UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 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.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 80-0091851
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
400 Rella Blvd., Montebello, New York 10901
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(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
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(Registrant's Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. YES |_| NO |X|
Indicate by check mark whether to Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Act of 1934). YES |X| NO |_|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of the common stock
as of March 31, 2004, was $469,488,243.
As of December 6, 2004, there were issued and outstanding 45,889,827
shares of the Registrant's common stock.
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be
held in February 2005.
PROVIDENT BANCORP, INC.
FORM 10-K TABLE OF CONTENTS
September 30, 2004
PART I.........................................................................1
ITEM 1. Business...........................................................1
ITEM 2. Properties........................................................30
ITEM 3. Legal Proceedings.................................................31
ITEM 4. Submission of Matters to a Vote of Security Holders...............31
PART II.......................................................................31
ITEM 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities...............31
ITEM 6. Selected Financial Data...........................................32
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................35
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk........49
ITEM 8. Financial Statements and Supplementary Data.......................50
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................102
ITEM 9A. Controls and Procedures..........................................102
ITEM 9B. Other Information ...............................................102
PART III.....................................................................102
ITEM 10. Directors and Executive Officers of the Registrant...............102
ITEM 11. Executive Compensation...........................................102
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.....................103
ITEM 13. Certain Relationships and Related Transactions...................103
ITEM 14. Principal Accountant Fees and Services...........................103
PART IV......................................................................104
ITEM 15. Exhibits and Financial Statement Schedules.......................104
SIGNATURES...................................................................106
Exhibit 21...................................................................107
Exhibit 23.1.................................................................108
Exhibit 31.1.................................................................109
Exhibit 31.2.................................................................110
Exhibit 32...................................................................111
PART I
ITEM 1. Business
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Provident Bancorp, Inc.
Provident Bancorp, Inc. ("Provident Bancorp" or the "Company") is a
Delaware corporation that owns all of the outstanding shares of common stock of
Provident Bank (the "Bank"). At September 30, 2004, Provident Bancorp had
consolidated assets of $1.8 billion, deposits of $1.2 billion and stockholders'
equity of $ 349.5 million. As of September 30, 2004, Provident Bancorp had
39,618,373 shares of common stock outstanding.
Second Step Common Stock Offering 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, the former mutual
holding company for the Bank. As part of the conversion, the Company succeeded
to Provident Bancorp, Inc., a federal corporation ("Provident Federal") as 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. 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
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
was converted into 4.4323 new shares of the Company's common stock.
In addition, the Company simultaneously completed its acquisition of
E.N.B. Holding Company, Inc., ("ENB"), headquartered in Ellenville, New York.
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. ENB had total assets of $349.7 million, total loans of $213.5 million
and total deposits of $326.8 million. ENB had five offices in Orange County, two
offices in Ulster County and two offices in Sullivan County, all in New York
State.
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 September 30, 2004, reflect the effect of the
conversion of existing common shares, the stock offering, the acquisition of ENB
and the issuance of shares and contribution of cash to the charitable
foundation. Goodwill recorded in the ENB acquisition ($51.8 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 ($4.9 million at September 30, 2004), is recognized
apart from goodwill and amortized to expense over its estimated useful life and
evaluated for impairment.
Provident Bank
Provident Bank is a full-service, community-oriented savings bank that
provides financial services to individuals, families and businesses through 27
branch offices and 50 ATMs throughout Rockland, Orange, Ulster and Sullivan
Counties, New York.
Provident Bank's business consists primarily of accepting deposits from
the general public and investing those deposits, together with funds generated
from operations and borrowings, in one- to four-family residential, multi-family
residential and commercial real estate loans, commercial business loans and
leases, consumer loans and in investment securities and mortgage-backed
securities.
Originally organized in 1888 as a New York State-chartered mutual savings
and loan association, in January 1999 Provident Bank reorganized into the mutual
holding company structure as the wholly-owned subsidiary of Provident Federal,
which simultaneously conducted an initial public offering. We have increased our
number of branch offices from 11 branch offices at September 30, 1998 to 27
branch offices at September 30, 2004. Subsequent to our mutual holding company
reorganization and initial stock offering, we have broadened our market reach
through de novo branching and our acquisitions of The National Bank of Florida
("NBF") in April 2002 and ENB, discussed above.
Provident Bank's website (www.providentbanking.com) contains a direct link
to the Company's filings with the Securities and Exchange Commission, including
copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to these filings. Copies may also be
obtained, without charge, by written request to Investor Relations, attn.
Roberta Lenett, 400 Rella Boulevard, Montebello, New York 10901.
Provident Municipal Bank
In April 2002, Provident Bank organized Provident Municipal Bank as a
wholly-owned subsidiary. Provident Municipal Bank is a New York State-chartered
commercial bank that is engaged in the business of accepting deposits from
municipalities in our market area, as New York State law requires municipalities
located in the State of New York to deposit funds with commercial banks,
effectively forbidding these municipalities from depositing funds with savings
institutions, including federally chartered savings associations, such as
Provident Bank.
Subsequent Event
On October 1, 2004 the Company completed the acquisition of Warwick
Community Bancorp, Inc. ("Warwick"). The Company paid $72.6 million in cash and
issued approximately 6,258,000 shares of its common stock in connection with the
acquisition. Warwick had nine branch locations: six in Orange County, New York,
one in Putnam County, New York and two office locations in Bergen County, New
Jersey. Warwick had approximately $700 million in consolidated assets, $285
million in loans and $480 million in deposits.
Forward-Looking Statements
In addition to historical information, this annual report contains
forward-looking statements. For this purpose, any statements contained herein
(including documents incorporated herein by reference) that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believe", "anticipates", "plans", "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause Provident Bancorp's
actual results to differ materially from those contemplated by such
forward-looking statements. These important factors include, without limitation,
Provident Bancorp's continued ability to originate quality loans, fluctuations
in interest rates, real estate conditions in Provident Bancorp's lending areas,
general and local economic conditions, Provident Bancorp's continued ability to
attract and retain deposits, Provident Bancorp's ability to control costs,
effect of new accounting pronouncements and changing regulatory requirements,
and Provident Bancorp's ability to complete its announced acquisition and
related systems conversions. Provident Bancorp undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
2
Market Area
Provident Bank is an independent community bank offering a broad range of
financial services to businesses and individuals as an alternative to money
centers and large regional banks in our market area. At September 30, 2004, our
27 full-service banking offices consisted of 13 offices in Rockland County, New
York, 10 offices in Orange County, New York, and four offices in contiguous
Ulster and Sullivan Counties, New York. We acquired two of the Orange County
offices as part of our acquisition of NBF, located in Florida, New York, which
was completed in April 2002, and five offices as a result of our acquisition of
ENB, which was headquartered in Ellenville, Ulster County, New York. Our primary
market for deposits is currently concentrated around the areas where our
full-service banking offices are located. Our primary lending area consists of
Rockland and Orange Counties as well as contiguous counties.
Rockland and Orange counties constitute a suburban market with a broad
employment base. They also serve as bedroom communities for nearby New York City
and other suburban areas including Westchester County and northern New Jersey.
Orange County is one of the two fastest growing counties in New York State. The
economic environment in Rockland, Orange and contiguous counties continues to be
favorable and has supported increased commercial and residential activity in
recent years.
Lending Activities
General. We originate commercial real estate loans, commercial business
loans and construction loans (collectively referred to as the "commercial loan
portfolio"). We also originate in our market area fixed-rate and adjustable-rate
("ARM") residential mortgage loans collateralized by one- to four-family
residential real estate, and consumer loans such as home equity lines of credit,
homeowner loans and personal loans. We retain most of the loans we originate,
although we may sell longer-term one- to four-family residential loans and
participations in some commercial loans.
Commercial Real Estate Lending. We originate real estate loans secured
predominantly by first liens on commercial real estate. The commercial
properties are predominantly non-residential properties such as offices
buildings, shopping centers, retail strip centers, industrial and warehouse
properties and, to a lesser extent, more specialized properties such as
churches, mobile home parks, restaurants and motel/hotels. We may, from time to
time, purchase commercial real estate loan participations. We target commercial
real estate loans with initial principal balances between $1.0 million and $5.0
million. Loans secured by commercial real estate totaled $327.4 million, or
32.8% of our total loan portfolio at September 30, 2004, and consisted of 738
loans outstanding with an average loan balance of approximately $444,000
although there are a large number of loans with balances substantially greater
than this average. Substantially all of our commercial real estate loans are
secured by properties located in our primary market area.
Most of our commercial real estate loans are written as five-year
adjustable-rate or ten-year fixed-rate mortgages and typically have balloon
maturities of ten years. Amortization on these loans is typically based on 10-
to 20-year payout schedules. We also originate some 15- to 20-year fixed-rate,
fully amortizing loans. Margins generally range from 175 basis points to 300
basis points above the applicable Federal Home Loan Bank advance rate.
In the underwriting of commercial real estate loans, we generally lend up
to 75% of the property's appraised value. Decisions to lend are based on the
economic viability of the property and the creditworthiness of the borrower. In
evaluating a proposed commercial real estate loan, we emphasize primarily the
ratio of the property's projected net cash flow to the loan's debt service
requirement (generally targeting a ratio of 120%), computed after deduction for
a vacancy factor and property expenses we deem appropriate. In addition, a
personal guarantee of the loan or a portion of thereof is generally required
from the principal(s) of the borrower. We require title insurance insuring the
priority of our lien, fire and extended coverage casualty insurance, and flood
insurance, if appropriate, in order to protect our security interest in the
underlying property. In addition, business interruption insurance or other
insurance may be required.
Commercial real estate loans generally carry higher interest rates and
have shorter terms than those on one- to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated
3
with single borrowers or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties typically depends on
the successful operation of the related real estate project and thus may be
subject to a greater extent to adverse conditions in the real estate market and
in the general economy. For commercial real estate loans in which the borrower
is the primary occupant, repayment experience also depends on the successful
operation of the borrower's underlying business.
Commercial Business Loans. We make various types of secured and unsecured
commercial loans to customers in our market area for the purpose of financing
equipment acquisition, expansion, working capital and other general business
purposes. The terms of these loans generally range from less than one year to
seven years. The loans are either negotiated on a fixed-rate basis or carry
adjustable interest rates indexed to (i) a lending rate that is determined
internally, or (ii) a short-term market rate index. At September 30, 2004, we
had 1,327 commercial business loans outstanding with an aggregate balance of
$105.2 million, or 10.5% of the total loan portfolio. As of September 30, 2004,
the average commercial business loan balance was approximately $80,000, although
there are a large number of loans with balances substantially greater than this
average.
Commercial credit decisions are based upon a credit assessment of the loan
applicant. A determination is made as to the applicant's ability to repay in
accordance with the proposed terms as well as an overall assessment of the risks
involved. An evaluation is made of the applicant to determine character and
capacity to manage. Personal guarantees of the principals are generally
required, except in the case of not-for-profit corporations. In addition to an
evaluation of the loan applicant's financial statements, a determination is made
of the probable adequacy of the primary and secondary sources of repayment to be
relied upon in the transaction. Credit agency reports of the applicant's credit
history supplement the analysis of the applicant's creditworthiness. Checking
with other banks and trade investigations also may be conducted. Collateral
supporting a secured transaction also is analyzed to determine its
marketability. For small business loans and lines of credit, generally those not
exceeding $250,000, we use a credit scoring system that enables us to process
the loan requests quickly and efficiently. Commercial business loans generally
bear higher interest rates than residential loans of like duration because they
involve a higher risk of default since their repayment is generally dependent on
the successful operation of the borrower's business and the sufficiency of
collateral, if any.
One- to Four-Family Real Estate Lending. We offer conforming and
non-conforming, fixed-rate and adjustable-rate residential mortgage loans with
maturities of up to 30 years and maximum loan amounts generally up to $1.1
million. This portfolio totaled $380.7 million, or 38.2% of our total loan
portfolio at September 30, 2004.
We currently offer both fixed- and adjustable-rate conventional mortgage
loans with terms of 10 to 30 years that are fully amortizing with monthly or
bi-weekly loan payments. One- to four-family residential mortgage loans are
generally underwritten according to Fannie Mae and Freddie Mac guidelines, and
loans that conform to such guidelines are referred to as "conforming loans." We
generally originate both fixed-rate and ARM loans in amounts up to the maximum
conforming loan limits as established by Fannie Mae and Freddie Mac, which are
currently $333,700 for single-family homes. Private mortgage insurance is
generally required for loans with loan-to-value ratios in excess of 80%. We also
originate loans above conforming limits, referred to as "jumbo loans," that have
been underwritten to the credit standards of Fannie Mae or Freddie Mac. These
loans are generally eligible for sale to various firms that specialize in the
purchase of such non-conforming loans, although we retained in our portfolio all
such loans originated in fiscal 2004, totaling $11.9 million. In our market
area, due to our proximity to New York City, such larger residential loans are
not uncommon. We also originate loans at higher rates that do not meet the
credit standards of Fannie Mae or Freddie Mac, but are deemed to be acceptable
risks. The amount of such loans originated for fiscal 2004 was $3.8 million, all
of which were retained in our loan portfolio.
We actively monitor our interest rate risk position to determine the
desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and our capital and liquidity position, we may retain all of our
newly originated longer term fixed-rate, residential mortgage loans, or from
time to time we may decide to sell all or a portion of such loans in the
secondary mortgage market to government sponsored entities such as Fannie Mae
and Freddie Mac or other purchasers. Our bi-weekly one- to four-family
residential mortgage loans that are retained in our portfolio result in shorter
repayment schedules than conventional monthly mortgage loans, and are repaid
through an automatic
4
deduction from the borrower's savings or checking account. As of September 30,
2004, bi-weekly loans totaled $154.1 million, or 40.5 % of our residential loan
portfolio. We retain the servicing rights on a large majority of loans sold to
generate fee income and reinforce our commitment to customer service, although
we may also sell non-conforming loans to mortgage banking companies, generally
on a servicing-released basis. As of September 30, 2004, loans serviced for
others totaled $84.9 million.
We currently offer several ARM loan products secured by residential
properties with rates that are fixed for a period ranging from six months to ten
years. After the initial term, the interest rate on these loans is generally
reset every year based upon a contractual spread or margin above the average
yield on U.S. Treasury securities, adjusted to a constant maturity of one year,
as published weekly by the Federal Reserve Board and subject to certain periodic
and lifetime limitations on interest rate changes. Many of the borrowers who
select these loans have shorter-term credit needs than those who select
long-term, fixed-rate loans. ARM loans generally pose different credit risks
than fixed-rate loans primarily because the underlying debt service payments of
the borrowers rise as interest rates rise, thereby increasing the potential for
default. At September 30, 2004, our ARM portfolio included $5.3 million in loans
that re-price every six months, $19.3 million in loans that re-price once a year
and $27.7 million in loans that reprice periodically after an initial fixed-rate
period of three years or more.
We require title insurance on all of our one- to four-family mortgage
loans, and we also require that borrowers maintain fire and extended coverage or
all risk casualty insurance (and, if appropriate, flood insurance) in an amount
at least equal to the lesser of the loan balance or the replacement cost of the
improvements but in any event in an amount calculated to avoid the effect of any
coinsurance clause. Loans with initial loan-to-value ratios in excess of 80%
must have private mortgage insurance, although occasional exceptions may be
made. Nearly all residential loans must have a mortgage escrow account from
which disbursements are made for real estate taxes and for hazard and flood
insurance.
Construction Loans. We originate land acquisition, development and
construction loans to builders in our market area. These loans totaled $54.3
million, or 5.4% of our total loan portfolio at September 30, 2004.
Acquisition loans help finance the purchase of land intended for further
development, including single-family houses, multi-family housing, and
commercial income property. In some cases, we may make an acquisition loan
before the borrower has received approval to develop the land as planned. In
general, the maximum loan-to-value ratio for a land acquisition loan is 60% of
the appraised value of the property. We also make development loans to builders
in our market area to finance improvements to real estate, consisting mostly of
single-family subdivisions, typically to finance the cost of utilities, roads,
sewers and other development costs. Builders generally rely on the sale of
single-family homes to repay development loans, although in some cases the
improved building lots may be sold to another builder. The maximum amount loaned
is generally limited to the cost of the improvements plus an interest reserve,
if one is required. Advances are made in accordance with a schedule reflecting
the cost of the improvements.
We also grant construction loans to area builders, often in conjunction
with development loans. In the case of residential subdivisions, these loans
finance the cost of completing homes on the improved property. Advances on
construction loans are made in accordance with a schedule reflecting the cost of
construction. Repayment of construction loans on residential subdivisions is
normally expected from the sale of units to individual purchasers. In the case
of income-producing property, repayment is usually expected from permanent
financing upon completion of construction. We commit to provide the permanent
mortgage financing on most of our construction loans on income-producing
property.
Land acquisition, development and construction lending exposes us to
greater credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event we make an acquisition loan on
property that is not yet approved for the planned development, there is the risk
that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property.
Development and construction loans also expose us to the risk that improvements
will not be completed on time in accordance with specifications and projected
costs. In addition, the ultimate sale or rental of the property may not occur as
anticipated.
5
Consumer Loans. We originate a variety of consumer and other loans,
including homeowner loans, home equity lines of credit, new and used automobile
loans, and personal unsecured loans, including fixed-rate installment loans and
variable lines of credit. As of September 30, 2004, consumer loans totaled
$130.0 million, or 13.0% of the total loan portfolio.
At September 30, 2004, the largest group of consumer loans consisted of
$106.9 million of loans secured by junior liens on residential properties. We
offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner
loans, and we also offer adjustable-rate home equity lines of credit. As of
September 30, 2004, homeowner loans totaled $26.9 million or 2.7% of our total
loan portfolio. The disbursed portion of home equity lines of credit totaled
$80.0 million, or 8.0% of our total loan portfolio at September 30, 2004, with
$47.4 million remaining undisbursed.
Other consumer loans include personal loans and loans secured by new or
used automobiles. As of September 30, 2004, these loans totaled $23.0 million,
or 2.3% of our total loan portfolio. We originate consumer loans directly to our
customers or on an indirect basis through selected dealerships. We require
borrowers to maintain collision insurance on automobiles securing consumer
loans, with us listed as loss payee. Personal loans also include secured and
unsecured installment loans for other purposes. Unsecured installment loans
generally have shorter terms than secured consumer loans, and generally have
higher interest rates than rates charged on secured installment loans with
comparable terms. Personal loans are generally unsecured and carry higher
interest rates and shorter terms than homeowner loans or automobile loans.
Our procedures for underwriting consumer loans include an assessment of an
applicant's credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount.
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as automobiles. In addition, the
repayment of consumer loans depends on the borrowers' continued financial
stability, as repayment is more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy than a single family mortgage loan.
6
Loan Portfolio Composition. The following table sets forth the composition
of our loan portfolio, excluding loans held for sale, by type of loan at the
dates indicated.
September 30,
-------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------------- ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
One- to four-family
residential mortgage loans.. $ 380,749 38.2% $ 380,776 53.3% $ 366,111 54.6% $ 358,198 58.2% $ 343,871 57.5%
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Commercial real estate loans .. 327,414 32.8 188,360 26.4 163,329 24.3 129,295 21.0 124,988 20.9
Commercial business loans ..... 105,196 10.5 54,174 7.6 41,320 6.2 31,394 5.1 27,483 4.6
Construction loans ....... .... 54,294 5.4 10,323 1.4 17,020 2.5 19,490 3.2 29,599 5.0
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total commercial loans ..... 486,904 48.7 252,857 35.4 221,669 33.0 180,179 29.3 182,070 30.5
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Home equity lines of credit ... 80,013 8.1 50,197 7.0 39,727 5.9 31,125 5.1 28,021 4.7
Homeowner loans ............... 26,921 2.7 25,225 3.6 36,880 5.5 39,501 6.4 37,027 6.2
Other consumer loans .......... 23,047 2.3 5,198 0.7 6,812 1.0 6,266 1.0 6,486 1.1
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total consumer loans ....... 129,981 13.1 80,620 11.3 83,419 12.4 76,892 12.5 71,534 12.0
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total loans ................... 997,634 100.0% 714,253 100.0% 671,199 100.0% 615,269 100.0% 597,475 100.0%
===== ===== ===== ===== =====
Allowance for loan losses ..... (17,353) (11,069) (10,383) (9,123) (7,653)
--------- --------- --------- --------- ---------
Total loans, net .............. $ 980,281 $ 703,184 $ 660,816 $ 606,146 $ 589,822
========= ========= ========= ========= =========
7
Loan Portfolio Maturities and Yields. The following table summarizes the
scheduled repayments of our loan portfolio at September 30, 2004. Demand loans,
loans having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
One- to Four-Family Commercial Real Estate Commercial Business
------------------- ----------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Due During the Years Ending
September 30,
- -------------
2005 (1) ............. $ 18,708 6.08% $ 41,002 6.44% $ 68,752 5.61%
2006 to 2009 ......... 45,947 5.70 72,921 6.52 20,398 6.16
2010 and beyond ...... 316,094 5.88 213,491 6.64 16,046 6.41
-------- -------- --------
Total ....... $380,749 5.87% $327,414 6.59% $105,196 5.84%
======== ======== ========
Construction (2) Consumer Total
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Due During the Years Ending
September 30,
- -------------
2005 (1) ............. $ 44,510 5.92% $ 12,446 7.50% $185,418 6.04%
2006 to 2009 ......... 692 6.45 16,005 7.30 155,963 6.31
2010 and beyond ...... 9,092 5.81 101,530 4.66 656,253 5.95
-------- -------- --------
Total ....... $ 54,294 5.91% $129,981 5.26% $997,634 6.03%
======== ======== ========
- ----------
(1) Includes demand loans, loans having no stated repayment schedule or
maturity, and overdraft loans.
(2) Includes land acquisition loans.
The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at September 30, 2004 that are contractually due after
September 30, 2005.
Due After September 30, 2005
---------------------------------------
Fixed Adjustable Total
-------- ---------- --------
(In thousands)
One- to four-family residential mortgage loans .......... $309,643 $ 52,398 $362,041
-------- -------- --------
Commercial real estate loans ............................ 169,860 116,552 286,412
Commercial business loans ............................... 28,490 7,954 36,444
Construction loans ...................................... 3,043 6,741 9,784
-------- -------- --------
Total commercial loans ......................... 201,393 131,247 332,640
-------- -------- --------
Consumer loans .......................................... 13 117,522 117,535
-------- -------- --------
Total loans .................................... $511,049 $301,167 $812,216
======== ======== ========
8
Loan Originations, Purchases, Sales and Servicing. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon borrower demand, market interest rates, borrower preference for
fixed- versus adjustable-rate loans, and the interest rates offered on each type
of loan by other lenders in our market area. These include competing banks,
savings banks, credit unions, mortgage banking companies, life insurance
companies and similar financial services firms. Loan originations are derived
from a number of sources, including branch office personnel, existing customers,
borrowers, builders, attorneys, real estate broker referrals and walk-in
customers.
Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in decreased loan
demand, while declining interest rates may stimulate increased loan demand.
Accordingly, the volume of loan origination, the mix of fixed and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines,
and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold,
the sales are conducted using standard Fannie Mae/Freddie Mac purchase contracts
and master commitments as applicable. One- to four-family mortgage loans may be
sold both to Fannie Mae or Freddie Mac on a non-recourse basis whereby
foreclosure losses are generally the responsibility of the purchaser and not
Provident Bank.
We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our
policy has been to retain the servicing rights for all conforming loans sold. We
therefore continue to collect payments on the loans, maintain tax escrows and
applicable fire and flood insurance coverage, and supervise foreclosure
proceedings if necessary. We retain a portion of the interest paid by the
borrower on the loans as consideration for our servicing activities.
Loan Approval Authority and Underwriting. We have four levels of lending
authority beginning with the Board of Directors. The Board grants lending
authority to the Director Loan Committee, the members of which are Directors.
The Director Loan Committee, in turn, may grant authority to the Management Loan
Committee and individual loan officers. In addition, designated members of
management may grant authority to individual loan officers up to specified
limits. Our lending activities are subject to written policies established by
the Board. These policies are reviewed periodically.
The Director Loan Committee may approve loans in accordance with
applicable loan policies, up to the limits established in our policy governing
loans to one borrower. This policy places limits on the aggregate dollar amount
of credit that may be extended to any one borrower and related entities. Loans
exceeding the maximum loan-to-one borrower limit described below require
approval by the Board of Directors. The Management Loan Committee may approve
loans of up to an aggregate of $2 million to any one borrower and group of
related borrowers. Two loan officers with sufficient loan authority acting
together may approve loans up to $1,000,000. The maximum individual authority to
approve an unsecured loan is $50,000, however, for credit-scored small business
loans; the maximum individual authority is $150,000.
We have established a risk rating system for our commercial business
loans, commercial and multi-family real estate loans, and acquisition,
development and construction loans to builders. The risk rating system assesses
a variety of factors to rank the risk of default and risk of loss associated
with the loan. These ratings are performed by commercial credit personnel who do
not have responsibility for loan originations. We determine our maximum
loan-to-one-borrower limits based upon the rating of the loan. The large
majority of loans fall into three categories. The maximum for the best-rated
borrowers is $15 million, for the next group of borrowers is $12 million, and
for the third group is $6 million. Sublimits apply based on reliance on any
single property, and for commercial business loans. However, for loans that fall
into the best rated group or the next best group, the limits may be increased by
20% in certain cases if the loans are secured by mortgages on three or more
properties.
9
In connection with our residential and commercial real estate loans, we
generally require property appraisals to be performed by independent appraisers
who are approved by the Board. Appraisals are then reviewed by the appropriate
loan underwriting areas. Under certain conditions, appraisals may not be
required for loans under $250,000 or in other limited circumstances. We also
require title insurance, hazard insurance and, if indicated, flood insurance on
property securing mortgage loans. Title insurance is not required for consumer
loans under $100,000, such as home equity lines of credit and homeowner loans.
Loan Origination Fees and Costs. In addition to interest earned on loans,
we also receive loan origination fees. Such fees vary with the volume and type
of loans and commitments made, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money. We defer
loan origination fees and costs, and amortize such amounts as an adjustment to
yield over the term of the loan by use of the level-yield method. Deferred loan
origination costs (net of deferred fees) were $1,263,000 at September 30, 2004.
To the extent that originated loans are sold with servicing retained, we
capitalize a mortgage servicing asset at the time of the sale in accordance with
applicable accounting standards (Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities"). The capitalized amount is amortized
thereafter (over the period of estimated net servicing income) as a reduction of
servicing fee income. The unamortized amount is fully charged to income when
loans are prepaid. Originated mortgage servicing rights with an amortized cost
of $746,000 are included in other assets at September 30, 2004. See also Notes 3
and 6 of the Notes to Consolidated Financial Statements.
Loans to One Borrower. At September 30, 2004, our five largest aggregate
amounts loaned to any one borrower and certain related interests (including any
unused lines of credit) consisted of secured and unsecured financing of $13.3
million, $10.1 million, $8.6 million, $8.4 million and $7.3 million. See
"Regulation--Federal Banking Regulation--Loans to One Borrower" for a discussion
of applicable regulatory limitations.
Delinquent Loans, Other Real Estate Owned and Classified Assets
Collection Procedures for Residential and Commercial Mortgage Loans and
Consumer Loans. Computer-generated late notice is sent by the 16th day after the
payment due date on a loan requesting the payment due plus any late charge that
was assessed. Accounts are distributed to a collector or account officer to
contact borrowers, determine the reason for delinquency and arrange for payment,
and accounts are monitored electronically for receipt of payments. If payments
are not received within 30 days of the original due date, a letter demanding
payment of all arrearages is sent and contact efforts are continued. If payment
is not received within 60 days of the due date, loans are generally accelerated
and payment in full is demanded. Failure to pay within 90 days of the original
due date generally results in legal action, notwithstanding ongoing collection
efforts. Unsecured consumer loans are generally charged-off after 120 days. For
other commercial loans, procedures vary depending upon individual circumstances.
Loans Past Due and Non-performing Assets. Loans are reviewed on a regular
basis, and are placed on non-accrual status when either principal or interest is
90 days or more past due. In addition, loans are placed on non-accrual status
when, in the opinion of management, there is sufficient reason to question the
borrower's ability to continue to meet principal or interest payment
obligations. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is reversed from interest income. Interest payments received
on non-accrual loans are not recognized as income unless warranted based on the
borrower's financial condition and payment record. At September 30, 2004, we had
non-accrual loans of $2.7 million.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses. At September 30, 2004 we had
no REO.
10
The following table sets forth certain information with respect to our
loan portfolio delinquencies at the dates indicated.
