Back to GetFilings.com
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, 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 Identification Number)
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. YES |_| NO |X|
Indicate by check mark whether to Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Act of 1934). YES |X| NO |_|
As of December 15, 2003, there were issued and outstanding 7,947,321
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 15, 2003, was $135,774,624.
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be
held in February 2004.
PROVIDENT BANCORP, INC.
FORM 10-K TABLE OF CONTENTS
September 30, 2003
PART I..............................................................................................................1
ITEM 1. Business..............................................................................................1
ITEM 2. Properties...........................................................................................33
ITEM 3. Legal Proceedings....................................................................................34
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................34
PART II............................................................................................................34
ITEM 5. Market for Company's Common Equity and Related Stockholder Matters...................................34
ITEM 6. Selected Financial Data..............................................................................35
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................38
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...........................................50
ITEM 8. Financial Statements and Supplementary Data..........................................................51
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................92
ITEM 9A. Controls and Procedures............................................................................ .92
PART III.......................................................................................................... 92
ITEM 10. Directors and Executive Officers of the Registrant...................................................92
ITEM 11. Executive Compensation...............................................................................92
ITEM 12. Security Ownership of Certain Beneficial Owners and Management & Related Stockholder Matters.........93
ITEM 13. Certain Relationships and Related Transactions.......................................................93
PART IV............................................................................................................93
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................93
SIGNATURES.........................................................................................................95
Exhibit 14.........................................................................................................96
Exhibit 21........................................................................................................104
Exhibit 23.1......................................................................................................105
Exhibit 31.1......................................................................................................106
Exhibit 31.2......................................................................................................107
Exhibit 32........................................................................................................108
PART I
ITEM 1. Business
Provident Bancorp, Inc.
Provident Bancorp, Inc. ("Provident Bancorp" or the "Company") is a
federally chartered corporation that owns all of the outstanding common stock of
Provident Bank. At September 30, 2003, Provident Bancorp had consolidated assets
of $1.2 billion, deposits of $869.5 million and stockholders' equity of $117.9
million. As of September 30, 2003, Provident Bancorp had 7,946,521 shares of
common stock issued and outstanding. As of that date, Provident Bancorp, MHC
owned 4,416,000 shares of common stock of Provident Bancorp, representing 55.6%
of the issued and outstanding shares of common stock. The remaining 3,530,521
shares are held by the public.
Provident Bank
Provident Bank is a full-service, community-oriented savings bank that
provides financial services to individuals, families and businesses through 18
branch offices and 25 ATMs throughout Rockland and Orange Counties, New York.
Originally organized in 1888 as a New York State-chartered mutual savings
and loan association, in January 1999 Provident Bank reorganized into Provident
Bancorp, MHC structure as the wholly-owned subsidiary of Provident Bancorp,
which simultaneously conducted an initial public offering. On September 30, 1998
we operated 11 branch offices. Subsequent to our mutual holding company
reorganization and initial stock offering, we have broadened our market reach
through de novo branching and our acquisition of The National Bank of Florida in
April 2002, which had assets of $104.0 million and deposits of $88.2 million.
Provident Bank's business consists primarily of accepting deposits from
the general public and investing those deposits, together with funds generated
from operations and borrowings, in one- to four-family residential, multi-family
residential and commercial real estate loans, commercial business loans and
leases, consumer loans and in investment securities and mortgage-backed
securities.
Provident Municipal Bank
In April 2002, Provident Bank organized Provident Municipal Bank as a
wholly-owned subsidiary. Provident Municipal Bank is a New York State-chartered
commercial bank that is engaged in the business of accepting deposits from
municipalities in our market area, as New York State law requires municipalities
located in the State of New York to deposit funds with commercial banks,
effectively forbidding these municipalities from depositing funds with savings
institutions, including federally chartered savings associations, such as
Provident Bank.
Provident Bancorp, MHC
Provident Bancorp, MHC was formed in January 1999 as part of Provident
Bank's mutual holding company reorganization. Provident Bancorp, MHC is
chartered under federal law and owns 55.6% of the outstanding shares of common
stock of Provident Bancorp as of September 30, 2003. By virtue of its ownership
of a majority of the outstanding shares, Provident Bancorp, MHC is able to elect
all the members of the Board of Directors of Provident Bancorp and will
generally be able to affect significantly the outcome of all matters presented
for consideration by the shareholders of Provident Bancorp.
During the fiscal year ended September 30, 2003, Provident Bancorp, MHC
contributed $321,000 to local charities. Provident Bancorp, MHC has outstanding
commitments to make future charitable contributions of $33,500. Provident
Bancorp, MHC does not engage in any business activities other than owning the
common stock of Provident Bancorp, investing in liquid assets and contributing
to local charities.
Since its formation in January 1999, Provident Bancorp, MHC has waived the
receipt of approximately $4.7 million of cash dividends declared on shares of
Provident Bancorp's common stock it owns. There can be no assurance that
Provident Bancorp, MHC will continue to waive the receipt of cash dividends in
any future period, and Provident Bancorp, MHC retains the right to accept
payment of future cash dividends on all of Provident Bancorp'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 Provident Bancorp's
actual results to differ materially from those contemplated by such
forward-looking statements. These important factors include, without limitation,
Provident Bancorp's continued ability to originate quality loans, fluctuations
in interest rates, real estate conditions in Provident Bancorp's lending areas,
general and local economic conditions, Provident Bancorp's continued ability to
attract and retain deposits, Provident Bancorp's ability to control costs,
effect of new accounting pronouncements and changing regulatory requirements,
and Provident Bancorp's ability to complete its announced acquisition and
related systems conversions. Provident Bancorp 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.
Second Step Conversion and Acquisition of E.N.B. Holding Company, Inc.
On July 1, 2003, the respective Boards of Directors of Provident Bancorp,
Inc. and the Mutual Holding Company adopted a plan to convert from the mutual
holding company form of organization to a fully public holding company
structure. The Mutual Holding Company will merge into the Bank, and will no
longer exist. Provident Bancorp, Inc. will be succeeded by a new Delaware
corporation with the same name. Shares of common stock of Provident Bancorp,
Inc. representing the ownership interest of the Mutual Holding Company will be
offered for sale in a subscription offering and a community offering, the net
proceeds of which will result in additional capital for Provident Bancorp, Inc.
Shares of common stock of Provident Bancorp, Inc. owned by public shareholders
(shareholders other than the Mutual Holding Company) will be converted into the
right to receive new shares of Provident Bancorp, Inc. common stock determined
pursuant to an exchange ratio. In connection with the second step conversion,
Provident Bancorp, Inc. intends to establish a charitable foundation and
contribute $5,000 to the foundation. A contribution of $1,000 will be paid to
the foundation in cash, with the remainder of the contribution being contributed
in shares. The charitable foundation is subject to the approval of the majority
of the members of the Mutual Holding Company and two-thirds of the shareholders
of Provident Bancorp, Inc. as well as the separate approval of the public
shareholders. Except for the effect of the issuance of shares to the charitable
foundation, the exchange ratio will ensure that immediately after the conversion
and exchange of existing shares of Provident Bancorp, Inc. for new shares, the
public shareholders will own the same aggregate percentage of new Provident
Bancorp, Inc. common stock that they owned immediately prior to the conversion,
excluding any shares purchased in the offering.
The plan of conversion provides for the establishment, upon the completion
of the conversion, of a special "liquidation account" for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders (as those
terms are defined in the plan of conversion) in an amount equal to the greater
of (i) the Mutual Holding Company's ownership interest in the retained earnings
of Provident Bancorp, Inc. as of the date of its latest balance sheet contained
in the prospectus, or (ii) the retained earnings of the Bank at the time that
the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible
Account Holder and Supplemental Eligible Account Holder that continues to
maintain his or her deposit account at the Bank would be entitled, in the event
of a complete liquidation of the Bank after the conversion, to a pro rata
interest in the liquidation account prior to any payment to
2
the stockholders of Provident Bancorp, Inc. The liquidation account will be
reduced annually on December 31 to the extent that Eligible Account Holders and
Supplemental Eligible Account Holders have reduced their qualifying deposits as
of each anniversary date. Subsequent increases will not restore such account
holder's interest in the liquidation account. Subsequent to the conversion, the
Bank may not pay cash dividends or make other capital distributions if the
effect thereof would be to reduce its stockholder's equity below the amount of
the liquidation account.
The conversion and related transactions will be accounted for at
historical cost, with no resulting change in the historical carrying amounts of
assets and liabilities. Costs related to the offering will be netted against the
gross proceeds from the sale of common stock; if the offering is not completed,
the costs would be charged to expense. Offering costs of $59 have been incurred
as of September 30, 2003.
At the time of the adoption of the plan of conversion and reorganization,
the Company entered into an agreement to acquire all of the outstanding shares
of common stock of E.N.B. Holding Company, Inc. E.N.B. Holding Company, Inc. is
a New York corporation that owns all of the outstanding common stock of
Ellenville National Bank. Stockholders of E.N.B. Holding Company, Inc. will
receive $4,830 for each share of E.N.B. Holding Company common stock in the form
of (i) cash; (ii) shares of common stock of Provident Bancorp, Inc. a Delaware
Corporation (valued at $10.00 per share); or (iii) a combination of cash and
shares of common stock, provided that the aggregate merger consideration to be
paid to all stockholders of E.N.B. Holding Company will consist of 50% cash and
50% shares of Provident Bancorp common stock.
The conversion, stock offering and acquisition are expected to be
completed simultaneously in January 2004. However, the merger is not contingent
upon the completion of the mutual-to-stock conversion. If the conversion is not
completed by March 31, 2004, E.N.B. Holding Company, Inc. can elect to either:
(1) proceed with the merger transaction, in which case, E.N.B. Holding Company,
Inc. shareholders will receive merger consideration of $4,500 per share in cash
or (2) terminate the merger transaction and receive a fee of $3,700. Costs
related to the acquisition will be included in the total purchase price of
E.N.B. Holding Company, Inc.; if the acquisition is not completed, the costs
would be charged to expense. As of September 30, 2003, the Company incurred
acquisition costs of $559. Additionally, costs of $4 have been charged to
expense in fiscal 2003.
Market Area
Provident Bank is an independent community bank offering a broad range of
financial services to businesses and individuals as an alternative to money
centers and large regional banks in our market area. At September 30, 2003, our
18 full-service banking offices consisted of 13 offices in Rockland County, New
York and five offices in contiguous Orange County, New York. We acquired two of
the Orange County offices as part of our acquisition of The National Bank of
Florida, located in Florida, New York, which was completed in April 2002. Our
primary market for deposits is currently concentrated around the areas where our
full-service banking offices are located. Our 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 population of Rockland and Orange Counties increased by approximately
9% and 12%, respectively, between 1990 and 2002, while the population of the
State of New York as a whole increased by 6% during the same period.
3
The economy of our primary market area is based on a mixture of service,
manufacturing and wholesale/retail trade. Approximately 44% and 45% of the
workforces of Rockland and Orange Counties, respectively, are employed in
managerial, professional or administrative support positions. Other employment
is provided by a variety of industries and state and local governments. The
diversity of the employment base is evidenced by the diverse group of major
employers in our market area. Rockland and Orange Counties also have numerous
small business employers. As of October 2003, the unemployment rates in Rockland
County (3.6%) and Orange County (4.5%) were lower than the rates for the State
of New York (6.0%) and the United States as a whole (5.6%).
Lending Activities
General. We originate commercial real estate loans, commercial business
loans and construction loans (collectively referred to as the "commercial loan
portfolio"). We are also one of the largest originators in our market area of
fixed-rate and adjustable-rate ("ARM") residential mortgage loans collateralized
by one- to four-family residential real estate. In addition, we originate
consumer loans such as home equity lines of credit, homeowner loans and personal
loans. We retain most of the loans we originate, although we may sell
longer-term one- to four-family residential loans and participations in some
commercial loans.
Commercial Real Estate Lending. We originate real estate loans secured
predominantly by first liens on commercial real estate. 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. We may, from time to
time, purchase commercial real estate loan participations. We target commercial
real estate loans with initial principal balances between $1.0 million and $5.0
million. Loans secured by commercial real estate totaled $188.4 million, or
26.4% of our total loan portfolio at September 30, 2003, and consisted of 353
loans outstanding with an average loan balance of approximately $534,000,
although there are a large number of loans with balances substantially greater
than this average. Substantially all of our commercial real estate loans are
secured by properties located in our primary market area.
Most of our 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. Amortization on these loans is typically based on 15-
to 20-year payout schedules. We also originate some 15- to 20-year fixed-rate,
fully amortizing loans. Margins generally range from 175 basis points to 300
basis points above the applicable Federal Home Loan Bank advance rate.
In the underwriting of commercial real estate loans, we generally lend up
to 75% of the property's appraised value. 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, we emphasize primarily the
ratio of the property's projected net cash flow to the loan's debt service
requirement (generally requiring a ratio of 120%), computed after deduction for
a vacancy factor and property expenses we deem appropriate. In addition, a
personal guarantee of the loan is generally required from the principal(s) of
the borrower. We require title insurance insuring the priority of our lien, fire
and extended coverage casualty insurance, and flood insurance, if appropriate,
in order to protect our 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.
4
Commercial Business Loans. We make various types of secured and unsecured
commercial loans to customers in our 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 (i) a lending rate that is determined
internally, or (ii) a short-term market rate index. At September 30, 2003, we
had 738 commercial business loans outstanding with an aggregate balance of $54.2
million, or 7.6% of the total loan portfolio. As of September 30, 2003, the
average commercial business loan balance was approximately $73,400, although
there are a large number of loans with balances substantially greater than this
average.
5
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
also may be conducted. Collateral supporting a secured transaction also is
analyzed to determine its marketability. For small business loans and lines of
credit, generally those not exceeding $250,000, we use a credit scoring system
that enables us to process the loan requests quickly and efficiently. Commercial
business loans generally bear higher interest rates than residential loans of
like duration because they 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. We offer 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 $1.1
million. This portfolio totaled $380.8 million, or 53.3% of our total loan
portfolio at September 30, 2003.
We currently offer 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." We
generally originate both fixed-rate and ARM loans in amounts up to the maximum
conforming loan limits as established by Fannie Mae and Freddie Mac, which are
currently $322,700 for single-family homes. Private mortgage insurance is
generally required for loans with loan-to-value ratios in excess of 80%. We also
originate loans above conforming limits, referred to as "jumbo loans," that have
been underwritten to the credit standards of Fannie Mae or Freddie Mac. These
loans are generally eligible for sale to various firms that specialize in the
purchase of such non-conforming loans, although we retained in our portfolio all
such loans originated in fiscal 2003, totaling $28.2 million. In our market
area, due to our proximity to New York City, such larger residential loans are
not uncommon. We also originate loans at higher rates that do not meet the
credit standards of Fannie Mae or Freddie Mac, but are deemed to be acceptable
risks. The amount of such loans originated for fiscal 2003 was $3.7 million, all
of which were retained in our loan portfolio.
We actively monitor our interest rate risk position to determine the
desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and our capital and liquidity position, we may retain all of our
newly originated longer term fixed-rate, fixed-term residential mortgage loans
or from time to time we may decide to sell all or a portion of such loans in the
secondary mortgage market to government sponsored entities such as Fannie Mae
and Freddie Mac or other purchasers. Our bi-weekly one- to four-family
residential mortgage loans that are retained in our portfolio 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.
As of September 30, 2003, bi-weekly loans totaled $157.0 million, or 21.9 % of
our residential loan portfolio. We retain the servicing rights on a large
majority of loans sold to generate fee income and reinforce our commitment to
customer service, although we may also sell non-conforming loans to mortgage
banking companies, generally on a servicing-released basis. As of September 30,
2003, loans serviced for others totaled $83.3 million.
We currently offer several ARM loan products secured by residential
properties with rates that are fixed for a period ranging from six months to
seven years. After the initial term, the interest rate on these loans is
generally reset every year based upon a contractual spread or margin above the
average yield on U.S. Treasury securities, adjusted to a constant maturity of
one year, as published weekly by the Federal Reserve Board and subject to
certain periodic and lifetime limitations on interest rate changes. Many of the
borrowers who select these loans have shorter-term credit needs than those who
select long-term, fixed-rate loans. 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, 2003, our ARM portfolio included $6.5
million in loans that re-price every six months, $22.2 million in loans that
re-price once a year and $24.1 million in loans that reprice periodically after
an initial fixed-rate period of three years or more.
6
We require title insurance on all of our one- to four-family mortgage
loans, and we also require that borrowers maintain fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) 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. We originate land acquisition, development and
construction loans to builders in our market area. These loans totaled $10.3
million, or 1.4% of our total loan portfolio at September 30, 2003.
Acquisition loans help finance the purchase of land intended for further
development, including single-family houses, multi-family housing, and
commercial income property. In some cases, we may make an acquisition loan
before the borrower has received approval to develop the land as planned. In
general, the maximum loan-to-value ratio for a land acquisition loan is 60% of
the appraised value of the property. We also make development loans to builders
in our 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.
We also grant construction loans to area builders, often in conjunction
with development loans. In the case of residential subdivisions, these loans
finance the cost of completing homes on the improved property. 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. We commit to provide the permanent
mortgage financing on most of our construction loans on income-producing
property.
Land acquisition, development and construction lending exposes us 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 we make 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 us 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.
Consumer Loans. We originate 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, 2003, consumer loans totaled $80.6
million, or 11.3% of the total loan portfolio.
At September 30, 2003, the largest group of consumer loans consisted of
$75.4 million of loans secured by junior liens on residential properties. We
offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner
loans, and we also offer adjustable-rate home equity lines of credit. As of
September 30, 2003, homeowner loans totaled $25.2 million or 3.6% of our total
loan portfolio. The disbursed portion of home equity lines of credit totaled
$50.2 million, or 7.0% of our total loan portfolio at September 30, 2003, with
$22.4 million remaining undisbursed.
7
Other consumer loans include personal loans and loans secured by new or
used automobiles. As of September 30, 2003, these loans totaled $5.2 million, or
0.7% of our total loan portfolio. We originate automobile loans directly to our
customers and have no outstanding agreement with automobile dealerships to
generate indirect loans. We require borrowers to maintain collision insurance on
automobiles securing consumer loans, with us 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. Personal loans are generally unsecured
and carry higher interest rates and shorter terms than homeowner loans or
automobile loans.
Our 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 our loan portfolio, excluding loans held for sale, by type of loan at the
dates indicated.
