SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 39,619,261
as of May 11, 2004
1
PROVIDENT BANCORP, INC.
QUARTERLY PERIOD ENDED MARCH 31, 2004
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
at March 31, 2004 and September 30, 2003 3-4
Consolidated Statements of Income for the Three Months and
Six Months Ended March 31, 2004 and 2003 5
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2004 and 2003 6-7
Consolidated Statements of Cash Flows
for the Six Months Ended March 31, 2004 and 2003 8-9
Consolidated Statements of Comprehensive Income for the
Three Months and Six Months Ended March 31, 2004 and 2003 10
Notes to Consolidated Financial Statements 11-27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-37
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 37
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 39
Item 3. Defaults upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 5. Other Information 39
Item 6. Exhibits and Reports on Form 8-K 40
Signature 41
Certifications Pursuant to Sarbanes-Oxley Act of 2002 42-46
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 March 31, 2004 September 30, 2003
-------------- ------------------
Cash and due from banks $ 50,523 $ 33,500
Securities (Note 7):
Available for sale, at fair value (amortized cost of
$516,767 at March 31, 2004 and $294,801 at
September 30, 2003) 524,173 300,715
Held to maturity, at amortized cost (fair value of $ 71,544
at March 31, 2004 and $75,628 at September 30, 2003) 69,735 73,544
----------- -----------
Total securities 593,908 374,259
----------- -----------
Loans held for sale 946 2,364
Gross loans (Note 5) 961,717 714,253
Allowance for loan losses (Note 6) (17,093) (11,069)
----------- -----------
Total loans, net 944,624 703,184
----------- -----------
FHLB stock, at cost 6,724 8,220
Accrued interest receivable, net 6,570 4,851
Premises and equipment, net 16,365 11,647
Goodwill (Notes 2 and 3) 65,670 13,540
Core Deposit Intangible 6,900 1,063
Bank owned life insurance 12,985 12,483
Other assets 8,725 9,194
----------- -----------
Total assets $ 1,713,940 $ 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 March 31, 2004 September 30, 2003
-------------- ------------------
Liabilities:
Deposits (Note 8):
Non-interest bearing $ 259,595 $ 163,009
Interest bearing 948,779 706,544
----------- -----------
Total deposits 1,208,374 869,553
Borrowings 134,726 164,757
Mortgage escrow funds 6,993 3,949
Other 15,761 18,189
----------- -----------
Total liabilities 1,365,854 1,056,448
----------- -----------
Stockholders' equity:
Preferred stock (par value $0.01 per share; 10,000,000 shares
authorized; none issued or outstanding at March 31, 2004 and
par value $0.10 per share; 10,000,000 shares authorized; none
issued or outstanding at September 30, 2003) -- --
Common stock (par value $0.01 per share; 75,000,000 shares
authorized; 39,619,261 shares issued and outstanding at
March 31, 2004; par value $0.10 per share; 20,000,000 shares
authorized; 8,280,000 shares issued; 7,946,521 shares outstanding
at September 30, 2003) 396 828
Additional paid-in capital 268,209 38,032
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (1,503,150 shares at March 31, 2004
and 273,789 shares at September 30, 2003, respectively) (11,292) (1,597)
Common stock awards under recognition and retention plan ("RRP") (253) (506)
Treasury stock, at cost (0 shares at March 31, 2004 and
333,479 shares at September 30, 2003, respectively) -- (7,780)
Retained earnings 86,644 85,398
Accumulated other comprehensive income 4,382 3,482
----------- -----------
Total stockholders' equity 348,086 117,857
----------- -----------
Total liabilities and stockholders' equity $ 1,713,940 $ 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 For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2004 2003 2004 2003
---- ---- ---- ----
Interest and dividend income:
Loans $ 13,821 $ 11,129 $ 24,351 $ 22,475
Securities 5,253 3,296 9,018 6,968
Other earning assets 11 14 34 20
------------ ------------ ------------ ------------
Total interest and dividend income 19,085 14,439 33,403 29,463
------------ ------------ ------------ ------------
Interest expense:
Deposits 1,996 1,965 3,553 4,310
Borrowings 1,151 982 2,361 2,026
------------ ------------ ------------ ------------
Total interest expense 3,147 2,947 5,914 6,336
------------ ------------ ------------ ------------
Net interest income 15,938 11,492 27,489 23,127
Provision for loan losses (Note 6) 200 300 350 600
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 15,738 11,192 27,139 22,527
------------ ------------ ------------ ------------
Non-interest income:
Banking fees and service charges 1,806 1,114 3,190 2,203
Gain on sales of securities available for sale 518 427 1,448 1,084
Gains on sales of loans 84 403 170 442
Other 376 423 779 641
------------ ------------ ------------ ------------
Total non-interest income 2,784 2,367 5,587 4,370
------------ ------------ ------------ ------------
Non-interest expense:
Compensation and employee benefits 6,699 5,016 11,650 9,232
Occupancy and office operations 1,663 1,358 2,990 2,490
Advertising and promotion 567 495 1,035 911
Professional fees 406 377 792 725
Data and check processing 765 683 1,509 1,378
Merger integration costs 717 -- 717 --
Amortization of core deposit intangible 703 115 787 242
Establishment of Charitable Foundation 5,000 -- 5,000 --
Other 2,130 1,513 3,740 3,052
------------ ------------ ------------ ------------
Total non-interest expense 18,650 9,557 28,220 18,030
------------ ------------ ------------ ------------
Income (loss) before income tax expense (128) 4,002 4,506 8,867
Income tax (benefit) expense (200) 1,482 1,389 3,306
------------ ------------ ------------ ------------
Net income $ 72 $ 2,520 $ 3,117 $ 5,561
============ ============ ============ ============
Weighted average common shares:(1)
Basic 37,269,062 34,207,019 35,777,054 34,186,015
Diluted 37,912,560 34,728,985 36,391,057 34,696,935
Per common share: (Note 9)(1)
Basic $ 0.00 $ 0.07 $ 0.09 $ 0.16
Diluted 0.00 0.07 0.09 0.16
Dividends declared 0.04 0.03 0.07 0.06
Book value at period end $ 8.79 $ 3.21
See accompanying notes to unaudited consolidated financial statements.
