SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25233
PROVIDENT BANCORP, INC.
-----------------------
(Exact Name of Registrant as Specified in its Charter)
Federal 06-1537499
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ------------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
(914) 369-8040
--------------
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
(2) Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
----------------------- ------------------
$0.10 per share 8,086,800 as of
July 21, 2000
PROVIDENT BANCORP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2000
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
June 30, 2000 and September 30, 1999 3-4
Consolidated Statements of Income for the Three Months
and Nine Months Ended June 30, 2000 and 1999 5
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended June 30, 2000 6
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2000 and 1999 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Provident Bancorp, Inc. and subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands)
June 30, September 30,
Assets 2000 1999
- ------ --------- ---------
Cash and due from banks $ 15,400 $ 11,838
Securities:
Available for sale, at fair value (amortized cost of
$167,269 at June 30, 2000 and $150,792 at
September 30, 1999) 163,245 148,387
Held to maturity, at amortized cost (fair value of $51,283
at June 30, 2000 and $56,479 at September 30, 1999) 52,211 56,782
Total securities 215,456 205,169
--------- ---------
Loans:
One- to four-family residential mortgage loans 344,237 344,731
Commercial real estate, commercial business
and construction loans 175,676 160,297
Consumer loans 70,697 67,695
Allowance for loan losses (Note 3) (7,293) (6,202)
Total loans, net 583,317 566,521
--------- ---------
Accrued interest receivable, net 4,683 5,656
Federal Home Loan Bank stock, at cost 7,023 6,176
Premises and equipment, net 9,023 8,232
Other assets 11,356 10,926
--------- ---------
Total assets $ 846,258 $ 814,518
========= =========
3
Provident Bancorp, Inc. and subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED
(Unaudited)
(In thousands)
Liabilities and Stockholders' Equity June 30, 2000 September 30, 1999
- ------------------------------------ ------------- ------------------
Liabilities:
Deposits:
Retail demand and NOW deposits $ 94,948 $ 82,830
Commercial demand deposits 25,897 24,147
Savings and money market deposits 244,846 241,842
Certificates of deposit 252,069 237,821
--------- ---------
Total deposits 617,760 586,640
Borrowings 113,611 117,753
Mortgage escrow funds 14,846 10,489
Other 12,787 9,337
--------- ---------
Total liabilities 759,004 724,219
--------- ---------
Stockholders' equity (Note 1):
Preferred stock
(par value $0.10 per share;
10,000,000 shares authorized;
none issued or outstanding) -- --
Common stock
(par value $0.10 per share;
20,000,000 shares authorized;
8,280,000 shares issued) 828 828
Additional paid-in capital 36,330 36,262
Unallocated common stock held by the employee stock ownership
plan ("ESOP") (2,820) (3,102)
Stock awards under the recognition and retention
plan ("RRP") (2,591) --
Treasury stock, at cost (193,200 shares) (3,061) --
Retained earnings 60,995 57,754
Accumulated other comprehensive loss,
net of tax benefit of $1,597 at June 30, 2000
and $962 at September 30, 1999 (Note 4) (2,427) (1,443)
--------- ---------
Total stockholders' equity 87,254 90,299
--------- ---------
Total liabilities and stockholders' equity $ 846,258 $ 814,518
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
Interest and dividend income:
Loans $11,197 $10,204 $33,245 $29,407
Securities 3,470 2,880 9,980 8,597
Other earning assets 144 87 406 238
------- ------- ------- -------
Total interest and dividend income 14,811 13,171 43,631 38,242
------- ------- ------- -------
Interest expense:
Deposits 4,783 4,198 13,680 13,126
Borrowings 1,859 1,051 5,479 2,465
------- ------- ------- -------
Total interest expense 6,642 5,249 19,159 15,591
------- ------- ------- -------
Net interest income 8,169 7,922 24,472 22,651
Provision for loan losses (Note 3) 450 420 1,350 1,140
------- ------- ------- -------
Net interest income after provision for loan losses 7,719 7,502 23,122 21,511
------- ------- ------- -------
Non-interest income:
Loan servicing 116 154 389 402
Banking service fees and other income 727 533 2,095 1,863
------- ------- ------- -------
Total non-interest income 843 687 2,484 2,265
------- ------- ------- -------
Non-interest expense:
Compensation and employee benefits 3,477 3,066 9,945 9,026
Occupancy and office operations 944 847 2,807 2,525
