SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25233
PROVIDENT BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 80-0091851
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
----------------------- ------------------
$0.01 per share 39,608,586
as of January 31, 2004
1
PROVIDENT BANCORP, INC.
QUARTERLY PERIOD ENDED DECEMBER 31, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
at December 31, 2003 and September 30, 2003 3-4
Consolidated Statements of Income
for the Three Months Ended December 31, 2003 and 2002 5
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended December 31, 2003 and 2002 6-7
Consolidated Statements of Cash Flows
for the Three Months Ended December 31, 2003 and 2002 8-9
Consolidated Statements of Comprehensive Income
for the Three Months Ended December 31, 2003 and 2002 10
Notes to Consolidated Financial Statements 11-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-30
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 30
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 32
Signature 33
Certifications Pursuant to Sarbanes-Oxley Act of 2002 34-38
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Assets December 31, 2003 September 30, 2003
----------------- ------------------
Cash and due from banks $ 40,331 $ 33,500
Federal funds sold 15,000 --
----------- -----------
Total cash and cash equivalents 55,331 33,500
Securities (Note 7):
Available for sale, at fair value (amortized cost of
$413,241 at December 31, 2003 and $294,801 at
September 30, 2003) 416,798 300,715
Held to maturity, at amortized cost (fair value of $69,916
at December 31, 2003 and $75,628 at September 30, 2003) 68,003 73,544
----------- -----------
Total securities 484,801 374,259
----------- -----------
Loans held for sale 727 2,364
Gross loans (Note 5) 715,912 714,253
Allowance for loan losses (Note 6) (11,249) (11,069)
----------- -----------
Total loans, net 704,663 703,184
----------- -----------
FHLB stock, at cost 5,665 8,220
Accrued interest receivable, net 5,206 4,851
Premises and equipment, net 11,465 11,647
Goodwill (Note 3) 13,540 13,540
Bank owned life insurance 12,641 12,483
Other assets 11,919 10,257
----------- -----------
Total assets $ 1,305,958 $ 1,174,305
=========== ===========
(Continued)
3
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, cONTINUED
(Unaudited)
(Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity December 31, 2003 September 30, 2003
----------------- ------------------
Liabilities:
Deposits (Note 8):
Non-interest bearing $ 166,518 $ 163,009
Interest bearing 703,651 706,544
----------- -----------
Total deposits 870,169 869,553
Stock Subscriptions (Note 2) 174,660 --
Borrowings 113,653 164,757
Mortgage escrow funds 9,610 3,949
Other 18,336 18,189
----------- -----------
Total liabilities 1,186,428 1,056,448
----------- -----------
Stockholders' equity:
Preferred stock (par value $0.10 per share; 10,000,000 shares
authorized; none issued or outstanding) -- --
Common stock (par value $0.10 per share; 20,000,000 shares
authorized; 8,280,000 shares issued; 7,947,321 and 7,946,521 shares
outstanding at December 31, 2003 and September 30, 2003,
respectively) 828 828
Additional paid-in capital 38,290 38,032
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (123,898 shares at December 31, 2003
and 131,626 shares at September 30, 2003, respectively) (1,503) (1,597)
Common stock awards under recognition and retention plan ("RRP") (379) (506)
Treasury stock, at cost (332,679 shares at December 31, 2003 and
333,479 shares at September 30, 2003, respectively) (7,761) (7,780)
Retained earnings 87,985 85,398
Accumulated other comprehensive income 2,070 3,482
----------- -----------
Total stockholders' equity 119,530 117,857
----------- -----------
Total liabilities and stockholders' equity $ 1,305,958 $ 1,174,305
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share data)
For the Three Months
Ended December 31,
------------------
2003 2002
---- ----
Interest and dividend income:
Loans $ 10,530 $ 11,346
Securities 3,765 3,595
Other earning assets 23 83
---------- ----------
Total interest and dividend income 14,318 15,024
---------- ----------
Interest expense:
Deposits 1,557 2,345
Borrowings 1,210 1,044
---------- ----------
Total interest expense 2,767 3,389
---------- ----------
Net interest income 11,551 11,635
Provision for loan losses (Note 5) 150 300
---------- ----------
Net interest income after provision for loan losses 11,401 11,335
---------- ----------
Non-interest income:
Banking fees and service charges 1,384 1,089
Gain on sales of securities available for sale 930 657
Gains on sales of loans 86 39
Other 403 218
---------- ----------
Total non-interest income 2,803 2,003
---------- ----------
Non-interest expense:
Compensation and employee benefits 4,919 4,216
Occupancy and office operations 1,327 1,132
Advertising and promotion 468 416
Professional fees 417 348
Data and check processing 744 696
Amortization of core deposit intangible 84 127
Other 1,611 1,538
---------- ----------
Total non-interest expense 9,570 8,473
---------- ----------
Income before income tax expense 4,634 4,865
Income tax expense 1,589 1,824
---------- ----------
Net income $ 3,045 $ 3,041
========== ==========
Weighted average common shares:
Basic 7,738,931 7,721,560
Diluted 7,883,872 7,858,438
Per common share: (Note 9)
Basic $ 0.39 $ 0.39
Diluted 0.39 0.39
Dividends declared 0.15 0.13
Book value at period end $ 15.04 $ 14.83
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
(Unaudited)
(In thousands, except share and per share data)
Common
Additional Unallocated Stock
Common Paid-In ESOP Awards
Stock Capital Shares Under RRP
----- ------- ------ ---------
Balance at September 30, 2003 $ 828 $ 38,032 $ (1,597) $ (506)
Net income
Cash dividends paid ($0.15 per share)
Stock option transactions
ESOP shares allocated or committed
to be released for allocation
(7,728 shares) 258 94
Vesting of RRP shares 127
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $943
-------- -------- -------- --------
Balance at December 31, 2003 $ 828 $ 38,290 $ (1,503) $ (379)
======== ======== ======== ========