- ----------
(1) Common share information has been adjusted to reflect the stock split of
4.4323 in connection with the second step conversion in January 2004.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2004
(Unaudited)
(In thousands, except share and per share data)
Common
Number of Additional Stock
Shares Common Paid-In Unallocated Awards
Outstanding(1) Stock Capital ESOP Shares Under RRP
-------------- ----- ------- ----------- ---------
Balance at September 30, 2003 7,946,521 $828 $ 38,032 $ (1,597) $ (506)
Net Income
Other comprehensive income
Total comprehensive income
Recapitalization (Note 2) 7,700,331 (672) (6,913)
Common stock offering 19,573,000 196 192,229
Formation of Charitable Foundation 400,000 4 3,996
Purchase of ENB Holding Co., Inc. 3,969,676 40 39,657
Establishment of ESOP Plan (9,987)
Tax benefits:
Contribution of 400,000 shares 115
MHC contribution carryforward 512
Stock option transactions 29,733 9
ESOP shares allocated or committed to
be released for allocation 572 292
Vesting of RRP shares 253
Cash dividends paid
($0.07 per common share)
---------- ----- -------- -------- ------
Balance at March 31, 2004 39,619,261 $ 396 $268,209 $(11,292) $ (253)
========== ===== ======== ======== ======
Total
Treasury Retained Accum Stockholders'
Stock Earnings OCI Equity
----- -------- --- ------
Balance at September 30, 2003 $(7,780) $85,398 $3,482 $117,857
Net Income 3,117 3,117
Other comprehensive income 900 900
--------
Total comprehensive income 4,017
Recapitalization (Note 2) 7,680 95
Common stock offering 192,425
Formation of Charitable Foundation 4,000
Purchase of ENB Holding Co., Inc. 39,697
Establishment of ESOP Plan (9,987)
Tax benefits:
Contribution of 400,000 shares 115
MHC contribution carryforward 512
Stock option transactions 100 (34) 75
ESOP shares allocated or committed to
be released for allocation 864
Vesting of RRP shares 253
Cash dividends paid
($0.07 per common share) (1,837) (1,837)
------- ------- ------ --------
Balance at March 31, 2004 $ 0 $86,644 $4,382 $348,086
======= ======= ====== ========
- ----------
(1) Share information has been adjusted to reflect 4.4323 conversion ratio in
connection with the Company's second step conversion in January 2004. See
accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2003
(Unaudited)
(In thousands, except share and per share data)
Common
Number of Additional Stock
Shares Common Paid-In Unallocated Awards
Outstanding(2) Stock Capital ESOP Shares Under RRP
-------------- ----- ------- ----------- ---------
Balance at September 30, 2002 35,447,372 $ 823 $36,696 $(1,974) $(1,108)
Net Income
Other comprehensive loss
Total comprehensive income
Purchase of treasury stock
(166,211 shares) 166,211
Stock option transactions 53,586
ESOP shares allocated or committed
to be released for allocation
(68,505 shares) 283 189
Vesting of RRP shares 256
Cash dividends paid
($0.06 per common share)
Balance at March 31, 2003 35,344,747 $ 828 $36,979 $(1,785) $ 852
========== ======= ======= ======= =======
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Income Equity
----- -------- ------ ------
Balance at September 30, 2002 $(5,874) $76,727 $5,572 $110,876
Net Income 5,561 5,561
Other comprehensive loss (1,162) (1,162)
--------
Total comprehensive income 4,399
Purchase of treasury stock
(166,211 shares) (1,157) (1,157)
Stock option transactions 177 (134) 43
ESOP shares allocated or committed
to be released for allocation
(68,505 shares) 472
Vesting of RRP shares 256
Cash dividends paid
($0.06 per common share) (1,335) (1,335)
Balance at March 31, 2003 $ 6,854 $80,819 $4,410 $113,545
======= ======= ====== ========
- ----------
(2) Share information has been adjusted to reflect 4.4323 conversion ratio in
connection with the Company's second step conversion in January 2004. See
accompanying notes to unaudited consolidated financial statements.
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended March 31,
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 3,117 $ 5,561
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 350 600
Depreciation and amortization of premises
and equipment 1,065 961
Amortization of core deposit intangible 787 242
Gain on sales of securities available for sale (1,448) (1,084)
Gain on sales of loans held for sale (170) (442)
Gain on sales of fixed assets sold (46) --
Net amortization of premiums and discounts
on securities 1,176 487
ESOP and RRP expense 1,117 728
Originations of loans held for sale (5,264) (13,501)
Proceeds from sales of loans held for sale 6,852 13,775
Deferred income tax expense (benefit) 5 570
Net changes in accrued interest receivable
and payable 293 204
Other adjustments (principally net changes
in other assets and other liabilities) (3,863) (632)
--------- ---------
Net cash provided by
operating activities 3,971 7,469
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (331,617) (81,392)
Held to maturity (4,070) (24,809)
Proceeds from maturities, calls and other
principal payments on securities:
Available for sale 44,942 35,279
Held to maturity 10,908 18,188
Proceeds from sales of securities available for sale 90,892 16,113
Loan originations (151,285) (188,865)
Loan principal payments 123,303 169,556
Sale (purchase) of FHLB stock 1,496 (622)
Purchase of ENB Holding Co. 60,297 --
Purchase of bank owned life insurance -- (12,000)
Purchases of premises and equipment (1,784) (1,234)
Other Adjustments 22 218
--------- ---------
Net cash used in investing activities (156,896) (69,568)
--------- ---------
(continued)
8
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Six Months
Ended March 31,
---------------
2004 2003
---- ----
Cash flows from financing activities:
Net increase in transaction and savings deposits $ 8,857 $ 41,992
Net increase (decrease) in time deposits 2,680 (994)
Receipt of stock subscription funds 192,425 --
Net (decrease)/increase in borrowings (30,031) 16,420
Net increase in mortgage escrow funds 3,044 3,898
Establishment of ESOP plan (9,987) --
Common stock issued for formation of charitable foundation 4,000 --
Tax benefit: contribution of 400,000 shares to charitable
foundation 115 --
Tax benefit: MHC contribution carry-forward 512 --
Recapitalization 95 --
Treasury shares purchased -- (1,157)
Exercises of stock options 75 43
Cash dividends paid (1,837) (1,335)
--------- ---------
Net cash provided by financing activities 169,948 58,867
--------- ---------
Net increase (decrease) in cash and cash equivalents 17,023 (3,232)
Cash and cash equivalents at beginning of period 33,500 35,093
--------- ---------
Cash and cash equivalents at end of period $ 50,523 $ 31,861
========= =========
Supplemental information:
Interest payments 5,620 $ 6,455
Income tax payments 1,235 3,231
Fair value of assets acquired (incl. intangibles) 406,267 --
Fair value of liabilities assumed 329,797 --
Net fair value 76,470 --
Cash portion of ENB Holding Co. purchase transaction 36,773 --
Stock portion of ENB Holding Co. purchase transaction 39,697 --
Total paid for ENB Holding Co. stock 76,470
Transfer of loans to real estate owned 112 99
Net change in unrealized gains recorded on
securities available for sale 1,490 (1,959)
Change in deferred taxes on unrealized gains
on securities available for sale (596) 783
See accompanying notes to unaudited consolidated financial statements.