Advertising and promotion 400 322 909 1,000
Data processing 377 327 1,151 853
Amortization of branch purchase premiums 430 430 1,290 1,290
Other 737 1,525 3,272 4,929
------- ------- ------- -------
Total non-interest expense 6,365 6,517 19,374 19,623
------- ------- ------- -------
Income before income tax expense 2,197 1,672 6,232 4,153
Income tax expense 681 545 2,088 1,464
------- ------- ------- -------
Net income $ 1,516 $ 1,127 $ 4,144 $ 2,689
======= ======= ======= =======
Basic and diluted earnings per common share (Note 5) $ 0.20 $ 0.14 $ 0.53
======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2000 (Unaudited)
(In thousands, except share and per share data)
Accumulated
Additional Unallocated RRP Other
Common Paid-In ESOP Stock Treasury Retained Comprehensive
Stock Capital Shares Awards Stock Earnings Loss Total
----- ------- ------ ------ ----- -------- ---- -----
Balance at September 30, 1999 $828 $36,262 $(3,102) $ -- $ -- $57,754 $(1,443) $90,299
Net income for the nine-month
period 4,144 4,144
Treasury stock purchases
(193,200 shares) (3,061) (3,061)
ESOP shares allocated or released
for allocation (22,734 shares) 68 282 350
Award of RRP shares (2,995) (2,995)
Vesting of RRP shares 404 404
Change in net unrealized loss on
securities available for sale,
net of taxes of $635 (984) (984)
Cash dividends ($0.11 per share) (903) (903)
---- ------- ------- ------- ------- ------- ------- -------
Balance at June 30, 2000 $828 $36,330 $(2,820) $(2,591) $(3,061) $60,995 $(2,427) $87,254
==== ======= ======= ======= ======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Nine Months
(In thousands) Ended June 30,
--------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income $ 4,144 $ 2,689
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises
and equipment 1,202 1,111
Net amortization of premiums and discounts
on securities 76 162
ESOP and RRP expense 754 543
Provision for loan losses 1,350 1,140
Amortization of branch purchase premiums 1,290 1,290
Proceeds from sales of loans held for sale 836 14,081
Originations of loans held for sale (361) (12,759)
Deferred income tax benefit (653) (300)
Net changes in accrued interest receivable
and payable 2,152 (1,168)
Net increase in other assets (642) (180)
Net increase in other liabilities 921 1,312
Other adjustments, net 262 150
--------- ---------
Net cash provided by operating activities 11,331 8,071
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Securities available for sale (35,746) (62,490)
Securities held to maturity (4,710) (18,355)
Proceeds from maturities, calls and principal payments:
Securities available for sale 13,200 30,895
Securities held to maturity 9,252 36,917
Proceeds from sales of securities available for sale 5,992 --
Loan originations (100,857) (188,169)
Loan repayments 81,864 86,774
Purchases of Federal Home Loan Bank stock (847) (2,013)
Proceeds from sale of real estate owned 350 274
Purchases of premises and equipment (1,993) (1,620)
--------- ---------
Net cash used in investing activities (33,495) (117,787)
--------- ---------
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Nine Months
Ended June 30,
--------------
2000 1999
--------- ---------
Cash flows from financing activities:
Net increase in deposits $ 31,120 $ 8,070
Net (decrease) increase in borrowings (4,142) 61,914
Net increase in mortgage escrow funds 4,357 10,041
Proceeds from stock offering -- 37,089
Treasury shares purchased (3,061) --
Shares purchased by ESOP -- (3,760)
Shares purchased for RRP awards (1,645) --
Initial capitalization of Provident Bancorp, MHC -- (100)
Cash dividends (903) (116)
--------- ---------
Net cash provided by financing activities 25,726 113,138
--------- ---------
Net increase in cash and cash equivalents 3,562 3,422
Cash and cash equivalents at beginning of period 11,838 7,572
Cash and cash equivalents at end of period $ 15,400 $ 10,994
========= =========
Supplemental information:
Interest paid $ 17,981 $ 15,638
Income taxes paid 1,352 1,446
Transfers of loans to real estate owned 154 311
========= =========
See accompanying notes to unaudited consolidated financial statements
8
PROVIDENT BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Reorganization and Offering
---------------------------
On January 7, 1999, Provident Bank (the "Bank") completed its
reorganization into a mutual holding company structure. Provident Bancorp, Inc.,
the Bank's holding company (the "Company"), issued a total of 8,280,000 common
shares, consisting of 3,864,000 shares sold to the public and 4,416,000 shares
issued to Provident Bancorp, MHC. The Company raised net proceeds of $37.1
