 $ 1,027,701
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share data)
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Interest and dividend income:
Loans $ 11,129 $ 11,002 $ 22,475 $ 22,222
Securities 3,296 3,532 6,968 7,067
Other earning assets 14 24 20 30
---------- ---------- ---------- ----------
Total interest and dividend income 14,439 14,558 29,463 29,319
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,965 2,698 4,310 6,001
Borrowings 982 1,494 2,026 2,982
---------- ---------- ---------- ----------
Total interest expense 2,947 4,192 6,336 8,983
---------- ---------- ---------- ----------
Net interest income 11,492 10,366 23,127 20,336
Provision for loan losses (Note 3) 300 175 600 400
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 11,192 10,191 22,527 19,936
---------- ---------- ---------- ----------
Non-interest income:
Banking fees and service charges 1,114 935 2,203 1,911
Gain on sales of securities available for sale 427 90 1,084 237
Gains on sales of loans 403 34 442 40
Other 423 171 641 326
---------- ---------- ---------- ----------
Total non-interest income 2,367 1,230 4,370 2,514
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits 5,304 3,976 9,999 7,833
Occupancy and office operations 1,254 1,182 2,490 2,266
Advertising and promotion 495 304 911 705
Consulting fees 210 72 423 198
Data processing 528 440 1,101 843
Amortization of core deposit intangible 115 -- 242 --
Other 1,651 1,296 2,864 2,578
---------- ---------- ---------- ----------
Total non-interest expense 9,557 7,270 18,030 14,423
---------- ---------- ---------- ----------
Income before income tax expense 4,002 4,151 8,867 8,027
Income tax expense 1,482 1,550 3,306 2,900
---------- ---------- ---------- ----------
Net income $ 2,520 $ 2,601 $ 5,561 $ 5,127
========== ========== ========== ==========
Weighted average common shares:
Basic 7,717,668 7,703,009 7,719,635 7,694,528
Diluted 7,835,432 7,847,100 7,834,907 7,825,278
Per common share: (Note 8)
Basic $ 0.33 $ 0.34 $ 0.72 $ 0.67
Diluted 0.32 0.33 0.71 0.66
Dividends declared 0.14 0.10 0.27 0.18
Book value at period end $ 14.24 $ 13.15
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2003
(Unaudited)
(In thousands, except share data)
Common Accumulated
Additional Unallocated Stock Other Total
Common Paid-In ESOP Awards Treasury Retained Comprehensive Stockholders'
Stock Capital Shares Under RRP Stock Earnings Income Equity
----- ------- ------ --------- ----- -------- ------ ------
Balance at September 30, 2002 $ 828 $ 36,696 $(1,974) $(1,108) $(5,874) $76,727 $5,572 $110,867
Net income 5,561 5,561
Cash dividends paid ($0.27
per share) (1,335) (1,335)
Purchases of treasury stock
(37,500 shares) (1,157) (1,157)
Stock options exercised
(12,090 shares) 177 (134) 43
ESOP shares allocated or committed
to be released for allocation
(15,456 shares) 283 189 472
Vesting of RRP shares 256 256
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $787 (1,172) (1,172)
Decrease in net unrealized loss
on cash flow hedges, net of
taxes of $(6) 10 10
------- -------- ------- ------- ------- ------- ------ --------
Balance at March 31, 2003 $ 828 $ 36,979 $(1,785) $ (852) $(6,854) $80,819 $4,410 $113,545
======= ======== ======= ======= ======= ======= ====== ========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2002
(Unaudited)
(In thousands, except share data)
Common Accumulated
Additional Unallocated Stock Other Total
Common Paid-In ESOP Awards Treasury Retained Comprehensive Stockholders'
Stock Capital Shares Under RRP Stock Earnings Income Equity
----- ------- ------ --------- ----- -------- ------ ------
Balance at September 30, 2001 $828 $ 36,535 $(2,350) $(1,729) $(4,298) $69,252 $ 4,382 $102,620
Net income 5,127 5,127
Cash dividends paid ($0.18
per share) (851) (851)
Purchases of treasury stock
(8,000 shares) (219) (219)
Stock option exercises
(27,333 shares) 288 (99) 189
ESOP shares allocated or committed
to be released for allocation
(15,456 shares) 213 188 401
Vesting of RRP shares 310 310
Decrease in net unrealized gain
on securities available for
sale, net of taxes of $1,190 (1,786) (1,786)
Decrease in net unrealized loss on
cash flow hedges, net of
taxes of $(12) 19 19
---- -------- ------- ------- ------- ------- ------- --------
Balance at March 31, 2002 $828 $ 36,748 $(2,162) $(1,419) $(4,229) $73,429 $ 2,615 $105,810
==== ======== ======= ======= ======= ======= ======= ========
See accompanying notes to unaudited consolidated financial statements.