9
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (Dollars in thousands)
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2004 2003 2004 2003
---- ---- ---- ----
Net income: $ 72 $ 2,520 $ 3,117 $ 5,561
Other comprehensive income (loss):
Net unrealized gains (losses) on securities
available for sale:
Net unrealized holding gains (losses)
arising during the year, net of taxes of
$1,749, $197, $1,179 and $349 2,623 (292) 1,769 (522)
Less reclassification adjustment for
net realized gains included in net income,
net of taxes of $207, $171, $579 and $434 (311) (256) (869) (650)
Net unrealized gain on
derivatives, net of taxes
of $0, $(2), $0 and $(6) -- 4 -- 10
------- ------- ------- -------
Other comprehensive income (loss) 2,312 (544) 900 (1,162)
------- ------- ------- -------
Total comprehensive income $ 2,384 $ 1,976 $ 4,017 $ 4,399
======= ======= ======= =======
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
The consolidated financial statements and other financial information
presented in this document as of March 31, 2004, include the accounts of
Provident Bancorp, Inc., a Delaware corporation (the "Company"), Provident Bank
(the "Bank"), and each subsidiary of Provident Bank (Shawangunk Holding Co.,
Inc., Provest Services Corp., 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
publicly-held company and the parent of Provident Bank. 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 to the customers of Provident Bank. Through March 31,
2004, 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 six months ended
March 31, 2004 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.
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 6), which is a
critical accounting policy.
11
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.
12
Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 72 $ 2,520 $ 3,117 $ 5,561
Add RRP expense included in reported net
income, net of related tax effects 79 86 163 173
Deduct RRP and stock option expense
determined under the fair-value-based
method, net of related tax effects (150) (163) (234) (326)
--------- --------- --------- ---------
Pro forma net income $ 1 $ 2,443 $ 3,046 $ 5,408
========= ========= ========= =========
Earnings per share:
Basic, as reported $ 0.00 $ 0.07 $ 0.09 $ 0.16
Basic, pro forma 0.00 0.07 0.09 0.16
Diluted, as reported 0.00 0.07 0.09 0.16
Diluted, pro forma 0.00 0.07 0.08 0.16
2. Mutual Holding Company Conversion and Acquisition of E.N.B. Holding
Company, Inc.
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC. As a result of the
conversion, the Company became the stock holding company of the Bank. In the
stock offering, shares representing Provident Bancorp, MHC's ownership interest
in Provident Bancorp., Inc., a federal Corporation ("Provident Federal") were
sold to investors. In addition, the Company simultaneously completed its
acquisition of E.N.B. Holding Company, Inc., ("ENB") located in Ellenville, New
York.
The Company sold 19,573,000 shares of common stock at $10.00 per share to
depositors of the 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 Provident Federal as of January 14, 2004
has been converted into 4.4323 new shares of the Company'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 had 39,608,586 issued
and outstanding shares at January 14, 2004.
Financial statements as of March 31, 2004, reflect the effect of the
conversion of existing common shares, the stock offering and the acquisition of
ENB. Goodwill recorded in the ENB acquisition ($52.1 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
13
asset ($6.0 million at March 31, 2004), is recognized apart from goodwill and
amortized to expense over its estimated useful life and evaluated for
impairment.
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 the 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 statements 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, ($901,000 and $1.1 million at March 31, 2004 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 the Company 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 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). 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
30, 2003.
14
5. Loans
Major classifications of loans, excluding loans held for sale, are
summarized below:
March 31, 2004 September 30, 2003
-------------- ------------------
Real estate - residential mortgage $389,154 $380,776
Real estate - commercial mortgage 311,284 188,360
Real estate - construction 41,686 10,323
Commercial and industrial 101,014 54,174
Consumer loans 118,579 80,620
-------- --------
Total $961,717 $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 Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning of period $ 11,249 $ 10,687 $ 11,069 $ 10,383
Allowance acquired through acquisition 5,750 -- 5,750 --
Provision for loan losses 200 300 350 600
Charge-offs (136) (117) (148) (131)
Recoveries 30 31 72 49
-------- -------- -------- --------
Balance at end of period $ 17,093 $ 10,901 $ 17,093 $ 10,901
======== ======== ======== ========
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).
March 31, 2004 September 30, 2003
-------------- ------------------
Non-accrual loans:
One- to four-family residential mortgage loans $ 950 $ 951
Commercial real estate, commercial business
and construction loans 3,004 3,632
Consumer loans 184 114
Total non-performing loans 4,138 4,697
Real estate owned:
One- to four-family residential 112 --
------ ------
Total non-performing assets $4,250 $4,697
====== ======
Ratios:
Non-performing loans to total loans, net 0.44% 0.66%
Non-performing assets to total assets 0.25% 0.40%
Allowance for loan losses to total
non-performing loans 413.07% 235.66%
Allowance for loan losses to total loans 1.78% 1.55%
16
7. Securities
The following is a summary of securities available for sale ("AFS") at March 31,
2004 and September 30, 2003:
Available for Sale Portfolio
March 31, 2004
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=======================================================
Mortgage-backed ("MBS") and SBA Securities
Mortgage-backed securities $ 285,050 $ 4,491 $ (432) $ 289,109
Collateralized mortgage obligations 14,699 50 (27) 14,722
SBAs and other 184 1 -- 185
--------- --------- --------- ---------
Total mortgage-backed and SBA securities 299,933 4,541 (459) 304,016
--------- --------- --------- ---------
Investment Securities
U.S. Government and federal agency
securities 195,277 3,245 (62) 198,460
State and municipal securities 20,552 166 (164) 20,554
Equity securities 1,005 302 (164) 1,143
--------- --------- --------- ---------
Total investment securities 216,834 3,713 (390) 220,157
--------- --------- --------- ---------
Total available for sale $ 516,767 $ 8,254 $ (849) $ 524,173
========= ========= ========= =========
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 ("HTM") at March 31,
2004 and September 30, 2003:
Held to Maturity Portfolio
March 31, 2004
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=======================================================
Mortgage-backed Securities
Mortgage-backed securities $ 42,363 $ 1,148 $ (154) $ 43,357
Collateralized mortgage obligations 3,537 51 -- 3,588
--------- --------- --------- ---------
Total mortgage-backed securities 45,900 1,199 (154) 46,945
--------- --------- --------- ---------
Investment Securities
State and municipal securities 23,476 1,071 (271) 24,276
Other investments 359 -- (36) 323
--------- --------- --------- ---------
Total investment securities $ 23,835 $ 1,071 $ (307) $ 24,599
--------- --------- --------- ---------
Total held to maturity $ 69,735 $ 2,270 $ (461) $ 71,544
========= ========= ========= =========
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 March 31, 2004 and September 30, 2003, the unrealized net gain on
securities available for sale (net of tax of $3,024 and $2,432, respectively)
that was included in accumulated other comprehensive income, a separate
component of stockholders' equity, was $4,382 and $3,482 respectively. Gross
realized gains were $518 and $427 respectively, for the three months ended March
31, 2004 and 2003, and $1,448 and $1,084, respectively, for the six months ended
March 31, 2004 and 2003.
Securities with a carrying amount of $136,101 and $69,452 were pledged as
collateral for municipal deposits, borrowings and other purposes at March 31,
2004 and September 30, 2003, respectively.