million (gross proceeds of $38.6 million less offering costs of $1.5 million)
from the sale of shares to the public. The Bank's Employee Stock Ownership Plan
("ESOP") subsequently purchased 8% of the shares issued to the public, or
309,120 shares, in the open market.
2. Basis of Presentation
---------------------
The results of operations and financial condition for the periods and
as of dates subsequent to the reorganization in January 1999 are reported on a
consolidated basis for the Company and the Bank (collectively, the "Company").
Earlier financial information pertains to the Bank only.
The financial statements included herein have been prepared by
management without audit. In the opinion of management, the unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position and results of
operations as of the dates and for the periods presented. Certain information
and footnote disclosures normally included in conformity with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Company believes that
the disclosures are adequate to make the information presented not misleading;
however, the results for the period ended June 30, 2000 are not necessarily
indicative of results to be expected for the entire fiscal year ending September
30, 2000.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expense.
Actual results could differ significantly from these estimates. A material
estimate that is particularly susceptible to near-term change is the allowance
for loan losses, which is discussed in Note 3.
The unaudited financial statements presented herein should be read in
conjunction with the annual audited financial statements for the fiscal year
ended September 30, 1999, included in the Company's 1999 Annual Report.
9
3. Allowance for Loan Losses and Non-Performing Assets
---------------------------------------------------
The allowance for loan losses is established through provisions for
losses charged to earnings. Loan losses are charged against the allowance when
management believes that the collection of principal is unlikely. Recoveries of
loans previously charged-off are credited to the allowance when realized.
The allowance for loan losses is an amount that management believes
will be adequate to absorb probable losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of the loans.
Management's evaluations, which are subject to periodic review by the Company's
regulators, take into consideration such factors as the Company's past loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and collateral values, and
current economic conditions that may affect the borrowers' ability to pay.
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, regulatory examinations, the
identification of additional problem loans, and other factors.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
Balance at beginning of period $ 6,954 $ 5,631 $ 6,202 $ 4,906
Provision for loan losses 450 420 1,350 1,140
Charge-offs (134) (686) (307) (863)
Recoveries 23 130 48 312
Balance at end of period $ 7,293 $ 5,495 $ 7,293 $ 5,495
The following table sets forth the amounts and categories of the
Company's non-performing assets at the dates indicated. At both dates, the
Company had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).
10
June 30, September 30,
2000 1999
------ ------
(Dollars in thousands)
Non-accrual loans:
One- to four- family residential mortgage loans $2,420 $2,839
Commercial real estate, commercial business
and construction loans 1,340 1,368
Consumer loans 352 429
------ ------
Total non-performing loans 4,112 4,636
Real estate owned:
One- to four-family residential 154 403
------ ------
Total non-performing assets $4,266 $5,039
====== ======
Ratios:
Non-performing loans to total loans 0.70% 0.82%
Non-performing assets to total assets 0.50 0.62
Allowance for loan losses to total
non-performing loans 177.36 133.78
Allowance for loan losses to total loans 1.25 1.08
====== ======
4. Comprehensive Income
--------------------
The Company's total comprehensive income was $3.2 million and $722,000
for the nine months ended June 30, 2000 and 1999, respectively. The difference
between the Company's net income and total comprehensive income equals the net
increase in the after-tax net unrealized loss on securities available for sale
of $984,000 and $2.0 million for the nine months ended June 30, 2000 and 1999,
respectively. Accumulated other comprehensive loss in the consolidated
statements of financial condition represents the after-tax net unrealized loss
on securities available for sale as of June 30, 2000 and September 30, 1999.
