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, 2001
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 (I.R.S. Employer Identification Number)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ------------------------------------------ ----------
(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.
As of November 30, 2001, there were issued and outstanding 8,034,624
shares of the Registrant's common stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the closing price of the common stock as of November 30, 2001, was $89,380,013.
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be
held in February 2002.
1
FORM 10-K TABLE OF CONTENTS
PART I........................................................................................................3
ITEM 1. BUSINESS......................................................................................3
ITEM 2. PROPERTIES...................................................................................33
ITEM 3. LEGAL PROCEEDINGS............................................................................34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................34
PART II......................................................................................................34
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........................34
ITEM 6. SELECTED FINANCIAL DATA......................................................................35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE...................................................................................87
PART III.....................................................................................................87
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........................................87
ITEM 11. EXECUTIVE COMPENSATION.......................................................................87
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................87
PART IV......................................................................................................88
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.............................88
SIGNATURES...................................................................................................90
2
PART I
ITEM 1. Business
Provident Bancorp, Inc.
Provident Bancorp, Inc. (the "Company") was organized at the
direction of the Board of Directors of Provident Bank (the "Bank") for the
purpose of acting as the stock holding company of the Bank. The Company's
principal business is overseeing and directing the business of the Bank. At
September 30, 2001, the Company's assets consist primarily of its investment in
all outstanding capital stock of the Bank, and cash and securities totaling $9.4
million. At September 30, 2001, 3,608,166 shares, or 44.97%, of the Company's
outstanding common stock, par value $0.10 per share, were held by the public,
and 4,416,000 shares, or 55.03%, were held by Provident Bancorp, MHC, the
Company's parent mutual holding company (the "Mutual Holding Company").
The Company's office is located at 400 Rella Boulevard,
Montebello, New York 10901. The telephone number is (845) 369-8040.
Provident Bank
The Bank was organized in 1888 as a New York-chartered mutual
savings and loan association. It adopted a federal mutual charter in 1986 and
reorganized into the stock form of ownership in 1999 as part of its
reorganization into the mutual holding company structure. The Bank's deposits
are insured by the Savings Association Insurance Fund ("SAIF"), as administered
by the Federal Deposit Insurance Corporation ("FDIC"), up to the maximum amount
permitted by law. The Bank is engaged primarily in the business of offering
various FDIC-insured savings and demand deposits to customers through its 14
full-service offices, and using those deposits, together with funds generated
from operations and borrowings, to originate one- to four-family residential and
commercial real estate loans, consumer loans, construction loans and commercial
business loans. The Bank also invests in investment securities and
mortgage-backed securities. Additional products and services offered include the
sale of mutual funds and annuities, and investment management and trust
services.
The Bank's executive office is located at 400 Rella Boulevard,
Montebello, New York 10901. The telephone number is (845) 369-8040.
Provident Bancorp, MHC
The Mutual Holding Company was formed in January 1999 as part of
the Bank's mutual holding company reorganization. The Mutual Holding Company is
chartered under federal law and owns 55.03% of the outstanding common stock of
the Company as of September 30, 2001. The Mutual Holding Company does not engage
in any business activities other than owning the common stock of the Company,
investing in liquid assets and contributing to local charities.
The Mutual Holding Company's office is located at 400 Rella
Boulevard, Montebello, New York 10901. The telephone number is (845) 369-8040.
3
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 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.
Market Area
The Bank is an independent community bank offering a broad range
of customer-focused services as an alternative to money center banks in its
market area. At September 30, 2001, the Bank's 14 branch offices consisted of 12
full-service banking offices in Rockland County, New York and two full-service
supermarket branches in Orange County, New York. An additional supermarket
branch was opened in October 2001. The Bank's primary market for deposits is
currently concentrated around the areas where its full-service banking offices
are located. The Bank's primary lending area also has been historically
concentrated in Rockland and contiguous counties.
Rockland County is a suburban market with a broad employment
base. Rockland County also serves as a bedroom community for nearby New York
City and other suburban areas including Westchester County and northern New
Jersey. Neighboring Orange County, where the Bank operates two branches, is one
of the two fastest growing counties in New York State. The favorable economic
environment in the New York metropolitan area has led to an increase in
residential and commercial construction activity in recent years.
The economy of the Bank's primary market areas is based on a
mixture of service, manufacturing and wholesale/retail trade. Other employment
is provided by a variety of industries and state and local governments. The
diversity of the employment base is evidenced by its many major employers.
Additionally, Rockland and Orange Counties have numerous small employers.
Lending Activities
General. Historically, the principal lending activity of the Bank
has been the origination of fixed-rate and adjustable-rate mortgage ("ARM")
loans collateralized by one- to four-family residential real estate located
within its primary market area. The Bank also originates commercial real estate
loans, commercial business loans and construction loans (collectively referred
to as the "commercial loan portfolio"), as well as consumer loans such as home
equity lines of credit and homeowner loans. The Bank retains most of the loans
that it originates, although from time to time it may sell longer-term one- to
four-family residential real estate loans.
One- to Four-Family Real Estate Lending. The Bank offers
conforming and non-conforming, fixed-rate and adjustable-rate residential
mortgage loans with maturities of up to 30 years and maximum loan amounts
generally of up to $650,000. This portfolio totaled $358.2 million, or 58.2% of
the Bank's total loan portfolio at September 30, 2001.
4
The Bank currently offers 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." The Bank generally originates both fixed-rate
and ARM loans in amounts up to the maximum conforming loan limits as established
by Fannie Mae and Freddie Mac secondary mortgage market standards, which are
currently $275,000 for single-family homes. Private mortgage insurance is
generally required initially for loans with loan-to-value ratios in excess of
80%. Loans in excess of conforming loan limits, in amounts of up to $500,000,
are also generally underwritten to both Fannie Mae and Freddie Mac secondary
mortgage market standards. These loans are generally eligible for sale to
various conduit firms that specialize in the purchase of such non-conforming
loans, although most of these loans are retained in the Bank's loan portfolio.
The Bank's bi-weekly one- to four-family residential mortgage
loans result in significantly shorter repayment schedules than conventional
monthly mortgage loans, and are repaid through an automatic deduction from the
borrower's savings or checking account, which enables the Bank to avoid the cost
of processing payments. As of September 30, 2001, bi-weekly loans totaled $106.4
million or 29.7% of the Bank's residential loan portfolio.
The Bank actively monitors its interest rate risk position to
determine the desirable level of investment in fixed-rate mortgages. Depending
on market interest rates and the Bank's capital and liquidity position, the Bank
may retain all of its newly originated longer term fixed-rate, fixed-term
residential mortgage loans or from time to time may decide to sell all or a
portion of such loans in the secondary mortgage market to government sponsored
enterprises such as Fannie Mae and Freddie Mac. As a matter of policy, the Bank
retains the servicing rights on all loans sold to generate fee income and
reinforce its commitment to customer service. For the year ended September 30,
2001, the Bank sold no mortgage loans, compared with $808,000 and $14.1 million
sold for the years ended September 30, 2000 and 1999, respectively. As of
September 30, 2001 and 2000, the Bank's portfolio of loans serviced for others
totaled $86.7 million and $98.5 million, respectively.
The Bank currently offers several ARM loan products secured by
residential properties with rates that adjust every six months to one year,
after an initial fixed-rate period ranging from six months to five years. After
the initial term, the interest rate on these loans is reset based upon a
contractual spread or margin above the average yield on U.S. Treasury
securities, adjusted to a constant maturity of six months to one year (the "U.S.
Treasury Constant Maturity Index"), as published weekly by the Federal Reserve
Board and subject to certain limitations on interest rate changes. 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, 2001, the
Bank's ARM portfolio included $9.4 million in loans that re-price every six
months, $22.1 million in one-year ARMs and $48.2 million in loans with an
initial fixed-rate period ranging from three to five years.
The Bank requires title insurance on all of its one- to
four-family mortgage loans, and also requires that fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least equal to the lesser of the loan balance or the replacement cost
of the improvements. Loans with initial loan-to-value ratios in excess of 80%
must have private mortgage insurance, although occasional exceptions may be
made. Nearly all residential loans must have a mortgage escrow account from
which disbursements are made for real estate taxes and for hazard and flood
insurance.
5
Commercial Real Estate Lending. The Bank originates real estate
loans secured predominantly by first liens on commercial real estate and
apartment buildings. The commercial real estate properties are predominantly
non-residential properties such as office buildings, shopping centers, retail
strip centers, industrial and warehouse properties and, to a lesser extent, more
specialized properties such as churches, mobile home parks, restaurants,
motel/hotels and auto dealerships. The Bank may, from time to time, purchase
commercial real estate loan participations. Loans secured by commercial real
estate totaled $129.3 million or 21.0% of the Bank's total loan portfolio at
September 30, 2001, and consisted of 252 loans outstanding with an average loan
balance of approximately $513,000. Substantially all of the Bank's commercial
real estate loans are secured by properties located in its primary market area.
The initial interest rates on a substantial portion of the Bank's
commercial real estate loans adjust after an initial three-to-five year period
to new market rates that generally range between 200 to 350 basis points over
the then-current three-to-five year U.S. Treasury or FHLB rates. More typically,
commercial real estate loans may have a term of approximately 5 to 10 years,
with an amortization schedule of approximately 20 to 25 years, and may be repaid
subject to certain penalties. Fixed rate loans for a term of 15 to 20 years are
also made, from time to time.
In the underwriting of commercial real estate loans, the Bank
generally lends up to 75% of the property's appraised value on apartment
buildings and commercial properties. 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, the Bank emphasizes primarily
the ratio of the property's projected net cash flow to the loan's debt service
requirement (generally requiring a ratio of at least 110%), computed after
deduction for a vacancy factor and property expenses deemed appropriate by the
Bank. In addition, a personal guarantee of the loan is generally required from
the principal(s) of the borrower. On all real estate loans, the Bank requires
title insurance insuring the priority of its lien, fire and extended coverage
casualty insurance, and flood insurance, if appropriate, in order to protect the
Bank's security interest in the underlying property.
Commercial real estate loans generally carry higher interest
rates and have shorter terms than those on one- to four-family residential
mortgage loans. Commercial real estate loans, however, entail significant
additional credit risks compared to one- to four-family residential mortgage
loans, as they typically involve large loan balances concentrated with single
borrowers or groups of related borrowers. In addition, the payment experience on
loans secured by income-producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
economy generally.
Construction Loans. The Bank originates land acquisition,
development and construction loans to builders in its market area. These loans
totaled $19.5 million, or 3.2% of the Bank's total loan portfolio at September
30, 2001.
Acquisition loans are made to help finance the purchase of land
intended for further development, including single-family houses, multi-family
housing, and commercial income property. In some cases, the Bank may make an
acquisition loan before the borrower has received approval to develop the land
as planned. Loans for the acquisition of land are generally limited to the
Bank's most creditworthy customers. In general, the maximum loan-to-value ratio
for a land acquisition loan is 60% of the appraised value of the property. The
Bank also makes development loans to builders in its market area to finance
improvements to real estate, consisting mostly of single-family subdivisions,
typically to finance the cost of utilities, roads and sewers. Builders generally
rely on the sale of single-family homes to repay development loans, although in
some cases the improved building lots may be sold to another builder. The
maximum amount loaned is generally limited to the cost of the improvements.
Advances are made in accordance with a schedule reflecting the cost of the
improvements.
6
The Bank also grants construction loans to area builders, often
in conjunction with development loans. These loans finance the cost of
completing homes on the improved property. The loans are generally limited to
the lesser of 70% of the appraised value of the property or the actual cost of
improvements. 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. The
Bank commits to provide the permanent mortgage financing on most of its
construction loans on income-producing property.
Land acquisition, development and construction lending exposes
the Bank 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 the Bank makes 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 the Bank 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.
Commercial Business Loans. In an effort to expand its customer
account relationships and develop a broader mix of assets, the Bank makes
various types of secured and unsecured commercial loans to customers in its
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 a
lending rate which is determined internally, or a short-term market rate index.
The Bank may, from time to time, purchase commercial business loan
participations. At September 30, 2001, the Bank had 375 commercial business
loans outstanding with an aggregate balance of $31.4 million, or 5.1% of the
total loan portfolio. As of September 30, 2001, the average commercial business
loan balance was approximately $83,700.
Commercial credit decisions are based upon a complete 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 investigation is made of the applicant to
determine character and capacity to manage. Personal guarantees of the
principals are generally required. In addition to an evaluation of the loan
applicant's financial statements, a determination is made of the probable
adequacy of the primary and secondary sources of repayment to be relied upon in
the transaction. Credit agency reports of the applicant's credit history as well
as bank checks and trade investigations supplement the analysis of the
applicant's creditworthiness. Collateral supporting a secured transaction is
also analyzed to determine its marketability and liquidity. Commercial business
loans generally bear higher interest rates than residential loans, but they also
involve a higher risk of default since their repayment is generally dependent on
the successful operation of the borrower's business.
7
Consumer Loans. The Bank originates 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 prime rate variable lines-of-credit. As of September 30,
2001, consumer loans totaled $76.9 million, or 12.5% of the total loan
portfolio.
At September 30, 2001, the largest group of consumer loans
consisted of $70.6 million of loans secured by junior liens on residential
properties. The Bank offers fixed-rate, fixed-term second mortgage loans
referred to as homeowner loans and adjustable-rate home equity lines of credit.
As of September 30, 2001, homeowner loans totaled $39.5 million or 6.4% of the
Bank's total loan portfolio. The disbursed portion of home equity lines of
credit totaled $31.1 million, or 5.1% of the Bank's total loan portfolio, with
$18.7 million remaining undisbursed.
Other consumer loans include personal loans and loans secured by
new or used automobiles. As of September 30, 2001, these loans totaled $6.3
million, or 1.0% of the Bank's total loan portfolio. The Bank originates
automobile loans directly to its customers and has no outstanding agreement with
automobile dealerships to generate indirect loans. The Bank requires all
borrowers to maintain collision insurance on automobiles securing consumer
loans, with the Bank 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.
The Bank's procedures for underwriting consumer loans include an
assessment of an applicant's credit history and the ability to meet existing
obligations and payments on the proposed loan. Although an applicant's
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral security, if any, to the
proposed loan amount.
Consumer loans generally entail greater risk than residential
mortgage loans, particularly in the case of consumer loans that are unsecured or
secured by assets that tend to depreciate rapidly, such as automobiles. In
addition, the repayment of consumer loans depends on the borrower's continued
financial stability, as their repayment is more likely than a single family
mortgage loan to be adversely affected by job loss, divorce, illness or personal
bankruptcy.
8
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio by type of loan at the dates indicated.
September 30,
-----------------------------------------------------------------
2001 2000 1999
------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
One- to four-family residential mortgage loans $ 358,198 58.2% $ 343,871 57.5% $ 344,731 60.2%
--------- ---- --------- ---- --------- ----
Commercial real estate loans ................. 129,295 21.0 124,988 20.9 110,382 19.3
Commercial business loans .................... 31,394 5.1 27,483 4.6 30,768 5.4
Construction loans ........................... 19,490 3.2 29,599 5.0 19,147 3.3
--------- ---- --------- ---- --------- ----
Total commercial loans ..................... 180,179 29.3 182,070 30.5 160,297 28.0
--------- ---- --------- ---- --------- ----
Home equity lines of credit .................. 31,125 5.1 28,021 4.7 25,380 4.4
Homeowner loans .............................. 39,501 6.4 37,027 6.2 34,852 6.1
Other consumer loans ......................... 6,266 1.0 6,486 1.1 7,463 1.3
--------- ---- --------- ---- --------- ----
Total consumer loans ....................... 76,892 12.5 71,534 12.0 67,695 11.8
--------- ---- --------- ---- --------- ----
Total loans .................................. 615,269 100.0% 597,475 100.0% 572,723 100.0%
Allowance for loan losses .................... (9,123) (7,653) (6,202)
--------- --------- ---------
Total loans, net ............................. $ 606,146 $ 589,822 $ 566,521
========= ========= =========
September 30,
---------------------------------------------
1998 1997
------------------- --------------------
Amount Percent Amount Percent
One- to four-family residential mortgage loans $ 290,334 62.0% $ 241,886 59.3%
--------- ---- --------- ----
Commercial real estate loans ................. 71,149 15.1 62,910 15.4
Commercial business loans .................... 24,372 5.2 18,433 4.5
Construction loans ........................... 20,049 4.3 23,475 5.7
--------- ---- --------- ----
Total commercial loans ..................... 115,570 24.6 104,818 25.6
--------- ---- --------- ----
Home equity lines of credit .................. 26,462 5.7 31,571 7.8
Homeowner loans .............................. 27,208 5.8 19,160 4.7
Other consumer loans ......................... 8,999 1.9 10,741 2.6
--------- ---- --------- ----
Total consumer loans ....................... 62,669 13.4 61,572 15.1
--------- ---- --------- ----
Total loans .................................. 468,573 100.0% 408,276 100.0%
===== ======= =====
Allowance for loan losses .................... (4,906) (3,779)
--------- ---------
Total loans, net ............................. $ 463,667 $404,497
========= ========
9
Loan Maturity Schedule. The following table summarizes the
scheduled repayments of the Bank's loan portfolio at September 30, 2001. 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,
2002 (1) ...................................... $ 12,785 7.96% $ 15,255 6.88% $ 19,210 6.65%
2003 to 2006 .................................. 58,050 8.36 43,983 8.04 12,105 7.81
2007 and beyond ............................... 287,363 7.24 70,057 8.01 79 8.64
Total....................................... $358,198 7.25% $129,295 7.99% $ 31,394 7.41%
======== ======== ========
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,
2002 (1) ...................................... $ 14,750 6.75% $ 8,354 11.04% $ 70,354 6.97%
2003 to 2006 .................................. 3,563 5.88 31,272 8.21 148,973 7.88
2007 and beyond ............................... 1,177 7.49 37,266 7.69 395,942 7.45
-------- ---- -------- ----- -------- -----
Total....................................... $ 19,490 6.57% $ 76,892 7.93% $615,269 7.48%
======== ======== ========
- -------------------------------
(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, 2001 that are contractually due after
September 30, 2002.