Loans Delinquent For
-----------------------------------------------
60-89 Days 90 Days and Over Total
--------------------- --------------------- ---------------------
Number Amount Number Amount Number Amount
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
At September 30, 2004
- ---------------------
One- to four-family ........................ 6 $ 761 11 $ 1,597 17 $ 2,359
Commercial real estate ..................... 1 377 4 488 5 865
Commercial business ........................ 7 158 7 474 14 632
Consumer ................................... 25 107 19 178 44 285
-------- -------- -------- -------- -------- --------
Total .................................... 39 $ 1,403 41 $ 2,737 80 $ 4,141
======== ======== ======== ======== ======== ========
At September 30, 2003
- ---------------------
One- to four-family ........................ 6 $ 626 6 $ 951 12 $ 1,577
Commercial real estate ..................... 1 36 8 3,632 9 3,668
Commercial business ........................ 1 36 -- -- 1 36
Consumer ................................... 7 63 3 114 10 177
-------- -------- -------- -------- -------- --------
Total .................................... 15 $ 761 17 $ 4,697 32 $ 5,458
======== ======== ======== ======== ======== ========
At September 30, 2002
- ---------------------
One- to four-family ........................ 6 $ 577 22 $ 2,291 28 $ 2,868
Commercial real estate ..................... -- -- 3 2,492 3 2,492
Consumer ................................... 7 37 14 171 21 208
-------- -------- -------- -------- -------- --------
Total .................................... 13 $ 614 39 $ 4,954 52 $ 5,568
======== ======== ======== ======== ======== ========
Non-Performing Assets. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).
September 30,
------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(Dollars in thousands)
Non-accrual loans:
One- to four-family ........................ $ 1,597 $ 951 $ 2,291 $ 1,684 $ 2,496
Commercial real estate ..................... 488 3,632 2,492 418 1,149
Commercial business ........................ 474 -- -- -- --
Construction ............................... -- -- -- -- 27
Consumer ................................... 178 114 171 175 359
-------- -------- -------- -------- --------
Total non-performing loans ............... 2,737 4,697 4,954 2,277 4,031
-------- -------- -------- -------- --------
Real estate owned:
One- to four-family ........................ -- -- 41 109 154
-------- -------- -------- -------- --------
Total real estate owned .................. -- -- 41 109 154
-------- -------- -------- -------- --------
Total non-performing assets ................... $ 2,737 $ 4,697 $ 4,995 $ 2,386 $ 4,185
======== ======== ======== ======== ========
Ratios:
Non-performing loans to total loans ........ 0.27% 0.66% 0.74% 0.37% 0.67%
Non-performing assets to total assets ...... 0.15 0.40 0.49 0.27 0.50
For the year ended September 30, 2004, gross interest income that would
have been recorded had the non-accrual loans at the end of the year remained on
accrual status throughout the year amounted to $163,000. Interest income
actually recognized on such loans totaled $119,000.
Classification of Assets. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets that are
considered to be of lesser quality as substandard, doubtful, or loss assets. An
asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the savings institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the
11
weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets is not
warranted. Assets that do not expose us to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess
potential weaknesses that deserve our close attention, are required to be
designated as special mention. As of September 30, 2004, we had $4.7 million of
assets designated as special mention.
When we classify assets as either substandard or doubtful, we allocate a
portion of the related general loss allowances to such assets as deemed prudent
by management. The allowance for loan losses represents amounts that have been
established to recognize losses inherent in the loan portfolio that are both
probable and reasonably estimable at the date of the financial statements. When
we classify problem assets as loss, we charge-off such amount. Our determination
as to the classification of our assets and the amount of our loss allowances are
subject to review by our regulatory agencies, which can order the establishment
of additional loss allowances. Management regularly reviews our asset portfolio
to determine whether any assets require classification in accordance with
applicable regulations. On the basis of management's review of our assets at
September 30, 2004, classified assets consisted of substandard assets of $3.7
million and $260,000 doubtful assets (loans).
Allowance for Loan Losses. We provide for loan losses based on the
allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes provisions for
loan losses in order to maintain the allowance for loan losses in accordance
with accounting principles generally accepted in the United States of America.
The allowance for loan losses consists of amounts specifically allocated to
non-performing loans and other criticized or classified loans (if any) as well
as allowances determined for each major loan category. After we establish a
provision for loans that are known to be non-performing, criticized or
classified, we calculate a percentage to apply to the remaining loan portfolio
to estimate the probable losses inherent in that portion of the portfolio. When
the loan portfolio increases, therefore, the percentage calculation results in a
higher dollar amount of estimated probable losses than would be the case without
the increase, and when the loan portfolio decreases, the percentage calculation
results in a lower dollar amount of estimated probable losses than would be the
case without the decrease. These percentages are determined by management based
on historical loss experience for the applicable loan category, which are
adjusted to reflect our evaluation of:
o levels of, and trends in, delinquencies and non-accruals;
o trends in volume and terms of loans;
o effects of any changes in lending policies and procedures;
o experience, ability, and depth of lending management and staff;
o national and local economic trends and conditions;
o concentrations of credit by such factors as location, industry,
inter-relationships, and borrower; and
o for commercial loans, trends in risk ratings.
We consider commercial real estate loans, commercial business loans, and
land acquisition, development and construction loans to be riskier than one-to
four-family residential mortgage loans. Commercial real estate loans entail
significant additional credit risks compared to one- to four-family residential
mortgage loans, as they involve large loan balances concentrated with single
borrowers or groups of related borrowers. In addition, the payment experience on
loans secured by income-producing properties typically depends on the successful
operation of the related real estate project (business operation of the borrower
who is also the primary occupant), and thus may be subject to a greater extent
to adverse conditions in the real estate market and in the general economy.
Commercial business loans involve a
12
higher risk of default than residential loans of like duration since their
repayment is generally dependent on the successful operation of the borrower's
business and the sufficiency of collateral, if any. Land acquisition,
development and construction lending exposes us to greater credit risk than
permanent mortgage financing. The repayment of land acquisition, development and
construction loans depends upon the sale of the property to third parties or the
availability of permanent financing upon completion of all improvements. In the
event we make an acquisition loan on property that is not yet approved for the
planned development, there is the risk that approvals will not be granted or
will be delayed. These events may adversely affect the borrower and the
collateral value of the property. Development and construction loans also expose
us to the risk that improvements will not be completed on time in accordance
with specifications and projected costs. In addition, the ultimate sale or
rental of the property may not occur as anticipated.
The carrying value of loans is periodically evaluated and the allowance is
adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the information used in making the
evaluations. In addition, as an integral part of their examination process, our
regulatory agencies periodically review the allowance for loan losses. Such
agencies may require us to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
The following table sets forth activity in our allowance for loan losses
for the years indicated.
At or For the Years Ended September 30,
--------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year ................... $ 11,069 $ 10,383 $ 9,123 $ 7,653 $ 6,202
-------- -------- -------- -------- --------
Charge-offs:
One- to four-family ......................... (1) -- -- (25) (168)
Commercial real estate ...................... -- -- (31) -- (1)
Commercial business ......................... (284) (212) (130) (1) (6)
Consumer .................................... (199) (140) (163) (133) (195)
-------- -------- -------- -------- --------
Total charge-offs ......................... (484) (352) (324) (159) (370)
Recoveries:
One- to four-family ......................... 86 -- -- -- 24
Commercial real estate ...................... -- -- -- 96 --
Commercial business ......................... 32 40 40 42 24
Construction ................................ -- -- -- -- --
Consumer .................................... 100 98 107 51 63
-------- -------- -------- -------- --------
Total recoveries .......................... 218 138 147 189 111
Net (charge-offs) recoveries ................... (266) (214) (177) 30 (259)
Allowance recorded in acquisitions ............. 5,750 -- 537 -- --
Provision for loan losses ...................... 800 900 900 1,440 1,710
-------- -------- -------- -------- --------
Balance at end of year ......................... $ 17,353 $ 11,069 $ 10,383 $ 9,123 $ 7,653
======== ======== ======== ======== ========
Ratios:
Net charge-offs to average loans
outstanding (annualized) .................... 0.03% 0.03% 0.03% --% 0.04%
Allowance for loan losses to
non-performing loans ........................ 634.00 235.66 209.59 400.66 189.85
Allowance for loan losses to total loans ....... 1.74 1.55 1.55 1.48 1.28
13
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category (excluding loans held for sale), and the percent of loans
in each category to total loans at the dates indicated. The allowance for loan
losses allocated to each category is not necessarily indicative of future losses
in any particular category and does not restrict the use of the allowance to
absorb losses in other categories.
September 30,
---------------------------------------------------------------------------------------
2004 2003
----------------------------------------- ----------------------------------------
Percent of Percent of
Allowance Loan Loans in Each Allowance Loan Loans in Each
for Loan Balances by Category to for Loan Balances by Category to
Losses Category Total Loans Losses Category Total Loans
---------- ----------- ------------ --------- ----------- -----------
(Dollars in thousands)
One- to four-family .......... $ 1,588 $380,749 38.2% $ 1,513 $380,776 53.3%
Commercial real estate ....... 7,443 327,414 32.8 6,009 188,360 26.4
Commercial business .......... 4,571 105,196 10.5 2,413 54,174 7.6
Construction ................. 2,090 54,294 5.4 420 10,323 1.4
Consumer ..................... 1,661 129,981 13.1 714 80,620 11.3
-------- -------- ----- -------- -------- -----
Total ...................... $ 17,353 $997,634 100.0% $ 11,069 $714,253 100.0%
======== ======== ===== ======== ======== =====
September 30,
-------------------------------------------
2002
-------------------------------------------
Percent of
Loans in
Loan Each
Allowance for Balances by Category to
Loan Losses Category Total Loans
------------- ----------- -----------
(Dollars in thousands)
One- to four-family .......... $ 3,315 $366,111 54.6%
Commercial real estate ....... 4,275 163,329 24.3
Commercial business .......... 925 41,320 6.2
Construction ................. 871 17,020 2.5
Consumer ..................... 997 83,419 12.4
-------- -------- -----
Total ...................... $ 10,383 $671,199 100.0%
======== ======== =====
September 30,
--------------------------------------------------------------------------------------
2001 2000
----------------------------------------- ----------------------------------------
Percent of Percent of
Allowance Loan Loans in Each Allowance Loan Loans in Each
for Loan Balances by Category to for Loan Balances by Category to
Losses Category Total Loans Losses Category Total Loans
--------- ----------- ------------- --------- ----------- -----------
(Dollars in thousands)
One- to four-family .. $ 2,638 $358,198 58.2% $ 2,423 $343,871 57.5%
Commercial real estate 3,930 129,295 21.0 3,210 124,988 20.9
Commercial business .. 841 31,394 5.1 481 27,483 4.6
Construction ......... 871 19,490 3.2 733 29,599 5.0
Consumer ............. 843 76,892 12.5 806 71,534 12.0
-------- -------- ----- -------- -------- -----
Total ............. $ 9,123 $615,269 100.0% $ 7,653 $597,475 100.0%
======== ======== ===== ======== ======== =====
14
Securities Activities
Our securities investment policy is established by our Board of Directors.
This policy dictates that investment decisions be made based on the safety of
the investment, liquidity requirements, potential returns, cash flow targets,
and consistency with our interest rate risk management strategy. The Board's
asset/liability committee oversees our investment program and evaluates on an
ongoing basis our investment policy and objectives. Our chief financial officer,
or our chief financial officer acting with our chief executive officer, is
responsible for making securities portfolio decisions in accordance with
established policies. Our chief financial officer, chief executive officer and
certain other executive officers have the authority to purchase and sell
securities within specific guidelines established by the investment policy. In
addition, all transactions are reviewed by the Board's asset/liability committee
at least quarterly.
Our current investment policy generally permits securities investments in
debt securities issued by the U.S. Government and U.S. Agencies, municipal
bonds, and corporate debt obligations, as well as investments in preferred and
common stock of government agencies and government sponsored enterprises such as
Fannie Mae, Freddie Mac and the Federal Home Loan Bank of New York (federal
agency securities) and, to a lesser extent, other equity securities. Securities
in these categories are classified as "investment securities" for financial
reporting purposes. The policy also permits investments in mortgage-backed
securities, including pass-through securities issued and guaranteed by Fannie
Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations
("CMOs") issued or backed by securities issued by these government agencies.
Also permitted are investments in securities issued or backed by the Small
Business Administration, privately issued mortgage-backed securities and
asset-backed securities collateralized by auto loans, credit card receivables,
and home equity and home improvement loans. Our current investment strategy uses
a risk management approach of diversified investing in fixed-rate securities
with short- to intermediate-term maturities, as well as adjustable-rate
securities, which may have a longer term to maturity. The emphasis of this
approach is to increase overall investment securities yields while managing
interest rate risk.
SFAS No. 115 requires that, at the time of purchase, we designate a
security as held to maturity, available for sale, or trading, depending on our
ability and intent. Securities available for sale are reported at fair value,
while securities held to maturity are reported at amortized cost. We do not have
a trading portfolio.
Government Securities. At September 30, 2004, we held government
securities available for sale with a fair value of $192.3 million, consisting
primarily of U.S. Treasury and Agency obligations with short- to medium-term
maturities (one to five years). While these securities generally provide lower
yields than other investments such as mortgage-backed securities, our current
investment strategy is to maintain investments in such instruments to the extent
appropriate for liquidity purposes, as collateral for borrowings, and for
prepayment protection.
Corporate and Municipal Bonds. At September 30, 2004, we held no corporate
debt securities. Although corporate bonds may offer a higher yield than that of
a U.S. Treasury or Agency security of comparable duration, corporate bonds also
have a higher risk of default due to adverse changes in the creditworthiness of
the issuer. In recognition of this potential risk, our policy limits investments
in corporate bonds to securities with maturities of ten years or less and rated
"A" or better by at least one nationally recognized rating agency, and to a
total investment of no more than $5.0 million per issuer and a total corporate
bond portfolio limit of $40.0 million. The policy also limits investments in
municipal bonds to securities with maturities of 20 years or less and rated AA
or better by at least one nationally recognized rating agency, and favors issues
that are insured unless the issuer is a local government entity within our
service area. Such local entity obligations generally are not rated, and are
subject to internal credit reviews. In addition, the policy imposes an
investment limitation of $5.0 million per municipal issuer and a total municipal
bond portfolio limit of 5% of assets. At September 30, 2004, we held $50.5
million in bonds issued by states and political subdivisions, $29.9 million of
which were classified as held to maturity at amortized cost and $20.6 million of
which were classified as available for sale at fair value.
15
Equity Securities. At September 30, 2004, our equity securities available
for sale had a fair value of $1.2 million and consisted of stock issued by
Freddie Mac and Fannie Mae, and certain other equity investments. We also held
$10.2 million (at cost) of Federal Home Loan Bank of New York ("FHLBNY") common
stock, a portion of which must be held as a condition of membership in the
Federal Home Loan Bank System, with the remainder held as a condition to our
borrowing under the Federal Home Loan Bank advance program. Dividends recorded
in the year ended September 30, 2004 amounted to $141,000.
Mortgage-Backed Securities. We purchase mortgage-backed securities in
order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower credit risk as a result of the guarantees
provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase
liquidity. We invest primarily in mortgage-backed securities issued or sponsored
by Fannie Mae, Freddie Mac, and Ginnie Mae. To a lesser extent, we also invest
in securities backed by agencies of the U.S. Government. At September 30, 2004,
our mortgage-backed securities portfolio totaled $359.1 million, consisting of
$320.2 million available for sale at fair value and $38.9 million held to
maturity at amortized cost. The total mortgage-backed securities portfolio
includes CMOs of $12.4 million, consisting of $9.6 million available for sale at
fair value and $2.8 million held to maturity at amortized cost. The remaining
mortgage-backed securities of $346.7 million were pass-through securities,
consisting of $310.6 million available for sale at fair value and $36.1 million
held to maturity at amortized cost.
Mortgage-backed securities are created by pooling mortgages and issuing a
security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of our mortgage-backed
securities are collateralized by single-family mortgages. The issuers of such
securities (generally U.S. Government agencies and government sponsored
enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell
the participation interests in the form of securities to investors, such as us,
and guarantee the payment of principal and interest to these investors.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater or less than the prepayment rate estimated at the time of
purchase, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments, thereby affecting the
net yield on such securities. We review prepayment estimates for our
mortgage-backed securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the securities at issue and
current interest rates, and to determine the yield and estimated maturity of the
mortgage-backed securities portfolio. Periodic reviews of current prepayment
speeds are performed in order to ascertain whether prepayment estimates require
modification that would cause amortization or accretion adjustments.
A portion of our mortgage-backed securities portfolio is invested in CMOs
or collateralized mortgage obligations, including Real Estate Mortgage
Investment Conduits ("REMICs"), backed by Fannie Mae and Freddie Mac. CMOs and
REMICs are types of debt securities issued by a special-purpose entity that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of securities with varying maturities and amortization
schedules, as well as a residual interest, with each class possessing different
risk characteristics. The cash flows from the underlying collateral are
generally divided into "tranches" or classes that have descending priorities
with respect to the distribution of principal and interest cash flows, while
cash flows on pass-through mortgage-backed securities are distributed pro rata
to all security holders. Our practice is to limit fixed-rate CMO investments
primarily to the early-to-intermediate tranches, which have the greatest cash
flow stability. Floating rate CMOs are purchased with emphasis on the relative
trade-offs between lifetime rate caps, prepayment risk, and interest rates.
16
Available for Sale Portfolio. The following table sets forth the
composition of our available for sale portfolio at the dates indicated.
September 30,
-------------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- ----------------------
Amortized Amortized Amortized Fair
Cost Fair Value Cost Fair Value Cost Value
--------- -------- --------- -------- --------- --------
(In thousands)
Investment Securities:
U.S. Government securities .................. $ 4,992 $ 5,042 $ 20,374 $ 20,627 $ 21,199 $ 21,658
Federal agency obligations .................. 187,796 187,260 110,018 112,983 87,878 91,625
Corporate debt securities ................... -- -- 6,030 6,623 30,079 32,144
State and municipal securities .............. 20,482 20,559 2,545 2,536 -- --
Equity securities ........................... 1,005 1,214 1,052 1,326 1,113 2,071
-------- -------- -------- -------- -------- --------
Total investment securities
available for sale ........................ 214,275 214,075 140,019 144,095 140,269 147,498
-------- -------- -------- -------- -------- --------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae ................................ 238,112 237,474 80,233 80,546 20,076 21,121
Freddie Mac ............................... 66,466 66,807 50,439 51,516 10,591 11,023
Ginnie Mae ................................ 1,626 1,630 -- -- -- --
Other ..................................... 4,322 4,695 4,377 4,879 4,430 5,000
CMOs and REMICs ............................. 9,711 9,616 19,733 19,679 21,352 21,504
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities
available for sale ........................ 320,237 320,222 154,782 156,620 56,449 58,648
-------- -------- -------- -------- -------- --------
Total securities available for sale ......... $534,512 $534,297 $294,801 $300,715 $196,718 $206,146
======== ======== ======== ======== ======== ========
At September 30, 2004, our available for sale U. S. Treasury securities
portfolio, at fair value, totaled $5.0 million, or 0.3% of total assets, and the
federal agency securities portfolio, at fair value, totaled $187.3 million, or
10.3% of total assets. Of the combined U.S. Government and agency portfolio,
based on amortized cost, $10.2 million had maturities of one year or less and a
weighted average yield of 2.63%, and $182.6 million had maturities of between
one and five years and a weighted average yield of 2.95%. The agency securities
portfolio includes both non-callable and callable debentures. The agency
debentures may be callable on a quarterly or one time basis depending on the
security's individual terms following an initial holding period of from twelve
to twenty-four months.
Equity securities available for sale at September 30, 2004 had a fair
value of $1.2 million.
At September 30, 2004, $310.6 million of our available for sale
mortgage-backed securities, at fair value, consisted of pass-through securities,
which totaled 17.0% of total assets. At the same date, the fair value of our
available for sale CMO portfolio totaled $9.6 million, or 0.5% of total assets,
and consisted of CMOs issued by government sponsored agencies such as Fannie Mae
and Freddie Mac with a weighted average yield of 3.7%. We own both fixed-rate
and floating-rate CMOs. The underlying mortgage collateral for our portfolio of
CMOs available for sale at September 30, 2004 had contractual maturities of over
ten years. However, as with mortgage-backed pass-through securities, the actual
maturity of a CMO may be less than its stated contractual maturity due to
prepayments of the underlying mortgages and the terms of the CMO tranche owned.
17
Held to Maturity Portfolio. The following table sets forth the composition
of our held to maturity portfolio at the dates indicated.
September 30,
------------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------- --------- ----------
(In thousands)
Investment Securities:
State and municipal securities ......... $ 29,894 $ 30,523 $ 18,384 $ 19,386 $ 16,409 $ 17,325
Other .................................. 309 265 -- -- -- --
--------- --------- --------- --------- --------- ---------
Total investment securities held to
maturity ............................. 30,203 30,788 18,384 19,386 16,409 17,325
--------- --------- --------- --------- --------- ---------
Mortgage-Backed Securities:
Pass-through securities:
Ginnie Mae ........................... 685 722 1,103 1,165 2,785 2,988
Fannie Mae ........................... 17,157 17,413 23,249 23,698 28,600 30,177
Freddie Mac .......................... 18,245 18,464 26,511 27,016 34,693 35,788
CMOs and REMICs ........................ 2,788 2,843 4,297 4,363 4,304 4,428
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities held to maturity .......... 38,875 39,442 55,160 56,242 70,382 73,381
--------- --------- --------- --------- --------- ---------
Total securities held to maturity ...... $ 69,078 $ 70,230 $ 73,544 $ 75,628 $ 86,791 $ 90,706
========= ========= ========= ========= ========= =========
At September 30, 2004, our held to maturity mortgage-backed securities
portfolio totaled $38.9 million at amortized cost, consisting of: $16.8 million
with a weighted average yield of 5.01% and contractual maturities of one year or
less and $22.1 million with a weighted average yield of 4.96% and contractual
maturities within five years; CMOs of $2.8 million are included in this
portfolio. While the contractual maturity of the CMOs underlying collateral is
greater than ten years, the actual period to maturity of the CMOs may be shorter
due to prepayments on the underlying mortgages and the terms of the CMO tranche
owned.
18
Portfolio Maturities and Yields. The composition and maturities of the
investment debt securities portfolio and the mortgage-backed securities
portfolio at September 30, 2004 are summarized in the following table.
Maturities are based on the final contractual payment dates, and do not reflect
the impact of prepayments or early redemptions that may occur. State and
municipal securities yields have not been adjusted to a tax-equivalent basis.
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae .............. $ 48,791 4.15% $184,427 4.00% $ 4,895 4.97%
Freddie Mac ............. 571 3.45 61,570 4.30 4,325 5.25
Other ................... 2,238 3.62 13,420 4.92 -- --
-------- ------ -------- ------ -------- ------
Total ................. 51,600 4.12 259,417 4.12 9,220 5.10
-------- ------ -------- ------ -------- ------
Investment Securities
U.S. Government and
agency securities ..... 10,214 2.63 182,574 2.95 -- --
Equity securities ....... -- -- -- -- 1,005 --
State and municipal
securities ............ 1,187 2.85 2,747 2.55 5,763 3.49
-------- ------ -------- ------ -------- ------
Total ................. 11,401 2.65 185,321 2.94 6,768 2.97
-------- ------ -------- ------ -------- ------
Total debt securities
available for sale ...... $ 63,001 3.85% $444,738 3.63% $ 15,988 4.20%
======== ====== ======== ====== ======== ======
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae .............. $ 9,629 4.36% $ 7,528 6.00% $ -- --%
Freddie Mac ............. 7,022 5.81 11,222 4.71 -- --
Ginnie Mae & Other ...... 172 8.57 3,302 3.43 -- --
-------- ------ -------- ------ -------- ------
Total ................. 16,823 5.01 22,052 4.96 -- --
Investment Securities
State and municipal
securities ............ 10,146 1.62 8,989 3.56 9,926 3.92
Other .................... 50 6.79 259 4.43 -- --
-------- ------ -------- ------ -------- ------
Total .................... 10,196 1.65 9,248 3.58 9,926 3.92
-------- ------ -------- ------ -------- ------
Total debt securities
held to maturity ..... $ 27,019 3.74% $ 31,300 4.55% $ 9,926 3.92%
======== ====== ======== ====== ======== ======
More than Ten Years Total Securities
--------------------- ---------------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Fair Value Yield
--------- -------- --------- ---------- --------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae ............... $ -- --% $238,112 $237,474 4.05%
Freddie Mac .............. -- -- 66,466 66,807 4.35
Other .................... -- -- 15,659 15,941 4.73
-------- ------ -------- -------- ------
Total .................. -- -- 320,237 320,222 4.15
-------- ------ -------- -------- ------
Investment Securities
U.S. Government and
agency securities ...... -- -- 192,788 192,302 2.93
Equity securities ........ -- -- 1,005 1,214 --
State and municipal
securities ............. 10,785 4.08 20,482 20,559 3.64
-------- ------ -------- -------- ------
Total .................. 10,785 4.08 214,275 214,075 2.98
-------- ------ -------- -------- ------
Total debt securities
available for sale ....... $ 10,785 4.08% $534,512 $534,297 3.68%
======== ====== ======== ======== ======
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae ............... $ -- --% $ 17,157 $ 17,413 5.08%
Freddie Mac .............. -- -- 18,245 18,464 5.13
Ginnie Mae & Other ....... -- -- 3,473 3,565 3.69
-------- ------ -------- -------- ------
Total .................. -- -- 38,875 39,442 4.98
Investment Securities
State and municipal
securities ............. 833 5.01 29,894 30,523 3.06
Other ..................... -- -- 309 265 4.81
-------- ------ -------- -------- ------
Total ..................... 833 5.01 30,203 30,788 3.08
-------- ------ -------- -------- ------
Total debt securities
held to maturity ...... $ 833 5.01% $ 69,078 $ 70,230 4.13%
======== ====== ======== ======== ======
19
Sources of Funds
General. Deposits, borrowings, repayments and prepayments of loans and
securities, proceeds from sales of loans and securities, proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings accounts, NOW accounts,
checking accounts, money market accounts, club accounts, certificates of deposit
and IRAs and other qualified plan accounts. We provide commercial checking
accounts for businesses. In addition, we provide low-cost checking account
services for low-income customers.
At September 30, 2004, our deposits totaled $1.2 billion. Interest-bearing
deposits totaled $950.2 million, and non-interest-bearing demand deposits
totaled $289.4 million. NOW, savings and money market deposits totaled $616.8
million at September 30, 2004. Also at that date, we had a total of $333.3
million in certificates of deposit, of which $277.8 million had maturities of
one year or less. Although we have a significant portion of our deposits in
shorter-term certificates of deposit, management monitors activity on these
accounts and, based on historical experience and our current pricing strategy we
believe we will retain a large portion of such accounts upon maturity.
Our deposits are obtained predominantly from the areas in which our branch
offices are located. We rely on our favorable locations, customer service and
competitive pricing to attract and retain these deposits. While we accept
certificates of deposit in excess of $100,000 for which we may provide
preferential rates, we do not actively solicit such deposits as they are more
difficult to retain than core deposits. With the commencement of operations of
our limited purpose commercial bank subsidiary, Provident Municipal Bank, in
April 2002, we began accepting municipal deposits. Municipal time accounts
(certificates of deposit) are generally obtained through a bidding process, and
tend to carry higher average interest rates than retail certificates of deposit
of similar term.
The following tables set forth the distribution of total deposit accounts,
by account type, at the dates indicated.
September 30,
---------------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
---------- ------- -------- ---------- ------- -------- ---------- ------- --------
(Dollars in thousands)
Demand deposits:
Retail ............... $ 122,276 9.9% --% $ 90,471 10.4% --% $ 54,399 6.8% --%
Commercial ........... 167,084 13.4 -- 72,538 8.3 -- 55,732 6.9 --
---------- ----- ---------- ----- ---------- -----
Total demand deposits 289,360 23.3 -- 163,009 18.7 -- 110,131 13.7 --
NOW deposits ............ 83,439 6.8 0.21 62,367 7.2 0.20 82,983 10.4 0.40
Savings deposits ........ 360,138 29.0 0.45 279,717 32.2 0.40 247,918 31.0 0.99
Money market deposits ... 173,272 14.0 0.64 128,222 14.7 0.52 115,065 14.4 1.23
---------- ----- ---------- ----- ---------- -----
906,209 73.1 0.47 633,315 72.8 0.41 556,097 69.5 0.76
Certificates of deposit . 333,323 26.9 1.86 236,238 27.2 1.85 243,529 30.5 2.64
---------- ----- ---------- ----- ---------- -----
Total deposits ....... $1,239,532 100.0% 0.96% $ 869,553 100.0% 0.72% $ 799,626 100.0% 1.33%
========== ===== ========== ===== ========== =====
20
The following table sets forth, by interest rate ranges, information
concerning certificates of deposit at the dates indicated.