5. Earnings Per Common Share
-------------------------
The Company completed the reorganization and offering on January 7,
1999. As a result, earnings per share ("EPS") data is presented herein only for
periods subsequent to that date. Weighted average common shares used in
calculating basic and diluted earnings per share for the three and nine months
ended June 30, 2000 were 7,690,273 and 7,862,218, respectively, and for the
three months ended June 30, 1999 were 8,012,209. These include all shares issued
to the mutual holding company, but exclude unvested shares awarded under the
recognition and retention plan ("RRP") and unallocated ESOP shares that have not
been released or committed to
11
be released to participants. Unvested RRP shares and stock options issued in
February 2000 had an anti-dilutive effect on EPS for both the three and nine
months ended June 30, 2000 and, therefore, are not included in the respective
EPS calculations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein 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 the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Company's continued
ability to originate quality loans, fluctuations in interest rates, real estate
conditions in the Company's lending areas, general and local economic
conditions, the Company's continued ability to attract and retain deposits, the
Company's ability to control costs, and the effect of new accounting
pronouncements and changing regulatory requirements. The Company 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.
Comparison of Financial Condition at June 30, 2000 and September 30, 1999
Total assets increased to $846.3 million at June 30, 2000 from $814.5
million at September 30, 1999, an increase of $31.8 million or 3.9%. Asset
growth was primarily attributable to increases in loans receivable and the
securities portfolio, as described below. In addition, cash levels increased to
$15.4 million at June 30, 2000 from $11.8 million at September 30, 1999, an
increase of $3.6 million.
The total securities portfolio increased by $10.3 million to $215.5
million at June 30, 2000 from $205.2 million at September 30, 1999. This net
increase reflects a $14.9 million increase in available-for-sale securities,
partially offset by a $4.6 million decrease in securities held to maturity.
Net loans receivable increased to $583.3 million at June 30, 2000, an
increase of $16.8 million compared to September 30, 1999, led by increases in
the commercial loan portfolio (commercial real estate, construction and
commercial business loans) to $175.7 million, an increase of $15.4 million or
9.6%.
Total deposits increased by $31.1 million to $617.8 million at June 30,
2000 from $586.6 million at September 30, 1999, primarily due to the increase in
retail transaction accounts (demand and NOW) balances, which increased by $12.1
million, or 14.6%, to $94.9 million at June 30, 2000. Total savings account and
money market account balances increased by $3.0
12
million to $244.8 million at June 30, 2000 from $241.8 million at September 30,
1999. During the same time period, total certificates of deposit increased $14.2
million to $252.1 million at June 30, 2000 from $237.8 million at September 30,
1999. Borrowings (primarily Federal Home Loan Bank advances) decreased $4.1
million during the nine-month period to $113.6 million at June 30, 2000 from
$117.8 million at September 30, 1999.
Stockholders' equity decreased by $3.0 million to $87.3 million at June
30, 2000 compared to $90.3 million at September 30, 1999. Rising interest rates
during the fiscal year-to-date period resulted in a $984,000 decrease in
stockholders' equity from higher net unrealized losses on the available for sale
securities portfolio. In addition, cash dividends of $903,000 were paid, and
capital was further reduced by treasury stock purchases of $3.1 million
associated with the Company's previously announced stock repurchase program and
by stock grants of $3.0 million under the RRP. Net income of $4.1 million for
the nine-month period, allocation of ESOP shares of $350,000 and vesting of RRP
shares of $404,000 partially offset these decreases.