8. Deposits
Major classifications of deposits are summarized below:
March 31, 2004 September 30, 2003
-------------- ------------------
Demand deposits:
Retail $ 123,009 $ 90,471
Commercial and municipal 136,586 72,538
NOW 80,710 62,367
---------- ----------
Total transaction accounts 340,305 225,376
Money market 156,617 128,222
Savings 356,894 279,717
Time under $100,000 253,742 187,623
Time over $100,000 100,816 48,615
---------- ----------
Total $1,208,374 $ 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 for all
periods through January 14, 2004, 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 stock 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.
Prior period share information has been adjusted to reflect the 4.4323
exchange ratio in connection with the Company's stock offering completed January
14, 2004.
19
Basic earnings per common share is computed as follows (dollars in
thousands, except share data):
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2004 2003 2004 2003
---- ---- ---- ----
Weighted average common shares
outstanding (basic) 37,269,062 34,207,019 35,777,054 34,186,015
----------- ----------- ----------- -----------
Net income $ 72 $ 2,520 $ 3,117 $ 5,561
Basic earnings per common share $ 0.00 $ 0.07 $ 0.09 $ 0.16
Diluted earnings per common share is computed as follows (dollars in
thousands, except share data):
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted average common shares
outstanding 37,269,062 34,207,019 35,777,054 34,186,015
Effect of common stock equivalents 643,498 521,966 614,003 510,920
----------- ----------- ----------- -----------
Total diluted shares 37,912,560 34,728,985 36,391,057 34,696,935
Net income $ 72 $ 2,520 $ 3,117 $ 5,561
Diluted earnings per common share $ 0.00 $ 0.07 $ 0.09 $ 0.16
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 March 31, 2004, the Company had $12.0 million in outstanding letters
of credit, of which $5.5 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
and non-performing loans is considered a critical accounting policy by
management 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 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 the Bank, to serve the banking needs of municipalities
throughout our service area, primarily Rockland and Orange Counties. The 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 deposit of funds that may not be deposited with the Bank.
21
As of January 14, 2004, the Company completed its stock offering and
acquisition of ENB in connection with Provident Bancorp, MHC's mutual-to-stock
conversion. The acquisition was accounted for as a purchase and, accordingly,
amounts attributable to ENB have been included in the Company's consolidated
financial statements from the date of acquisition. See Note 2 to the
accompanying consolidated financial statements included in Item 1 of this
quarterly report.
Comparison of Financial Condition at March 31, 2004 and September 30, 2003
Total assets as of March 31, 2004 were $1.7 billion, an increase of $540
million, or 46.0% over assets of $1.2 billion at September 30, 2003, and an
increase of $623 million, or $57.1%, over assets of $1.1 billion at March 31,
2003. The increases were due primarily to the January 2004 acquisition of ENB,
whose assets totaled $349.7 million on the merger date, and proceeds from the
offering in the second-step conversion of $192.4 million, net of related costs.
Net loans as of March 31, 2004 were $944.6 million, an increase of $241.4
million, or 34.3%, over net loan balances of $703.2 million at September 30,
2003, and an increase of $265.1 million, or 39.0%, over balances at March 31,
2003. Loans acquired from ENB totaled $219.2 million, while the allowance for
loan losses acquired in connection with ENB was $5.7 million, or 2.6% of
outstanding loan balances, net. Post-acquisition, residential loans increased by
$8.4 million, or 2.2% over balances at September 30, 2003. Commercial loans
increased by $201.1 million, or 79.5%, during the six month period, while
consumer loans increased by $38.0 million, or 47.1%, both primarily attributable
to the ENB acquisition. Asset quality continues to be strong. At March 31, 2004,
non-performing assets were $4.3 million, or 0.25% of total assets, compared to
$4.7 million at September 30, 2003 and $5.8 million at March 31, 2003.
Total securities increased by $219.6 million, or 58.7%, to $593.9 million
at March 31, 2004 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 $152.2 million, or 111.1%, and in U.S. Government
and Federal Agency Securities, which increased by $65.1 million, or 48.8%.
Total deposits as of March 31, 2004 were $1.2 billion, up $338.8 million,
or 39.0%, from September 30, 2003, and $367.8 million, or 43.8%, from March 31,
2003. Deposits acquired from ENB totaled $326.8 million. The remaining increase
from September 30, 2003 to March 31, 2004 was $12.0 million, after ENB deposits
acquired. However, charges to deposit accounts for the purchase of shares of
common stock in the second step offering totaled $21.1 million, thereby
resulting in a true increase in deposits of $33.1 million, or 3.8%. As of March
31, 2004 retail and commercial transaction accounts were 28.2% of deposits
compared to 25.9% at September 30, 2003 and 24.7% at March 31, 2003.
Borrowings from the Federal Home Loan Bank of New York (the "FHLB")
decreased by $30.1 million during the six-month period to $134.7 million at
March 31, 2004 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 $230.2 million to $348.1 million at
March 31, 2004 compared to $117.9 million at September 30, 2003. The Company
completed its second-step stock conversion in January 2004, raising $192.4
million in new capital, net of related costs. In addition, $39.7 million and
$4.0 million, respectively, in new shares of common stock was issued for the
purchase of ENB and for the formation of the charitable foundation. Net income
of $3.1 million for the six-month period also increased capital. Partially
offsetting the increases were the payments of cash dividends totaling $1.8
million and the establishment of a new ESOP plan for $10.0 million.
During the first six 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 March 31, 2004. At March 31, 2004, there were no shares of common
stock held by the Company in treasury. The authorization to repurchase shares of
the Company's common stock expired in connection with its second-step conversion
on January 14, 2004, pursuant to applicable Office of Thrift Supervision
regulations that restrict stock repurchases for one year following the
completion of a mutual stock conversion.
Supplemental Reporting of Non-GAAP Results of Operations. The Company is
providing supplemental reporting of its results on a "net operating cash" or
"tangible" basis, from which the Company excludes the after tax charge for
establishing the charitable foundation, the after-tax effect of amortization of
core deposit intangible assets and expenses associated with merging acquired
operations into the Company. Although "net operating cash income" as defined by
the Company is not a GAAP measure, management believes that this information
helps investors understand the effect of acquisition activity and the
establishment of the charitable foundation in reported results. The after-tax
effect of the establishment of the charitable foundation was $3,000 ($0.08 per
share). Merger integration expenses were $430,000 after tax for both the three
and six months ended March 31, 2004. The after-tax effect of the amortization of
core deposit intangible assets was $422,000 ($0.01 per diluted share) in the
recent quarter, compared with $69,000 (less than $0.01 per diluted share) in the
year-earlier quarter. Similar amortization charges for the six months ended
March 31, 2004 and 2003 were $472,000, after tax ($0.01 per diluted share) and
$145,000 after tax (less than $0.01 per diluted share), respectively.