At September 30, 2004
------------------------------------------------------------------------
Period to Maturity
------------------------------------------------------------------------ Total at September 30,
Less than One to Two Two to More than Percent of ----------------------
One Year Years Three Years Three Years Total Total 2003 2002
--------- ---------- ----------- ----------- -------- ---------- -------- --------
(Dollars in thousands)
Interest Rate Range:
2.00% and below ......... $236,076 $ 13,098 $ 421 $ 30 $249,625 74.8% $164,462 $107,202
2.01% to 3.00% .......... 25,422 10,933 5,207 1,129 42,691 12.8 28,265 73,101
3.01% to 4.00% .......... 7,537 273 7,976 6,053 21,839 6.6 26,236 27,373
4.01% to 5.00% .......... 6,123 1,320 3,428 5,360 16,231 4.9 14,281 20,245
5.01% to 6.00% .......... 2,037 250 33 -- 2,320 0.7 2,378 6,563
6.01% and above ......... 617 -- -- -- 617 0.2 616 9,045
-------- -------- -------- -------- -------- ----- -------- --------
Total ................... $277,812 $ 25,874 $ 17,065 $ 12,572 $333,323 100.0% $236,238 $243,529
======== ======== ======== ======== ======== ===== ======== ========
The following table sets forth certificates of deposit by time remaining
until maturity as of September 30, 2004.
Maturity
------------------------------------------------------
3 Months or Over 3 to 6 Over 6 to 12 Over 12
Less Months Months Months Total
----------- ----------- ------------ ------- --------
(In thousands)
Certificates of deposit less than $100,000 .............. $ 95,516 $ 45,072 $ 53,365 $ 45,458 $239,411
Certificates of deposit of $100,000 or more (1) ......... 60,382 13,100 10,377 10,053 93,912
-------- -------- -------- -------- --------
Total of certificates of deposit ..................... $155,898 $ 58,172 $ 63,742 $ 55,511 $333,323
======== ======== ======== ======== ========
- ----------
(1) The weighted average interest rates for these accounts, by maturity
period, are 1.76% for 3 months or less; 1.77% for 3 to 6 months; 1.94% for
6 to 12 months; and 2.15% for over 12 months. The overall weighted average
interest rate for accounts of $100,000 or more was 1.84%.
Borrowings. Our borrowings consist of advances and repurchase agreements.
At September 30, 2004, we had access to additional Federal Home Loan Bank
advances of up to $228 million. The following table sets forth information
concerning balances and interest rates on our Federal Home Loan Bank and other
advances and repurchase agreements at the dates and for the years indicated.
At or For the Years Ended September 30,
------------------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Balance at end of year ............................. $214,909 $164,757 $102,968
Average balance during year ........................ 159,948 112,248 113,446
Maximum outstanding at any month end ............... 214,910 164,757 131,637
Weighted average interest rate at end of year ...... 2.97% 2.98% 4.08%
Average interest rate during year .................. 3.17% 3.83% 4.85%
21
Activities of Subsidiaries and Affiliated Entities
Provident Municipal Bank is a wholly-owned subsidiary of Provident Bank.
Provident Municipal Bank is a New York State-chartered commercial bank whose
purpose is limited to accepting municipal deposits and investing funds obtained
into investment securities. New York State law requires municipalities located
in the State of New York to deposit funds with commercial banks, effectively
forbidding these municipalities from depositing funds with savings institutions,
including federally chartered savings associations, such as Provident Bank.
Provident Municipal Bank began operations on April 19, 2002, and at September
30, 2004 had $106.7 million in deposits from municipal entities in the
communities served by Provident Bank.
Provest Services Corp. is a wholly-owned subsidiary of Provident Bank,
holding an investment in a limited partnership that operates an assisted-living
facility. A percentage of the units in the facility are for low-income
individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident
Bank that has engaged a third-party provider to sell annuities, mutual funds,
life and health insurance products to Provident Bank's customers. Through
September 30, 2004, the activities of these subsidiaries have had an
insignificant effect on our consolidated financial condition and results of
operations. During fiscal 1999, Provident Bank established Provident REIT, Inc.,
a wholly-owned subsidiary in the form of a real estate investment trust.
Provident REIT, Inc. holds both residential and commercial real estate loans.
At the time of our initial public offering, 46.7% of our common stock was
sold to the public, and the remaining 53.3% was retained by Provident Bancorp,
MHC, the successor to our original mutual savings association. The accounts of
Provident Bancorp, MHC are not included in our consolidated financial statements
for the years ending September 30, 2003 and 2002.
Competition
We face significant competition in both originating loans and attracting
deposits. The New York metropolitan area has a high concentration of financial
institutions, many of which are significantly larger institutions with greater
financial resources than us, and many of which are our competitors to varying
degrees. Our competition for loans comes principally from commercial banks,
savings banks, mortgage banking companies, credit unions, insurance companies
and other financial service companies. Our most direct competition for deposits
has historically come from commercial banks, savings banks and credit unions. We
face additional competition for deposits from non-depository competitors such as
the mutual fund industry, securities and brokerage firms and insurance
companies. We have emphasized personalized banking and the advantage of local
decision making in our banking business and this strategy appears to have been
well received in our market area. We do not rely on any individual, group, or
entity for a material portion of our deposits.
Employees
As of September 30, 2004, we had 396 full-time employees and 56 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
22
Regulation
General
As a federally chartered savings association, Provident Bank is regulated
and supervised by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. Provident Municipal Bank is regulated by the New York
State Department of Banking and the Federal Deposit Insurance Corporation. This
regulation and supervision establishes a comprehensive framework of activities
in which a financial institution may engage and is intended primarily for the
protection of the Federal Deposit Insurance Corporation's deposit insurance
funds and depositors. Under this system of federal regulation, financial
institutions are periodically examined to ensure that they satisfy applicable
standards with respect to their capital adequacy, assets, management, earnings,
liquidity and sensitivity to market interest rates. After completing an
examination, the federal agency critiques the financial institution's operations
and assigns its rating (known as an institution's CAMELS). Under federal law, an
institution may not disclose its CAMELS rating to the public. Provident Bank
also is a member of, and owns stock in, the Federal Home Loan Bank of New York,
which is one of the twelve regional banks in the Federal Home Loan Bank System.
Provident Bank also is regulated to a lesser extent by the Board of Governors of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision examines Provident Bank and
prepares reports for the consideration of its board of directors on any
operating deficiencies. Provident Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws,
especially in matters concerning the ownership of deposit accounts and the form
and content of Provident Bank's loan documents.
Any change in these laws or regulations, whether by the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the New York State
Department of Banking or Congress, could have a material adverse impact on
Provident Bancorp, Inc., Provident Bank, Provident Municipal Bank and their
respective operations.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and
investment powers from the Home Owners' Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, Provident Bank may invest in mortgage loans secured by residential
and commercial real estate, commercial business and consumer loans, certain
types of debt securities and certain other loans and assets. Provident Bank also
may establish subsidiaries that may engage in activities not otherwise
permissible for Provident Bank directly, including real estate investment,
securities brokerage and insurance agency.
Capital Requirements. Office of Thrift Supervision regulations require
savings associations to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital ratio. The
prompt corrective action standards discussed below, in effect, establish a
minimum 2% tangible capital standard.
The risk-based capital standard for savings associations requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks inherent in the type of asset. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, allowance for loan and lease
losses up to a maximum of 1.25% of risk-weighted assets, and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
At September 30, 2004, Provident Bank's capital exceeded all applicable
requirements.
23
Loans to One Borrower. A federal savings association generally may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which generally does not
include real estate. As of September 30, 2004, Provident Bank was in compliance
with the loans-to-one-borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, Provident
Bank is subject to a qualified thrift lender, or "QTL," test. Under the QTL
test, Provident Bank must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings association's business.
"Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans.
Provident Bank also may satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
A savings association that fails the QTL test must either convert to a
bank charter or operate under specified restrictions. At September 30, 2004,
Provident Bank maintained approximately 85% of its portfolio assets in qualified
thrift investments, and therefore satisfied the QTL test.
Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the institution's
capital account. A savings association must file an application for approval of
a capital distribution if:
o the total capital distributions for the applicable calendar year
exceed the sum of the savings association's net income for that year
to date plus the savings association's retained net income for the
preceding two years;
o the savings association would not be at least adequately capitalized
following the distribution;
o the distribution would violate any applicable statute, regulation,
agreement or Office of Thrift Supervision-imposed condition; or
o the savings association is not eligible for expedited treatment of
its filings.
Even if an application is not otherwise required, every savings
association that is a subsidiary of a holding company must still file a notice
with the Office of Thrift Supervision at least 30 days before the board of
directors declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application
if:
o the savings association would be undercapitalized following the
distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in
any statute, regulation or agreement.
Liquidity. A federal savings association is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
24
Community Reinvestment Act and Fair Lending Laws. All savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
connection with its examination of a federal savings association, the Office of
Thrift Supervision is required to assess the savings association's record of
compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. A savings association's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by
the Office of Thrift Supervision, as well as other federal regulatory agencies
and the Department of Justice. Provident Bank received an "outstanding"
Community Reinvestment Act rating in its most recent federal examination.
Privacy Standards. Effective July 2001, financial institutions, including
Provident Bank, became subject to regulations implementing the privacy
protection provisions of the Gramm-Leach-Bliley Act. These regulations require
Provident Bank to disclose its privacy policy, including identifying with whom
it shares "nonpublic personnel information," to customers at the time of
establishing the customer relationship and annually thereafter. In addition,
Provident Bank is required to provide its customers with the ability to
"opt-out" of having Provident Bank share their nonpublic personal information
with unaffiliated third parties before it can disclose such information, subject
to certain exceptions. The implementation of these regulations did not have a
material adverse effect on Provident Bank. The Gramm-Leach-Bliley Act also
allows each state to enact legislation that is more protective of consumers'
personal information.
Also effective July 1, 2001, the Office of Thrift Supervision and other
federal banking agencies adopted guidelines establishing standards for
safeguarding customer information to implement certain provisions of the
Gramm-Leach-Bliley Act. The guidelines describe the agencies' expectations for
the creation, implementation and maintenance of an information security program,
which would include administrative, technical and physical safeguards
appropriate to the size and complexity of a financial institution and the nature
and scope of its activities. The standards set forth in the guidelines are
intended to insure the security and confidentiality of customer records and
information, to protect against any anticipated threats or hazards to the
security or integrity of such records and to protect against unauthorized access
to or use of such records, or information that could result in substantial harm
or inconvenience to any customer. Provident Bank has implemented these
guidelines, and such implementation did not have a material adverse effect on
our operations.
Transactions with Related Parties. A federal savings association's
authority to engage in transactions with its "affiliates" is limited by Office
of Thrift Supervision regulations and by Sections 23A and 23B of the Federal
Reserve Act. The term "affiliates" for these purposes generally means any
company that controls or is under common control with an institution. Provident
Bancorp, Inc. and its non-savings institution subsidiaries will be affiliates of
Provident Bank. In general, transactions with affiliates must be on terms that
are as favorable to the savings association as comparable transactions with
non-affiliates. In addition, certain types of these transactions are restricted
to an aggregate percentage of the savings association's capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive
loans from the savings association. In addition, Office of Thrift Supervision
regulations prohibit a savings association from lending to any of its affiliates
that are engaged in activities that are not permissible for bank holding
companies and from purchasing the securities of any affiliate, other than a
subsidiary.
Provident Bank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions require that extensions of credit to insiders (i)
be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features, and
(ii) not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of Provident Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by Provident Bank's board of
directors.
25
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over federal savings institutions and has the authority to bring
enforcement action against all "institution-affiliated parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institution, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal
law. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The guidelines address
internal controls and information systems, internal audit systems, credit
underwriting, loan documentation, interest rate risk exposure, asset growth,
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
Prompt Corrective Action Regulations. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five categories
based on the savings association's capital:
o well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based
capital and 10% total risk-based capital);
o adequately capitalized (at least 4% leverage capital, 4% tier 1
risk-based capital and 8% total risk-based capital);
o undercapitalized (less than 3% leverage capital, 4% tier 1
risk-based capital or 8% total risk-based capital);
o significantly undercapitalized (less than 3% leverage capital, 3%
tier 1 risk-based capital or 6% total risk-based capital); and
o critically undercapitalized (less than 2% tangible capital).
Generally, the banking regulator is required to appoint a receiver or
conservator for a savings association that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
Office of Thrift Supervision within 45 days of the date a bank receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the savings association, including, but not limited
to, restrictions on growth, investment activities, capital distributions and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
savings associations, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At September 30, 2004, Provident Bank met the criteria for being
considered "well-capitalized."
26
Insurance of Deposit Accounts. Deposit accounts in Provident Bank are
insured by the Savings Association Insurance Fund and, to a limited extent, the
Bank Insurance Fund of the Federal Deposit Insurance Corporation, generally up
to a maximum of $100,000 per separately insured depositor. Provident Bank's
deposits, therefore, are subject to Federal Deposit Insurance Corporation
deposit insurance assessments. The Federal Deposit Insurance Corporation has
adopted a risk-based system for determining deposit insurance assessments. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates as necessary to maintain the required ratio of reserves to insured
deposits of 1.25%. In addition, all Federal Deposit Insurance
Corporation-insured institutions must pay assessments to the Federal Deposit
Insurance Corporation at an annual rate of .0212% of insured deposits to fund
interest payments on bonds maturing in 2017 that were issued by a federal agency
to recapitalize the predecessor to the Savings Association Insurance Fund.
Prohibitions Against Tying Arrangements. Federal savings associations are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
Federal Home Loan Bank System. Provident Bank is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank System provides a central credit facility primarily
for member institutions. As a member of The Federal Home Loan Bank of New York,
Provident Bank is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank, whichever is greater. As of September 30, 2004,
Provident Bank was in compliance with this requirement.
Federal Reserve System
Federal Reserve Board regulations require savings associations to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At September 30,
2004, Provident Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.
The USA PATRIOT Act
The USA PATRIOT Act gives the federal government powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Certain provisions of the act impose affirmative
obligations on a broad range of financial institutions, such as Provident Bank.
These obligations include enhanced anti-money laundering programs, customer
identification programs and regulations relating to private banking accounts or
correspondent accounts in the United States for non-United States persons or
their representatives (including foreign individuals visiting the United
States).
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These regulations would require
financial institutions to adopt the policies and procedures contemplated by the
USA PATRIOT Act. Such required compliance programs are intended to supplement
existing compliance requirements, also applicable to financial institutions,
under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations.
Holding Company Regulation
Provident Bancorp is a unitary savings and loan holding company, subject
to regulation and supervision by the Office of Thrift Supervision. The Office of
Thrift Supervision has enforcement authority over Provident Bancorp and its
non-savings institution subsidiaries. Among other things, this authority permits
the Office of Thrift Supervision to restrict or prohibit activities that are
determined to be a risk to Provident Bank.
27
Under prior law, a unitary savings and loan holding company generally had
no regulatory restrictions on the types of business activities in which it could
engage, provided that its subsidiary savings bank was a qualified thrift lender.
The Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings and loan
holding companies not existing on, or applied for before, May 4, 1999 to those
activities permissible for financial holding companies or for multiple savings
and loan holding companies. Provident Bancorp is not a grandfathered unitary
savings and loan holding company and, therefore, is limited to the activities
permissible for financial holding companies or for multiple savings and loan
holding companies. A financial holding company may engage in activities that are
financial in nature, including underwriting equity securities and insurance,
incidental to financial activities or complementary to a financial activity. A
multiple savings and loan holding company is generally limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift Supervision,
and certain additional activities authorized by Office of Thrift Supervision
regulations.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the acquisition
or retention of, with specified exceptions, more than 5% of the equity
securities of a company engaged in activities that are not closely related to
banking or financial in nature or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by holding
companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources and future prospects of the
savings institution involved the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
Federal Securities Law
The common stock of Provident Bancorp is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). Provident Bancorp is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act. Common stock of Provident Bancorp held by persons who
are affiliates (generally officers, directors and principal stockholders) of
Provident Bancorp may not be resold without registration or unless sold in
accordance with certain resale restrictions. If Provident Bancorp meets
specified current public information requirements, each affiliate of Provident
Bancorp is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (the "Act"), provides for corporate
governance, disclosure and accounting reforms intended to address corporate and
accounting fraud. The Act establishes a new accounting oversight board that
enforces auditing, quality control and independence standards, and will be
funded by fees from all publicly traded companies. The Act also places certain
restrictions on the scope of services that may be provided by accounting firms
to their public company audit clients. Any non-audit services being provided to
a public company audit client will require preapproval by the company's audit
committee. In addition, the Act makes certain changes to the requirements for
audit partner rotation after a period of time. The Act also requires chief
executive officers and chief financial officers, or their equivalent, to certify
to the accuracy of periodic reports filed with the Securities and Exchange
Commission, subject to civil and criminal penalties if they knowingly or
willingly violate this certification requirement. In addition, under the Act,
counsel is required to report to the chief executive officer or chief legal
officer of the company, evidence of a material violation of the securities laws
or a breach of fiduciary duty by a company and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.
Under the Act, longer prison terms will apply to corporate executives who
violate federal securities laws; the period during which certain types of suits
can be brought against a company or its officers is extended; and bonuses issued
to top executives prior to restating a company's financial statements are now
subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures
28
by public companies, as they must immediately disclose any material changes in
their financial condition or operations. Directors and executive officers must
also provide information for most changes in beneficial ownership in a company's
securities within two business days of the change.
The Act also increases the oversight of, and codifies certain requirements
relating to, audit committees of public companies and how they interact with the
company's "registered public accounting firm." Audit Committee members must be
independent and are absolutely barred from accepting consulting, advisory or
other compensatory fees from the public company. In addition, companies must
disclose whether at least one member of the committee is an "audit committee
financial expert" (as defined by Securities and Exchange Commission regulations)
and if not, why not. Under the Act, a company's registered public accounting
firm will be prohibited from performing statutorily mandated audit services for
a company if such company's chief executive officer, chief financial officer,
comptroller, chief accounting officer or any person serving in equivalent
positions had been employed by such firm and participated in the audit of such
company during the one-year period preceding the audit initiation date. The Act
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent accountant engaged in the audit of the
company's financial statements for the purpose of rendering the financial
statements materially misleading. The Act also requires the Securities and
Exchange Commission to prescribe rules requiring inclusion of any internal
control report and assessment by management in the annual report to
shareholders. The Act requires the company's registered public accounting firm
that issues the audit report to attest to and report on management's assessment
of the company's internal controls.
Although we will incur additional expense in complying with the provisions
of the Sarbanes-Oxley Act and the resulting regulations, management does not
expect that such compliance will have a material impact on our results of
operations or financial condition.
29
ITEM 2. Properties
- ------------------
As of September 30, 2004, Provident Bank leased 14 properties, including
its headquarters location, from third parties. In addition, Provident Bank owns
fourteen properties. At September 30, 2004, the net book value of our properties
was $11.6 million. The following is a list of our locations:
Corporate Office, Commercial Lending Division, and Investment Management and
Trust Department:
# 400 Rella Boulevard
Montebello, NY 10901
(845) 369-8040
Rockland County Branches:
- ------------------------
# 44 West Route 59 * 196 Route 59 # 69 Brookside Avenue
Nanuet, NY 10954 Suffern, NY 10901 Chester, NY 10918
(845)627-6180 (845)369-8360 (845)469-2255
# 38-40 New Main Street # 1633 Route 202 # 400 Route 211 East
Haverstraw, NY 10927 Pomona, NY 10970 Middletown, NY 10940
(845)942-3880 (845)364-5690 (845)344-0125
* 375 Route 303 at Kings Highway # 44 North Main Street * 200 Stony Brook Court
Orangeburg, NY 10962 (Shop Rite Supermarket) Newburgh, NY 12550
(845)398-4810 New City, NY 10956 (845)561-1000
(845)639-7650
* 148 Route 9W # 2380 Route 52
Stony Point, NY 10980 Orange County Branches: Pine Bush, NY 12566
(845)942-3890 ----------------------- (845)744-2088
* 179 South Main Street # 125 Dolson Avenue Ulster County Branches:
New City, NY 10956 (Shop Rite Supermarket) -----------------------
(845)639-7750 Middletown, NY 10940
(845)342-5777 * 70 Canal Street
* 72 West Eckerson Road Ellenville, NY 12428
Spring Valley, NY 10977 # 153 Route 94 (845)647-4300
(845)426-7230 (Shop Rite Supermarket)
Warwick, NY 10990 * 6100 Route 209
# 715 Route 304 (845)986-9540 Kerhonkson, NY 1244
Bardonia, NY 10954 (845)626-3500
(845)623-6340 * 7 Edward J. Lempka Drive
Florida, NY 10921 Sullivan County Branches:
# 1 Lake Road West (845)651-4091 -------------------------
Congers, NY 10920
(845)267-2180 * 1992 Route 284 * 5250 Main Street, Route 42
Slate Hill, NY 10973 South Fallsburg, NY 12779
* 71 Lafayette Avenue (845)355-6181 (845)434-3070
Suffern, NY 10901
(845)369-8350 # 300 Larkin Drive * Broadway, PO Box 577
Harriman Commons Woodridge, NY 12789
# 26 North Middletown Road Monroe, NY 10950 (845)434-6440
(Shop Rite Supermarket) (845)782-7226
Pearl River, NY 10965
(845)627-6170 * 815 Route 208
Monroe, NY 10950
(845)782-4111
* owned # leased
- ----------------------
30
ITEM 3. Legal Proceedings
- -------------------------
Provident Bancorp is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involve amounts which are believed by management to be
immaterial to Provident Bancorp's financial condition and results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of stockholders during the quarter
ended September 30, 2004.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- ------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
The common stock of Provident Bancorp is quoted on the Nasdaq National
Market under the symbol "PBCP." As of September 30, 2004, Provident Bancorp had
11 registered market makers, 6,243 stockholders of record (excluding the number
of persons or entities holding stock in street name through various brokerage
firms), and 39,618,373 shares outstanding.
The following table sets forth market price and dividend information for
the common stock for the past two fiscal years.
Cash Dividends
Quarter Ended High Low Declared
------------------ ------ ------ --------------
September 30, 2004 $11.75 $10.58 $0.04
June 30, 2004 11.90 10.25 0.04
March 31, 2004 12.15 10.64 0.035
December 31, 2003 10.87 9.33 0.035
September 30, 2003 9.70 7.47 0.034
June 30, 2003 7.46 7.04 0.034
March 31, 2003 7.11 6.77 0.032
December 31, 2002 7.11 6.26 0.029
Information prior to January 14, 2004 has been restated to reflect
the 4.4323-to-1 stock split in conjunction with the Company's
second-step stock offering.
Payment of dividends on Provident Bancorp's common stock is subject to
determination and declaration by the Board of Directors and depends on a number
of factors, including capital requirements, regulatory limitations on the
payment of dividends, the results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends will continue. There were no repurchases of the
Company's shares of common stock during the fourth quarter of the fiscal year
ended September 30, 2004.
31
ITEM 6. Selected Financial Data
- -------------------------------
The following financial condition data and operating data are derived from
the audited consolidated financial statements of Provident Bancorp. Additional
information is provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes included as Item 7 and Item 8 of this report, respectively.
At September 30,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(In thousands)
Selected Financial Condition Data:
Total assets ....................................... $1,826,151 $1,174,305 $1,027,701 $ 881,260 $ 844,303
Loans, net (1) ..................................... 980,281 703,184 660,816 606,146 589,822
Securities available for sale ...................... 534,297 300,715 206,146 163,928 162,157
Securities held to maturity ........................ 69,078 73,544 86,791 71,355 48,586
Deposits ........................................... 1,239,532 869,553 799,626 653,100 608,976
Borrowings ......................................... 214,909 164,757 102,968 110,427 127,571
Equity ............................................. 349,512 117,857 110,867 102,620 90,986
Years Ended September 30,
----------------------------------------------------------------------
2004(9) 2003 2002(10) 2001 2000
---------- ---------- ---------- ---------- ----------
(In thousands)
Selected Operating Data:
Interest and dividend income ....................... $ 74,508 $ 57,790 $ 59,951 $ 60,978 $ 58,899
Interest expense ................................... 12,982 12,060 17,201 26,244 26,034
---------- ---------- ---------- ---------- ----------
Net interest income ............................. 61,526 45,730 42,750 34,734 32,865
Provision for loan losses .......................... 800 900 900 1,440 1,710
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses ....................................... 60,726 44,830 41,850 33,294 31,155
Non-interest income ................................ 11,573 9,555 5,401 4,706 3,391
Non-interest expense ............................... 56,146 36,790 32,161 26,431 25,808
---------- ---------- ---------- ---------- ----------
Income before income tax expense ................... 16,153 17,595 15,090 11,569 8,738
Income tax expense ................................. 5,136 6,344 5,563 4,087 2,866
---------- ---------- ---------- ---------- ----------
Net income ...................................... $ 11,017 $ 11,251 $ 9,527 $ 7,482 $ 5,872
========== ========== ========== ========== ==========
(footnotes on following pages)
32
At or For the Years Ended September 30,
-----------------------------------------------------------
2004(9) 2003 2002(10) 2001 2000
------- ------- ------- ------- -------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average
total assets) ................................................... 0.69% 1.04% 0.99% 0.87% 0.70%
Return on equity (ratio of net income to average
equity) ......................................................... 3.94 9.92 8.92 7.71 6.58
Average interest rate spread (2) ................................. 3.94 4.30 4.33 3.56 3.51
Net interest margin (3) ........................................... 4.25 4.55 4.71 4.20 4.12
Efficiency ratio (4) .............................................. 76.81 66.55 66.79 67.02 71.18
Non-interest expense to average total assets ...................... 3.49 3.40 3.36 3.06 3.08
Ratio of average interest-earning assets
to average interest-bearing liabilities ......................... 135.27 121.33 120.03 120.20 118.54
Per Share and Related Data: (8)
Basic earnings per share (8) ...................................... $ 0.30 $ 0.33 $ 0.28 $ 0.22 $ 0.17
Diluted earnings per share ........................................ 0.29 0.32 0.27 0.22 0.17
Dividends per share (5) ........................................... 0.15 0.13 0.09 0.05 0.03
Dividend payout ratio (6) ......................................... 50.00% 39.39% 32.14% 22.73% 17.65%
Book value per share (7) .......................................... $ 8.82 $ 3.35 $ 3.13 $ 2.89 $ 2.54
Asset Quality Ratios:
Non-performing assets to total assets ............................. 0.15% 0.40% 0.49% 0.27% 0.50%
Non-performing loans to total loans ............................... 0.27 0.66 0.74 0.37 0.67
Allowance for loan losses to non-performing
loans ........................................................... 634.02 235.66 209.59 400.66 189.85
Allowance for loan losses to total loans .......................... 1.74 1.55 1.55 1.48 1.28
Capital Ratios:
Equity to total assets at end of year ............................. 19.14% 10.04% 10.79% 11.64% 10.78%
Average equity to average assets .................................. 17.41 10.47 11.15 11.24 10.67
Tier 1 leverage ratio (bank only) ................................. 11.28 8.14 8.45 10.20 9.59
Other Data:
Number of full service offices .................................... 27 18 17 15 13
- --------------------------------------------------------------------------------
(1) Excludes loans held for sale.
(2) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-
average cost of interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(4) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(5) The following table sets forth aggregate cash dividends paid per period,
which is calculated by multiplying the dividend declared per share by the
number of shares outstanding as of the applicable record date.
33
For the Years Ended September 30,
---------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In thousands)
Dividends paid to public stockholders $5,008 $1,968 $1,435 $ 807 $ 563
Dividends paid to Provident Bancorp, MHC -- 453 500 -- 486
------ ------ ------ ------ ------
Total dividends paid $5,008 $2,421 $1,935 $ 807 $1,049
====== ====== ====== ====== ======
Payments listed above exclude cash dividends waived by Provident Bancorp,
MHC during the years ended September 30, 2004, 2003, 2002, 2001 and 2000
of $662, $2.1 million, $1.3 million, $972,000, and $177,000, respectively.
Provident Bancorp, MHC began waiving dividends in May 1999, and, as of
September 30, 2004, had waived dividends totaling $5.3 million.
(6) The dividend payout ratio represents dividends per share divided by basic
earnings per share.
(7) Book value per share is based on total stockholders' equity and
39,618,373, 35,221,365 35,447,372, 35,565,510 and 35,803,232 outstanding
common shares at September 30, 2004, 2003, 2002, 2001 and 2000,
respectively. For this purpose, common shares include unallocated employee
stock ownership plan shares but exclude treasury shares.