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Six Months
Ended March 31,
---------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 5,561 $ 5,127
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 400
Depreciation and amortization of premises
and equipment 961 872
Amortization of core deposit intangible 242 --
Gain on sales of securities available for sale (1,084) (238)
Gain on sales of loans held for sale (442) 40
Net amortization of premiums and discounts
on securities 487 102
ESOP and RRP expense 728 711
Originations of loans held for sale (13,501) (8,659)
Proceeds from sales of loans held for sale 13,775 8,009
Deferred income tax (benefit) expense 570 (3,209)
Net changes in accrued interest receivable
and payable 204 (14)
Other adjustments (principally net changes
in other assets and other liabilities) (632) 3,238
--------- ---------
Net cash provided by operating activities 7,469 6,379
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (81,392) (27,913)
Held to maturity (24,809) (6,332)
Proceeds from maturities, calls and other
principal payments on securities:
Available for sale 35,279 7,461
Held to maturity 18,188 11,414
Proceeds from sales of securities available for sale 16,113 12,060
Loan originations (188,865) (113,797)
Loan principal payments 169,556 96,955
Purchases of regulatory securities (622) (1,108)
Purchase of bank owned life insurance (12,000) --
Purchases of premises and equipment (1,234) (1,064)
Other adjustments 218 --
--------- ---------
Net cash used in investing activities (69,568) (22,324)
--------- ---------
(continued)
8
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited) (In thousands)
For the Six Months
Ended March 31,
---------------
2003 2002
---- ----
Cash flows from financing activities:
Net increase in transaction and savings deposits $ 41,992 $ 44,906
Net decrease in time deposits (994) (20,124)
Borrowings 40,000 17,884
Repayments of borrowings (23,580) (11,028)
Net increase in mortgage escrow funds 3,898 1,839
Treasury shares purchased (1,157) (219)
Exercises of stock options 43 189
Cash dividends paid (1,335) (851)
-------- --------
Net cash provided by financing activities 58,867 32,596
-------- --------
Net (decrease) increase in cash and cash equivalents (3,232) 16,651
Cash and cash equivalents at beginning of period 35,093 16,447
-------- --------
Cash and cash equivalents at end of period $ 31,861 $ 33,098
======== ========
Supplemental information:
Interest payments $ 6,455 $ 9,145
Income tax payments 3,231 4,422
Transfer of loans to real estate owned 99 162
Net change in unrealized gains recorded on
securities available for sale $ (1,959) $ (2,980)
Change in deferred taxes on unrealized gains
on securities available for sale 783 1,178
See accompanying notes to unaudited consolidated financial statements.
9
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Net income: $ 2,520 $ 2,601 $ 5,561 $ 5,127
Other comprehensive income (loss):
Net unrealized losses on securities
available for sale:
Net unrealized holding losses
arising during the year, net of taxes of
$197, $585, $349 and $1,095 (292) (877) (522) (1,643)
Less reclassification adjustment for
net realized gains included in net income,
net of taxes of $171, $36, $434, and $95 (256) (54) (650) (143)
Net unrealized gain on
derivatives, net of taxes
of ($2), ($5), ($6) and ($12) 4 8 10 19
------- ------- ------- -------
Other comprehensive loss (544) (923) (1,162) (1,767)
------- ------- ------- -------
Comprehensive income $ 1,976 $ 1,678 $ 4,399 $ 3,360
======= ======= ======= =======
10
PROVIDENT BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Provident
Bancorp, Inc., Provident Bank (the "Bank"), and each subsidiary of Provident
Bank (Provest Services Corp. I, Provest Services Corp. II, Provident REIT, Inc.
and Provident Municipal Bank). Collectively, these entities are referred to
herein as "the Company". Provident Bancorp, Inc. is a majority-owned subsidiary
of Provident Bancorp, MHC, a mutual holding company. Provest Services Corp. I
holds an investment in a low-income housing partnership which provides certain
favorable tax consequences. Provest Services Corp. II has engaged a third-party
provider to sell annuities and mutual funds to the customers of Provident Bank.
Through March 31, 2003, the activities of these two wholly-owned subsidiaries
have had a minor impact on the Company's consolidated financial condition and
results of operations. Provident REIT, Inc. holds a portion of the Company's
real estate loans and is a real estate investment trust for federal income tax
purposes. Provident Municipal Bank ("PMB") is a limited purpose New York
State-chartered commercial bank, which began operations on April 19, 2002 and is
authorized to accept deposits from municipalities in the Bank's business area.
The Company's off-balance sheet activities are limited to (i) loan
origination commitments, lines of credit and letters of credit extended to
customers in the ordinary course of its lending activities, and (ii) interest
rate cap agreements used as part of its interest rate risk management ($30
million notional amount, expired 4/7/03). The Company does not engage in
off-balance sheet financing transactions or other activities involving the use
of special-purpose entities.
The consolidated financial statements have been prepared by management
without audit, but, in the opinion of management, include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the Company's financial position and results of operations as of the dates and
for the periods presented. Although certain information and footnote disclosures
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form 10-Q,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The results of operations for the three months and six
months ended March 31, 2003 are not necessarily indicative of results to be
expected for other interim periods or the entire fiscal year ending September
30, 2003. The unaudited consolidated financial statements presented herein
should be read in conjunction with the annual audited financial statements
included in the Company's Form 10-K for the fiscal year ended September 30,
2002.
11
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. A material estimate that is particularly susceptible to
near-term change is the allowance for loan losses (see Note 2), which is a
critical accounting policy.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
Stock-Based Compensation
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its stock option plan.
No stock-based employee compensation cost is reflected in net income, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of the grant. SFAS No. 123,
Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income if the fair-value-based
method had been applied to all outstanding awards in each period. In April 2003
the FASB decided to require all companies to expense the value of employee stock
options but has not decided how to measure the fair value of the options. As
such, the financial statement impact of stock option expensing is not known at
this time.
Three-months Six-months
Ended Ended
March 31, March 31,
- -----------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 2,520 $ 2,601 $ 5,561 $ 5,127
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net ofrelated tax effects (77) (76) (153) (161)
Pro forma net income $ 2,443 $ 2,525 $ 5,408 $ 4,966
Earnings per share
Basic - as reported $ 0.33 $ 0.34 $ 0.72 $ 0.67
Basic - pro forma 0.32 0.33 0.70 0.65
Diluted - as reported 0.32 0.33 0.71 0.66
Diluted - pro forma 0.31 $ 0.32 0.69 $ 0.63
2. Critical Accounting Policies
The accounting and reporting policies of Provident Bancorp, Inc. are
prepared in accordance with accounting principles generally accepted within the
United States of America and conform to general practices within the banking
industry. Accounting and reporting policies for the allowance for credit losses
are deemed critical since they involve the use of estimates and require
significant management judgments. Application of assumptions different than
those used by management could result in material changes in the Company's
financial position or results of operations. Footnote 3 (Summary of Significant
Accounting Policies) of the 2002 Annual Report on Form 10-K, provide detail with
regard to the Corporation's accounting for the allowance for loan losses. There
have been no significant changes in the application of accounting policies since
September 2002.
3. Allowance for Loan Losses and Non-Performing Assets
The allowance for loan losses is established through provisions for losses
charged to earnings. Loan losses are charged against the allowance 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 the amount that management has determined
to be necessary to absorb probable loan losses inherent in the existing
portfolio. Management's evaluations, which are subject to periodic review by the
Company's regulators, are made using a consistently-applied methodology that
takes into consideration such factors 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.