Diluted net operating cash earnings per share, which exclude the impact of
the establishment of the charitable foundation, amortization of core deposit
intangible assets and merger-related expenses, were $0.10 for the quarter ended
March 31, 2004, compared with $0.07 in the second quarter of 2003. Net operating
income for the recent quarter was $3.9 million, an increase of 51.6% from $2.6
million in the year-earlier quarter. Expressed as an annualized rate of return
on average assets and average stockholders' equity, net operating income was
1.04% and 5.1% respectively, in the quarter ended March 31, 2004, compared with
0.98% and 9.09% in the quarter ended March 31, 2003.
23
Reconciliation of GAAP and Non-GAAP results of operations: A
reconciliation of diluted earnings per share and net income with diluted net
operating cash earnings per share and net operating income follows (in
thousands, except per share amounts):
Three months ended March 31, Six months ended March 31,
---------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Diluted cash earnings per share $ 0.00 $ 0.07 $ 0.09 $ 0.16
Charge for establishment of
charitable foundation (1) 0.08 0.08
Merger integration expenses (1) 0.01 0.01
Amortization of core deposit
intangibles (1) 0.01 0.01
------ ------
Diluted net cash operating earnings $ 0.10 $ 0.07 $ 0.19 $ 0.16
====== ====== ====== ======
Net Income $ 72 $2,520 $3,117 $5,561
Charge for establishment of
charitable foundation (1) 3,000 3,000
Merger integration expenses (1) 430 430
Amortization of core deposit
intangibles (1) 422 69 472 145
------ ------ ------ ------
Net operating cash income $3,924 $2,589 $7,019 $5,706
====== ====== ====== ======
(1) After related tax effect at 40% marginal rate
Comparison of Operating Results for the Three Months Ended
March 31, 2004 and March 31, 2003
Net Income. For the three months ended March 31, 2004 net interest income
after provision for loan losses was $15.7 million, an increase of $4.5 million,
or 40.6%, compared to $11.2 million for the same period in fiscal 2003.
Non-interest income was $2.8 million for the three months ended March 31, 2004
compared to $2.4 million for the same period last year, an increase of $417,000,
or 17.6%, including an increase in gains on sale of securities of $91,000.
Non-interest expenses increased $9.1 million (including $5.0 million for the
establishment of the charitable foundation), or 95.1%, to $18.7 million for the
three months ended March 31, 2004 compared to $9.6 million for the same
prior-year period. Net income after taxes was $72,000 for the three months ended
March 31, 2004 and $2.4 million for the same period of 2003.
The relevant performance measures follow:
Three Months Ended
March 31,
2004 2003
---- ----
Per common share:
Basic earnings $0.00 $0.07
Diluted earnings 0.00 0.07
Dividends declared 0.04 0.03
Return on average (annualized):
Assets 0.02% 0.97%
Equity 0.10% 9.09%
24
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 March 31,
----------------------------
2004 2003
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and commercial mortgage
loans (1) $ 355,297 $ 6,000 6.79% $ 216,172 $ 3,788 7.11%
Consumer loans (1) 116,433 1,457 5.03 80,896 1,038 5.20
Residential mortgage loans (1) 421,165 6,364 6.08 386,727 6,303 6.61
---------- ------- ---------- -------
Total loans 892,895 13,821 6.23 683,795 11,129 6.60
---------- ------- ---------- -------
AFS investments and MBS 493,113 4,337 3.54 208,780 2,127 4.13
HTM investments and MBS 72,619 885 4.90 77,094 1,169 6.15
Other earning assets 10,949 42 1.57 3,932 14 1.44
---------- ------- ---------- -------
Total securities and other earning assets 576,681 5,264 3.67 289,806 3,310 4.63
---------- ------- ---------- -------
Total interest-earning assets 1,469,576 19,085 5.22 973,601 14,439 6.01
Non-interest-earning assets: 178,462 82,153
---------- ----------
Total assets $1,648,038 $1,055,754
========== ==========
Interest bearing liabilities:
Savings, clubs and escrow $ 384,097 $ 425 0.45% $ 266,936 $ 369 0.56%
Money market accounts 143,320 200 0.56 116,217 243 0.85
NOW checking 76,496 50 0.26 86,381 55 0.26
Certificate accounts 321,675 1,322 1.65 242,324 1,298 2.17
---------- ------- ---------- -------
Total interest-bearing deposits 925,588 1,997 0.87 711,858 1,965 1.12
Borrowings 159,020 1,150 2.91 105,039 982 3.79
---------- ------- ---------- -------
Total interest-bearing liabilities 1,084,608 3,147 1.17 816,897 2,947 1.46
------- ------- ------- ----
Non-interest-bearing liabilities: 252,572 126,451
---------- ----------
Total liabilities 1,337,180 943,348
Equity 310,858 112,406
---------- ----------
Total liabilities and equity $1,648,038 $1,055,754
========== ==========
Net interest income $15,938 $11,492
======= =======
Net interest rate spread 4.06% 4.55%
==== ====
Net earning assets $ 384,968 $ 156,704
========== ==========
Net interest margin 4.36% 4.79%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 135.49% 119.18%
======= =======
(1) Includes non-accrual loans.
25
The table below details the changes in interest income and interest
expense for the periods indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Three Months Ended March 31,
2004 vs. 2003
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Consumer loans $ 2,391 $ (179) $ 2,212
Commercial and commercial
mortgage loans 454 (35) 419
Residential mortgage loans 571 (510) 61
Available for sale securities 2,557 (347) 2,210
Held to maturity securities (63) (221) (284)
Other earning assets 27 1 28
------- ------- -------
Total interest income 5,937 (1,291) 4,646
------- ------- -------
Interest-bearing liabilities
Savings 140 (84) 56
Money market 51 (94) (43)
NOW checking (5) 0 (5)
Certificates of deposit 377 (353) 24
Borrowings 434 (266) 168
------- ------- -------
Total interest expense 997 (797) 200
------- ------- -------
Net interest income $ 4,940 $ (494) $ 4,446
======= ======= =======
- --------------------------------------------------------------------------------
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
26
Net Interest Income. Net interest income after provision for loan losses
for the three months ended March 31, 2004 was $15.7 million, compared to $11.2
million for the three months ended March 31, 2003, an increase of $4.5 million,
or 41%. The increase in net interest income was largely due to a $496.0 million
increase in average earning assets to $1.5 billion during the quarter ended
March 31, 2004, as compared to $973.6 million for the same quarter in the prior
year, due primarily to the ENB acquisition and net proceeds from the second-step
offering. The increase in average earning assets was partially offset by a
decline in average yield of 79 basis points from 6.01% to 5.22%. A decrease in
the average cost of interest bearing liabilities of 29 basis points still
resulted in a $201,000 increase in interest expense for the quarter compared to
the same quarter in 2003, as average interest-bearing liabilities increased by
$268 million. Net interest margin declined by 43 basis points to 4.36%, while
net interest spread declined by 49 basis points to 4.06%.