September 30,
-------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ------------------ ----------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
One- to four-family
residential mortgage
loans................. $380,776 53.3% $366,111 54.6% $358,198 58.2% $343,871 57.5% $344,731 60.2%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial real estate
loans................. 188,360 26.4 163,329 24.3 129,295 21.0 124,988 20.9 110,382 19.3
Commercial business loans 54,174 7.6 41,320 6.2 31,394 5.1 27,483 4.6 30,768 5.4
Construction loans....... 10,323 1.4 17,020 2.5 19,490 3.2 29,599 5.0 19,147 3.3
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total commercial loans 252,857 35.4 221,669 33.0 180,179 29.3 182,070 30.5 160,297 28.0
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Home equity lines of
credit................ 50,197 7.0 39,727 5.9 31,125 5.1 28,021 4.7 25,380 4.4
Homeowner loans.......... 25,225 3.6 36,880 5.5 39,501 6.4 37,027 6.2 34,852 6.1
Other consumer loans..... 5,198 0.7 6,812 1.0 6,266 1.0 6,486 1.1 7,463 1.3
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total consumer loans.. 80,620 11.3 83,419 12.4 76,892 12.5 71,534 12.0 67,695 11.8
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans.............. 714,253 100.0% 671,199 100.0% 615,269 100.0% 597,475 100.0% 572,723 100.0%
======= ======= ======= ======= =======
Allowance for loan losses (11,069) (10,383) (9,123) (7,653) (6,202)
-------- -------- -------- -------- --------
Total loans, net......... $703,184 $660,816 $606,146 $589,822 $566,521
======== ======== ======== ======== ========
9
Loan Portfolio Maturities and Yields. The following table summarizes the
scheduled repayments of our loan portfolio at September 30, 2003. 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
------------------- ---------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------------------- ---------------------- -------------------
(Dollars in thousands)
Due During the Years
Ending September 30,
2004 (1)............... $ 13,794 5.71% $ 23,866 6.17% $ 26,184 4.90%
2005 to 2008........... 44,247 5.68 44,557 6.72 13,594 5.92
2009 and beyond........ 322,735 5.96 119,937 5.68 14,396 5.82
--------- --------- ---------
Total......... $ 380,776 5.92% $ 188,360 5.99% $ 54,174 5.40%
========= ========= =========
Construction (2) Consumer Total
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------- --------- --------- -------- --------- ---------
(Dollars in thousands)
Due During the Years
Ending September 30,
2004 (1)............... $ 6,192 5.11% $ 53,060 4.38% $ 123,096 5.02%
2005 to 2008........... 4,131 5.24 9,404 7.64 115,933 6.25
2009 and beyond........ -- -- 18,156 7.19 475,224 5.93
--------- --------- ---------
Total......... $ 10,323 5.16% $ 80,620 5.39% $ 714,253 5.83%
========= ========= =========
- -----------
(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, 2003 that are contractually due after
September 30, 2004.
Due After September 30, 2003
---------------------------------------
Fixed Adjustable Total
----------- ----------- -----------
(In thousands)
One- to four-family residential mortgage loans... $ 312,183 $ 54,799 $ 366,982
----------- ----------- -----------
Commercial real estate loans..................... 73,954 90,540 164,494
Commercial business loans........................ 13,911 14,079 27,990
Construction loans............................... -- 4,131 4,131
----------- ----------- -----------
Total commercial loans.................. 87,865 108,750 196,615
----------- ----------- -----------
Consumer loans................................... 27,560 -- 27,560
----------- ----------- -----------
Total loans............................. $ 427,608 $ 163,549 $ 591,157
=========== =========== ===========
10
Loan Originations, Purchases, Sales and Servicing. While we originate both
fixed-rate and adjustable-rate loans, our 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 our 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.
Our 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 or Freddie Mac on a non-recourse basis whereby
foreclosure losses are generally the responsibility of the purchaser and not
Provident Bank.
We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our
policy has been to retain the servicing rights for all conforming 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. We retain a portion of the interest paid by the
borrower on the loans as consideration for our servicing activities.
Loan Approval Authority and Underwriting. We have four levels of lending
authority beginning with the Board of Directors. The Board grants lending
authority to the Director Loan Committee, 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. Our lending activities are subject to written policies established by
the Board. These policies are reviewed periodically. Following completion of the
conversion and offering, it is likely that the lending levels will be increased.
The Director Loan Committee may approve loans in accordance with
applicable loan policies, up to the limits established in our 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, however, for credit-scored small business loans, the
maximum individual authority is $150,000.
We have established a risk rating system for our commercial business
loans, commercial and multi-family real estate loans, and acquisition,
development 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. We determine our maximum
loan-to-one-borrower limits based upon the rating of the loan. The large
majority of loans fall into three categories. The maximum for the best-rated
borrowers is $11.5 million, for the next group of borrowers is $8.5 million, and
for the third group is $4.0 million. Sublimits apply based on reliance on any
single property, and for commercial business loans.
11
In connection with our residential and commercial real estate loans, we
generally require property appraisals to be performed by independent appraisers
who are approved by the Board. Appraisals are then reviewed by the appropriate
loan underwriting areas. Under certain conditions, appraisals may not be
required for loans under $250,000 or in other limited circumstances. We also
require title insurance, hazard insurance and, if indicated, flood insurance on
property securing 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,
we also receive 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. We defer
loan origination fees and costs, and amortize 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 $903,000 at September 30, 2003.
To the extent that originated loans are sold with servicing retained, we
capitalize a mortgage servicing asset at the time of the sale in accordance with
applicable accounting standards (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. Originated mortgage servicing rights with an amortized cost
of $702,000 are included in other assets at September 30, 2003. See also Notes 3
and 6 of the Notes to Consolidated Financial Statements.
Loans to One Borrower. At September 30, 2003, our five largest aggregate
amounts loaned to any one borrower and certain related interests (including any
unused lines of credit) consisted of secured and unsecured financing of $8.2
million, $7.5 million, $7.3 million, $6.9 million and $6.4 million. See
"Regulation--Federal Banking Regulation--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
16th day after the payment due date on a loan requesting the payment due plus
any late charge that was assessed. Accounts are distributed to a collector or
account officer to contact borrowers, determine the reason for delinquency and
arrange for payment, and accounts are monitored electronically for receipt of
payments. If payments are not received within 30 days of the original due date,
a letter demanding payment of all arrearages is sent and contact efforts are
continued. If payment is not received within 60 days of the due date, loans are
generally accelerated and payment in full is demanded. Failure to pay within 90
days of the original due date generally results in legal action, notwithstanding
ongoing collection efforts. Unsecured consumer loans are charged-off after 120
days. For commercial loans, procedures may vary depending upon individual
circumstances.
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, 2003, we had
non-accrual loans of $4.7 million.
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.
12
The following table sets forth certain information with respect to our
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, 2003
One- to four-family........ 6 $ 626 6 $ 951 12 $ 1,577
Commercial real estate..... 1 36 8 3,632 9 3,668
Commercial business........ 1 36 -- -- 1 36
Consumer................... 7 63 3 114 10 177
---------- ---------- ---------- ---------- ---------- ----------
Total.................... 15 $ 761 17 $ 4,697 32 $ 5,458
========== ========== ========== ========== ========== ==========
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
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
Consumer................... 9 277 8 175 17 452
---------- ---------- ---------- ---------- ---------- ----------
Total.................... 20 $ 1,425 32 $ 2,277 52 $ 3,702
========== ========== ========== ========== ========== ==========
Non-Performing Assets. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we 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,
--------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
Non-accrual loans:
One- to four-family............. $ 951 $ 2,291 $ 1,684 $ 2,496 $ 2,839
Commercial real estate.......... 3,632 2,492 418 1,149 1,133
Commercial business............. -- -- -- -- 208
Construction.................... -- -- -- 27 27
Consumer........................ 114 171 175 359 429
--------- --------- --------- --------- ---------
Total non-performing loans.... 4,697 4,954 2,277 4,031 4,636
--------- --------- --------- --------- ---------
Real estate owned:
One- to four-family............. -- 41 109 154 403
Total real estate owned....... -- 41 109 154 403
--------- --------- --------- --------- ---------
Total non-performing assets $ 4,697 $ 4,995 $ 2,386 $ 4,185 $ 5,039
========= ========= ========= ========= =========
Ratios:
Non-performing loans to total
loans........................... 0.66% 0.74% 0.37% 0.67% 0.81%
Non-performing assets to total
assets.......................... 0.40 0.49 0.27 0.50 0.62
For the year ended September 30, 2003, gross interest income that would
have been recorded had the non-accrual loans at the end of the year remained on
accrual status throughout the year amounted to $354,000. Interest income
actually recognized on such loans totaled $167,000.
Classification of Assets. Our 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
13
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 us to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess
potential weaknesses that deserve our close attention, are required to be
designated as special mention. As of September 30, 2003, we had $1.6 million of
assets designated as special mention.
When we classify assets as either substandard or doubtful, we allocate a
portion of the related general loss allowances to such assets as deemed prudent
by management. The allowance for loan losses represents amounts that have been
established to recognize losses inherent in the loan portfolio that are both
probable and reasonably estimable at the date of the financial statements. When
we classify problem assets as loss, we charge-off such amount. Our determination
as to the classification of our assets and the amount of our loss allowances are
subject to review by our regulatory agencies, which can order the establishment
of additional loss allowances. Management regularly reviews our asset portfolio
to determine whether any assets require classification in accordance with
applicable regulations. On the basis of management's review of our assets at
September 30, 2003, classified assets consisted of substandard assets of $4.2
million and no doubtful assets (loans).
Allowance for Loan Losses. We provide 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 accounting principles generally accepted in the United States of America.
The allowance for loan losses consists of amounts specifically allocated to
non-performing loans and other criticized or classified loans (if any) as well
as allowances determined for each major loan category. After we establish a
provision for loans that are known to be non-performing, criticized or
classified, we calculate a percentage to apply to the remaining loan portfolio
to estimate the probable losses inherent in that portion of the portfolio. When
the loan portfolio increases, therefore, the percentage calculation results in a
higher dollar amount of estimated probable losses than would be the case without
the increase, and when the loan portfolio decreases, the percentage calculation
results in a lower dollar amount of estimated probable losses than would be the
case without the decrease. These percentages are determined by management based
on historical loss experience for the applicable loan category, which may be
adjusted to reflect our evaluation of:
o levels of, and trends in, delinquencies and non-accruals;
o trends in volume and terms of loans;
o effects of any changes in lending policies and procedures;
o experience, ability, and depth of lending management and staff;
o national and local economic trends and conditions;
o concentrations of credit by such factors as location, industry,
inter-relationships, and borrower; and
o for commercial loans, trends in risk ratings.
We consider commercial real estate loans, commercial business loans, and
land acquisition, development and construction loans to be riskier than one-to
four-family residential mortgage loans. Commercial real estate loans 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
14
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.
Commercial business loans involve a higher risk of default than residential
loans of like duration since their repayment is generally dependent on the
successful operation of the borrower's business and the sufficiency of
collateral, if any. Land acquisition, development and construction lending
exposes us 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 we make 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 us 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.
The carrying value of loans is periodically evaluated and the allowance is
adjusted accordingly. 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, our
regulatory agencies periodically review the allowance for loan losses. Such
agencies may require us to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
The following table sets forth activity in our allowance for loan losses
for the years indicated.
At or For the Years Ended September 30,
-----------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year ....... $ 10,383 $ 9,123 $ 7,653 $ 6,202 $ 4,906
-------- -------- -------- -------- --------
Charge-offs:
One- to four-family ............. -- -- (25) (168) (9)
Commercial real estate .......... -- (31) -- (1) --
Commercial business ............. (212) (130) (1) (6) (567)
Consumer ........................ (140) (163) (133) (195) (346)
-------- -------- -------- -------- --------
Total charge-offs ............. (352) (324) (159) (370) (922)
Recoveries:
One- to four-family ............. -- -- -- 24 --
Commercial real estate .......... -- -- 96 -- 101
Commercial business ............. 40 40 42 24 194
Construction .................... -- -- -- -- 286
Consumer ........................ 98 107 51 63 47
-------- -------- -------- -------- --------
Total recoveries .............. 138 147 189 111 628
Net (charge-offs) recoveries ....... (214) (177) 30 (259) (294)
Allowance recorded in acquisition
of The National Bank of Florida . -- 537 -- -- --
Provision for loan losses .......... 900 900 1,440 1,710 1,590
-------- -------- -------- -------- --------
Balance at end of year ............. $ 11,069 $ 10,383 $ 9,123 $ 7,653 $ 6,202
======== ======== ======== ======== ========
Ratios:
Net charge-offs to average loans
outstanding (annualized) ........ 0.03% 0.03% --% 0.04% 0.06%
Allowance for loan losses to
non-performing loans ............ 235.66 209.59 400.66 189.85 133.78
Allowance for loan losses to
total loans ..................... 1.55 1.55 1.48 1.28 1.08
15
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 (excluding loans held for sale), 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,
----------------------------------------------------------------------------------
2003 2002
--------------------------------------- ---------------------------------------
Percent of
Percent of Loans in
Allowance Loan Loans in Each Allowance Loan Each
for Loan Balances by Category to for Loan Balances by Category to
Losses Category Total Loans Losses Category Total Loans
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
One- to four-family ... $ 1,513 $ 380,776 53.3% $ 3,315 $ 366,111 54.6%
Commercial real estate 6,009 188,360 26.4 4,275 163,329 24.3
Commercial business ... 2,413 54,174 7.6 925 41,320 6.2
Construction .......... 420 10,323 1.4 871 17,020 2.5
Consumer .............. 714 80,620 11.3 997 83,419 12.4
----------- ----------- ----------- ----------- ----------- -----------
Total .............. $ 11,069 $ 714,253 100.0% $ 10,383 $ 671,199 100.0%
=========== =========== =========== =========== =========== ===========
-------------------------------------------
2001
-------------------------------------------
Percent of
Loans in
Loan Each
Allowance for Balances by Category to
Loan Losses Category Total Loans
------------- ------------ ------------
(Dollars in thousands)
One- to four-family ... $ 2,638 $ 358,198 58.2%
Commercial real estate 3,930 129,295 21.0
Commercial business ... 841 31,394 5.1
Construction .......... 871 19,490 3.2
Consumer .............. 843 76,892 12.5
------------ ------------ ------------
Total .............. $ 9,123 $ 615,269 100.0%
============ ============ ============
September 30,
---------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- --------------------------------------------
.. Percent of
Percent of Loans in
Allowance Loan Loans in Each Allowance Loan Each
for Loan Balances by Category to for Loan Balances by Category to
Losses Category Total Loans Losses Category Total Loans
------------ ------------ ------------- ------------ ------------ ------------
(Dollars in thousands)
One- to four-family .. $ 2,423 $ 343,871 57.5% $ 2,091 $ 344,731 60.2%
Commercial real estate 3,210 124,988 20.9 2,416 110,382 19.3
Commercial business .. 481 27,483 4.6 254 30,768 5.4
Construction ......... 733 29,599 5.0 614 19,147 3.3
Consumer ............. 806 71,534 12.0 827 67,695 11.8
------------ ------------ ------------ ------------ ------------ ------------
Total ............. $ 7,653 $ 597,475 100.0% $ 6,202 $ 572,723 100.0%
============ ============ ============ ============ ============ ============
16
Securities Activities
Our securities investment policy is established by our 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 our interest rate risk management strategy. The Board's
asset/liability committee oversees our investment program and evaluates on an
ongoing basis our investment policy and objectives. Our chief financial officer,
or our chief financial officer acting with our chief executive officer, is
responsible for making securities portfolio decisions in accordance with
established policies. Our chief financial officer, chief executive officer and
certain other executive officers 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.
Our 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 of New York (federal
agency securities) and, to a lesser extent, other equity 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. Our 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, we designate a
security as held to maturity, available for sale, or trading, depending on our
ability and intent. Securities available for sale are reported at fair value,
while securities held to maturity are reported at amortized cost. We do not have
a trading portfolio.
Government Securities. At September 30, 2003, we held government
securities available for sale with a fair value of $133.6 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, our 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, 2003, we held $6.6 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 have a higher risk of default due to adverse changes in the
creditworthiness of the issuer. In recognition of this potential risk, our
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 $5.0 million per issuer
and a total corporate bond portfolio limit of $40.0 million. The policy also
limits investments in municipal bonds 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 unless the issuer is a local
government entity within our service area. Such local entity obligations
generally are not rated, and are subject to internal credit reviews. In
addition, the policy imposes an investment limitation of $5.0 million per
municipal issuer and a total municipal bond portfolio limit of 5% of assets. At
September 30, 2003, we held $20.9 million in bonds issued by states and
political subdivisions, $18.4 million of which were classified as held to
maturity at amortized cost and $2.5 million of which were classified as
available for sale at fair value.
17
Equity Securities. At September 30, 2003, our equity securities available
for sale had a fair value of $1.3 million and consisted of stock issued by
Freddie Mac and Fannie Mae, and certain other equity investments. We also held
$8.2 million (at cost) of Federal Home Loan Bank of New York ("FHLBNY") 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 our
borrowing under the Federal Home Loan Bank advance program. In September 2003,
the FHLBNY announced that due to certain losses recorded on a portion of its
investment portfolio it would not pay a dividend in the quarter ended December
2003 and would evaluate in the future when and if it would resume a dividend.
Dividends recorded in the year ended September 30, 2003 amounted to $310,000.
Mortgage-Backed Securities. We purchase 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. We invest primarily in mortgage-backed securities issued or sponsored
by Fannie Mae, Freddie Mac, and Ginnie Mae. To a lesser extent, we also invest
in securities backed by agencies of the U.S. Government. At September 30, 2003,
our mortgage-backed securities portfolio totaled $211.8 million, consisting of
$156.6 million available for sale at fair value and $55.2 million held to
maturity at amortized cost. The total mortgage-backed securities portfolio
includes CMOs of $24.0 million, consisting of $19.7 million available for sale
at fair value and $4.3 million held to maturity at amortized cost. The remaining
mortgage-backed securities of $187.8 million were pass-through securities,
consisting of $136.9 million available for sale at fair value and $50.9 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 our 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 us,
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 or less than the prepayment rate estimated at the time of
purchase, 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. We review prepayment estimates for our
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. Periodic reviews of current prepayment
speeds are performed in order to ascertain whether prepayment estimates require
modification, that would cause amortization or accretion adjustments.
A portion of our 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. Our 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.
18
Available for Sale Portfolio. The following table sets forth the
composition of our available for sale portfolio at the dates indicated.
September 30,
--------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- -------------------------- --------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Investment Securities:
U.S. Government securities $ 20,374 $ 20,627 $ 21,199 $ 21,658 $ 22,125 $ 22,975
Federal agency obligations 110,018 112,983 87,878 91,625 26,744 28,182
Corporate debt securities . 6,030 6,623 30,079 32,144 48,367 50,872
State and municipal
securities ................ 2,545 2,536 -- -- -- --
Equity securities ......... 1,052 1,326 1,113 2,071 1,290 2,372
----------- ----------- ----------- ----------- ----------- -----------
Total investment securities
available for sale ...... 140,019 144,095 140,269 147,498 98,526 104,401
----------- ----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae .............. 80,233 80,546 20,076 21,121 18,225 18,815
Freddie Mac ............. 50,439 51,516 10,591 11,023 6,361 6,842
Other ................... 4,377 4,879 4,430 5,000 4,481 4,529
CMOs and REMICs ........... 19,733 19,679 21,352 21,504 28,811 29,341
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage-backed
securities available for
sale .................... 154,782 156,620 56,449 58,648 57,878 59,527
----------- ----------- ----------- ----------- ----------- -----------
Total securities available
for sale ................ $ 294,801 $ 300,715 $ 196,718 $ 206,146 $ 156,404 $ 163,928
=========== =========== =========== =========== =========== ===========
At September 30, 2003, our available for sale U. S. Treasury securities
portfolio, at fair value, totaled $20.6 million, or 1.8% of total assets, and
the federal agency securities portfolio, at fair value, totaled $113.0 million,
or 9.6% of total assets. Of the combined U.S. Government and agency portfolio,
based on amortized cost, $17.2 million had maturities of one year or less and a
weighted average yield of 4.27%, and $113.2 million had maturities of between
one and five years and a weighted average yield of 3.64%. The agency securities
portfolio includes both non-callable and callable debentures. The agency
debentures are callable on a quarterly or one time basis depending on the
security's individual terms following an initial holding period of from twelve
to twenty-four months.