Changes in the allowance for loan losses may be necessary in the future based on
changes in economic and real estate market conditions, new information obtained
regarding known problem loans, regulatory examinations, the identification of
additional problem loans, and other factors.
12
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands)
Balance at beginning of period $ 10,687 $ 9,334 $ 10,383 $ 9,123
Provision for loan losses 300 175 600 400
Charge-offs (117) (75) (131) (102)
Recoveries 31 69 49 82
======== ======= ======== =======
Balance at end of period $ 10,901 $ 9,503 $ 10,901 $ 9,503
======== ======= ======== =======
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated. At both dates, the Company 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).
March 31, 2003 September 30, 2002
-------------- ------------------
(Dollars in thousands)
Non-accrual loans:
One- to four- family residential mortgage loans $1,798 $2,291
Commercial real estate, commercial business
and construction loans 3,717 2,492
Consumer loans 119 171
------ ------
Total non-performing loans 5,634 4,954
Real estate owned:
One- to four-family residential 140 41
------ ------
Total non-performing assets $5,774 $4,995
====== ======
Ratios:
Non-performing loans to total loans 0.82% 0.74%
Non-performing assets to total assets 0.53 0.49
Allowance for loan losses to total
non-performing loans 193.48 209.59
Allowance for loan losses to total loans 1.58 1.55
4. Acquisition of The National Bank of Florida
On April 23, 2002, the Company consummated its acquisition, for cash, of
The National Bank of Florida ("NBF"), which was merged with and into Provident
Bank. The transaction was valued at approximately $28.1 million. At the
acquisition date, NBF had total assets of approximately $104 million and total
deposits of approximately $88 million.
The 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 at their fair values at the
13
acquisition date. The excess of the total acquisition cost over the fair value
of the net assets acquired was recorded as intangible assets (consisting of both
goodwill and a core deposit intangible asset recognized apart from goodwill) and
is accounted for in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets". Amounts attributable to NBF are included in the Company's consolidated
financial statement from the date of acquisition.
In accordance with SFAS No. 142, goodwill recorded in the NBF acquisition
($13.5 million) is not amortized to expense, but instead is reviewed for
impairment at least annually, with impairment losses charged to expense, if and
when they occur. The core deposit intangible asset, ($1.3 million and $1.5
million at March 31, 2003 and September 30, 2002, respectively), is recognized
apart from goodwill and amortized to expense over its estimated useful life and
evaluated for impairment.
5. Loans
Major classifications of loans are summarized below (in thousands):
March 31, 2003 September 30, 2002
-------------- ------------------
Real estate - residential mortgage $386,629 $366,111
Real estate - commercial mortgage 172,214 163,329
Real estate - construction 8,564 17,020
Commercial and industrial 41,749 41,320
Consumer 6,024 6,812
Other loans 75,413 76,607
-------- --------
Total $690,593 $671,199
======== ========
6. Deposits
Major classifications of deposits are summarized below (in thousands):
March 31, 2003 September 30, 2002
-------------- ------------------
Demand deposits:
Retail $ 61,078 $ 54,399
Commercial and municipal 61,739 55,732
NOW 84,751 82,983
-------- --------
Total transaction accounts 207,568 193,114
Money market 130,664 115,065
Savings 259,857 247,918
Time under $100,000 196,532 204,967
Time over $100,000 45,980 38,562
-------- --------
Total $840,601 $799,626
======== ========
14
7. Securities
The following is a summary of securities available for sale (AFS) at March 31,
2003 and September 30, 2002 (in thousands):
Available for Sale Portfolio
March 31, 2003
==============================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
==============================================================
Mortgage-backed and SBA Securities
Mortgage-backed securities $ 50,899 $1,513 $(124) $ 52,288
Collateralized mortgage obligations 33,204 153 (3) 33,354
SBAs and other 1,065 7 -- 1,072
----------------------------------------------------------------------------------------------------------------------
Total mortgage-backed and SBA securities 85,168 1,673 (127) 86,714
----------------------------------------------------------------------------------------------------------------------
Investment Securities
U.S. Government and federal agency
securities 123,138 3,887 -- 127,025
Corporate debt securities 18,025 1,435 -- 19,460
Equity securities 1,106 701 (100) 1,707
----------------------------------------------------------------------------------------------------------------------
Total investment securities 142,269 6,023 (100) 148,192
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Total available for sale $227,437 $7,696 $(227) $234,906
======================================================================================================================
Available for Sale Portfolio
September 30, 2002
==============================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
==============================================================
Mortgage-backed and SBA Securities
Mortgage-backed Securities $ 35,097 $2,048 $ -- $ 37,145
Collateralized mortgage obligations 21,352 161 (10) 21,503
SBAs and other 1,105 5 -- 1,110
----------------------------------------------------------------------------------------------------------------------
Total mortgage-backed and SBA securities 57,554 2,214 (10) 59,758
----------------------------------------------------------------------------------------------------------------------
Investment Securities
U.S. Government and federal agency
securities 107,972 4,201 -- 112,173
Corporate debt securities 30,079 2,065 -- 32,144
Equity securities 1,113 1,060 (102) 2,071
----------------------------------------------------------------------------------------------------------------------
Total investment securities 139,164 7,326 (102) 146,388
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Total available for sale $196,718 $9,540 $(112) $206,146
======================================================================================================================
15
The following is a summary of securities held to maturity (HTM) at March 31,
2003 and September 30, 2002 (in thousands):
Held to Maturity Portfolio
March 31, 2003
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===========================================================
Mortgage-backed Securities
Mortgage-backed securities $69,725 $2,624 $ -- $72,349
Collateralized mortgage obligations 4,303 67 -- 4,370
-------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 74,028 2,691 -- 76,719
-------------------------------------------------------------------------------------------------------------
Investment Securities
State and municipal securities 19,261 825 -- 20,086
-------------------------------------------------------------------------------------------------------------
Total investment securities 19,261 825 -- 20,086
-------------------------------------------------------------------------------------------------------------
Total held to maturity $93,289 $3,516 -- $96,805
=============================================================================================================
Held to Maturity Portfolio
September 30, 2002
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===========================================================
Mortgage-backed Securities
Mortgage-backed securities $66,078 $2,896 $(21) $68,953
Collateralized mortgage obligations 4,304 124 -- 4,428
-------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 70,382 3,020 (21) 73,381
-------------------------------------------------------------------------------------------------------------
Investment Securities
State and municipal securities 16,409 916 -- 17,325
-------------------------------------------------------------------------------------------------------------
Total investment securities 16,409 916 -- 17,325
-------------------------------------------------------------------------------------------------------------
Total held to maturity $86,791 $3,936 $(21) $90,706
=============================================================================================================
16
At March 31, 2003 and September 30, 2002, the unrealized net gain on
securities available for sale (net of tax of $3,059 and $3,856, respectively)
that was included in accumulated other comprehensive income, a separate
component of stockholders' equity, was $4,410 and $5,572, respectively. Gross
realized gains were $427 and $90, respectively, for the three months ended March
31, 2003 and 2002, and $1,084 and $237, respectively, for the six months ended
March 31, 2003 and 2002.