Due After September 30, 2002
--------------------------------------
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)
One- to four-family residential mortgage loans $265,684 $ 79,729 $345,413
-------- -------- --------
Commercial real estate loans ................. 42,721 71,319 114,040
Commercial business loans .................... 6,786 5,398 12,184
Construction loans ........................... 433 4,307 4,740
-------- -------- --------
Total commercial loans ........ 49,940 81,024 130,964
-------- -------- --------
Consumer loans ............................... 37,844 30,694 68,538
-------- -------- --------
Total loans ................... $353,468 $191,447 $544,915
======== ======== ========
10
Loan Originations, Purchases, Sales and Servicing. While the Bank
originates both fixed-rate and adjustable-rate loans, its 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 the Bank's market area. This
includes competing banks, savings banks, credit unions, mortgage banking
companies and life insurance companies that may also actively compete for local
commercial real estate loans. Loan originations are derived from a number of
sources, including branch office personnel, existing customers, borrowers,
builders, attorneys, real estate broker referrals and walk-in customers.
The Bank's 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,
closed on standard Fannie Mae/Freddie Mac documents, and sales 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
and Freddie Mac on a non-recourse basis whereby foreclosure losses are generally
the responsibility of the purchaser and not the Bank.
The Bank is a qualified loan servicer for both Fannie Mae and
Freddie Mac. The Bank's policy has been to retain the servicing rights for all
loans sold, and to continue to collect payments on the loans, maintain tax
escrows and applicable fire and flood insurance coverage, and supervise
foreclosure proceedings if necessary. The Bank retains a portion of the interest
paid by the borrower on the loans as consideration for its servicing activities.
The following table sets forth the loan origination, sale and
repayment activities of the Bank for the last three fiscal years. The Bank has
not purchased any loans in recent years.
Year Ended September 30,
2001 2000 1999
-------------- -------------- ---------------
(In thousands)
Unpaid principal balances at beginning of year.......... $ 597,475 $ 572,723 $ 468,573
--------------- -------------- ---------------
Originations by Type
Adjustable-rate:
One- to four-family............................. 12,711 16,792 17,563
Commercial real estate.......................... 7,827 22,463 17,540
Commercial business............................. 16,962 17,785 20,616
Construction.................................... 5,803 15,630 16,941
Consumer........................................ 12,055 12,886 12,510
--------------- -------------- ---------------
Total adjustable-rate........................ 59,558 85,556 85,170
--------------- -------------- ---------------
Fixed-rate:
One- to four-family............................. 50,209 16,328 100,873
Commercial real estate.......................... 5,396 3,014 22,244
Commercial business............................. 5,401 12,305 4,584
Construction.................................... 4,570 3,675 --
Consumer........................................ 19,163 14,589 21,213
--------------- -------------- ---------------
Total fixed-rate............................. 84,739 49,911 148,914
--------------- -------------- ---------------
Total loans originated.......................... 139,297 135,467 234,084
Principal repayments.................................... (121,129) (109,580) (115,525)
Sales ................................................ -- (808) (14,089)
Net recoveries (charge-offs)............................ 30 (259) (294)
Net change in deferred loan fees and costs.............. (186) 86 285
Transfers to real estate owned.......................... (218) (154) (311)
---------------- --------------- ----------------
Unpaid principal balances at end of year................ 615,269 597,475 572,723
Allowance for loan losses............................... (9,123) (7,653) (6,202)
---------------- --------------- ----------------
Net loans at end of year................................ $ 606,146 $ 589,822 $ 566,521
=============== ============== ===============
11
Loan Approval Authority and Underwriting. The Bank has four
levels of lending authority beginning with the Board of Directors. The Board
grants lending authority to the Director Loan Committee, the majority of 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. The lending activities of the Bank 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, of up to the limits established in the Bank's 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 $3.2 million in the aggregate require approval of the
Board of Directors. The Management Loan Committee may approve loans of up to an
aggregate of $650,000 to any one borrower and related borrowers. Two loan
officers with sufficient loan authority acting together may approve loans up to
$350,000. The maximum individual authority to approve an unsecured loan is
$50,000.
The Bank has established a risk rating system for its commercial
business loans, commercial real estate loans, 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. The Bank determines its maximum loans to one borrower based upon
the rating of the loan. The large majority of loans fall into three categories.
The maximum for the best rated borrowers is $8.5 million, for the next group of
borrowers is $6.5 million, and for the third group is $3.5 million. Sublimits
apply based on reliance on any single property, and for commercial business
loans.
In connection with its residential and commercial real estate
loans, the Bank requires property appraisals to be performed by independent
appraisers who are approved by the Board. Appraisals are then reviewed by the
appropriate loan underwriting areas of the Bank. The Bank also requires title
insurance, hazard insurance and, if indicated, flood insurance on property
securing its mortgage loans. For consumer loans under $50,000, such as equity
lines of credit and homeowner loans, title insurance is not required.
Loan Origination Fees and Costs. In addition to interest earned
on loans, the Bank also receives 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.
The Bank defers loan origination fees and costs, and amortizes 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 $914,000 at
September 30, 2001.
To the extent that originated loans have been sold with servicing
retained since January 1, 1997, the Bank has capitalized a mortgage servicing
asset at the time of the sale in accordance with applicable accounting standards
(currently 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. Asset recognition of servicing rights on sales of originated loans was
not permitted under accounting standards in effect prior to January 1,1997, when
the Bank sold the majority of the loans it presently services for others.
Originated mortgage servicing rights with an amortized cost of $201,000 are
included in other assets at September 30, 2001. See also Notes 3 and 6 of the
Notes to Consolidated Financial Statements.
12
Loans to One Borrower. At September 30, 2001, the five largest
aggregate amounts loaned to individual borrowers by the Bank (including any
unused lines of credit) consisted of secured and unsecured financing of $8.1
million, $8.0 million, $7.1 million, $6.7 million and $5.1 million. See
"REGULATION - Federal Regulation of Savings Institutions - Loans to One
Borrower" for a discussion of applicable regulatory limitations.
Delinquent Loans, Other Real Estate Owned and Classified Assets
Collection Procedures. A computer-generated late notice is sent
by the 17th day of the month requesting the payment due plus the late charge
that was assessed. After the late notices have been mailed, accounts are
assigned to a collector for follow-up to determine reasons for delinquency and
to review payment options. Additional system-generated collection letters are
sent to customers every 10 days. Notwithstanding ongoing collection efforts, all
consumer loans are fully charged-off after 120 days.
Loans Past Due and Non-performing Assets. Loans are reviewed on a
regular basis. Loans are placed on non-accrual status when either principal or
interest is 90 days or more past due. In addition, loans are placed on
non-accrual status when, in the opinion of management, there is sufficient
reason to question the borrower's ability to continue to meet contractual
principal or interest payment obligations. Interest accrued and unpaid at the
time a loan is placed on non-accrual status is reversed from interest income.
Interest payments received on non-accrual loans are not recognized as income
unless warranted based on the borrower's financial condition and payment record.
At September 30, 2001, the Bank had non-accrual loans of $2.3 million. The ratio
of non-performing loans to total loans was 0.38% at September 30, 2001.
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,
2001, the Bank had REO of $109,000, total non-performing assets (non-accrual
loans and REO) of $2.4 million, and a ratio of non-performing assets to total
assets of 0.27%.
13
The following table sets forth certain information with respect
to the Bank's 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, 2001
One- to four-family .. 9 $ 935 21 $1,684 30 $2,619
Commercial real estate 2 213 3 418 5 631
Commercial business .. -- -- -- -- -- --
Construction ......... -- -- -- -- -- --
Consumer ............. 9 277 8 175 17 452
------ ------ ------ ------ ------ ------
Total .............. 20 $1,425 32 $2,277 52 $3,702
====== ====== ====== ====== ====== ======
At September 30, 2000
One- to four-family .. 14 $1,180 26 $2,496 40 $3,676
Commercial real estate 2 270 5 1,149 7 1,419
Commercial business .. -- -- -- -- -- --
Construction ......... -- -- 1 27 1 27
Consumer ............. 10 187 23 359 33 546
------ ------ ------ ------ ------ ------
Total .............. 26 $1,637 55 $4,031 81 $5,668
====== ====== ====== ====== ====== ======
At September 30, 1999
One- to four-family .. 15 $1,834 37 $2,839 52 $4,673
Commercial real estate 1 45 4 1,133 5 1,178
Commercial business .. -- -- 2 208 2 208
Construction ......... -- -- 1 27 1 27
Consumer ............. 21 432 23 429 44 861
------ ------ ------ ------ ------ ------
Total .............. 37 $2,311 67 $4,636 104 $6,947
====== ====== ====== ====== ====== ======
Non-Performing Assets. The table below sets forth the amounts and
categories of the Bank's non-performing assets at the dates indicated. At each
date presented, the Bank 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,
------------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual loans:
One- to four-family ................. $1,684 $2,496 $2,839 $2,965 $2,549
Commercial real estate .............. 418 1,149 1,133 871 1,375
Commercial business ................. -- -- 208 368 243
Construction ........................ -- 27 27 1,256 276
Consumer ............................ 175 359 429 647 234
------ ------ ------ ------ ------
Total non-performing loans ........ 2,277 4,031 4,636 6,107 4,677
------ ------ ------ ------ ------
Real estate owned:
One- to four-family ................. 109 154 403 92 186
Commercial real estate .............. -- -- -- 274 --
------ ------ ------ ------ ------
Total real estate owned ........... 109 154 403 366 186
------ ------ ------ ------ ------
Total non-performing assets ........... $2,386 $4,185 $5,039 $6,473 $4,863
====== ====== ====== ====== ======
Ratios:
Non-performing loans to total loans . 0.38% 0.67% 0.82% 1.32% 1.16%
Non-performing assets to total assets 0.27 0.50 0.62 0.94 0.75
14
For the year ended September 30, 2001, gross interest income that
would have been recorded had the non-accrual loans at the end of the period
remained on accrual status throughout the period amounted to $165,000. Interest
income actually recognized on such loans totaled $13,000.
Classification of Assets. The Bank's 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
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 the Bank to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated as special mention by management. As
of September 30, 2001, the Bank had $3.5 million of assets designated as special
mention.
When the Bank classifies assets as either substandard or
doubtful, it allocates for analytical purposes a portion of general valuation
allowances or loss reserves to such assets as deemed prudent by management.
General allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities, but which have
not been allocated to particular problem assets. When the Bank classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of the amount of the assets so classified, or to
charge-off such amount. The Bank's determination as to the classification of its
assets and the amount of its valuation allowance is subject to review by its
regulatory agencies, which can order the establishment of additional loss
allowances. Management regularly reviews the Bank's asset portfolio to determine
whether any assets require classification in accordance with applicable
regulations. On the basis of management's review of the Bank's assets at
September 30, 2001, classified assets consisted of substandard assets of $3.4
million (loans receivable of $3.3 million and REO of $109,000) and doubtful
assets (loans receivable) of $71,000. There were no assets classified as loss at
September 30, 2001.
Allowance for Loan Losses. The Bank provides 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 adequacy of the
allowance for loan losses. The allowance for loan losses consists of amounts
specifically allocated to non-performing loans and potential problem loans (if
any) as well as allowances determined for each major loan category. Loan
categories such as single-family residential mortgages and consumer loans are
generally evaluated on an aggregate or "pool" basis by applying loss factors to
the current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of historical loss experience,
delinquency trends, volume and type of lending conducted, and the impact of
current economic conditions in the Bank's market area. 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, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
At September 30, 2001, the allowance for loan losses was $9.1
million, which equaled 1.51% of net loans and 400.66% of non-performing loans.
For the years ended September 30, 2001, 2000 and 1999, the Bank recorded net
loan (recoveries) charge-offs of ($30,000), $259,000 and $294,000, respectively.
Provisions for loan losses were $1.4 million, $1.7 million and $1.6 million
during the respective fiscal years.
15
The following table sets forth activity in the Bank's allowance
for loan losses for the years indicated.
Years Ended September 30,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of year ........................ $ 7,653 $ 6,202 $ 4,906 $ 3,779 $ 3,357
------- ------- ------- ------- -------
Charge-offs:
One- to four-family ............................... (26) (168) (9) (13) (114)
Commercial real estate ............................ (18) (1) -- (87) (301)
Commercial business ............................... (115) (6) (567) (10) (173)
Construction ...................................... -- -- -- (355) --
Consumer .......................................... -- (195) (346) (200) (171)
------- ------- ------- ------- -------
Total charge-offs ............................. (159) (370) (922) (665) (759)
------- ------- ------- ------- -------
Recoveries:
One- to four-family ............................... -- 24 -- -- 42
Commercial real estate ............................ 147 -- 101 -- --
Commercial business ............................... 42 24 194 -- --
Construction ...................................... -- -- 286 2 32
Consumer .......................................... -- 63 47 53 49
------- ------- ------- ------- -------
Total recoveries .............................. 189 111 628 55 123
------- ------- ------- ------- -------
Net recoveries (charge-offs) ........................ 30 (259) (294) (610) (636)
Provision for loan losses ........................... 1,440 1,710 1,590 1,737 1,058
------- ------- ------- ------- -------
Balance at end of year .............................. $ 9,123 $ 7,653 $ 6,202 $ 4,906 $ 3,779
======= ======= ======= ======= =======
Ratios:
Net charge-offs to average loans outstanding ...... --% 0.04% 0.06% 0.14% 0.17%
Allowance for loan losses to non-performing loans . 400.66 189.85 133.78 80.33 80.80
Allowance for loan losses to total loans, net ..... 1.51 1.30 1.09 1.06 0.93
16
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, 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,
----------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------------------------
Percent Percent Percent
of Losses of Losses of Losses
Loan in Each Loan in Each Loan in Each
Balances Category Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in thousands)
One- to four-family .. $ 2,638 $358,198 58.2% $ 2,423 $343,871 57.5% $ 2,091 $344,731 60.2%
Commercial real estate 3,930 129,295 21.0 3,210 124,988 20.9 2,416 110,382 19.3
Commercial business .. 841 31,394 5.1 481 27,483 4.6 254 30,768
5.4
Construction ......... 871 19,490 3.2 733 29,599 5.0 614 19,147 3.3
Consumer ............. 843 76,892 12.5 806 71,534 12.0 827 67,695 11.8
-------- -------- ----- -------- -------- ----- -------- --------
Total .......... $ 9,123 $615,269 100.0% $ 7,653 $597,475 100.0% $ 6,202 $572,723 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
September 30,
-----------------------------------------------------------------
1998 1997
-----------------------------------------------------------------
Percent Percent
of Losses of Losses
Loan in Each Loan in Each
Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in thousands)
One- to four-family .. $ 1,320 $290,334 62.0% $ 734 $241,886 59.3%
Commercial real estate 1,976 71,149 15.1 1,431 62,910 15.4
Commercial business .. 376 24,372 5.2 443 18,433 4.5
Construction ......... 301 20,049 4.3 389 23,475 5.7
Consumer ............. 933 62,669 13.4 782 61,572 15.1
-------- -------- ----- -------- -------- -----
Total ............ $ 4,906 $468,573 100.0% $ 3,779 $408,276 100.0%
======== ======== ===== ======== ======== =====
17
Securities Activities
The Company's securities investment policy is established by the
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 the Company's interest rate risk management
strategy. The Board's asset/liability committee oversees the Company's
investment program and evaluates on an ongoing basis the Company's investment
policy and objectives. The chief financial officer, or the chief financial
officer acting with the chief executive officer, is responsible for making
securities portfolio decisions in accordance with established policies. The
Company's chief financial officer and chief executive officer 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.
The Company's current policies generally permit securities
investments in U.S. Government and U.S. Agency securities, municipal bonds, and
corporate debt obligations, as well as investments in preferred and common stock
of government agencies such as Fannie Mae, Freddie Mac and the FHLB (federal
agency 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 and
asset-backed securities collateralized by auto loans, credit card receivables,
and home equity and home improvement loans. The Company's 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 the Company
designate a security as held to maturity, available for sale, or trading,
depending on the Company's ability and intent. Available for sale securities are
reported at fair value, while held to maturity securities are reported at
amortized cost. The Company does not have a trading portfolio.
As of September 30, 2001, the Company's overall securities
portfolio had a carrying value of $235.3 million. In accordance with SFAS No.
115, securities with a fair value of $163.9 million, or 18.6% of total assets,
were classified as available for sale, while securities with an amortized cost
of $71.4 million, or 8.1% of total assets, were classified as held to maturity.
The estimated fair value of the held to maturity securities at September 30,
2001 was $73.7 million, which was $2.3 million more than their amortized cost.
Government Securities. At September 30, 2001, the Company held
$48.9 million, or 5.5% of total assets, in government securities at amortized
cost, consisting primarily of U.S. Treasury and agency obligations with short-
to medium-term maturities (one to five years), all of which were classified as
available for sale. While these securities generally provide lower yields than
other investments such as mortgage-backed securities, the Company's 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 Bonds and Other Debt Securities. At September 30, 2001,
the Company held $48.4 million in corporate debt securities, at amortized cost,
all of which were classified as available for sale. Although corporate bonds may
offer a higher yield than that of a U.S. Treasury or agency security of
comparable duration, corporate bonds also may have a higher risk of default due
to adverse changes in the creditworthiness of the issuer. In recognition of this
potential risk, the Company's 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 $2.0 million per issuer and a total portfolio limit of $40.0 million.
The policy 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. In addition, the policy
imposes limitations on a total investment to no more than $2.0 million per
municipal issuer and a total portfolio limit of 5% of assets. At September 30,
2001, the Company held $11.9 million at amortized cost in bonds issued by states
and political subdivisions, all of which were classified as held to maturity.
18
Equity Securities. At September 30, 2001, the Company's equity
securities portfolio at amortized cost totaled $1.3 million, all of which was
classified as available for sale, and consisted of stock issued by Freddie Mac
and Fannie Mae, and certain other equity investments. The Company also held $5.5
million of common stock in the FHLB of New York, 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 borrow under the FHLB advance program.
Mortgage-Backed Securities. The Company purchases 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. The Company invests primarily in mortgage-backed securities issued or
sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae. The Company also invests
to a lesser extent in securities backed by agencies of the U.S. Government. At
September 30, 2001, the Company's mortgage-backed securities portfolio totaled
$117.3 million at amortized cost, of which $57.9 million was available for sale
and $59.4 million was held to maturity. Of this total, the CMO portfolio totaled
$33.2 million, of which $28.8 million was available for sale and $4.4 million
was held to maturity. The remaining mortgage-backed securities were pass-through
securities.