The RRP was approved by the Company's stockholders in February 2000 and
provides for awards of common stock to certain employees and directors. A total
of 193,200 shares were awarded under the RRP and the grant-date fair value of
these shares ($3.0 million) was charged to stockholders' equity. The awards vest
at a rate of 20% on each of five annual vesting dates, beginning with September
30, 2000. The Company's liability for RRP awards not yet funded through stock
purchases was $1.4 million as of June 30, 2000.
Comparison of Operating Results for the
Three Months Ended June 30, 2000 and June 30, 1999
Net Income. For the three months ended June 30, 2000, net income was
$1.5 million or $0.20 per common share, an increase of $389,000 or 34.5% from
net income of $1.1 million for the three months ended June 30, 1999.
Interest Income. Interest income for the three months ended June 30,
2000 was $14.8 million, which was $1.6 million or 12.5% higher than interest
income for the three months ended June 30, 1999, primarily due to higher average
loan balances, as well as the acquisition over time of higher yielding
securities and the upward adjustment of rates earned on variable rate loans.
Interest income on loans increased $993,000 or 9.7% to $11.2 million from $10.2
million for the three months ended June 30, 1999. This increase was attributable
to a $35.1 million increase in average loan balances to $576.8 million from
$541.6 million, accompanied by a 23 basis point increase in average yield to
7.79% from 7.56%. The increase in average loan balances reflects a $20.6
million, or 13.9%, increase in the average commercial loan portfolio, as well as
a $14.6 million, or 3.7%, increase in the average balance of residential
mortgages and consumer loans. The higher total interest income also reflected a
$647,000 or 21.8% increase in interest income on securities and other earning
assets to $3.6 million for the three months ended June 30, 2000 from $3.0
million for the three months ended June 30, 1999. This increase was attributable
to a $32.0 million increase in the average balance of these assets to $224.5
million in 2000 from $192.4 million in 1999, as well as a 30 basis point
increase in the average yield to 6.48% from 6.18%.
13
Interest Expense. Interest expense for the three months ended June 30,
2000 was $6.6 million, which was $1.4 million or 26.5% higher than the same
period last year due primarily to the continuing rise in overall interest rates
and to higher balances in wholesale borrowings, which carry higher interest
rates than the Bank's core deposits. Average interest-bearing liabilities for
the three months ended June 30, 2000 increased by $66.1 million, or 10.8% to
$676.4 million, from an average of $610.3 million for the three months ended
June 30, 1999. The average rate paid on total interest-bearing liabilities in
the 2000 period was 3.95%, compared to 3.45% in the 1999 period. Interest
expense on deposits increased by $585,000 resulting from an increase in average
interest-bearing deposits to $557.1 million for the three-month period ended
June 30, 2000 from $530.4 million for the three-month period ended June 30,
1999, accompanied by higher average rates paid on those deposits, which
increased by 28 basis points to 3.45% from 3.17%. The increase in deposit
interest expense was accompanied by higher interest expense on borrowings from
the Federal Home Loan Bank ("FHLB"). The average balance of FHLB borrowings
increased by $39.4 million to $119.3 million for the 2000 period, from $79.9
million in 1999, while the average rate paid on these borrowings increased 99
basis points to 6.27% from 5.28%.
Net Interest Income. For the three months ended June 30, 2000, net
interest income was $8.2 million compared to $7.9 million for the three months
ended June 30, 1999, an increase of $247,000 or 3.1% which was caused by a $1.6
million increase in interest income partially offset by a $1.4 million increase
in interest expense. The increase in net interest income was primarily
attributable to a $67.2 million increase in total earning assets to $801.2
million from $734.1 million, accompanied by a $1.1 million increase in net
earning assets (interest-earning assets less interest-bearing liabilities). The
Company's net interest margin declined 23 basis points to 4.10% from 4.33%. and
the net interest rate spread declined 26 basis points to 3.49% from 3.75%.