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 $200,000 and $300,000 in loan loss provisions
during the three months ended March 31, 2004 and 2003, 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 months ended March
31, 2004 was $2.8 million compared to $2.4 million for the three months ended
March 31, 2003, an increase of $417,000 or 17.6%. Realized gains on securities
available for sale were $518,000 for the current three-month period, compared to
$427,000 for the same period last year. During the three-month period ending
March 31, 2004, the Company also recorded gains on sales of loans totaling
$84,000, compared to $403,000 for the same period last year. Excluding the
effects of gains on sales of securities and loans, the increase was $645,000 or
42.0%. Banking fees and service charges increased by $692,000 or 62.1%, of which
$403,000 was generated from the acquired ENB branches. The remaining increase of
$289,000 was due primarily to volume-driven increases in overdraft,
non-sufficient funds, and ATM and debit card fees. Other non-interest income
decreased by $47,000, or 11.1%, due primarily to lower rates on the Company's
bank owned life insurance investments.
Non-Interest Expense. Excluding the charitable foundation contribution of
$5 million, pre-tax, non-interest expense for the three months ended March 31,
2004 increased by $4.1 million, or 42.8%, to $13.7 million, compared to $9.6
million for the three months ended March 31, 2003. The acquisition of ENB in
January 2004, played a major role in the increases in most categories,
contributing to increases in compensation and employee benefits of $937,000.
Excluding the acquisition-related salaries and benefits, the increase in
compensation and benefits was $746,000, or 14.9%. The increase is primarily due
to $193,000, or 5.5%, in annual salary increases and staff additions and a
$273,000 increase in stock-based compensation plans, as the Company's
stockholders realized an increase in the price of shares of the Company's common
stock during the current period. Occupancy and office operations increased by
$305,000, or 22.5%, for the three months ended March 31, 2004, almost all of
which was attributable to the acquired Ellenville properties. Amortization of
core deposit intangible increased by $588,000 as a result of the ENB deposits
acquired. Other expenses increased by $617,000 or 40.8% due primarily to
increases of $126,000, $134,000, $107,000 and $67,000, all respectively in
director's stock-based compensation plans, office supplies, correspondent bank
expense and postage. Further, merger integration expenses were $717,000.
27
Income Taxes. Income tax benefit was $ 200,000 for the three months ended
March 31, 2004, compared to $1.5 million expense for the same period in 2003.
The effective tax rates exclusive of the Charitable Foundation contribution were
36.9% and 37.0%, respectively.
Comparison of Operating Results for the Six Months Ended
March 31, 2004 and March 31, 2003
Net Income. For the six months ended March 31, 2004 net interest income
after provision for loan losses was $27.1 million, up $4.6 million, or 20.5%,
compared to $22.5 million for the same period of 2003. Non-interest income was
$5.6 million for the six months ended March 31, 2004 compared to $4.4 million
for the same period last year, an increase of $1.2 million, or 27.8%.
Non-interest expenses increased $10.2 million, or 56.5% (including the $5
million contribution to the Charitable Foundation), to $28.2 million for the six
months ended March 31, 2004 compared to $18 million for the same prior-year
period. Net income was $3.1 million for the six months ended March 31, 2004
compared to $5.6 million for the same period last year.
The relevant performance measures follow:
Six Months Ended
March 31,
2004 2003
---- ----
Per common share:
Basic earnings $0.09 $0.16
Diluted earnings 0.09 0.16
Dividends declared 0.07 0.06
Return on average (annualized):
Assets 0.44% 1.06%
Equity 2.92% 9.96%
28
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).
Six Months Ended March 31,
--------------------------
2004 2003
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and commercial mortgage
loans (1) $ 310,471 $ 10,103 6.51% $ 214,590 $ 7,627 7.13%
Consumer loans (1) 98,265 2,335 4.75 82,424 2,168 5.28
Residential mortgage loans (1) 397,523 11,913 5.99 380,507 12,680 6.68
---------- -------- ---------- --------
Total loans 806,259 24,351 6.04 677,521 22,475 6.65
---------- -------- ---------- --------
AFS investments and MBS 403,387 7,481 3.71 210,310 4,651 4.44
HTM investments and MBS 71,257 1,506 4.23 86,039 2,317 5.40
Other earning assets 11,615 65 1.12 2,356 20 1.70
---------- -------- ---------- --------
Total securities and other earning assets 486,259 9,052 3.72 298,705 6,988 4.69
---------- -------- ---------- --------
Total interest-earning assets 1,292,518 33,403 5.17 976,226 29,463 6.05
Non-interest-earning assets: 121,159 71,469
---------- ----------
Total assets $1,413,677 $1,047,695
========== ==========
Interest bearing liabilities:
Savings, clubs and escrow $ 318,634 739 0.46% $ 262,612 878 0.67%
Money market accounts 139,112 377 0.54 116,627 541 0.93
NOW checking 68,852 81 0.24 83,250 117 0.28
Certificate accounts 274,764 2,356 1.71 244,343 2,774 2.28
---------- -------- ---------- --------
Total interest-bearing deposits 801,362 3,553 0.89 706,832 4,310 1.22
Borrowings 149,826 2,361 3.15 104,055 2,026 3.90
---------- -------- ---------- --------
Total interest-bearing liabilities 951,188 5,914 1.24 810,887 6,336 1.57
Non-interest-bearing liabilities: 248,772 124,819
---------- ----------
Total liabilities 1,199,960 935,706
Equity 213,717 111,989
----------
Total liabilities and equity $1,413,677 $1,047,695
========== ==========
Net interest income $ 27,489 $ 23,127
======== ========
Net interest rate spread 3.93% 4.48%
==== ====
Net earning assets $ 341,330 $ 165,339
========== ==========
Net interest margin 4.25% 4.75%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 135.88% 120.39%
======== ========
- --------------------------------------------------------------------------------
(1) Includes non-accrual loans.