Securities with a carrying amount of $72,596 and $45,280 were pledged as
collateral for municipal deposits, borrowings and other purposes at March 31,
2003 and September 30, 2002, respectively.
8. Earnings Per Common Share
The number of shares used in the computation of both basic and diluted
earnings per share includes all shares issued to Provident Bancorp, MHC, but
excludes unallocated ESOP shares that have not been released or committed to be
released to participants. Unvested RRP shares are excluded from basic earnings
per share calculations only.
The common equivalent shares are incremental shares (computed using the
treasury stock method) that would have been outstanding if all potentially
dilutive stock options and unvested RRP shares were exercised or became vested
during the periods.
Basic earnings per common share is computed as follows ($ in thousands,
except share data):
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2003 2002 2003 2002
---- ---- ---- ----
Weighted average common shares
outstanding 7,717,668 7,703,009 7,719,635 7,694,528
Total basic shares 7,717,668 7,703,009 7,719,635 7,694,528
Net income $2,520 $2,601 $5,561 $5,127
Basic earnings per common share $0.33 $0.34 $0.72 $0.67
Diluted earnings per common share is computed as follows ( $in thousands,
except share data):
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Weighted average common shares
outstanding 7,717,668 7,703,009 7,719,635 7,694,528
Effect of common stock equivalents 117,764 144,091 115,272 130,750
Total diluted shares 7,835,432 7,847,100 7,834,907 7,825,278
Net income $2,520 $2,601 $5,561 $5,127
Diluted earnings per common share $0.32 $0.33 $0.71 $0.66
17
9. Guarantor's Obligations Under Guarantees
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.
18
As of March 31, 2003, the Company had $6.2 million in outstanding letters
of credit, of which $1.5 million were secured by cash collateral.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 2003 and, in certain instances, subsequent periods. The
Company cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements for subsequent periods
are subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; pricing
pressures on loan and deposit products; changes in local and national economic
conditions; the extent and timing of actions of the Company's regulators;
customer deposit disintermediation; changes in customers' acceptance of the
Company's products and services; general actions of competitors, other normal
business risks such as credit losses, litigation, increases in the levels of
non-performing assets, revenues following acquisitions if such revenues are
lower than expected, and costs or difficulties related to the integration of
acquired and existing businesses are greater than expected. The Company's
forward-looking statements speak only as of the date on which such statements
are made. The Company assumes no duty to update forward-looking statements to
reflect new, changing or unanticipated events or circumstances.
The Company's significant accounting policies are summarized in Note 3 to
the consolidated financial statements included in its September 30, 2002 Annual
Report on Form 10-K. An accounting policy considered particularly critical to
the Company's financial results is the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance for loan losses
is considered a critical accounting policy by management 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
in the necessary allowance.
As discussed in Note 4 to the consolidated financial statements included
in Item 1 of this quarterly report, the Company completed its acquisition of NBF
in April 2002. The acquisition was accounted for as a purchase and, accordingly,
amounts attributable to NBF have been included in the Company's consolidated
financial statements from the date of acquisition.
In April 2002, the Company announced the formation of PMB, a commercial
bank subsidiary of Provident Bank, to serve the banking needs of municipalities
throughout Rockland and Orange Counties. Provident Bank is a federally chartered
savings association and municipalities in New York may only deposit funds in
commercial banks. The formation of PMB provides a vehicle for the deposits that
may not be deposited with Provident Bank.
19
Comparison of Financial Condition at March 31, 2003 and September 30, 2002
Total assets as of March 31, 2003 were $1,091.3 million, an increase of
$63.6 million, or 6.2% over assets of $1,027.7 million at September 30, 2002.
Net loans as of March 31, 2003 were $679.7 million, an increase of $18.9
million, or 2.9%, over net loan balances of $660.8 million at September 30,
2002. Residential loans continued to grow during the six-month period, posting
an increase of $20.5 million, or 5.6%, over balances at September 30, 2002,
primarily in bi-weekly mortgages. Commercial and consumer loans remained
relatively unchanged as prepayments and maturities of existing loans virtually
offset originations of $89.9 million. Asset quality continues to be strong. At
$5.8 million, or 0.53% of total assets, non-performing assets were up slightly
from $5.0 million, or 0.49% of total assets at September 30, 2002.
Total securities increased to $334.2 million at March 31, 2003 from $298.3
million at September 30, 2002, as the Company continued to purchase additional
securities funded by growth in deposits and advances from the Federal Home Loan
Bank.