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Income Equity
----- -------- ------ ------
Balance at September 30, 2003 $ (7,780) $ 85,398 $ 3,482 $117,857
Net income 3,045 3,045
Cash dividends paid ($0.15 per share) (452) (452)
Stock option transactions 19 (6) 13
ESOP shares allocated or committed
to be released for allocation
(7,728 shares) 352
Vesting of RRP shares 127
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $943 (1,412) (1,412)
-------- -------- -------- --------
Balance at December 31, 2003 $ (7,761) $ 87,985 $ 2,070 $119,530
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
(Unaudited)
(In thousands, except share and per share data)
Common
Additional Unallocated Stock
Common Paid-In ESOP Awards
Stock Capital Shares Under RRP
----- ------- ------ ---------
Balance at September 30, 2002 $ 828 $ 36,696 $ (1,974) $ (1,108)
Net income
Cash dividends paid ($0.13 per share)
ESOP shares allocated or committed
to be released for allocation 138 94
(7,728 shares)
Vesting of RRP shares 139
Decrease in net unrealized gain
on securities available for sale
net of taxes of $415
Decrease in net unrealized loss
on cash flow hedges,
net of taxes of $(4)
-------- -------- -------- --------
Balance at December 31, 2002 $ 828 $ 36,834 $ (1,880) $ (969)
======== ======== ======== ========
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Income Equity
----- -------- ------ ------
Balance at September 30, 2002 $ (5,874) $ 76,727 $ 5,572 $110,867
Net income 3,041 3,041
Cash dividends paid ($0.13 per share) (590) (590)
ESOP shares allocated or committed
to be released for allocation 232
(7,728 shares)
Vesting of RRP shares 139
Decrease in net unrealized gain
on securities available for sale
net of taxes of $415 (624) (624)
Decrease in net unrealized loss
on cash flow hedges,
net of taxes of $(4) 6 6
-------- -------- -------- --------
Balance at December 31, 2002 $ (5,874) $ 79,178 $ 4,954 $113,071
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months Ended December 31,
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 3,045 $ 3,041
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 150 300
Depreciation and amortization of premises
and equipment 473 486
Amortization of core deposit intangible 84 127
Gain on sales of securities available for sale (930) (657)
Gain on sales of loans held for sale (86) (4)
Gain on sales of fixed assets sold (46) --
Net amortization of premiums and discounts
on securities 380 267
ESOP and RRP expense 479 371
Originations of loans held for sale (2,502) (8,718)
Proceeds from sales of loans held for sale 4,225 129
Proceeds from sales of fixed assets 358
Deferred income tax expense (benefit) (4,080) (1)
Net changes in accrued interest receivable
and payable (353) 527
Other adjustments (principally net changes
in other assets and other liabilities) 3,318 (40)
--------- ---------
Net cash provided by (used in)
operating activities 4,157 (4,172)
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (182,930) (35,543)
Held to maturity (1,886) (4,386)
Proceeds from maturities, calls and other
principal payments on securities:
Available for sale 35,960 17,377
Held to maturity 7,380 9,819
Proceeds from sales of securities available for sale 29,127 15,678
Proceeds from sales of fixed assets 358 --
Loan originations (66,829) (100,069)
Loan principal payments 65,148 86,442
Sale (purchase) of FHLB stock 2,555 (523)
Purchase of bank owned life insurance -- (12,000)
Purchases of premises and equipment (603) (582)
--------- ---------
Net cash used in investing activities (111,720) (23,787)
--------- ---------
(continued)
8
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited) (In thousands)
For the Three Months
Ended December 31,
------------------
2003 2002
---- ----
Cash flows from financing activities:
Net increase in transaction and savings deposits $ 19,022 $ 17,955
Net (decrease)/increase in time deposits (18,406) 4,136
Receipt of stock subscription funds 174,660 --
Net (decrease)/increase in borrowings (51,104) 1,041
Net increase in mortgage escrow funds 5,661 5,834
Exercises of stock options 13 --
Cash dividends paid (452) (590)
--------- ---------
Net cash provided by financing activities 129,394 28,376
--------- ---------
Net increase in cash and cash equivalents 21,831 417
Cash and cash equivalents at beginning of period 33,500 35,093
--------- ---------
Cash and cash equivalents at end of period $ 55,331 $ 35,510
========= =========
Supplemental information:
Interest payments $ 2,765 $ 3,487
Income tax payments 9 66
Net change in unrealized gains recorded on
securities available for sale (2,355) (1,039)
Change in deferred taxes on unrealized gains
on securities available for sale 943 415
See accompanying notes to unaudited consolidated financial statements.
9
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months
Ended December 31,
------------------
2003 2002
---- ----
Net income: $ 3,045 $ 3,041
Other comprehensive (loss):
Net unrealized gains (losses) on securities
available for sale:
Net unrealized holding gains (losses)
arising during the year, net of taxes of
$569 and $153 (854) (230)
Less reclassification adjustment for
net realized gains included in net income,
net of taxes of $372 and $263 (558) (394)
Net unrealized gain on
derivatives, net of taxes
of $0 and $(4) -- 6
------- -------
Other comprehensive (loss) (1,412) (618)
------- -------
Total comprehensive income $ 1,633 $ 2,423
======= =======
See accompanying notes to unaudited consolidated financial statements.
10
PROVIDENT BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
As described in note 2, Mutual Holding Company Conversion and Acquisition
of E.N.B. Holding Company, Inc., Provident Bancorp., Inc., a Delaware
corporation, was not an operating company as of December 31, 2003. Accordingly,
the consolidated financial statements and other financial information presented
in this document as of December 31, 2003, include the accounts of Provident
Bancorp, Inc., a federal corporation (the "Company"), Provident Bank (the
"Bank"), and each subsidiary of Provident Bank (Provest Services Corp. I,
Provest Services Corp. II, Provident REIT, Inc. and Provident Municipal Bank).