Provision for Loan Losses. The Company records provisions for loan
losses, which are charged to earnings, in order to maintain the allowance for
loan losses at a level which is considered appropriate to absorb probable loan
losses inherent in the existing portfolio. In determining the appropriate level
of the allowance for loan losses, management considers such factors as the
Company's past loan loss experience, changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans and
collateral values, and current economic conditions that may affect the
borrowers' ability to pay. For example, the loan loss allowance and provision
take into account the continuing growth in the commercial loan portfolio.
Management assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses in order to maintain the adequacy of the allowance.
The Company recorded $450,000 and $420,000 in loan loss provisions during the
three months ended June 30, 2000 and 1999, respectively.
Non-Interest Income. Non-interest income is composed primarily of fee
income for bank services, and also includes gains and losses from the sale of
loans and securities. Total non-interest income increased by $156,000 or 22.7%,
to $843,000 for the three months ended June 30, 2000 from $687,000 for the three
months ended June 30, 1999, reflecting increased fees collected
14
on loans and increased fees charged on ATM usage by non-Bank customers. These
increases were partially offset by a decrease in income from loan servicing.
Non-Interest Expense. For the three months ended June 30, 2000,
non-interest expense was $6.4 million, a decrease of $152,000 or 2.3% from $6.5
million for the three months ended June 30, 1999. Expenses in the current
quarter not incurred in the prior year include costs associated with operating a
new trust department and two new branches, as well as RRP expenses of $298,000.
However, these costs were partially offset by the reversal in the June 2000
quarter of $278,000 in accruals made in fiscal 1999 for potential operating
losses related to the conversion of computer systems. These losses did not
materialize, and management determined that the accruals were no longer
necessary.
Income Taxes. Income tax expense was $681,000 for the three months
ended June 30, 2000, compared to $545,000 for the same period in 1999. The
effective tax rates were 31.0% and 32.6%, respectively. The lower effective tax
rate in the current period reflects the implementation of state tax strategies
in fiscal 1999.
Comparison of Operating Results for the
Nine Months Ended June 30, 2000 and June 30, 1999
Net Income. For the nine months ended June 30, 2000, net income was
$4.1 million or $0.53 per common share, an increase of $1.5 million or 54.1%
from net income of $2.7 million for the nine months ended June 30, 1999.
Interest Income. Interest income for the nine months ended June 30,
2000 grew by $5.4 million compared to the same period in the last fiscal year,
to $43.6 million, primarily due to increased loan volume, as well as the
acquisition over time of higher yielding securities and the upward adjustment of
rates earned on variable rate loans. Average interest-earning assets for the
nine months ended June 30, 2000 were $792.1 million, or $85.5 million higher
than average interest-earning assets in the nine months ended June 30, 1999 of
$706.6 million, an increase of 12.1 %. Average loan balances grew by $59.5
million, while average balances of securities and other earning assets increased
by $26.0 million.
The increase in interest income was primarily due to a $3.8 million or
13.1% increase in income from loans to $33.2 million for the nine months ended
June 30, 2000, from $29.4 million for the nine months ended June 30, 1999. This
increase was attributable to a $59.5 million increase in the average loan
balance to $571.7 million from $512.2 million, while average yields remained
substantially unchanged from the prior nine-month period. The increase in
average loan balances reflects a $29.8 million, or 22.3%, increase in the
average commercial loan portfolio, as well as a $29.7 million, or 7.8%, increase
in the average balance of residential mortgages and consumer loans. The higher
total interest income also reflected a $1.6 million or 17.6% increase in income
from securities and other earning assets, to $10.4 million for the nine months
ended June 30, 2000, from $8.8 million for the nine months ended June 30, 1999.
This increase was attributable to a $26.0 million increase in the average
balance of these assets to $220.4 million in
15
2000 from $194.4 million in 1999, as well as a 21 basis point increase in the
average yield to 6.29% from 6.08%.
Interest Expense. Interest expense for the nine months ended June, 2000
was $19.2 million, $3.6 million higher than the same period during the previous
fiscal year, due primarily to higher balances in wholesale borrowings, which
carry higher interest rates than the Bank's core deposits, and the continuing
rise in overall interest rates.