Total deposits increased by $41.0 million to $840.6 million, an increase
of 5.1% over balances of $799.6 million at September 30, 2002. Deposit growth
has occurred in transaction account, savings and money market account products,
while certificates of deposit were virtually unchanged. The largest deposit
growth has occurred in savings and money market accounts, which increased to
$390.5 million at March 31, 2003 from $363.0 million at September 30, 2002, an
increase of $27.5 million, or 7.6%. Transaction accounts posted an increase of
$14.5 million, or 7.5%, to $207.6 million. During the same time period, total
certificates of deposit declined by $1.0 million as municipal certificates of
deposit grew to $15.5 million, while all other certificates decreased to $227.0
million. The overall deposit increase is primarily due to improved marketing
efforts, coupled with new product offerings. Total municipal deposits equaled
$26.7 million at March 31, 2003 compared to $8.8 million at September 30, 2002.
Provident began taking in municipal deposits in April 2002 after the formation
of PMB.
Borrowings from the Federal Home Loan Bank of New York (the "FHLB")
increased by $16.4 million during the six-month period to $119.4 million at
March 31, 2003 from $103.0 million at September 30, 2002, primarily to fund
loans and investments as noted above.
Stockholders' equity increased by $2.6 million to $113.5 million at March
31, 2003 compared to $110.9 million at September 30, 2002. In addition to net
income of $5.6 million for the six-month period, equity increased by $0.8
million due to activity related to the Company's ESOP, stock option and
management retention plans. Partially offsetting these increases were cash
dividends and treasury share purchases, which reduced stockholders' equity by
$1.3 million and $1.1 million, respectively, and the change in after-tax
unrealized gains on securities available for sale, which decreased equity by
$1.2 million.
During the first six months of fiscal 2003, the Company repurchased 37,500
shares of common stock, bringing the total shares repurchased to 368,051 shares
under its previously announced repurchase programs, which authorized the
repurchase of up to 376,740 shares. Net of option-related reissuances, treasury
shares held by the Company at March 31, 2003 were 307,898
20
shares. In March 2003 the Company announced that the Board of Directors
authorized the additional repurchase of 177,250 shares of its common stock,
which represents 5% of its shares.
Comparison of Operating Results for the Three Months Ended
March 31, 2003 and March 31, 2002
Net Income. Interest income for the three months ended March 31, 2002
declined by $119,000, or less than 1% compared to the same period of 2002.
Interest expense decreased by $1.2 million or 29.7%. This resulted in an
increase in net interest income of $1.1 million or 10.6%. The provision for loan
losses increased by $125,000 to $300,000 for the quarter ended March 31, 2003.
Total non-interest income, which includes an increase in securities gains of
$337,000 and gains on sales of loans of $369,000, increased $1.2 million or
100%. Non interest expense, which includes a one-time compensation charge of
$324,000, increased by $2.3 million or 31.5%. Net income (after taxes) decreased
$81,000 to $2,520,000.
The relevant performance measures follow:
Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Per common share:
Basic earnings $ 0.33 $ 0.34
Diluted earnings 0.32 0.33
Dividends declared 0.14 0.10
Return on average (annualized):
Assets 0.97% 1.16%
Equity 9.09% 9.88%
Tangible equity 10.50% 9.90%
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
21
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial loans (1) $ 216,172 $ 3,788 7.11% $182,227 $ 3,322 7.39%
Consumer loans (1) 80,896 1,038 5.20 73,395 1,140 6.30
Other loans (1) 386,727 6,303 6.61 362,597 6,540 7.31
------------------------ ---------------------
Total loans 683,795 11,129 6.60 618,219 11,002 7.22
------------------------ ---------------------
AFS Investments & MBS 208,780 2,127 4.13 176,627 2,354 5.41
HTM Investments & MBS 77,094 1,169 6.15 72,396 1,172 6.60
Other earning assets 3,932 14 1.44 2,378 30 4.09
------------------------ ---------------------
Total securities & other earning assets 289,806 3,310 4.63 251,401 3,556 5.74
------------------------ ---------------------
Total interest-earning assets 973,601 14,439 6.01 869,620 14,558 6.79
Non-interest-earning assets:
Cash & Due from Banks 29,302 18,911
Premises & Equipment 11,425 9,003
Other assets 41,426 9,500
---------- --------
Total assets $1,055,754 $907,034
========== ========
Interest bearing liabilities:
Savings, clubs & escrow $ 266,936 369 0.56% $194,946 475 0.99%
Money market accounts 116,217 243 0.85 102,070 343 1.36
NOW checking 86,381 55 0.26 68,410 76 0.45
Certificate accounts 242,324 1,298 2.17 224,687 1,804 3.26
------------------------ ---------------------
Total interest-bearing deposits 711,858 1,965 1.12 590,113 2,698 1.85
Borrowings 105,039 982 3.79 122,813 1,494 4.93
------------------------ ---------------------
Total interest-bearing liabilities 816,897 2,947 1.46 712,926 4,192 2.38
Non-interest-bearing liabilities:
Demand deposits 114,519 78,451
Other 11,932 8,914
------------------------ ---------------------
Total liabilities 943,348 2,947 1.27 800,291 4,192 2.12
Equity 112,406 106,743
---------- --------
Total liabilities and equity $1,055,754 $907,034
========== ========
Net interest income $ 11,492 $10,366
======== =======
Net interest rate spread 4.55% 4.41%
==== ====
Net earning assets $ 156,704 $156,694
========== ========
Net interest margin 4.79% 4.83%
==== ====
Average interest-earning assets 119.18% 121.98%
to average interest-bearing liabilities ====== ======
(1) Includes nonaccrual loans.