Collectively, these entities are referred to herein as "the Company". Provident
Bancorp, Inc. is a majority-owned subsidiary of Provident Bancorp, MHC, a mutual
holding company. Provest Services Corp. I holds an investment in a low-income
housing partnership which provides certain favorable tax consequences. Provest
Services Corp. II has engaged a third-party provider to sell annuities and
mutual funds to the customers of Provident Bank. Through December 31, 2003, the
activities of these two wholly-owned subsidiaries have had a minor impact on the
Company's consolidated financial condition and results of operations. Provident
REIT, Inc. holds a portion of the Company's real estate loans and is a real
estate investment trust for federal income tax purposes. Provident Municipal
Bank ("PMB") is a limited purpose New York State-chartered commercial bank,
which began operations on April 19, 2002 and is authorized to accept deposits
from municipalities in the Bank's business area.
The Company's off-balance sheet activities are limited to loan origination
commitments, lines of credit and letters of credit extended to customers in the
ordinary course of its lending activities. The Company does not engage in
off-balance sheet financing transactions or other activities involving the use
of special-purpose entities.
The consolidated financial statements have been prepared by management
without audit, but, in the opinion of management, include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the Company's financial position and results of operations as of the dates and
for the periods presented. Although certain information and footnote disclosures
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form 10-Q,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The results of operations for the three months ended
December 31, 2003 are not necessarily indicative of results to be expected for
other interim periods or the entire fiscal year ending September 30, 2004. The
unaudited consolidated financial statements presented herein should be read in
conjunction with the annual audited financial statements included in the
Company's Form 10-K for the fiscal year ended September 30, 2003.
11
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates. A material estimate that is particularly susceptible to
near-term change is the allowance for loan losses (see Note 5), which is a
critical accounting policy.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
Stock-Based Compensation
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its stock option plan.
No stock-based employee compensation cost is reflected in net income, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of the grant. SFAS No. 123,
Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income if the fair-value-based
method had been applied to all outstanding awards in each period. In April 2003
the FASB decided to require all companies to expense the value of employee stock
options commencing in 2005, but has not decided how to measure the fair value of
the options. As such, the financial statement impact of stock option expensing
is not known at this time.
Three Months Ended
December 31,
2003 2002
---- ----
Net income, as reported $3,045 $3,041
Add RRP expense included in reported net income, net
of related tax effects 84 87
Deduct RRP and stock option expense determined
under the fair-value-based method, net of related
tax effects (84) (87)
Pro forma net income $3,045 $3,041
Earnings per share:
Basic, as reported $ 0.39 $ 0.39
Basic, pro forma 0.39 0.39
Diluted, as reported 0.39 0.39
Diluted, pro forma 0.39 0.39
12
2. Mutual Holding Company Conversion and Acquisition of E.N.B. Holding
Company, Inc.
On January 14, 2004 Provident Delaware completed its stock offering in
connection with the second-step conversion of Provident Bancorp, MHC. As a
result of the conversion, Provident Delaware became the stock holding company of
Provident Bank. In the stock offering, shares representing Provident Bancorp,
MHC's ownership interest in the Company were sold to investors. In addition,
Provident Delaware simultaneously completed its acquisition of E.N.B. Holding
Company, Inc., (ENB) located in Ellenville, New York.
Provident Delaware sold 19,573,000 shares of common stock at $10.00 per
share to depositors of Provident Bank as of June 30, 2002 and September 30,
2003. The new holding company also issued 400,000 shares of common stock and
contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In
addition, each outstanding share of common stock of the Company as of January
14, 2004 has been converted into 4.4323 new shares of the Corporation's common
stock.
Shareholders of ENB as of the close of business on January 14, 2004
received total merger consideration of approximately $76.47 million, consisting
of 3,969,676 shares of common stock of the Company and approximately $36.77
million in cash.
As a result of the above transactions, the Company will have 39,608,586
issued and outstanding shares.
Financial statements as of December 31, 2003, do not reflect the effect of
the conversion of existing common shares, the stock offering or the acquisition
of ENB.
ENB operated nine offices and had total assets of $361 million and
deposits of $325 million as of December 31, 2003.
13
3. Acquisition of The National Bank of Florida
On April 23, 2002, the Company consummated its acquisition, for cash, of
The National Bank of Florida ("NBF"), which was merged with and into Provident
Bank. The transaction was valued at approximately $28.1 million. At the
acquisition date, NBF had total assets of approximately $104 million and total
deposits of approximately $88.2 million. Amounts attributable to NBF are
included in the Company's consolidated financial statement from the date of
acquisition.
Goodwill recorded in the NBF acquisition ($13.5 million) is not amortized
to expense, but instead is reviewed for impairment at least annually, with
impairment losses charged to expense, if and when they occur. The core deposit
intangible asset, ($979,000 and $1.1 million at December 31, 2003 and September
30, 2003, respectively), is recognized apart from goodwill and amortized to
expense over its estimated useful life and evaluated for impairment.
4. Critical Accounting Policies
The accounting and reporting policies of Provident Bancorp, Inc. are
prepared in accordance with accounting principles generally accepted within the
United States of America and conform to general practices within the banking
industry. Accounting policies considered critical to the Company's financial
results include the allowance for loan losses, accounting for goodwill and the
recognition of interest income. The methodology for determining the allowance
for loan losses is considered by management to be a critical accounting policy
due to the high degree of 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. Accounting for goodwill is considered to be a critical policy because
goodwill must be tested for impairment at least annually using a "two-step"
approach that involves the identification of reporting units and the estimation
of fair values. The estimation of fair values involves a high degree of judgment
and subjectivity in the assumptions utilized. Interest income on loans,
securities and other interest-earning assets is accrued monthly unless
management considers the collection of interest to be doubtful. Loans are placed
on nonaccrual status when payments are contractually past due 90 days or more,
or when management has determined that the borrower may be unable to meet
contractual principal or interest obligations. At such time, unpaid interest is
reversed by charging interest income. Interest payments received on nonaccrual
loans (including impaired loans) are recognized as income unless future
collections are doubtful. Loans are returned to accrual status when
collectibility is no longer considered doubtful (generally, when all payments
have been brought current). Application of assumptions different than those used
by management could result in material changes in the Company's financial
position or results of operations. Footnote 3 (Summary of Significant Accounting
Policies) of the 2003 Annual Report on Form 10-K, provides detail with regard to
the Company's accounting for the allowance for loan losses. There have been no
significant changes in the application of accounting policies since September
2003.