Available for sale corporate debt securities, at fair value, totaled $6.6
million at September 30, 2003. These securities all had maturities of less than
five years, with a weighted average yield of 6.71%. Equity securities available
for sale at September 30, 2003 had a fair value of $1.3 million.
At September 30, 2003, $136.9 million of our available for sale
mortgage-backed securities, at fair value, consisted of pass-through securities,
which totaled 11.7% of total assets. At the same date, the fair value of our
available for sale CMO portfolio totaled $19.7 million, or 1.7% 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 3.49%. We own both fixed-rate
and floating-rate CMOs. The underlying mortgage collateral for our portfolio of
CMOs available for sale at September 30, 2003 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.
19
Held to Maturity Portfolio. The following table sets forth the composition
of our held to maturity portfolio at the dates indicated.
September 30,
--------------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Investment Securities:
State and municipal
securities ............. $ 18,384 $ 19,386 $ 16,409 $ 17,325 $ 11,906 $ 12,160
----------- ----------- ----------- ----------- ----------- -----------
Total investment
securities held to
maturity ............. 18,384 19,386 16,409 17,325 11,906 12,160
----------- ----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities:
Pass-through securities:
Ginnie Mae ........... 1,103 1,165 2,785 2,988 3,510 3,611
Fannie Mae ........... 23,249 23,698 28,600 30,177 23,616 24,421
Freddie Mac .......... 26,511 27,016 34,693 35,788 26,477 27,394
Other ................ -- -- -- -- 1,491 1,542
CMOs and REMICs ........ 4,297 4,363 4,304 4,428 4,355 4,532
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage-backed
securities held to
maturity ............. 55,160 56,242 70,382 73,381 59,449 61,500
----------- ----------- ----------- ----------- ----------- -----------
Total securities held to
maturity ............. $ 73,544 $ 75,628 $ 86,791 $ 90,706 $ 71,355 $ 73,660
=========== =========== =========== =========== =========== ===========
At September 30, 2003, our held to maturity mortgage-backed securities
portfolio totaled $55.2 million at amortized cost, consisting of: $45.2 million
with a weighted average yield of 5.2% and contractual maturities within five
years; and $10.0 million with a weighted average yield of 4.2% and contractual
maturities of five to 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.
20
Portfolio Maturities and Yields. The composition and maturities of the
investment debt securities portfolio and the mortgage-backed securities
portfolio at September 30, 2003 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. State and
municipal securities yields have not been adjusted to a tax-equivalent basis.
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae .......... $ 2,182 3.79% $ 72,238 4.19% $ 5,813 4.01%
Freddie Mac ......... 657 4.11 49,510 4.45 7,915 5.19
Other ............... 4,875 2.72 11,591 4.75 -- --
--------- --------- --------- --------- --------- ---------
Total ............. 7,714 3.14 133,339 4.34 13,728 4.69
--------- --------- --------- --------- --------- ---------
Investment Securities
U.S. Government and -
agency securities . 17,204 4.27 113,188 3.64 -- --
Corporate debt
securities .......... -- -- 6,030 6.71 -- --
State and municipal
securities ........ 146 1.00 703 2.12 1,345 3.09
--------- --------- --------- --------- --------- ---------
Total ............. 17,350 4.24 119,921 3.79 1,345 3.09
--------- --------- --------- --------- ---------
Total debt securities
available for sale .. $ 25,064 3.90% $ 253,260 4.08% $ 15,073 4.55%
========= ========= ========= ========= ========= =========
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae .......... $ 668 5.58% $ 16,907 4.99% $ 9,971 4.24%
Freddie Mac ......... 4,541 5.81 21,970 5.16 -- --
Other ............... 89 5.36 1,014 7.53 -- --
--------- --------- --------- --------- --------- ---------
Total ............. 5,298 5.82 39,891 5.15 9,971 4.24
Investment Securities
State and municipal
securities ........ 2,240 1.09 5,825 3.67 10,001 4.13
--------- --------- --------- --------- --------- ---------
Total debt securities
held to maturity .... $ 7,538 4.41% $ 45,716 4.96% $ 19,972 4.18%
========= ========= ========= ========= ========= =========
More than Ten Years Total Securities
---------------------- -----------------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Fair Value Yield
--------- --------- --------- ---------- ---------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae .......... $ -- --% $ 80,233 $ 80,546 4.16%
Freddie Mac ......... -- 58,083 59,134 4.55
Other ............... -- -- 16,466 16,940 4.15
--------- --------- --------- --------- ---------
Total ............. -- -- 154,782 156,620 4.31
--------- --------- --------- --------- ---------
Investment Securities
U.S. Government and -
agency securities . -- -- 130,392 133,610 3.73
Corporate debt
securities .......... -- -- 6,030 6,623 6.71
State and municipal
securities ........ 351 3.23 2,545 2,536 2.66
--------- --------- --------- --------- ---------
Total ............. 351 3.23 138,967 142,769 3.84
--------- --------- --------- --------- ---------
Total debt securities
available for sale .. $ 351 3.23% $ 293,749 $ 299,389 4.09%
========= ========= ========= ========= =========
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae .......... $ -- --% $ 27,546 $ 28,061 4.73%
Freddie Mac ......... -- -- 26,511 27,016 5.27
Other ............... -- -- 1,103 1,165 7.59
--------- --------- --------- --------- ---------
Total ............. -- 55,160 56,242 5.05
Investment Securities
State and municipal
securities ........ 318 6.75 18,384 19,386 3.53
--------- --------- --------- --------- ---------
Total debt securities
held to maturity .... $ 318 6.75% $ 73,544 $ 75,628 4.67%
========= ========= ========= ========= =========
21
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 our funds
for use in lending, investing and for other general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our 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. We provide commercial checking
accounts for businesses. In addition, we provide low-cost checking account
services for low-income customers.
At September 30, 2003, our deposits totaled $869.5 million.
Interest-bearing deposits totaled $706.5 million, and non-interest-bearing
demand deposits totaled $163.0 million. NOW, savings and money market deposits
totaled $470.3 million at September 30, 2003. Also at that date, we had a total
of $236.2 million in certificates of deposit, of which $190.1 million had
maturities of one year or less. Although we have a significant portion of our
deposits in shorter-term certificates of deposit, management monitors activity
on these accounts and, based on historical experience and our current pricing
strategy we believe we will retain a large portion of such accounts upon
maturity.
Our deposits are obtained predominantly from the areas in which our branch
offices are located. We rely on our favorable locations, customer service and
competitive pricing to attract and retain these deposits. While we accept
certificates of deposit in excess of $100,000 for which we may provide
preferential rates, we do not actively solicit such deposits as they are more
difficult to retain than core deposits. With the commencement of operations of
our limited purpose commercial bank subsidiary, Provident Municipal Bank, in
April 2002, we began accepting municipal deposits. Municipal time accounts
(certificates of deposit) are generally obtained through a bidding process, and
tend to carry higher average interest rates than retail certificates of deposit
of similar term.
The following tables set forth the distribution of total deposit accounts,
by account type, at the dates indicated.
September 30,
-------------------------------------------------------------------------------------------- ---------
2003 2002 2001
-------------------------------- ------------------------------- ---------------------- ---------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
--------- -------- --------- --------- -------- -------- --------- -------- ---------
(Dollars in thousands)
Demand deposits:
Retail ............... $ 90,471 10.4% --% $ 54,399 6.8% --% $ 41,280 6.3% --%
Commercial ........... 72,538 8.3 -- 55,732 6.9 -- 33,081 5.1 --
--------- ----- --------- ----- --------- -----
Total demand deposits 163,009 18.7 -- 110,131 13.7 -- 74,361 11.4 --
NOW deposits ............ 62,367 7.2 0.20 82,983 10.4 0.40 63,509 9.7 0.49
Savings deposits ........ 279,717 32.2 0.40 247,918 31.0 0.99 160,777 24.6 1.05
Money market deposits ... 128,222 14.7 0.52 115,065 14.4 1.23 109,126 16.7 1.81
--------- ----- --------- ----- --------- -----
633,315 72.8 0.41 556,097 69.5 0.76 407,773 62.4 1.00
Certificates of deposit . 236,238 27.2 1.85 243,529 30.5 2.64 245,327 37.6 4.63
--------- ----- --------- ----- --------- -----
Total deposits ....... $ 869,553 100.0% 0.72% $ 799,626 100.0% 1.33% $ 653,100 100.0% 2.31%
========= ===== ========= ===== ========= =====
22
The following table sets forth, by interest rate ranges, information
concerning certificates of deposit at the dates indicated.
At September 30, 2003
----------------------------------------------------------------------------
Period to Maturity
---------------------------------------------------------------------------- Total at September 30,
Less than One to Two Two to More than Percent of ------------------------
One Year Years Three Years Three Years Total Total 2002 2001
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Interest Rate Range:
2.00% and below ... $ 154,353 $ 9,524 $ 555 $ 30 $ 164,462 69.6% $ 107,202 $ --
2.01% to 3.00% ... 17,993 6,395 3,547 330 28,265 12.0 73,101 --
3.01% to 4.00% ... 14,453 5,148 210 6,425 26,236 11.1 27,373 108,161
4.01% to 5.00% ... 3,185 6,008 1,354 3,734 14,281 6.0 20,245 33,785
5.01% to 6.00% ... 156 1,947 244 31 2,378 1.0 6,563 30,416
6.01% and above ... -- 616 -- -- 616 0.3 9,045 72,965
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total ............. $ 190,140 $ 29,638 $ 5,910 $ 10,550 $ 236,238 100.0% $ 243,529 $ 245,327
=========== =========== =========== =========== =========== =========== =========== ===========
The following table sets forth certificates of deposit by time remaining
until maturity as of September 30, 2003.
Maturity
--------------------------------------------------
3 Months or Over 3 to 6 Over 6 to 12 Over 12
Less Months Months Months Total
----------- ----------- ----------- ----------- -----------
(In thousands)
Certificates of deposit less than $100,000 .... $ 60,792 $ 44,266 $ 43,913 $ 38,652 $ 187,623
Certificates of deposit of $100,000 or more (1) 27,864 6,961 6,344 7,446 48,615
----------- ----------- ----------- ----------- -----------
Total of certificates of deposit ........... $ 88,656 $ 51,227 $ 50,257 $ 46,098 $ 236,238
=========== =========== =========== =========== ===========
- ----------
(1) The weighted average interest rates for these accounts, by maturity
period, are 1.29% for 3 months or less; 1.29% for 3 to 6 months; 1.90% for
6 to 12 months; and 3.60% for over 12 months. The overall weighted average
interest rate for accounts of $100,000 or more was 1.72%.
Borrowings. Our borrowings consist of advances and repurchase agreements.
At September 30, 2003, we had access to additional Federal Home Loan Bank
advances of up to $228 million. The following table sets forth information
concerning balances and interest rates on our Federal Home Loan Bank advances
and repurchase agreements at the dates and for the years indicated.
At or For the Years Ended September 30,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
(Dollars in thousands)
Balance at end of year .............. $ 164,757 $ 102,968 $ 110,427
Average balance during year ......... 112,248 113,446 113,975
Maximum outstanding at any month end 164,757 131,637 135,727
Weighted average interest rate at end
of year .......................... 2.98% 4.08% 5.32%
Average interest rate during year ... 3.83% 4.85% 5.98%
23
Activities of Subsidiaries and Affiliated Entities
Provident Municipal Bank is a wholly-owned subsidiary of Provident Bank.
Provident Municipal Bank is a New York State-chartered commercial bank whose
purpose is limited to accepting municipal deposits and investing funds obtained
into investment securities. New York State law requires municipalities located
in the State of New York to deposit funds with commercial banks, effectively
forbidding these municipalities from depositing funds with savings institutions,
including federally chartered savings associations, such as Provident Bank.
Provident Municipal Bank began operations on April 19, 2002, and at September
30, 2003 had $31.0 million in deposits from municipal entities in the
communities served by Provident Bank.
Provest Services Corp. I is a wholly-owned subsidiary of Provident Bank,
holding an investment in a limited partnership that 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 Provident
Bank that has engaged a third-party provider to sell annuities, mutual funds,
life and health insurance products to Provident Bank's customers. Through
September 30, 2003, the activities of these subsidiaries have had an
insignificant effect on our consolidated financial condition and results of
operations. During fiscal 1999, Provident Bank established Provident REIT, Inc.,
a wholly-owned subsidiary in the form of a real estate investment trust.
Provident REIT, Inc. holds both residential and commercial real estate loans.
At the time of our initial public offering, 46.7% of our common stock was
sold to the public, and the remaining 53.3% was retained by Provident Bancorp,
MHC, the successor to our original mutual savings association. The accounts of
Provident Bancorp, MHC are not included in our consolidated financial
statements. Provident Bancorp, MHC's primary activity is to hold its majority
ownership interest in us. Provident Bancorp, MHC waives the receipt of most cash
dividends with respect to its shares of our common stock, but uses the proceeds
of those dividends it accepts principally to make charitable contributions in
the communities Provident Bank serves. In fiscal 2003, Provident Bancorp, MHC
accepted $453,000 in dividends and made charitable contributions of $321,000.
Provident Bancorp, MHC has commitments to make future charitable contributions
of $33,500. These commitments will be assumed by Provident Bank following the
conversion.
Competition
We face significant competition in both originating loans and attracting
deposits. The New York metropolitan area has a high concentration of financial
institutions, many of which are significantly larger institutions with greater
financial resources than us, and many of which are our competitors to varying
degrees. Our competition for loans comes principally from commercial banks,
savings banks, mortgage banking companies, credit unions, insurance companies
and other financial service companies. Our most direct competition for deposits
has historically come from commercial banks, savings banks and credit unions. We
face additional competition for deposits from non-depository competitors such as
the mutual fund industry, securities and brokerage firms and insurance
companies. We have emphasized personalized banking and the advantage of local
decision making in our banking business and this strategy appears to have been
well received in our market area. We do not rely on any individual, group, or
entity for a material portion of our deposits.
Employees
As of September 30, 2003, we had 285 full-time employees and 47 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
24
Regulation
General
As a federally chartered savings association, Provident Bank is regulated
and supervised by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. Provident Municipal Bank is regulated by the New York
State Department of Banking and the Federal Deposit Insurance Corporation. This
regulation and supervision establishes a comprehensive framework of activities
in which a financial institution may engage and is intended primarily for the
protection of the Federal Deposit Insurance Corporation's deposit insurance
funds and depositors. Under this system of federal regulation, financial
institutions are periodically examined to ensure that they satisfy applicable
standards with respect to their capital adequacy, assets, management, earnings,
liquidity and sensitivity to market interest rates. After completing an
examination, the federal agency critiques the financial institution's operations
and assigns its rating (known as an institution's CAMELS). Under federal law, an
institution may not disclose its CAMELS rating to the public. Provident Bank
also is a member of, and owns stock in, the Federal Home Loan Bank of New York,
which is one of the twelve regional banks in the Federal Home Loan Bank System.
Provident Bank also is regulated to a lesser extent by the Board of Governors of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision examines Provident Bank and
prepares reports for the consideration of its board of directors on any
operating deficiencies. Provident Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws,
especially in matters concerning the ownership of deposit accounts and the form
and content of Provident Bank's loan documents.
Any change in these laws or regulations, whether by the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the New York State
Department of Banking or Congress, could have a material adverse impact on
Provident Bancorp, Inc., Provident Bank, Provident Municipal Bank and their
respective operations.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and
investment powers from the Home Owners' Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, Provident Bank may invest in mortgage loans secured by residential
and commercial real estate, commercial business and consumer loans, certain
types of debt securities and certain other loans and assets. Provident Bank also
may establish subsidiaries that may engage in activities not otherwise
permissible for Provident Bank directly, including real estate investment,
securities brokerage and insurance agency.
Capital Requirements. Office of Thrift Supervision regulations require
savings associations to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital ratio. The
prompt corrective action standards discussed below, in effect, establish a
minimum 2% tangible capital standard.
The risk-based capital standard for savings associations requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks inherent in the type of asset. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, allowance for loan and lease
losses up to a maximum of 1.25% of risk-weighted assets, and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
At September 30, 2003, Provident Bank's capital exceeded all applicable
requirements.
25
Loans to One Borrower. A federal savings association generally may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which generally does not
include real estate. As of September 30, 2003, Provident Bank was in compliance
with the loans-to-one-borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, Provident
Bank is subject to a qualified thrift lender, or "QTL," test. Under the QTL
test, Provident Bank must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings association's business.
"Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans.
Provident Bank also may satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
A savings association that fails the QTL test must either convert to a
bank charter or operate under specified restrictions. At September 30, 2003,
Provident Bank maintained approximately 75.2% of its portfolio assets in
qualified thrift investments, and therefore satisfied the QTL test.
Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the institution's
capital account. A savings association must file an application for approval of
a capital distribution if:
o the total capital distributions for the applicable calendar year
exceed the sum of the savings association's net income for that year
to date plus the savings association's retained net income for the
preceding two years;
o the savings association would not be at least adequately capitalized
following the distribution;
o the distribution would violate any applicable statute, regulation,
agreement or Office of Thrift Supervision-imposed condition; or
o the savings association is not eligible for expedited treatment of
its filings.
Even if an application is not otherwise required, every savings
association that is a subsidiary of a holding company must still file a notice
with the Office of Thrift Supervision at least 30 days before the board of
directors declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application
if:
o the savings association would be undercapitalized following the
distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in
any statute, regulation or agreement.
Liquidity. A federal savings association is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
26
Community Reinvestment Act and Fair Lending Laws. All savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
connection with its examination of a federal savings association, the Office of
Thrift Supervision is required to assess the savings association's record of
compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. A savings association's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by
the Office of Thrift Supervision, as well as other federal regulatory agencies
and the Department of Justice. Provident Bank received an "outstanding"
Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings association's
authority to engage in transactions with its "affiliates" is limited by Office
of Thrift Supervision regulations and by Sections 23A and 23B of the Federal
Reserve Act. The term "affiliates" for these purposes generally means any
company that controls or is under common control with an institution. Provident
Bancorp, Inc. and its non-savings institution subsidiaries will be affiliates of
Provident Bank. In general, transactions with affiliates must be on terms that
are as favorable to the savings association as comparable transactions with
non-affiliates. In addition, certain types of these transactions are restricted
to an aggregate percentage of the savings association's capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive
loans from the savings association. In addition, Office of Thrift Supervision
regulations prohibit a savings association from lending to any of its affiliates
that are engaged in activities that are not permissible for bank holding
companies and from purchasing the securities of any affiliate, other than a
subsidiary.
Provident Bank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions require that extensions of credit to insiders (i)
be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features, and
(ii) not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of Provident Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by Provident Bank's board of
directors.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over federal savings institutions and has the authority to bring
enforcement action against all "institution-affiliated 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 institution, 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. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.
27
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal
law. 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,
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. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
Prompt Corrective Action Regulations. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five categories
based on the savings association's capital:
o well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based
capital and 10% total risk-based capital);
o adequately capitalized (at least 4% leverage capital, 4% tier 1
risk-based capital and 8% total risk-based capital);
o undercapitalized (less than 3% leverage capital, 4% tier 1
risk-based capital or 8% total risk-based capital);
o significantly undercapitalized (less than 3% leverage capital, 3%
tier 1 risk-based capital or 6% total risk-based capital); and
o critically undercapitalized (less than 2% tangible capital).