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 the Company's
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 the Company, 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 than the estimated life of the security,
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. The Company reviews prepayment estimates for its
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.
A portion of the Company's mortgage-backed securities portfolio
is invested in CMOs or collateralized mortgage obligations, including 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. The Company's 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.
19
Available for Sale Portfolio
As of September 30, 2001, securities with a fair value of $163.9
million, or 18.6% of total assets, were classified as available for sale.
Investment securities, consisting of U.S. Government and agency securities,
municipal bonds, and corporate debt obligations as well as investments in
preferred and common stock, made up $104.4 million of this total, or 11.8% of
total assets, with mortgage-backed securities totaling $59.5 million, or 6.8% of
total assets.
The following table sets forth the composition of the Company's
available for sale portfolio at the dates indicated.
September 30,
------------------------------------------------------------------------
2001 2000 1999
------------------------ --------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(In thousands)
Investment Securities:
U.S. Government securities .......................... $ 22,125 $ 22,975 $ 33,004 $ 32,851 $ 31,657 $ 31,507
Federal agency obligations .......................... 26,744 28,182 37,934 37,546 27,966 27,407
Corporate debt securities ........................... 48,367 50,872 30,975 30,588 24,201 23,667
State and municipal securities ...................... -- -- 11,697 10,981 11,700 10,808
Equity securities ................................... 1,290 2,372 3,201 4,383 3,175 3,236
-------- -------- -------- -------- -------- --------
Total investment securities available for sale ...... 98,526 104,401 116,811 116,349 98,699 96,625
-------- -------- -------- -------- -------- --------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae ..................................... 18,225 18,815 17,767 17,723 16,053 15,930
Freddie Mac .................................... 6,361 6,842 2,344 2,383 3,252 3,306
Other .......................................... 4,481 4,529 6,582 6,494 7,163 7,252
CMOs and REMICs .................................... 28,811 29,341 19,553 19,208 25,625 25,274
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale . 57,878 59,527 46,246 45,808 52,093 51,762
-------- -------- -------- -------- -------- --------
Total securities available for sale ................. $156,404 $163,928 $163,057 $162,157 $150,792 $148,387
======== ======== ======== ======== ======== ========
At September 30, 2001, the Company's available for sale U. S.
Treasury securities portfolio, at amortized cost, totaled $22.1 million, or 2.5%
of total assets and the federal agency securities in the Company's available for
sale portfolio totaled $26.7 million, or 3.0% of total assets. Of the combined
U.S. Government and agency portfolio, at amortized cost, $6.1 million had
maturities of one year or less and a weighted average yield of 5.71% and $36.0
million had maturities of between one and five years, with a weighted average
yield of 5.72%. The agency securities portfolio includes both non-callable and
callable debentures. The agency debentures are callable on a quarterly basis
following an initial holding period of from twelve to twenty-four months.
Available for sale corporate debt securities, at amortized cost,
totaled $48.4 million at September 30, 2001. Of these securities, at amortized
cost, $46.1 million had maturities of less than five years, with a weighted
average yield of 6.50%, and $2.2 million will mature between five and ten years,
with a weighted average yield of 6.45%. Equity securities available for sale at
September 30,2001 had an amortized cost of $1.3 million and a fair value of $2.4
million.
At September 30, 2001, $29.1 million of the Company's available
for sale mortgage-backed securities, at amortized cost, consisted of
pass-through securities, which totaled 3.3% of total assets. At the same date,
the amortized cost of the Company's available for sale CMO portfolio totaled
$28.8 million, or 3.3% 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 5.59%. The Company owns both fixed-rate and floating-rate CMOs.
The underlying mortgage collateral for the Company's portfolio of CMO's
available for sale at September 30, 2001 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.
20
Held to Maturity Portfolio
As of September 30, 2001, securities with an amortized cost of
$71.4 million, or 8.1% of total assets, were classified as held to maturity.
Mortgage-backed securities totaling $59.5 million, or 6.7% of total assets, made
up the majority of this portfolio. Investment securities, consisting of
municipal bonds, made up $11.9 million of this total, or 1.4% of total assets.
The following table sets forth the composition of the Company's
held to maturity portfolio at the dates indicated.
September 30,
------------------------------------------------------------------------
2001 2000 1999
------------------------ --------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(In thousands)
nvestment Securities:
State and municipal securities ........................ $11,906 $12,160 $ 2,991 $ 2,957 $ 2,987 $ 2,953
Other ................................................. -- -- 397 397 415 415
------- ------- ------- ------- ------- -------
Total investment securities held to maturity ...... 11,906 12,160 3,388 3,354 3,402 3,368
------- ------- ------- ------- ------- -------
Mortgage-Backed Securities:
Pass-through securities:
Ginnie Mae ........................................ 3,510 3,611 4,279 4,275 5,106 5,140
Fannie Mae ........................................ 23,616 24,421 16,578 16,440 18,116 17,786
Freddie Mac ....................................... 26,477 27,394 17,105 16,902 22,014 21,900
Other ............................................. 1,491 1,542 2,283 2,343 2,453 2,499
CMOs and REMICs ....................................... 4,355 4,532 4,953 5,060 5,691 5,786
------- ------- ------- ------- ------- -------
Total mortgage-backed securities held to maturity . 59,449 61,500 45,198 45,020 53,380 53,111
------- ------- ------- ------- ------- -------
Total securities held to maturity ....................... $71,355 $73,660 $48,586 $48,374 $56,782 $56,479
======= ======= ======= ======= ======= =======
At September 30, 2001, the Company's held to maturity
mortgage-backed pass-through securities portfolio including CMOs totaled $59.4
million, of which $3.7 million had a weighted average yield of 6.12% and
contractual maturities within five years; $14.2 million had a weighted average
yield of 6.32% and contractual maturities of five to ten years; and $41.6
million had a weighted average yield of 6.67% and contractual maturities of over
ten years. CMOs of $4.4 million are included in this portfolio, making up 0.5%
of total assets. The estimated fair value of the Company's held-to-maturity CMO
portfolio at September 30, 2001 was $4.5 million, or $177,000 more than the
amortized cost. 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.
The composition and maturities of the investment securities
portfolio (debt securities) and the mortgage-backed securities portfolio at
September 30, 2001 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.
21
Investment Portfolio Maturity Schedule. The following table summarizes the
composition and maturities of the Company's investment portfolio at September
30,2001
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years More than Ten Years
--------------------- -------------------- --------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ----- -------- -------- -------- ----- --------- --------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae ..................... $ -- --% $ 3,693 6.24% $ 927 6.09% $ 16,905 6.55%
Freddie Mac .................... -- -- -- -- 5,781 6.37 21,094 5.67
Other .......................... -- -- -- -- 4,594 6.33 4,884 5.50
-------- ----- -------- ---- -------- ---- -------- ----
Total ....................... -- -- 3,693 6.24 11,302 6.33 42,883 6.00
-------- ---- -------- ---- -------- ---- -------- ----
Investment Securities
U.S. Gov't and agency securities 6,108 5.71 35,964 5.72 5,000 7.00 1,797 4.71
Corporate debt securities ...... -- -- 46,127 6.50 2,240 6.45 -- --
Equity securities .............. -- -- -- -- -- -- 1,290 --
-------- ----- -------- ---- -------- ---- -------- ----
Total ....................... 6,108 5.71 82,091 6.16 7,240 6.83 3,087 4.71
-------- ----- -------- ---- -------- ---- -------- ----
Total available for sale ........... $ 6,108 5.71% $ 85,784 6.16% $ 18,542 6.53% $45,970 5.91%
======== ==== ======== ==== ======== ==== ======= ====
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae ..................... $ -- --% $ 1,846 5.89% $ 2,859 6.39% $ 23,266 6.34%
Freddie Mae .................... 26 6.10 1,693 6.59 10,744 6.19 14,040 6.87
Ginnie Mae and other ........... -- -- 111 2.86 586 8.30 4,304 7.78
-------- ---- -------- ---- -------- ---- -------- ----
Total ....................... 26 6.10 3,650 6.12 14,189 6.32 41,610 6.67
Investment Securities
State and municipal securities.. -- -- 604 3.90 6,727 4.07 4,575 4.46
-------- ---- -------- ---- -------- ---- -------- ----
Total held to maturity ............. $ 26 6.10% $ 4,254 5.81% $ 20,916 5.59% $ 46,185 6.45%
======== ==== ======== ==== ======== ==== ======== ====
Total Securities
-----------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
-------- --------- --------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae ..................... $ 21,525 $ 22,138 6.47%
Freddie Mac .................... 26,875 27,749 5.82
Other .......................... 9,478 9,640 5.90
Total ....................... 57,878 59,527 6.07
-------- -------- ----
Investment Securities
U.S. Gov't and agency securities 48,869 51,157 5.81
Corporate debt securities ...... 48,367 50,872 6.50
Equity securities .............. 1,290 2,372 --
-------- -------- ----
Total ....................... 98,526 104,401 6.07
-------- -------- ----
Total available for sale ........... $156,404 $163,928 6.07%
======== ========
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae ..................... $ 27,971 $ 28,953 6.32%
Freddie Mae .................... 26,477 27,394 6.58
Ginnie Mae and other ........... 5,001 5,153 7.74
-------- -------- ----
Total ....................... 59,449 61,500 6.56
Investment Securities
State and municipal securities . 11,906 12,160 4.21
-------- -------- ----
Total held to maturity ............. $ 71,355 $ 73,660 6.16%
======== ======== ====
22
Sources of Funds
General. Deposits, 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 the Bank's
funds for use in lending, investing and for other general purposes. To a lesser
extent, the Bank uses borrowed funds (primarily FHLB advances) to fund its
operations.
Deposits. The Bank offers a variety of deposit accounts with a
range of interest rates and terms. Its 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. The Bank
provides commercial checking accounts for small to moderately-sized businesses,
as well as low-cost checking account services for low-income customers.
At September 30, 2001, the Bank's deposits totaled $653.1
million. Interest-bearing deposits totaled $578.7 million, and non-interest
bearing demand deposits totaled $74.4 million. NOW, savings and money market
deposits totaled $333.4 million at September 30, 2001. Also at that date, the
Bank had a total of $245.3 million in certificates of deposit, of which $218.9
million had maturities of one year or less. Although the Bank has a significant
portion of its deposits in shorter-term certificates of deposit, management
monitors activity on these accounts and, based on historical experience and the
Bank's current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.
The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. It relies primarily on competitive pricing
of its deposit products, customer service and long-standing relationships with
customers to attract and retain these deposits. While certificates of deposit in
excess of $100,000 are accepted by the Bank, and may be subject to preferential
rates, it does not actively solicit such deposits as they are more difficult to
retain than core deposits. Historically, the Bank has not used brokers to obtain
deposits.
The following table sets forth the distribution of the Bank's
deposit accounts, by account type, at the dates indicated.
September 30,
2001 2000 1999
------------------------------- -------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------------------------------- -------------------------------- ----------------------------
(Dollars in thousands)
Demand deposits
Retail .................... $ 41,280 6.3% --% $ 38,145 6.3% --% $ 35,701 6.1% --%
Commercial ................ 33,081 5.1 -- 28,324 4.7 -- 24,147 4.1 --
-------- ---- ---- -------- ----- ----- -------- ----- -----
Total demand deposits 74,361 11.4 -- 66,469 11.0 -- 59,848 10.2 --
NOW deposits .............. 63,509 9.7 0.49 54,800 9.0 1.01 47,129 8.0 1.01
Savings deposits .......... 160,777 24.6 1.05 161,987 26.6 2.02 161,809 27.6 2.02
Money market deposits ..... 109,126 16.7 1.81 76,332 12.5 2.55 80,033 13.6 2.75
-------- ---- ---- -------- ----- ----- -------- ----- -----
407,773 62.4 1.00 359,588 59.1 1.61 348,819 59.4 1.70
Certificates of deposit.... 245,327 37.6 4.63 249,388 40.9 5.83 237,821 40.6 4.82
-------- ---- ---- -------- ----- ----- -------- ----- -----
Total deposits............. $ 653,100 100.0% 2.31% $ 608,976 100.0% 3.34% $586,640 100.0% 2.97%
========= ===== ==== ========= ===== ==== ======== ===== ====
23
The following table sets forth, by interest rate ranges,
information concerning the Bank's certificates of deposit at the dates
indicated.
At September 30, 2001
--------------------------------------------------------------------- Total at
Period to Maturity September 30,
--------------------------------------------------------------------- -------------------
Less than One to Two to More than Percent
Interest Rate Range One Year Two Years Three Years Three Years Total of Total 2000 1999
------------------- -------- --------- ----------- ----------- -------- -------- ------- --------
(Dollars in thousands)
4.00% and below .... $104,308 $ 3,760 $ 93 $ -- $108,161 44.1% $ 2,350 $ 14,019
4.01% to 5.00%...... 25,000 4,975 2,259 1,551 33,785 13.8 14,436 135,380
5.01% to 6.00% ..... 25,240 3,693 147 1,336 30,416 12.4 155,499 77,889
6.01% to 7.00% ..... 62,302 2,495 -- 658 65,455 26.7 69,936 7,026
7.01% and above .... 2,000 5,510 -- -- 7,510 3.0 7,167 3,507
-------- -------- -------- -------- -------- ----- -------- --------
Total .......... $218,850 $ 20,433 $ 2,499 $ 3,545 $245,327 100.0% $249,388 $237,821
======== ======== ======== ======== ======== ===== ======== ========
The following table sets forth the amount of the Bank's
certificates of deposit by time remaining until maturity as of September 30,
2001.
Maturity
-----------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
-------- ----------- ------------ -------- --------
(In Thousands)
Certificates of deposit less than $100,000 .... $ 97,460 $ 47,835 $ 43,741 $ 23,631 $212,667
Certificates of deposit of $100,000 or more (1) 14,101 8,368 7,345 2,846 32,660
-------- -------- -------- -------- --------
Total of certificates of deposit ......... $111,561 $ 56,203 $ 51,086 $ 26,477 $245,327
======== ======== ======== ======== ========
(1) The weighted average interest rates for these accounts, by maturity
period, are 4.63% for 3 months or less; 4.18% for 3 to 6 months; 4.33% for
6 to 12 months; and 5.98% for over 12 months. The overall weighted average
interest rate for accounts of $100,000 or more was 4.57%.
Borrowings. At September 30, 2001, the Bank had $110.4 million of
borrowings, consisting of FHLB advances and repurchase agreements. FHLB
borrowings were $122.0 million as of September 30, 2000 and $115.5 million as of
September 30, 1999. At September 30, 2001, the Bank had access to additional
FHLB borrowings of up to $193.7 million.
The following table sets forth information concerning balances
and interest rates on the Bank's FHLB advances and repurchase agreements at the
dates and for the periods indicated.
Years Ended September 30,
---------------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Balance at end of year............................... $110,427 $121,975 $115,515
Average balance during year.......................... 113,975 122,315 74,319
Maximum outstanding at any month end................. 135,727 131,458 118,526
Weighted average interest rate at end of year........ 5.32% 6.36% 5.60%
Average interest rate during year.................... 5.98% 5.98% 5.53%
24
Subsidiary Activities
Provest Services Corp. I is a wholly-owned subsidiary of the Bank
holding an investment in a limited partnership which 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 the Bank
which has engaged a third-party provider to sell annuities and mutual funds to
the Bank's customers. Through September 30, 2001, the activities of these
subsidiaries have had an insignificant effect on the Bank's consolidated
financial condition and results of operations. During fiscal 1999, the Bank
established Provident REIT, Inc., a wholly-owned subsidiary in the form of a
real estate investment trust ("REIT"). The REIT holds both residential and
commercial real estate loans.
Competition
The Bank faces significant competition in both originating loans
and attracting deposits. The New York metropolitan area has a high concentration
of financial institutions, most of which are significantly larger institutions
with greater financial resources than the Bank, and many of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, mortgage banking
companies, credit unions, insurance companies and other financial service
companies. Its most direct competition for deposits has historically come from
commercial banks, savings banks and credit unions. The Bank faces additional
competition for deposits from non-depository competitors such as the mutual fund
industry, securities and brokerage firms and insurance companies. The Bank has
emphasized personalized banking and the advantage of local decision making in
its banking business and this strategy appears to have been well received in the
Bank's market area. The Bank does not rely on any individual, group, or entity
for a material portion of its deposits.
Employees
As of September 30, 2001, the Bank had 219 full-time employees
and 26 part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
REGULATION
General
As a federally chartered, SAIF-insured savings bank, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The Bank also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors. The FDIC also has examination
authority over the Bank in its role as the administrator of the SAIF. The Bank's
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, or Congress,
could have a material adverse impact on the Company and the Bank and their
operations.
25
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus, and an additional 10% of unimpaired capital and surplus if
such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. The OTS by regulation has
amended the loans to one borrower rule to permit savings associations meeting
certain requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.
Qualified Thrift Lender Requirement. The HOLA requires savings
institutions to be qualified thrift lenders ("QTL"). To be a QTL, the Bank can
either satisfy the QTL test, or the Domestic Building and Loan Association
("DBLA") Test of the Internal Revenue Code of 1986, as amended (the "Code").
Under the QTL test, a savings bank is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments,"
primarily residential mortgages and related investments, including certain
mortgage-backed and related securities on a monthly basis in 9 out of every 12
months. Under the DBLA test, an institution must meet a "business operations
test" and a "60% of assets test". The business operations test requires the
business of a DBLA to consist primarily of acquiring the savings of the public
and investing in loans. An institution meets the public savings requirements
when it meets one of two conditions: (i) the institution acquires its savings in
conformity with OTS rules and regulations; or (ii) the general public holds more
than 75% of its deposits, withdrawable shares, and other obligations. The
general public may not include family or related business groups or persons who
are officers or directors of the institution.
The 60% of assets test requires that at least 60% of a DBLA's
assets must consist of assets that thrifts normally hold, except for consumer
loans that are not educational loans. The DBLA test does not include, as the QTL
test does to a limited or optional extent, mortgage loans originated and sold
into the secondary market and subsidiary investments. A savings bank that fails
to be a QTL must either convert to a bank charter or operate under certain
restrictions. As of September 30, 2001, the Bank met the QTL test.