22
The table below details the changes in interest income and interest expense for
the period indicated due to both changes in average outstanding balances and
changes in average interest rates (in thousands):
Three Months Ended March 31,
2003 vs. 2002
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Consumer loans $ 111 ($213) ($102)
Commercial loans 600 (134) 466
Residential loans 423 (660) (237)
Available for sale securities 393 (620) (227)
Held to maturity securities 75 (84) (9)
Other earning assets 11 (21) (10)
------- ------ -------
Total interest income 1,613 (1,732) (119)
Interest-bearing liabilities
Savings 144 (250) (106)
Money market 43 (143) (100)
NOW Checking 17 (38) (21)
Certificates of deposit 137 (643) (506)
Borrowings (199) (313) (512)
------- ------ -------
Total interest expense 142 (1,387) (1,245)
------- ------ -------
Net interest income $ 1,471 ($345) $ 1,126
======= ====== =======
(1) Changes in rate/volume have been allocated to rate and volume
23
Net Interest Income. Net interest income after provision for loan losses
for the three months ended March 31, 2003 was $11.2 million, compared to $10.2
million for the three months ended March 31, 2002, an increase of $1.0 million,
or 9.8%. The increase in net interest income was largely due to a $104.0 million
increase in average earning assets to $973.6 million during the quarter ended
March 31, 2003, as compared to $869.6 million for the same quarter in the prior
year, due primarily to the NBF acquisition. The increase in average earning
assets was partially offset by a decline in average yield of 78 basis points
from 6.79% to 6.01%. A decrease in the average cost of interest bearing
liabilities of 92 basis points led to a $1.2 million drop in interest expense
for the quarter compared to the same quarter in 2002, even as interest-bearing
liabilities increased by $104.0 million. Net interest margin declined by 4 basis
points to 4.79%, while net interest rate spread improved by 14 basis points to
4.55%. This increase in the Company's net interest income 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 since 2001. This
decrease in market interest rates has reduced the cost of interest-bearing
liabilities faster and to a greater extent than the rates on interest-earning
assets such as loans and securities. However, if recently low interest rate
levels persist for an extended period of time, the prepayment of assets could
continue at a rate exceeding scheduled repayment. Such funds received would most
likely be reinvested at lower yields than that of its previously held assets.
Also, as the reduction in liability costs have already exceeded the pace at
which assets repriced downward, net interest margin may be further compressed.
Conversely, if the geopolitical factors and an economic recovery become more
apparent, market interest rates could rise. Competitive pressures could cause a
rise in the Company's funding costs and lead to pressures on net interest
margin.
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 which is considered appropriate to absorb probable loan losses
inherent in the existing portfolio. In determining the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, evaluations of real estate collateral, current and anticipated
economic conditions, volume and type of lending, and the levels of
non-performing and other classified loans. The amount of the allowance for loan
losses 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 adequacy of
the allowance. The Company recorded $300,000 and $175,000 in loan loss
provisions during the three months ended March 31, 2003 and 2002, respectively.
Non-Interest Income. Non-interest income for the three months ended March
31, 2003 was $2.4 million compared to $1.2 million for the three months ended
March 31, 2002, an increase of $1.2 million, or 100%. Realized gains on
securities available for sale were $427,000 for the current three-month period,
compared to $90,000 for the same period in the prior year. The Company also
recorded gains on sale of loans totaling $403,000, while there was only $34,000
of such gains for the same period last year. Excluding the effects of gains on
sales of securities and loans, the increase in non-interest income was $431,000,
or 39.0%. Banking fees and services charges increased by $179,000, or 19.1%, due
primarily to volume-driven increases in overdraft, NSF, and debit card fees.
Loan fees and charges increased by $62,000, or 33.3%, primarily as the result of
a $100,000
24
prepayment fee received. In addition, the formation of a Bank Owned Life
Insurance ("BOLI") program in December 2002, generated $161,000 in other income
during the current three-month period.
Non-Interest Expense. Non-interest expenses for the three months ended
March 31, 2003 increased by $2.3 million, or 31.5%, to $9.6 million, compared to
$7.3 million for the three months ended March 31, 2002. The acquisition of NBF
in April, 2002, played a major role in the increases in most categories, as did
the opening of a new branch in February, 2003. The Company experienced related
increases in compensation and employee benefits of $264,000 and in occupancy and
office operations costs of $119,000. Also, amortization of intangible assets of
$115,000 in the current three-month period is related to the deposit premiums
recorded as a result of the acquisition. Excluding the new branch-related
salaries, the increase in compensation and benefits was $1.1 million, or 27.5%.
The $1.1 million increase is primarily due to a $324,000 payout of an employment
agreement, retirement plan and deferred compensation cost increases of $193,000,
net health insurance premium increases of $71,000 and salary increases due to
annual increases and additional administration staff. Consulting fees increased
by $138,000, or 191.7%, incurred primarily to improve the Company's
technological infrastructure. Other expenses increased by $706,000, or 21.9%,
due primarily to the start-up costs mentioned above, and an increase in
advertising of $191,000 related to the new branches.
Income Taxes. Income tax expense was $1,482,000 for the three months ended
March 31, 2003 compared to $1,550,000 for the same period in 2002, as a result
of changes in pre-tax income and the effects of the BOLI program implemented in
late December 2002. The effective tax rates were 37.0% and 37.3%, respectively.
Comparison of Operating Results for the Six Months Ended
March 31, 2003 and March 31, 2002
Net Income. For the six months ended March 31, 2003 net interest income
after provision for loan losses was $22.5 million, up $2.6 million or 13.1%
compared to $19.9 million for the same period of 2002. Other income was $4.4
million, which included $1.1 million in securities gains and $442,000 in gains
on sales of loans, (up $846,000 and $402,000, respectively), or an increase of
$1.9 million, or 76% over the six months ended March 31, 2002. Other expenses
increased $3.6 million, or 25% to $18.0 million for the six months ended March
31, 2003 compared to $14.4 million for the same prior year period. Net income
after taxes improved to $5,561,000 compared to $5,127,000, an increase of
$434,000, or 8.5%.