29
The table below details the changes in interest income and interest
expense for the periods indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Six Months Ended March 31,
2004 vs. 2003
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Consumer loans $ 2,630 $ (154) $ 2,476
Commercial and commercial
mortgage loans 253 (86) 167
Residential mortgage loans 165 (932) (767)
Available for sale securities 3,051 (221) 2,830
Held to maturity securities (359) (452) (811)
Other earning assets 47 (2) 45
------- ------- -------
Total interest income 5,787 (1,847) 3,940
------- ------- -------
Interest-bearing liabilities
Savings 56 (195) (139)
Money market 20 (184) (164)
NOW checking (20) (16) (36)
Certificates of deposit 92 (510) (418)
Borrowings 504 (169) 335
------- ------- -------
Total interest expense 652 (1,074) (422)
------- ------- -------
Net interest income $ 5,135 $ (773) $ 4,362
======= ======= =======
- --------------------------------------------------------------------------------
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
30
Net Interest Income. Net interest income after provision for loan losses
increased by $4.6 million, or 20.5%, to $27.1 million for the six months ended
March 31, 2004 from $22.5 million for the same period in 2003. The increase in
interest income reflects an increase in average earning assets of $316.3 million
to $1.3 billion, offset by a decline in yield of 88 basis points to 5.17%. The
cost of interest bearing liabilities declined by $422,000 as the average rate
paid on average interest bearing funds decreased 33 basis points to 1.24%, even
though average balances increased by $140.3 million to $951.2 million. Net
interest margin decreased from 4.75% to 4.25% and net interest spread declined
from 4.48% 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 $350,000 and $600,000 in loan loss provisions
during the six months ended March 31, 2004 and 2003, 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 six-month period ended
March 31, 2004 was $5.6 million, an increase of $1.2 million, or 28%, compared
to $4.4 million for the same six-month period last year. Realized gains on
securities available for sale and gains on sales of loans were $1.4 million and
$170,000, respectively, for the current period, generating a combined increase
of $92,000 over the securities and loan sales gains of $1.5 million for the same
period last year. Banking fees and service charges increased to $3.2 million for
the current six-month period, an increase of $987,000, or 44.8%, over the same
period last year. The increase is primarily attributable to an increase in
service fees of $403,000 resulting from the acquired branches, coupled with
volume-related increases in service fees on new and existing accounts at the
Company's existing branches. Other non-interest income increased by $138,000, or
21.5%, to $779,000 for the six-month period ended March 31, 2004, from $641,000
for the same period last year. The increase is primarily due to $292,000 in
income from the bank owned life insurance ("BOLI") for the current six-month
period compared to $161,000 for the same period last year, as the BOLI program
was established in December 2002.
Non-Interest Expense. Excluding the charitable foundation contribution of
$5 million, non-interest expense increased to $23.2 million for the six-month
period ended March 31, 2004, an increase of $5.2 million, or 28.9%, compared to
$18.0 million for the same six-month period last year. Increases in compensation
and benefits directly attributable to the acquisition of ENB were $937,000 and
in occupancy and office operations were $299,000. Compensation and benefits not
related to the acquisition increased by $1.5 million, of which $393,000 was
attributable to the increased cost of stock-based compensation plans. Additional
increases in non-interest expense categories for the current year to date period
are increased advertising costs of $124,000, or 13.6%, and a volume-related
increase of $131,000, or 9.5%, in data and check processing costs. Amortization
of intangible assets increased by $545,000 due to the addition of the ENB core
deposit intangible. Other non-interest expenses increased by $688,000, or 22.5%
primarily due to increases in office supplies ($196,000), directors' stock-based
compensation plans ($147,000), postage ($82,000) and correspondent bank expense
($81,000). Merger integration costs were $717,000.
Income Taxes. Income tax expense was $1.4 million for the six months ended
March 31, 2004 compared to $3.3 million for the same period in 2003. Excluding
the impact of the charitable foundation contribution, the effective tax rates
were 35.7% and 37.3%, respectively.
31
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the six-months
ended March 31, 2004 and March 31, 2003, loan originations, excluding loans
originated for sale, totaled $151.3 million and $188.9 million, respectively,
and purchases of securities totaled $335.7 million and $106.2 million,
respectively. For the six-month periods ended March 31, 2004 and 2003, 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 $82.2 million at March 31, 2004. 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, excluding the charitable foundation
contribution, 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.
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. Excluding the acquisition of ENB,
the net increase in total deposits for the six months ended March 31, 2004 was
$12.0 million, compared to $41.0 million for the six months ended March 31,
2003.
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC. As a result of the
conversion, the Company became the stock holding company of the Bank. In the
stock offering, shares representing Provident Bancorp, MHC's ownership interest
in Provident Federal were sold to investors. In addition, the Company
simultaneously completed its acquisition of E.N.B. Holding Company, Inc.,
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
32
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 March 31, 2004. The Company has the
ability to borrow an additional $300.6 million under its credit facilities with
the Federal Home Loan Bank of New York.
At March 31, 2004, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital (leverage) level of $194.4 million, or 11.9%
of adjusted assets (which is above the required level of $65.3 million, or 4.0%)
and a total risk-based capital level of $207.3 million, or 20.2% of
risk-weighted assets (which is above the required level of $82.0 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 and the January 2004 ENB acquisition
are deducted from capital and from total adjusted assets for purposes of
regulatory capital measures. At March 31, 2004, the Bank exceeded all capital
requirements for well-capitalized classification. These capital requirements,
which are applicable to the Bank only, do not consider additional capital
retained at the holding company level.
The following table sets forth the Bank's regulatory capital position at
March 31, 2004 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)
March 31, 2004
Tangible capital $194,419 11.9% $ 24,486 1.5% $ -- --%
Tier 1 (core) capital 194,419 11.9 65,297 4.0 81,621 5.0
Risk-based capital:
Tier 1 194,419 19.0 61,530 6.0
Total 207,290 20.2 82,040 8.0 102,549 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
33
Asset/Liability Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities and capital resources. The Company's
ALCO Committee of the Board monitors, and the Bank, through its Management ALCO
Committee, controls the rate sensitivity of the balance sheet while seeking to
maintain an appropriate level of net interest income contribution to the
operations of the Company.
The Company's net interest income is affected by fluctuations in market
interest rates as a result of timing differences in the repricing of its assets
and liabilities. These repricing differences are quantified in specific time
intervals and are referred to as interest rate sensitivity gaps. The Company
manages the interest rate risk of current and future earnings to a level that it
considers consistent with its mix of business and seeks to limit such risk
exposure to appropriate percentages of both earnings and the imputed value of
stockholders' equity. The objective in managing interest rate risk is to support
the achievement of business strategies, while controlling earnings variability
and seeking to provide appropriate liquidity. Further, the historical level of
transaction accounts (greater than 15% of total assets) serves to mitigate the
effects of increases in interest rates and reduce the average cost of total
liabilities.
The following chart (dollars in thousands) provides a quantification of
the Company's interest rate sensitivity gap as of March 31, 2004, based upon the
known repricing dates of certain assets, at amortized cost, and liabilities and
the assumed repricing dates of others. As shown in the following chart, at March
31, 2004, assuming no management action, the Company's principal interest rate
risk is to a falling rate environment, and particularly within a one-year time
frame. That is, net interest revenue would be expected to be adversely affected
by a decrease in interest rates below the rates embedded in the current yield
curve, principally due to the higher level of assets ($719.0 million) that would
reprice relative to similarly categorized liabilities ($643.2 million) in that
time frame.