14
5. Loans
Major classifications of loans, excluding loans held for sale, are
summarized below (in thousands):
December 31, 2003 September 30, 2003
----------------- ------------------
Real estate - residential mortgage $369,677 $380,776
Real estate - commercial mortgage 203,880 188,360
Real estate - construction 14,003 10,323
Commercial and industrial 47,159 54,174
Consumer loans 81,193 80,620
-------- --------
Total $715,912 $714,253
======== ========
6. Allowance for Loan Losses and Non-Performing Assets
The allowance for loan losses is established through provisions for losses
charged to earnings. Loan losses are charged against the allowance when
management believes that the collection of principal is unlikely. Recoveries of
loans previously charged-off are credited to the allowance when realized.
The allowance for loan losses is the amount that management has determined
to be necessary to absorb probable loan losses inherent in the existing
portfolio. Management's evaluations, which are subject to periodic review by the
Company's regulators, are made using a consistently-applied methodology that
takes into consideration such factors as the Company's past loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and collateral values, and
current economic conditions that may affect the borrowers' ability to pay.
Changes in the allowance for loan losses may be necessary in the future based on
changes in economic and real estate market conditions, new information obtained
regarding known problem loans, regulatory examinations, the identification of
additional problem loans, and other factors.
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months
Ended December 31,
------------------
2003 2002
---- ----
(In thousands)
Balance at beginning of period $ 11,069 $ 10,383
Provision for loan losses 150 300
Charge-offs (12) (14)
Recoveries 42 18
-------- --------
Balance at end of period $ 11,249 $ 10,687
======== ========
15
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated. At both dates, the Company had no
troubled debt restructurings (loans for which a portion of interest or principal
has been forgiven and loans modified at interest rates materially less than
current market rates).
December 31, 2003 September 30, 2003
----------------- ------------------
(Dollars in thousands)
Non-accrual loans:
One- to four-family residential mortgage loans $1,194 $ 951
Commercial real estate, commercial business
and construction loans 3,625 3,632
Consumer loans 169 114
------ ------
Total non-performing loans 4,988 4,697
Real estate owned:
One- to four-family residential -- --
------ ------
Total non-performing assets $4,988 $4,697
====== ======
Ratios:
Non-performing loans to total loans 0.70% 0.66%
Non-performing assets to total assets 0.38 0.40
Allowance for loan losses to total
non-performing loans 225.52 235.66
Allowance for loan losses to total loans 1.57 1.55
16
7. Securities
The following is a summary of securities available for sale at December 31, 2003
and September 30, 2003 (in thousands):
Available for Sale Portfolio
December 31, 2003
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
======================================================
Mortgage-backed and SBA Securities
Mortgage-backed securities $228,074 $ 2,418 $ (1,103) $229,389
Collateralized mortgage obligations 16,680 28 (140) 16,568
SBAs and other 187 1 -- 188
-------- -------- -------- --------
Total mortgage-backed and SBA securities 244,941 2,447 (1,243) 246,145
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency
Securities 164,752 2,339 (152) 166,939
State and municipal securities 2,542 27 (28) 2,541
Equity securities 1,006 297 (130) 1,173
-------- -------- -------- --------
Total investment securities 168,300 2,663 (310) 170,653
-------- -------- -------- --------
Total available for sale $413,241 $ 5,110 $ (1,553) $416,798
======== ======== ======== ========
Available for Sale Portfolio
September 30, 2003
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
======================================================
Mortgage-backed and SBA Securities
Mortgage-backed Securities $135,049 $ 2,541 $ (648) $136,942
Collateralized mortgage obligations 19,733 -- (55) 19,678
SBAs and other 206 -- -- 206
-------- -------- -------- --------
Total mortgage-backed and SBA securities 154,988 2,541 (703) 156,826
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency
securities 130,186 3,278 (60) 133,404
State and municipal securities 2,545 26 (35) 2,536
Corporate debt securities 6,030 593 -- 6,623
Equity securities 1,052 359 (85) 1,326
-------- -------- -------- --------
Total investment securities 139,813 4,256 (180) 143,889
-------- -------- -------- --------
Total available for sale $294,801 $ 6,797 $ (883) $300,715
======== ======== ======== ========
17
The following is a summary of securities held to maturity at December 31, 2003
and September 30, 2003 (in thousands):
Held to Maturity Portfolio
December 31, 2003
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===================================================
Mortgage-backed Securities
Mortgage-backed securities $45,229 $ 1,150 $ (268) $46,111
Collateralized mortgage obligations 4,009 62 -- 4,071
------- ------- ------- -------
Total mortgage-backed securities 49,238 1,212 (268) 50,182
------- ------- ------- -------
Investment Securities
State and municipal securities 18,765 970 (1) 19,734
------- ------- ------- -------
Total held to maturity $68,003 $ 2,182 $ (269) $69,916
======= ======= ======= =======
Held to Maturity Portfolio
September 30, 2003
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===================================================
Mortgage-backed Securities
Mortgage-backed securities $50,863 $ 1,271 $ (255) $51,879
Collateralized mortgage obligations 4,297 66 -- 4,363
------- ------- ------- -------
Total mortgage-backed securities 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
======= ======= ======= =======
18
At December 31, 2003 and September 30, 2003, the unrealized net gain on
securities available for sale (net of tax of $1,373 and $3,305, respectively)
that was included in accumulated other comprehensive income, a separate
component of stockholders' equity, was $2,070 and $3,482 respectively. Gross
realized gains were $930 and $657 respectively, for the three months ended
December 31, 2003 and 2002.