(8) Prior period share information has been adjusted to reflect the
4.4323-to-one conversion ratio in connection with the Company's second
step conversion in January 2004.
(9) Includes $5.0 million ($3.0 million after tax) and $773,000 ($464,000
after tax) for the establishment of the charitable foundation and merger
integration costs, respectively.
(10) Includes $531,000 ($319,000 after tax) in merger integration costs.
34
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
General
Our results of operations depend primarily on our net interest income,
which is the difference between the interest income on our earning assets, such
as loans and securities, and the interest expense paid on our deposits and
borrowings. Results of operations are also affected by non-interest income and
expense, the provision for loan losses and income tax expense. Non-interest
income consists primarily of banking fees and service charges, gains (losses) on
sales of loans and securities available for sale and net increases in the cash
surrender value of bank-owned life insurance ("BOLI") contracts. Our
non-interest expense consists primarily of salaries and employee benefits,
occupancy and office expenses, advertising and promotion expense and data
processing expenses. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities. The
financial condition and results of operations of Provident Bancorp are discussed
herein on a consolidated basis with the Bank. Reference to Provident Bancorp may
signify the Bank, depending on the context and time period.
The following is an analysis of the financial condition and results of
operations of the Company. This item should be read in conjunction with the
consolidated financial statements and related notes filed herewith in Part II,
Item 8, "Financial Statements and Supplementary Data" and the description of the
Company's business filed here with in Part I, Item I, "Business."
Overview
The Company provides financial services to individuals and businesses in
Upstate New York. The Company's business is primarily accepting deposits from
customers through its banking centers and investing those deposits, together
with funds generated from operations and borrowings, in residential mortgages,
commercial real estate loans, commercial business loans and leases, consumer
loans, and investment securities. Additionally, the Company offers wealth
management services.
Total assets increased to $1.8 billion at September 30, 2004 from $1.2
billion at September 30, 2003. This 56% increase resulted principally from the
investment of the $192.5 million of capital raised from the Offering and the
concurrent $349.7 million of assets acquired from ENB in January 2004. Given the
historically low interest rate environment, the Company invested a portion of
the proceeds from the Offering in short-term investments. Although this strategy
forgoes some short-term profits, management believes this initiative will better
position the Company for long-term growth and profitability when interest rates
begin to rise. During 2004, the Company furthered its commercial lending and
banking initiatives. Excluding the loans acquired with ENB, commercial loans
increased 78%.
Net income for the year ended September 30, 2004 decreased 2% to $11.0
million, or $0.29 per diluted share from $11.3 million, or $0.32 per diluted
share for the year September 30, 2003. The decline is primarily due to an
after-tax charge of $3.0 million due to the establishment of the charitable
foundation in connection with the Offering. During 2004, the Company benefited
from the investment of funds raised in the Offering, the acquisition of ENB in
January and increased commercial real estate and business lending activity.
These benefits were partially offset by the impact of the low interest rate
environment on its investment and loan portfolio yields, which reduced the
Company's net interest rate spread.
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. Accounting policies
considered critical to our financial results include the allowance for loan
losses, accounting for goodwill and other intangible assets, accounting for
deferred income taxes and the recognition of interest income.
35
The methodology for determining the allowance for loan losses is
considered by management to be a critical accounting policy due to the high
degree of judgment involved, the subjectivity of the assumptions utilized and
the potential for changes in the economic environment that could result in
changes to the amount of the allowance for loan losses considered necessary. We
evaluate our assets at least quarterly, and review their risk components as a
part of that evaluation. See Note 3, Summary of Significant Accounting
Policies--Allowance for Loan Losses in our Notes to Consolidated Financial
Statements for a discussion of the risk components. We consistently review the
risk components to identify any changes in trends. Accounting for goodwill is
considered to be a critical policy because goodwill must be tested for
impairment at least annually using a "two-step" approach that involves the
identification of reporting units and the estimation of fair values. The
estimation of fair values involves a high degree of judgment and subjectivity in
the assumptions utilized. If goodwill is determined to be impaired, it would be
expensed in the period in which it became impaired.
We also use judgment in the valuation of other intangible assets (core
deposit base intangibles). A core deposit base intangible asset has been
recorded for core deposits (defined as checking, money market and savings
deposits) that were acquired in an acquisition that was accounted as a purchase
business combination. The core deposit base intangible asset has been recorded
using the assumption that the acquired deposits provide a more favorable source
of funding than more expensive wholesale borrowings. An intangible asset has
been recorded for the present value of the difference between the expected
interest to be incurred on these deposits and interest expense that would be
expected if these deposits were replaced by wholesale borrowings, over the
expected lives of the core deposits. If we find these deposits have a shorter
life than was estimated, we will write down the asset by expensing the amount
that is impaired.
We use the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises doubt as to the
realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We exercise significant
judgment in evaluating the amount and timing of recognition of the resulting tax
liabilities and assets, including projections of future taxable income. These
judgments and estimates are reviewed on a continual basis as regulatory and
business factors change.
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.
Management Strategy
We operate as an independent community bank that offers a broad range of
customer-focused financial services as an alternative to money center banks in
our market area. Management has invested in the infrastructure and staffing to
support our strategy of serving the financial needs of individuals, businesses
and municipalities in our market area. This has resulted in a change in our
business mix, providing a favorable platform for long-term sustainable growth.
Highlights of management's business strategy are as follows:
Operating as a Community Bank. As an independent community bank, we
emphasize the local nature of our decision-making to respond more effectively to
the needs of our customers while providing a full range of financial services to
the individuals, corporations and municipalities in our market area. We offer a
broad range of financial products to meet the changing needs of the marketplace,
including internet banking, cash management services and sweep accounts. In
addition, we offer asset management and trust services to meet the investing
needs of individuals, corporations and not-for-profit entities. As a result, we
are able to provide locally the financial services required to meet the needs of
the majority of existing and potential customers in our market.
36
Enhancing Customer Service. We are committed to providing superior
customer service as a way to differentiate us from our competition. As part of
our commitment to service, we have established Sunday banking and extended
service hours. In addition, we offer multiple access channels to our customers,
including our branch and ATM network, internet banking, our Customer Care
Telephone Center and our Automated Voice Response system. We reinforce in our
employees a commitment to customer service through extensive training,
recognition programs and measurement of service standards.
Growing and Diversifying our Loan Portfolio. We offer a broad range of
loan products to commercial businesses, real estate owners, developers and
individuals. To support this activity, we have developed commercial, consumer
and residential loan departments staffed with experienced professionals to
promote the continued growth and prudent management of loan assets. We have
experienced consistent and significant growth in our commercial loan portfolio
over the years while continuing to grow our residential mortgage and consumer
lending businesses. As a result, we believe that we have developed a diversified
loan portfolio with a favorable mix of loan types, maturities and yields.
Expanding our Retail Banking Franchise. Management intends to continue
expansion of its retail banking franchise and to increase the number of
households and businesses served in our market area. Our strategy is to deliver
exceptional customer service, which depends on up-to-date technology and
convenient access, as well as courteous personal contact from a trained and
motivated workforce. This approach has resulted in continued growth in core
deposits, which has improved our overall cost of funds. Management intends to
maintain this strategy, which will require ongoing investment in retail banking
locations and technology to support exceptional service levels for Provident
Bank's customers.
Analysis of Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them,
respectively.
37
The following table sets forth average balance sheets, average yields and
costs, and certain other information for the years indicated. Tax-exempt
securities are reported on a tax-equivalent basis, using a 35% federal tax rate.
All average balances are daily average balances. Non-accrual loans were included
in the computation of average balances, but have been reflected in the table as
loans carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense.
Years Ended September 30,
At September ---------------------------------------
30, 2004 2004
------------ ---------------------------------------
Average
Outstanding
Yield/Rate Balance Interest Yield/Rate
---------- ----------- ---------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans (1) ............................. 6.03% $ 886,749 $ 54,093 6.10%
Securities taxable .................... 3.77 508,123 18,865 3.71
Securities-tax exempt ................. 5.08 38,505 2,102 5.46
Other ................................. 2.17 12,626 184 1.46
---------- ----------
Total interest-earning assets ...... 5.14 1,446,003 75,244 5.20
----------
Non-interest-earning assets ........... 161,591
----------
Total assets ....................... $1,607,594
==========
Interest-bearing liabilities:
Savings deposits (2) .................. 0.45 $ 356,998 1,570 0.44
Money market deposits ................. 0.64 150,866 859 0.57
NOW deposits .......................... 0.21 88,677 189 0.21
Certificates of deposit ............... 1.86 311,197 5,283 1.70
Borrowings ............................ 2.97 161,272 5,081 3.15
---------- ----------
Total interest-bearing
liabilities ...................... 1.31 1,069,010 12,982 1.21
----------
Non-interest-bearing liabilities ...... 258,696
----------
Total liabilities .................. 1,327,706
Stockholders' equity .................. 279,888
----------
Total liabilities and
stockholders' equity ............. $1,607,594 62,262
========== ----------
Less tax equivalent
adjustment ........................... (736)
----------
Net interest income ................... $ 61,526
==========
Net interest rate spread (3) .......... 3.99%
Net interest-earning assets (4) ....... $ 376,993
==========
Net interest margin (5) ............... 4.31%
Ratio of interest-earning assets to
interest-bearing liabilities ....... 135.27%
Years Ended September 30,
-----------------------------------------------------------------------------------
2003 2002
---------------------------------------- ----------------------------------------
Average Average
Outstanding Outstanding
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ---------- ---------- ----------- ---------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans (1) ............................. $ 683,102 $ 43,815 6.41% $ 630,710 $ 44,967 7.13%
Securities taxable .................... 290,717 12,885 4.25 244,735 13,892 5.68
Securities-tax exempt ................. 18,861 1,078 4.79 14,139 928 6.56
Other ................................. 11,804 389 3.30 18,138 488 2.69
---------- ---------- ---------- ----------
Total interest-earning assets ...... 1,004,484 58,167 5.79 907,722 60,275 6.64
---------- ----------
Non-interest-earning assets ........... 78,078 50,192
---------- ----------
Total assets ....................... $1,082,562 $ 957,914
========== ==========
Interest-bearing liabilities:
Savings deposits (2) .................. $ 276,527 1,497 0.54 $ 227,143 2,289 1.01
Money market deposits ................. 121,840 955 0.78 106,133 1,435 1.35
NOW deposits .......................... 77,165 200 0.26 73,403 315 0.43
Certificates of deposit ............... 240,141 5,123 2.13 236,133 7,662 3.24
Borrowings ............................ 112,248 4,285 3.83 113,446 5,500 4.85
---------- ---------- ---------- ----------
Total interest-bearing
liabilities ...................... 827,921 12,060 1.46 756,258 17,201 2.27
---------- ----------
Non-interest-bearing liabilities ...... 141,272 94,869
---------- ----------
Total liabilities .................. 969,193 851,127
Stockholders' equity .................. 113,369 106,787
---------- ----------
Total liabilities and
stockholders' equity ............. $1,082,562 46,107 $ 957,914 43,074
========== ====== ========== ----------
Less tax equivalent
adjustment ........................... (377) (324)
---------- ----------
Net interest income ................... $ 45,730 $ 42,750
========== ==========
Net interest rate spread (3) .......... 4.33% 4.37%
Net interest-earning assets (4) ....... $ 176,563 $ 151,464
========== ==========
Net interest margin (5) ............... 4.59% 4.75%
Ratio of interest-earning assets to
interest-bearing liabilities ....... 121.33% 120.03%
- --------------------------------------------------------------------------------
(1) Balances include the effect of net deferred loan origination fees
and costs, and the allowance for loan losses.
(2) Includes club accounts and interest-bearing mortgage escrow
balances.
(3) Net interest rate spread represents the difference between the tax
equivalent yield on average interest-earning assets and the cost of
average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets
less total interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent)
divided by average total interest-earning assets.
38
The following table presents the dollar amount of changes in interest
income (on a fully tax-equivalent basis) and interest expense for the major
categories of our interest-earning assets and interest-bearing liabilities.
Information is provided for each category of interest-earning assets and
interest-bearing liabilities with respect to (i) changes attributable to changes
in volume (i.e., changes in average balances multiplied by the prior-period
average rate) and (ii) changes attributable to rate (i.e., changes in average
rate multiplied by prior-period average balances). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the change due to volume and the change due to
rate.
Years Ended September 30,
---------------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
-------------------------------------- -------------------------------------
Increase (Decrease) Due Increase (Decrease) Due
to Total to Total
----------------------- Increase ----------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- -------- ---------- -------- -------- --------
(In thousands)
Interest-earning assets:
Loans .................................. $ 13,160 $ (2,882) $ 10,278 $ 3,649 $ (4,801) $ (1,152)
Securities taxable ..................... 8,351 (2,371) 5,980 2,354 (3,361) (1,007)
Securities-tax exempt .................. 1,075 (51) 1,024 280 (130) 150
Other .................................. 25 (230) (205) (194) 95 (99)
-------- -------- -------- -------- -------- --------
Total interest-earning assets ........ 22,611 (5,534) 17,077 6,089 (8,197) (2,108)
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Savings deposits ....................... 383 (310) 73 428 (1,220) (792)
Money market deposits .................. 195 (291) (96) 189 (669) (480)
NOW deposits ........................... 29 (40) (11) 15 (130) (115)
Certificates of deposit ................ 1,323 (1,163) 160 128 (2,667) (2,539)
Borrowings ............................. 1,641 (845) 796 (57) (1,158) (1,215)
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ........................ 3,571 (2,649) 922 703 (5,844) (5,141)
-------- -------- -------- -------- -------- --------
Less tax equivalent
adjustment ........................... 377 (18) 359 98 (45) 53
-------- -------- -------- -------- -------- --------
Change in net interest
income ................................. $ 18,663 $ (2,867) $ 15,796 $ 5,288 $ (2,308) $ 2,980
======== ======== ======== ======== ======== ========
Comparison of Financial Condition at September 30, 2004 and September 30, 2003
Total assets. Total assets as of September 30, 2004 were $1.8 billion, an
increase of $651.8 million, or 55.5%, over total assets of $1.2 billion at
September 30, 2003. The increase is due primarily to: (i) the January
acquisition of ENB, whose assets totaled $349.7 million on the merger date; (ii)
proceeds from the offering in the second-step conversion of $192.5 million, net
of related costs; and (iii) internal growth of the Company.
Total securities. Total securities increased by $229.1 million, or 61.2%,
to $603.4 million at September 30, 2004 from $374.3 million at September 30,
2003 as the Company invested the majority of the stock offering in securities.
We primarily invested in mortgage-backed securities, which increased by $147.3
million, or 69.5%, and in U.S. Government and Federal Agency Securities, which
increased by $60.3 million or 45.2%.
Net loans. Net loans as of September 30, 2004 were $980.3 million, an
increase of $277.1 million, or 39.4%, over net loan balances of $703.2 million
at September 30, 2003. Loans acquired from ENB totaled $219.2 million, while the
allowance for loan losses acquired in connection with ENB were $5.7 million, or
2.6% of ENB's outstanding loan balances. Inclusive of ENB loans acquired, (1)
commercial loans increased by $234.0 million, or 92.6%, over balances at
September 30, 2003; (2) consumer loans increased by $49.4 million, or 61.2%,
during the twelve-month period; and (3) residential loans remained unchanged.
Asset quality continues to be strong. At $2.7 million, or 0.15% of total assets,
non-performing assets were down from $4.7 million at September 30, 2003 as two
loans totaling $2.1 million were resolved in the fiscal fourth quarter of 2004.
At September 30, 2004, non-performing loans totaled $2.7 million, or 0.27% of
total loans, compared to $4.7 million, or 0.66% of total loans, at September 30,
2003.
39
Deposits. Deposits as of September 30, 2004 were $1.2 billion, up $370.0
million, or 42.6%, from $869.6 million at September 30, 2003. Deposits acquired
from ENB totaled $326.8 million. Our deposit mix has continued to change along
with our deposit growth. Transaction accounts (demand and NOW deposits)
represented 30% of deposits at September 30, 2004, compared to 26% at September
30, 2003. Savings and money market account balances, which totaled $533.4
million at September 30, 2004, represented 43% of deposits at that date,
compared to 47% at September 30, 2003. Certificates of deposit remained at 27%
of deposits at September 30, 2004 the same as at September 30, 2003. This shift
in mix to lower cost transaction accounts had a positive impact on earnings in
fiscal 2004.
Stockholders' Equity. Stockholders' equity increased by $231.7 million to
$349.5 million at September 30, 2004, compared to $117.9 million at September
30, 2003. The Company completed its second-step conversion in January 2004
raising $192.5 million in new capital, net of related costs from the issuance of
19,573,000 shares of its common stock. In addition, $39.7 million and $4.0
million, respectively, in new capital were issued for the purchase of ENB and
for the formation of the charitable foundation. Net income of $11.0 million for
the fiscal year also increased capital. Partially offsetting the increases were
the payments of cash dividends totaling $5.0 million, the purchase of Employee
Stock Option Plan ("ESOP") shares totaling $10.0 million and net declines in
accumulated comprehensive income of $3.8 million.
During fiscal 2004, the Company did not repurchase shares of its common
stock. The total shares (not adjusted to reflect the 4.4323-to-1 conversion
ratio) 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 September 30, 2004.
At September 30, 2004, there were no shares of common stock held by the Company
in connection with a repurchase program as the treasury shares were cancelled in
connection with the second step stock conversion. Pursuant to applicable Office
of Thrift Supervision regulations that restrict stock repurchases for one year
following the completion of a mutual stock conversion, the authorization to
repurchase shares of the Company's common stock expired in connection with its
second-step conversion on January 14, 2004. However, at September 30, 2004 the
Company held 36,794 shares in treasury relating to the purchase of shares from
participants in the Recognition and Retention Plan ("RRP"), at market value, to
fund the individual participants' applicable tax liability on vested shares.
Comparison of Operating Results for the Years Ended September 30, 2004 and
- --------------------------------------------------------------------------
September 30, 2003
- ------------------
Net income for the year ended September 30, 2004, was $11.0 million,
including after-tax charges of: (i) $3.0 million due to the establishment of the
charitable foundation in connection with the second-step conversion in January
2004, and (ii) $463,000 in merger integration costs for Ellenville National Bank
("ENB"). This compares to $11.3 million for the year ended September 30, 2003.
Diluted earnings per share were $0.29 for the year ended September 30, 2004
compared to $0.32 for the prior fiscal year. Excluding the above items, adjusted
diluted earnings per share would have been $0.39 for the fiscal year ended
September 30, 2004 compared to $0.32 for fiscal 2003. Earnings per share results
for the prior periods have been restated to reflect the 4.4323-to-one conversion
ratio as a result of the Company's second-step conversion.
Supplemental Reporting of Non-GAAP Results of Operations. The Company is
providing supplemental reporting of its results on a "net operating" basis, from
which the Company excludes the after-tax charge for establishing the charitable
foundation, and the after-tax effect of expenses associated with merging
acquired operations into the Company. Although "net operating 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 $3.0 million ($0.08
per share). Merger integration expenses were $464,000 ($0.01 per share) after
tax for the year ended September 30, 2004. Net operating income for the year was
$14.5 million, an increase of 28.7% from $11.3 million in the year-earlier.
Expressed as an annualized rate of return on average assets and average
stockholders' equity, net operating income was 0.90% and 5.17% respectively, in
the year ended September 30, 2004, compared with 1.04% and 9.92% in the year
ended September 30, 2003.
40
Reconciliation of GAAP and Non-GAAP results of operations: A
reconciliation of diluted earnings per share and net income with diluted net
operating earnings per share and net operating income follows (in thousands,
except per share amounts):
For the year ended September 30,
--------------------------------
2004 2003
---------- ----------
Diluted earnings per share $ 0.29 $ 0.32
Charge for establishment of
charitable foundation (1) 0.08 --
Merger integration expenses (1) 0.01 --
Rounding 0.01 --
---------- ----------
Diluted net operating earnings per share $ 0.39 $ 0.32
========== ==========
Net Income $ 11,017 $ 11,251
Charge for establishment of
charitable foundation (1) 3,000 --
Merger integration expenses (1) 464 --
---------- ----------
Net operating income $ 14,481 $ 11,251
========== ==========
(1) After related tax effect at 40% marginal rate.
Interest Income. Interest income on a tax-equivalent basis for the year
ended September 30, 2004 increased to $75.2 million, an increase of $17.1
million, or 29.4%, compared to the prior year. The increase was primarily due to
higher average balances of loans and securities, offset in large part by lower
average yields in both asset classes. Average interest-earning assets for the
year ended September 30, 2004 were $1.4 billion, an increase of $441.5 million,
or 44.0%, over average interest-earning assets for the year ended September 30,
2003 of $1.0 billion. Average loan balances grew by $203.6 million and average
balances of securities and other earning assets increased by $237.9 million. On
a tax-equivalent basis, average yields on interest earning assets fell by 59
basis points to 5.20% for the year ended September 30, 2004, from 5.79% for the
year ended September 30, 2003. Lower market interest rates were the primary
reason for the decline in asset yields.
Interest income on loans for the year ended September 30, 2004 grew 23.5%
to $54.1 million from $43.8 million for the prior fiscal year. Interest income
on commercial loans for the year ended September 30, 2004 increased to $26.2
million, up 72.7% from commercial loan interest income of $15.2 million for the
prior fiscal year. Average balances of commercial loans grew $165.4 million to
$385.7 million, and the impact of that increase offset a nine basis point
decline in average yield. The lower average yield was due, in part, to the
effect on commercial business loans of the lower average prime rate of 4.11% in
fiscal 2004 compared to 4.24% in fiscal 2003. Interest income on consumer loans
increased by $1.0 million, or 25.6%. Our fixed-rate consumer loans have short
average maturities, and our adjustable-rate consumer loans float with the prime
rate. Income earned on residential mortgage loans was $22.8 million for the year
ended September 30, 2004, down $1.8 million, or 7.3%, from the prior year.
Despite an increase of $8.7 million in average residential mortgage loan
balances, interest income was negatively impacted as yields declined by 60 basis
points to 5.84% from 6.44%, reflecting the impact of lower market rates and
refinancing activity.
Interest income on securities and other earning assets increased to $21.2
million for the year ended September 30, 2004, compared to $14.4 million for the
prior year. A 69 basis-point decline in yields was offset by a $237.9 million
increase in the average balances of securities and other earning assets.
Interest Expense. Interest expense for the year ended September 30, 2004
increased by $922,000 to $13.0 million, an increase of 7.6% compared to interest
expense of $12.1 million for the prior fiscal year. The increase was primarily
due to an increase of $241.1 million, or 29.1%, in average interest-bearing
liabilities resulting from the ENB acquisition. Average rates paid on
interest-bearing liabilities for the year ended September 30, 2004 declined by
25 basis points to 1.21% from 1.46% in fiscal 2003. The average interest rate
paid on certificates of deposit fell by 43 basis points to 1.70% for the year
ended September 30, 2004, from 2.13% for the prior year. For the year ended
41
September 30, 2004, average balances of lower cost savings and money market
accounts increased by $80.5 million and $29.0 million, respectively, while
average balances of certificates of deposit increased by $71.1 million compared
to the year ended September 30, 2003. The average interest rate paid on savings
and money market accounts fell by 10 and 21 basis points to 0.44% and 0.57%,
respectively, for the year ended September 30, 2004, from 0.54% and 0.78% for
the prior year.
Net Interest Income. On a tax-equivalent basis, net interest income for
the year ended September 30, 2004 increased to $62.3 million, compared to $46.1
million for the year ended September 30, 2003, an increase of $16.2 million or
35.0%, which was largely due to a $200.4 million increase in average net earning
assets. The increase in interest income of $17.1 million, or 29.4%, reflects a
decline in yield of 59 basis points to 5.20% on average earning assets, offset
by an increase in average earning asset balances of $441.5 million, or 44.0%, to
$1.4 billion as of September 30, 2004. The cost of interest bearing liabilities
increased by $922,000 as the average rate paid on interest bearing liabilities
decreased 25 basis points to 1.21%, but was offset by an increase in average
balances of $241.1 million to $1.1 billion. Net interest margin decreased from
4.59% to 4.31% and net interest spread decreased from 4.33% to 3.99%.
This increase in our net interest income was due, in large part, to the
relative changes in the yield and cost of our assets and liabilities as a result
of decreasing market interest rates since 2001. This decrease in market interest
rates has reduced the cost of interest-bearing liabilities faster and to a
greater extent than the rates on interest-earning assets such as loans and
securities. We have seen a reversal in recent months as the Board of Governors
of the Federal Reserve System has begun to increase the federal funds rate. By
historical standards, however, interest rates remain relatively low. However, if
recently low interest rate levels persist for an extended period of time, the
prepayment of assets could continue at a rate exceeding scheduled repayment.
Such funds received would most likely be reinvested at lower yields than that of
our previously held assets. Also, as the reduction in liability costs have
already exceeded the pace at which assets repriced downward, net interest margin
may be further compressed. Conversely, if market interest rates continue to rise
as a result of an economic recovery, (primarily if shorter term interest rates
rise without a corresponding increase in intermediate term interest rates)
competitive pressures could cause us to increase our funding costs and lead to
pressure on the net interest margin.
Provision for Loan Losses. We recorded $800,000 and $900,000,
respectively, in loan loss provisions for the years ended September 30, 2004 and
September 30, 2003, respectively. At September 30, 2004 the allowance for loan
losses totaled $17.4 million, or 1.74% of the loan portfolio, compared to $11.1
million, or 1.55% of the loan portfolio at September 30, 2003. Net charge-offs
for the year ended September 30, 2004 were $266,000 and $214,000, respectively
(an annual rate of 0.03% of the average loan portfolio).
The increase in the allowance for loan losses was primarily attributable
to growth in the loan portfolio of $55.9 million, representing an increase of
9.09%. In addition, higher risk loan categories, primarily commercial real
estate loans and commercial business loans provided most of this increase. In
January 2004, we acquired $219.2 million in loans as part of our acquisition of
ENB. An additional $5.7 million in the allowance for loan losses was recorded
for the addition of the loan portfolio of ENB. The allowance for loan losses was
also increased as loans that were delinquent, criticized or classified grew to
$9.0 million at September 30, 2002 from $7.5 million at September 30, 2001, an
increase of $1.5 million. An increase in commercial mortgage loans of $2.9
million was partially offset by a decrease in the retail categories (residential
mortgages, equity lines of credit and consumer loans) of $1.2 million and a
decrease in commercial and industrial loans of $294,000.
We increased the percentage allowance requirements in the retail loan
portfolio to reflect the higher delinquencies in the consumer loan portfolio. We
also increased the percentage allowance in the commercial loan portfolio to
reflect the potential impact of loan growth in new adjacent markets, and
continued growth in larger, more complex loans. There has also been a slight
increase in the risk ratings of the performing loan portfolio.
Non-Interest Income. Non-interest income for the fiscal year ended
September 30, 2004 was $11.6 million compared to $9.6 million for the fiscal
year ended September 30, 2003, an increase of $2.0 million, or 21.1%. Gains on
sales of securities and loans were $2.5 million and $320,000, respectively, for
the current year, representing a combined decrease of $327,000 from the
securities and loan sales gains of $2.0 million and $1.1 million, respectively,
for the prior
42
year. Deposit fees and service charges increased to $6.6 million for the current
fiscal year, an increase of $2.1 million, or 48.2%, over the same period last
year. The increase is primarily attributable to increases in service fees of
$1.2 million resulting from the acquired branches, coupled with volume-related
increases in service fees on new and existing accounts at the "legacy" Provident
branches. Other income including loan fees and charges increased by $207,000, or
10.2%, to $2.2 million for the year ended September 30, 2004, from $2.0 million
for the same period last year. The increase is primarily due to $552,000 in
income from the Bank Owned Life Insurance ("BOLI") for the current fiscal year
compared to $483,000 for the same period last year, as the BOLI program was only
established for nine months of fiscal 2003, and $107,000 in increased income on
mutual funds and annuity sales.
Non-Interest Expense. Non-interest expense for the fiscal year ended
September 30, 2004 was $56.1 million, a $19.4 million, or 52.6%, increase over
expenses of $36.8 million for the fiscal year ended September 30, 2003. The
increase was primarily attributable to a contribution of $5.0 million for the
establishment of the Charitable Foundation in connection with the second-step
stock conversion in January, 2004 and other expenses associated with the
completed and pending acquisitions of ENB and Warwick, respectively. Major
increases in compensation and benefits ($2.5 million) and occupancy and office
operations ($1.1 million) were directly attributable to the increased operations
resulting from the acquisition of ENB. Compensation and benefits increased by an
additional $3.1 million due to annual salary increases and staff additions.