25
The relevant performance measures follow:
Six Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Per common share:
Basic earnings $ 0.72 $ 0.67
Diluted earnings 0.71 0.66
Dividends declared 0.27 0.18
Return on average (annualized):
Assets 1.06% 1.15%
Equity 9.96% 9.76%
Tangible equity 11.52% 9.78%
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
26
Six Months Ended March 31,
--------------------------
2003 2002
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial loans (1) $ 214,590 $ 7,627 7.13% $178,949 $ 6,734 7.55%
Consumer loans (1) 82,424 2,168 5.28 74,949 2,403 6.43
Other loans (1) 380,507 12,680 6.68 359,245 13,085 7.31
----------------------- ---------------------
Total loans 677,521 22,475 6.65 613,143 22,222 7.27
----------------------- ---------------------
AFS Investments & MBS 210,310 4,651 4.44 169,830 4,714 5.57
HTM Investments & MBS 86,039 2,317 5.40 77,565 2,353 6.08
Other earning assets 2,356 20 1.70 1,371 30 4.39
----------------------- ---------------------
Total securities & other earning assets 298,705 6,988 4.69 248,766 7,097 5.72
----------------------- ---------------------
Total interest-earning assets 976,226 29,463 6.05 861,909 29,319 6.82
Non-interest-earning assets:
Cash & Due from Banks 29,871 17,874
Premises & Equipment 11,245 9,013
Other assets 30,353 8,156
---------- --------
Total assets $1,047,695 $896,952
========== ========
Interest bearing liabilities:
Savings, clubs & escrow $ 262,612 878 0.67% $191,952 958 1.00%
Money market accounts 116,627 541 0.93 99,453 706 1.42
NOW checking 83,250 117 0.28 65,845 147 0.45
Certificate accounts 244,343 2,774 2.28 229,608 4,190 3.66
----------------------- ---------------------
Total interest-bearing deposits 706,832 4,310 1.22 586,858 6,001 2.05
Borrowings 104,055 2,026 3.90 119,474 2,982 5.01
----------------------- ---------------------
Total interest-bearing liabilities 810,887 6,336 1.57 706,332 8,983 2.55
Non-interest-bearing liabilities:
Demand deposits 113,627 75,926
Other 11,192 9,351
----------------------- ---------------------
Total liabilities 935,706 6,336 1.36 791,609 8,983 2.28
Equity 111,989 105,343
---------- --------
Total liabilities and equity $1,047,695 $896,952
========== ========
Net interest income $23,127 $20,336
======= =======
Net interest rate spread 4.48% 4.27%
==== ====
Net earning assets $ 165,339 $155,577
========== ========
Net interest margin 4.75% 4.73%
==== ====
Average interest-earning assets 120.39% 122.03%
to average interest-bearing liabilities ====== ======
(1) Includes nonaccrual loans.
27
The table below details the changes in interest income and interest expense for
the period indicated due to both changes in average outstanding balances and
changes in average interest rates (in thousands):
Six Months Ended March 31,
2003 vs. 2002
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Consumer loans $ 224 ($459) ($235)
Commercial loans 1,285 (392) 893
Residential loans 755 (1,160) (405)
Available for sale securities 1,002 (1,064) (63)
Held to maturity securities 243 (280) (36)
Other earning assets 14 (24) (10)
------- ----- -------
Total interest income 3,523 (3,379) 144
Interest-bearing liabilities
Savings 292 (372) (80)
Money market 108 (273) (165)
NOW Checking 34 (64) (30)
Certificates of deposit 254 (1,670) (1,416)
Borrowings (353) (603) (956)
------- ----- -------
Total interest expense 335 (2,982) (2,647)
------- ----- -------
Net interest income $ 3,188 ($397) $ 2,791
======= ===== =======
(1) Changes in rate/volume have been allocated to rate and volume.
28
Net Interest Income. For the six months ended March 31, 2003, net interest
income increased by $2.8 million, or 13.8% to $23.1 million from the same period
in 2002. The increase in interest income reflects an increase in average earning
assets of $114.3 million to $976.2 million, offset by a decline in yield of 77
basis points to 6.05%. The cost of interest bearing liabilities declined by $2.6
million as the average rate paid on interest bearing liabilities dropped 98
basis points to 1.57%, which offset an increase in average balances of $104.6
million to $810.9 million. Net interest margin increased from 4.73% to 4.75% and
net interest spread improved from 4.27% to 4.48%.
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 which is considered appropriate to absorb probable loan losses
inherent in the existing portfolio. The Company recorded $600,000 and $400,000
in loan loss provisions during the six months ended March 31, 2003 and 2002,
respectively.
Non-Interest Income. Non-interest income for the six-month period ended
March 31, 2003 increased to $4.4 million, an increase of $1.9 million, or 76%,
compared to $2.5 million for the same six-month period last year. Realized gains
on securities available for sale and sales of loans were $1.1 million and
$442,000, respectively, for the current period, generating a combined increase
of $1.2 million over the securities and loan sales gains of $277,000 for the
same period last year. Banking fees and services charges increased to $2.2
million for the current six-month period, an increase of $292,000, or 15.8%,
over the same period last year. The increase is primarily attributable to
volume-related increases in transaction account fees of $270,000 resulting from
the new and acquired branches. Other income increased by $315,000, or 96.6%, to
$641,000 for the six-month period ended March 31, 2003, from $326,000 for the
same period last year. The increase is primarily due to $161,000 in income from
the BOLI and the previously mentioned prepayment fee received, as well as a
one-time fee of $86,000 from the Company's check-printing vendor.
Non-Interest Expense. Non-interest expense increased by $3.6 million, or
25%, to $18.0 million for the six-month period ended March 31, 2003, compared to
$14.4 million for the same six-month period last year. Increases in compensation
and benefits and in occupancy and office operations directly attributable to the
new branches were $522,000 and $283,000, respectively. Compensation and benefits
increased by an additional $1.7 million, of which $324,000 represented the
pay-out of an employment agreement, $212,000 was attributable to the increased
cost of stock-based compensation plans, $234,000 was due to additional
retirement plan and other deferred compensation expense, $118,000 was related to
higher health insurance premiums and the remaining increase was due to annual
salary increases of approximately 4.5% and additional administration staff. The
Company amortized $242,000 of intangible assets, during the current fiscal
year-to-date period as a result of the NBF acquisition. Consulting fees
increased by $225,000, or 113.6%, incurred primarily for technological
development. Other expenses increased by $974,000, or 15.2%, for the current
fiscal year-to-date period primarily due to: additional advertising costs of
$206,000, or 29.2%, related to new branches and products and a volume-related
increase of $258,000, or 30.6%, in data processing costs.
29
Income Taxes. Income tax expense was $3.3 million for the six months ended
March 31, 2003 compared to $2.9 million for the same period in 2002. The
effective tax rates were 37.3% and 36.1%, respectively, as a greater portion of
the Company's increase in pre-tax income was subject to the marginal tax rates.