Securities with a carrying amount of $69,397 and $69,452 were pledged as
collateral for municipal deposits, borrowings and other purposes at December 31,
2003 and September 30, 2003, respectively.
8. Deposits
Major classifications of deposits are summarized below (in thousands):
December 31, 2003 September 30, 2003
----------------- ------------------
Demand deposits:
Retail $ 98,798 $ 90,471
Commercial and municipal 67,720 72,538
NOW 62,305 62,367
-------- --------
Total transaction accounts 228,823 225,376
Money market 132,609 128,222
Savings 290,905 279,717
Time under $100,000 181,559 187,623
Time over $100,000 36,273 48,615
-------- --------
Total $870,169 $869,553
======== ========
9. Earnings Per Common Share
The number of shares used in the computation of both basic and diluted
earnings per share includes all shares issued to Provident Bancorp, MHC, but
excludes unallocated ESOP shares that have not been released or committed to be
released to participants. Unvested RRP shares are excluded from basic earnings
per share calculations only.
The common equivalent shares are incremental shares (computed using the
treasury stock method) that would have been outstanding if all potentially
dilutive stock options and unvested RRP shares were exercised or became vested
during the periods.
19
Basic earnings per common share is computed as follows (dollars in
thousands, except share data):
For the Three Months
Ended December 31,
------------------
2003 2002
---- ----
Weighted average common shares
outstanding 7,738,931 7,721,560
---------- ----------
Total basic shares 7,738,931 7,721,560
Net income $ 3,045 $ 3,041
Basic earnings per common share $ 0.39 $ 0.39
Diluted earnings per common share is computed as follows (dollars in
thousands, except share data):
For the Three Months
Ended December 31,
------------------
2003 2002
---- ----
Weighted average common shares
outstanding 7,738,931 7,721,560
Effect of common stock equivalents 144,941 136,878
---------- ----------
Total diluted shares 7,883,872 7,858,438
Net income $ 3,045 $ 3,041
Diluted earnings per common share $ 0.39 $ 0.39
10. Guarantor's Obligations Under Guarantees
Standby letters of credit are commitments issued by the Company on behalf
of its customer/obligor 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 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 December 31, 2003, the Company had $9.5 million in outstanding
letters of credit, of which $2.8 million were secured by cash collateral.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 2004 and, in certain instances, subsequent periods. The
Company cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements for subsequent periods
are subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; pricing
pressures on loan and deposit products; changes in local and national economic
conditions; the extent and timing of actions of the Company's regulators;
customer deposit disintermediation; changes in customers' acceptance of the
Company's products and services; general actions of competitors, other normal
business risks such as credit losses, litigation, increases in the levels of
non-performing assets, revenues following acquisitions if such revenues are
lower than expected, and costs or difficulties related to the integration of
acquired and existing businesses that are greater than expected. The Company's
forward-looking statements speak only as of the date on which such statements
are made. The Company assumes no duty to update forward-looking statements to
reflect new, changing or unanticipated events or circumstances.
The Company's significant accounting policies are summarized in Note 3 to
the consolidated financial statements included in its September 30, 2003 Annual
Report on Form 10-K. An accounting policy considered particularly critical to
the Company's financial results is the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance for loan losses
is considered a critical accounting policy by management due to the high degree
of judgement involved, the subjectivity of the assumptions utilized, and the
potential for changes in the economic environment that could result in changes
in the necessary allowance.
As discussed in Note 3 to the consolidated financial statements included
in Item 1 of this quarterly report, the Company completed its acquisition of NBF
in April 2002. The acquisition was accounted for as a purchase and, accordingly,
amounts attributable to NBF have been included in the Company's consolidated
financial statements from the date of acquisition.
In April 2002, the Company announced the formation of PMB, a commercial
bank subsidiary of Provident Bank, to serve the banking needs of municipalities
throughout our service area, primarily Rockland and Orange Counties. Provident
Bank is a federally chartered savings association and municipalities in New York
State may only deposit funds in commercial banks. The formation of PMB provides
a vehicle for the deposits that may not be deposited with Provident Bank.
21
As of January 14, 2004 Provident Delaware completed its stock offering and
acquisition of E.N.B. Holding Company in connection with Provident Bancorp,
MHC's mutual-to-stock conversion. See Note 2 to the accompanying financial
statements.
Comparison of Financial Condition at December 31, 2003 and September 30, 2003
Total assets as of December 31, 2003 were $1.3 billion, an increase of
$127.6 million, or 10.9% over assets of $1.2 billion at September 30, 2003.
Net loans as of December 31, 2003 were $704.7 million, an increase of $1.5
million, or 0.2%, over net loan balances of $703.2 million at September 30,
2003. Residential loans declined during the three-month period by $11.1 million,
or 2.9%, compared to balances at September 30, 2003, primarily in fixed rate
mortgages. Commercial mortgage loans increased by $15.5 million, or 8.2%, as
originations of $23.9 million surpassed repayments of $8.4 million. Commercial
and industrial loans decreased by $7.0 million, or 12.9%, as customers paid down
lines of credit in a greater amount than drawn on new advances under lines of
credit. Asset quality continues to be strong. At $5.0 million, or 0.38% of total
assets, non-performing assets were up slightly from $4.7 million, or 0.40% of
total assets at September 30, 2003.
Total securities increased by $110.5 million, or 29.5%, to $484.8 million
at December 31, 2003 as the Company invested the majority of the stock
subscription funds received in securities. Investments were made primarily in
mortgage-backed securities, which increased by $83.4 million, or 39.3%, and in
U.S. Government and Federal Agency Securities, which increased by $33.5 million,
or 25.1%.