Stock-based compensation expense increased by $584,000, or 26.5%, as the
Company's per share value increased from an average of $7.43 per share for the
year ended September 30, 2003 to an average of $10.95 per share for the year
ended September 30, 2004. Also, the Company allocated additional shares related
to the $10.0 million ESOP plan purchase. Professional fees increased to $2.7
million for the year ended September 30, 2004, an increase of $1.1 million, or
68.0%, over the comparable period in the prior year. The increase is primarily
due to the additional fees associated with Sarbanes-Oxley compliance, and the
fees for contracted consultants engaged during the integration periods of ENB
and Warwick. Additional increases in non-interest expense categories for the
current fiscal year were advertising costs of $393,000, or 23.7%, and a
volume-related increase of $711,000, or 24.3%, in data and check processing
costs. The Company incurred $773,000 in integration costs for the current fiscal
year, due primarily to the expenses associated with the systems conversion of
ENB. Amortization of intangible assets increased by $1.6 million due to the
addition of the ENB core deposit intangible. Other non-interest expense
increased by $2.1 million, or 39.0%, primarily due to increases in SEC and
shareholder relations expenses ($231,000), supplies expenses ($520,000), postage
($269,000), ATM transaction expenses ($172,000), insurance expense ($199,000),
courier related expense ($148,000), and miscellaneous operational write-offs
($215,000).
Income Taxes. Income tax expense was $5.1 million for the fiscal year
ended September 30, 2004 compared to $6.3 million for fiscal 2003, representing
effective tax rates of 31.8% and 36.1%, respectively. The lower effective tax
rate in fiscal 2004 is attributable to an increase in tax-exempt securities, a
decrease in state taxes and the release of tax contingency reserves due, in
part, to closed examination years.
Comparison of Operating Results for the Years Ended September 30, 2003 and
- --------------------------------------------------------------------------
September 30, 2002
- ------------------
Net income for the year ended September 30, 2003, was $11.3 million, an
increase of $1.8 million, or 18.1%, compared to net income of $9.5 million for
the year ended September 30, 2002. Basic and diluted earnings per share
increased to $0.33 and $0.32, respectively, for the year ended September 30,
2003, compared to $0.28 and $0.27, respectively, for the year ended September
30, 2002. The increase in net income reflected a $5.1 million, or 29.9%,
decrease in interest expense and a $4.2 million, or 76.9%, increase in
non-interest income, which were partially offset by a $4.6 million, or 14.4%,
increase in non-interest expense and a $2.2 million, or 3.6%, decrease in
interest income.
Interest Income. Interest income for the year ended September 30, 2003
declined to $57.8 million, a decrease of $2.2 million, or 3.6%, compared to the
prior year. The decrease was primarily due to lower average yields on loans and
securities, offset in large part by higher average balances in both asset
classes. Average interest-earning assets for the year ended September 30, 2003
were $1.0 billion, an increase of $96.8 million, or 10.7%, over average
interest-earning assets for the year ended September 30, 2002 of $907.7 million.
Average loan balances grew by $52.4 million and average balances of securities
and other earning assets increased by $44.4 million. Average tax equivalent
yields on interest earning assets fell by 85 basis points to 5.79% for the year
ended September 30, 2003, from 6.64% for the year ended September 30, 2002.
Lower market interest rates were the primary reason for the decline in asset
yields.
43
Total interest income on loans for the year ended September 30, 2003
declined 2.6% to $43.8 million from $45.0 million for the prior fiscal year.
Interest income on commercial loans for the year ended September 30, 2003
increased to $15.2 million, up 6.8% from commercial loan interest income of
$14.2 million for the prior fiscal year. Average balances of commercial loans
grew $32.0 million to $220.3 million, and the impact of that increase offset a
66 basis point decline in average yield. The lower average yield was due, in
part, to the effect on commercial business loans of the lower average prime rate
of 4.24% in fiscal 2003 compared to 4.86% in fiscal 2002. Interest income on
consumer loans declined by $715,000, or 15.0% for the year. Our fixed-rate
consumer loans have short average maturities, and our adjustable-rate consumer
loans float with the prime rate. Income earned on residential mortgage loans was
$24.6 million for the year ended September 30, 2003, down $1.4 million, or 5.4%,
from the prior year. Despite an increase of $16.7 million in average residential
mortgage loan balances, interest income was negatively impacted as yields
declined by 68 basis points to 6.44% from 7.12%, reflecting the impact of lower
market rates and refinancing activity.
Interest income on securities and other earning assets decreased to $14.0
million for the year ended September 30, 2003, compared to $15.0 million for the
prior year. A 106 basis-point decline in yields offset a $44.4 million increase
in the average balances of securities and other earning assets.
Interest Expense. Interest expense for the year ended September 30, 2003
fell by $5.1 million to $12.1 million, a decrease of 29.9% compared to interest
expense of $17.2 million for the prior fiscal year. The decrease was primarily
due to lower rates paid on interest-bearing deposits and borrowings, as well as
to a higher concentration of non-interest-bearing and low interest-bearing
deposits in fiscal 2003. Average rates paid on interest-bearing liabilities for
the year ended September 30, 2003 declined by 81 basis points to 1.46% from
2.27% last year. The average interest rate paid on certificates of deposit fell
by 111 basis points to 2.13% for the year ended September 30, 2003, from 3.24%
for the prior year. For the year ended September 30, 2003, average balances of
lower cost savings and money market accounts increased by $49.4 million and
$15.7 million, respectively, while average balances of certificates of deposit
increased by only $4.0 million compared to the year ended September 30, 2002.
The average interest rate paid on savings and money market accounts fell by 47
and 57 basis points to 0.54% and 0.78%, respectively, for the year ended
September 30, 2003, from 1.01% and 1.35% for the prior year.
Net Interest Income. Net interest income on a tax equivalent basis, for
the year ended September 30, 2003 increased to $46.1 million, compared to $43.1
million for the year ended September 30, 2002, an increase of $3.0 million or
7.0%, which was largely due to a $25.1 million increase in average net earning
assets. The decrease in interest income of $2.2 million, or 3.6%, reflects a
decline in yield of 85 basis points to 5.79% on average earning assets, mostly
offset by an increase in average earning asset balances of $96.8 million, or
10.7%, to $1.0 billion as of September 30, 2003. The cost of interest bearing
liabilities declined by $5.1 million as the average rate paid on interest
bearing liabilities decreased 81 basis points to 1.46%, offsetting an increase
in average balances of $71.7 million to $827.9 million. Net interest margin
decreased from 4.75% to 4.59% and net interest spread decreased from 4.37% to
4.33%.
Provision for Loan Losses. We recorded $900,000 in loan loss provisions
for each of the years ended September 30, 2003 and September 30, 2002. At
September 30, 2003 the allowance for loan losses totaled $11.1 million, or 1.55%
of the loan portfolio, compared to $10.4 million, or 1.55% of the loan portfolio
at September 30, 2003. See "Comparison of Operating Results for the year Ended
September 30, 2004 and September 30, 2003--Provision for Loan Losses," above.
Non-Interest Income. Non-interest income for the fiscal year ended
September 30, 2003 was $9.6 million compared to $5.4 million for the fiscal year
ended September 30, 2002, an increase of $4.2 million, or 76.9%. This increase
was primarily attributable to realized gains on securities available for sale
and sales of loans of $2.0 million and $1.1 million, respectively, in the
current fiscal year, a combined increase of $2.5 million over the securities and
loan sales gains of $607,000 for the prior fiscal year. Other factors include an
increase of $786,000, or 18.7%, in banking fees and service charges, $483,000 in
income from the new BOLI program, which began in December 2002, and an increase
in prepayment fees of $264,000.
44
Non-Interest Expense. Non-interest expense for the fiscal year ended
September 30, 2003 was $36.8 million, a $4.6 million, or 14.4%, increase over
expenses of $32.2 million for the fiscal year ended September 30, 2002. The
increase was primarily attributable to an increase in compensation and employee
benefits of $3.5 million, or 20.0%, primarily related to annual merit raises,
staff for new branches, the payout of an employment agreement and the increased
cost of stock-based compensation plans due to the increase in the market price
of our common stock.
Occupancy and office operations expense increased by $370,000, or 7.7%,
due primarily to the expenses associated with the branches acquired as part of
the acquisition of The National Bank of Florida; we owned these branches for
only five months in fiscal 2002. Advertising and promotion costs increased by
$187,000, or 12.7%, due to additional advertising related to new branches and
products. Increases in loan and deposit accounts generated a volume-related
increase of $472,000, or 19.3%, in data and check processing costs. A focus on
technological development and internal controls resulted in an increase in
professional fees over the same period in 2002 of $427,000, or 42.0%, to $1.4
million. Amortization of intangible assets increased by $152,000, or 53.1%, as
the core deposit amortization for The National Bank of Florida was in place for
all of fiscal 2003, compared to five months in fiscal 2002. Other expenses
increased by $91,000, or 2.1%, due primarily to an increase of $226,000, or
54.6%, in ATM charges related to the increase in transaction accounts and
greater debit card usage.
Income Taxes. Income tax expense was $6.3 million for the fiscal year
ended September 30, 2003 compared to $5.6 million for fiscal 2002, representing
effective tax rates of 36.1% and 36.9%, respectively. The lower effective tax
rate in fiscal 2003 is primarily attributable to the transfer of $12.5 million
in assets from taxable securities to tax-exempt bank owned life insurance.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by the Company for general corporate purposes or for
customer needs. Corporate purpose transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital. Customer transactions
are used to manage customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include
lending commitments, are described below. At September 30, 2004 and 2003, the
Company had no interests in non-consolidated special purpose entities.
Lending Commitments. Lending commitments include loan commitments, standby
letters of credit and unused business credit lines. These instruments are not
recorded in the consolidated balance sheet until funds are advanced under the
commitments. The Company provides these lending commitments to customers in the
normal course of business.
For commercial customers, loan commitments generally take the form of
revolving credit arrangements to finance customers' working capital
requirements. For retail customers, loan commitments are generally lines of
credit secured by residential property. At September 30, 2004, commercial and
retail loan commitments totaled $211.0 million. Standby letters of credit
totaled $12.7 million. Standby letters of credit are conditional commitments to
guarantee performance, typically of a contract or the financial integrity, of a
customer to a third party. Unused business, personal and credit card lines,
which totaled $120.7 million at September 30, 2004, are generally for short-term
borrowings.
Provident Bank applies essentially the same credit policies and standards
as it does in the lending process when making these commitments. See Note 16 to
Consolidated Financial Statements in Item 8 hereof for additional information
regarding lending commitments.
Contractual Obligations. In the ordinary course of our operations, we
enter into certain contractual obligations. Such obligations include operating
leases for premises and equipment.
45
The following table summarizes our significant fixed and determinable
contractual obligations and other funding needs by payment date at September 30,
2004. The payment amounts represent those amounts due to the recipient and do
not include any unamortized premiums or discounts or other similar carrying
amount adjustments.
Payments Due by Period
--------------------------------------------------------------------------
Less than One to Three Three to Five More than
Contractual Obligations One Year Years Years Five Years Total
- ---------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Long-term debt ..................................... $ 15,500 $ 46,651 $ 69,460 $ 3,837 $ 135,448
Standby letters of credit .......................... 11,035 1,611 65 -- 12,711
Operating leases ................................... 2,603 2,828 2,270 11,249 18,950
---------- ---------- ---------- ---------- ----------
Total ............................................ $ 29,138 $ 51,090 $ 71,795 $ 15,086 $ 167,109
========== ========== ========== ========== ==========
Commitments to extend credit ....................... $ 151,507 $ 1,331 $ 2,003 $ 56,219 $ 211,060
========== ========== ========== ========== ==========
Impact of Inflation and Changing Prices
The financial statements and related notes of Provident Bancorp have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than the effects of inflation.
Liquidity and Capital Resources
The overall objective of our liquidity management is to ensure the
availability of sufficient cash funds to meet all financial commitments and to
take advantage of investment opportunities. We manage liquidity in order to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments
on loans and securities, wholesale borrowings, the proceeds from maturing
securities and short-term investments, and the proceeds from the sales of loans
and securities. The scheduled amortization of loans and securities, as well as
proceeds from borrowings, are predictable sources of funds. Other funding
sources, however, such as deposit inflows, mortgage prepayments and mortgage
loan sales are greatly influenced by market interest rates, economic conditions
and competition.
Our cash flows are derived from operating activities, investing activities
and financing activities as reported in the Consolidated Statements of Cash
Flows in our consolidated financial statements. Our primary investing activities
are the origination of residential one- to four-family and commercial real
estate loans, and the purchase of investment securities and mortgage-backed
securities. During the years ended September 30, 2004, 2003 and 2002, our loan
originations totaled $342.5 million, $403.5 million and $202.5 million,
respectively. Purchases of securities available for sale totaled $468.4 million,
$219.5 million and $73.5 million for the years ended September 30, 2004, 2003
and 2002, respectively. Purchases of securities held to maturity totaled $12.2
million, $27.6 million and $34.4 million for the years ended September 30, 2004,
2003 and 2002, respectively. These activities were funded primarily by deposit
growth (a financing activity), and by principal repayments on loans and
securities. Loan origination commitments totaled $90.4 million at September 30,
2004, and consisted of $78.7 million at adjustable or variable rates and $11.7
million at fixed rates. Unused lines of credit granted to customers were $120.7
million at September 30, 2004. We anticipate that we will have sufficient funds
available to meet current loan commitments and lines of credit.
In December 2003 we invested $12.0 million in BOLI contracts. These
investments are illiquid and are therefore classified as other assets. Earnings
from BOLI are derived from the net increase in cash surrender value of the BOLI
contracts and the proceeds from the payment on the insurance policies, if any.
BOLI contracts totaled $13.2 million at September 30, 2004.
46
Deposit flows are generally affected by the level of market interest
rates, the interest rates and other conditions on deposit products offered by
our banking competitors, and other factors. The net increase in total deposits
(excluding deposits acquired during 2004 and 2002 as part of the acquisitions of
ENB and NBF, respectively) was $43.1 million, $69.9 million and $58.4 million
for the years ended September 30, 2004, 2003 and 2002, respectively.
Certificates of deposit that are scheduled to mature in one year or less from
September 30, 2004 totaled $277.8 million. Based upon prior experience and our
current pricing strategy, management believes that a significant portion of such
deposits will remain with us.
We generally remain fully invested and utilize additional sources of funds
through Federal Home Loan Bank of New York advances, of which $164.9 million was
outstanding at September 30, 2004. At September 30, 2004 we had the ability to
borrow an additional $383.0 million under our credit facilities with the Federal
Home Loan Bank.
Recent Accounting Standards
FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, was issued in November 2002. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
interpretation also requires a guarantor to recognize, at fair value, a
liability for the obligation at inception of the guarantee (effective for
guarantees issued or modified after December 31, 2002). The adoption of FIN No.
45 did not have a material impact on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effects of the method used on reported results. The
provisions of this statement are not expected to have a material impact on the
consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, to provide guidance on the identification of entities
controlled through means other than voting rights. FIN No. 46 specifies how a
business enterprise should evaluate its interests in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity must
be consolidated by its primary beneficiary if the entity does not effectively
disperse risks among the parties involved. A public company with a variable
interest in an entity created before February 1, 2003 must apply FIN No. 46 in
the first interim or annual period ending after December 15, 2003. The adoption
of FIN No. 46 is not expected to have a significant effect on the consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, for certain
decisions made by the Board as part of the Derivative Implementation Group
process. This statement is effective for contracts entered into or modified
after June 30, 2003 and hedging relationships designated after June 30, 2003.
Management does not expect that the provisions of SFAS No. 149 will have a
material impact on the results of operations or financial condition.
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity was issued in May 2003. Under
this statement, certain freestanding financial instruments that embody
obligations for the issuer and that are now classified in equity, must be
classified as liabilities (or as assets in some circumstances). Generally, SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. However, the effective date of the
statement's provisions related to the classification and measurement of certain
mandatorily redeemable non-controlling interests has been deferred indefinitely
by the FASB, pending further Board action. Adoption of this standard did not
have an impact on the consolidated financial statements.
47
In November 2003, the Emerging Issues Task Force ("EITF") issued issue
summary 03-1 ("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments. EITF 03-01 addressed an entity's
treatment of the impairment of securities when such impairment is considered
other than temporary. The preliminary summary required disclosures only related
to other than temporary impairment. In March 2004, the EITF continued its
discussion and reached a consensus on the procedures for recognizing an
impairment of securities considered other than temporarily impaired. The
guidance in EITF 03-1 was intended to be effective for reporting periods
beginning after June 15, 2004. However, in September 2004, the FASB issued FSP
EITF 03-1-1, which deferred the effective date for the measurement and
recognition provisions of EITF 03-1 until further implementation guidance could
be established. Management does not believe the provisions of this standard, as
currently written, will have a material impact on the results of future
operations.
In December 2003, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer." The SOP is effective for loans acquired in
fiscal years beginning after December 15, 2004. The SOP addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. The SOP applies to loans acquired in business
combinations but does not apply to loans originated by the Company. Management
does not believe the provision of this standard will have a material impact on
the results of future operations.
On March 9, 2004, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 105, Application of Accounting Principles
to Loan Commitments. SAB No. 105 requires that when a company is recognizing and
valuing a loan commitment at fair value, only differences between the guaranteed
interest rate in the loan commitment and a market interest rate should be
included. Any expected future cash flows related to the customer relationships
or loan servicing should be excluded from the fair value measurement. The
expected future cash flows that are excluded from the fair-value determination
include anticipated fees for servicing the funded loan, late-payment charges,
other ancillary fees, or other cash flows from servicing rights. The guidance in
SAB No. 105 is effective for mortgage-loan commitments that are accounted for as
derivatives and are entered into after March 31, 2004. Management does not
believe the provisions of this standard will have a material impact on the
results of future operations.
48
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
Management of Interest Rate Risk
Management believes that our most significant form of market risk is
interest rate risk. The general objective of our interest rate risk management
is to determine the appropriate level of risk given our business strategy, and
then manage that risk in a manner that is consistent with our policy to limit
the exposure of our net interest income to changes in market interest rates.
Provident Bank's asset/liability management committee ("ALCO"), which consists
of certain members of senior management, evaluates the interest rate risk
inherent in certain assets and liabilities, our operating environment, and
capital and liquidity requirements, and modifies our lending, investing and
deposit gathering strategies accordingly. A committee of the Board of Directors
reviews the ALCO's activities and strategies, the effect of those strategies on
our net interest margin, and the effect that changes in market interest rates
would have on the economic value of our loan and securities portfolios as well
as the intrinsic value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending,
investing, and deposit activities. We emphasize the origination of residential
fixed-rate mortgage loans that are repaid monthly and bi-weekly, fixed-rate
commercial mortgage loans, adjustable-rate residential and commercial mortgage
loans, commercial business loans and consumer loans. Depending on market
interest rates and our capital and liquidity position, we may retain all of the
fixed-rate, fixed-term residential mortgage loans that we originate or we may
sell all or a portion of such longer-term loans, generally on a
servicing-retained basis. We also invest in short-term securities, which
generally have lower yields compared to longer-term investments. Shortening the
average maturity of our interest-earning assets by increasing our investments in
shorter-term loans and securities helps to better match the maturities and
interest rates of our assets and liabilities, thereby reducing the exposure of
our net interest income to changes in market interest rates. These strategies
may adversely affect net interest income due to lower initial yields on these
investments in comparison to longer-term, fixed-rate loans and investments.
Management monitors interest rate sensitivity primarily through the use of
a model that simulates net interest income under varying interest rate
assumptions. Management also evaluates this sensitivity using a model that
estimates the change in Provident Bank's net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. Both models
assume estimated loan prepayment rates, reinvestment rates and deposit decay
rates that seem most likely based on historical experience during prior interest
rate changes.
The table below sets forth, as of September 30, 2004, the estimated
changes in our NPV and our net interest income that would result from the
designated instantaneous changes in the U.S. Treasury yield curve. Computations
of prospective effects of hypothetical interest rate changes are based on
numerous assumptions including relative levels of market interest rates, loan
prepayments and deposit decay, and should not be relied upon as indicative of
actual results.
NPV Net Interest Income
----------------------------------------------- ------------------------------------------------
Estimated Increase (Decrease) Increase (Decrease) in
Change in in NPV Estimated Net Estimated Net Interest Income
Interest Rates Estimated ---------------------------- interest ------------------------------
(basis points) NPV Amount Percent Income Amount Percent
- -------------- --------- --------- ----------- ------------- ----------- -----------
(Dollars in thousands)
+300 $ 301,855 $ (68,500) (18.5%) $ 68,630 $ (264) (0.4%)
+200 326,066 (44,289) (12.0) 68,808 (86) (0.1)
+100 350,122 (20,233) (5.5) 69,015 (121) 0.2
0 370,355 -- -- 68,894 --
-100 373,271 2,916 0.8 66,569 (2,325) (3.4)
-200 365,828 (4,527) (1.2) 62,402 (6,492) (9.4)
The table set forth above indicates that at September 30, 2004, in the
event of an immediate 100 basis point decrease in interest rates, we would be
expected to experience a 0.8% increase in NPV and a 3.4% decrease in net
49
interest income. In the event of an immediate 200 basis point increase in
interest rates, we would be expected to experience a 12.0% decrease in NPV and a
0.1% decrease in net interest income.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV and net interest income
requires making certain assumptions that may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. The
NPV and net interest income table presented above assumes that the composition
of our interest-rate sensitive assets and liabilities existing at the beginning
of a period remains constant over the period being measured and, accordingly,
the data does not reflect any actions management may undertake in response to
changes in interest rates. The table also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or the repricing characteristics of specific assets and
liabilities. Accordingly, although the NPV and net interest income table
provides an indication of our sensitivity to interest rate changes at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our net interest income and will differ from actual results.
ITEM 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The following are included in this item:
(A) Report of Independent Registered Public Accounting Firm
(B) Consolidated Statements of Financial Condition as of September
30, 2004 and 2003
(C) Consolidated Statements of Income for the years ended
September 30, 2004, 2003 and 2002
(D) Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended September 30, 2004,
2003 and 2002
(E) Consolidated Statements of Cash Flows for the years ended
September 30, 2004, 2003 and 2002
(F) Notes to Consolidated Financial Statements
The supplementary data required by this item (selected quarterly financial
data) is provided in Note 21 of the Notes to Consolidated Financial Statements.
50
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Provident Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Provident Bancorp, Inc. and subsidiaries (the Company) as of September 30,
2004 and 2003, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended September 30, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Provident Bancorp,
Inc. and subsidiaries as of September 30, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2004, in conformity with U.S. generally accepted
accounting principles.
\s\ KPMG LLP
New York, New York
December 10, 2004
51
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2004 and 2003
(Dollars in thousands, except per share data)
Assets 2004 2003
----------- -----------
Cash and due from banks $ 107,571 $ 33,500
Securities (including $54,819 and $32,749 pledged as collateral
for borrowings in 2004 and 2003, respectively):
Available for sale, at fair value (note 4) 534,297 300,715
Held to maturity, at amortized cost (fair value of $70,230 and $75,628 in
2004 and 2003, respectively) (note 5) 69,078 73,544
----------- -----------
Total securities 603,375 374,259
----------- -----------
Loans (note 6):
One- to four-family residential mortgage loans 380,749 380,776
Commercial real estate, commercial business and construction loans 486,904 252,857
Consumer loans 129,981 80,620
Allowance for loan losses (17,353) (11,069)
----------- -----------
Total loans, net 980,281 703,184
----------- -----------
Loans held for sale 855 2,364
Federal Home Loan Bank ("FHLB") stock, at cost 10,247 8,220
Accrued interest receivable (note 7) 6,815 4,851
Premises and equipment, net (note 8) 16,846 11,647
Goodwill (note 3) 65,260 13,540
Core deposit intangible, net (note 3) 5,624 1,063
Bank owned life insurance 13,245 12,483
Deferred income taxes, net (note 11) 5,821 651
Other assets (notes 6, 11 and 12) 10,211 8,543
----------- -----------
Total assets $ 1,826,151 $ 1,174,305
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $ 1,239,532 $ 869,553
FHLB borrowings (note 10) 214,909 164,757
Mortgage escrow funds (note 6) 2,526 3,949
Other (note 11) 19,672 18,189
----------- -----------
Total liabilities 1,476,639 1,056,448
----------- -----------
Commitments and contingencies (notes 16 and 17)
Stockholders' equity (notes 1 and 15):
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized;
none issued or outstanding) --
Common stock (par value $0.01 per share; 75,000,000 shares authorized;
39,655,167 shares and 8,280,000 shares issued; 39,618,373 shares and
7,946,521 shares outstanding in 2004 and 2003, respectively) 397 828
Additional paid-in capital 269,325 38,032
Unallocated common stock held by employee stock ownership
plan ("ESOP") (note 12) (10,854) (1,597)
Treasury stock, at cost (36,794 shares in 2004 and 333,479 shares
in 2003) (note 15) (432) (7,780)
Common stock awards under recognition and retention plan
("RRP") (note 12) -- (506)
Retained earnings 91,373 85,398
Accumulated other comprehensive income (loss), net of taxes (note 13) (297) 3,482
----------- -----------
Total stockholders' equity 349,512 117,857
----------- -----------
Total liabilities and stockholders' equity $ 1,826,151 $ 1,174,305
=========== ===========
See accompanying notes to consolidated financial statements
52
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended September 30, 2004, 2003 and 2002
(Dollars in thousands, except per share data)
2004 2003 2002
--------- --------- ---------
Interest and dividend income:
Loans $ 54,093 $ 43,815 $ 44,967
Securities 20,231 13,586 14,496
Other earning assets 184 389 488
--------- --------- ---------
Total interest and dividend income 74,508 57,790 59,951
--------- --------- ---------
Interest expense:
Deposits (note 9) 7,901 7,775 11,701
Borrowings 5,081 4,285 5,500
--------- --------- ---------
Total interest expense 12,982 12,060 17,201
--------- --------- ---------
Net interest income 61,526 45,730 42,750
Provision for loan losses (note 6) 800 900 900
--------- --------- ---------
Net interest income after provision for loan losses 60,726 44,830 41,850
--------- --------- ---------
Non-interest income:
Deposit fees and service charges 6,570 4,432 3,720
Loan fees and late charges 832 903 561
Net gain on sales of securities available for sale (note 4) 2,455 2,006 461
Net gain on sales of loans 320 1,096 146
Other (note 6) 1,396 1,118 513
--------- --------- ---------
Total non-interest income 11,573 9,555 5,401
--------- --------- ---------
Non-interest expense:
Compensation and employee benefits (note 12) 23,001 17,451 14,789
Stock-based compensation plans 2,790 2,206 1,624
Occupancy and office operations (note 17) 6,741 5,178 4,808
Advertising and promotion 2,050 1,657 1,470
Data and check processing 3,634 2,923 2,451
Professional fees 2,655 1,580 1,092
Stationery and office supplies 1,036 516 614
Merger integration costs (note 3) 773 4 531
Amortization of intangible assets (note 3) 2,063 438 286
Establishment of charitable foundation 5,000 -- --
Other 6,403 4,837 4,496
--------- --------- ---------
Total non-interest expense 56,146 36,790 32,161
--------- --------- ---------
Income before income tax expense 16,153 17,595 15,090
Income tax expense (note 11) 5,136 6,344 5,563
--------- --------- ---------
Net income $ 11,017 $ 11,251 $ 9,527
========= ========= =========
Earnings per common share (note 14):
Basic $ 0.30 $ 0.33 $ 0.28
Diluted 0.29 0.32 0.27
========= ========= =========
See accompanying notes to consolidated financial statements.