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, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. 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 and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the six months
ended March 31, 2003 and March 31, 2002, loan originations (including loans held
for sale) totaled $202.4 million and $122.4 million, respectively, and purchases
of securities totaled $106.2 million and $34.2 million, respectively. For the
six-month periods ended March 31, 2003 and 2002, these investing activities were
funded primarily by principal repayments on loans, by proceeds from sales and
maturities of securities, by deposit growth and additional borrowings. Loan
origination commitments totaled $78.0 million at March 31, 2003. The Company
anticipates that it will have sufficient funds available to meet current loan
commitments. In December 2002 the Company invested $12 million in Bank Owned
Life Insurance (BOLI) contracts. Such investments are illiquid and are therefore
classified as other assets. As the Company's quarterly earnings exceeded $2.5
million, it is expected that the funds will be replaced by retained earnings in
approximately 1.5 years, thereby not having a significant impact on capital and
liquidity. Earnings from BOLI are derived from the net increase in cash
surrender value.
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, the appeal of
non-deposit investments, and other factors. The net increase in total deposits
for the six months ended March 31, 2003 was $41.0 million, compared to $24.8
million for the six months ended March 31, 2002.
The Company monitors its liquidity position on a daily basis. The Company
generally remains fully invested and utilizes additional sources of funds
through FHLB overnight advances, which amounted to $4.0 million at March 31,
2003.
30
At March 31, 2003, the Bank exceeded all of its regulatory capital requirements
with a Tier 1 capital (leverage) level of $90.8 million, or 8.5% of adjusted
assets (which is above the required level of $42.6 million, or 4.0%) and a total
risk-based capital level of $98.5 million, or 16.0% of risk-weighted assets
(which is above the required level of $49.4 million, or 8.0%). In order to be
classified as well-capitalized, the regulatory requirements call for leverage
and total risk-based capital ratios of 5.0% and 10.0%, respectively. At March
31, 2003, the Bank exceeded all capital requirements for well-capitalized
classification. These capital requirements, which are applicable to the Bank
only, do not consider additional capital retained at the holding company level.
The intangible assets recorded in the April 2002 NBF acquisition are deducted
from capital for purposes of calculating regulatory capital measures. However,
the Bank continues to be classified as a well-capitalized institution.
The following table sets forth the Bank's regulatory capital position at
March 31, 2003 and September 30, 2002, compared to OTS requirements.
OTS Requirements
-------------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
----------- -------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
March 31, 2003
Tangible capital $90,789 8.5% $15,993 1.5% $ -- --%
Tier 1 (core) capital 90,789 8.5 42,647 4.0 53,309 5.0
Risk-based capital:
Tier 1 90,789 14.7 -- -- 37,030 6.0
Total 98,543 16.0 49,373 8.0 61,716 10.0
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
31
Recent Accounting Standards
In April 2003, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," for certain decisions made by the Board as part of the Derivative
Implementation Group process. This Statement is effective for contracts entered
into or modified after June 30, 2003 and hedging relationships designated after
June 30, 2003. Management does not expect that the provisions of SFAS No. 149
will have a material impact on the Company's results of operations or financial
condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate risk,
as the majority of its assets and liabilities are sensitive to changes in
interest rates. There have been no material changes in the Company's interest
rate risk position since September 30, 2002, although the dramatic increase in
net interest spread in the past six months could be adversely impacted by a rise
in short term interest rates. As noted in Item 2, Management's Discussion and
Analysis, the increase in the Company's net interest income 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 beginning in 2001.
This decrease in market interest rates has reduced the cost of interest-bearing
liabilities faster, and to a greater extent, than the rates on interest-earning
assets such as loans and securities. Should market interest rates increase with
the expected economic recovery, the cost of the interest-bearing liabilities
could increase faster than the rates on 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.
Conversely, should market interest rates continue to fall below today's levels,
the Company's net interest margin could also be negatively affected, as
competitive pressures could keep the Company from reducing rates much lower on
its deposits and prepayments and curtailments on assets may continue. Such
movements may cause a decrease in interest rate spread and net interest margin.
Other types of market risk, such as foreign exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
32
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Company's management, including 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 any material information relating to the Company and
its subsidiaries required to be included in the Company's Exchange Act filings.
There were no significant changes made in the Company's internal controls
or in other factors that that could significantly affect these disclosure
controls and procedures subsequent to the date of the evaluation performed by
the Company's Chief Executive Officer and Chief Financial Officer.
Part II. OTHER INFORMATION
Item 1. 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, involved amounts which are believed to be immaterial to the
consolidated financial condition and operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
33
Item 4. Submission of Matters to a Vote of Security Holders
On February 19, 2003, the Company held its annual meeting of stockholders
for the purpose of the election of four Directors to three year terms and the
ratification of the appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending September 30, 2003.
The number of votes cast at the meeting as to each matter acted upon was
as follows:
VOTES VOTES
FOR WITHHELD
--------- --------
1. Election of Directors:
Judith Hershaft 7,159,125 9,284
Thomas F. Jauntig, Jr. 7,159,125 9,284
Donald T. McNelis 7,159,325 9,084
Richard A. Nozell 7,158,925 9,484
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
-------- ------- ----------
2. Ratification of the
Appointment of KPMG LLP as
the Company's Independent
Auditors 7,136,190 13,388 18,831
Item 5. Other Information
None
34
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
99.1 Certification pursuant to Title 18, United States Code,
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
The Company filed the following report on Form 8-K during the three
months ended March 31, 2003:
Filed March 26, 2003 - News releases announcing the resignation of
Katherine Dering, chief financial officer, and announcing the
appointment of Paul Maisch as chief financial officer.
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Bancorp, Inc.
-----------------------
(Registrant)
By: ___________________________________________
George Strayton
President and Chief Executive Officer
(Duly Authorized Representative)
Date: May 13, 2003
By: ___________________________________________
Paul A. Maisch
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Representative)
Date: May 13, 2003
36