Generally, the banking regulator is required to appoint a receiver or
conservator for a savings association that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
Office of Thrift Supervision within 45 days of the date a bank receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the savings association, including, but not limited
to, restrictions on growth, investment activities, capital distributions and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
savings associations, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At September 30, 2003, Provident Bank met the criteria for being
considered "well-capitalized."
Insurance of Deposit Accounts. Deposit accounts in Provident Bank are
insured by the Savings Association Insurance Fund and, to a limited extent, the
Bank Insurance Fund of the Federal Deposit Insurance Corporation, generally up
to a maximum of $100,000 per separately insured depositor. Provident Bank's
deposits, therefore, are subject to Federal Deposit Insurance Corporation
deposit insurance assessments. The Federal Deposit Insurance Corporation has
adopted a risk-based system for determining deposit insurance assessments. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates as necessary to maintain the required ratio of reserves to insured
deposits of 1.25%. In addition, all Federal Deposit Insurance
Corporation-insured institutions must pay assessments to the Federal Deposit
Insurance Corporation at an annual rate of .0212% of insured deposits to fund
interest payments on bonds maturing in 2017 that were issued by a federal agency
to recapitalize the predecessor to the Savings Association Insurance Fund.
28
Prohibitions Against Tying Arrangements. Federal savings associations are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
Federal Home Loan Bank System. Provident Bank is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank System provides a central credit facility primarily
for member institutions. As a member of The Federal Home Loan Bank of New York,
Provident Bank is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank 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 borrowings from the
Federal Home Loan Bank, whichever is greater. As of September 30, 2003,
Provident Bank was in compliance with this requirement.
Federal Reserve System
Federal Reserve Board regulations require savings associations to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At September 30,
2003, Provident Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.
The USA PATRIOT Act
In response to the events of September 11th, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or 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. Title III of the USA PATRIOT Act amended the Bank
Secrecy Act to encourage information sharing among bank regulatory agencies and
law enforcement bodies. Moreover, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions, including
banks, savings associations, 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 that
provide for minimum standards with respect to customer
identification at the time new accounts are opened. On July 23,
2002, the Office of Thrift Supervision and the other federal bank
regulators jointly issued proposed rules to implement Section 326.
The proposed rules require financial institutions to establish a
program specifying procedures for obtaining identifying information
from customers seeking to open new accounts. This identifying
information would be essentially the same information currently
obtained by most financial institutions for individual customers.
29
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.
Holding Company Regulation
General. Provident Bancorp, MHC and Provident Bancorp are nondiversified
mutual savings and loan holding companies within the meaning of the HOLA. As
such, Provident Bancorp, MHC and Provident Bancorp are registered with the OTS
and are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over Provident
Bancorp, MHC and Provident Bancorp 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, Provident Bancorp and Provident Bancorp,
MHC 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 Provident Bancorp 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.
30
The HOLA prohibits a savings and loan holding company, including Provident
Bancorp and Provident Bancorp, MHC, 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 Provident Bancorp 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.
Waivers of Dividends by Provident Bancorp, MHC. OTS regulations require
Provident Bancorp, MHC 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) Provident
Bancorp, MHC's board of directors determines that such waiver is consistent with
such directors' fiduciary duties to Provident Bancorp, MHC's members; (ii) for
as long as the savings association subsidiary is controlled by Provident
Bancorp, MHC, the dollar amount of dividends waived by Provident Bancorp, MHC
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 Provident Bancorp, MHC is
available for declaration as a dividend solely to Provident Bancorp, MHC, and,
in accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to Provident Bancorp, MHC 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.
Federal Securities Law
The common stock of Provident Bancorp is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). Provident Bancorp is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act. Common stock of Provident Bancorp held by persons who
are affiliates (generally officers, directors and principal stockholders) of
Provident Bancorp may not be resold without registration or unless sold in
accordance with certain resale restrictions. If Provident Bancorp meets
specified current public information requirements, each affiliate of Provident
Bancorp is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Sarbanes-Oxley Act of 2002
On July 30, 2002 the President signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which provides for corporate governance, disclosure and
accounting reforms intended to address corporate and accounting fraud. The Act
establishes 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 also 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 audit partner rotation after a
period of time. The Act also 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
31
report to the chief executive officer or chief legal officer of the company,
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company 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 restating 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 beneficial ownership in a company's
securities within two business days of the change.
The Act also increases the oversight of, 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 public company. In addition, companies must
disclose whether at least one member of the committee is an "audit committee
financial expert" (as defined by Securities and Exchange Commission regulations)
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
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 we 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 our results of
operations or financial condition.
32
ITEM 2. Properties
As of September 30, 2003, Provident Bank leased 11 properties, including
its headquarters location, from third parties. In addition, Provident Bank owns
eight properties. At September 30, 2003, the net book value of our properties
was $11.6 million. The following is a list of our 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
(In the ShopRite Supermarket)
715 Route 304 Warwick, NY 10990
Bardonia, NY 10954 (845) 986-9540
(845) 623-6340
7 Edward J. Lempka Drive
1 Lake Road West Florida, NY 10921
Congers, NY 19020 (845) 651-4091
(845) 267-2180
1992 Route 284
71 Lafayette Avenue Slate Hill, NY 10973
Suffern, NY 10901 (845) 355-6181
(845) 369-8350
300 Larkin Drive
Harriman Commons
Monroe, NY 10950
(845) 782-7226
33
ITEM 3. Legal Proceedings
Provident Bancorp 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 Provident Bancorp'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, 2003.
PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder Matters
The common stock of Provident Bancorp is quoted on the Nasdaq National
Market under the symbol "PBCP." As of September 30, 2003, Provident Bancorp had
11 registered market makers, 3,018 stockholders of record (excluding the number
of persons or entities holding stock in street name through various brokerage
firms), and 7,946,521 shares outstanding. As of such date, Provident Bancorp,
MHC held 4,416,000 shares of Provident Bancorp's common stock and stockholders
other than Provident Bancorp, MHC held 3,530,521 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
------------------ --------- -------- ---------------
September 30, 2003 $43.30 $31.97 $0.15
June 30, 2003 33.06 31.20 0.15
March 31, 2003 31.50 30.00 0.14
December 31, 2002 31.50 27.75 0.13
September 30, 2002 29.15 27.69 0.12
June 30, 2002 28.97 26.50 0.11
March 31, 2002 28.90 26.50 0.10
December 31, 2001 29.64 21.58 0.08
Payment of dividends on Provident Bancorp'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, Provident Bancorp, MHC waived receipt of
certain dividends declared by Provident Bancorp, after obtaining OTS approval to
do so. In total, Provident Bancorp, MHC has waived receipt of $4.7 million in
dividends through September 30, 2003, including $2.1 million in fiscal 2003 and
$1.3 million in fiscal 2002.
34
ITEM 6. Selected Financial Data
The following financial condition data and operating data are derived from
the audited consolidated financial statements of Provident Bancorp 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,
----------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(In thousands)
Selected Financial Condition Data:
Total assets ......................... $1,174,305 $1,027,701 $ 881,260 $ 844,303 $ 814,518
Loans, net (1) ....................... 703,184 660,816 606,146 589,822 566,521
Securities available for sale ........ 300,715 206,146 163,928 162,157 148,387
Securities held to maturity .......... 73,544 86,791 71,355 48,586 56,782
Deposits ............................. 869,553 799,626 653,100 608,976 586,640
Borrowings ........................... 164,757 102,968 110,427 127,571 117,753
Equity ............................... 117,857 110,867 102,620 90,986 90,299
Years Ended September 30,
----------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(In thousands)
Selected Operating Data:
Interest and dividend income ......... $ 57,790 $ 59,951 $ 60,978 $ 58,899 $ 52,267
Interest expense ..................... 12,060 17,201 26,244 26,034 21,589
---------- ---------- ---------- ---------- ----------
Net interest income ............... 45,730 42,750 34,734 32,865 30,678
Provision for loan losses ............ 900 900 1,440 1,710 1,590
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses ................. 44,830 41,850 33,294 31,155 29,088
Non-interest income .................. 9,555 5,401 4,706 3,391 3,103
Non-interest expense ................. 36,790 32,161 26,431 25,808 26,303
---------- ---------- ---------- ---------- ----------
Income before income tax expense ..... 17,595 15,090 11,569 8,738 5,888
Income tax expense ................... 6,344 5,563 4,087 2,866 1,958
---------- ---------- ---------- ---------- ----------
Net income ........................ $ 11,251 $ 9,527 $ 7,482 $ 5,872 $ 3,930
========== ========== ========== ========== ==========
(footnotes on following pages)
35
At or For the Years Ended September 30,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to
average total assets) ................ 1.04% 0.99% 0.87% 0.70% 0.52%
Return on equity (ratio of net income to
average equity) ...................... 9.92 8.92 7.71 6.58 5.03
Average interest rate spread (2) ....... 4.30 4.33 3.56 3.51 3.66
Net interest margin (3) ................. 4.55 4.71 4.20 4.12 4.24
Efficiency ratio (4) .................... 66.55 66.79 67.02 71.18 77.86
Non-interest expense to average total
assets ............................... 3.40 3.36 3.06 3.08 3.47
Ratio of average interest-earning assets
to average interest-bearing
liabilities .......................... 121.33 120.03 120.20 118.54 119.28
Per Share and Related Data:
Basic earnings per share (5) ............ $ 1.46 $ 1.24 $ 0.98 $ 0.76 $ 0.40
Diluted earnings per share .............. 1.44 1.22 0.97 0.76 0.40
Dividends per share (6) ................. 0.57 0.41 0.22 0.15 0.06
Dividend payout ratio (7) ............... 39.04% 33.06% 22.45% 19.74% 15.00%
Book value per share (8) ................ $ 14.83 $ 13.86 $ 12.79 $ 11.26 $ 10.91
Asset Quality Ratios:
Non-performing assets to total assets ... 0.40% 0.49% 0.27% 0.50% 0.62%
Non-performing loans to total loans ..... 0.66 0.74 0.37 0.67 0.81
Allowance for loan losses to
non-performing loans ................. 235.66 209.59 400.66 189.85 133.78
Allowance for loan losses to total loans 1.55 1.55 1.48 1.28 1.08
Capital Ratios:
Equity to total assets at end of year ... 10.04% 10.79% 11.64% 10.78% 11.09%
Average equity to average assets ........ 10.47 11.15 11.24 10.67 10.29
Tier 1 leverage ratio (bank only) ....... 8.14 8.45 10.20 9.59 9.56
Other Data:
Number of full service offices .......... 18 17 15 13 12
- --------------------------------------------------------------------------------
(1) Excludes loans held for sale.
(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 following table sets forth aggregate cash dividends paid per period,
which is calculated by multiplying the dividend declared per share by the
number of shares outstanding as of the applicable record date.
36
For the Years Ended September 30,
---------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(In thousands)
Dividends paid to public stockholders $1,968 $1,435 $ 807 $ 563 $ 235
Dividends paid to Provident Bancorp, MHC 453 500 -- 486 132
------ ------ ------ ------ ------
Total dividends paid $2,421 $1,935 $ 807 $1,049 $ 367
====== ====== ====== ====== ======
Payments listed above exclude cash dividends waived by Provident Bancorp,
MHC during the years of $2.1 million, $1.3 million, $972,000, $177,000 and
$132,000, respectively. Provident Bancorp, MHC began waiving dividends in
May 1999, and, as of September 30, 2003, had waived dividends totaling
$4.7 million.
(7) 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%.
(8) Book value per share is based on total stockholders' equity and 7,946,521,
7,997,512, 8,024,166, 8,077,800 and 8,280,000 outstanding common shares at
September 30, 2003, 2002, 2001, 2000 and 1999, respectively. For this
purpose, common shares include unallocated employee stock ownership plan
shares but exclude treasury shares.
37
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Our results of operations depend primarily on our net interest income,
which is the difference between the interest income on our earning assets, such
as loans and securities, and the interest expense paid on our 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, gains (losses) on
sales of loans and securities available for sale and net increases in the cash
surrender value of bank-owned life insurance ("BOLI") contracts. Our
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. The
financial condition and results of operations of Provident Bancorp are discussed
herein on a consolidated basis with the Bank. Reference to Provident Bancorp may
signify the Bank, depending on the context and time period.
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. Accounting policies
considered critical to our financial results include the allowance for loan
losses, accounting for goodwill and other intangible assets, accounting for
deferred income taxes 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 judgment 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. We
evaluate our assets at least quarterly, and review their risk components as a
part of that evaluation. See Note 3, Summary of Significant Accounting
Policies--Allowance for Loan Losses in our Notes to Consolidated Financial
Statements for a discussion of the risk components. We consistently review the
risk components to identify any changes in trends. 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. If goodwill is determined to be impaired, it would be
expensed in the period in which it became impaired.
We also use judgment in the valuation of other intangible assets (core
deposit base intangibles). A core deposit base intangible asset has been
recorded for core deposits (defined as checking, money market and savings
deposits) that were acquired in an acquisition that was accounted as a purchase
business combination. The core deposit base intangible asset has been recorded
using the assumption that the acquired deposits provide a more favorable source
of funding than more expensive wholesale borrowings. An intangible asset has
been recorded for the present value of the difference between the expected
interest to be incurred on these deposits and interest expense that would be
expected if these deposits were replaced by wholesale borrowings, over the
expected lives of the core deposits. If we find these deposits have a shorter
life than was estimated, we will write down the asset by expensing the amount
that is impaired.
We use the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises doubt as to the
realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We exercise significant
judgment in evaluating the amount and timing of recognition of the resulting tax
liabilities and assets, including projections of future taxable income. These
judgments and estimates are reviewed on a continual basis as regulatory and
business factors change.
38
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 is
unlikely 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).
Management Strategy
We operate as an independent community bank that offers a broad range of
customer-focused financial services as an alternative to money center banks in
our market area. Over the years, management has invested in the infrastructure
and staffing to support our strategy of serving the financial needs of
individuals, businesses and municipalities in our market area. This has resulted
in a change in our business mix, providing a favorable platform for long-term
sustainable growth. Highlights of management's business strategy are as follows:
Operating as a Community Bank. As an independent community bank, we
emphasize the local nature of our decision-making to respond more effectively to
the needs of our customers while providing a full range of financial services to
the individuals, corporations and municipalities in our market area. We offer a
broad range of financial products to meet the changing needs of the marketplace,
including internet banking, cash management services and sweep accounts. In
addition, we offer asset management and trust services to meet the investing
needs of individuals, corporations and not-for-profit entities. As a result, we
are able to provide locally the financial services required to meet the needs of
the majority of existing and potential customers in our market.
Enhancing Customer Service. We are committed to providing superior
customer service as a way to differentiate us from our competition. As part of
our commitment to service, we have established Sunday banking and extended
service hours. In addition, we offer multiple access channels to our customers,
including our branch and ATM network, internet banking, our Customer Care
Telephone Center and our Automated Voice Response system. We reinforce in our
employees a commitment to customer service through extensive training,
recognition programs and measurement of service standards.
Growing and Diversifying our Loan Portfolio. We offer a broad range of
loan products to commercial businesses, real estate owners, developers and
individuals. To support this activity, we have developed commercial, consumer
and residential loan departments staffed with experienced professionals to
promote the continued growth and prudent management of loan assets. We have
experienced consistent and significant growth in our commercial loan portfolio
over the years while continuing to grow our residential mortgage and consumer
lending businesses. As a result, we believe that we have developed a diversified
loan portfolio with a favorable mix of loan types, maturities and yields.
Expanding our Retail Banking Franchise. Management intends to continue
expansion of its retail banking franchise and to increase the number of
households and businesses served in our market area. Our 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. This approach has resulted in continued growth in core
deposits, which has improved our overall cost of funds. Management intends to
maintain this strategy, which will require ongoing investment in retail banking
locations and technology to support exceptional service levels for Provident
Bank's customers.
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.
39
The following table sets forth average balance sheets, average yields and
costs, and certain other information for the years indicated. No tax-equivalent
yield adjustments were made, as the effect thereof was not material. All average
balances are 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.
At Years Ended September 30,
September 30, -------------------------------------------------------------------------
2003 2003 2002
------------- ------------------------------------ ------------------------------------
Average Average
Yield/ Outstanding Yield/ Outstanding Yield/
Rate Balance Interest Rate Balance Interest Rate
------------- ----------- --------- --------- ----------- ---------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans (1).................. 5.83% $ 683,102 $ 43,815 6.41% $ 630,710 $ 44,967 7.13%
Securities available for
sale..................... 4.07 228,532 9,704 4.25 185,326 9,869 5.33
Securities held to maturity 4.67 81,046 3,882 4.79 73,548 4,627 6.29
Other...................... 0.89 11,804 389 3.30 18,138 488 2.69
--------- --------- --------- ---------
Total interest-earning
assets.................. 5.26 1,004,484 57,790 5.75 907,722 59,951 6.60
--------- ---------
Non-interest-earning assets 78,078 50,192
---------- ---------
Total assets............ $1,082,562 $ 957,914
========== =========
Interest-bearing
liabilities:
Savings deposits (2)....... 0.40 $ 276,527 1,497 0.54 $ 227,143 2,289 1.01
Money market deposits...... 0.52 121,840 955 0.78 106,133 1,435 1.35
NOW deposits............... 0.20 77,165 200 0.26 73,403 315 0.43
Certificates of deposit.... 1.85 240,141 5,123 2.13 236,133 7,662 3.24
Borrowings................. 2.98 112,248 4,285 3.83 113,446 5,500 4.85
--------- --------- --------- ---------
Total interest-bearing
liabilities........... 1.28 827,921 12,060 1.46 756,258 17,201 2.27
--------- ---------
Non-interest-bearing
liabilities................ 141,272 94,869
--------- ---------
Total liabilities....... 969,193 851,127
Stockholders' equity....... 113,369 106,787
--------- ---------
Total liabilities and
stockholders' equity.. $1,082,562 $ 957,914
========== =========
Net interest income........ $ 45,730 $ 42,750 4.33%
========= =========
Net interest rate spread
(3)...................... 4.29%
Net interest-earning
assets (4)............... $ 176,563 $ 151,464
========== =========
Net interest margin (5).... 4.55% 4.71%
Ratio of interest-earning
assets to
interest-bearing
liabilities............. 121.33% 120.03%
2001
-------------------------------------
Average
Outstanding
Balance Interest Yield/Rate
----------- --------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans (1).................. $ 590,298 $ 46,434 7.87%
Securities available for
sale..................... 159,185 9,598 6.03
Securities held to maturity 66,253 4,318 6.52
Other...................... 10,983 628 5.72
--------- --------- ---------
Total interest-earning
assets.................. 826,719 60,978 7.38
---------
Non-interest-earning assets 36,624
---------
Total assets............ $ 863,343
=========
Interest-bearing
liabilities:
Savings deposits (2)....... $ 177,994 2,898 1.63
Money market deposits...... 86,717 2,245 2.59
NOW deposits............... 57,806 365 0.63
Certificates of deposit.... 251,299 13,915 5.54
Borrowings................. 113,975 6,821 5.98
--------- ---------
Total interest-bearing
liabilities 687,791 26,244 3.82
---------
Non-interest-bearing
liabilities................ 78,547
---------
Total liabilities....... 766,338
Stockholders' equity....... 97,005
---------
Total liabilities and
stockholders' equity.. $ 863,343
=========
Net interest income........ $ 34,734
========
Net interest rate spread
(3)...................... 3.56%
Net interest-earning
assets (4)............... $ 138,928
=========
Net interest margin (5) 4.20%
Ratio of interest-earning
assets to
interest-bearing
liabilities............. 120.20%
- --------------------------------------------------------------------------------
(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.