Total deposits at December 31, 2003 were virtually unchanged compared to
balances at September 30, 2003. Deposit growth has occurred in transaction
account, savings and money market account products, while certificates of
deposit declined slightly. The largest deposit growth has occurred in savings
and money market accounts, which increased to $423.5 million at December 31,
2003 from $407.9 million at September 30, 2003, an increase of $15.6 million, or
3.8%. Transaction accounts posted an increase of $3.4 million, or 1.5%, to
$228.8 million. During the same time period, total certificates of deposit
declined by $18.4 million as municipal certificates declined by $15.9 million,
while all other certificates decreased by $2.5 million. Total municipal deposits
amounted to $15.1 million at December 31, 2003 compared to $31.0 million at
September 30, 2003. The Company began accepting municipal deposits in April 2002
after the formation of PMB.
Borrowings from the Federal Home Loan Bank of New York (the "FHLB")
decreased by $51.1 million during the three-month period to $113.7 million at
December 31, 2003 from $164.8 million at September 30, 2003, as the Company used
uninvested stock subscription funds to pay down overnight borrowings.
22
Stockholders' equity increased by $1.6 million to $119.5 million at
December 31, 2003 compared to $117.9 million at September 30, 2003. In addition
to net income of $3.0 million for the three-month period, equity increased by
$492,000 due to activity related to the Company's ESOP, stock option and
management retention plans. Partially offsetting these increases were cash
dividends, which reduced stockholders' equity by $452,000 and the change in
after-tax unrealized gains on securities available for sale, which decreased
equity by $1.4 million.
During the first three months of fiscal 2004, the Company did not
repurchase shares of its common stock. The total shares repurchased under its
previously announced repurchase programs, which authorized the repurchase of up
to 553,990 shares including the March 2003 authorization of 177,250 shares, was
399,555 shares through December 31, 2003. Net of option-related reissuances,
treasury shares held by the Company at December 31, 2003 were 332,679 shares.
The authorization to repurchase shares of the Company's common stock expired in
connection with its second-step conversion on January 14, 2004.
Comparison of Operating Results for the Three Months Ended
December 31, 2003 and December 31, 2002
Net Income. For the three months ended December 31, 2003 net interest
income after provision for loan losses was $11.4 million, up $66,000, or 0.6%,
compared to $11.3 million for the same period of 2002. Non-interest income was
$2.8 million for the three months ended December 31, 2003 compared to $2.0
million for the same period last year, an increase of $800,000, or 39. 9 %,
including increases in securities gains and gains on sales of loans of $273,000
and $47,000, respectively. Non-interest expenses increased $1.1 million, or
12.9%, to $9.6 million for the three months ended December 31, 2003 compared to
$8.5 million for the same prior-year period. Net income after taxes was
unchanged at $3.0 million for the three months ended December 31, 2003 and
December 31, 2002.
The relevant performance measures follow:
Three Months Ended
December 31,
2003 2002
---- ----
Per common share:
Basic earnings $ 0.39 $ 0.39
Diluted earnings 0.39 0.39
Dividends declared 0.15 0.13
Return on average (annualized):
Assets 1.02% 1.16%
Equity 10.30% 10.81%
23
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
Three Months Ended December 31,
-------------------------------
2003 2002
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and comm. mtg. loans (1) $ 254,295 $ 4,104 6.42% $ 215,295 $ 3,839 7.07%
Consumer loans (1) 79,225 878 4.41 83,919 1,130 5.34
Residential mortgage loans (1) 369,814 5,548 5.97 372,169 6,377 6.80
---------- ------- ---------- -------
Total loans 703,334 10,530 5.96 671,383 11,346 6.70
AFS Investments & MBS 308,232 3,000 3.87 213,307 2,524 4.69
HTM Investments & MBS 69,241 765 4.40 84,085 1,071 5.05
Other earning assets 12,146 23 0.75 6,289 83 5.24
---------- ------- ---------- -------
Total securities & other earning assets 389,619 3,788 3.87 303,681 3,678 4.81
---------- ------- ---------- -------
Total interest-earning assets 1,092,953 14,318 5.21 975,064 15,024 6.11
---------- ------- ---------- -------
Non-interest-earning assets:
Cash & due from banks 41,892 28,197
Premises & equipment 11,576 11,070
Other assets 35,442 25,481
---------- ----------
Total assets $1,181,863 $1,039,812
========== ==========
Interest bearing liabilities:
Savings, clubs & escrow $ 291,402 $ 314 0.43% $ 258,382 $ 509 0.78%
Money market accounts 133,437 177 0.53 117,028 298 1.01
NOW checking 62,797 32 0.20 80,187 62 0.31
Certificate accounts 225,304 1,034 1.83 246,318 1,476 2.38
---------- ------- ---------- -------
Total interest-bearing deposits 712,940 1,557 0.87 701,915 2,345 1.33
Borrowings 147,571 1,210 3.26 103,092 1,044 4.02
---------- ------- ---------- -------
Total interest-bearing liabilities 860,511 2,767 1.28 805,007 3,389 1.67
------- ------- ----
Non-interest-bearing liabilities:
Demand deposits 159,766 113,705
Other 43,94 9,519
Total liabilities 1,064,231 928,231
Equity 117,632 111,581
---------- ----------
Total liabilities and equity $1,181,863 $1,039,812
========== ==========
Net interest income $11,551 $11,635
======= =======
Net interest rate spread 3.93% 4.44%
==== ====
Net earning assets $ 232,442 $ 170,057
========== ==========
Net interest margin 4.20% 4.73%
==== ====
Average interest-earning assets 127.01% 121.12%
====== =======
Total average interest-bearing liabilities
(1) Includes non-accrual loans.
24
The table below details the changes in interest income and interest
expense for the period indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Three Months Ended December 31,
2003 vs. 2002
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Consumer loans $ (62) $ (190) $(252)
Commercial and comm. mtg. loans 640 (375) 265
Residential mortgage loans (41) (788) (829)
Available for sale securities 969 (493) 476
Held to maturity securities (177) (129) (306)
Other earning assets 43 (103) (60)
------- ------- -----
Total interest income 1,372 (2,078) (706)
Interest-bearing liabilities
Savings 57 (252) (195)
Money market 36 (157) (121)
NOW Checking (11) (19) (30)
Certificates of deposit (119) (323) (442)
Borrowings 388 (222) 166
------- ------- -----
Total interest expense 351 (973) (622)
------- ------- -----
Net interest income $ 1,021 $(1,105) $ (84)
======= ======= =====
(1) Changes in rate/volume have been allocated to rate and volume.