34
3 months 4 months to Total within One to Over Five
Maturity Repricing Date (1) or less One Year One Year Five Years Years TOTAL
---------- ----------- ------------ ---------- ---------- ----------
Securities $ 39,925 $ 87,685 $ 127,610 $ 293,310 $ 172,988 $ 593,908
Fixed Rate Loans (3) 118,684 200,276 318,960 216,219 71,847 607,026
Variable Rate Loans (2), (3) 206,275 66,181 272,456 46,271 19,817 338,544
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Earnings Assets (1) $ 364,884 $ 354,142 $ 719,026 $ 555,800 $ 264,652 $1,539,478
========== ========== ========== ========== ========== ==========
Total Deposits (4),(5) $ 208,625 $ 372,514 $ 581,139 $ 372,904 $ 254,331 $1,208,374
Borrowing (6) 53,181 1,937 55,118 38,383 41,225 134,726
Other 918 6,075 6,993 -- -- 6,993
---------- ---------- ---------- ---------- ---------- ----------
Total Repricable Liabilities $ 262,725 $ 380,526 $ 643,250 $ 411,287 $ 295,556 $1,350,093
========== ========== ========== ========== ========== ==========
Period Gap 102,159 (26,384) 75,776 144,513 (30,904) 189,385
Percent of Total Assets 5.96% -1.54% 4.42% 8.43% -1.80% 11.05%
Cumulative Gap 102,159 75,775 75,776 220,289 189,385 189,385
Percent of Total Assets (cumulative) 5.96% 4.42% 4.42% 12.85% 11.05%
- ----------
(1) Interest rate sensitivity gaps are defined as the fixed rate positions
(assets less liabilities) for a given time period. The gaps measure the
time weighted dollar equivalent volume of positions fixed for a particular
period. The gap positions reflect a repricing date at which date funds are
assumed to "mature" and reprice to a current market rate for the asset or
liability. The table does not include loans on nonaccrual status as of
March 31, 2004.
(2) Prime-priced loans are considered as 1 to 3 month assets.
(3) Variable rate balances are reported on their repricing formulas. Fixed
rate balances are reported based on their scheduled contractual maturity
dates, except for certain investment securities and loans secured by 1-4
family residential properties that are based on anticipated cash flow.
(4) Noninterest bearing deposit liabilities were approximately $246 million at
March 31, 2004.
(5) Time Deposits totaling $350.0 million are classified by contractual
maturity or repricing frequency as of March 31, 2004.
(6) Borrowings of $134.7 million as of March 31, 2004 are classified by
contractual maturity or repricing frequency.
35
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.
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.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
requires that an issuer classify financial instruments that are considered a
liability (or an asset in some circumstances) when that financial instrument
embodies an obligation of the issuer.
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. SFAS No. 150 had no impact
on the Company's consolidated statement of financial condition or results of
operations upon implementation during the third quarter of 2003. In November
2003, the FASB also issued a staff position that indefinitely deferred the
effective date of SFAS No. 150 for certain mandatorily redeemable
non-controlling interests. The Company currently believes that the deferral of
the effective date of SFAS No. 150 for certain mandatorily redeemable
non-controlling interests will not have any impact on its consolidated statement
of financial condition or results of operations when implemented.
The issuance of SFAS No. 150 and FIN 46 has also resulted in the Federal
Reserve Board announcing potential future reconsideration of trust preferred
securities as elements of regulatory capital. The Company currently has no
issuances of trust preferred securities.
In March 2004, the FASB published an Exposure Draft, "Share-Based Payment,
an Amendment of FASB Statements No. 123 and 95." The Exposure Draft proposes
changes in accounting that would
36
replace existing requirements under SFAS 123 and APB Opinion NO 25, "Accounting
for Stock Issued to Employees." Under the proposal, all forms of share-based
payments to employees, including employee stock options, would be treated the
same as other forms of compensation by recognizing the related cost in the
income statement. The expense of the award would generally be measured at fair
value at the grant date. Current accounting guidance requires that the expense
relating to so-called fixed plan employee stock options only be disclosed in the
footnotes to the 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. The Bank's interest rate profile has changed since September 30,
2003 as a result of the $192.4 million in new capital and the acquisition of
ENB. As a result of these events, the Bank has become more asset sensitive,
which indicates that more of the Bank's assets will now reprice quicker than its
liabilities and that net interest income should increase if rates increase
gradually. However, if rates increase rapidly as a result of an improving
economy, the Bank may have to increase the rates paid on deposits and borrowed
funds quicker than loans and investments reprice, resulting in a negative impact
on interest spreads and net interest income. 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 level the Company's net interest
margin could also be negatively affected, as competitive pressures could keep
the Bank from reducing rates much lower on its deposits and prepayments and
curtailments on assets may continue. Such movements may cause a decrease in the
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, the Company completed its
stock offering and acquisition of ENB. The Company received $192.4 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.
Quantitative and qualitative disclosure about market risk is presented at
September 30, 2003 in Item 7A in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on December 29, 2003. The following
is an update of the discussion provided therein.
General. The Company's largest component of market risk continues to be
interest rate risk. The Company is not subject to foreign currency exchange or
commodity price risk. At March 31, 2004, neither the Company nor the Bank owned
any trading assets, nor did they utilize hedging transactions such as interest
rate swaps and caps.
GAP Analysis: The one-year and five-year cumulative interest sensitivity
gap as a percentage of total assets have changed from (17%) and 10% at September
30, 2003, respectively, to 4% and 13% at March 31, 2004, respectively.
Investments, loans and fixed rate time deposits utilized contractual repricing
dates in this analysis. Non-maturity deposits (demand, money market and savings)
have been decayed utilizing national norms.
Interest Rate Risk Compliance: The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at September 30, 2003. There have been no changes in the board
approved limits of acceptable variance in net interest income
37
and net portfolio value change at March 31, 2004 compared to September 30, 2003,
and the impact of possible changes within the Company's models continue to fall
within all board approved limits for potential interest rate volatility.
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.
38
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, Use of Proceeds and Issuer Purchases of Equity
Securities
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
39
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 March 31, 2004:
1) On March 19, 2004, the Company filed a Form 8-K/A announcing
that it completed its acquisition of ENB and submitting
related proforma financial information.
2) On March 16, 2004, the Company filed a Form 8-K announcing
that it issued a press release announcing it has entered into
a definitive merger agreement with Warwick Community Bancorp,
Inc. ("WCBI") pursuant to which the Company will acquire WCBI
and its banking subsidiaries. In addition the Company filed an
investor presentation made in connection with acquisition.
3) On March 18, 2004 the Company filed a report on Form 8-K
filing a copy of the merger agreement dated March 15, 2004
between the Company and Warwick Community Bancorp, Inc.
4) On January 26, 2004 the Company furnished a report on Form 8-K
announcing that it issued a press release regarding its
earnings for the fiscal quarter ending December 31, 2003.
5) On January 22, 2004 the Company filed a report on form 8-K
announcing the issuance of 19,573,000 shares in connection
with its second-step conversion, 400,000 shares in connection
with the formation of a charitable foundation, 3,969,676
shares in connection with the acquisition of ENB Holding
Company, Inc. and exchanged common shares at an exchange ratio
of 4.4323 shares for each existing share of Provident Bancorp,
Inc., a federal corporation.
40
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: May 13, 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: May 13, 2004
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