40
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of our 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,
--------------------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
------------------------------------------ -----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
-------------------------- Increase -------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Interest-earning assets:
Loans ............... $ 3,651 $ (4,803) $ (1,152) $ 3,093 $ (4,560) $ (1,467)
Securities available
for sale .......... 2,054 (2,219) (165) 1,464 (1,193) 271
Securities held to
maturity .......... 438 (1,183) (745) 465 (156) 309
Other ............... (194) 95 (99) 290 (430) (140)
----------- ----------- ----------- ----------- ----------- -----------
Total
interest-earning
assets .......... 5,949 (8,110) (2,161) 5,312 (6,339) (1,027)
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing
liabilities:
Savings deposits .... 428 (1,220) (792) 680 (1,289) (609)
Money market deposits 189 (669) (480) 427 (1,237) (810)
NOW deposits ........ 15 (130) (115) 83 (133) (50)
Certificates of
deposit ........... 128 (2,667) (2,539) (793) (5,460) (6,253)
Borrowings .......... (57) (1,158) (1,215) (32) (1,289) (1,321)
----------- ----------- ----------- ----------- ----------- -----------
Total
interest-bearing
liabilities ..... 703 (5,844) (5,141) 365 (9,408) (9,043)
----------- ----------- ----------- ----------- ----------- -----------
Change in net interest
income .............. $ 5,246 $ (2,266) $ 2,980 $ 4,947 $ 3,069 $ 8,016
=========== =========== =========== =========== =========== ===========
Comparison of Financial Condition at September 30, 2003 and September 30, 2002
Total assets. Total assets as of September 30, 2003 were $1.2 billion, an
increase of $146.6 million, or 14.3%, over total assets of $1.0 billion at
September 30, 2002. Average total assets for the year ended September 30, 2003
were $1.1 billion, an increase of $124.6 million, or 13.0%, over average total
assets of $957.9 million in fiscal 2002.
Total securities. Total securities increased by $81.4 million, or 27.8%,
to $374.3 million at September 30, 2003 from $292.9 million at September 30,
2002. Securities available for sale increased by $94.6 million, or 45.9%,
primarily as a result of an increase in mortgage-backed securities. Securities
held to maturity decreased by $13.3 million, or 15.3%, to $73.5 million at
September 30, 2003 from $86.8 million at September 30, 2002. The decrease in
securities held to maturity resulted from securities maturing and from payments
on mortgage-backed securities. No securities were sold during the fiscal year
ended September 30, 2003.
Net loans. Net loans as of September 30, 2003 were $703.2 million, an
increase of $42.4 million, or 6.4%, over net loan balances of $660.8 million at
September 30, 2002. During fiscal 2003 the commercial loan portfolio, which
consists of commercial real estate, commercial business and construction loans,
grew $31.2 million, or 14.1%. Residential mortgage loans grew during fiscal 2003
as well, increasing (net of significant refinancing activity) $14.7 million, or
4.0%, over balances at September 30, 2002. Consumer loans declined to $80.6
million from $83.4 million at September 30, 2002, a decrease of $2.8 million, or
3.4%, as many customers refinanced their home equity
41
loans with their first mortgages. Average total loans were $683.1 million in
fiscal 2003, an increase of $52.4 million, or 8.3%, over average total loans of
$630.7 million in fiscal 2002. At September 30, 2003, non-performing loans
totaled $4.7 million, or 0.66% of total loans, compared to $5.0 million, or
0.74% of total loans, at September 30, 2002.
Deposits. Deposits as of September 30, 2003 were $869.5 million, up $69.9
million, or 8.7%, from September 30, 2002. Our deposit mix has continued to
change along with our deposit growth. Transaction accounts (demand and NOW
deposits) represented 26% of deposits at September 30, 2003, compared to 24% at
September 30, 2002. Similarly, savings and money market account balances, which
totaled $407.9 million at September 30, 2003, represented 47% of deposits at
that date, compared to 45% at September 30, 2002. Certificates of deposit
declined to 27% of deposits at September 30, 2003 from 31% at September 30,
2002. This shift in mix to lower cost transaction and savings accounts had a
positive impact on earnings in fiscal 2003.
Stockholders' Equity. Stockholders' equity increased by $7.0 million to
$117.9 million at September 30, 2003, compared to $110.9 million at September
30, 2002. In addition to net income of $11.3 million for the current fiscal
year, equity increased by $2.1 million due to the allocation of employee stock
ownership plan shares and the vesting of shares issued under our recognition and
retention plan, and by $524,000 related to transactions in our stock option
plan. Partially offsetting these increases were cash dividends, which reduced
stockholders' equity by $2.4 million, $2.3 million in stock repurchases, and a
reduction of $2.1 million in the after-tax net unrealized gains on securities
available for sale.
During fiscal 2003, we repurchased 69,004 shares of our common stock, of
which 22,815 shares were repurchased under our third repurchase program, which
was announced in March 2003, and which authorized the repurchase of up to
177,250 shares. We repurchased a total of 376,740 shares under our two
previously announced and completed repurchase programs. We held a total of
333,479 treasury shares at September 30, 2003,which is net of stock option
related issuances.
Comparison of Operating Results for the Years Ended September 30, 2003 and
September 30, 2002
Net income for the year ended September 30, 2003, was $11.3 million, an
increase of $1.8 million, or 18.1%, compared to net income of $9.5 million for
the year ended September 30, 2002. Basic and diluted earnings per share
increased to $1.46 and $1.44, respectively, for the year ended September 30,
2003, compared to $1.24 and $1.22, respectively, for the year ended September
30, 2002. The increase in net income reflected a $5.1 million, or 29.9%,
decrease in interest expense and a $4.2 million, or 76.9%, increase in
non-interest income, which were partially offset by a $4.6 million, or 14.4%,
increase in non-interest expense and a $2.2 million, or 3.6%, decrease in
interest income.
Interest Income. Interest income for the year ended September 30, 2003
declined to $57.8 million, a decrease of $2.2 million, or 3.6%, compared to the
prior year. The decrease was primarily due to lower average yields on loans and
securities, offset in large part by higher average balances in both asset
classes. Average interest-earning assets for the year ended September 30, 2003
were $1.0 billion, an increase of $96.8 million, or 10.7%, over average
interest-earning assets for the year ended September 30, 2002 of $907.7 million.
Average loan balances grew by $52.4 million and average balances of securities
and other earning assets increased by $44.4 million. Average yields on interest
earning assets fell by 85 basis points to 5.75% for the year ended September 30,
2003, from 6.60% for the year ended September 30, 2002. Lower market interest
rates were the primary reason for the decline in asset yields.
Total interest income on loans for the year ended September 30, 2003
declined 2.6% to $43.8 million from $45.0 million for the prior fiscal year.
Interest income on commercial loans for the year ended September 30, 2003
increased to $15.2 million, up 6.8% from commercial loan interest income of
$14.2 million for the prior fiscal year. Average balances of commercial loans
grew $32.0 million to $220.3 million, and the impact of that increase offset a
66 basis point decline in average yield. The lower average yield was due, in
part, to the effect on commercial business loans of the lower average prime rate
of 4.24% in fiscal 2003 compared to 4.86% in fiscal 2002. Interest
42
income on consumer loans declined by $715,000, or 15.0% for the year. Our
fixed-rate consumer loans have short average maturities, and our adjustable-rate
consumer loans float with the prime rate. Income earned on residential mortgage
loans was $24.6 million for the year ended September 30, 2003, down $1.4
million, or 5.4%, from the prior year. Despite an increase of $16.7 million in
average residential mortgage loan balances, interest income was negatively
impacted as yields declined by 68 basis points to 6.44% from 7.12%, reflecting
the impact of lower market rates and refinancing activity.
Interest income on securities and other earning assets decreased to $14.0
million for the year ended September 30, 2003, compared to $15.0 million for the
prior year. A 106 basis-point decline in yields offset a $44.4 million increase
in the average balances of securities and other earning assets.
Interest Expense. Interest expense for the year ended September 30, 2003
fell by $5.1 million to $12.1 million, a decrease of 29.9% compared to interest
expense of $17.2 million for the prior fiscal year. The decrease was primarily
due to lower rates paid on interest-bearing deposits and borrowings, as well as
to a higher concentration of non-interest-bearing and low interest-bearing
deposits in fiscal 2003. Average rates paid on interest-bearing liabilities for
the year ended September 30, 2003 declined by 81 basis points to 1.46% from
2.27% last year. The average interest rate paid on certificates of deposit fell
by 111 basis points to 2.13% for the year ended September 30, 2003, from 3.24%
for the prior year. For the year ended September 30, 2003, average balances of
lower cost savings and money market accounts increased by $49.4 million and
$15.7 million, respectively, while average balances of certificates of deposit
increased by only $4.0 million compared to the year ended September 30, 2002.
The average interest rate paid on savings and money market accounts fell by 47
and 57 basis points to 0.54% and 0.78%, respectively, for the year ended
September 30, 2003, from 1.01% and 1.35% for the prior year.
Net Interest Income. Net interest income for the year ended September 30,
2003 increased to $45.7 million, compared to $42.8 million for the year ended
September 30, 2002, an increase of $2.9 million or 7.0%, which was largely due
to a $25.1 million increase in average net earning assets. The decrease in
interest income of $2.2 million, or 3.6%, reflects a decline in yield of 85
basis points to 5.75% on average earning assets, mostly offset by an increase in
average earning asset balances of $96.8 million, or 10.7%, to $1.0 billion as of
September 30, 2003. The cost of interest bearing liabilities declined by $5.1
million as the average rate paid on interest bearing liabilities decreased 81
basis points to 1.46%, offsetting an increase in average balances of $71.7
million to $827.9 million. Net interest margin decreased from 4.71% to 4.55% and
net interest spread decreased from 4.33% to 4.29%.
This increase in our net interest income was due, in large part, to the
relative changes in the yield and cost of our 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 our 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
market interest rates rise as a result of an economic recovery, competitive
pressures could cause us to increase our funding costs and lead to pressure on
the net interest margin.
Provision for Loan Losses. We recorded $900,000 in loan loss provisions
for each of the years ended September 30, 2003 and September 30, 2002. At
September 30, 2003 the allowance for loan losses totaled $11.1 million, or 1.55%
of the loan portfolio, compared to $10.4 million, or 1.55% of the loan portfolio
at September 30, 2003. See "Comparison of Operating Results for the Three Months
Ended September 30, 2003 and September 30, 2002--Provision for Loan Losses,"
above.
43
Non-Interest Income. Non-interest income for the fiscal year ended
September 30, 2003 was $9.6 million compared to $5.4 million for the fiscal year
ended September 30, 2002, an increase of $4.2 million, or 76.9%. This increase
was primarily attributable to realized gains on securities available for sale
and sales of loans of $2.0 million and $1.1 million, respectively, in the
current fiscal year, a combined increase of $2.5 million over the securities and
loan sales gains of $607,000 for the prior fiscal year. Other factors include an
increase of $786,000, or 18.7%, in banking fees and service charges, $483,000 in
income from the new BOLI program, which began in December 2002, and an increase
in prepayment fees of $264,000.
Non-Interest Expense. Non-interest expense for the fiscal year ended
September 30, 2003 was $36.8 million, a $4.6 million, or 14.4%, increase over
expenses of $32.2 million for the fiscal year ended September 30, 2002. The
increase was primarily attributable to an increase in compensation and employee
benefits of $3.5 million, or 20.0%, primarily related to annual merit raises,
staff for new branches, the payout of an employment agreement and the increased
cost of stock-based compensation plans due to the increase in the market price
of our common stock.
Occupancy and office operations expense increased by $370,000, or 7.7%,
due primarily to the expenses associated with the branches acquired as part of
the acquisition of The National Bank of Florida; we owned these branches for
only five months in fiscal 2002. Advertising and promotion costs increased by
$187,000, or 12.7%, due to additional advertising related to new branches and
products. Increases in loan and deposit accounts generated a volume-related
increase of $472,000, or 19.3%, in data and check processing costs. A focus on
technological development and internal controls resulted in an increase in
professional fees over the same period in 2002 of $427,000, or 42.0%, to $1.4
million. Amortization of intangible assets increased by $152,000, or 53.1%, as
the core deposit amortization for The National Bank of Florida was in place for
all of fiscal 2003, compared to five months in fiscal 2002. Other expenses
increased by $91,000, or 2.1%, due primarily to an increase of $226,000, or
54.6%, in ATM charges related to the increase in transaction accounts and
greater debit card usage.
Income Taxes. Income tax expense was $6.3 million for the fiscal year
ended September 30, 2003 compared to $5.6 million for fiscal 2002, representing
effective tax rates of 36.1% and 36.9%, respectively. The lower effective tax
rate in fiscal 2003 is primarily attributable to the transfer of $12.5 million
in assets from taxable securities to tax-exempt bank owned life insurance.
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 our acquisition of The National
Bank of Florida. 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 we maintained high balances in cash and short-term securities in the
weeks before and after our acquisition of The National Bank of Florida.
44
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 (commercial real estate,
commercial business and construction loans) 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 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. Interest income on consumer loans declined by $1.0
million, or 17.4% for the year. Our fixed-rate consumer loans have short average
maturities, and our 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% compared to 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 fiscal 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.
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 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% in the prior fiscal 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
average balances for 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 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 was due, in
large part, to the relative changes in the yield and cost of our assets and
liabilities as a result of decreasing market interest rates in calendar 2001 and
2002. This decrease in market interest rates reduced our cost of
interest-bearing liabilities faster and to a greater extent than the rates on
our 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 our interest-bearing liabilities would likely increase faster than the
rates on our 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.
45
Provision for Loan Losses. We recorded $900,000 and $1.4 million in loan
loss provisions for the years ended September 30, 2002 and September 30, 2001,
respectively. At September 30, 2002 the allowance for loan losses totaled $10.4
million, or 1.55% of the loan portfolio, compared to $9.1 million, or 1.48% of
the loan portfolio at September 30, 2001. Net charge-offs for the year ended
September 30, 2002 were $177,000 (an annual rate of 0.03% of the average loan
portfolio) and there were net recoveries of $30,000 for the year ended September
30, 2001.
The increase in the allowance for loan losses was primarily attributable
to growth in the loan portfolio of $55.9 million, representing an increase of
9.09%. In addition, higher risk loan categories, primarily commercial real
estate loans and commercial business loans provided most of this increase. In
April 2002, we acquired $23.6 million in loans as part of our acquisition of The
National Bank of Florida. An additional $537,000 in the allowance for loan
losses was recorded for the addition of the loan portfolio of The National Bank
of Florida. The allowance for loan losses was also increased as loans that were
delinquent, criticized or classified grew to $9.0 million at September 30, 2002
from $7.5 million at September 30, 2001, an increase of $1.5 million. An
increase in commercial mortgage loans of $2.9 million was partially offset by a
decrease in the retail categories (residential mortgages, equity lines of credit
and consumer loans) of $1.2 million and a decrease in commercial and industrial
loans of $294,000.
We decreased the percentage allowance requirements in the retail loan
portfolio to reflect the lower level of delinquencies, the benefits of lower
interest rates in the credit portfolio, and appreciation in residential real
estate values. Conversely, we increased the percentage allowance requirements
for commercial business loans and commercial mortgages primarily to reflect the
negative trends in delinquencies and classifications, continued growth in
larger, more complex loans, and some negative trends in the risk ratings of the
performing loan portfolio. See "Business of Provident Bancorp and Provident
Bank--Delinquent Loans, Other Real Estate Owned and Classified Assets--Allowance
for Loan Losses" for a discussion of how the allowance for loan losses is
adjusted as a result of these factors.
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, our
trust services grew during 2002, generating fee income of $139,000 for the 2002
fiscal 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.
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
non-interest expense 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 of
approximately 4.0%, the addition of former employees of The National Bank of
Florida who continue to staff its two former branches, and increased staffing
for a new branch we opened prior to the acquisition of The National Bank of
Florida. 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, compared to fiscal 2001. Other non-interest expenses
were $1.3 million higher than the prior fiscal year, reflecting growth in our
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 The National Bank of Florida totaled $531,000
for the current year. Amortization of the core deposit intangible recorded in
the acquisition of The National Bank of Florida totaled $286,000 for the 2002
fiscal year, a decrease of $73,000 compared to similar expenses in the prior
fiscal year, which represented the final amortization of intangible assets
associated with two 1996 branch acquisitions.
46
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 employee
stock ownership plan expenses and the effect of graduated federal tax rates.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by the Company for general corporate purposes or for
customer needs. Corporate purpose transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital. Customer transactions
are used to manage customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include
lending commitments and derivatives, are described below. At September 30, 2003
and 2002, the Company had no interests in non-consolidated special purpose
entities.
Lending Commitments. Lending commitments include loan commitments, standby
letters of credit and unused business credit card lines. These instruments are
not recorded in the consolidated balance sheet until funds are advanced under
the commitments. The Company provides these lending commitments to customers in
the normal course of business.
For commercial customers, loan commitments generally take the form of
revolving credit arrangements to finance customers' working capital
requirements. For retail customers, loan commitments are generally lines of
credit secured by residential property. At September 30, 2003, commercial and
retail loan commitments totaled $159.9 million. Standby letters of credit
totaled $9.0 million. Standby letters of credit are conditional commitments to
guarantee performance, typically of a contract or the financial integrity, of a
customer to a third party. Unused business, personal and credit card lines,
which totaled $79.6 million at September 30, 2003, are generally for short-term
borrowings.
Provident Bank applies essentially the same credit policies and standards
as it does in the lending process when making these commitments. See Note 16 to
Consolidated Financial Statements in Item 8 hereof for additional information
regarding lending commitments.
Impact of Inflation and Changing Prices
The financial statements and related notes of Provident Bancorp have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than the effects of inflation.
Liquidity and Capital Resources
The overall objective of our liquidity management is to ensure the
availability of sufficient cash funds to meet all financial commitments and to
take advantage of investment opportunities. We manage liquidity in order 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.
47
Our primary sources of funds are deposits, principal and interest payments
on loans and securities, wholesale borrowings, the proceeds from maturing
securities and short-term investments, and the proceeds from the sales of loans
and securities. The 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.
Our cash flows are derived from operating activities, investing activities
and financing activities as reported in the Consolidated Statements of Cash
Flows in our consolidated financial statements. Our primary investing activities
are the origination of 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, 2003, 2002 and 2001, our loan
originations totaled $403.5 million, $202.5 million and $139.3 million,
respectively. Purchases of securities available for sale totaled $219.5 million,
$73.5 million and $51.4 million for the years ended September 30, 2003, 2002 and
2001, respectively. Purchases of securities held to maturity totaled $27.6
million, $34.4 million and $30.4 million for the years ended September 30, 2003,
2002 and 2001, respectively. These activities were funded primarily by deposit
growth (a financing activity), and by principal repayments on loans and
securities. Loan origination commitments totaled $71.3 million at September 30,
2003, and consisted of $55.6 million at adjustable or variable rates and $15.7
million at fixed rates. Unused lines of credit granted to customers were $79.6
million at September 30, 2003. We anticipate that we will have sufficient funds
available to meet current loan commitments and lines of credit.
In December 2002 we invested $12.0 million in BOLI contracts. These
investments are illiquid and are therefore classified as other assets. Earnings
from BOLI are derived from the net increase in cash surrender value of the BOLI
contracts and the proceeds from the payment on the insurance policies, if any.