Limitations on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. A "well capitalized" institution can, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year in an amount up to 100 percent of its net income during the
calendar year, plus its retained net income for the preceding two years. As of
September 30, 2001, the Bank was a "well-capitalized" institution.
26
In addition, OTS regulations require the Mutual Holding Company
to notify the OTS of any proposed waiver of its right to receive dividends. It
is the OTS' recent practice to review dividend waiver notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability and (iv) the amount of any
waived dividend is considered as having been paid by the savings association
(and the savings association's capital ratios adjusted accordingly) in
evaluating any proposed dividend under OTS capital distribution regulations.
Community Reinvestment Act and Fair Lending Laws. Savings
associations share a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Fair
Lending Laws could result in enforcement actions by the OTS, as well as other
federal regulatory agencies and the Department of Justice. The Bank received an
outstanding CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Affiliates. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any nonsavings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related 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 institutions, 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. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
27
Standards for Safety and Soundness. The FDI Act requires each
federal banking agency to prescribe for all insured depository institutions
standards relating to, among other things, internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, compensation, and such other operational and
managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement the safety and soundness standards
required under the FDI Act. 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; and 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, as
required by the FDI Act. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 4% tier 1 core capital ratio, a
4% tier 1 risk-based ratio, and an 8% total risk-based ratio. Tier 1 core
capital is defined as common stockholders' equity less investments in and
advances to "nonincludable" subsidiaries, goodwill and other intangible assets,
nonqualifying equity instruments, disallowed servicing assets, and other
disallowed assets; plus (minus) accumulated losses (gains) on certain
available-for-sale securities and cash flow hedges (net of taxes); plus
qualifying intangible assets, minority interest in includable consolidated
subsidiaries, and mutual institutions' nonwithdrawable deposit accounts.
Adjusted total assets is defined as total assets less assets of "nonincludable"
subsidiaries, goodwill and other intangible assets, disallowed servicing assets,
and other disallowed assets; plus (minus) accumulated losses (gains) on certain
available-for sale securities and cash flow hedges; plus qualifying intangible
assets. Total risk-based capital is defined as tier 1 (core) capital plus 45% of
net unrealized gains on available-for-sale equity securities, qualifying
subordinated debt and redeemable preferred stock, capital certificates,
nonwithdrawable deposit accounts not included in core capital, other equity
instruments and allowances for loan and lease losses; less equity investments
and other assets required to be deducted, low-level recourse deduction and
capital reduction for interest-rate risk exposure.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset.
At September 30, 2001, the Bank exceeded each of the OTS capital
requirements as summarized below:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- -----------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio(1)
------ --------- ------ --------- ------ --------
(Dollars in thousands)
Tangible capital .......... $88,526 10.20% $13,015 1.5% $ -- --%
Tier I core capital ....... 88,526 10.20 34,706 4.0 43,383 5.0
Tier I risk-based capital.. 88,526 16.91 -- -- 31,404 6.0
Total risk-based capital... 95,100 18.17 41,873 8.0 52,341 10.0
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
28
Prompt Corrective Regulatory Action. Under the OTS Prompt
Corrective Action regulations, the OTS is required to take certain supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's degree of capitalization. Generally, a savings
institution that has total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be
undercapitalized. A savings institution that has total risk-based capital of
less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized", and a savings institution that has a tangible capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized". Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized". The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized". In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS may also take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
At September 30, 2001, the Bank was categorized as "well
capitalized", meaning that the Bank's total risk-based capital ratio exceeded
10.0%, Tier I risk-based capital ratio exceeded 6.0%, leverage capital ratio
exceeded 5.0%, and the Bank was not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based
deposit insurance assessment system. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. The FDIC is
authorized to raise the assessment rates in certain circumstances. The FDIC has
exercised this authority several times in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank, as a federal association, is required to be a member of
the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a
central credit facility primarily for member institutions. The Bank, as a member
of the FHLB of New York, is required to acquire and hold shares of capital stock
in that FHLB 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 advances (borrowings) from the FHLB,
whichever is greater. As of September 30, 2001, the Bank was in compliance with
this requirement. The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
29
Federal Reserve System
The Federal Reserve Board regulations require savings
institutions to maintain noninterest-earning reserves against their transaction
accounts (primarily NOW and regular checking accounts). At September 30, 2001,
the Bank was in compliance with these reserve requirements.
Holding Company Regulation
General. The Mutual Holding Company and the Company are
nondiversified mutual savings and loan holding companies within the meaning of
the HOLA. As such, the Mutual Holding Company and the Company are registered
with the OTS and are subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Mutual Holding Company and the Company and any nonsavings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. As federal corporations, the Company and the Mutual Holding
Company are generally not subject to state business organizations law.
Permitted Activities. Pursuant to Section 10(o) of the HOLA and
OTS regulations and policy, a Mutual Holding Company and a federally chartered
mid-tier holding company such as the Company may engage in the following
activities: (i) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act of
1956, unless the Director, by regulation, prohibits or limits any such activity
for savings and loan holding companies; or (B) in which multiple savings and
loan holding companies were authorized (by regulation) to directly engage on
March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a Mutual
Holding Company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (x) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.
The HOLA prohibits a savings and loan holding company, including
the Company and the Mutual Holding Company, directly or indirectly, or through
one or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
30
The OTS is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies,
and (ii) the acquisition of a savings institution in another state if the laws
of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
The OTS has proposed new rules which would require savings and
loan holding companies to notify the OTS prior to engaging in transactions which
(i) when combined with other debt transactions engaged in during a 12-month
period, would increase the holding company's consolidated debt by 5% or more;
(ii) when combined with other asset acquisitions engaged in during a 12-month
period, would result in asset acquisitions of greater than 15% of the holding
company's consolidated assets; or (iii) when combined with any other
transactions engaged in during a 12-month period, would reduce the holding
company's ratio of consolidated tangible capital to consolidated tangible assets
by 10% or more during the 12-month period. The OTS has proposed to exempt from
this rule holding companies whose consolidated tangible capital exceeds 10%
following the transactions.
The OTS has also proposed new rules which would codify the manner
in which the OTS reviews the capital adequacy of savings and loan holding
companies and determines when a holding company must maintain additional
capital. The OTS is not currently proposing to establish uniform capital
adequacy guidelines for all savings and loan holding companies.
The Company and the Bank are unable to predict whether or when
these proposed regulations will be adopted, and what effect, if any, the
adoption of these regulations would have on their business.
Waivers of Dividends by the Mutual Holding Company. OTS
regulations require the Mutual Holding Company to notify the OTS of any proposed
waiver of its right to receive dividends. The OTS reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to any such
waiver if: (i) the Mutual Holding Company's board of directors determines that
such waiver is consistent with such directors' fiduciary duties to the Mutual
Holding Company's members; (ii) for as long as the savings association
subsidiary is controlled by the Mutual Holding Company, the dollar amount of
dividends waived by the Mutual Holding Company are considered as a restriction
to the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the Mutual Holding Company is available for declaration as a
dividend solely to the Mutual Holding Company, and, in accordance with SFAS No.
5, where the savings association determines that the payment of such dividend to
the Mutual Holding Company is probable, an appropriate dollar amount is recorded
as a liability and (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed dividend
under OTS capital distribution regulations.
31
Conversion of the Mutual Holding Company to Stock Form. OTS
regulations permit the Mutual Holding Company to undertake a conversion from
mutual to stock form ("Conversion Transaction"). In a Conversion Transaction a
new holding company would be formed as the successor to the Company (the "New
Holding Company"), the Mutual Holding Company's corporate existence would end,
and certain customers of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock ("Common Stock") held by stockholders of the Company other
than the Mutual Holding Company ("Minority Stockholders") would be automatically
converted into a number of shares of common stock of the New Holding Company
determined pursuant an exchange ratio that ensures that after the Conversion
Transaction the percentage of the to-be outstanding shares of the New Holding
Company issued to Minority Stockholders in exchange for their Common Stock would
be equal to the percentage of the outstanding shares of Common Stock held by
Minority Stockholders immediately prior to the Conversion Transaction. The total
number of shares held by Minority Stockholders after the Conversion Transaction
would be affected by any purchases by such persons in the offering that would be
conducted as part of the Conversion Transaction.
Federal Securities Law
The common stock of the Company is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act. Common stock of the Company held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Company may
not be resold without registration or unless sold in accordance with certain
resale restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
32
ITEM 2. Properties
Properties
As of September 30, 2001, the Bank leases ten properties,
including its headquarters location, from third parties under terms and
conditions considered by management to be favorable to the Bank. In addition,
the Bank owns six properties. Following is a list of the Bank's locations:
Corporate Office, Commercial Lending
Group, and Investment Management and
Trust Department
400 Rella Boulevard 1 Lake Road West
Montebello, NY 10901 Congers, NY 19020
(845) 369-8040 (845) 267-2180
Rockland County Branches: 71 Lafayette Avenue
Suffern, NY 10901
44 W. Route 59 (845) 369-8350
Nanuet, NY 10954
(845) 627-6180 26 North Middletown Rd.
(In the ShopRite Supermarket)
38-40 New Main Street Pearl River, NY 10965
Haverstraw, NY 10927 (845) 627-6170
(845) 942-3880
196 Rt. 59
375 Rt. 303 at Kings Highway Suffern, NY 10901
Orangeburg, NY 10962 (845) 369-8360
(845) 398-4810
1633 Rt. 202
148 Rt. 9W Pomona, NY 10970
Stony Point, NY 10980 (845) 364-5690
(845) 942-3890
44 North Main Street
179 South Main Street (In the ShopRite Supermarket) (Opened 10/01)
New City, NY 10956 New City, NY 10956
(845) 639-7750 (845) 639-7650
72 West Eckerson Rd.
Spring Valley, NY 10977 Orange County Branches:
(845) 426-7230
125 Dolson Avenue
715 Route 304 (In the ShopRite Supermarket)
Bardonia, NY 10954 Middletown, NY 10940
(845) 623-6340 (845)-342-5777
153 Rt. 94
(In the ShopRite Supermarket)
Warwick, NY 10990
(845) 986-9540
33
ITEM 3. Legal Proceedings
The Company is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business which, in the aggregate, involved amounts which are believed by
management to be immaterial to the financial condition and operations of the
Company.
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, 2001.
PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder Matters
The common stock of the Company is quoted on the Nasdaq National
Market under the symbol "PBCP." As of September 30, 2001, the Company had seven
registered market makers, 3,245 stockholders of record (excluding the number of
persons or entities holding stock in street name through various brokerage
firms), and 8,024,166 shares outstanding. As of such date, Provident Bancorp,
MHC (the "Mutual Holding Company"), held 4,416,000 shares of common stock and
stockholders other than the Mutual Holding Company held 3,608,166 shares.
The following table sets forth market price and dividend
information for the common stock for the past two fiscal years.
Cash Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
December 31, 1999 $16.75 $12.50 $ 0.03
March 31, 2000 16.13 14.00 0.04
June 30, 2000 15.88 14.13 0.04
September 30, 2000 16.00 14.63 0.04
December 31, 2000 16.63 15.19 0.04
March 31, 2001 17.81 15.75 0.05
June 30, 2001 21.52 17.00 0.06
September 30, 2001 21.65 17.65 0.07
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and depends on a number
of factors, including capital requirements, regulatory limitations on the
payment of dividends, the results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends will continue.
In accordance with regulations, the Mutual Holding Company waived
receipt of dividends declared by the Company during the fourth quarter of fiscal
2000 and all of fiscal 2001 after obtaining OTS approval to do so. In total, the
Mutual Holding Company has waived receipt of $1.3 million in dividends through
September 30, 2001.
34
ITEM 6. Selected Financial Data
The following financial condition data and operating data are
derived from the audited consolidated financial statements of Provident Bancorp,
Inc. (the "Company"), or prior to January 7, 1999, Provident Bank (the "Bank").
Additional information is provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes included as Item 7 and Item 8 of this report,
respectively.
At September 30,
----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in thousands)
Selected Financial Condition Data:
Total assets ................... $881,260 $844,303 $814,518 $691,068 $648,742
Loans, net ..................... 606,146 589,822 566,521 463,667 404,497
Securities available for sale... 163,928 162,157 148,387 97,983 84,670
Securities held to maturity .... 71,355 48,586 56,782 98,402 126,266
Deposits ....................... 653,100 608,976 586,640 573,174 546,846
Borrowings ..................... 110,427 127,571 117,753 49,931 41,623
Equity ......................... 102,620 90,986 90,299 55,200 50,399
Years Ended September 30,
------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in thousands)
Selected Operating Data:
Interest and dividend income ................................ $60,978 $58,899 $52,267 $47,948 $46,555
Interest expense ............................................ 26,244 26,034 21,589 20,880 20,179
------- ------- ------- ------- -------
Net interest income ................................... 34,734 32,865 30,678 27,068 26,376
Provision for loan losses ................................... 1,440 1,710 1,590 1,737 1,058
------- ------- ------- ------- -------
Net interest income after provision for loan losses.... 33,294 31,155 29,088 25,331 25,318
Non-interest income ......................................... 4,706 3,391 3,103 3,080 2,711
Non-interest expense (1) ................................... 26,431 25,808 26,303 21,823 20,602
------- ------- ------- ------- -------
Income before income tax expense ............................ 11,569 8,738 5,888 6,588 7,427
Income tax expense .......................................... 4,087 2,866 1,958 2,346 2,829
------- ------- ------- ------- -------
Net income (1) ....................................... $ 7,482 $ 5,872 $ 3,930 $ 4,242 $ 4,598
======= ======= ======= ======= =======
(Footnotes on next page)
35
At or for the Years Ended September 30,
-------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)............ 0.87% 0.70% 0.52% 0.64% 0.72%
Return on equity (ratio of net income to average equity).................. 7.71 6.58 5.03 7.94 9.51
Average interest rate spread (2).......................................... 3.56 3.51 3.66 3.79 3.92
Net interest margin (3)................................................... 4.20 4.12 4.24 4.28 4.36
Efficiency ratio (4)...................................................... 67.02 71.18 77.86 72.39 70.83
Non-interest expense to average total assets.............................. 3.06 3.08 3.47 3.29 3.24
Average interest-earning assets to average interest-bearing liabilities... 120.20 118.54 119.28 114.88 113.07
Per Share and Related Data:
Basic earnings per share (5)............................................ $ 0.98 $ 0.76 $0.40 -- --
Diluted earnings per share ............................................. 0.97 0.76 0.40 -- --
Dividends per share .................................................... 0.22 0.15 0.06 -- --
Dividend payout ratio (6)............................................... 22.45% 19.74% 15.00% -- --
Book value per share (7)................................................ $ 12.79 $ 11.26 $10.91 -- --
................................................................
Asset Quality Ratios:
Non-performing assets to total assets..................................... 0.27% 0.50% 0.62% 0.94% 0.75%
Non-performing loans to total loans....................................... 0.38 0.67 0.82 1.32 1.16
Allowance for loan losses to non-performing loans......................... 400.66 189.85 133.78 80.33 80.80
Allowance for loan losses to total loans.................................. 1.51 1.30 1.09 1.06 0.93
Capital Ratios:
Equity to total assets at end of year..................................... 11.64% 10.77% 11.09% 7.99% 7.77%
Average equity to average assets.......................................... 11.24 10.67 10.29 8.05 7.59
Tier 1 leverage ratio (Bank only)......................................... 10.20 9.59 9.56 7.37 6.96
- -------------------------------
(1) Non interest expense for fiscal 1999 includes special charges totaling
approximately $1.5 million in connection with a computer system conversion ($1.1
million) and establishment of the employee stock ownership plan ("ESOP")
($371,000). Excluding these special charges, net income after taxes would have
been approximately $4.9 million for fiscal 1999.
(2) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average cost
of interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(4) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(5) Basic earnings per share for fiscal 1999 was computed for the nine-month
period following the stock offering based on net income of approximately $3.2
million for that period and 8,041,018 average common shares.
(6) For fiscal 1999, the payout ratio is based on dividends of $0.06 per share
and nine-month earnings of $0.40 per share. Based on six- month earnings of
$0.29 per share for the third and fourth quarters of fiscal 1999, the dividend
payout ratio would have been 20.69%.
(7) Book value per share is based on total shareholders' equity and 8,024,166,
8,077,800 and 8,280,000 outstanding common shares at September 30, 2001, 2000
and 1999, respectfully. For this purpose, common shares include unallocated ESOP
shares but exclude treasury shares.
36
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Provident Bank (the "Bank") is a federally chartered thrift
institution operating as a community bank and conducting business primarily in
Rockland County, New York. On January 7, 1999, the Bank completed its
reorganization into a mutual holding company structure. Provident Bancorp, Inc.
(the "Company"), which is the Bank's stock holding company, sold 3,864,000
shares or 46.67% of its common stock to the public and issued 4,416,000 shares
or 53.33% to Provident Bancorp, MHC. As a result of the stock offering, the
Company raised net proceeds of approximately $37.1 million, prior to the
purchase of stock by the Employee Stock Ownership Plan (the "ESOP"). The ESOP,
which did not purchase shares in the offering, purchased 8% of the shares issued
to the public, or 309,120 shares, in the open market during January and February
1999. The financial condition and results of operations of the Company are being
discussed on a consolidated basis with the Bank. Reference to the Company may
signify the Bank, depending on the context and time period.
The Company's results of operations depend primarily on its net
interest income, which is the difference between the interest income on its
earning assets, such as loans and securities, and the interest expense paid on
its 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 service fees and
income from loan servicing. The Company's 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.
Management Strategy
Management intends to continue the Bank's growth as an
independent community bank offering a broad range of customer-focused services
as an alternative to money center banks in its market area, positioning the Bank
for sustainable long-term growth. In recent years, management determined that
the success of the Bank would be enhanced by operating as a community bank
rather than a traditional thrift institution. As a result, management
implemented a business strategy that included: (i) creating an infrastructure
for commercial and consumer banking, including an experienced commercial loan
department and delivery systems to accommodate the needs of business and
individual customers; and (ii) placing a greater emphasis on commercial real
estate and business lending, as well as checking and other transaction accounts.