53
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income (Loss)
Years Ended September 30, 2004, 2003 and 2002
(Dollars in thousands, except per share data)
Additional Unallocated Common
Common Paid-in ESOP Stock Awards
Stock Capital Shares Under RRP
--------- ---------- ----------- ------------
Balance at September 30, 2001 $ 828 $ 36,535 $ (2,350) $ (1,729)
Net income -- -- -- --
Other comprehensive income (note 13) -- -- -- --
Total comprehensive income
Cash dividends paid ($0.09 per common share) -- -- -- --
Purchases of treasury stock (307,233 shares) -- -- -- --
ESOP shares allocated or committed to be
released for allocation -- 459 376 --
Vesting of RRP shares -- -- -- 621
Stock option and other equity transactions -- (298) -- --
--------- --------- --------- ---------
Balance at September 30, 2002 828 36,696 (1,974) (1,108)
Net income -- -- -- --
Other comprehensive income (loss) (note 13) -- -- -- --
Total comprehensive income
Cash dividends paid ($0.13 per common share) -- -- -- --
Purchases of treasury stock (307,233 shares) -- -- -- --
ESOP shares allocated or committed to be
released for allocation -- 665 377 --
Vesting (forfeiture) of RRP shares -- 521 -- 602
Stock option and other equity transactions -- 150 -- --
--------- --------- --------- ---------
Balance at September 30, 2003 828 38,032 (1,597) (506)
Net income -- -- -- --
Other comprehensive income (loss) (note 13) -- -- -- --
Total comprehensive income
Recapitalization and common stock offering (476) 185,254 -- --
Purchase of ENB Holding Co., Inc. 40 39,657 -- --
Establishment of ESOP Plan (998,650 shares) -- -- (9,987) --
Formation of Charitable Foundation 4 3,996 -- --
Cash dividends paid ($0.15 per common share) -- -- -- --
Purchases of treasury stock (36,788 shares) -- -- -- --
ESOP shares allocated or committed to be
released for allocation -- 1,166 730 --
Vesting of RRP shares -- -- -- 506
Stock option and other equity transactions 1 1,220 -- --
--------- --------- --------- ---------
Balance at September 30, 2004 $ 397 $ 269,325 $ (10,854) $ --
========= ========= ========= =========
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Income (Loss) Equity
--------- --------- ------------- -------------
Balance at September 30, 2001 $ (4,298) $ 69,252 $ 4,382 $ 102,620
Net income -- 9,527 -- 9,527
Other comprehensive income (note 13) -- -- 1,190 1,190
---------
Total comprehensive income 10,717
Cash dividends paid ($0.09 per common share) -- (1,935) -- (1,935)
Purchases of treasury stock (307,233 shares) (1,971) -- -- (1,971)
ESOP shares allocated or committed to be
released for allocation -- -- -- 835
Vesting of RRP shares -- -- -- 621
Stock option and other equitytransactions 395 (117) -- (20)
--------- --------- --------- ---------
Balance at September 30, 2002 (5,874) 76,727 5,572 110,867
Net income -- 11,251 -- 11,251
Other comprehensive income (loss) (note 13) -- -- (2,090) (2,090)
---------
Total comprehensive income 9,161
Cash dividends paid ($0.13 per common share) -- (2,421) -- (2,421)
Purchases of treasury stock (307,233 shares) (2,343) -- -- (2,343)
ESOP shares allocated or committed to be
released for allocation -- -- -- 1,042
Vesting (forfeiture) of RRP shares (96) -- -- 1,027
Stock option and other equity transactions 533 (159) -- 524
--------- --------- --------- ---------
Balance at September 30, 2003 (7,780) 85,398 3,482 117,857
Net income -- 11,017 -- 11,017
Other comprehensive income (loss) (note 13) -- -- (3,779) (3,779)
---------
Total comprehensive income 7,238
Recapitalization and common stock offering 7,680 -- -- 192,458
Purchase of ENB Holding Co., Inc. -- -- -- 39,697
Establishment of ESOP Plan (998,650 shares) -- -- -- (9,987)
Formation of Charitable Foundation -- -- -- 4,000
Cash dividends paid ($0.15 per common share) -- (5,008) -- (5,008)
Purchases of treasury stock (36,788 shares) (432) -- -- (432)
ESOP shares allocated or committed to be
released for allocation -- -- -- 1,896
Vesting of RRP shares -- -- -- 506
Stock option and other equity transactions 100 (34) -- 1,287
--------- --------- --------- ---------
Balance at September 30, 2004 $ (432) $ 91,373 $ (297) $ 349,512
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
54
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 11,017 $ 11,251 $ 9,527
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 800 900 900
Depreciation and amortization of premises
and equipment 2,381 2,025 1,876
Amortization of intangible assets 2,063 438 286
Net amortization of premiums and discounts
on securities 2,661 1,228 383
ESOP and RRP expense 2,402 2,069 1,456
Originations of loans held for sale (14,638) (47,667) (11,912)
Proceeds from sales of loans held for sale 16,467 48,765 12,058
Net gain on sales of securities available for sale (2,455) (2,006) (461)
Net gain on sales of loans (320) (1,096) (146)
Net gain on sales of fixed assets (73) -- --
Deferred income tax (benefit) expense (1,897) 613 (1,172)
Net changes in accrued interest receivable
and payable 208 468 (428)
Other adjustments (principally net changes in other
assets and other liabilities) (2,418) 381 2,302
---------- ---------- ----------
Net cash provided by operating activities 16,198 17,369 14,669
---------- ---------- ----------
Cash flows from investing activities:
Purchases of securities:
Available for sale (468,417) (219,481) (73,491)
Held to maturity (12,245) (27,605) (34,411)
Proceeds from maturities, calls and other principal
payments on securities:
Available for sale 91,256 83,080 29,907
Held to maturity 19,634 40,533 22,083
Proceeds from sales of securities available for sale 163,263 39,416 56,049
Loan originations (342,456) (403,456) (202,483)
Loan principal payments 278,011 358,039 169,652
Purchase of The National Bank of Florida, net of cash
and cash equivalents acquired -- -- (6,000)
Purchase of ENB Holding Co., Inc., net of cash
and cash equivalents acquired 60,355 -- --
(Purchase)/redemption of FHLB stock (2,027) (2,872) 173
Increase in bank owned life insurance (552) (12,000) --
Purchases of premises and equipment (3,631) (2,601) (2,382)
Proceeds from sales of fixed assets 434
Proceeds from sales of other real estate owned 135 307 --
Other investing activities (55) -- --
---------- ---------- ----------
Net cash used in investing activities (216,295) (146,640) (40,903)
---------- ---------- ----------
55
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 43,121 69,927 58,417
Net increase (decrease) in borrowings 50,152 61,789 (7,459)
Net (decrease) increase in mortgage escrow funds (1,423) 202 (2,450)
Common stock offering proceeds, net 192,363 -- --
Treasury shares purchased (432) (2,343) (1,971)
Stock option transactions 125 524 278
Shares purchased for ESOP plan (9,987) -- --
Formation of charitable foundation 4,000 -- --
Recapitalization related to second-step stock conversion 95 -- --
Tax benefits generated from financing activities 1,162
Cash dividends paid (5,008) (2,421) (1,935)
--------- --------- ---------
Net cash provided by financing activities 274,168 127,678 44,880
--------- --------- ---------
Net increase in cash and cash equivalents $ 74,071 $ (1,593) $ 18,646
Cash and cash equivalents at beginning of year 33,500 35,093 16,447
--------- --------- ---------
Cash and cash equivalents at end of year $ 107,571 $ 33,500 $ 35,093
========= ========= =========
Supplemental information:
Interest payments $ 12,529 $ 12,232 $ 17,735
Income tax payments 5,661 5,088 7,752
Acquisition of ENB Holding Co., Inc. (2004) and
The National Bank of Florida (2002), accounted for
using the purchase method:
Fair value of assets acquired $ 406,331 $ -- $ 121,186
Fair value of liabilities assumed 329,861 -- 93,086
--------- --------- ---------
Net fair value $ 76,470 $ -- $ 28,100
========= ========= =========
Cash portion of purchase transaction $ 36,773 $ -- $ 28,100
Stock portion of purchase transaction 39,697 -- --
--------- --------- ---------
Total consideration paid for purchase transaction $ 76,470 $ -- $ 28,100
========= ========= =========
Loans transferred to real estate owned $ 112 $ 151 $ 132
Net change in unrealized gains recorded on securities
available for sale (6,130) (3,513) 1,904
Change in deferred taxes on unrealized gains on securities
available for sale 2,447 1,008 761
See accompanying notes to consolidated financial statements.
56
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Reorganization and Stock Offerings
Initial Public Offering
On January 7, 1999, Provident Bank (the Bank) completed its reorganization
into a mutual holding company structure (the Reorganization). As part of
the Reorganization, the Bank converted from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank (the Conversion).
The Bank became the wholly owned subsidiary of Provident Bancorp, Inc., a
federal corporation ("Provident Federal"), which became the majority-owned
subsidiary of Provident Bancorp, MHC ("the Mutual Holding Company").
Provident Bancorp, Inc. issued a total of 8,280,000 common shares on
January 7, 1999, consisting of 3,864,000 shares (or 46.67%) sold to the
public (the Offering) and 4,416,000 shares (or 53.33%) issued to the
Mutual Holding Company. The net proceeds from the sale of shares to the
public amounted to $37,113. Provident Bancorp, Inc. utilized net proceeds
of $24,000 to make a capital contribution to the Bank. The Company's
employee stock ownership plan (ESOP) purchased 309,120 shares (or 8% of
the number of shares sold in the Offering) in open market transactions,
during January and February 1999, at a total cost of $3,760.
Second Step Conversion
On January 14, 2004 Provident Bancorp, MHC completed its stock offering in
connection with the second-step conversion from a mutual holding company,
a federal corporation, to a publicly held bank holding company,
incorporated in the State of Delaware. In anticipation of the second-step
conversion the board of Directors of Provident Bancorp, MHC formed a
Delaware Corporation known as the "Provident Bancorp, Inc." Concurrent
with the public stock offering of Provident Bancorp, MHC shares, Provident
Bancorp, MHC ceased to exist and Provident Federal was replaced by the
"New Provident Bancorp. Inc."
As a result of the stock offering and conversion, Provident Bank (Bank) is
a wholly owned subsidiary of Provident Bancorp, Inc. (Parent), a publicly
held bank holding company, Collectively, the Bank and Parent company are
referred to herein as the "Company". In addition, the Company
simultaneously completed its acquisition of E.N.B. Holding Company, Inc.,
("ENB") located in Ellenville, New York.
Provident Bancorp, MHC 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.
Cash was paid in lieu of the issuance of fractional shares. In connection
with the Conversion, the number of shares of authorized but unissued
preferred stock was unchanged and the amount of common stock authorized
was increased to 75,000,000 shares par value $0.01. The Conversion was
accounted for as reorganization in corporate form with no change in the
historical basis of the Company's assets
57
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
and liabilities. Outstanding shares for purposes of calculating prior year
per share amounts have been adjusted to give recognition to the exchange
ratio applied in the Conversion. Prior year share data within the
consolidated statements of condition not been restated for the exchange
ratio.
Costs related to the Offering, primarily marketing fees paid to the
Company's investment banking firm, professional fees, registration fees,
and printing and mailing costs were $3.5 million and accordingly, net
offering proceeds were $192.2 million.
(2) Summary of Significant Accounting Policies
The Bank is a community bank offering financial services to individuals
and businesses primarily in Rockland and Orange Counties, New York and the
contiguous area. The Bank's principal business is accepting deposits and,
together with funds generated from operations and borrowings, investing in
various types of loans and securities. The Bank is a federally-chartered
savings bank and its deposits are insured up to applicable limits by the
Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation (FDIC) and deposits related to the NBF and ENB acquisitions
and Provident Municipal Bank are insured by the Bank Insurance Fund of the
FDIC. The Office of Thrift Supervision (OTS) is the primary regulator for
the Bank and for Provident Bancorp, Inc.
(a) Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of
Provident Bancorp, Inc., the Bank, and the Bank's wholly owned
subsidiaries. These subsidiaries are (i) Provident Municipal Bank
(PMB) which is a limited-purpose, New York State-chartered
commercial bank formed to accept deposits from municipalities in the
Company's market area, (ii) Provident REIT, Inc. which is a real
estate investment trust that holds a portion of the Company's real
estate loans, (iii) Provest Services Corp. I which has invested in a
low-income housing partnership, and (iv) Provest Services Corp. II
which has engaged a third-party provider to sell mutual funds and
annuities to the Bank's customers. Intercompany transactions and
balances are eliminated in consolidation.
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America. In preparing the consolidated financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and
expense. Actual results could differ significantly from these
estimates. An estimate that is particularly susceptible to
significant near-term change is the allowance for loan losses, which
is discussed below.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation. For purposes of reporting cash flows,
cash equivalents (if any) include highly-liquid, short-term
investments such as overnight federal funds.
(b) Securities
The Company classifies its securities among three categories - held
to maturity, trading, and available for sale. Management determines
the appropriate classification of the Company's securities at the
time of purchase.
58
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Held-to-maturity securities are limited to debt securities for which
management has the intent and the Company has the ability to hold to
maturity. These securities are reported at amortized cost.
Trading securities are debt and equity securities held principally
for the purpose of selling them in the near term. These securities
are reported at fair value, with unrealized gains and losses
included in earnings. The Company does not engage in security
trading activities.
All other debt and marketable equity securities are classified as
available for sale. These securities are reported at fair value,
with unrealized gains and losses (net of the related deferred income
tax effect) excluded from earnings and reported in a separate
component of stockholders' equity (accumulated other comprehensive
income or loss). Available-for-sale securities include securities
that management intends to hold for an indefinite period of time,
such as securities to be used as part of the Company's
asset/liability management strategy or securities that may be sold
in response to changes in interest rates, changes in prepayment
risks, the need to increase capital, or similar factors.
Premiums and discounts on debt securities are recognized in interest
income on a level-yield basis over the period to maturity. The cost
of securities sold is determined using the specific identification
method. Unrealized losses are charged to earnings when management
determines that the decline in fair value of a security is other
than temporary.
(c) Loans
Loans (other than loans held for sale) are reported at amortized
cost less the allowance for loan losses. Mortgage loans originated
and held for sale in the secondary market (if any) are reported at
the lower of aggregate cost or estimated fair value. Fair value is
estimated based on outstanding investor commitments or, in the
absence of such commitments, based on current investor yield
requirements. Net unrealized losses, if any, are recognized in a
valuation allowance by a charge to earnings.
A loan is placed on nonaccrual status when management has determined
that the borrower may be unable to meet contractual principal or
interest obligations, or when payments are 90 days or more past due.
Accrual of interest ceases and, in general, uncollected past due
interest (including interest applicable to prior years, if any) is
reversed and charged against current interest income. Interest
payments received on nonaccrual loans, including impaired loans, are
not recognized as income unless warranted based on the borrower's
financial condition and payment record.
The Company defers nonrefundable loan origination and commitment
fees, and certain direct loan origination costs, and amortizes the
net amount as an adjustment of the yield over the contractual term
of the loan. If a loan is prepaid or sold, the net deferred amount
is recognized in the statement of income at that time.
(d) Allowance for Loan Losses
The allowance for loan losses is established through provisions for
losses charged to earnings. Losses on loans (including impaired
loans) are charged to the allowance for loan losses when
59
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
management believes that the collection of principal is unlikely.
Recoveries of loans previously charged-off are credited to the
allowance when realized.
The allowance for loan losses is an amount that management believes
is necessary to absorb probable losses on existing loans that may
become uncollectible, based on evaluations of the collectability of
the loans. Management's evaluations, which are subject to periodic
review by the OTS, take into consideration factors such as the
Company's past loan loss experience, changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and collateral values, and current economic
conditions that may affect the borrowers' ability to pay. Future
adjustments to the allowance for loan losses may be necessary based
on changes in economic and real estate market conditions, further
information obtained regarding known problem loans, results of
regulatory examinations, the identification of additional problem
loans, and other factors.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that it will be unable to
collect all principal and interest contractually due. Certain loans
are individually evaluated for collectability in accordance with the
Company's ongoing loan review procedures (principally commercial
real estate, commercial business and construction loans).
Smaller-balance homogeneous loans are collectively evaluated for
impairment, such as residential mortgage loans and consumer loans.
Impaired loans are based on one of three measures - the present
value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent. If
the measure of an impaired loan is less than its recorded
investment, an impairment loss is recognized as a charge to the
allowance for loan losses.
(e) Mortgage Servicing Assets
The cost of an originated mortgage loan that is sold with servicing
retained is allocated between the loan and the servicing right. The
cost allocated to the retained servicing right is capitalized as a
separate asset and amortized thereafter in proportion to, and over
the period of, estimated net servicing income. Capitalized mortgage
servicing rights are included in other assets and are assessed for
impairment based on the fair value of those rights, and impairment
losses are recognized in a valuation allowance by charges to income.
(f) Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) of New York, the
Bank is required to hold a certain amount of FHLB stock. This stock
is a nonmarketable equity security and, accordingly, is reported at
cost.
(g) Premises and Equipment
Premises and equipment are reported at cost, less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related
assets which range from 3 to 40 years. Leasehold improvements are
amortized on a straight-line basis over the terms of the respective
leases or the estimated useful lives of the
60
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
improvements, whichever is shorter. Routine holding costs are
charged to expense as incurred, while significant improvements are
capitalized.
(h) Goodwill and Other Intangible Assets
Goodwill recorded in the NBF and ENB acquisitions is not amortized
to expense, but instead is evaluated for impairment at least
annually. The core deposit intangibles recorded in both the NBF and
ENB acquisitions are amortized to expense using an accelerated
method over their estimated lives of approximately eight years, and
are evaluated for impairment at least annually. Impairment losses on
intangible assets are charged to expense if and when they occur.
(i) Real Estate Owned
Real estate properties acquired through loan foreclosures are
recorded initially at estimated fair value less expected sales
costs, with any resulting write-down charged to the allowance for
loan losses. Subsequent valuations are performed by management, and
the carrying amount of a property is adjusted by a charge to expense
to reflect any subsequent declines in estimated fair value. Fair
value estimates are based on recent appraisals and other available
information. Routine holding costs are charged to expense as
incurred, while significant improvements are capitalized. Gains and
losses on sales of real estate owned are recognized upon
disposition. Real estate owned is included in other assets.
(j) Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers
securities to counterparty under an agreement to repurchase the
identical securities at a fixed price on a future date. These
agreements are accounted for as secured financing transactions since
the Company maintains effective control over the transferred
securities and the transfer meets other specified criteria.
Accordingly, the transaction proceeds are recorded as borrowings and
the underlying securities continue to be carried in the Company's
securities portfolio. Disclosure of the pledged securities is made
in the consolidated statements of financial condition if the
counterparty has the right by contract to sell or repledge such
collateral.
(k) Income Taxes
Deferred taxes are recognized for the estimated future tax effects
attributable to "temporary differences" between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which the temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax laws or rates is recognized in income tax expense in
the period that includes the enactment date of the change.
A deferred tax liability is recognized for all temporary differences
that will result in future taxable income and is carried on the
balance sheet in other liabilities. A deferred tax asset, which is
carried on the balance sheet in other assets, is recognized for all
temporary differences that will result in future tax deductions,
subject to reduction of the asset by a valuation allowance in
certain
61
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
circumstances. This valuation allowance is recognized if, based on
an analysis of available evidence, management determines that it is
more likely than not that some portion or all of the deferred tax
asset will not be realized. The valuation allowance is subject to
ongoing adjustment based on changes in circumstances that affect
management's judgment about the realizability of the deferred tax
asset. Adjustments to increase or decrease the valuation allowance
are charged or credited, respectively, to income tax expense.
(l) Interest Rate Cap Agreements
Interest rate cap agreements are accounted for in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which the Company adopted as of October 1, 2000. These
agreements are cash flow hedges as they are used to reduce the
variability of cash flows from potentially higher interest payments
associated with upward interest rate repricings on a portion of the
Company's certificate of deposit accounts and borrowings. In
accordance with SFAS No. 133, the interest rate cap agreements are
reported at fair value. Changes in fair value attributable to time
value are reported in interest expense, while changes attributable
to intrinsic value are reported in accumulated other comprehensive
income until earnings are affected by the variability in cash flows
of the hedged liabilities.
(m) Stock-Based Compensation Plans
Compensation expense is recognized for the ESOP equal to the fair
value of shares that have been allocated or committed to be released
for allocation to participants. Any difference between the fair
value at that time and the ESOP's original acquisition cost is
charged or credited to stockholders' equity (additional paid-in
capital). The cost of ESOP shares that have not yet been allocated
or committed to be released for allocation is deducted from
stockholders' equity.
The Company accounts for the Stock Option Plan in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Accordingly,
compensation expense is recognized only if the exercise price of an
option is less than fair value of the underlying stock on the date
of the grant. The fair value of shares awarded under the recognition
and retention plan (RRP), measured at the grant date, is recognized
as unearned compensation (a deduction from stockholders' equity) and
amortized to compensation expense as the shares become vested. Tax
benefits attributable to any tax deductions that are greater than
the amount of compensation expense recognized for financial
statement purposes are credited to additional paid-in capital.
62
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
SFAS No. 123, Accounting for Stock-Based Compensation, encourages
the use of a fair-value-based method of accounting for employee
stock compensation plans, but permits the continued use of the
intrinsic-value-based method of accounting prescribed by APB Opinion
No. 25. Under SFAS No. 123, the grant-date fair value of options is
recognized as compensation expense over the vesting period. The
Company has elected to continue to apply APB Opinion No. 25 and
disclose the pro forma information required by SFAS No. 123. Had
stock-based compensation expense been recognized in accordance with
SFAS No. 123, the Company's net income and earnings per common share
would have been adjusted to the following pro forma amounts:
Years ended September 30,
----------------------------------
2004 2003 2002
-------- -------- --------
Net income, as reported $ 11,017 11,251 9,527
Add RRP expense included in
reported net income, net of
related tax effects 345 336 392
Deduct RRP and stock option
expense determined under
the fair-value-based method,
net of related tax effects (539) (595) (886)
-------- -------- --------
Pro forma net income $ 10,823 10,992 9,033
======== ======== ========
Earnigs per share:(1)
Basic, as reported $ 0.30 0.33 0.28
======== ======== ========
Basic, pro forma 0.29 0.32 0.26
======== ======== ========
Diluted, as reported 0.29 0.32 0.27
======== ======== ========
Diluted, pro forma 0.29 0.32 0.26
======== ======== ========
(1) Prior period share information has been adjusted to reflect the
4.4323-to-one conversion ratio in connection with the Company's
second step conversion in January 2004.
The estimated per-share fair value of stock options granted in
fiscal 2004, 2003 and 2002 was $2.71, $1.13 and $1.59, respectively,
using the Black-Scholes option-pricing model with assumptions as
follows for the respective years: dividend yields of 1.4%, 1.8% and
1.4%; expected volatility rates of 20.10%, 14.67% and 22.40%;
risk-free interest rates of 2.7%, 3.3% and 4.2%; and expected option
lives of approximately 4 years, 5 years and 6 years.
(n) Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income
applicable to common stock by the weighted average number of common
shares outstanding during the period. Diluted EPS is computed in a
similar manner, except that the weighted average number of common
shares is increased to include incremental shares (computed using
the treasury stock method) that would have been outstanding if all
potentially dilutive stock options and unvested RRP shares were
exercised or became vested during the period. For purposes of
computing both basic and diluted
63
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
EPS, outstanding shares include all shares issued to the Mutual
Holding Company, (for the years ending September 30, 2003 and 2002),
but exclude unallocated ESOP shares.
(o) Segment Information
Public companies are required to report certain financial
information about significant revenue-producing segments of the
business for which such information is available and utilized by the
chief operating decision maker. As a community-oriented financial
institution, substantially all of the Company's operations involve
the delivery of loan and deposit products to customers. Management
makes operating decisions and assesses performance based on an
ongoing review of these community banking operations, which
constitute the Company's only operating segment for financial
reporting purposes.
(3) Acquisitions
Acquisition of the E.N.B. Holding Company, Inc. (ENB)
On January 14, 2004, simultaneously with the Conversion and Offering, the
Company acquired 100% of the outstanding common shares of ENB the holding
company of Ellenville National Bank headquartered in Ellenville, New York
with five locations in Orange County, New York. Subsequent to the
acquisition, ENB branch locations were merged into Provident's banking
center network. The Company paid $4,830 per share, in a combination of
cash and stock from the Offering. The aggregate purchase price of $76.5
million included the issuance of 3,969,676 shares of Provident stock, cash
payments totaling $36.8 million and capitalized costs related to the
acquisition, primarily investment banking and professional fees, of $4.8
million. The value of the shares issued to ENB was based on the Offering
price of $10.00 per share. This acquisition was accounted for under the
purchase method of accounting. Accordingly, the results of operations of
ENB have been included in the consolidated statement of income from the
date of acquisition.
64
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents unaudited pro forma information as if ENB had
been consummated on September 30, 2001. This pro forma information gives
effect to certain adjustments, including accounting adjustments related to
fair value adjustments, amortization of core deposit intangibles and
related income tax effects. The pro forma information does not necessarily
reflect the results of operations that would have occurred had the Company
acquired ENB on September 30, 2001.
Pro forma (unaudited)
2002 2003 2004
------- ------- -------
Net interest income $55,905 $59,895 $64,102
------- ------- -------
Noninterest income 7,989 11,989 12,162
Noninterest expense 45,271 51,567 60,838
Net income 11,978 12,804 10,567
======= ======= =======
Basic earnings per share $ 0.31 $ 0.34 $ 0.29
======= ======= =======
Diluted earnings per share $ 0.31 $ 0.33 0.28
======= ======= =======
The following table summarizes the purchase price allocation relating to
the acquisition of ENB. This allocation is based on the estimated fair
values of assets acquired and liabilities assumed at the acquisition date:
January 14,
2004
-----------
Cash and Cash equivalents $ 29,218
Securities available for sale 96,960
Loans, net 213,730
Goodwill 51,794
Core deposit intangible 6,624
Other assets 8,005
--------
Total assets acquired 406,331
Deposits 327,284
Other liabilities 2,577
--------
Total liabilities assumed 329,861
--------
Net assets acquired $ 76,470
========
Consideration paid for ENB $ 76,470
========
65
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The core deposit intangible acquired of $6,624 (none of which is tax
deductible)is being amortized over 7.6 years. Amortization expense for the
core deposit intangible was $1,762 for the year ending September 30, 2004.
Scheduled core deposit amortization expense is $1,583 for fiscal 2005,
$1,074 for fiscal 2006, $763 for fiscal 2007, $553 for fiscal 2008, $404
for fiscal 2009 and $485 for later years. Goodwill of $51,794 was assigned
to the Company's banking segment of which none is deductible for income
tax purposes.
The Company incurred $773 in costs associated with the integration of ENB
into the Company. These costs are included in non- interest expense for
the year ended September 30, 2004.
Acquisition of The National Bank of Florida
On April 23, 2002, the Company consummated its acquisition of The National
Bank of Florida (NBF), which was merged with and into the Bank, in an
all-cash transaction. The Company acquired 100% of the outstanding common
stock of NBF for $28,100, pursuant to an Agreement and Plan of Merger
entered into during November 2001. The acquisition was made to further the
Company's strategic objective of expanding its retail and commercial
banking market share in Orange County, New York, where NBF conducted its
operations.
The NBF acquisition was accounted for using the purchase method of
accounting. Accordingly, the assets acquired and liabilities assumed were
recorded by the Company at their fair values at the acquisition date. The
total acquisition cost (including direct transaction costs) exceeded the
fair value of the net assets acquired by $15,253. This amount was
recognized as intangible assets, consisting of goodwill of $13,466 (none
of which is tax deductible) and a core deposit intangible of $1,787.
The core deposit intangible represents the estimated value of acquired
depositor relationships, principally attributable to the relatively
low-cost funding provided by such deposits. Amortization expense for the
core deposit intangible was $301, $438 and $286 for each of the years
ending September 30, 2004, 2003 and 2002, respectively. The accumulated
amortization was $1,025 as of September 30, 2004. Scheduled core deposit
amortization expense is $220 for fiscal 2005, $164 for fiscal 2006, $123
for fiscal 2007, $94 for fiscal 2008, $72 for fiscal 2009 and $89 for
later years.
Costs incurred by the Company to integrate the operations of NBF into the
Bank amounted to $531 and are included in non-interest expense for the
year ended September 30, 2002.
The following is a summary of the fair values of the assets acquired and
liabilities assumed at the acquisition date (in thousands):
66
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Assets acquired:
Cash and cash equivalents $ 24,286
Securities 55,809
Loans, net 23,112
Goodwill 13,466
Core deposit intangible 1,787
Other 2,726
--------
Total assets acquired 121,186
Liabilities assumed:
Deposits 88,182
Other 4,904
--------
Total liabilities assumed 93,086
--------
Cash paid for NBF common stock $ 28,100
========
Amounts attributable to NBF are included in the Company's consolidated
financial statements from the date of acquisition. Pro forma combined
operating results for the fiscal year ended September 30, 2002 , as if NBF
had been acquired at the beginning of those periods, have not been
presented since the NBF acquisition would not materially affect such
results.
67
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Subsequent Event Acquisition of Warwick Community Bancorp, Inc.
On October 1, 2004 the Company announced the completion of its acquisition
of Warwick Community Bancorp, Inc. ("WCBI"), located in Warwick, New York.
Warwick Community Bancorp, Inc. is the holding company for The Warwick
Savings Bank, headquartered in Warwick, New York, The Towne Center Bank,
headquartered in Lodi, New Jersey and Hardenburgh Abstract Company
headquartered in Goshen, New York. In addition, Warwick Commercial Bank is
a subsidiary of The Warwick Savings Bank.