Deposit flows are generally affected by the level of market interest
rates, the interest rates and other conditions on deposit products offered by
our banking competitors, and other factors. The net increase in total deposits
(excluding deposits acquired during 2002 as part of the acquisition of The
National Bank of Florida) was $69.9 million, $58.4 million and $44.1 million for
the years ended September 30, 2003, 2002 and 2001, respectively. Certificates of
deposit that are scheduled to mature in one year or less from September 30, 2003
totaled $190.1 million. Based upon prior experience and our current pricing
strategy, management believes that a significant portion of such deposits will
remain with us.
We generally remain fully invested and utilize additional sources of funds
through Federal Home Loan Bank overnight advances, of which $124.4 million was
outstanding at September 30, 2003. At September 30, 2003 we had the ability to
borrow an additional $228.0 million under our credit facilities with the Federal
Home Loan Bank.
If the conversion and stock offering are not completed by March 31, 2004,
E.N.B. Holding Company can elect to: (i) proceed with the merger transaction and
E.N.B. Holding Company shareholders will receive merger consideration of $4,500
per share in cash, or (ii) terminate the merger and receive a fee of $3.7
million. In the event that E.N.B. Holding Company determined to proceed with an
all-cash election and the conversion is not completed, Provident Bancorp would
likely need to raise additional capital to achieve pro forma regulatory capital
levels that would permit the receipt of regulatory approvals of the merger.
Provident Bancorp's existing mutual holding company structure does not permit
the issuance of additional shares of common stock as merger consideration
without completion of the conversion. The capital to be raised would likely be
in the form of debt, preferred securities or trust preferred securities issued
by Provident Bancorp. The ability to complete such an offering and the terms of
such an offering would be subject to market conditions at that time, and there
can be no assurance that Provident Bancorp would be able to complete such an
offering and subsequently complete the merger on an all-cash basis.
48
Recent Accounting Standards
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effects of the method used on reported results. The
provisions of this statement are not expected to have a material impact on our
consolidated financial statements.
In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends Statement
of Financial Accounting Standards 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 Statement of Financial Accounting Standards No. 149 will have
a material impact on our financial condition or results of operations.
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" was issued in May 2003. Under this statement, certain freestanding
financial instruments that embody obligations for the issuer and that are now
classified in equity, must be classified as liabilities (or as assets in some
circumstances). Generally, Statement of Financial Accounting Standards No. 150
is effective for financial instruments entered into or modified after May 31,
2003 and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. However, the effective date of the statement's
provisions related to the classification and measurement of certain mandatorily
redeemable non-controlling interests has been deferred indefinitely by the FASB,
pending further FASB action. Adoption of this standard did not have a material
impact on our consolidated financial statements.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was issued in November 2002. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
interpretation also requires a guarantor to recognize, at fair value, a
liability for the obligation at inception of the guarantee (effective for
guarantees issued or modified after December 31, 2002). The adoption of FIN 45
did not have a material impact on our consolidated financial statements.
49
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"), to provide guidance on the
identification of entities controlled through means other than voting rights.
FIN No. 46 specifies how a business enterprise should evaluate its interests in
a variable interest entity to determine whether to consolidate that entity. A
variable interest entity must be consolidated by its primary beneficiary if the
entity does not effectively disperse risks among the parties involved. A public
company with a variable interest in an entity created before February 1, 2003
must apply FIN No. 46 in the first interim or annual period ending after
December 15, 2003. The adoption of FIN No. 46 is not expected to have a material
impact on our consolidated financial statements.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Management of Interest Rate Risk
Management believes that our most significant form of market risk is
interest rate risk. The general objective of our interest rate risk management
is to determine the appropriate level of risk given our business strategy, and
then manage that risk in a manner that is consistent with our policy to limit
the exposure of our net interest income to changes in market interest rates.
Provident Bank's asset/liability management committee ("ALCO"), which consists
of certain members of senior management, evaluates the interest rate risk
inherent in certain assets and liabilities, our operating environment, and
capital and liquidity requirements, and modifies our 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
our net interest margin, and the effect that changes in market interest rates
would have on the economic value of our loan and securities portfolios as well
as the intrinsic value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending,
investing, and deposit activities. We emphasize the origination of residential
fixed-rate mortgage loans that are repaid monthly and bi-weekly, fixed-rate
commercial mortgage loans, adjustable-rate residential and commercial mortgage
loans, commercial business loans and consumer loans. Depending on market
interest rates and our capital and liquidity position, we may retain all of the
fixed-rate, fixed-term residential mortgage loans that we originate or we may
sell all or a portion of such longer-term loans, generally on a
servicing-retained basis. We also invest in short-term securities, which
generally have lower yields compared to longer-term investments. Shortening the
average maturity of our interest-earning assets by increasing our investments in
shorter-term loans and securities helps to better match the maturities and
interest rates of our assets and liabilities, thereby reducing the exposure of
our net interest income to changes in market interest rates. These strategies
may adversely affect net interest income due to lower initial yields on these
investments in comparison to longer-term, fixed-rate loans and investments.
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 Provident 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 that seem most likely based on historical experience during prior interest
rate changes.
50
The table below sets forth, as of September 30, 2003, the estimated
changes in our NPV and our 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 (Decrease) Increase (Decrease) in
Change in in NPV Estimated Estimated Net Interest Income
Interest Rates ----------------------------- Net interest -------------------------------
(basis points) Estimated NPV Amount Percent Income Amount Percent
- --------------- ------------- ------------ --------- ------------- ------------ ---------------
(Dollars in thousands)
+300 $ 126,377 $ (45,536) (26.5)% $ 42,597 $ (3,830) (8.2)%
+200 144,886 (27,027) (15.7) 43,867 (2,560) (5.5)
+100 161,571 (10,342) (6.0) 45,515 (912) (2.0)
0 171,913 -- 46,427 --
-100 173,471 1,558 0.9 46,278 (149) (0.3)
-200 169,908 (2,005) (1.2) 44,846 (1,581) (3.4)
The table set forth above indicates that at September 30, 2003, in the
event of an immediate 100 basis point decrease in interest rates, we would be
expected to experience a 0.9% increase in NPV and a 0.3% decrease in net
interest income. In the event of an immediate 200 basis point increase in
interest rates, we would be expected to experience a 15.7% decrease in NPV and a
5.5% decrease 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 our interest-rate 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 our 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
our net interest income and will differ from actual results.
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, 2003 and 2002
(C) Consolidated Statements of Income for the years ended
September 30, 2003, 2002 and 2001
(D) Consolidated Statements of Changes in Stockholders' Equity for
the years ended September 30, 2003, 2002 and 2001
(E) Consolidated Statements of Cash Flows for the years ended
September 30, 2003, 2002 and 2001
(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, 2003
and 2002, 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, 2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2003, in conformity with accounting principles generally
accepted in the United States of America.
\s\ KPMG LLP
New York, New York
November 26, 2003
52
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
At September 30,
-----------------------------
Assets 2003 2002
----------- -----------
Cash and due from banks $ 33,500 $ 35,093
Securities (including $32,749 and $29,624 pledged as collateral
for borrowings in 2003 and 2002, respectively):
Available for sale, at fair value (note 4) 300,715 206,146
Held to maturity, at amortized cost (fair value of $75,628
and $90,706 at the respective dates) (note 5) 73,544 86,791
----------- -----------
Total securities 374,259 292,937
----------- -----------
Loans held for sale 2,364 --
Loans (note 6):
One-to four-family residential mortgage loans 380,776 366,111
Commercial real estate, commercial business, and construction loans 252,857 221,669
Consumer loans 80,620 83,419
Allowance for loan losses (11,069) (10,383)
----------- -----------
Total loans, net 703,184 660,816
----------- -----------
Accrued interest receivable, net (note 7) 4,851 5,491
Federal Home Loan Bank (FHLB) stock, at cost 8,220 5,348
Premises and equipment, net (note 8) 11,647 11,071
Goodwill (note 2) 13,540 13,540
Bank owned life insurance 12,483 --
Core deposit intangible, net (note 2) 1,063 1,501
Other assets (notes 6, 11, and 12) 9,194 1,904
----------- -----------
Total assets $ 1,174,305 $ 1,027,701
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $ 869,553 $ 799,626
FHLB borrowings (note 10) 164,757 102,968
Mortgage escrow funds (note 6) 3,949 3,747
Other (note 11) 18,189 10,493
----------- -----------
Total liabilities 1,056,448 916,834
----------- -----------
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; 7,946,521 and 7,997,512 shares outstanding at
September 30, 2003 and 2002, respectively) 828 828
Additional paid-in capital 38,032 36,696
Unallocated common stock held by employee stock ownership
Plan ("ESOP") (note 12) (1,597) (1,974)
Common stock awards under recognition and retention plan
("RRP") (note 12) (506) (1,108)
Treasury stock, at cost (333,479 and 282,488 shares at
September 30, 2003 and 2002, respectively) (note 15) (7,780) (5,874)
Retained earnings 85,398 76,727
Accumulated other comprehensive income, net of taxes (note 13) 3,482 5,572
----------- -----------
Total stockholders' equity 117,857 110,867
----------- -----------
Total liabilities and stockholders' equity $ 1,174,305 $ 1,027,701
=========== ===========
See accompanying notes to consolidated financial statements
53
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Years ended September 30,
---------------------------------
2003 2002 2001
------- ------- -------
Interest and dividend income:
Loans $43,815 $44,967 $46,434
Securities 13,586 14,496 13,916
Other earning assets 389 488 628
------- ------- -------
Total interest and dividend income 57,790 59,951 60,978
------- ------- -------
Interest expense:
Deposits (note 9) 7,775 11,701 19,423
Borrowings 4,285 5,500 6,821
------- ------- -------
Total interest expense 12,060 17,201 26,244
------- ------- -------
Net interest income 45,730 42,750 34,734
Provision for loan losses (note 6) 900 900 1,440
------- ------- -------
Net interest income after provision for loan losses 44,830 41,850 33,294
------- ------- -------
Non-interest income:
Banking fees and service charges 4,987 4,201 3,555
Net gain on sales of securities available for sale (note 4) 2,006 461 531
Net gain on sales of loans 1,096 146 --
Other 1,466 593 620
------- ------- -------
Total non-interest income 9,555 5,401 4,706
------- ------- -------
Non-interest expense:
Compensation and employee benefits (note 12) 20,703 17,246 14,129
Occupancy and office operations (note 17) 5,178 4,808 4,261
Advertising and promotion 1,657 1,470 1,507
Data and check processing 2,923 2,451 1,998
Professional fees 1,443 1,016 793
Merger integration costs (note 2) 4 531 --
Amortization of intangible assets (notes 2 and 3) 438 286 359
Other 4,444 4,353 3,384
------- ------- -------
Total non-interest expense 36,790 32,161 26,431
------- ------- -------
Income before income tax expense 17,595 15,090 11,569
Income tax expense (note 11) 6,344 5,563 4,087
------- ------- -------
Net income $11,251 $ 9,527 $ 7,482
======= ======= =======
Earnings per common share (note 14):
Basic $ 1.46 $ 1.24 $ 0.98
Diluted 1.44 1.22 0.97
======= ======= =======
See accompanying notes to consolidated financial statements.
54
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands, except per share data)
Additional Unallocated Common
Common paid-in ESOP stock awards
stock capital shares under RRP
------- ---------- ----------- ------------
Balance at September 30, 2000 $ 828 $ 36,356 $(2,726) $(2,306)
Net income -- -- -- --
Other comprehensive income (note 13) -- -- -- --
Total comprehensive income
Cash dividends paid ($0.22 per common share) -- -- -- --
Purchases of treasury stock (59,034 shares) -- -- -- --
ESOP shares allocated or committed to be released for allocation -- 179 376 --
Vesting of RRP shares -- -- -- 577
Stock option transactions -- -- -- --
------- -------- ------- -------
Balance at September 30, 2001 828 36,535 (2,350) (1,729)
Net income -- -- -- --
Other comprehensive income (note 13) -- -- -- --
Total comprehensive income
Cash dividends paid ($0.41 per common share) -- -- -- --
Purchases of treasury stock (69,317 shares) -- -- -- --
ESOP shares allocated or committed to be released for allocation -- 459 376 --
Vesting of RRP shares -- -- -- 621
Stock option and other equity transactions -- (298) -- --
------- -------- ------- -------
Balance at September 30, 2002 828 36,696 (1,974) (1,108)
Net income -- -- -- --
Other comprehensive loss (note 13) -- -- -- --
Total comprehensive income
Cash dividends paid ($0.57 per common share) -- -- -- --
Purchases of treasury stock (69,004 shares) -- -- -- --
ESOP shares allocated or committed to be released for
allocation -- 665 377 --
Vesting (forfeiture) of RRP shares -- 521 -- 602
Stock option and other equity transactions -- 150 -- --
------- -------- ------- -------
Balance at September 30, 2003 $ 828 $ 38,032 $(1,597) $ (506)
======= ======== ======= =======
Accumulated
other Total
Treasury Retained comprehensive stockholders'
stock earnings income (loss) equity
-------- -------- ------------- -------------
Balance at September 30, 2000 $(3,203) $ 62,577 $ (540) $ 90,986
Net income -- 7,482 -- 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) -- (807)
Purchases of treasury stock (59,034 shares) (1,155) -- -- (1,155)
ESOP shares allocated or committed to be released for allocation -- -- -- 555
Vesting of RRP shares -- -- -- 577
Stock option transactions 60 -- -- 60
------- -------- ------- ---------
Balance at September 30, 2001 (4,298) 69,252 4,382 102,620
Net income -- 9,527 -- 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) -- -- (1,971)
ESOP shares allocated or committed to be released for allocation -- -- -- 835
Vesting of RRP shares -- -- -- 621
Stock option and other equity transactions 395 (117) -- (20)
------- -------- ------- ---------
Balance at September 30, 2002 (5,874) 76,727 5,572 110,867
Net income -- 11,251 -- 11,251
Other comprehensive loss (note 13) -- -- (2,090) (2,090)
---------
Total comprehensive income 9,161
Cash dividends paid ($0.57 per common share) -- (2,421) -- (2,421)
Purchases of treasury stock (69,004 shares) (2,343) -- -- (2,343)
ESOP shares allocated or committed to be released for
allocation -- -- -- 1,042
Vesting (forfeiture) of RRP shares (96) -- -- 1,027
Stock option and other equity transactions 533 (159) -- 524
------- -------- ------- ---------
Balance at September 30, 2003 $(7,780) $ 85,398 $ 3,482 $ 117,857
======= ======== ======= =========
See accompanying notes to consolidated financial statements.
55
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended September 30,
-----------------------------------------
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net income $ 11,251 $ 9,527 $ 7,482
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900 900 1,440
Depreciation and amortization of premises and equipment 2,025 1,876 1,741
Amortization of intangible assets 438 286 359
Net amortization of premiums and discounts on securities 1,228 383 109
ESOP and RRP expense 2,069 1,456 1,132
Originations of loans held for sale (47,667) (11,912) --
Proceeds from sales of loans 48,765 12,058 --
Net gain on sales of securities available for sale (2,006) (461) (531)
Net gain on sales of loans (1,096) (146) --
Deferred income tax expense (benefit) 613 (1,172) 1,897
Net changes in accrued interest receivable and payable 468 (428) (786)
Other adjustments (principally net changes in other
assets and other liabilities) 381 2,302 133
--------- --------- ---------
Net cash provided by operating activities 17,369 14,669 12,976
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (219,481) (73,491) (51,368)
Held to maturity (27,605) (34,411) (30,366)
Proceeds from maturities, calls and other principal
payments on securities:
Available for sale 83,080 29,907 29,743
Held to maturity 40,533 22,083 19,396
Proceeds from sales of securities available for sale 39,416 56,049 17,291
Loan originations (403,456) (202,483) (139,297)
Loan principal payments 358,039 169,652 121,129
Purchase of The National Bank of Florida, net of cash
and cash equivalents acquired -- (6,000) --
Redemption (purchase) of FHLB stock (2,872) 173 1,502
Purchase of bank owned life insurance (12,000) -- --
Purchases of premises and equipment (2,601) (2,382) (1,706)
Proceeds from sales of other real estate owned 307 -- --
Other investing activities -- -- 259
--------- --------- ---------
Net cash used in investing activities (146,640) (40,903) (33,417)
--------- --------- ---------
Cash flows from financing activities:
Net deposits 69,927 58,417 44,124
Net increase (decrease) in borrowings 61,789 (7,459) (17,144)
Net increase (decrease) in mortgage escrow funds 202 (2,450) 226
Treasury shares purchased (2,343) (1,971) (1,155)
Stock option transactions 524 278 60
Shares purchased for RRP awards -- -- (1,201)
Cash dividends paid (2,421) (1,935) (807)
--------- --------- ---------
Net cash provided by financing activities 127,678 44,880 24,103
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (1,593) 18,646 3,662
Cash and cash equivalents at beginning of year 35,093 16,447 12,785
--------- --------- ---------
Cash and cash equivalents at end of year $ 33,500 $ 35,093 $ 16,447
========= ========= =========
Supplemental information:
Interest payments $ 12,232 $ 17,735 $ 26,928
Income tax payments 5,088 7,752 3,110
Securities transferred from available for sale to held to maturity -- -- 11,865
Loans transferred to real estate owned 151 132 218
========= ========= =========
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.
56
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Reorganization and Stock Offering
Initial Public 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, 2003, the Mutual Holding Company owned 4,416,000 (or
55.57%) of the outstanding common shares of Provident Bancorp, Inc. and
the remaining 3,530,521 shares (or 44.43%), respectively, were owned by
other shareholders.
Second Step Conversion and Acquisition of E.N.B Holding Company, Inc.
On July 1, 2003, the respective Boards of Directors of Provident Bancorp,
Inc. and the Mutual Holding Company adopted a plan to convert from the
mutual holding company form of organization to a fully public holding
company structure. The Mutual Holding Company will merge into the Bank,
and will no longer exist. Provident Bancorp, Inc. will be succeeded by a
new Delaware corporation with the same name. Shares of common stock of
Provident Bancorp, Inc. representing the ownership interest of the Mutual
Holding Company will be offered for sale in a subscription offering and a
community offering, the net proceeds of which will result in additional
capital for Provident Bancorp, Inc. Shares of common stock of Provident
Bancorp, Inc. owned by public shareholders (shareholders other than the
Mutual Holding Company) will be converted into the right to receive new
shares of Provident Bancorp, Inc. common stock determined pursuant to an
exchange ratio. In connection with the second step conversion, Provident
Bancorp, Inc. intends to establish a charitable foundation and contribute
$5,000 to the foundation. A contribution of $1,000 will be paid to the
foundation in cash, with the remainder of the contribution being
contributed in shares. The charitable foundation is subject to the
approval of the majority of the members of the Mutual Holding Company and
two-thirds of the shareholders of Provident Bancorp, Inc. as well as the
separate approval of the public shareholders. Except for the effect of the
issuance of shares to the charitable foundation, the exchange ratio will
ensure that immediately after the conversion and exchange of existing
shares of Provident Bancorp, Inc. for new shares, the public shareholders
will own the same aggregate percentage of new Provident Bancorp, Inc.
common stock that they owned immediately prior to the conversion,
excluding any shares purchased in the offering.