Highlights of management's business strategy are as follows:
Community banking and customer service: As an independent
community bank, a principal objective of the Bank is to respond to the financial
services needs of its consumer and commercial customers. Management has
implemented new technologies to offer customers new financial products and
services including PC banking, cash management services and sweep accounts, and
intends to continue to do so as market and regulatory conditions permit. The
Bank has also begun to offer asset management and trust services and intends to
offer personal financial planning services in the near future.
Growing and diversifying the loan portfolio: The Bank also offers
a broad range of products to commercial businesses and real estate owners and
developers. Commercial and real estate loans improve the yield of the overall
portfolio and shorten its average maturity. The Bank has established experienced
commercial loan and loan administration departments to assure the continued
growth and careful management of the quality of its assets.
37
Expanding the retail banking franchise: Management intends to
continue to expand the retail banking franchise and to increase the number of
households served in the Bank's market area. Management's 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. In addition, acknowledging the time pressures on the
two-income families typical to its market area, seven of the Bank's branch
offices are now open seven days a week. The Bank also has 20 automated teller
machines ("ATM") including nine new, advanced-function ATMs that deliver change
to the penny, in addition to the more typical ATM functions. Its ATMs also
participate in networks that permit customers to access their accounts through
ATMs worldwide. The Bank fosters a sales culture in its branch offices that
emphasizes transaction accounts, the account most customers identify with
"their" bank. During and immediately following the close of fiscal 2001, the
Bank opened two additional branches in Rockland County, adding to its base of 11
conveniently located branches in Rockland County and two in Orange County.
In November 2001, the Bank entered into an agreement and plan of
merger with The National Bank of Florida ("NBF"), a commercial bank in Orange
County that had total assets of $99.7 million and deposits of $81.2 million at
September 30, 2001. The Bank will acquire all of the outstanding common shares
of NBF in an all-cash transaction valued at approximately $28.1 million.
Consummation of the merger is subject to approval by NBF shareholders and the
receipt of all required regulatory approvals. As a result of the merger, which
is anticipated to take place by the end of the first calendar quarter of 2002,
NBF's main office and branch office will become branch offices of the Bank. The
Bank intends to pursue opportunities to expand its branch network further as
market conditions permit.
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.
38
The following table sets forth average balance sheets, average
yields and costs, and certain other information for the years ended September
30, 2001, 2000 and 1999. No tax-equivalent yield adjustments were made, as the
effect thereof was not material. All average balances are monthly average
balances which, in the opinion of management, are not materially different from
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.
Years Ended September 30,
2001 2000
----------------------------------- ----------------------------------
Average Average
Outstanding Outstanding
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- --------- ---------- ----------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans (1) .................................. $590,298 $ 46,434 7.87% $577,119 $ 45,043 7.80%
Securities available for sale .............. 159,185 9,598 6.03 159,287 9,719 6.10
Securities held to maturity ................ 66,253 4,318 6.52 52,515 3,549 6.76
Other ...................................... 10,983 628 5.72 9,119 588 6.45
-------- -------- ---- -------- -------- ------
Total interest-earning assets ....... 826,719 60,978 7.38 798,040 58,899 7.38
-------- --------
Non-interest-earning assets ................ 36,624 38,770
-------- --------
Total assets............................... $863,343 $836,810
======== ========
Interest-bearing liabilities:
Savings deposits (2) ....................... $177,994 $ 2,898 1.63 $177,077 3,435 1.94
Money market deposits ...................... 86,717 2,245 2.59 77,475 2,029 2.62
NOW deposits ............................... 57,806 365 0.63 52,052 470 0.90
Certificates of deposit .................... 251,299 13,915 5.54 244,279 12,787 5.23
Borrowings ................................. 113,975 6,821 5.98 122,315 7,313 5.98
-------- -------- -------- -------- -------
Total interest-bearing liabilities .... 687,791 26,244 3.82 673,198 26,034 3.87
.Non-interest-bearing liabilities .......... 78,547 74,316
-------- --------
Total liabilities ..................... 766,338 747,514
Equity ..................................... 97,005 89,296
--------
Total liabilities and equity .......... $863,343 $836,810
======== ========
Net interest income ........................ $ 34,734 $ 32,865
======== ========
Net interest rate spread (3) ............... 3.56 3.51
Net interest-earning assets (4) ............ $138,928 $124,842
======== ========
Net interest margin (5) .................... 4.20 4.12
Ratio of interest-earning assets
to interest-bearing liabilities ...... 120.20% 118.54%
====== ======
Years Ended September 30,
1999
----------------------------------
Average
Outstanding
Balance Interest Yield/Rate
-------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans (1) .................................. $526,139 $ 40,209 7.64%
Securities available for sale .............. 120,329 7,192 5.98
Securities held to maturity ................ 71,987 4,520 6.28
Other ...................................... 5,229 346 6.62
-------- -------- --------
Total interest-earning assets ....... 723,684 52,267 7.22
--------
Non-interest-earning assets ................ 35,165
--------
Total assets............................... $758,849
========
Interest-bearing liabilities:
Savings deposits (2) ....................... $171,585 3,398 1.98
Money market deposits ...................... 79,568 2,049 2.58
NOW deposits ............................... 45,628 467 1.02
Certificates of deposit .................... 235,620 11,560 4.91
Borrowings ................................. 74,328 4,115 5.53
-------- -------- --------
Total interest-bearing liabilities .... 606,729 21,589 3.56
------- --------
.Non-interest-bearing liabilities .......... 74,064
--------
Total liabilities ..................... 680,793
Equity ..................................... 78,056
--------
Total liabilities and equity .......... $758,849
========
Net interest income ........................ $ 30,678
========
Net interest rate spread (3) ............... 3.66
Net interest-earning assets (4) ............ $116,955
========
Net interest margin (5) .................... 4.24
Ratio of interest-earning assets
to interest-bearing liabilities ...... 119.28%
======
- -------------------------------
(1) Balances include the effect of net deferred loan origination fees and
costs, and the allowance for loan losses.
(2) Includes club accounts and interest-bearing mortgage escrow balances.
(3) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total
interest-earning assets.
39
The following table presents the dollar amount of changes in
interest income and interest expense for the major categories of the Company's
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,
------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ -------- -------- -------- ------ ---------
(Dollars in thousands)
Interest-earning assets:
Loans ................................ $ 1,060 $ 331 $ 1,391 $ 4,119 $ 715 $ 4,834
Securities available for sale ........ (6) (115) (121) 2,380 147 2,527
Securities held to maturity .......... 899 (130) 769 (1,296) 325 (971)
Other ................................ 112 (72) 40 251 (9) 242
------- ------- ------- ------- ------- -------
Total interest-earning assets ... 2,065 14 2,079 5,454 1,178 6,632
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings deposits ..................... 23 (560) (537) 109 (72) 37
Money market deposits ................ 239 (23) 216 (53) 33 (20)
NOW deposits ......................... 48 (153) (105) 62 (59) 3
Certificates of deposit .............. 369 759 1,128 442 785 1,227
Borrowings ........................... (492) -- (492) 2,848 350 3,198
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 187 23 210 3,408 1,037 4,445
------- ------- ------- ------- ------- -------
Change in net interest income .......... $ 1,878 $ (9) $ 1,869 $ 2,046 $ 141 $ 2,187
======= ======= ======= ======= ======= =======
Comparison of Financial Condition at September 30, 2001 and September 30, 2000
Total assets increased to $881.3 million at September 30, 2001
from $844.3 million at September 30, 2000, an increase of $37.0 million, or
4.4%. The asset growth was primarily attributable to overall increases of $16.3
million in net loans and $24.5 million in securities.
Net Loans. Net loans increased by $16.3 million, or 2.8%, in the
year ended September 30, 2001, primarily due to increases of $14.3 million in
residential mortgage loans. Residential mortgage loans increased to $358.2
million at September 30, 2001, from $343.9 million at September 30, 2000, a
growth rate of 4.2%. The commercial loan portfolio (which includes commercial
mortgage, construction and commercial business loans) decreased to $180.2
million at September 30, 2001, from $182.1 million at September 30, 2000
reflecting the slowing economic growth in the Bank's market area. The small
decline in the commercial portfolio was primarily attributable to a decrease of
$10.1 million in commercial construction loans to $19.5 million from $29.6
million, partially offset by increases in commercial mortgage loans of $4.3
million and commercial business loans of $3.9 million. Total consumer loans
increased by $5.4 million. The allowance for loan losses increased by $1.4
million to $9.1 million at September 30, 2001 from $7.7 million at September 30,
2000. Asset quality remains high, with a ratio of non-performing loans ("NPLs")
40
to total loans of 0.38% at September 30, 2001, an improvement from 0.67% at
September 30, 2000.
Securities. The total securities portfolio increased by $24.5
million to $235.3 million at September 30, 2001 from $210.7 million at September
30, 2000. This net increase reflects a $1.7 million increase in securities
available for sale to $163.9 million from $162.2 million and a $22.8 million
increase in securities held to maturity to $71.4 million at September 30, 2001
from $48.6 million at September 30, 2000. During fiscal 2001, the Company
reclassified its municipal debt securities, which had an amortized cost of $12.0
million at September 30, 2000, from the available for sale portfolio to the held
to maturity portfolio, based on its present intent to retain these securities.
Deposits. Total deposits increased by $44.1 million to $653.1
million at September 30, 2001 from $609.0 million at September 30, 2000. Total
transaction account balances increased by $16.6 million, or 13.7%, in the year
ended September 30, 2001, to $137.9 million from $121.3 million at September 30,
2000. Total savings and money market account balances increased by $31.6
million, or 13.3%, to $269.9 million at September 30, 2001 from $238.3 million
at September 30, 2000. Total certificates of deposits decreased by $4.1 million,
or 1.6%, to $245.3 million at September 30, 2001 from $249.4 million at
September 30, 2000. As interest rates declined, many Bank customers allowed
maturing higher rate certificates of deposit to roll into savings or money
market accounts rather than lock in the lower rates in effect.
Borrowings. Total borrowings decreased by $11.5 million to $110.4
million at September 30, 2001 from $122.0 million at September 30, 2000. The
Bank was able to pay down borrowings, as the growth in transaction and savings
accounts was sufficient to fund asset growth.
Stockholders' Equity. Stockholders' equity increased by $11.6
million, or 12.8%, to $102.6 million at September 30, 2001 compared to $91.0
million at September 30, 2000, reflecting fiscal year net income of $7.5 million
and a $4.9 million improvement in accumulated other comprehensive income (loss),
principally the after-tax net unrealized gains and losses on the
available-for-sale securities portfolio. Allocation of ESOP shares totaling
$555,000 and vesting of shares issued under the Bank's recognition and retention
plan of $577,000 also increased equity. The increases in equity were partially
offset by cash dividends of $0.8 million and net treasury share purchases of
$1.1 million.
Comparison of Operating Results for the Years Ended September 30, 2001 and
September 30, 2000
Net income for the year ended September 30, 2001 was $7.5
million, an increase of $1.6 million, or 27.4%, compared to net income of $5.9
million for the year ended September 30, 2000. The growth and changes in mix of
assets and liabilities provided a 5.7% increase in net interest income, to $34.7
million from $32.9 million. Non-interest income grew by 38.8%, to $4.7 million
from $3.4 million, while non-interest expense increased by only 2.4%.
Interest Income. Interest income for the fiscal year ended
September 30, 2001 grew by $2.1 million, or 3.5%, over the prior fiscal year to
$61.0 million, primarily due to increased loan and securities volumes. Average
interest-earning assets for the fiscal year ended September 30, 2001 were $826.7
million, an increase of $28.7 million, or 3.6%, compared to average
interest-earning assets in the fiscal year ended September 30, 2000 of $798.0
million. Average loan balances grew by $13.2 million, while the average balances
of securities and other earning assets increased by a combined $15.5 million.
Although market interest rates declined significantly during fiscal 2001, the
average yield on total earning assets remained the same as the prior year. The
average yield on loans increased by 7 basis points to 7.87%, from 7.80%,
reflecting the higher rates in effect when the loans were originated, as many of
these loans carry fixed rates. The average yield on securities, which have
shorter average maturities, declined somewhat during fiscal 2001, leaving the
average earning asset yield unchanged on an overall basis.
41
Interest Expense. Interest expense increased by $210,000, or
0.8%, to $26.2 million for the year ended September 30, 2001 from $26.0 million
for the year ended September 30, 2000. This was the net result of a $14.6
million or 2.2% increase in the average balance of total interest-bearing
liabilities in fiscal 2001 compared to fiscal 2000, offset by a five basis point
decrease in the average rate paid on such liabilities over the same period.
Interest expense on savings and NOW accounts decreased in fiscal
2001 by $537,000 and $105,000, respectively, attributable to declines in the
average rates paid of 31 basis points and 27 basis points, respectively.
Partially offsetting the lower interest expense on savings and NOW accounts was
an increase of $216,000 in interest expense on money market deposits to $2.2
million from $2.0 million. This increase was due to a $9.2 million increase in
the average balance to $86.7 million from $77.5 million, which was partially
offset by a three basis point decrease in the average rate paid to 2.59% from
2.62%.
Interest expense on certificates of deposit increased by $1.1
million to $13.9 million from $12.8 million, due to a 31 basis point increase in
the average rate paid to 5.54% from 5.23%, as well as a $7.0 million increase in
the average balance to $251.3 million from $244.3 million. The increase in
average rate paid occurred despite the large decline in market interest rates,
as CDs added to the portfolio from June through December of 2000 were booked at
relatively high rates. If current market interest rates continue at present
levels, management expects that the existing CD portfolio will re-price at lower
rates.
Interest expense on borrowings from the Federal Home Loan Bank of
New York (the "FHLB") decreased by $492,000 due to a decrease of $8.3 million in
the average balance to $114.0 million from $122.3 million.
Net Interest Income. For the years ended September 30, 2001 and
2000, net interest income was $34.7 million and $32.9 million, respectively. The
$1.9 million increase in net interest income was primarily attributable to a
$14.1 million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), to $138.9 million from $124.8 million, combined
with a five basis point increase in the net interest rate spread to 3.56% from
3.51%. The Company's net interest margin increased to 4.20% in the year ended
September 30, 2001 from 4.12% in the year ended September 30, 2000.
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 past and
anticipated loss experience, evaluations of real estate collateral, current and
anticipated economic conditions, volume and type of lending, and the levels of
non-performing and other classified loans. The amount of the allowance is based
on estimates, and the ultimate losses may vary from such estimates. 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. Due to the
steadily improving asset quality and the growing coverage ratio of the allowance
for loan losses to non-performing loans, management determined that it was
appropriate to reduce the loan loss provision to $1.4 million for fiscal 2001
compared to a provision of $1.7 million in fiscal 2000.
Non-Interest Income. Non-interest income for the fiscal year
ended September 30, 2001 was $4.7 million, an increase of $1.3 million over
non-interest income for the fiscal year ended September 30, 2000, primarily
reflecting higher collection of service charges on deposits, fees on asset
management and trust services, and other fee income, which together increased by
$561,000, or 20.3%. The Company also recorded gains on sales of securities of
$531,000 for the current year, compared to only $9,000 of such gains for fiscal
2000. Other non-interest income increased by $263,000 over the prior fiscal
year, including a $118,000 gain recognized in connection with the final
repayment of a construction loan.
42
Non-Interest Expense. Non-interest expenses for the fiscal year
ended September 30, 2001 totaled $26.4 million, or $623,000 more than expenses
of $25.8 million for the fiscal year ended September 30, 2000. Compensation
expense increased by $620,000, and occupancy and office operations increased by
$456,000, both related partially to the opening of the new branch in Bardonia
and preparation for opening the new supermarket branch in New City, which began
operations in October 2001. Compensation expense also grew due to normal annual
merit increases and staff additions. Also, advertising and promotion expenses
increased by $411,000, or $37.5%, related to the opening of the new branches and
the introduction of the Bank's new product lines. In addition, other expenses in
the current fiscal year were higher by $335,000, or 7.8%, primarily because
expenses in fiscal 2000 were reduced by the reversal of $318,000 in accruals
made in fiscal 1999 for operational losses that did not materialize as
originally expected. These increases were partially offset by fiscal 2001's
decrease of $1.3 million in the amortization of branch purchase and deposit
premiums, as the premiums associated with 1996 branch purchases became fully
amortized.
Income Taxes. Income tax expense was $4.1 million for the fiscal
year ended September 30, 2001 compared to $2.9 million for fiscal 2000,
representing effective tax rates of 35.3% and 32.8%, respectively. The higher
effective tax rate in fiscal 2001 primarily reflects a lower level of state tax
benefits from the REIT subsidiary in relation to total pre-tax income.
Comparison of Operating Results for the Years Ended September 30, 2000 and
September 30, 1999
Net income for the year ended September 30, 2000 was $5.9
million, an increase of $2.0 million, or 49.4%, from net income of $3.9 million
for the year ended September 30, 1999. The increase was due primarily to an
increase in net interest income and a decrease in non-interest expense, which,
in fiscal 1999, included special charges associated with the conversion to a new
computer system and the establishment of the ESOP. Excluding the after-tax
impact of these special charges, net income would have been approximately $4.9
million for the year ended September 30, 1999.
Interest Income. Interest income increased by $6.6 million, or
12.7%, to $58.9 million for the year ended September 30, 2000 from $52.3 million
for the year ended September 30, 1999. The increase was primarily due to
increased loan volume, as well as the acquisition over time of higher yielding
loans and investment securities and the upward adjustment of rates earned on
variable rate loans. For the year ended September 30, 2000, income from loans
increased by $4.8 million or 12.0%, and income from securities and other earning
assets increased $1.8 million or 14.9%. The increase in income from loans was
attributable to a $51.0 million increase in the average balance to $577.1
million from $526.1 million, as well as a 16 basis point increase in the average
yield to 7.80% from 7.64%. The continued growth of the commercial loan portfolio
was responsible for $26.9 million of the overall increase in average loans.