Shareholders of WCBI as of the close of business on October 1, 2004
received total merger consideration of approximately $147.2 million,
consisting of approximately 6,257,892 shares of common stock of the
Company and approximately $72.6 million in cash (including cash paid in
lieu of fractional shares). Shareholders who elected to receive all cash
or indicated "No Preference" received $32.26 in cash for each of their
WCBI shares. Shareholders who elected to receive all stock received 2.7810
shares of common stock of the Company for 99.89% of their shares of common
stock of WCBI and $32.26 in cash for each of the remaining 0.11% of their
shares. Shareholders who elected to receive cash and shares of common
stock of the Company received $32.26 in cash for the cash portion of their
election, 2.7810 shares of common stock of the Company for 99.89% of their
stock election shares and $32.26 in cash for each of the remaining 0.11%
of their stock election shares. Cash was issued in lieu of fractional
shares at a rate of $11.612 per whole share.
On the merger date, WCBI had total loans of $284.5 million, total deposits
of $475.1 million and total assets of $703.7 million.
68
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(4) Securities Available for Sale
The following is a summary of securities available for sale:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
September 30, 2004
------------------
Mortgage-backed securities
Fannie Mae $ 238,112 $ 537 $ (1,175) $ 237,474
Freddie Mac 66,466 618 (277) 66,807
Other 15,659 377 (95) 15,941
--------- --------- --------- ---------
320,237 1,532 (1,547) 320,222
--------- --------- --------- ---------
Investment securities
U.S. Government and
Agency securities 192,788 522 (1,008) 192,302
State and municipal securities 20,482 172 (95) 20,559
Equities 1,005 337 (128) 1,214
--------- --------- --------- ---------
214,275 1,031 (1,231) 214,075
--------- --------- --------- ---------
Total available for sale $ 534,512 $ 2,563 $ (2,778) $ 534,297
========= ========= ========= =========
September 30, 2003
------------------
Mortgage-backed securities
Fannie Mae $ 80,233 $ 851 $ (538) $ 80,546
Freddie Mac 50,439 1,188 (111) 51,516
Other 24,110 502 (54) 24,558
--------- --------- --------- ---------
154,782 2,541 (703) 156,620
--------- --------- --------- ---------
Investment securities
U.S. Government and
Agency securities 130,392 3,278 (60) 133,610
Corporate debt securities 6,030 593 -- 6,623
State and municipal securities 2,545 26 (35) 2,536
Equities 1,052 359 (85) 1,326
--------- --------- --------- ---------
140,019 4,256 (180) 144,095
--------- --------- --------- ---------
Total available for sale $ 294,801 $ 6,797 $ (883) $ 300,715
========= ========= ========= =========
Equity securities principally consist of Freddie Mac and Fannie Mae common
and preferred stock.
69
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of
investment securities available for sale (other than equity securities),
by remaining period to contractual maturity. Actual maturities may differ
because certain issuers have the right to call or prepay their
obligations.
September 30, 2004
---------------------------
Investment Securities Amortized cost Fair Value
-------------- ----------
Remaining period to contractual maturity $ $
Less than one year 11,401 11,432
One to five years 185,321 184,800
Five to ten years 5,763 5,793
Greater than ten years 10,785 10,836
-------- --------
Total $213,270 $212,861
======== ========
Proceeds from sales of securities available for sale during the years
ended September 30, 2004, 2003 and 2002 totaled $163,263, $39,416 and
$56,049, respectively. These sales resulted in gross realized gains of
$2,556, $2,166 and $745 for the years ended September 30, 2004, 2003 and
2002, respectively, and gross realized losses of $101, $160 and $284 in
fiscal 2004, 2003 and 2002, respectively.
Securities with carrying amounts of $54,819 and $32,749 were pledged as
collateral for borrowings under securities repurchase agreements at
September 30, 2004 and September 30, 2003, respectively. U.S. Government
and municipal securities with carrying amounts of $113,491 and $36,703
were pledged as collateral for municipal deposits and other purposes at
September 30, 2004 and September 30, 2003, respectively.
The following table summarizes those securities available for sale with
unrealized losses, segregated by the length of time in a continuous
unrealized loss position:
Continuous Unrealized Loss Position
----------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
--------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2004 Value Losses Value Losses Value Losses
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $171,592 $ (1,009) $ 28,750 $ (539) $200,342 $ (1,548)
U.S. Government and agency securities 102,026 (938) 4,956 (69) 106,982 (1,007)
Municipal securities 9,898 (73) 1,409 (22) 11,307 (95)
Equity securities -- -- 871 (128) 871 (128)
--------------------------------------------------------------------------------
Total $283,516 $ (2,020) $ 35,986 $ (758) $319,502 $ (2,778)
================================================================================
70
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(5) Securities Held to Maturity
The following is a summary of securities held to maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
September 30, 2004
------------------
Mortgage-backed securities
Fannie Mae $ 17,157 $ 396 $ (140) $ 17,413
Freddie Mac 18,245 345 (126) 18,464
Ginnie Mae & other 3,473 92 -- 3,565
-------- -------- -------- --------
38,875 833 (266) 39,442
Investment securities
State and municipal 29,894 922 (293) 30,523
Other 309 -- (44) 265
-------- -------- -------- --------
30,203 922 (337) 30,788
-------- -------- -------- --------
Total held to maturity $ 69,078 $ 1,755 $ (603) $ 70,230
======== ======== ======== ========
September 30, 2003
------------------
Mortgage-backed securities
Fannie Mae $ 27,546 $ 705 $ (190) $ 28,061
Freddie Mac 26,511 570 (65) 27,016
Other 1,103 62 -- 1,165
-------- -------- -------- --------
55,160 1,337 (255) 56,242
Investment securities
State and municipal 18,384 1,003 (1) 19,386
-------- -------- -------- --------
Total held to maturity $ 73,544 $ 2,340 $ (256) $ 75,628
======== ======== ======== ========
71
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of
investment securities held to maturity, by remaining period to contractual
maturity. Actual maturities may differ because certain issuers have the
right to call or repay their obligations.
September 30, 2004
-----------------------
Amortized
cost Fair value
--------- ----------
Remaining period to contractual maturity:
Less than one year $10,196 $10,197
One to five years 9,248 9,550
Five to ten years 9,926 10,188
Greater than ten years 833 853
------- -------
Total $30,203 $30,788
======= =======
There were no sales of securities held to maturity during the years ended
September 30, 2004, 2003 and 2002.
The following table summarizes those securities held to maturity with
unrealized losses, segregated by the length of time in a continuous
unrealized loss position:
Continuous Unrealized Loss Position
-------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
----------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2004 Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ -- $ -- $16,409 $ (266) $16,409 $ (266)
Municipal securities 4,421 (293) -- -- 4,421 (293)
Other securities 265 (44) -- -- 265 (44)
------------------------------------------------------------------------------------------------------------
Total $ 4,686 $ (337) $16,409 $ (266) $21,095 $ (603)
------------------------------------------------------------------------------------------------------------
72
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(6) Loans
The components of the loan portfolio, excluding loans held for sale, were
as follows:
September 30,
-------------------------
2004 2003
--------- ---------
One- to four-family residential
mortgage loans:
Fixed rate $ 328,337 $ 327,916
Adjustable rate 52,412 52,860
--------- ---------
380,749 380,776
--------- ---------
Commercial real estate loans 327,414 188,360
Commercial business loans 105,196 54,174
Construction loans 54,294 10,323
--------- ---------
486,904 252,857
--------- ---------
Consumer loans:
Home equity lines of credit 80,013 50,197
Homeowner loans 26,921 25,225
Other consumer loans 23,047 5,198
--------- ---------
129,981 80,620
--------- ---------
Total loans 997,634 714,253
Allowance for loan losses (17,353) (11,069)
--------- ---------
Total loans, net $ 980,281 $ 703,184
========= =========
Total loans include net deferred loan origination costs of $1,263 and $903
at September 30, 2004 and September 30, 2003, respectively.
A substantial portion of the Company's loan portfolio is secured by
residential and commercial real estate located in Rockland and Orange
Counties of New York and contiguous areas such as Ulster and Sullivan
Counties of New York. The ability of the Company's borrowers to make
principal and interest payments is dependent upon, among other things, the
level of overall economic activity and the real estate market conditions
prevailing within the Company's concentrated lending area. Commercial real
estate and construction loans are considered by management to be of
somewhat greater credit risk than loans to fund the purchase of a primary
residence due to the generally larger loan amounts and dependency on
income production or sale of the real estate. Substantially all of these
loans are collateralized by real estate located in the Company's primary
market area.
73
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The principal balances of non-accrual loans were as follows:
September 30,
------------------
2004 2003
------ ------
One- to four-family residential
mortgage loans $1,597 $ 951
Commercial real estate loans 488 3,632
Commercial business 474 --
Consumer loans 178 114
------ ------
Total non-accrual loans $2,737 $4,697
====== ======
Gross interest income that would have been recorded if the foregoing
non-accrual loans had remained current in accordance with their
contractual terms totaled $163, $354, and $371 for the years ended
September 30, 2004, 2003 and 2002, respectively, compared to interest
income actually recognized (including income recognized on a cash basis)
of $119, $167 and $83, respectively.
The Company's total recorded investment in impaired loans, as defined by
SFAS No. 114, was $231 and $815 at September 30, 2004 and September 30,
2003, respectively. Substantially all of these loans were
collateral-dependent loans measured based on the fair value of the
collateral. The Company determines the need for an allowance for loan
impairment under SFAS No. 114 on a loan-by-loan basis. An impairment
allowance was not required at September 30, 2004 and 2003 due to the
adequacy of collateral values. The Company's average recorded investment
in impaired loans was $523 and $701 during the years ended September 30,
2004 and 2003, respectively.
Activity in the allowance for loan losses is summarized as follows:
Year ended September 30,
------------------------
2004 2003
-------- --------
Balance at beginning of year $ 11,069 $ 10,383
Provision for loan losses 800 900
Charge-offs (484) (352)
Recoveries 218 138
Allowance recorded in ENB acquisition 5,750 --
-------- --------
Balance at end of year $ 17,353 $ 11,069
======== ========
74
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Provisions for losses and other activity in the allowance for losses on
real estate owned were insignificant during the years ended September 30,
2004 and 2003. Certain residential mortgage loans originated by the
Company are sold in the secondary market. Other non-interest income
includes net gains on such sales of $320 in fiscal 2004, $1,096 in fiscal
2003 and $146 in fiscal 2002. At September 30, 2004 and 2003 there was
$855 and $2,364 in loans held for sale, respectively. Other assets at
September 30, 2004 and 2003 include capitalized mortgage servicing rights
with an amortized cost of $746 and $702, respectively, which approximated
fair value.
The Company generally retains the servicing rights on mortgage loans sold.
Servicing loans for others involves collecting payments, maintaining
escrow accounts, making remittances to investors and, if necessary,
processing foreclosures. Mortgage loans serviced for others totaled
approximately $84,924 and $83,346 at September 30, 2004 and 2003,
respectively. Mortgage escrow funds include balances of $493 and $816 at
September 30, 2004 and 2003, respectively, related to loans serviced for
others.
(7) Accrued Interest Receivable
The components of accrued interest receivable were as follows:
September 30,
------------------
2004 2003
------ ------
Loans $3,095 $2,064
Securities 3,720 2,787
------ ------
Total accrued interest receivable $6,815 $4,851
====== ======
(8) Premises and Equipment, Net
Premises and equipment are summarized as follows:
September 30,
-----------------------
2004 2003
-------- --------
Land and land improvements $ 1,772 $ 1,407
Buildings 10,247 6,843
Leasehold improvements 6,312 6,084
Furniture, fixtures, and equipment 15,340 11,791
-------- --------
33,671 26,125
Accumulated depreciation and amortization (16,825) (14,478)
-------- --------
Total premises and equipment, net $ 16,846 $ 11,647
======== ========
75
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(9) Deposits
Deposit balances and weighted average interest rates are summarized as
follows:
September 30,
------------------------------------------------------
2004 2003
------------------------ ------------------------
Amount Rate Amount Rate
---------- ---- ---------- ----
Demand deposits:
Retail $ 122,276 --% $ 90,471 --%
Commercial 167,084 -- 72,538 --
NOW deposits 83,439 0.21 62,367 0.20
Savings deposits 360,138 0.45 279,717 0.40
Money market deposits 173,272 0.64 128,222 0.52
Certificates of deposit 333,323 1.86 236,238 1.85
---------- ----------
Total deposits $1,239,532 0.96% $ 869,553 0.72%
========== ==========
Municipal deposits held by PMB totaled $106.7 million and $31.0 million at
September 30, 2004 and September 30, 2003, respectively. PMB commenced its
public deposit operations on April 19, 2002. See note 4, Securities
Available for Sale, for the amount of securities that are pledged as
collateral for municipal deposits and other purposes.
Certificates of deposit had remaining periods to contractual maturity as
follows:
September 30,
---------------------
2004 2003
-------- --------
Remaining period to contractual maturity:
Less than one year $277,812 $190,140
One to two years 25,874 29,638
Two to three years 17,065 5,910
Greater than three years 12,572 10,550
-------- --------
Total certificates of deposit $333,323 $236,238
======== ========
Certificate of deposit accounts with a denomination of $100 or more
totaled $93,912 and $48,615 at September 30, 2004 and 2003, respectively.
The FDIC generally insures depositor accounts up to $100 as defined in the
applicable regulations.
76
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Interest expense on deposits is summarized as follows:
Years ended September 30,
-------------------------------
2004 2003 2002
------- ------- -------
Savings deposits $ 1,570 $ 1,497 $ 2,289
Money market and NOW deposits 1,048 1,155 1,750
Certificates of deposit 5,283 5,123 7,662
------- ------- -------
Total interest expense $ 7,901 $ 7,775 $11,701
======= ======= =======
(10) FHLB and Other Borrowings
The Company's FHLB and other borrowings and weighted average interest
rates are summarized as follows:
September 30,
------------------------------------------------------
2004 2003
------------------------ ------------------------
Amount Rate Amount Rate
---------- ---- ---------- ----
By type of borrowing:
Advances $164,947 2.81% $124,398 2.49%
Repurchase agreements 49,962 3.49 40,359 4.52
-------- --------
Total borrowings $214,909 2.97% $164,757 2.98%
======== ========
By remaining period to maturity:
Less than one year $ 94,961 2.11% $ 70,358 2.28%
One to two years 28,000 3.18 15,000 2.19
Two to three years 18,651 3.65 28,000 3.18
Three to four years 29,443 3.78 9,162 4.69
Four to five years 40,017 3.76 33,277 3.65
Greater than five years 3,837 4.89 8,960 5.01
-------- --------
Total borrowings $214,909 2.97% $164,757 2.98%
======== ========
As a member of the FHLB of New York, the Bank may borrow in the form of
term and overnight FHLB advances up to 30% of its total assets, or
approximately $548,000 and $352,000 at September 30, 2004 and 2003,
respectively. The Bank's unused FHLB borrowing capacity was approximately
$383,000 and $228,000, respectively, at those dates. FHLB advances are
secured by the Bank's investment in FHLB stock and by a blanket security
agreement. This agreement requires the Bank to maintain as collateral
certain qualifying assets (such as securities and residential mortgage
loans) not otherwise pledged. The Bank satisfied this collateral
requirement at September 30, 2004 and 2003. At September 30, 2004
repurchase agreements included $9,962 to other than the FHLB.
77
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Securities repurchase agreements had weighted average remaining terms to
maturity of approximately 2.7 years and 3.2 years at September 30, 2004
and 2003, respectively. Average borrowings under securities repurchase
agreements were $43,183 and $35,953 during the years ended September 30,
2004 and 2003, respectively, and the maximum outstanding month-end balance
was $50,246 and $40,359, respectively.
FHLB borrowings of $20,000 at September 30, 2004 and 2003 are callable
quarterly, at the discretion of the FHLB. These borrowings have a weighted
average remaining term to the contractual maturity dates of approximately
2 years and 3 years and weighted average interest rates of 4.9% and 5.11%
at September 30, 2004 and 2003, respectively.
(11) Income Taxes
Income tax expense consists of the following:
Years ended September 30,
-------------------------------
2004 2003 2002
------- ------- -------
Current tax expense:
Federal $ 5,556 $ 5,137 $ 5,872
State 656 594 863
------- ------- -------
6,212 5,731 6,735
------- ------- -------
Deferred tax expense (benefit):
Federal (789) 610 (918)
State (287) 3 (254)
------- ------- -------
(1,076) 613 (1,172)
------- ------- -------
Total income tax expense $ 5,136 $ 6,344 $ 5,563
======= ======= =======
78
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Actual income tax expense differs from the tax computed based on pre-tax
income and the applicable statutory Federal tax rate, for the following
reasons:
Years ended September 30,
---------------------------------
2004 2003 2002
------- ------- -------
Tax at Federal statutory rate $ 5,654 $ 6,158 $ 5,282
State income taxes, net of Federal
tax benefit 240 388 396
Tax-exempt interest (460) (234) (193)
Nondeductible portion of ESOP
expense 408 222 161
BOLI Income (193) (169) --
Low-income housing tax credits (72) (72) (72)
Other, net (441) 51 (11)
------- ------- -------
Actual income tax expense $ 5,136 $ 6,344 $ 5,563
======= ======= =======
Effective income tax rate 31.8% 36.1% 36.9%
======= ======= =======
79
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized below. The net amount is reported in
other assets or other liabilities in the consolidated statements of
financial condition.
September 30,
---------------------
2004 2003
-------- --------
Deferred tax assets:
Allowance for loan losses $ 7,092 $ 4,524
Deferred compensation 2,662 2,684
Contribution carry forward 1,836 --
Depreciation of premises and equipment 661 245
Core deposit intangibles -- 1,111
Net unrealized loss on securities available for sale 124 --
Other 468 178
-------- --------
Total deferred tax assets 12,843 8,742
-------- --------
Deferred tax liabilities:
Undistributed earnings of subsidiary not
consolidated for tax return purposes
(Provident REIT, Inc.) (4,337) (4,311)
Prepaid pension costs (582) (608)
Core deposit intangibles (958) --
Purchase accounting fair value
adjustments (493) (153)
Net unrealized gain on securities
available for sale -- (2,322)
Other (652) (697)
-------- --------
Total deferred tax liabilities (7,022) (8,091)
-------- --------
Net deferred tax asset (liability) $ 5,821 $ 651
======== ========
80
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Based on management's consideration of historical and anticipated future
pre-tax income, as well as the reversal period for the items giving rise
to the deferred tax assets and liabilities, a valuation allowance for
deferred tax assets was not considered necessary at September 30, 2004 and
2003.
The Bank is subject to special provisions in the Federal and New York
State tax laws regarding its allowable tax bad debt deductions and related
tax bad debt reserves. Tax bad debt reserves consist of a defined
"base-year" amount, plus additional amounts accumulated after the base
year. Deferred tax liabilities are recognized with respect to reserves
accumulated after the base year, as well as any portion of the base-year
amount that is expected to become taxable (or recaptured) in the
foreseeable future. The Bank's base-year tax bad debt reserves were $4,600
for Federal tax purposes and $39,000 and $34,900 for New York State tax
purposes at September 30, 2004 and 2003, respectively. Associated deferred
tax liabilities of $3,900 and $3,660 have not been recognized at those
dates since the Company does not expect that the base-year reserves will
become taxable in the foreseeable future. Under the tax laws, events that
would result in taxation of certain of these reserves include (i)
redemptions of the Bank's stock or certain excess distributions by the
Bank to Provident Bancorp, Inc. and (ii) failure of the Bank to maintain a
specified qualifying-assets ratio or meet other thrift definition tests
for New York State tax purposes.
(12) Employee Benefit Plans and Stock-Based Compensation Plans
(a) Pension Plan
The Company has a noncontributory defined benefit pension plan
covering substantially all of its employees. Employees who are
twenty-one years of age or older and have worked for the Company for
one year are eligible to participate in the plan. The Company's
funding policy is to contribute annually an amount sufficient to
meet statutory minimum funding requirements, but not in excess of
the maximum amount deductible for Federal income tax purposes.
Contributions are intended to provide not only for benefits
attributed to service to date, but also for benefits expected to be
earned in the future. As part of the acquisition of ENB the Company
assumed the ENB Pension Plan, a defined benefit plan. The ENB plan
was frozen in connection with the merger of ENB into the Company.
81
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of changes in the projected benefit
obligation and fair value of plan assets, together with a
reconciliation of the funded status to the amount of prepaid pension
costs reported in other assets in the consolidated statements of
financial condition:
September 30,
---------------------
2004 2003
-------- --------
Changes in projected benefit obligation:
Beginning of year $ 11,520 $ 9,132
Service cost 787 669
Interest cost 990 673
Actuarial loss 903 1,255
Acquisition of ENB plan 7,132 --
Benefits paid (428) (209)
-------- --------
End of year 20,904 11,520
-------- --------
Changes in fair value of plan assets:
Beginning of year 9,896 7,887
Actual gain on plan assets 802 1,056
Employer contributions 3,309 1,162
Employee contributions 20 --
Acquisition of ENB plan 6,236 --
Benefits and distributions paid (619) (209)
-------- --------
End of year 19,644 9,896
-------- --------
Funded status at end of year (1,260) (1,624)
Unrecognized net actuarial loss 4,154 3,132
Unrecognized prior service cost (43) (56)
Unrecognized net transition obligation 10 36
-------- --------
Prepaid pension costs $ 2,861 $ 1,488
======== ========
A discount rate of 6.00% and a rate of increase in future
compensation levels of 5.00% were used in determining the actuarial
present value of the projected benefit obligation at September 30,
2004 (6.25% and 5.00%, respectively, at September 30, 2003). The
long-term rate of return on plan assets was 7.75% for both fiscal
2004 and 2003. The discount rate, long-term rate of return on plan
assets and future compensation increase assumptions for the ENB Plan
were 6.00%, 6.00% and 0.00%, respectively, for the year ended
September 30, 2004.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
2005 $ 692
2006 835
2007 893
2008 993
2009 1,126
2010-2014 6,423
82
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The components of the net periodic pension expense were as follows:
Years ended September 30,
-------------------------------
2004 2003 2002
------- ------- -------
Service cost $ 787 $ 669 $ 430
Interest cost 990 673 490
Expected return on plan assets (1,068) (647) (598)
Amortization of prior service cost (13) (14) (14)
Amortization of net transition obligation 26 26 26
Recognized net actuarial loss 194 155 12
------- ------- -------
Net periodic pension expense $ 916 $ 862 $ 346
======= ======= =======
The Company has also established a non-qualified Supplemental
Executive Retirement Plan to provide certain executives with
supplemental retirement benefits in addition to the benefits
provided by the pension plan. The periodic pension expense for the
supplemental plan amounted to $113, $97 and $90 for the years ended
September 30, 2004, 2003 and 2002, respectively. The actuarial
present value of the projected benefit obligation was $877 and $759
at September 30, 2004 and 2003, respectively, and the vested benefit
obligation was $800 and $653 for the same periods, respectively, all
of which is unfunded.
(b) Other Postretirement Benefits Plan
The Company's postretirement health care plan, which is unfunded,
provides optional medical, dental and life insurance benefits to
retirees. In accordance with SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, the cost of
postretirement benefits is accrued over the years in which employees
provide services to the date of their full eligibility for such
benefits. As permitted by SFAS No. 106, the Company has elected to
amortize the transition obligation for accumulated benefits as an
expense over a 20-year period. The periodic expense recognized for
this plan was $43, $40 and $32 for the years ended September 30,
2004, 2003 and 2002, respectively.
(c) Employee Savings Plans
The Company also sponsors a defined contribution plan established
under Section 401(k) of the Internal Revenue Code. Eligible
employees may elect to contribute up to 50% of their compensation to
the plan. The Company currently makes matching contributions equal
to 50% of a participant's contributions up to a maximum matching
contribution of 3% of compensation. Voluntary and matching
contributions are invested, in accordance with the participant's
direction, in one or a number of investment options. Savings plan
expense was $294, $248 and $206 for the years ended September 30,
2004, 2003 and 2002, respectively.
83
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(d) Employee Stock Ownership Plan
In connection with the Reorganization and Offering in 1999, the
Company established an ESOP for eligible employees who meet certain
age and service requirements. The ESOP borrowed $3,760 from
Provident Bancorp, Inc. and used the funds to purchase 1,370,112
shares of common stock in the open market subsequent to the
Offering. The Bank makes periodic contributions to the ESOP
sufficient to satisfy the debt service requirements of the loan
which has a ten-year term and bears interest at the prime rate. The
ESOP uses these contributions, and any dividends received by the
ESOP on unallocated shares, to make principal and interest payments
on the loan.
In connection with the Second-Step Stock Conversion and Offering in
January, 2004, the Company established an additional ESOP for
eligible employees. The ESOP borrowed $9,987 from Provident Bancorp,
Inc. and used the funds to purchase 998,650 shares of common stock
in the offering. The term of the second ESOP loan is twenty years.
ESOP shares are held by the plan trustee in a suspense account until
allocated to participant accounts. Shares released from the suspense
account are allocated to participants on the basis of their relative
compensation in the year of allocation. Participants become vested
in the allocated shares over a period not to exceed five years. Any
forfeited shares are allocated to other participants in the same
proportion as contributions.
ESOP expense was $1,896, $1,012 and $835 for the years ended
September 30, 2004, 2003 and 2002, respectively. Through September
30, 2004 and 2003, a cumulative total of 923,717 shares and 786,706
shares, respectively, have been allocated to participants or
committed to be released for allocation, respectively. The cost of
ESOP shares that have not yet been allocated to participants or
committed to be released for allocation is deducted from
stockholders' equity (1,445,045 shares with a cost of $10,854 and a
fair value of approximately $16,965 at September 30, 2004 and
583,405 shares with a cost of $1,597 and a fair value of
approximately $5,500 at September 30, 2003, respectively).
A supplemental savings plan has also been established for certain
senior officers. Expense recognized for this plan was $198, $67 and
$68 for the years ended September 30, 2004, 2003 and 2002,
respectively.
84
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(e) Recognition and Retention Plan
In February 2000, the Company's stockholders approved the Provident
Bank 2000 Recognition and Retention Plan (the RRP). The principal
purpose of the RRP is to provide executive officers and directors a
proprietary interest in the Company in a manner designed to
encourage their continued performance and service. A total of
856,320 shares were awarded under the RRP in February 2000, and the
grant-date fair value of these shares $(2,995) was charged to
stockholders' equity. The awards vest at a rate of 20% on each of
five annual vesting dates, the first of which was September 30,
2000. RRP expense was $506, $526 and $621 for the years ended
September 30, 2004, 2003 and 2002, respectively. In 2003, 27,413
shares were forfeited and returned to the plan as available for
future grant.
85
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(f) Stock Option Plan
The stockholders also approved the Provident Bank 2000 Stock Option
Plan (the Stock Option Plan) in February 2000. A total of 1,712,640
shares of authorized but unissued common stock has been reserved for
issuance under the Stock Option Plan, although the Company may also
fund option exercises using treasury shares. Options have a ten-year
term and may be either non-qualified stock options or incentive
stock options. Reload options may be granted and provide for the
automatic grant of a new option at the then-current market price in
exchange for each previously owned share tendered by an employee in
a stock-for-stock exercise. Each option entitles the holder to
purchase one share of common stock at an exercise price equal to the
fair market value of the stock on the grant date.
The following is a summary of activity in the Stock Option Plan:
Weighted
Shares subject average
to option exercise price
-------------- --------------
Outstanding at September 30, 2001 1,545,987 3.52
Granted 196,488 5.86
Exercised (385,584) 3.71
Forfeited (13,740) 3.50
---------- ----------
Outstanding at September 30, 2002 1,343,151 3.81
Granted 47,065 7.08
Exercised (154,327) 3.96
Forfeited (22,385) 3.50
---------- ----------
Outstanding at September 30, 2003 1,213,504 $ 3.92
---------- ----------
Granted 191,418 11.77
Exercised (82,059) 3.70
---------- ----------
Outstanding at September 30, 2004 1,322,863 $ 5.05
========== ==========
Options exercisable at September 30, 2004, 2003 and 2002 totaled
1,182,863, 918,204 and 697,923 respectively, with a weighted average
exercise price of approximately $4.25, $4.00 and $3.77 per share,
respectively. These options had weighted average remaining terms of
6.0, 6.4 years and 7.4 years at the respective dates. There were
3,843 shares and 178,843 shares available for future option grants
at September 30, 2004 and 2003, respectively.
86
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(13) Comprehensive Income
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net
unrealized gain or loss on securities available for sale. The Company has
reported its comprehensive income in the consolidated statements of
changes in stockholders' equity.