The plan of conversion provides for the establishment, upon the completion
of the conversion, of a special "liquidation account" for the benefit of
Eligible Account
57 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Holders and Supplemental Eligible Account Holders (as those terms are
defined in the plan of conversion) in an amount equal to the greater of
(i) the Mutual Holding Company's ownership interest in the retained
earnings of Provident Bancorp, Inc. as of the date of its latest balance
sheet contained in this prospectus, or (ii) the retained earnings of the
Bank at the time that the Bank reorganized into the Mutual Holding Company
in 1999. Each Eligible Account Holder and Supplemental Eligible Account
Holder that continues to maintain his or her deposit account at the Bank
would be entitled, in the event of a complete liquidation of the Bank
after the conversion, to a pro rata interest in the liquidation account
prior to any payment to the stockholders of Provident Bancorp, Inc. The
liquidation account will be reduced annually on December 31 to the extent
that Eligible Account Holders and Supplemental Eligible Account Holders
have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore such account holder's interest in
the liquidation account. Subsequent to the conversion, the Bank may not
pay cash dividends or make other capital distributions if the effect
thereof would be to reduce its stockholder's equity below the amount of
the liquidation account.
The conversion and related transactions will be accounted for at
historical cost, with no resulting change in the historical carrying
amounts of assets and liabilities. Costs related to the offering will be
netted against the gross proceeds from the sale of common stock; if the
offering is not completed, the costs would be charged to expense. Offering
costs of $59 have been incurred as of September 30, 2003.
At the time of the adoption of the plan of conversion and reorganization,
the Company entered into an agreement to acquire all of the outstanding
shares of common stock of E.N.B. Holding Company, Inc. E.N.B. Holding
Company, Inc. is a New York corporation that owns all of the outstanding
common stock of Ellenville National Bank. Stockholders of E.N.B. Holding
Company, Inc. will receive $4,830 for each share of E.N.B. Holding Company
common stock in the form of (i) cash; (ii) shares of common stock of
Provident Bancorp, Inc. a Delaware corporation (valued at $10.00 per
share); or (iii) a combination of cash and shares of common stock,
provided that the aggregate merger consideration to be paid to all
stockholders of E.N.B. Holding Company will consist of 50% cash and 50%
shares of Provident Bancorp common stock.
The conversion, stock offering and acquisition are expected to be
completed simultaneously in January 2004. However, the merger is not
contingent upon the completion of the mutual-to-stock conversion. If the
conversion is not completed by March 31, 2004, E.N.B. Holding Company,
Inc. can elect to either: (1) proceed with the merger transaction, in
which case, E.N.B. Holding Company, Inc. shareholders will receive merger
consideration of $4,500 per share in cash or (2) terminate the merger
transaction and receive a fee of $3,700. Costs related to the acquisition
will be included in the total purchase price of E.N.B Holding Company,
Inc.; if the acquisition is not completed, the costs would be charged to
expense. As of September 30, 2003, the company incurred acquisition costs
of $559. Additionally, costs of $4 have been charged to expense in fiscal
2003.
(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
58 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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. 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 $724 for the period from the acquisition date
through September 30, 2003, representing the accumulated amortization at
that date. Scheduled core deposit amortization expense is $301 for fiscal
2004, $220 for fiscal 2005, $164 for fiscal 2006, $123 for fiscal 2007,
$94 for fiscal 2008 and $161 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.
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 year ended September 30, 2002 , 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
59 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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) and deposits related to the NBF acquisition and Provident Municipal
Bank are insured by the Bank Insurance Fund of the FDIC. The Office of
Thrift Supervision (OTS) is the primary regulator for the Bank, Provident
Bancorp, Inc. and the Mutual Holding Company.
(a) 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.
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.
(b) Securities
The Company classifies its 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
60 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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.
(c) 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 nonaccrual 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 nonaccrual loans, including impaired loans, are
not recognized as income unless warranted based on the borrower's
financial condition and payment record.
The Company defers nonrefundable 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.
(d) 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.
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. Loans that are
61 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
individually evaluated for collectability in accordance with the
Company's ongoing loan review procedures (principally commercial
real estate, commercial business and construction loans).
Smaller-balance homogeneous loans that are collectively evaluated
for impairment, such as residential mortgage loans and consumer
loans. Impaired loans are 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 a charge to the
allowance for loan losses.
(e) 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.
(f) 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 nonmarketable equity security and, accordingly, is reported at
cost.
(g) 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.
(h) 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.
Core deposit intangibles recorded in the Company's 1996 branch
acquisitions became fully amortized during fiscal 2001.
(i) 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
62 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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.
(j) 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.
(k) 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.
(l) 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 as 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.
63 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(m) Stock-Based Compensation Plans
Compensation expense is recognized for the 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 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 the Stock Option Plan in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Accordingly,
compensation expense is recognized only if the exercise price of an
option is less than fair value of the underlying stock on the date
of the grant. The fair value of shares awarded under the recognition
and retention plan (RRP), 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.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages
the use of a fair-value-based method of accounting for employee
stock compensation plans, but permits the continued use of the
intrinsic-value-based method of accounting prescribed by APB Opinion
No. 25. Under SFAS No. 123, the grant-date fair value of options is
recognized as compensation expense over the vesting period. The
Company has elected to continue to apply APB Opinion No. 25 and
disclose the pro forma information required by SFAS No. 123. Had
stock-based compensation expense been recognized in accordance with
SFAS No. 123, the Company's net income and earnings per common share
would have been adjusted to the following pro forma amounts:
Years ended September 30,
-----------------------------------------------
2003 2002 2001
------------- ----------- -----------
Net income, as reported $ 11,251 9,527 7,482
Add RRP expense included in
reported net income, net of
related tax effects 336 392 373
Deduct RRP and stock option
expense determined under
the fair-value-based method,
net of related tax effects (595) (886) (812)
------------- ----------- -----------
Pro forma net income $ 10,992 9,033 7,043
============= =========== ===========
Earnigs per share:
Basic, as reported $ 1.46 1.24 0.98
============= =========== ===========
Basic, pro forma 1.43 1.17 0.93
============= =========== ===========
Diluted, as reported 1.44 1.22 0.97
============= =========== ===========
Diluted, pro forma 1.40 1.15 0.92
============= =========== ===========
64 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The estimated per-share fair value of stock options granted in
fiscal 2003, 2002 and 2001 was $4.99, $7.06 and $5.80, respectively,
using the Black-Scholes option-pricing model with assumptions as
follows for the respective years: dividend yields of 1.8%, 1.4% and
1.3%; expected volatility rates of 14.67%, 22.4% and 22.7%;
risk-free interest rates of 3.3%, 4.2% and 3.9%; and expected option
lives of approximately 5 years, 6 years and 6 years.
(n) 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.
(o) 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.
65 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(4) Securities Available for Sale
The following is a summary of securities available for sale:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
September 30, 2003
Mortgage-backed securities
Fannie Mae $ 80,233 $ 851 $ (538) $ 80,546
Freddie Mac 58,083 1,188 (137) 59,134
Other 16,466 502 (28) 16,940
-------- ------- --------- --------
154,782 2,541 (703) 156,620
-------- ------- --------- --------
Investment securities
U.S. Government and
Agency securities 130,392 3,278 (60) 133,610
Corporate debt securities 6,030 593 -- 6,623
State and municipal securities 2,545 26 (35) 2,536
Equity securities 1,052 359 (85) 1,326
-------- ------- --------- --------
140,019 4,256 (180) 144,095
-------- ------- --------- --------
Total available for sale $294,801 $ 6,797 $ (883) $300,715
======== ======= ========= ========
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
======== ======= ========= ========
Equity securities principally consist of Freddie Mac and Fannie Mae common
and preferred stock.
66 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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),
by remaining period to contractual maturity. Actual maturities may differ
because certain issuers have the right to call or prepay their
obligations.
September 30, 2003
--------------------------
Amortized
cost Fair value
--------- ----------
Remaining period to contractual
maturity:
Less than one year $ 17,350 $ 17,494
One to five years 119,921 123,596
Five to ten years 1,345 1,342
Greater than ten years 351 337
-------- --------
Total $138,967 $142,769
======== ========
Proceeds from sales of securities available for sale during the years
ended September 30, 2003, 2002 and 2001 totaled $39,416, $56,049 and
$17,291, respectively. These sales resulted in gross realized gains of
$2,006, $744 and $531 for the years ended September 30, 2003, 2002 and
2001, respectively, and gross realized losses of $283 in fiscal 2002.
Securities with carrying amounts of $32,749 and $29,624 were pledged as
collateral for borrowings under securities repurchase agreements at
September 30, 2003 and September 30, 2002, respectively. U.S. Government
securities with carrying amounts of $36,703 and $15,656 were pledged as
collateral for municipal deposits and other purposes at September 30, 2003
and September 30, 2002, respectively.
67 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(5) Securities Held to Maturity
The following is a summary of securities held to maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
September 30, 2003
Mortgage-backed securities
Fannie Mae $27,546 $ 705 $ (190) $28,061
Freddie Mac 26,511 570 (65) 27,016
Other 1,103 62 -- 1,165
------- ------- -------- -------
55,160 1,337 (255) 56,242
Investment securities
State and municipal securities 18,384 1,003 (1) 19,386
------- ------- -------- -------
Total held to maturity $73,544 $ 2,340 $ (256) $75,628
======= ======= ======== =======
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
======= ======= ======== =======
The following is a summary of the amortized cost and fair value of
investment securities held to maturity, by remaining period to contractual
maturity. Actual maturities may differ because certain issuers have the
right to call or repay their obligations.
September 30, 2003
------------------------
Amortized
cost Fair value
--------- ----------
Remaining period to contractual
maturity:
Less than one year $ 2,240 $ 2,242
One to five years 5,825 6,185
Five to ten years 10,001 10,572
Greater than ten years 318 387
------- -------
Total $18,384 $19,386
======= =======
68 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
There were no sales of securities held to maturity during the years ended
September 30, 2003, 2002 and 2001.
(6) Loans
The components of the loan portfolio, excluding loans held for sale, were
as follows:
September 30,
-------------------------
2003 2002
--------- ---------
One- to four-family residential
mortgage loans:
Fixed rate $ 327,916 $ 299,851
Adjustable rate 52,860 66,260
--------- ---------
380,776 366,111
--------- ---------
Commercial real estate loans 188,360 163,329
Commercial business loans 54,174 41,320
Construction loans 10,323 17,020
--------- ---------
252,857 221,669
--------- ---------
Consumer loans:
Home equity lines of credit 50,197 39,727
Homeowner loans 25,225 36,880
Other consumer loans 5,198 6,812
--------- ---------
80,620 83,419
--------- ---------
Total loans 714,253 671,199
Allowance for loan losses (11,069) (10,383)
--------- ---------
Total loans, net $ 703,184 $ 660,816
========= =========
Total loans include net deferred loan origination costs of $903 and $1,048
at September 30, 2003 and September 30, 2002, respectively.
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.
69 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The principal balances of non-accrual loans were as follows:
September 30,
-----------------------
2003 2002
-------- --------
One- to four-family residential
mortgage loans $ 951 $ 2,291
Commercial real estate loans 3,632 2,492
Consumer loans 114 171
-------- --------
Total non-accrual loans $ 4,697 $ 4,954
======== ========
Gross interest income that would have been recorded if the foregoing
non-accrual loans had remained current in accordance with their
contractual terms totaled $354, $371, and $165 for the years ended
September 30, 2003, 2002 and 2001, respectively, compared to interest
income actually recognized (including income recognized on a cash basis)
of $167, $83 and $13, respectively.
The Company's total recorded investment in impaired loans, as defined by
SFAS No. 114, was $815 and $588 at September 30, 2003 and September 30,
2002, 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, 2003 and 2002 due to the
adequacy of collateral values. The Company's average recorded investment
in impaired loans was $701 and $473 during the years ended September 30,
2003 and 2002, respectively.
Activity in the allowance for loan losses is summarized as follows:
Year ended September 30,
-----------------------
2003 2002
-------- --------
Balance at beginning of year $ 10,383 $ 9,123
Provision for loan losses 900 900
Charge-offs (352) (324)
Recoveries 138 147
Allowance recorded in NBF acquisition -- 537
-------- --------
Balance at end of year $ 11,069 $ 10,383
======== ========
Real estate owned properties are included in other assets at net carrying
amounts of $41 at September 30, 2002 (none at September 30, 2003).
Provisions for losses and other activity in the allowance for losses on
real estate owned were insignificant during the years ended September 30,
2003 and 2002.
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 $1,096 in fiscal 2003, $146 in fiscal 2002 and none in fiscal
2001. At September 30, 2003 there was $2,364 in loans held for sale. There
were no loans held for
70 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
sale at September 30, 2002. Other assets at September 30, 2003 and 2002
include capitalized mortgage servicing rights with an amortized cost of
$702 and $193, 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 $83,346 and $73,600 at September 30, 2003 and 2002,
respectively. Mortgage escrow funds include balances of $816 and $879 at
September 30, 2003 and 2002, respectively, related to loans serviced for
others.
(7) Accrued Interest Receivable
The components of accrued interest receivable were as follows:
September 30,
-----------------------
2003 2002
-------- --------
Loans $ 2,064 $ 2,561
Securities 2,787 2,930
-------- --------
Total accrued interest receivable $ 4,851 $ 5,491
======== ========
(8) Premises and Equipment, Net
Premises and equipment are summarized as follows:
September 30,
-----------------------
2003 2002
-------- --------
Land and land improvements $ 1,407 $ 1,368
Buildings 6,843 6,802
Leasehold improvements 6,084 4,600
Furniture, fixtures, and equipment 11,791 10,895
-------- --------
26,125 23,665
Accumulated depreciation and amortization (14,478) (12,594)
-------- --------
Total premises and equipment, net $ 11,647 $ 11,071
======== ========
71 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(9) Deposits
Deposit balances and weighted average interest rates are summarized as
follows:
September 30,
---------------------------------------------------
2003 2002
---------------------- ----------------------
Amount Rate Amount Rate
-------- -------- -------- --------
Demand deposits:
Retail $ 90,471 --% $ 54,399 --%
Commercial 72,538 -- 55,732 --
NOW deposits 62,367 0.20 82,983 0.40
Savings deposits 279,717 0.40 247,918 0.99
Money market deposits 128,222 0.52 115,065 1.23
Certificates of deposit 236,238 1.85 243,529 2.64
-------- --------
Total deposits $869,553 0.72% $799,626 1.33%
======== ========
Municipal deposits held by PMB totaled $31,008 and $8,800 at September 30,
2003 and September 30, 2002, respectively. PMB commenced its public
deposit operations on April 19, 2002. See note 4, Securities Available for
Sale, for the amount of securities that are pledged as collateral for
municipal deposits and other purposes.
Certificates of deposit had remaining periods to contractual maturity as
follows:
September 30,
----------------------
2003 2002
-------- --------
Remaining period to contractual maturity:
Less than one year $190,140 $186,160
One to two years 29,638 36,168
Two to three years 5,910 13,485
Greater than three years 10,550 7,716
-------- --------
Total certificates of deposit $236,238 $243,529
======== ========
Certificate of deposit accounts with a denomination of $100 or more
totaled $48,615 and $38,562 at September 30, 2003 and 2002, respectively.
The FDIC generally insures depositor accounts up to $100 as defined in the
applicable regulations.
72 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Interest expense on deposits is summarized as follows:
Years ended September 30,
--------------------------------
2003 2002 2001
------ ------- -------
Savings deposits $1,497 $ 2,289 $ 2,898
Money market and NOW deposits 1,155 1,750 2,610
Certificates of deposit 5,123 7,662 13,915
------ ------- -------
Total interest expense $7,775 $11,701 $19,423
====== ======= =======
(10) FHLB Borrowings
The Company's FHLB borrowings and weighted average interest rates are
summarized as follows:
September 30,
---------------------------------------------------
2003 2002
---------------------- ----------------------
Amount Rate Amount Rate
-------- -------- -------- --------
By type of borrowing:
Advances $124,398 2.49% $ 72,968 3.63%
Repurchase agreements 40,359 4.52 30,000 5.17
-------- --------
Total borrowings $164,757 2.98% $102,968 4.08%
======== ========
By remaining period to maturity:
Less than one year $ 70,358 2.28% $ 30,319 3.24%
One to two years 15,000 2.19 20,000 5.02
Two to three years 28,000 3.18 15,000 2.69
Three to four years 9,162 4.69 8,000 4.72
Four to five years 33,277 3.65 9,649 4.69
Greater than five years 8,960 5.01 20,000 4.88
-------- --------
Total borrowings $164,757 2.98% $102,968 4.08%
======== ========
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 $352,000 and $308,000 at September 30, 2003 and 2002,
respectively. The Bank's unused FHLB borrowing capacity was approximately
$228,000 and $235,000, respectively, at those dates. 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, 2003 and 2002.
Securities repurchase agreements had weighted average remaining terms to
maturity of approximately 3.2 years and 4.3 years at September 30, 2003
and 2002, respectively. Average borrowings under securities repurchase
agreements were $35,953 and $34,479 during the years ended September 30,
2003 and 2002, respectively, and the maximum outstanding month-end balance
was $40,359 and $39,750, respectively.
73 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
FHLB borrowings of $35,000 at September 30, 2003 and 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
3 years and 4 years at those dates, respectively, and weighted average
interest rates of 5.11% at both September 30, 2003 and 2002.
(11) Income Taxes
Income tax expense consists of the following:
Years ended September 30,
-------------------------------------
2003 2002 2001
------- ------- -------
Current tax expense:
Federal $ 5,137 $ 5,872 $ 1,839
State 594 863 351
------- ------- -------
5,731 6,735 2,190
------- ------- -------
Deferred tax expense (benefit):
Federal 610 (918) 1,800
State 3 (254) 97
------- ------- -------
613 (1,172) 1,897
------- ------- -------
Total income tax expense $ 6,344 $ 5,563 $ 4,087
======= ======= =======
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:
Years ended September 30,
-------------------------------------
2003 2002 2001
------- ------- -------
Tax at Federal statutory rate $ 6,158 $ 5,282 $ 3,933
State income taxes, net of Federal
tax benefit 388 396 296
Tax-exempt interest (234) (193) (148)
Nondeductible portion of ESOP
expense 222 161 61
Low-income housing tax credits (72) (72) (72)
BOLI Income (169) -- --
Other, net 51 (11) 17
------- ------- -------
Actual income tax expense $ 6,344 $ 5,563 $ 4,087
======= ======= =======
Effective income tax rate 36.1% 36.9% 35.3%
======= ======= =======
74 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized below. The net amount is reported in
other assets or other liabilities in the consolidated statements of
financial condition.
September 30,
---------------------
2003 2002
------- -------
Deferred tax assets:
Allowance for loan losses $ 4,524 $ 4,226
Deferred compensation 2,684 1,924
Core deposit intangibles 1,111 1,132
Depreciation of premises and equipment 245 540
Other 178 150
------- -------
Total deferred tax assets 8,742 7,972
------- -------
Deferred tax liabilities:
Net unrealized gain on securities
available for sale (2,322) (3,720)
Undistributed earnings of subsidiary not
consolidated for tax return purposes
(Provident REIT, Inc.) (4,311) (3,067)
Purchase accounting fair value
adjustments (153) (578)
Prepaid pension costs (608) (484)
Other (697) (604)
------- -------
Total deferred tax liabilities (8,091) (8,453)
------- -------
Net deferred tax asset (liability) $ 651 $ (481)
======= =======
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, 2003 and
2002.
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 $34,900 and $32,100 for New York State tax
purposes at September 30, 2003 and 2002, respectively. Associated deferred
tax liabilities of $3,660 and $3,500 have not been recognized at those
dates 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.