25
Net Interest Income. For the three months ended December 31, 2003, net
interest income before provision for loan losses decreased by $84,000, or 0.7%
to $11.5 million from $11.6 million for the same period in 2002. Interest income
decreased by $706,000, or 4.7%, as an increase in average earning assets of
$117.9 million to $1.1 billion, was offset by a decline in yield of 90 basis
points to 5.21%. The cost of interest-bearing liabilities declined by $622,000
as the average rate paid on interest-bearing liabilities dropped 39 basis points
to 1.28%, which partially offset an increase in average balances of $55.5
million to $860.5 million. Net interest margin decreased from 4.73% to 4.20% and
net interest spread decreased from 4.44% to 3.93%.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $150,000 and $300,000 in loan loss provisions
during the three months ended December 31, 2003 and 2002, respectively. The
decrease in the provision reflects the strong coverage ratios provided by the
allowance, as well as the Company's historical charge-off ratios.
Non-Interest Income. Non-interest income for the three month period ended
December 31, 2003 increased to $2.8 million, an increase of $800,000 million, or
39.9%, compared to $2.0 million for the same three-month period last year.
Realized gains on securities available for sale and sales of loans were $930,000
and $86,000, respectively, for the current period, generating a combined
increase of $320,000 over the securities and loan sales gains of $696,000 for
the same period last year. Banking fees and services charges increased to $1.4
million for the current three-month period, an increase of $295,000, or 27.1%,
over the same period last year. The increase is primarily attributable to
increases in overdraft and uncollected fees of $187,000. Other income increased
by $185,000, or 84.9%, for the three month period ended December 31, 2003, from
$218,000 for the same period last year. The increase is primarily due to
$157,000 in income from the new BOLI program and an increase of $19,000 in loan
fees. In addition, the Company realized $46,000 on the sale of fixed assets in
the current three-month period.
Non-Interest Expense. Non-interest expense increased by $1.1 million, or
12.9%, to $9.6 million for the three-month period ended December 31, 2003,
compared to $8.5 million for the same three-month period last year. In February,
2003 the Company opened a de novo branch in our Northern region, generating
modest increases in compensation and benefits and in occupancy and office
operations during the current quarter. Compensation and benefits increased by
$703,000, or 16.7%, of which $108,000 was attributable to the increased cost of
stock-based compensation plans, $67,000 was due to additional retirement plan
and other deferred compensation expense, $81,000 was related to higher life and
health insurance premiums and the remaining increase was due to annual salary
increases of approximately 4% and additional administration staff. Additional
increases in non-interest expense categories for the current year to date period
are additional advertising costs of $52,000, or 12.5%, related to the new branch
and new products, and a volume-related increase of $48,000, or 6.9%, in data and
check processing costs. Professional fees increased by $69,000 primarily related
to expenses recorded in connection with compliance for Section 404 of the
Sarbanes Oxley Act of 2002. Other expenses increased by $73,000, or 4.7%, due
primarily to an increase of $35,000, or 120.7%, in charitable contributions.
26
Amortization of the core deposit intangible decreased by $43,000 as the
premium associated with the acquisition of NBF in third quarter 2002 is
amortized on an accelerated basis declining each year.
Income Taxes. Income tax expense was $1.6 million for the three months
ended December 31, 2003 compared to $1.8 million for the same period in 2002.
The effective tax rates were 34.3 % and 37.5%, respectively, as a greater
portion of the Company's pre-tax income was derived from investments in tax
advantaged vehicles, such as bank owned life insurance.
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the three months
ended December 31, 2003 and December 31, 2002, loan originations, excluding
loans originated for sale, totaled $66.8 million and $100.1 million,
respectively, and purchases of securities totaled $184.8 million and $39.9
million, respectively. For the three month periods ended December 31, 2003 and
2002, these investing activities were funded primarily by principal repayments
on loans, by proceeds from sales and maturities of securities, by deposit growth
and stock subscriptions received in the Company's stock offering completed in
January 2004. Loan origination commitments totaled $69.7 million at December 31,
2003. The Company anticipates that it will have sufficient funds available to
meet current loan commitments. In December 2002 the Company invested $12 million
in BOLI contracts. Such investments are illiquid and are therefore classified as
other assets. As the Company's quarterly earnings exceeded $3.0 million, it is
expected that the funds will be replaced by retained earnings in approximately
1.25 years, thereby not having a significant impact on capital and liquidity.
Earnings from BOLI are derived from the net increase in cash surrender value.
27
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, the appeal of
non-deposit investments, and other factors. The net increase in total deposits
for the three months ended December 31, 2003 was $616,000, compared to $22.1
million for the three months ended December 31, 2002.
On January 14, 2004 Provident Delaware completed its stock offering in
connection with the second-step conversion of Provident Bancorp, MHC. As a
result of the conversion, Provident Delaware became the stock holding company of
Provident Bank. In the stock offering, shares representing Provident Bancorp,
MHC's ownership interest in the Company were sold to investors. In addition,
Provident Delaware has completed its acquisition of E.N.B. Holding Company,
Inc., (ENB) located in Ellenville, New York.
Provident Delaware sold 19,573,000 shares of common stock at $10.00 per
share to depositors of Provident Bank as of June 30, 2002 and September 30,
2003. The new holding company also issued 400,000 shares of common stock and
contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In
addition, each outstanding share of common stock of the Company as of January
14, 2004 has been converted into 4.4323 new shares of the Corporation's common
stock.
Shareholders of ENB as of the close of business on January 14, 2004
received total merger consideration of approximately $76.47 million, consisting
of 3,969,676 shares of common stock of the Company and approximately $36.77
million in cash.