The average rate paid on total interest-bearing liabilities in the 2000
period was 3.82%, compared to 3.53% in the 1999 period. Average total
interest-bearing liabilities also increased to $669.1 million for the period
ended June 30, 2000, compared to an average of $590.7 million for the prior
period, an increase of $78.4 million, or 13.3%. Interest expense on deposits
increased $554,000, due to an increase in average interest-bearing deposits to
$544.5 million for the nine-month period ended June 30, 2000 from $530.3 million
for the nine-month period ended June 30, 1999. Average rates paid on
interest-bearing deposits were substantially unchanged. The increase in deposit
interest expense was accompanied by higher interest expense on borrowings from
the FHLB. The average balance of FHLB borrowings increased by $64.2 million to
$124.7 million for the 2000 period, from $60.4 million in 1999, while the
average rate paid on these borrowings increased 42 basis points to 5.87% from
5.45%.
Net Interest Income. Net interest income for the nine months ended June
30, 2000 was $24.5 million, compared to $22.7 million for the nine months ended
June 30, 1999, an increase of $1.8 million or 8.0%. This increase in net
interest income was primarily attributable to a $7.0 million increase in net
earning assets (interest-earning assets less interest-bearing liabilities),
partially offset by an 18 basis point decrease in the net interest rate spread
to 3.53% from 3.71%. The Company's net interest margin declined to 4.13% in the
nine months ended June 30, 2000 from 4.29% in the nine months ended June 30,
1999.
Provision for Loan Losses. The Company records provisions for loan
losses, which are charged to earnings, in order to maintain the allowance for
loan losses at a level which is considered appropriate to absorb probable loan
losses inherent in the existing portfolio. The provision for loan losses was
$1.4 million for the current nine months, compared to $1.1 million for the same
nine months in the prior fiscal year.
Non-Interest Income. Non-interest income for the nine months ended June
30, 2000 was $2.5 million, an increase of $219,000 over non-interest income for
the nine months ended June 30, 1999. Within this category, bank service fees and
other income increased $232,000 while loan servicing income decreased $13,000.
Non-Interest Expenses. Non-interest expenses for the nine months ended
June 30, 2000 were $19.4 million, or $249,000 less than expenses for the nine
months ended June 30, 1999. During the prior year, expenses of $1.1 million were
incurred in connection with the conversion of computer systems, and ESOP expense
of $371,000 was recognized for shares allocated to employees for the full plan
year ended December 31, 1998. The absence of these costs in the nine
16
months ended June 30, 2000 was partially offset by current period expenses
associated with opening two new branches, establishing a trust division (which
began operations on March 10, 2000), and making final preparations for issues
relating to the Year 2000 date change. Total expenses for the current nine-month
period also benefited from the reversal of $378,000 in accruals made in fiscal
1999 related to the conversion of computer systems, as discussed above.
Income Taxes. Income tax expense was $2.1 million for the nine months
ended June 30, 2000 compared to $1.5 million for the same period in 1999. The
effective tax rates were 33.5% and 35.3%, respectively. The lower effective tax
rate in the current period reflects the implementation of state tax strategies
in fiscal 1999.
Year 2000 Considerations
The Company, like all companies that utilize computer technology, faced
the significant challenge in recent years of ensuring that its computer systems
would be able to process time-sensitive data accurately beyond the Year 1999
(referred to as the "Year 2000 issue"). Although no guaranty can be given that
all internal systems and/or third parties will not have some
as-yet-to-be-identified problem due to the Year 2000 issue, as of this date, it
appears the date change occurred without incident.
Monitoring and managing the Year 2000 issue resulted, and may result,
in additional direct and indirect costs for the Company. These costs have been
charged to expense as incurred, except for costs incurred in the purchase of new
software or hardware, which were capitalized. As of June 30, 2000, total direct
and indirect Year 2000 costs are estimated to have been approximately $240,000.
Significant additional Year 2000 costs are not anticipated.
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and to a lesser extent,
wholesale borrowings, the proceeds from maturities of securities and short-term
investments and the sale of fixed-rate loans in the secondary mortgage market.