75 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(12) Employee Benefit Plans and Stock-Based Compensation Plans
(a) Pension Plan
The Company has a noncontributory 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:
September 30,
----------------------
2003 2002
-------- -------
Changes in projected benefit obligation:
Beginning of year $ 9,132 $ 6,889
Service cost 669 430
Interest cost 673 490
Actuarial (gain) loss 1,255 (427)
Acquisition of NBF -- 1,875
Benefits paid (209) (125)
-------- -------
End of year 11,520 9,132
-------- -------
Changes in fair value of plan assets:
Beginning of year 7,887 6,385
Actual gain (loss) on plan assets 1,056 (895)
Employer contributions 1,162 600
Acquisition of NBF -- 1,922
Benefits paid (209) (125)
-------- -------
End of year 9,896 7,887
-------- -------
Funded status at end of year (1,624) (1,245)
Unrecognized net actuarial loss 3,132 2,555
Unrecognized prior service cost (56) (70)
Unrecognized net transition obligation 36 62
-------- -------
Prepaid pension costs $ 1,488 $ 1,302
======== =======
A discount rate of 6.25% 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,
2003 (6.75% and 5.0%, respectively, at September 30, 2002). The
long-term rate of return on plan assets was 7.75% and 8.0% for
fiscal 2003 and 2002, respectively.
76 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The components of the net periodic pension expense were as follows:
Years ended September 30,
-----------------------------
2003 2002 2001
----- ----- -----
Service cost $ 669 $ 430 $ 465
Interest cost 673 490 427
Expected return on plan assets (647) (598) (600)
Amortization of prior service cost (14) (14) (14)
Amortization of net transition obligation 26 26 26
Recognized net actuarial loss (gain) 155 12 (2)
----- ----- -----
Net periodic pension expense $ 862 $ 346 $ 302
===== ===== =====
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 $97, $90 and $59 for the years ended
September 30, 2003, 2002 and 2001, respectively. The actuarial
present value of the projected benefit obligation was $771 and $555
at September 30, 2003 and 2002, respectively, all of which is
unfunded.
(b) 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 $40, $32 and $37 for the years ended September 30,
2003, 2002 and 2001, respectively.
(c) 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 $248, $206 and $184 for the years ended September 30,
2003, 2002 and 2001, respectively. A supplemental savings plan has
also been established for certain senior officers. Expense
recognized for this plan was $67, $68 and $62 for the years ended
September 30, 2003, 2002 and 2001, respectively.
(d) 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
77 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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.
ESOP expense was $1,012, $835 and $555 for the years ended September
30, 2003, 2002 and 2001, respectively. Through September 30, 2003
and 2002, a cumulative total of 177,494 shares and 146,582 shares,
respectively, have been allocated to participants or committed to be
released for allocation, respectively. 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
(131,626 shares with a cost of $1,597 and a fair value of
approximately $5,500 at September 30, 2003 and 162,538 shares with a
cost of $1,974 and a fair value of approximately $4,600 at September
30, 2002, respectively).
(e) 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 $526, $621 and $577 for the years ended
September 30, 2003, 2002 and 2001, respectively.
(f) 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. Reload options may be granted and provide for the
automatic grant of a new option at the then-current market price in
exchange for each previously owned share tendered by an employee in
a stock-for-stock exercise. 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.
78 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of activity in the Stock Option Plan:
Weighted
Shares subject average
to option exercise price
-------------- --------------
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
Granted 10,620 31.36
Exercised (34,818) 17.56
Forfeited (5,050) 15.50
-------- --------
Outstanding at September 30, 2003 273,789 $ 17.37
======== ========
Options exercisable at September 30, 2003, 2002 and 2001 totaled
207,162, 157,463 and 137,815, respectively, with a weighted average
exercise price of approximately $17.71, $16.70 and $15.50 per share,
respectively. These options had weighted average remaining terms of
6.4 years, 7.4 years, and 8.4 years at the respective dates. There
were 40,350 shares and 35,300 shares available for future option
grants at September 30, 2003 and 2002, respectively.
(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.
79 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The components of other comprehensive income (loss) are summarized as
follows:
Year ended September 30,
-----------------------------------
2003 2002 2001
------- ------- -------
Net unrealized holding (loss) gain
arising during the year on securities
available for sale, net of related
income taxes of $597,
$(950) and $(3,526), respectively $ (896) $ 1,429 $ 5,289
Reclassification adjustment for net
realized gains included in net
income, net of related income
taxes of $802, $184 and $212,
respectively (1,204) (277) (319)
------- ------- -------
(2,100) 1,152 4,970
Net unrealized gain (loss) on
derivatives, net of related
income taxes of $(6), $(26)
and $32, respectively (note 16) 10 38 (48)
------- ------- -------
Other comprehensive
income (loss) $(2,090) $ 1,190 $ 4,922
======= ======= =======
The Company's accumulated other comprehensive income included in
stockholders' equity at September 30, 2003 and 2002 consists of (i) the
after-tax net unrealized gain of $3,482 and $5,582, respectively, on
securities available for sale, and (ii) the after-tax net unrealized loss
of $0 and $10, respectively, on derivatives accounted for as cash flow
hedges.
80 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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):
Years ended September 30,
-------------------------------
2003 2002 2001
------- ------ ------
(In thousands, except per share data)
Net income $11,251 $9,527 $7,482
======= ====== ======
Weighted average common shares
outstanding for computation of
basic EPS (1) 7,713 7,702 7,661
Common-equivalent shares due to
the dilutive effect of stock
options and RRP awards (2) 108 118 50
------- ------ ------
Weighted average common shares
for computation of diluted EPS $ 7,821 $7,820 $7,711
======= ====== ======
Earnings per common share:
Basic $ 1.46 $ 1.24 $ 0.98
Diluted 1.44 1.22 0.97
======= ====== ======
(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
(a) 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
81 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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, 2003 and 2002 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.
The following is a summary of the Bank's actual regulatory capital
amounts and ratios at September 30, 2003 and 2002, 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, 2003 and 2002.
OTS requirements
----------------------------------------------------
Minimum capital Classification as well
Bank actual adequacy capitalized
----------------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
September 30, 2003:
Tangible capital $ 93,497 8.1% $ 17,231 1.5% $ -- 0.0%
Tier 1 (core) capital 93,497 8.1 45,950 4.0 57,437 5.0
Risk-based capital:
Tier 1 93,497 13.7 -- 0.0 40,835 6.0
Total 102,041 15.0 54,447 8.0 68,058 10.0
======== ======== ========
September 30, 2002:
Tangible capital $ 84,307 8.5% $ 14,963 1.5% $ -- 0.0%
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 -- 0.0 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% $ -- 0.0%
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 -- 0.0 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.
The following is a reconciliation of the Bank's total stockholder's
equity under accounting principles generally accepted in the United
States of America ("GAAP") and its regulatory capital:
82 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
September 30,
-------------------------
2003 2002
--------- ---------
Total GAAP stockholder's equity $ 112,039 $ 104,779
Goodwill and intangible assets (15,163) (15,041)
Unrealized gain on securities available
for sale (3,379) (5,431)
--------- ---------
Tangible, tier 1 core and
Tier 1 risk-based capital 93,497 84,307
Allowance for loan losses 8,544 7,440
--------- ---------
Total risk-based capital $ 102,041 $ 91,747
========= =========
(b) 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 $3,500
to Provident Bancorp, Inc. during the year ended September 30, 2003
(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 $2064 in fiscal 2003, $1,310 in fiscal 2002, and $972
in fiscal 2001, for a cumulative total of $4,655 through September
30, 2003.
(c) 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
183,540, of its publicly-traded shares as market conditions warrant.
This program was completed in May 2003. A third repurchase program
was announced in March 2003 to acquire up to 5% or approximately
177,250 shares. A total of 22,815 shares have been purchased for the
treasury under the third program through September 30, 2003 at a
total cost of $807.
(d) 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
83 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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:
September 30,
---------------------
2003 2002
------- -------
Lending-related instruments:
Loan origination commitments:
Fixed-rate loans $15,742 $36,285
Adjustable-rate loans 55,602 26,048
Unused lines of credit 79,593 63,091
Standby letters of credit 8,976 6,862
Interest rate risk management:
Interest rate cap agreements -- 50,000
======= =======
(a) 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, 2003 provide for interest rates ranging
principally from 5.38% to 8.50%.
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 commitments issued by the Company on
behalf of its customer in favor of a beneficiary that specify an
amount the Company can be called upon to pay upon the beneficiary's
compliance with the terms of the letter of credit. These commitments
are primarily issued in favor of local municipalities to support the
obligor's completion of real estate development
84 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
projects. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities
to customers.
As of September 30, 2003, the Company had $8,796 in outstanding
letters of credit, of which $1,500 were secured by cash collateral
(b) Interest Rate Cap Agreements
At September 30, 2002, the Company was a party to two interest rate
cap agreements with a total notional amount of $50,000. These
interest rate caps matured 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 were 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 were accounted for as cash flow hedges under
SFAS No. 133 and were reported at fair value, which was
insignificant at September 30, 2002. Interest expense for the years
ended September 30, 2003 and 2002 includes charges of $16 and $68,
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 was
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 noncancelable operating leases with initial or
remaining terms of more than one year at September 30, 2003 are $2,355 for
fiscal 2004, $2,227 for fiscal 2005, $1,315 for fiscal 2006, $1,207 for
fiscal 2007, $1,261 for fiscal 2008 and a total of $3,489 for later years.
Occupancy and office operations expense includes net rent expense of
$1,202, $1,137 and $1,076 for the years ended September 30, 2003, 2002 and
2001, 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.
85 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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.
The following is a summary of the carrying amounts and estimated fair
values of financial assets and liabilities (none of which were held for
trading purposes):
September 30,
---------------------------------------------------------
2003 2002
------------------------- -------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
Financial assets:
Cash and due from banks $ 33,500 $ 33,500 $ 35,093 $ 35,093
Securities available for sale 300,715 300,715 206,146 206,146
Securities held to maturity 73,544 75,628 86,791 90,706
Loans 703,184 733,769 660,816 678,927
Accrued interest receivable 4,851 4,851 5,491 5,491
FHLB stock 8,220 8,220 5,348 5,348
Financial liabilities:
Deposits 869,553 871,338 799,626 802,040
FHLB borrowings 164,757 166,195 102,968 106,308
Mortgage escrow funds 3,949 3,949 3,747 3,747
======== ======== ======== ========
The following paragraphs summarize the principal methods and assumptions
used by management to estimate the fair value of the Company's financial
instruments.
(a) Securities
The estimated fair values of securities were based on quoted market
prices.
(b) 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.
86 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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.
(c) 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.
(d) 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.
(e) 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, 2003 and 2002, the estimated fair
values of these instruments approximated the related carrying
amounts, which were insignificant.
(19) Recent Accounting Standards and Interpretations
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123. This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effects
of the method used on
87 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
reported results. The provisions of this statement are not expected to
have a material impact on the consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement 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 results of
operations or financial condition.
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity was issued in May 2003.
Under this statement, certain freestanding financial instruments that
embody obligations for the issuer and that are now classified in equity,
must be classified as liabilities (or as assets in some circumstances).
Generally, SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003.
However, the effective date of the statement's provisions related to the
classification and measurement of certain mandatorily redeemable
non-controlling interests has been deferred indefinitely by the FASB,
pending further Board action. Adoption of this standard did not have an
impact on the consolidated financial statements.
FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others, was issued in November 2002. This interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that
it has issued. The disclosure requirements in this interpretation are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The interpretation also requires a guarantor to
recognize, at fair value, a liability for the obligation at inception of
the guarantee (effective for guarantees issued or modified after December
31, 2002). The adoption of FIN No. 45 did not have a material impact on
the consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, to provide guidance on the identification of entities
controlled through means other than voting rights. FIN No. 46 specifies
how a business enterprise should evaluate its interests in a variable
interest entity to determine whether to consolidate that entity. A
variable interest entity must be consolidated by its primary beneficiary
if the entity does not effectively disperse risks among the parties
involved. A public company with a variable interest in an entity created
before February 1, 2003 must apply FIN No. 46 in the first interim or
annual period ending after December 15, 2003. The adoption of FIN No. 46
is not expected to have a significant effect on the consolidated financial
statements.
88 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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. and the related condensed statements of income and
cash flows:
September 30,
Condensed Statements of ------------------------
Financial Condition 2003 2002
-------- --------
Assets:
Cash $ 3,640 $ 641
Securities available for sale 2,297 6,466
Loan receivable from ESOP 1,880 2,256
Investment in Provident Bank 110,441 102,392
Other assets 107 195
-------- --------
Total assets $118,365 $111,950
======== ========
Liabilities $ 508 $ 1,083
Stockholders' equity 117,857 110,867
-------- --------
Total liabilities and
stockholders' equity $118,365 $111,950
======== ========
89 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Year ended September 30,
----------------------------------------
2003 2002 2001
-------- ------- -------
Condensed statements of income
Interest income $ 258 $ 450 $ 626
Dividends from Provident Bank 3,500 -- --
Gain on sale of securities available for sale 92 123 431
Non-interest expense (175) (226) (180)
Income tax expense (73) (134) (338)
-------- ------- -------
Income before equity in undistributed
earnings of Provident Bank 3,602 213 539
Equity in undistributed earnings of Provident Bank 7,649 9,314 6,943
-------- ------- -------
Net income $ 11,251 $ 9,527 $ 7,482
======== ======= =======
Condensed statements of cash flows
Cash flows from operating activities:
Net income $ 11,251 $ 9,527 $ 7,482
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of
Provident Bank (7,649) (9,314) (6,943)
Other adjustments, net 1,211 755 (674)
-------- ------- -------
Net cash provided by (used in)
operating activities 4,813 968 (135)
Cash flows from investing activities:
Purchases of securities available for sale -- (2,296) (2,431)
Proceeds from sales of securities available for sale 2,050 2,374 6,810
ESOP loan principal repayments 376 376 376
-------- ------- -------
Net cash provided by investing activities 2,426 454 4,755
-------- ------- -------
Cash flows from financing activities:
Treasury shares purchased (2,343) (1,971) (1,155)
Cash dividends paid (2,421) (1,935) (807)
Stock option transactions 524 278 60
-------- ------- -------
Net cash used in financing activities (4,240) (3,628) (1,902)
-------- ------- -------
Net increase (decrease) in cash 2,999 (2,206) 2,718
Cash at beginning of year 641 2,847 129
-------- ------- -------
Cash at end of year $ 3,640 $ 641 $ 2,847
======== ======= =======
90 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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, 2003, 2002 and 2001:
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Year ended September 30, 2003
Interest and dividend income $15,024 $14,439 $14,252 $14,075
Interest expense 3,389 2,947 2,975 2,749
------- ------- ------- -------
Net interest income 11,635 11,492 11,277 11,326
Provision for loan losses 300 300 200 100
Non-interest income 2,003 2,367 2,818 2,367
Non-interest expense 8,473 9,557 9,106 9,654
------- ------- ------- -------
Income before income
tax expense 4,865 4,002 4,789 3,939
Income tax expense 1,824 1,482 1,683 1,355
------- ------- ------- -------
Net income $ 3,041 $ 2,520 $ 3,106 $ 2,584
======= ======= ======= =======
Earnings per common share:
Basic $ 0.39 $ 0.33 $ 0.40 $ 0.34
Diluted 0.39 0.32 0.40 0.33
======= ======= ======= =======
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 $ 0.32 $ 0.34 $ 0.28 $ 0.29
Diluted 0.32 0.33 0.27 0.29
======= ======= ======= =======
91
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
ITEM 9A. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this annual report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this annual report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
There were no significant changes made in our internal control over
financial reporting during the period covered by this report or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The "Proposal I - Election of Directors" section of Provident Bancorp's
Proxy Statement for the Annual Meeting of Stockholders to be held in February
2004 (the "Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
Provident Bancorp does not have any equity compensation programs that were
not approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of September 30, 2003, regarding
equity compensation to directors and executive officers of Provident Bancorp
that has been approved by stockholders.
======================================================================================================================
Equity compensation plans Number of securities to be Number of securities remaining
approved by Issued upon exercise of Weighted average available for issuance
stockholders outstanding options and rights exercise price under plan
----------------------------------------------------------------------------------------------------------------------
Stock Option Plan 233,268 $17.40 40,360
----------------------------------------------------------------------------------------------------------------------
Recognition and Retention Plan (1) 35,550 Not Applicable 0
----------------------------------------------------------------------------------------------------------------------
Total (2) 268,818 $17.40 40,360
======================================================================================================================
(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.
92
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.
PART IV
ITEM 14. 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, 2003 and 2002
(C) Consolidated Statements of Income for the years ended
September 30, 2003, 2002 and 2001
(D) Consolidated Statements of Changes in Stockholders' Equity for
the years ended September 30, 2003, 2002, and 2001
(E) Consolidated Statements of Cash Flows for the years ended
September 30, 2003, 2002 and 2001
(F) Notes to Consolidated Financial Statements
(b) (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.
(c) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the three
months ended September 30, 2003.
On July 28, 2003 the Company filed a Form 8-K announcing that a
press release was issued on July 24, 2003 regarding quarter ended
June 30, 2003 earnings.
On July 3, 2003 the Company filed a Form 8-K announcing that a press
release was issued on July 2, 2003 regarding the adoption of a Plan
of Conversion and Reorganization to convert Provident Bancorp, MHC
to a capital stock corporation and the announcement that the
Corporation entered into a definitive merger agreement to acquire
ENB Holding Company, Inc.
93
(d) Exhibits
--------
3.1 Stock Holding Company Charter of Provident Bancorp, Inc.
(incorporated herein by reference to Provident Bancorp's
Registration Statement on Form S-1, dated September 17, 1998,
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 as amended (incorporated
herein by reference to the S-1A File No. 333-108795, October
31, 2003) as filed
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 Provident Bancorp'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 Provident Bancorp's Proxy Statement for
the 2000 Annual Meeting of Stockholders, filed with the SEC on
January 18, 2000)
14 Code of Ethics
21 Subsidiaries of Provident Bancorp
23.1 Consent of KPMG LLP
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as amended
by Section 906 of the Sarbanes-Oxley Act of 2002
94
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Provident Bancorp has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Provident Bancorp, Inc.
Date: December 23, 2003 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\ Paul A. Maisch
---------------------------------- --------------------------------
George Strayton Paul A. Maisch
President, Chief Executive Officer Chief Financial Officer and
and Director Senior Vice President
Date: December 23, 2003 Date: December 23, 2003
By: \s\ William F. Helmer By: \s\ Dennis L. Coyle
---------------------------------- --------------------------------
William F. Helmer Dennis L. Coyle, Vice Chairman
Chairman of the Board
Date: December 23, 2003 Date: December 23, 2003
By: \s\ Judith Hershaft By: \s\ Thomas F. Jauntig, Jr.
---------------------------------- --------------------------------
Judith Hershaft, Director Thomas F. Jauntig, Jr., Director
Date: December 23, 2003 Date: December 23, 2003
By: \s\ Donald T. McNelis By: \s\ Richard A. Nozell
---------------------------------- --------------------------------
Donald T. McNelis, Director Richard A. Nozell, Director
Date: December 23, 2003 Date: December 23, 2003
By: \s\ William R. Sichol, Jr. By: \s\ Burt Steinberg
---------------------------------- --------------------------------
William R. Sichol, Jr., Director Burt Steinberg, Director
Date: December 23, 2003 Date: December 23, 2003
By: \s\ F. Gary Zeh
----------------------------------
F. Gary Zeh, Director
Date: December 23, 2003
95