Average commercial loans grew to $167.1 million in 2000, from $140.2 million in
1999, an increase of 19.2%. Interest income from commercial loans was $14.6
million for 2000, a $3.0 million or 25.9% increase from income of $11.6 million
in 1999. The increase was attributable to both the above-mentioned increase in
average balances and a 47 basis point increase in average yields, to 8.72% from
8.25%. The increase in income from securities available for sale of $2.5 million
was attributable to a $39.0 million increase in the average balance to $159.3
million from $120.3 million, as well as a 12 basis point increase in the average
yield to 6.10% from 5.98%. The $971,000 decrease in income from securities held
to maturity was attributable to a $19.5 million decrease in the average balance
to $52.5 million from $72.0 million, which more than offset a 48 basis point
increase in the average yield to 6.76% from 6.28%.
<
43
Interest Expense. Interest expense increased by $4.4 million, or
20.6%, to $26.0 million for the year ended September 30, 2000 from $21.6 million
for the year ended September 30, 1999. This increase was due primarily to the
continuing rise in market interest rates which began late in fiscal 1999, and
higher average balances in wholesale borrowings, which carry higher interest
rates than the Bank's core deposits. Average interest-bearing liabilities for
the fiscal year ended September 30, 2000 increased $66.5 million, or 10.8%, to
$673.2 million, from an average of $606.7 million for the fiscal year ended
September 30, 1999. In addition, there was a 31 basis point increase in the
average rate paid on such liabilities over the same period. Interest expense on
FHLB borrowings increased by $3.2 million due to an increase of $48.0 million in
the average balance of such borrowings to $122.3 million from $74.3 million,
combined with an increase of 45 basis points in the average rate paid to 5.98%
from 5.53%. Interest expense on certificates of deposit increased to $12.8
million in fiscal 2000 from $11.6 million in fiscal 1999. This increase was due
to a 32 basis point increase in the average rate paid to 5.23% from 4.91%, as
well an $8.7 million increase in the average balance of certificates of deposit
to $244.3 million from $235.6 million. Interest expense in savings deposits,
money market and NOW accounts was substantially unchanged compared to fiscal
1999.
Net Interest Income. Net interest income was $32.9 million and
$30.7 million for the years ended September 30, 2000 and 1999, respectively. The
$2.2 million increase in net interest income was primarily attributable to a
$7.8 million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), to $124.8 million from $117.0 million, partially
offset by a 15 basis point decline in the net interest rate spread to 3.51% from
3.66%. The Company's net interest margin decreased by 12 basis points to 4.12%
in the year ended September 30, 2000 from 4.24% in the year ended September 30,
1999.
Provision for Loan Losses. The provision for loan losses is a
charge to earnings recorded in order to maintain the allowance for loan losses
at a level that is considered appropriate to absorb probable loan losses
inherent in the existing 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 $1.7 million and
$1.6 million in loan loss provisions during the years ended September 30, 2000
and 1999, respectively. The provisions reflect continued loan portfolio growth
in both fiscal years, including commercial mortgage and business loans.
Non-Interest Income. Non-interest income increased to $3.4
million for the year ended September 30, 2000 from $3.1 million for the year
ended September 30, 1999 primarily reflecting higher collection of
transaction-based service charges, fees on mutual fund sales, and other fee
income. ATM transaction fees increased $70,000 to $512,000 for the year ended
September 30, 2000 from $442,000 in the prior year. The Company also realized an
increase of $44,000 in income from the sale of mutual funds and annuities, to
$160,000 from $116,000 in the year ended September 30, 1999.
Non-Interest Expense. Non-interest expense decreased by $495,000,
or 1.9%, to $25.8 million for the fiscal year ended September 30, 2000 from
$26.3 million for the fiscal year ended September 30, 1999. During fiscal 1999,
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 fiscal 2000 was partially offset by increased expenses
associated with operating two new branches and the new Asset Management and
Trust Department, and making final preparations for issues relating to the Year
2000 date change. Non-interest expenses for fiscal 2000 were reduced by the
reversal of $318,000 in accruals made in fiscal 1999 which were part of the
total computer system conversion costs, as discussed above. These accruals were
made for conversion-related losses that did not materialize as originally
expected.
44
Excluding the impact of the accrual reversal in fiscal 2000 and
the one-time conversion and ESOP charges in fiscal 1999, total non-interest
expenses increased $1.3 million in fiscal 2000 compared to the prior year.
Compensation and employee benefits expense and occupancy and office operations
expense increased $1.7 million and $314,000, respectively. Compensation expense
in fiscal 2000 includes $689,000 for the vesting of RRP shares, while no shares
vested in fiscal 1999. These increases were partially offset by decreases in
fiscal 2000 expenses for advertising and promotion, FDIC insurance and
consulting fees of $103,000, $132,000 and $279,000, respectively.
Income Tax Expense. Income tax expense was $2.9 million for the
year ended September 30, 2000 compared to $2.0 million for fiscal 1999,
representing effective tax rates of 32.8% and 33.3%, respectively. The tax rate
in both fiscal years reflects the investment in tax-exempt securities and the
implementation of strategies designed to lower state taxes.
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, borrowings and proceeds from the sale of fixed-rate mortgage loans in
the secondary mortgage market. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows, mortgage
prepayments and mortgage loan sales are greatly influenced by market interest
rates, economic conditions and competition.
The Company's cash flows are derived from operating activities,
investing activitites and financing activities as reported in the Consolidated
Statements of Cash Flows in Item 8. The primary investing activities are the
origination of both 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, 2001, 2000, and 1999, the Company's loan
originations totaled $139.3 million, $135.5 million and $220.8 million,
respectively. Purchases of mortgage-backed securities totaled $53.5 million,
$9.2 million and $18.3 million for the years ended September 30, 2001, 2000 and
1999, respectively. Purchases of investment securities totaled $28.2 million,
$31.3 million and $72.7 million for the years ended September 30, 2001, 2000 and
1999, respectively. These activities were funded primarily by deposit growth (a
financing activity), and by principal repayments on loans and securities. Net
proceeds of $37.1 million from the stock offering provided an additional source
of financing cash flows during the year ended September 30, 1999. Loan
origination commitments totaled $12.3 million at September 30, 2001, comprised
of $2.3 million at adjustable or variable rates and $10.0 million at fixed
rates. The Company anticipates that it will have sufficient funds available to
meet current loan commitments.
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 was $44.1 million, $22.3 million and
$13.5 million for the years ended September 30, 2001, 2000 and 1999,
respectively. Certificates of deposit that are scheduled to mature in one year
or less from September 30, 2001 totaled $218.9 million. Based upon prior
experience and current pricing strategy, management believes that a significant
portion of such deposits will remain with the Bank.
The Company monitors its liquidity position on a daily basis, and
any excess short-term liquidity is usually invested in overnight federal funds
sold. The Company generally remains fully invested and meets additional funding
requirements through FHLB borrowings (a financing activity), which amounted to
$110.4 million at September 30, 2001.
45
At September 30, 2001, the Bank exceeded all of its regulatory
capital requirements with a leverage capital level of $88.5 million, or 10.2% of
adjusted assets (which is above the required level of $34.7 million, or 4.0%)
and a risk-based capital level of $95.1 million, or 18.2% of risk-weighted
assets (which is above the required level of $41.9 million, or 8.0%). These
capital requirements, which are applicable to the Bank only, do not consider
additional capital retained by the Company. See Note 15 of the Notes to
Consolidated Financial Statements in Item 8 for additional information
concerning the Bank's capital requirements.
Recent Accounting Standards
In July 2001, the Financial Accounting Standards Board issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. Among other things, SFAS No. 141 requires the use of the
purchase method to account for all business combinations; use of the
pooling-of-interests methods is not permitted for business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets must meet in order to be recognized and reported apart from
goodwill. SFAS No. 142 requires that (i) goodwill not be amortized to expense,
but instead be reviewed for impairment at least annually, with impairment losses
charged to expense when they occur, and (ii) acquisition-related intangible
assets recognized apart from goodwill be amortized to expense over their
estimated useful lives.
The Company is required to adopt the provisions of SFAS No. 141
immediately, and SFAS No. 142 effective October 1, 2002. However, goodwill
acquired in a purchase business combination completed after June 30, 2001 (but
before SFAS No. 142 is adopted in full) will not be amortized. Accordingly, if
the pending acquisition of NBF is consummated in fiscal 2002, the resulting
goodwill will not be amortized and the separately-recognized intangible assets
(such as core deposit values) will be amortized over their estimated useful
lives.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Management of Market Risk
Qualitative Analysis. As with other financial institution holding
companies, one of the Company's most significant forms of market risk is
interest rate risk. The general objective of the Company's interest rate risk
management is to determine the appropriate level of risk given the Company's
business strategy, and then manage that risk in a manner that is consistent with
the Company's policy to reduce the exposure of the Company's net interest income
to changes in market interest rates. The Bank's asset/liability management
committee ("ALCO"), which consists of senior management, evaluates the interest
rate risk inherent in certain assets and liabilities, the Company's operating
environment, and capital and liquidity requirements, and modifies 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 the Company's net interest margin, and the effect that changes in
market interest rates would have on the value of the Company's loan and
securities portfolios.
The Company actively evaluates interest rate risk concerns in
connection with its lending, investing, and deposit activities. The Company
emphasizes the origination of residential monthly and bi-weekly fixed-rate
mortgage loans, residential and commercial adjustable-rate mortgage loans, and
consumer loans. Depending on market interest rates and the Company's capital and
liquidity position, the Company may retain all of its newly originated
fixed-rate, fixed-term residential mortgage loans or may sell all or a portion
of such longer-term loans on a servicing-retained basis. The Company also
invests in short-term securities, which generally have lower yields compared to
longer-term investments. Shortening the maturities of the Company's
interest-earning assets by increasing investments in shorter-term loans and
securities helps to better match the maturities and interest rates of the
Company's assets and liabilities, thereby reducing the exposure of the Company's
net interest income to changes in market interest rates. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer term, fixed-rate loans and investments. The
Company has purchased interest rate caps with a notional amount of $50.0 million
46
to reduce the variability of cash flows from potentially higher interest
payments associated with upward interest rate repricings on a portion of its
certificate of deposit accounts and borrowings. In March 1998, the Company
entered into a five-year interest rate cap agreement in which the counterparty
agreed to make interest payments to the Company based on a $20.0 million
notional amount to the extent that the three-month LIBOR rate exceeds 6.50% at
each quarterly determination date. In April 2000, the Company entered into a
three-year interest rate cap agreement in which the counterparty agreed to make
interest payments to the Company based on a $30.0 million notional amount to the
extent that the three-month LIBOR rate exceeds 8.25% at each quarterly
determination date. These interest rate caps have not had a significant
financial impact on the Company because interest rate levels have remained below
the cap levels at substantially all times since inception of the agreements. See
Note 16 of the Notes to Consolidated Financial Statements in Item 8 for an
additional discussion of these agreements.
Quantitative Analysis. 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 the 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 which seem most likely based on historical experience during
prior interest rate changes.
The table below sets forth, as of September 30, 2001, the
estimated changes in the Company's NPV and its net interest income that would
result from the designated instantaneous changes in the U.S. Treasury yield
curve.
NPV Net Interest Income
Estimated Increase Increase (Decrease) in
Change in (Decrease) in NPV Estimated Estimated Net Interest Income
Interest Rates Estimated ----------------- Net Interest -----------------------------
(basis points) NPV Amount Percent Income Amount Percent
-------------- ---------- ---------- --------- ---------- --------- -------
(Dollars in thousands)
+300 $ 100,585 $ (41,999) (29.5)% $ 36,137 $ (5,304) (12.8)%
+200 115,761 (26,823) (18.8) 37,610 (3,831) (9.2)
+100 130,782 (11,802) (8.3) 39,049 (2,392) (5.8)
0 142,584 -- 0.0 41,441 - 0.0
-100 147,911 5,327 3.7 42,736 1,295 3.1
-200 151,770 9,186 6.4 42,991 1,550 3.7
-300 157,930 15,346 10.8 41,920 479 1.2
The table set forth above indicates that at September 30, 2001,
in the event of an abrupt 200 basis point decrease in interest rates, the
Company would be expected to experience a 6.4% increase in NPV, and a 3.7%
increase in net interest income. In the event of an abrupt 200 basis point
increase in interest rates, the Company would be expected to experience an 18.8%
decrease in NPV, and a 9.2% decline in net interest income. 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. Further, the computations do not reflect any actions management may
undertake in response to changes in interest rates.
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 the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured. It
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 the Company's
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 the Company's net interest income
and will differ from actual results.
47
ITEM 8. Financial Statements and Supplementary Data
The following are included in this item:
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition as of September
30, 2001 and 2000
(C) Consolidated Statements of Income for the years ended
September 30, 2001, 2000 and 1999
(D) Consolidated Statements of Changes in Stockholders' Equity for
the years ended September 30, 2001, 2000 and 1999
(E) Consolidated Statements of Cash Flows for the years ended
September 30, 2001, 2000 and 1999
(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.
48
Independent Auditors' Report
The Board of Directors and Stockholders
Provident Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Provident Bancorp, Inc. and subsidiary (the "Company") as of September 30,
2001 and 2000, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Provident Bancorp,
Inc. and subsidiary as of September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2001 in conformity with accounting principles generally
accepted in the United States of America.