The components of other comprehensive income (loss) are summarized as
follows:
Year ended September 30,
---------------------------------
2004 2003 2002
------- ------- -------
Net unrealized holding (loss) gain
arising during the year on securities
available for sale, net of related
income taxes of $1,463,
$597 and $(950), respectively $(2,195) $ (896) $ 1,429
Reclassification adjustment for net
realized gains included in net
income, net of related income
taxes of $982, $802 and $184,
respectively (1,473) (1,204) (277)
------- ------- -------
(3,668) (2,100) 1,152
Minimum liability on supplemental
retirement plan net of
related income taxes of $76 (111)
Net unrealized gain on
derivatives, net of related
income taxes of $(0), $(6)
and $(26), respectively (note 16) -- 10 38
------- ------- -------
Other comprehensive
income (loss) $(3,779) $(2,090) $ 1,190
======= ======= =======
The Company's accumulated other comprehensive income included in
stockholders' equity at September 30, 2004 and 2003 consists of the
after-tax net unrealized (loss) gain of $(186) and $3,482, respectively
and minimum liability for supplemental retirement plan of ( $111) at
September 30, 2004.
87
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(14) Earnings Per Common Share
The following is a summary of the calculation of earnings per share (EPS):
Years ended September 30,
-------------------------------------
2004 2003 2002
------- ------- -------
(In thousands, except per share data)
Net income $11,017 $11,251 $ 9,527
======= ======= =======
Weighted average common shares
outstanding for computation of
basic EPS(1) (3) 36,809 34,186 34,137
Common-equivalent shares due to
the dilutive effect of stock
options and RRP awards(2) (3) 635 477 523
------- ------- -------
Weighted average common shares
for computation of diluted EPS $37,444 $34,663 $34,660
======= ======= =======
Earnings per common share:(3)
Basic $ 0.30 $ 0.33 $ 0.28
Diluted 0.29 0.32 0.27
======= ======= =======
(1) Includes all shares issued to the Mutual Holding Company (2004 up
until January 14, 2004 and for 2003 and 2002), but excludes
unallocated ESOP shares.
(2) Represents incremental shares computed using the treasury stock
method.
(3) Prior period share information has been adjusted to reflect the
4.4323-to-one conversion ratio in connection with the Company's
second-step conversion in January 2004.
(15) Stockholders' Equity
(a) Regulatory Capital Requirements
OTS regulations require savings institutions to maintain a minimum
ratio of tangible capital to total adjusted assets of 1.5%, a
minimum ratio of Tier 1 (core) capital to total adjusted assets of
4.0%, and a minimum ratio of total (core and supplementary) capital
to risk-weighted assets of 8.0%.
88
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Under its prompt corrective action regulations, the OTS is required
to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized
institution. Such actions could have a direct material effect on the
institution's financial statements. The regulations establish a
framework for the classification of savings institutions into five
categories - well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered
well-capitalized if it has a Tier 1 (core) capital ratio of at least
5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a
total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the OTS about capital components, risk
weightings and other factors. These capital requirements apply only
to the Bank, and do not consider additional capital retained by
Provident Bancorp, Inc.
Management believes that, as of September 30, 2004 and 2003 the Bank
met all capital adequacy requirements to which it was subject.
Further, the most recent OTS notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's
capital classification.
89
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the Bank's actual regulatory capital
amounts and ratios at September 30, 2004 and 2003, compared to the
OTS requirements for minimum capital adequacy and for classification
as a well-capitalized institution. PMB is also subject to certain
regulatory capital requirements which it satisfied as of September
30, 2004 and 2003.
OTS requirements
-------------------------------------------------
Minimum capital Classification as well
Bank actual adequacy capitalized
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
September 30, 2004:
Tangible capital $189,486 11.3% $ 25,285 1.5% $ --
Tier 1 (core) capital 189,486 11.3 67,427 4.0 84,284 5.0
Risk-based capital:
Tier 1 189,486 16.6 -- 68,593 6.0
Total 203,776 17.8 91,458 8.0 114,322 10.0
======== ======== ========
September 30, 2003:
Tangible capital $ 93,497 8.1% $ 17,231 1.5% $ -- 0.0%
Tier 1 (core) capital 93,497 8.1 45,950 4.0 57,437 5.0
Risk-based capital:
Tier 1 93,497 13.7 -- 0.0 40,835 6.0
Total 102,041 15.0 54,447 8.0 68,058 10.0
======== ======== ========
Tangible and Tier 1 capital amounts represent the stockholder's
equity of the Bank, less intangible assets and after-tax net
unrealized gains on securities available for sale. Total capital
represents Tier 1 capital plus the allowance for loan losses up to a
maximum amount equal to 1.25% of risk-weighted assets.
90
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a reconciliation of the Bank's total stockholder's
equity under accounting principles generally accepted in the United
States of America ("GAAP") and its regulatory capital:
September 30,
------------------------
2004 2003
--------- ---------
Total GAAP stockholder's equity $ 259,790 $ 112,039
Goodwill and intangible assets (70,490) (15,163)
Unrealized gain on securities available
for sale 186 (3,379)
--------- ---------
Tangible, tier 1 core and
Tier 1 risk-based capital 189,486 93,497
Allowance for loan losses 14,290 8,544
--------- ---------
Total risk-based capital $ 203,776 $ 102,041
========= =========
(b) Dividend Payments
Under OTS regulations, savings associations such as the Bank
generally may declare annual cash dividends up to an amount equal to
the sum of net income for the current year and net income retained
for the two preceding years. Dividend payments in excess of this
amount require OTS approval. The Bank paid cash dividends of $15
million to Provident Bancorp, Inc. during the year ended September
30, 2004 ( $3,500 during the year ended September 30, 2003 and none
during the year ended September 30, 2002).
Unlike the Bank, Provident Bancorp, Inc. is not subject to OTS
regulatory limitations on the payment of dividends to its
shareholders.
(c) Stock Repurchase Programs
The Company completed a stock repurchase program during the year
ended September 30, 2000, purchasing 193,200 (unadjusted for the
4.4323-to-one conversion) common shares for the treasury at a total
cost of $3,061. In July 2000, the Company announced a second
repurchase program to acquire up to 5%, or 183,540, of its
publicly-traded shares as market conditions warrant. This
91
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
program was completed in May 2003. A third repurchase program was
announced in March 2003 to acquire up to 5% or approximately 177,250
shares. 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 restricted stock repurchases for one
year following the completion of a mutual stock conversion. The
restriction does not apply to treasury stock purchases in connection
with ESOP and option plans.
(d) Liquidation Rights
All depositors who had liquidation rights with respect to the Bank
as of the effective date of the Reorganization continue to have such
rights solely with respect to the Mutual Holding Company, as long as
they continue to hold deposit accounts with the Bank. In addition,
all persons who were depositors of the Bank as of the date of the
second step stock offering have liquidation rights with respect to
the Mutual Holding Company.
(16) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to
off-balance-sheet financial instruments that involve, to varying degrees,
elements of credit risk and interest rate risk in addition to the amounts
recognized in the consolidated financial statements. The contractual or
notional amounts of these instruments, which reflect the extent of the
Company's involvement in particular classes of off-balance-sheet financial
instruments, are summarized as follows:
September 30,
----------------------
2004 2003
-------- --------
Lending-related instruments:
Loan origination commitments:
Fixed-rate loans $ 11,671 $ 15,742
Adjustable-rate loans 78,694 55,602
Unused lines of credit 120,695 79,593
Standby letters of credit 12,711 8,976
(a) Lending-Related Instruments
The contractual amounts of loan origination commitments, unused
lines of credit and standby letters of credit represent the
Company's maximum potential exposure to credit loss, assuming (i)
the instruments are fully funded at a later date, (ii) the borrowers
do not meet the contractual payment obligations, and (iii) any
collateral or other security proves to be worthless. The contractual
amounts of these instruments do not necessarily represent future
cash requirements since certain of these instruments may expire
without being funded and others may not be fully drawn upon.
Substantially all of these lending-related instruments have been
entered into with customers located in the Company's primary market
area described in Note 6.
92
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Loan origination commitments are legally-binding agreements to lend
to a customer as long as there is no violation of any condition
established in the contract. Commitments have fixed expiration dates
(generally ranging up to 60 days) or other termination clauses, and
may require payment of a fee by the customer. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The
amount of collateral, if any, obtained by the Company upon extension
of credit, is based on management's credit evaluation of the
borrower. Collateral varies but may include mortgages on residential
and commercial real estate, deposit accounts with the Company, and
other property. The Company's fixed-rate loan origination
commitments at September 30, 2004 provide for interest rates ranging
principally from 4.25% to 8.25%.
Unused lines of credit are legally-binding agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Lines of credit generally have fixed
expiration dates or other termination clauses. The amount of
collateral obtained, if deemed necessary by the Company, is based on
management's credit evaluation of the borrower.
Standby letters of credit are commitments issued by the Company on
behalf of its customer in favor of a beneficiary that specify an
amount the Company can be called upon to pay upon the beneficiary's
compliance with the terms of the letter of credit. These commitments
are primarily issued in favor of local municipalities to support the
obligor's completion of real estate development projects. The credit
risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
As of September 30, 2004, the Company had $12,711in outstanding
letters of credit, of which $3,871 were secured by cash collateral.
(b) Interest Rate Cap Agreements
At September 30, 2002, the Company was a party to two interest rate
cap agreements with a total notional amount of $50,000. These
interest rate caps matured in March and April 2003. These agreements
were entered into to reduce the variability of cash flows from
potentially higher interest payments associated with upward interest
rate repricings on a portion of the Company's certificate of deposit
accounts and borrowings. The counterparties to the agreements are
obligated to make payments to the Company, based on the notional
amounts, to the extent that the three-month LIBOR rate exceeds
specified levels during the term of the agreements. These specified
rate levels were 8.25% and 6.50% for interest rate cap agreements
with notional amounts of $30,000 and $20,000, respectively.
The Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as of October 1, 2000, and
recorded an after-tax transition adjustment of $41 to recognize the
interest rate cap agreements at fair value. The Company's interest
rate cap agreements were accounted for as cash flow hedges under
SFAS No. 133 and were reported at fair value, which was
insignificant at September 30, 2002. Interest expense for the years
ended September 30, 2004, 2003, and 2002 includes charges of $0,
$16, and $64, respectively, for the effect of the interest rate cap
agreements. The remaining amount reported in accumulated other
93
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
comprehensive income with respect to these agreements at September
30, 2002 was reclassified into earnings during fiscal 2003.
(17) Commitments and Contingencies
Certain premises and equipment are leased under operating leases with
terms expiring through 2025. The Company has the option to renew certain
of these leases for terms of up to five years. Future minimum rental
payments due under noncancelable operating leases with initial or
remaining terms of more than one year at September 30, 2004 are $2,603 for
fiscal 2005, $1,467 for fiscal 2006, $1,361 for fiscal 2007, $1,419 for
fiscal 2008, $851 for fiscal 2009 and a total of $11,249 for later years.
Occupancy and office operations expense includes net rent expense of
$1,435, $1,202, and $1,137 for the years ended September 30, 2004, 2003
and 2002, respectively.
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. Management, after consultation with legal
counsel, does not anticipate losses on any of these claims or actions that
would have a material adverse effect on the consolidated financial
statements.
(18) Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information for those financial
instruments for which it is practicable to estimate fair value, whether or
not such financial instruments are recognized in the consolidated
statements of financial condition. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
Quoted market prices are used to estimate fair values when those prices
are available, although active markets do not exist for many types of
financial instruments. Fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. These estimates are highly subjective
and require judgments regarding significant matters, such as the amount
and timing of future cash flows and the selection of discount rates that
appropriately reflect market and credit risks. Changes in these judgments
often have a material effect on the fair value estimates. Since these
estimates are made as of a specific point in time, they are susceptible to
material near-term changes. Fair values disclosed in accordance with SFAS
No. 107 do not reflect any premium or discount that could result from the
sale of a large volume of a particular financial instrument, nor do they
reflect possible tax ramifications or estimated transaction costs.
94
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the carrying amounts and estimated fair
values of financial assets and liabilities (none of which were held for
trading purposes):
September 30,
------------------------------------------------------
2004 2003
------------------------ -------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 107,571 $ 107,571 $ 33,500 $ 33,500
Securities available for sale 534,297 534,297 300,715 300,715
Securities held to maturity 69,078 70,230 73,544 75,628
Loans 980,281 1,024,002 703,184 733,769
Accrued interest receivable 6,815 6,815 4,851 4,851
FHLB stock 10,247 10,247 8,220 8,220
Financial liabilities:
Deposits 1,239,532 1,238,364 869,553 871,338
FHLB borrowings 214,909 214,940 164,757 166,195
Mortgage escrow funds 2,526 2,526 3,949 3,949
========== ========== ========== ==========
The following paragraphs summarize the principal methods and assumptions
used by management to estimate the fair value of the Company's financial
instruments.
(a) Securities
The estimated fair values of securities were based on quoted market
prices.
(b) Loans
Fair values were estimated for portfolios of loans with similar
financial characteristics. For valuation purposes, the total loan
portfolio was segregated into adjustable-rate and fixed-rate
categories. Fixed-rate loans were further segmented by type, such as
residential mortgage, commercial mortgage, commercial business and
consumer loans. Loans were also segmented by maturity dates.
Fair values were estimated by discounting scheduled future cash
flows through estimated maturity using a discount rate equivalent to
the current market rate on loans that are similar with regard to
collateral, maturity and the type of borrower. The discounted value
of the cash flows was reduced by a credit risk adjustment based on
loan categories. Based on the current composition of the Company's
loan portfolio, as well as past experience and current economic
conditions and trends, the future cash flows were adjusted by
prepayment assumptions that shortened the estimated remaining time
to maturity and therefore affected the fair value estimates.
95
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(c) Deposits
In accordance with SFAS No. 107, deposits with no stated maturity
(such as savings, demand and money market deposits) were assigned
fair values equal to the carrying amounts payable on demand.
Certificates of deposit were segregated by account type and original
term, and fair values were estimated by discounting the contractual
cash flows. The discount rate for each account grouping was
equivalent to the current market rates for deposits of similar type
and maturity.
These fair values do not include the value of core deposit
relationships that comprise a significant portion of the Company's
deposit base. Management believes that the Company's core deposit
relationships provide a relatively stable, low-cost funding source
that has a substantial value separate from the deposit balances.
(d) FHLB Borrowings
Fair values of FHLB borrowings were estimated by discounting the
contractual cash flows. A discount rate was utilized for each
outstanding borrowing equivalent to the then-current rate offered by
the FHLB on borrowings of similar type and maturity.
(e) Other Financial Instruments
The other financial assets and liabilities listed in the preceding
table have estimated fair values that approximate the respective
carrying amounts because the instruments are payable on demand or
have short-term maturities and present relatively low credit risk
and interest rate risk.
The fair values of the Company's off-balance-sheet financial
instruments described in Note 16 were estimated based on current
market terms (including interest rates and fees), considering the
remaining terms of the agreements and the credit worthiness of the
counterparties. At September 30, 2004 and 2003, the estimated fair
values of these instruments approximated the related carrying
amounts, which were insignificant.
(19) Recent Accounting Standards and Interpretations
FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others, was issued in November 2002. This interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that
it has issued. The disclosure requirements in this interpretation are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The interpretation also requires a guarantor to
recognize, at fair value, a liability for the obligation at inception of
the guarantee (effective for guarantees issued or modified after December
31, 2002). The adoption of FIN No. 45 did not have a material impact on
the consolidated financial statements.
96
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123. This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effects
of the method used on reported results. The provisions of this statement
are not expected to have a material impact on the consolidated financial
statements.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, to provide guidance on the identification of entities
controlled through means other than voting rights. FIN No. 46 specifies
how a business enterprise should evaluate its interests in a variable
interest entity to determine whether to consolidate that entity. A
variable interest entity must be consolidated by its primary beneficiary
if the entity does not effectively disperse risks among the parties
involved. A public company with a variable interest in an entity created
before February 1, 2003 must apply FIN No. 46 in the first interim or
annual period ending after December 15, 2003. The adoption of FIN No. 46
is not expected to have a significant effect on the consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, for
certain decisions made by the Board as part of the Derivative
Implementation Group process. This statement is effective for contracts
entered into or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003. Management does not expect that the
provisions of SFAS No. 149 will have a material impact on the results of
operations or financial condition.
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity was issued in May 2003.
Under this statement, certain freestanding financial instruments that
embody obligations for the issuer and that are now classified in equity,
must be classified as liabilities (or as assets in some circumstances).
Generally, SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003.
However, the effective date of the statement's provisions related to the
classification and measurement of certain mandatorily redeemable
non-controlling interests has been deferred indefinitely by the FASB,
pending further Board action. Adoption of this standard did not have an
impact on the consolidated financial statements.
97
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
In November 2003, the Emerging Issues Task Force ("EITF") issued issue
summary 03-1 ("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment
and its Application to Certain Investments. EITF 03-01 addressed an
entity's treatment of the impairment of securities when such impairment is
considered other than temporary. The preliminary summary required
disclosures only related to other than temporary impairment. In March
2004, the EITF continued its discussion and reached a consensus on the
procedures for recognizing an impairment of securities considered other
than temporarily impaired. The guidance in EITF 03-1 was intended to be
effective for reporting periods beginning after June 15, 2004. However, in
September 2004, the FASB issued FSP EITF 03-1-1, which deferred the
effective date for the measurement and recognition provisions of EITF 03-1
until further implementation guidance could be established. Management
does not believe the provisions of this standard, as currently written,
will have a material impact on the results of future operations.
In December 2003, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 03-3, "Accounting for Certain Loans
or Debt Securities Acquired in a Transfer." The SOP is effective for loans
acquired in fiscal years beginning after December 15, 2004. The SOP
addresses accounting for differences between contractual cash flows and
cash flows expected to be collected from an investor's initial investment
in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. The SOP
applies to loans acquired in business combinations but does not apply to
loans originated by the Company. Management does not believe the provision
of this standard will have a material impact on the results of future
operations.
On March 9, 2004, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 105, Application of Accounting
Principles to Loan Commitments. SAB No. 105 requires that when a company
is recognizing and valuing a loan commitment at fair value, only
differences between the guaranteed interest rate in the loan commitment
and a market interest rate should be included. Any expected future cash
flows related to the customer relationships or loan servicing should be
excluded from the fair value measurement. The expected future cash flows
that are excluded from the fair-value determination include anticipated
fees for servicing the funded loan, late-payment charges, other ancillary
fees, or other cash flows from servicing rights. The guidance in SAB No.
105 is effective for mortgage-loan commitments that are accounted for as
derivatives and are entered into after March 31, 2004. Management does not
believe the provisions of this standard will have a material impact on the
results of future operations.
98
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(20) Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition of
Provident Bancorp, Inc. and the related condensed statements of income and
cash flows:
September 30,
Condensed Statements of ---------------------
Financial Condition 2004 2003
-------- --------
Assets:
Cash $ 74,726 $ 3,640
Securities available for sale -- 2,297
Loan receivable from ESOP 11,491 1,880
Investment in Provident Bank 258,922 110,441
Other assets 5,182 107
-------- --------
Total assets $350,321 $118,365
======== ========
Liabilities $ 809 $ 508
Stockholders' equity 349,512 117,857
-------- --------
Total liabilities and
stockholders' equity $350,321 $118,365
======== ========
99
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Year ended September 30,
-------------------------------------
2004 2003 2002
--------- --------- ---------
Condensed statements of income
Interest income $ 919 $ 258 $ 450
Dividends from Provident Bank 15,000 3,500 --
Gain on sale of securities available for sale 471 92 123
Non-interest expense (5,207) (175) (226)
Income tax expense 1,311 (73) (134)
--------- --------- ---------
Income before equity in undistributed
earnings of Provident Bank 12,494 3,602 213
Equity in undistributed earnings of Provident Bank (1,477) 7,649 9,314
--------- --------- ---------
Net income $ 11,017 $ 11,251 $ 9,527
========= ========= =========
Condensed statements of cash flows
Cash flows from operating activities:
Net income $ 11,017 $ 11,251 $ 9,527
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of
Provident Bank 1,477 (7,649) (9,314)
Net gain on sales of securities 471 92 123
Other adjustments, net 4,295 1,119 632
--------- --------- ---------
Net cash provided by
operating activities 17,260 4,813 968
--------- --------- ---------
Cash flows from investing activities:
Purchase of ENB Holding CO., Inc. 39,697 -- --
Purchases of securities available for sale (41,021) -- (2,296)
Proceeds from sales of securities available for sale 42,847 2,050 2,374
Origination of ESOP loan (9,987) -- --
ESOP loan principal repayments 376 376 376
--------- --------- ---------
Net cash provided by investing activities 31,912 2,426 454
--------- --------- ---------
Cash flows from financing activities:
Common stock offering proceeds net 192,363 -- --
Capital contribution to banking subsidiary (160,404) -- --
Treasury shares purchased (432) (2,343) (1,971)
Cash dividends paid (5,008) (2,421) (1,935)
Stock option transactions 125 524 278
Shares purchased for ESOP plan (9,987) -- --
Formation of Charitable Foundation 4,000 -- --
Other equity transactions 1,257 -- --
--------- --------- ---------
Net cash provided by (used in)financing activities 21,914 (4,240) (3,628)
--------- --------- ---------
Net increase (decrease) in cash 71,086 2,999 (2,206)
Cash at beginning of year 3,640 641 2,847
--------- --------- ---------
Cash at end of year $ 74,726 $ 3,640 $ 641
========= ========= =========
100
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(21) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations
for the years ended September 30, 2004 and 2003:
First Second Third Fourth
quarter quarter quarter quarter
-------- -------- -------- --------
Year ended September 30, 2004
-----------------------------
Interest and dividend income $ 14,318 $ 19,085 $ 19,984 $ 21,121
Interest expense 2,767 3,147 3,487 3,581
-------- -------- -------- --------
Net interest income 11,551 15,938 16,497 17,540
Provision for loan losses 150 200 225 225
Non-interest income 2,803 2,784 2,875 3,111
Non-interest expense 9,570 18,650 13,505 14,421
-------- -------- -------- --------
Income before income
tax expense 4,634 (128) 5,642 6,005
Income tax expense 1,589 (200) 1,988 1,759
-------- -------- -------- --------
Net income $ 3,045 $ 72 $ 3,654 $ 4,246
======== ======== ======== ========
Earnings per common share:
Basic $ 0.09 $ -- $ 0.10 $ 0.11
Diluted 0.09 -- 0.10 0.11
======== ======== ======== ========
Year ended September 30, 2003
-----------------------------
Interest and dividend income $ 15,024 $ 14,439 $ 14,252 $ 14,075
Interest expense 3,389 2,947 2,975 2,749
-------- -------- -------- --------
Net interest income 11,635 11,492 11,277 11,326
Provision for loan losses 300 300 200 100
Non-interest income 2,003 2,367 2,888 2,298
Non-interest expense 8,473 9,557 9,176 9,585
-------- -------- -------- --------
Income before income
tax expense 4,865 4,002 4,789 3,939
Income tax expense 1,824 1,482 1,683 1,355
-------- -------- -------- --------
Net income $ 3,041 $ 2,520 $ 3,106 $ 2,584
======== ======== ======== ========
Earnings per common share:
Basic $ 0.09 $ 0.07 $ 0.09 $ 0.08
Diluted 0.09 0.07 0.09 0.07
-------- -------- -------- --------
101
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
None
ITEM 9A. Controls and Procedures.
- ---------------------------------
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this annual report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this annual report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
There were no significant changes made in our internal control over
financial reporting during the period covered by this report or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART III
ITEM 9B. Other Information.
- ---------------------------
Not applicable.
ITEM 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The "Proposal I - Election of Directors" section of Provident Bancorp's
Proxy Statement for the Annual Meeting of Stockholders to be held in February
2005 (the "Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
- -------------------------------
The "Proposal I - Election of Directors" section of the Proxy Statement is
incorporated herein by reference.
102
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
ITEM 12. Security Ownership of Certain Beneficial Owners and Management &
- --------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Provident Bancorp does not have any equity compensation programs that were
not approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of September 30, 2004, regarding
equity compensation that has been approved by stockholders.
=================================================================================================================
Number of securities to be Number of securities
Equity compensation plans Issued upon exercise of remaining
approved by outstanding options and Weighted average available for issuance
stockholders rights exercise price under plan
-----------------------------------------------------------------------------------------------------------------
Stock Option Plan 1,322,863 $5.05 3,843
-----------------------------------------------------------------------------------------------------------------
Recognition and Retention Plan(1) -- Not Applicable 0
-----------------------------------------------------------------------------------------------------------------
Total(2) 1,322,863 $5.05 3,843
=================================================================================================================
(1) Represents shares that have been granted but have not yet vested.
(2) Weighted average exercise price represents Stock Option Plan only,
since RRP shares have no exercise price.
The "Proposal I - Election of Directors" section of the Proxy Statement is
incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The "Transactions with Certain Related Persons" section of the Proxy
Statement is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
- -----------------------------------------------
The "Proposal IV - Ratification of Appointment of Independent Registered
Public Accounting Firm" section of the proxy statement is incorporated herein by
reference.
103
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(1) Financial Statements
--------------------
The financial statements filed in Item 8 of this Form 10-K are as
follows:
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition as of September
30, 2004 and 2003
(C) Consolidated Statements of Income for the years ended
September 30, 2004, 2003 and 2002
(D) Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended September 30, 2004,
2003, and 2002
(E) Consolidated Statements of Cash Flows for the years ended
September 30, 2004, 2003 and 2002
(F) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
104
(3) Exhibits
--------
3.1 Certificate of Incorporation of Provident Bancorp, Inc.*
3.2 Bylaws of Provident Bancorp, Inc.*
4 Form of Common Stock Certificate of Provident Bancorp, Inc.*
10.1 Employee Stock Ownership Plan**
10.2 Employment Agreement with George Strayton, as amended**
10.3 Form of Employment Agreement**
10.4 Deferred Compensation Agreement, as amended and restated*
10.5 Supplemental Executive Retirement Plan, as amended**
10.6 Management Incentive Program**
10.7 1996 Long-Term Incentive Plan for Officers and Directors, as
amended**
10.8 Provident Bank 2000 Stock Option Plan***
10.9 Provident Bank 2000 Recognition and Retention Plan***
10.10 Employment Agreement with Paul A. Maisch*****
14 Code of Ethics****
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
24 Power of Attorney (set forth on signature page)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as amended
by Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
* Incorporated by reference to the Registration Statement on
Form S-1 (File No. 333-108795), originally filed with the
Commission on September 15, 2003 and amended on October 31,
2003 and November 10, 2003.
** Incorporated by reference to the Registration Statement on
Form S-1 of Provident Bancorp, Inc., a federal corporation
(File No. 333-63593), originally filed with the Commission on
September 17, 1998 and amended on November 6, 1998 and
November 12, 1998.
*** Incorporated by reference from the Proxy Statement for the
2000 Annual Meeting of Stockholders of Provident Bancorp,
Inc., a federal corporation (File No. 0-25233), filed with the
Commission on January 18, 2000.
**** Incorporated by reference from the Annual Report on Form 10-K
of Provident Bancorp, Inc., a federal corporation (File No.
0-25233), filed with the Commission on December 29, 2003.
***** Incorporated by reference from the Quarterly Report on Form
10-Q of Provident Bancorp, Inc., a federal corporation (File
No. 0-25233), filed with the Commission on August 12, 2004.
105
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Provident Bancorp has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Provident Bancorp, Inc.
Date: December 13, 2004 By: /s/ George Strayton
----------------------------------
George Strayton
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ George Strayton By: /s/ Paul A. Maisch
------------------------------- ----------------------------------
George Strayton Paul A. Maisch
President, Chief Executive Chief Financial Officer and
Officer and Director Senior Vice President
Date: December 13, 2004 Date: December 13, 2004
By: /s/ William F. Helmer By: /s/ Dennis L. Coyle
------------------------------- ----------------------------------
William F. Helmer Dennis L. Coyle, Vice Chairman
Chairman of the Board
Date: December 13, 2004 Date: December 13, 2004
By: /s/ Judith Hershaft By: /s/ Thomas F. Jauntig, Jr.
------------------------------- ----------------------------------
Judith Hershaft, Director Thomas F. Jauntig, Jr., Director
Date: December 13, 2004 Date: December 13, 2004
By: /s/ Donald T. McNelis By: /s/ Richard A. Nozell
------------------------------- ----------------------------------
Donald T. McNelis, Director Richard A. Nozell, Director
Date: December 13, 2004 Date: December 13, 2004
By: /s/ William R. Sichol, Jr. By: /s/ Burt Steinberg
------------------------------- ----------------------------------
William R. Sichol, Jr., Burt Steinberg, Director
Director
Date: December 13, 2004 Date: December 13, 2004
By: /s/ F. Gary Zeh By: /s/ Victoria Kossover
------------------------------- ----------------------------------
F. Gary Zeh, Director Victoria Kossover, Director
Date: December 13, 2004 Dated: December 13, 2004
106