While maturities and scheduled amortization of loans and securities, and
proceeds from borrowings, are predictable sources of funds, other funding
sources such as deposit inflows, mortgage prepayments and mortgage loan sales
are greatly influenced by market interest rates, economic conditions and
competition.
17
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the nine months
ended June 30, 2000, loan originations totaled $100.9 million or $87.3 million
less than the $188.2 million originated during the nine months ended June 30,
1999 when lower interest rates encouraged extensive refinancing activity.
Purchases of securities totaled $40.3 million and $80.8 million for the nine
months ended June 30, 2000 and 1999, respectively. In fiscal 2000, these
investing activities were funded primarily by deposit growth and principal
repayments on loans and securities. During the nine months ended June 30, 1999,
funding was also provided by an increase in wholesale borrowings and the net
proceeds from the stock offering, including stock purchases funded from Bank
savings accounts and certificates of deposit.
Deposit flows are generally affected by the level of interest rates,
the interest rates and products offered by local competitors, and other factors.
The net increase in total deposits for the nine months ended June 30, 2000 was
$31.1 million, compared to $8.1 million for the nine months ended June 30, 1999.
The year earlier period was impacted by deposit withdrawals to purchase shares
of the stock offering.
The Company monitors its liquidity position on a daily basis. Excess
short-term liquidity, if any, is usually invested in overnight federal funds.
The Company generally remains fully invested and utilizes additional sources of
funds through FHLB advances, which amounted to $113.6 million at June 30, 2000.
Loan origination commitments totaled $10.8 million at June 30, 2000. The Company
anticipates that it will have sufficient funds available to meet current loan
commitments.
At June 30, 2000, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $77.8 million, or 9.3% of adjusted
assets (which is above the required level of $33.6 million, or 4.0%) and a total
risk-based capital level of $83.9 million, or 16.5% of risk-weighted assets
(which is above the required level of $40.8 million, or 8.0%). These capital
requirements, which are applicable to the Bank only, do not consider additional
capital retained at the holding company level.
18
The following table sets forth the Bank's regulatory capital position
at June 30, 2000 and September 30, 1999, compared to OTS requirements.
OTS Requirements
----------------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
June 30, 2000
- -------------
Tangible capital $77,751 9.3% $12,590 1.5% $ -- -- %
Tier 1 (core) capital 77,751 9.3 33,573 4.0 41,966 5.0
Risk-based capital:
Tier 1 77,751 15.3 -- -- 30,571 6.0
Total 83,904 16.5 40,762 8.0 50,952 10.0
September 30, 1999
- ------------------
Tangible capital $76,894 9.6% $12,069 1.5% $ -- -- %
Tier 1 (core) capital 76,894 9.6 32,184 4.0 40,230 5.0
Risk-based capital:
Tier 1 76,894 15.9 -- -- 28,986 6.0
Total 82,935 17.2 38,648 8.0 48,310 10.0
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's most significant form of market risk is interest rate
risk, as the majority of its assets and liabilities are sensitive to changes in
interest rates. There have been no material changes in the Company's interest
rate risk position since September 30, 1999. Other types of market risk, such as
foreign exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is a defendant in a lawsuit, Allison Martin v. Provident Bank
et. al. alleging negligence on the part of the defendants in the operation of
certain real property at which plaintiff alleges to have suffered injuries. The
lawsuit was brought in the Supreme Court of the State of New York, County of
Rockland seeking $1.0 million in damages. Management believes the claim is
baseless and has retained counsel to vigorously defend the claim.
The Company is not involved in any other 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 the consolidated financial condition and
operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27.1 - Financial Data Schedule for June 30, 2000
(submitted only with filing in electronic format)
b) Exhibit 27.2 - Amended Financial Data Schedule for March 31, 2000
(submitted only with filing in electronic format)
c) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Bancorp, Inc.
(Registrant)
By: \s\Katherine A. Dering
----------------------
Katherine A. Dering
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer and
duly authorized representative)
Date: August 9, 2000
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