Stamford, Connecticut
October 26, 2001, except as to note 2
which is as of November 2, 2001
49
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 2001 and 2000
(Dollars in thousands, except per share data)
Assets 2001 2000
---------- ----------
Cash and due from banks $ 16,447 $ 12,785
Securities (including $40,582 and $37,619 pledged as collateral
for borrowings in 2001 and 2000, respectively):
Available for sale, at fair value (amortized cost of $156,404 in 2001 and
$163,057 in 2000 ) (note 4) 163,928 162,157
Held to maturity, at amortized cost (fair value of $73,660 in 2001 and
$48,374 in 2000) (note 5) 71,355 48,586
--------- ---------
Total securities 235,283 210,743
--------- ---------
Loans (note 6):
One- to four-family residential mortgage loans 358,198 343,871
Commercial real estate, commercial business and construction loans 180,179 182,070
Consumer loans 76,892 71,534
Allowance for loan losses (9,123) (7,653)
--------- ---------
Total loans, net 606,146 589,822
--------- ---------
Accrued interest receivable, net (note 7) 5,597 5,495
Federal Home Loan Bank stock, at cost 5,521 7,023
Premises and equipment, net (note 8) 8,917 8,952
Deferred income taxes (note 11) 371 5,550
Other assets (notes 6, 12 and 16) 2,978 3,933
--------- ---------
Total assets $ 881,260 $ 844,303
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $ 653,100 $ 608,976
Borrowings (note 10) 110,427 127,571
Mortgage escrow funds (note 6) 6,197 5,971
Other 8,916 10,799
--------- ---------
Total liabilities 778,640 753,317
--------- ---------
Commitments and contingencies (notes 16 and 17)
Stockholders' equity (notes 1 and 15):
Preferred stock (par value $0.10 per share; 10,000,000 shares authorized;
none issued or outstanding) -- --
Common stock (par value $0.10 per share; 10,000,000 shares authorized;
8,280,000 shares issued; 8,024,166 and 8,077,800 shares outstanding
in 2001 and 2000, respectively) 828 828
Additional paid-in capital 36,535 36,356
Unallocated common stock held by employee stock ownership plan ("ESOP")
(note 12) (2,350) (2,726)
Common stock awards under recognition and retention plan ("RRP") (note 12) (1,729) (2,306)
Treasury stock, at cost (255,834 shares in 2001 and 202,200 shares in 2000) (note 15) (4,298) (3,203)
Retained earnings 69,252 62,577
Accumulated other comprehensive income (loss), net of taxes (note 13) 4,382 (540)
---------
---------
Total stockholders' equity 102,620 90,986
--------- ---------
Total liabilities and stockholders' equity $ 881,260 $ 844,303
========= =========
See accompanying notes to consolidated financial statements
50
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended September 30, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
2001 2000 1999
------- ------- -------
Interest and dividend income:
Loans $46,434 $45,043 $40,209
Securities 13,916 13,268 11,641
Other earning assets 628 588 417
------- ------- -------
Total interest and dividend income 60,978 58,899 52,267
------- ------- -------
Interest expense:
Deposits (note 9) 19,423 18,721 17,474
Borrowings 6,821 7,313 4,115
------- ------- -------
Total interest expense 26,244 26,034 21,589
------- ------- -------
Net interest income 34,734 32,865 30,678
Provision for loan losses (note 6) 1,440 1,710 1,590
------- ------- -------
Net interest income after provision for loan losses 33,294 31,155 29,088
------- ------- -------
Non-interest income:
Banking fees and service charges 3,326 2,765 2,567
Loan servicing fees 229 260 298
Gain on sales of securities available for sale (note 4) 531 9 --
Other (note 6) 620 357 238
------- ------- -------
Total non-interest income 4,706 3,391 3,103
------- ------- -------
Non-interest expense:
Compensation and employee benefits (note 12) 14,129 13,509 12,279
Occupancy and office operations (note 17) 4,261 3,805 3,370
Advertising and promotion 1,507 1,096 1,199
Data processing 1,561 1,494 1,301
Amortization of branch purchase premiums 359 1,625 1,720
Other 4,614 4,279 6,434
------- ------- -------
Total non-interest expense 26,431 25,808 26,303
------- ------- -------
Income before income tax expense 11,569 8,738 5,888
Income tax expense (note 11) 4,087 2,866 1,958
------- ------- -------
Net income $ 7,482 $ 5,872 $ 3,930
======= ======= =======
Earnings per common share, subsequent to the January 7, 1999 stock offering
(note 14):
Basic $ 0.98 $ 0.76 $ 0.40
Diluted 0.97 0.76 0.40
======= ======= =======
See accompanying notes to consolidated financial statements
51
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
Additional Unallocated Common
Common Paid-in ESOP Stock Awards Treasury Retained
Stock Capital Shares Under RRP Stock Earnings
--------- --------- ---------- --------- --------- ---------
Balance at September 30, 1998 $ -- $ -- $ -- $ -- $ -- $ 54,291
Net income -- -- -- -- -- 3,930
Other comprehensive loss (note 13) -- -- -- -- -- --
Total comprehensive income 1,578
Issuance of 8,280,000 common shares (note 1) 828 36,285 -- -- -- --
Initial capitalization of Provident Bancorp, MHC -- -- -- -- -- (100)
Shares purchased by ESOP -- -- (3,760) -- -- --
ESOP shares allocated or committed to be
released for allocation -- (23) 658 -- -- --
Cash dividends paid ($0.06 per common share) -- -- -- -- -- (367)
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1999 828 36,262 (3,102) -- -- 57,754
Net income -- -- -- -- -- 5,872
Other comprehensive income (note 13) -- -- -- -- -- --
Total comprehensive income 6,775
Purchases of treasury stock (202,200 shares) -- -- -- -- (3,203) --
ESOP shares allocated or committed to be
released for allocation -- 94 376 -- -- --
Awards of RRP shares -- -- -- (2,995) -- --
Vesting of RRP shares -- -- -- 689 -- --
Cash dividends paid ($0.15 per common share) -- -- -- -- -- (1,049)
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2000 828 36,356 (2,726) (2,306) (3,203) 62,577
Net income -- -- -- -- -- 7,482
Other comprehensive income (note 13) -- -- -- -- -- --
Total comprehensive income 12,404
Purchases of treasury stock (59,034 shares) -- -- -- -- (1,155) --
Stock option transactions -- -- -- -- 60 --
ESOP shares allocated or committed to be
released for allocation -- 179 376 -- -- --
Vesting of RRP shares -- -- -- 577 -- --
Cash dividends paid ($0.22 per common share) -- -- -- -- -- (807)
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2001 $ 828 $ 36,535 $ (2,350) $ (1,729) $ (4,298) $ 69,252
========= ========= ========= ========= ========= =========
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
------------ -------------
Balance at September 30, 1998 $ 909 $ 55,200
Net income -- 3,930
Other comprehensive loss (note 13) (2,352) (2,352)
---------
Total comprehensive income
Issuance of 8,280,000 common shares (note 1) -- 37,113
Initial capitalization of Provident Bancorp, MHC -- (100)
Shares purchased by ESOP -- (3,760)
ESOP shares allocated or committed to be
Released for allocation -- 635
Cash dividends paid ($0.06 per common share) -- (367)
--------- ---------
Balance at September 30, 1999 (1,443) 90,299
Net income -- 5,872
Other comprehensive income (note 13) 903 903
---------
Total comprehensive income
Purchases of treasury stock (202,200 shares) -- (3,203)
ESOP shares allocated or committed to be
Released for allocation -- 470
Awards of RRP shares -- (2,995)
Vesting of RRP shares -- 689
Cash dividends paid ($0.15 per common share) -- (1,049)
--------- ---------
Balance at September 30, 2000 (540) 90,986
Net income -- 7,482
Other comprehensive income (note 13) 4,922 4,922
---------
Total comprehensive income
Purchases of treasury stock (59,034 shares) -- (1,155)
Stock option transactions -- 60
ESOP shares allocated or committed to be
released for allocation -- 555
Vesting of RRP shares -- 577
Cash dividends paid ($0.22 per common share) -- (807)
--------- ---------
Balance at September 30, 2001 $ 4,382 $ 102,620
========= =========
See accompanying notes to consolidated financial statements
52
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
--------- --------- ---------
Cash Flows from Operating Activities:
Net income $ 7,482 $ 5,872 $ 3,930
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan losses 1,440 1,710 1,590
Depreciation and amortization of premises
And equipment 1,741 1,625 1,497
Amortization of branch purchase premiums 359 1,625 1,720
Net amortization of premiums and discounts
On securities 109 85 239
ESOP and RRP expense 1,132 1,159 635
Originations of loans held for sale -- (361) (13,271)
Proceeds from sales of loans held for sale -- 808 14,089
Deferred income tax expense (benefit) 1,897 (642) (1,488)
Net changes in accrued interest receivable
And payable (786) 992 (1,293)
Other adjustments (principally net changes in 133 (640) 945
--------- --------- ---------
other assets and other liabilities)
Net cash provided by operating activities 13,507 12,233 8,593
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of securities:
Available for sale (51,368) (35,746) (91,029)
Held to maturity (30,366) (4,710) --
Proceeds from maturities, calls and other principal payments on
securities:
Available for sale 29,743 17,439 36,586
Held to maturity 19,396 12,869 41,510
Proceeds from sales of securities available for sale 16,760 6,001 --
Loan originations (139,297) (135,467) (220,813)
Loan principal payments 121,129 109,580 115,525
Redemption (purchase) of Federal Home Loan Bank stock 1,502 (847) (2,486)
Purchases of premises and equipment (1,706) (2,345) (2,670)
Other investing activities 259 350 274
--------- --------- ---------
Net cash used in investing activities (33,948) (32,876) (123,103)
--------- --------- ---------
(Continued)
53
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
--------- --------- ---------
Cash Flows from Financing Activities:
Net increase in deposits $ 44,124 $ 22,336 $ 13,466
Net increase (decrease) in borrowings (17,144) 9,818 67,822
Net increase (decrease) in mortgage escrow funds 226 (4,518) 4,602
Treasury shares purchased (1,155) (3,203) --
Stock option transactions 60 -- --
Shares purchased for RRP awards (1,201) (1,794) --
Shares purchased by ESOP -- -- (3,760)
Net proceeds from stock offering -- -- 37,113
Cash dividends paid (807) (1,049) (367)
Initial capitalization of Provident Bancorp, MHC -- -- (100)
--------- --------- ---------
Net cash provided by financing activities 24,103 21,590 118,776
--------- --------- ---------
Net increase in cash and cash equivalents 3,662 947 4,266
Cash and cash equivalents at beginning of year 12,785 11,838 7,572
--------- --------- ---------
Cash and cash equivalents at end of year $ 16,447 $ 12,785 $ 11,838
========= ========= =========
Supplemental Information:
Interest payments $ 26,928 $ 25,382 $ 21,313
Income tax payments 3,110 4,185 1,446
Securities transferred from available for sale to held to maturity 11,865 -- --
Loans transferred to real estate owned 218 154 311
========= ========= =========
See accompanying notes to consolidated financial statements.
54
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
(1) Reorganization and Stock Offering
On January 7, 1999, Provident Bank (the "Bank") completed its reorganization
into a mutual holding company structure (the "Reorganization"). As part of the
Reorganization, the Bank converted from a federally-chartered mutual savings
bank to a federally-chartered stock savings bank (the "Conversion"). The Bank
became the wholly-owned subsidiary of Provident Bancorp, Inc., which became the
majority-owned subsidiary of Provident Bancorp, MHC (the "Mutual Holding
Company"). Collectively, Provident Bancorp, Inc. and the Bank are referred to
herein as "the Company".
Provident Bancorp, Inc. issued a total of 8,280,000 common shares on January 7,
1999, consisting of 3,864,000 shares (or 46.67%) sold to the public (the
"Offering") and 4,416,000 shares (or 53.33%) issued to the Mutual Holding
Company. The net proceeds from the sale of shares to the public amounted to
$37,113, representing gross proceeds of $38,640 less offering costs of $1,527.
Provident Bancorp, Inc. utilized net proceeds of $24,000 to make a capital
contribution to the Bank. Prior to the Reorganization and Offering, Provident
Bancorp, Inc. had no operations other than those of an organizational nature.
The Company's employee stock ownership plan ("ESOP"), which did not purchase
shares in the Offering, was authorized to purchase up to 309,120 shares or 8% of
the number of shares sold in the Offering. The ESOP completed its purchase of
all such authorized shares in the open market during January and February 1999,
at a total cost of $3,760.
(2) Pending Acquisition
On November 2, 2001, Provident Bancorp, Inc. and the Bank entered into an
Agreement and Plan of Merger with The National Bank of Florida ("NBF") under
which the Bank will acquire all of NBF's outstanding common shares in an
all-cash transaction valued at approximately $28,100. NBF will be merged with
and into the Bank. At September 30, 2001, NBF had total assets of approximately
$99,700 (unaudited) and total deposits of approximately $81,200 (unaudited).
The acquisition will be accounted for using the purchase method of accounting
for business combinations. Accordingly, the assets acquired and liabilities
assumed by the Bank will be recorded at their fair values at the acquisition
date. The excess of the total acquisition cost over the fair value of the net
assets acquired will be recorded as intangible assets (consisting of both
goodwill and intangible assets recognized apart from goodwill) that will be
accounted for in accordance with the recently-issued accounting standards
described in note 19. Operating results attributable to the NBF acquisition will
be included in the Company's consolidated financial statements from the date of
acquisition.
Completion of the transaction is subject to approval by regulators and by the
shareholders of NBF. The transaction is expected to close during the first
calendar quarter of 2002.
(3) Summary of Significant Accounting Policies
The Bank is a community bank offering financial services to individuals and
businesses primarily in Rockland County, New York and its contiguous
communities. 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"). The Office
of Thrift Supervision ("OTS") is the primary regulator for the Bank, Provident
Bancorp, Inc. and the Mutual Holding Company.
55
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 REIT, Inc. which was formed in fiscal 1999 as a real estate
investment trust and holds a portion of the Company's real estate loans, (ii)
Provest Services Corp. I which became active in fiscal 1996 and has invested in
a low- income housing partnership, and (iii) Provest Services Corp. II which
became active in fiscal 1997 and 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.
Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires entities to classify
securities among three categories -- held to maturity, trading, and available
for sale. Management determines the appropriate classification of the Company's
securities at the time of purchase.
Held-to-maturity securities are limited to debt securities for which management
has the intent and the Company has the ability to hold to maturity. These
securities are reported at amortized cost.
Trading securities are debt and equity securities bought and 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 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.
56
Loans
Loans, other than those classified as 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 are reported at the lower of aggregate cost or
estimated market value. Market value is estimated based on outstanding investor
commitments or, in the absence of such commitments, based on current investor
yield requirements. Net unrealized losses, if any, are recognized in a valuation
allowance by a charge to earnings.
A loan is placed on non-accrual 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 non-accrual loans, including impaired loans under SFAS No.
114, are not recognized as income unless warranted based on the borrower's
financial condition and payment record.
The Company defers non-refundable 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 income at that time.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for losses
charged to earnings. Losses on loans (including impaired loans) are charged to
the allowance for loan losses when management believes that the collection of
principal is unlikely. Recoveries of loans previously charged-off are credited
to the allowance when realized.
The allowance for loan losses is an amount that management believes will be
adequate to absorb probable losses on existing loans that may become
uncollectable, based on evaluations of the collectability of the loans.
Management's evaluations, which are subject to periodic review by the OTS, take
into consideration factors such as the Company's past loan loss experience,
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and collateral values, and current
economic conditions that may affect the borrowers' ability to pay. Future
adjustments to the allowance for loan losses may be necessary based on changes
in economic and real estate market conditions, further information obtained
regarding known problem loans, results of regulatory examinations, the
identification of additional problem loans, and other factors.
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, 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. SFAS No. 114 applies to loans that are
individually evaluated for collectability in accordance with the Company's
ongoing loan review procedures (principally commercial real estate, commercial
business and construction loans). The standard does not generally apply to
smaller-balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage and consumer loans. Under SFAS No. 114,
creditors are permitted to report impaired loans 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 part of the allowance for loan losses.
57
Mortgage Servicing Assets
Mortgage servicing rights are recognized as assets when loans are sold with
servicing retained. The cost of an originated mortgage loan that is sold is
allocated between the loan and the servicing right based on estimated relative
fair values. The cost allocated to the servicing right is capitalized as a
separate asset and amortized thereafter in proportion to, and over the period
of, estimated net servicing income. Capitalized mortgage servicing rights are
assessed for impairment based on the fair value of those rights, and impairment
losses are recognized in a valuation allowance by charges to income.
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 considered to be
a non-marketable equity security under SFAS No. 115 and, accordingly, is
reported at cost.
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 ranging from 3 to 40 years.
Leasehold improvements are amortized on a straight-line basis over the terms of
the respective leases or the estimated useful lives of the improvements,
whichever is shorter. Routine holding costs are charged to expense as incurred,
while significant improvements are capitalized.
Branch Purchase Premiums
Premiums attributable to the acquisition of core deposits in branch purchase
transactions are amortized using the straight-line method over periods not
exceeding the estimated average remaining life of the acquired customer base.
Premium amortization was $359, $1,625 and $1,720 for the years ended September
20, 2001, 2000 and 1999, respectively. All premiums became fully amortized
during the year ended September 30, 2001.
Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded initially
at estimated fair value less expected sales costs, with any resulting writedown
charged to the allowance for loan losses. Subsequent valuations are performed by
management, and the carrying amount of a property is 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.
Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities to a
counterparty under an agreement to repurchase the identical securities at a
fixed price on a future date. These agreements are accounted for as secured
financing transactions since the Company maintains effective control over the
transferred securities and the transfer meets other specified criteria.
Accordingly, the transaction proceeds are recorded as borrowings and the
underlying securities continue to be carried in the Company's securities
portfolio. Disclosure of the pledged securities has been made in the
consolidated statements of financial condition because the counterparty has the
right by contract to sell or repledge the collateral.
58
Income Taxes
Deferred taxes are recognized for the estimated future tax effects attributable
to "temporary differences" between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax laws or rates is recognized in income tax expense in the period
that includes the enactment date of the change.
A deferred tax liability is recognized for all temporary differences that will
result in future taxable income. A deferred tax asset is recognized for all
temporary differences that will result in future tax deductions, subject to
reduction of the asset by a valuation allowance in certain circumstances. This
valuation allowance is recognized if, based on an analysis of available
evidence, management determines that it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The valuation
allowance is subject to ongoing adjustment based on changes in circumstances
that affect management's judgment about the realizability of the deferred tax
asset. Adjustments to increase or decrease the valuation allowance are charged
or credited, respectively, to income tax expense.
Interest Rate Cap Agreements
Interest rate cap agreements are accounted for as cash flow hedges under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which the
Company adopted as of October 1, 2000. These agreements 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 as assets or liabilities at their fair
value. Changes in time value are reported in interest expense, and changes in
intrinsic value of a derivative that is highly effective are reported in other
comprehensive income until earnings are affected by the variability in cash
flows of the hedged liabilities. Prior to the adoption of SFAS No. 133, payments
(if any) due from the counterparties were recognized as a reduction of interest
expense and premiums paid by the Company were amortized on a straight-line basis
to interest expense.
Stock-Based Compensation Plans
Compensation expense is recognized for the Company's 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 of the shares
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 is deducted from
stockholders' equity.
The Company accounts for its stock option plan in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, compensation expense is recognized only if the exercise
price of an option is less than the fair value of the underlying stock at the
grant date. SFAS No. 123, Accounting for Stock-Based Compensation, encourages
entities to recognize the fair value of all stock-based awards (measured on the
grant date) as compensation expense over the vesting period. Alternatively, SFAS
No. 123 allows entities to apply the provisions of APB Opinion No. 25 and
provide pro forma disclosures of net income and earnings per share as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to apply the provisions of APB Opinion No. 25 and provide these pro
forma disclosures.
59
The recognition and retention plan ("RRP") is also accounted for in accordance
with APB Opinion No. 25. The fair value of the shares awarded, 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.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income applicable
to common stock by the weighted average number of common shares outstanding
during the period. Diluted EPS is computed in a similar manner, except that the
weighted average number of common shares is increased to include incremental
shares (computed using the treasury stock method) that would have been
outstanding if all potentially dilutive stock options and unvested RRP shares
were exercised or became vested during the period. For purposes of computing
both basic and diluted EPS, outstanding shares include all shares issued to the
Mutual Holding Company, but exclude unallocated ESOP shares that have not been
committed to be released to participants. RRP shares are not included in
outstanding shares until they become vested.
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.
Specific information to be reported for individual operating segments includes a
measure of profit and loss, certain revenue and expense items, and total assets.
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.
60
(4) Securities Available for Sale
The following is a summary of securities available for sale at
September 30, 2001 and 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
September 30, 2001
Mortgage-Backed Securities
Fannie Mae $ 21,525 $ 613 $ -- $ 22,138
Freddie Mac 26,875 883 (9) 27,749
Other 9,478 162 -- 9,640
--------- --------- --------- ---------
57,878 1,658 (9) 59,527
--------- --------- --------- ---------
Investment Securities
U.S. Government and Agency securities 48,869 2,288 -- 51,157
Corporate debt securities 48,367 2,505 -- 50,872
Equity securities 1,290 1,143 (61) 2,372
--------- --------- --------- ---------
98,526 5,936 (61) 104,401
--------- --------- --------- ---------
Total available for sale $ 156,404 $ 7,594 $ (70) $ 163,928
========= ========= ========= =========
September 30, 2000
Mortgage-Backed Securities
Fannie Mae $ 22,193 $ 135 $ (309) $ 22,019
Freddie Mac 17,471 39 (214) 17,296
Other 6,582 16 (105) 6,493
--------- --------- --------- ---------
46,246 190 (628) 45,808
--------- --------- --------- ---------
Investment Securities
U.S. Government and Agency securities 70,938 -- (541) 70,397
Corporate debt securities 30,975 -- (387) 30,588
State and municipal securities 11,697 -- (716) 10,981
Equity securities 3,201 1,211 (29) 4,383
--------- --------- --------- ---------
--------- --------- --------- ---------
116,811 1,211 (1,673) 116,349
--------- --------- --------- ---------
Total available for sale $ 163,057 $ 1,401 $ (2,301) $ 162,157
========= ========= ========= =========
Equity securities principally consist of Freddie Mac and Fannie Mae common and
preferred stock.
The following is a summary of the amortized cost and fair value of investment
securities available for sale (other than equity securities) at September 30,
2001, by remaining period to contractual maturity. Actual maturities may differ
because certain issuers have the right to call or prepay their obligations.
61
Amortized Fair
Cost Value
-------- --------
Remaining period to contractual maturity:
Less than one year $ 6,108 $ 6,278
One to five years 82,091 86,317
Five to ten years 7,240 7,632
Greater than ten years 1,797 1,802
-------- --------
Total $ 97,236 $102,029
======== ========
The following is an analysis of the amortized cost and weighted average yield of
securities available for sale (other than equity securities), segregated between
fixed-rate and adjustable-rate securities:
Fixed Adjustable
Rate Rate Total
------------ ----------- ------------
September 30, 2001
Amortized cost $ 145,194 $ 9,920 $155,114
Weighted average yield 6.12% 6.16% 6.12%
September 30, 2000
Amortized cost $ 148,464 $11,392 $159,856
Weighted average yield 5.95% 7.52% 6.06%
Proceeds from sales of securities available for sale during the years ended
September 30, 2001 and 2000 totaled $16,760 and $6,001, respectively, resulting
in gross realized gains of $531 and $9, respectively. There were no sales of
securities available for sale during the year ended September 30, 1999.