The Company monitors its liquidity position on a daily basis. Although the
Company sold $15.0 million in federal funds at period end, it generally remains
fully invested and utilizes additional sources of funds through FHLB overnight
advances, of which none were outstanding at December 31, 2003. The Company has
the ability to borrow an additional $258.2 million under its credit facilities
with the Federal Home Loan Bank of New York.
At December 31, 2003, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital (leverage) level of $97.4 million, or 7.6% of
adjusted assets (which is above the required level of $51.3 million, or 4.0%)
and a total risk-based capital level of $106.3 million, or 15% of risk-weighted
assets (which is above the required level of $56.6 million, or 8.0%). In order
to be classified as well-capitalized, the regulatory requirements call for
leverage and total risk-based capital ratios of 5.0% and 10.0%, respectively. In
performing this calculation, the intangible assets recorded in the April 2002
NBF acquisition are deducted from capital for purposes of regulatory capital
measures. At December 31, 2003, the Bank exceeded all capital requirements for
well-capitalized classification. These capital requirements, which are
applicable to the Bank only, do not consider additional capital retained at the
holding company level.
28
The following table sets forth the Bank's regulatory capital position at
December 31, 2003 and September 30, 2003, compared to OTS requirements.
OTS Requirements
------------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
----------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
December 31, 2003
Tangible capital $ 98,384 7.7% $19,301 1.5% $ -- --%
Tier 1 (core) capital 98,384 7.7 51,468 4.0 64,336 5.0
Risk-based capital:
Tier 1 98,384 13.8 -- -- 42,682 6.0
Total 107,256 15.1 56,909 8.0 71,137 10.0
September 30, 2003
Tangible capital $ 93,497 8.1% $17,231 1.5% $ -- --%
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 -- -- 40,835 6.0
Total 102,041 15.0 54,447 8.0 68,058 10.0
Recent Accounting Standards
In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 (revised), Consolidation of Variable Interest
Entities ("FIN 46R"), which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and, accordingly, should consolidate the variable interest
entity ("VIE"). FIN 46R replaces FASB Interpretation No. 46, which was issued in
January 2003. As a public company that is not a small business issuer (as
defined in applicable SEC regulations), the Company is required to apply FIN 46R
to variable interests generally as of March 31, 2004 and to special-purpose
entities as of December 31, 2003. For any VIE's that must be consolidated under
FIN 46R that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts and any difference between the net amount added to the balance
sheet and any previously recognized interest would be recorded as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure
the assets, liabilities and noncontrolling interest of the VIE. The adoption of
FIN 46R did not and is not expected to have a significant effect on the
Company's consolidated financial statements.
29
In December 2003, the FASB also issued Statement of Financial Accounting
Standards No. 132 (revised), Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132R"). This standard prescribes employers'
disclosures about pension plans and other postretirement benefit plans, but does
not change the measurement or recognition of those plans. SFAS No. 132R retains
and revises the disclosure requirements contained in the original standard. It
also requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. As a public company, the Company will be required
to provide substantially all of the revised disclosures beginning with its
September 30, 2004 consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate risk,
as the majority of its assets and liabilities are sensitive to changes in
interest rates. There have been no material changes in the Company's interest
rate risk position since September 30, 2003, although the dramatic increase in
net interest spread in the past six months could be adversely impacted by a rise
in short term interest rates. As noted in Item 2, Management's Discussion and
Analysis, the increase in the Company's net interest income is due, in large
part, to the relative changes in the yield and cost of the Company's assets and
liabilities as a result of decreasing market interest rates beginning in 2001.
This decrease in market interest rates has reduced the cost of interest-bearing
liabilities faster, and to a greater extent, than the rates on interest-earning
assets such as loans and securities. Should market interest rates increase with
the expected economic recovery, the cost of the interest-bearing liabilities
could increase faster than the rates on interest-earning assets. In addition,
the impact of rising rates could be compounded if deposit customers move funds
from savings accounts back to higher-rate certificate of deposit accounts.
Conversely, should market interest rates continue to fall below today's levels,
the Company's net interest margin could also be negatively affected, as
competitive pressures could keep the Company from reducing rates much lower on
its deposits and prepayments and curtailments on assets may continue. Such
movements may cause a decrease in interest rate spread and net interest margin.
Other types of market risk, such as foreign exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
As discussed in Note 2, as of January 14, 2004, Provident Delaware
completed its stock offering and acquisition of E.N.B. Holding Company.
Provident Delaware received $174.7 million in new funds for stock subscriptions;
pending utilization of funds for its general business needs, the proceeds were
invested in securities (primarily mortgage backed securities), securities of US
government sponsored agencies and US Treasuries with an average life of
approximately three years.
30
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the
"Exchange Act") as of the end of the period covered by this report. Based upon
that evaluation, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that, as of the end of the period covered
by this report, the Company's 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 frames specified in the SEC's rules and
forms.
There were no significant changes made in the Company's internal controls
over financial reporting or in other factors that could significantly affect the
Company's internal control over financial reporting during the period covered by
this report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which,
in the aggregate, involved amounts which are believed to be immaterial to the
consolidated financial condition and operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
31
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the three
months ended December 31, 2003:
1) On October 28, 2003, the Company filed a Form 8-K announcing
that it issued a press release regarding its earnings for the
fiscal year ended September 30, 2003.
2) On December 11, 2003, the Company filed a Form 8-K announcing
that it made a slide presentation at an investor conference.
The Company also distributed a paper copy of the presentation
to conference attendees. The presentation discussed the
Company's current and historical performance and strategies.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Bancorp, Inc.
-----------------------
(Registrant)
By: \s\ George Strayton
-------------------
George Strayton
President and Chief Executive Officer
(Duly Authorized Representative)
Date: February 12, 2004
By: \s\ Paul A. Maisch
------------------
Paul A. Maisch
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Representative)
Date: February 12, 2004
33