The Company transferred securities with a fair value of $11,865 from its
available-for-sale portfolio to its held-to-maturity portfolio during the year
ended September 30, 2001, based on an evaluation of the respective portfolios
and the Company's investment policy and strategies. The securities were assigned
a new cost basis in the held-to-maturity portfolio equal to their fair value at
the transfer date. The net unrealized loss of $146 at the transfer date and the
related discounts are being amortized as offsetting yield adjustments over the
terms of the securities.
At September 30, 2001 and 2000, U.S. Government securities with carrying amounts
of $4,772 and $5,166, respectively, were pledged as collateral for purposes
other than the borrowings described in note 10.
62
(5) Securities Held to Maturity
The following is a summary of securities held to maturity at September 30, 2001
and 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
September 30, 2001
Mortgage-Backed Securities
Fannie Mae $ 27,971 $ 983 $ (1) $ 28,953
Freddie Mac 26,477 917 -- 27,394
Ginnie Mae and other 5,001 152 -- 5,153
-------- -------- -------- --------
59,449 2,052 (1) 61,500
Investment Securities
State and municipal securities 11,906 254 -- 12,160
-------- -------- -------- --------
Total held to maturity $ 71,355 $ 2,306 $ (1) $ 73,660
======== ======== ======== ========
September 30, 2000
Mortgage-Backed Securities
Fannie Mae $ 21,531 $ 107 $ (138) $ 21,500
Freddie Mac 17,105 19 (222) 16,902
Ginnie Mae and other 6,562 60 (4) 6,618
-------- -------- -------- --------
45,198 186 (364) 45,020
-------- -------- -------- --------
Investment Securities
U.S. Government and Agency securities 2,991 -- (34) 2,957
Other 397 -- -- 397
-------- -------- -------- --------
3,388 -- (34) 3,354
-------- -------- -------- --------
Total held to maturity $ 48,586 $ 186 $ (398) $ 48,374
======== ======== ======== ========
63
The following is a summary of the amortized cost and fair value of investment
securities held to maturity at September 30, 2001, by remaining period to
contractual maturity. Actual maturities may differ because certain issuers have
the right to call or repay their obligations.
Amortized Fair
Cost Value
------- -------
Remaining period to contractual maturity:
One to five years $ 604 $ 622
Five to ten years 6,727 6,880
Greater than ten years 4,575 4,658
------- -------
Total $11,906 $12,160
======= =======
The following is an analysis of the amortized cost and weighted
average yield of securities held to maturity, segregated between fixed-rate and
adjustable-rate securities:
Fixed Adjustable
Rate Rate Total
--------- ---------- ---------
September 30, 2001
Amortized cost $ 64,553 $ 6,802 $ 71,355
Weighted average yield 6.25% 5.39% 6.16%
September 30, 2000
Amortized cost $ 39,829 $ 8,757 $ 48,586
Weighted average yield 6.77% 7.72% 6.94%
There were no sales of securities held to maturity during the years ended
September 30, 2001, 2000 and 1999.
64
(6) Loans
The components of the loan portfolio were as follows at September 30:
2001 2000
--------- ---------
One- to four-family residential mortgage loans:
Fixed rate $ 278,668 $ 257,138
Adjustable rate 79,530 86,733
--------- ---------
358,198 343,871
--------- ---------
Commercial real estate loans 129,295 124,988
Commercial business loans 31,394 27,483
Construction loans 19,490 29,599
--------- ---------
180,179 182,070
--------- ---------
Home equity lines of credit 31,125 28,021
Homeowner loans 39,501 37,027
Other consumer loans 6,266 6,486
--------- ---------
76,892 71,534
--------- ---------
Total loans 615,269 597,475
Allowance for loan losses (9,123) (7,653)
--------- ---------
Total loans, net $ 606,146 $ 589,822
========= =========
Total loans include net deferred loan origination costs of $914 and $728 at
September 30, 2001 and 2000, respectively.
A substantial portion of the Company's loan portfolio is secured by residential
and commercial real estate located in Rockland County, New York and its
contiguous communities. 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.
65
The principal balances of non-accrual loans were as follows at September 30:
2001 2000
------ ------
One- to four-family residential mortgage loans $1,684 $2,496
Commercial real estate loans 418 1,149
Construction loans -- 27
Consumer loans 175 359
------ ------
Total non-accrual loans $2,277 $4,031
====== ======
The allowance for uncollected interest, representing the amount of interest on
non-accrual loans that has not been recognized in interest income, was $383 and
$485 at September 30, 2001 and 2000, respectively. Gross interest income that
would have been recorded if the non-accrual loans at September 30 had remained
on accrual status throughout the year, amounted to $165 in fiscal 2001, $337 in
fiscal 2000 and $395 in fiscal 1999. Interest income actually recognized on such
loans (including income recognized on a cash basis) totaled $13, $77 and $131
for the years ended September 30, 2001, 2000 and 1999, respectively.
The Company's total recorded investment in impaired loans, as defined by SFAS
No. 114, was $358 and $1,176 at September 30, 2001 and 2000, 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, 2001 and 2000 due to the
adequacy of collateral values. The Company's average recorded investment in
impaired loans was $768, $1,196 and $2,577 during the years ended September 30,
2001, 2000 and 1999, respectively.
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
2001 2000 1999
------- ------- -------
Balance at beginning of year $ 7,653 $ 6,202 $ 4,906
Provision for loan losses 1,440 1,710 1,590
Charge-offs (159) (370) (922)
Recoveries 189 111 628
------- ------- -------
Balance at end of year $ 9,123 $ 7,653 $ 6,202
======= ======= =======
66
Real estate owned properties are included in other assets at net carrying
amounts of $109 and $154 at September 30, 2001 and 2000, respectively.
Provisions for losses and other activity in the allowance for losses on real
estate owned were insignificant during the years ended September 30, 2001, 2000
and 1999.
Certain residential mortgage loans originated by the Company are sold in the
secondary market. Net gains on sales of residential mortgage loans held for sale
are included in other non-interest income and amounted to $28 and $162 for the
years ended September 30, 2000 and 1999, respectively (none for the year ended
September 30, 2001). There were no loans held for sale at September 30, 2001 and
2000. Other assets at September 30, 2001 and 2000 include capitalized mortgage
servicing rights with an amortized cost of $201 and $229, respectively, which
approximated fair value.
The Company generally retains the servicing rights on mortgage loans sold.
Servicing loans for others includes collecting payments, maintaining escrow
accounts, making remittances to investors and, if necessary, processing
foreclosures. Mortgage loans serviced for others totaled approximately $86,700,
$98,500 and $109,000 at September 30, 2001, 2000 and 1999, respectively. These
amounts include loans sold with recourse (approximately $1,200 at September 30,
2001) for which management does not expect the Company to incur any significant
losses. Mortgage escrow funds include balances of $1,416 and $1,680 at September
30, 2001 and 2000, respectively, related to loans serviced for others.
(7) Accrued Interest Receivable
The components of accrued interest receivable were as follows at September 30:
2001 2000
------ ------
Loans, net of allowance for uncollected interest
of $383 in 2001 and $485 in 2000 $2,971 $2,917
Securities 2,626 2,578
------ ------
Total accrued interest receivable, net $5,597 $5,495
====== ======
67
(8) Premises and Equipment
Premises and equipment are summarized as follows at September 30:
2001 2000
-------- --------
Land and land improvements $ 1,090 $ 1,090
Buildings 4,775 4,807
Leasehold improvements 4,163 3,304
Furniture, fixtures and equipment 9,607 8,712
-------- --------
19,635 17,913
Accumulated depreciation and amortization (10,718) (8,961)
-------- --------
Total premises and equipment, net $ 8,917 $ 8,952
======== ========
(9) Deposits
Deposit balances and weighted average interest rates are summarized as follows
at September 30:
2001 2000
----------------- -----------------
Amount Rate Amount Rate
------ ---- ------ ----
Demand deposits:
Retail $ 41,280 --% 38,145 --%
Commercial 33,081 -- 28,324 --
NOW deposits 63,509 0.49 54,800 1.01
Savings deposits 160,777 1.05 161,987 2.02
Money market deposits 109,126 1.81 76,332 2.55
Certificates of deposit 245,327 4.63 249,388 5.83
-------- ----
Total deposits $653,100 2.31% $608,976 3.34%
======== =======
Certificates of deposit at September 30 had remaining periods to contractual
maturity as follows:
2001 2000
-------- --------
Remaining period to contractual maturity:
Less than one year $218,850 $176,756
One to two years 20,433 59,579
Two to three years 2,499 9,788
Greater than three years 3,545 3,265
-------- --------
Total certificates of deposit $245,327 $249,388
======== ========
68
Certificate of deposit accounts with a denomination of $100 or more totaled
$32,660 and $31,003 at September 30, 2001 and 2000, respectively. The FDIC
generally insures depositor accounts up to $100 as defined in the applicable
regulations.
Interest expense on deposits is summarized as follows for the years ended
September 30:
2001 2000 1999
------- ------- -------
Savings deposits $ 2,898 $ 3,435 $ 3,398
Money market and NOW deposits 2,610 2,499 2,516
Certificates of deposit 13,915 12,787 11,560
------- ------- -------
Total interest expense $19,423 $18,721 $17,474
======= ======= =======
(10) Borrowings
The Company's borrowings and weighted average interest rates are summarized as
follows at September 30:
2001 2000
------------------- -------------------
Amount Rate Amount Rate
-------- ---- -------- ----
FHLB borrowings by remaining period to maturity:
Less than one year $ 39,950 6.20% $ 42,600 6.70%
One to two years 20,477 4.73 33,750 6.74
Two to three years 15,000 5.43 10,625 5.90
Three to four years 10,000 3.74 15,000 5.43
Four to five years -- -- 10,000 6.68
Greater than five years 25,000 4.96 10,000 5.19
--------
110,427 5.32 121,975 6.36
Bank overdraft -- 5,596
-------- -------
Total borrowings $110,427 $127,571
======== ========
69
FHLB borrowings include securities repurchase agreements of $39,750 at September
30, 2001 and $34,750 at September 30, 2000, with weighted average interest rates
of 5.18% and 5.70% and weighted average remaining terms to maturity of
approximately 63 months and 45 months at the respective dates. Securities with
carrying amounts of $40,582 and $37,619 were pledged as collateral for these
borrowings at September 30, 2001 and 2000, respectively. Average borrowings
under securities repurchase agreements were $36,417, $40,515 and $18,330 during
the years ended September 30, 2001, 2000 and 1999, respectively, and the maximum
outstanding month-end balance was $39,750, $44,750 and $44,750, respectively.
The remaining FHLB borrowings were advances of $70,677 and $87,225 at September
30, 2001 and 2000, respectively. As a member of the FHLB of New York, the Bank
may have outstanding advances of up to 30% of its total assets, or approximately
$264,400 at September 30, 2001, in a combination of term and overnight advances.
The Bank's unused FHLB borrowing capacity was approximately $193,700 at
September 30, 2001. 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 (principally securities and
residential mortgage loans) not otherwise pledged. The Bank satisfied this
collateral requirement at September 30, 2001 and 2000.
FHLB borrowings of $40,000 at September 30, 2001 are callable at the discretion
of the FHLB beginning on various dates during fiscal 2002 and 2003. These
borrowings have weighted average remaining terms to the initial call dates and
the contractual maturity dates of approximately 1 year and 6 years,
respectively. The weighted average interest rate on callable borrowings was
5.13% at September 30, 2001.
(11) Income Taxes
Income tax expense consists of the following for the years ended September 30:
2001 2000 1999
------- ------- -------
Current tax expense:
Federal $ 1,839 $ 3,214 $ 2,832
State 351 294 614
------- ------- -------
2,190 3,508 3,446
------- ------- -------
Deferred tax expense (benefit):
Federal 1,800 (472) (1,097)
State 97 (170) (391)
------- ------- -------
1,897 (642) (1,488)
------- ------- -------
Total income tax expense $ 4,087 $ 2,866 $ 1,958
======= ======= =======
70
Actual income tax expense for the years ended September 30 differs from the
amount computed by applying the statutory Federal tax rate of 34% to income
before income taxes, for the following reasons:
2001 2000 1999
------- ------- -------
Tax at Federal statutory rate $ 3,933 $ 2,971 $ 2,002
State income taxes, net of Federal tax effect 296 82 147
Tax-exempt interest (148) (139) (102)
Low-income housing tax credits (72) (72) (72)
Other, net 78 24 (17)
------- ------- -------
Actual income tax expense $ 4,087 $ 2,866 $ 1,958
======= ======= =======
Effective income tax rate 35.3% 32.8% 33.3%
======= ======= =======
The tax effects of temporary differences that give rise to deferred
tax assets and liabilities at September 30 are as follows:
2001 2000
------ ------
Deferred tax assets:
Allowance for loan losses $3,516 $3,134
Branch purchase premium amortization 1,904 2,002
Deferred compensation 1,389 1,093
Depreciation of premises and equipment 448 145
Net unrealized loss on securities available for sale -- 360
Other 164 321
------ ------
Total deferred tax assets 7,421 7,055
------ ------
Deferred tax liabilities:
Undistributed earnings of subsidiary not consolidated for
tax return purposes (Provident REIT, Inc.) 3,193 483
Net unrealized gain on securities available for sale 2,954 --
Prepaid pension costs 394 475
Other 509 547
------ ------
Total deferred tax liabilities 7,050 1,505
------ ------
Net deferred tax asset $ 371 $5,550
====== ======
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, 2001 and 2000.
71
As a savings institution, 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 ("excess reserves")
accumulated after the base year. Deferred tax liabilities are recognized with
respect to such excess reserves, as well as any portion of the base-year amount
that is expected to become taxable (or "recaptured") in the foreseeable future.
Federal tax laws include a requirement to recapture into taxable income (over a
six-year period) the Federal bad debt reserves in excess of the base-year
amounts. The Bank has established a deferred tax liability with respect to such
excess Federal reserves. New York State tax laws designate all State bad debt
reserves as the base-year amount.
The Bank's base-year tax bad debt reserves were $4,600 for Federal tax purposes
and $28,000 for New York State tax purposes at September 30, 2001. Associated
deferred tax liabilities of $3,400 have not been recognized 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 and Stock-Based Compensation Plans
Pension Plans
The Company has a non-contributory 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.
72
The following is a summary of changes in the projected benefit
obligations and fair value of plan assets, together with a
reconciliation of the plan's funded status and the prepaid pension
costs recognized in the consolidated statements of financial
condition:
2001 2000
------- -------
Changes in projected benefit obligations:
Beginning of year $ 5,421 $ 5,543
Service cost 465 515
Interest cost 427 409
Actuarial loss (gain) 640 (315)
Benefits paid (64) (731)
------- -------
End of year 6,889 5,421
------- -------
Changes in fair value of plan assets:
Beginning of year 7,459 6,464
Actual (loss) return on plan assets (1,150) 1,126
Employer contributions 140 600
Benefits paid (64) (731)
------- -------
End of year 6,385 7,459
------- -------
Funded status at end of year (504) 2,038
Unrecognized net actuarial loss (gain) 1,500 (893)
Unrecognized prior service cost (82) (96)
Unrecognized net transition obligation 86 112
------- -------
Prepaid pension costs (included in other assets) $ 1,000 $ 1,161
======= =======
A discount rate of 7.25% and a rate of increase in future compensation levels of
5.5% were used in determining the actuarial present value of the projected
benefit obligation at September 30, 2001 (7.75% and 5.5%, respectively, at
September 30, 2000). The expected long-term rate of return on plan assets was
8.0% for 2001 and 2000.
The components of the net periodic pension expense were as follows for the years
ended September 30:
2001 2000 1999
----- ----- -----
Service cost $ 465 $ 515 $ 475
Interest cost 427 409 402
Expected return on plan assets (600) (539) (425)
Amortization of prior service cost (14) (14) (14)
Amortization of net transition obligation 26 26 26
Recognized net actuarial (gain) loss (2) -- 23
----- ----- -----
Net periodic pension expense $ 302 $ 397 $ 487
===== ===== =====
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 $59, $54 and $53 for the
years ended September 30, 2001, 2000 and 1999, respectively. The actuarial
present value of the projected benefit obligation was $296 and $226 at September
30, 2001 and 2000, respectively, all of which is unfunded. The obligations at
September 30, 2001 and 2000 were determined using discount rates of 7.25% and
7.75%, respectively, and a rate of increase in future compensation of 4.5%.
73
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 $37, $39 and $44 for
the years ended September 30, 2001, 2000 and 1999, respectively.
Employee Savings Plans
The Company also sponsors a defined contribution plan established under Section
401(k) of the Internal Revenue Code. Eligible employees may elect to contribute
up to 10% of their compensation to the plan. The Company currently makes
matching contributions equal to 50% of a participant's contributions up to a
maximum matching contribution of 3% of compensation. Voluntary and matching
contributions are invested, in accordance with the participant's direction, in
one or a number of investment options. Savings plan expense was $184, $180 and
$212 for the years ended September 30, 2001, 2000 and 1999, respectively. A
supplemental savings plan has also been established for certain senior officers.
Expense recognized for this plan was $62, $53 and $41 for the years ended
September 30, 2001, 2000 and 1999, respectively.
Employee Stock Ownership Plan
In connection with the Reorganization and Offering, the Company established an
ESOP for eligible employees who meet certain age and service requirements. The
ESOP borrowed $3,760 from Provident Bancorp, Inc. and used the funds to purchase
309,120 shares of common stock in the open market subsequent to the Offering.
The Bank makes periodic contributions to the ESOP sufficient to satisfy the debt
service requirements of the loan which has a ten-year term and bears interest at
the prime rate. The ESOP uses these contributions, and any dividends received by
the ESOP on unallocated shares, to make principal and interest payments on the
loan.
ESOP shares are held by the plan trustee in a suspense account until allocated
to participant accounts. Shares released from the suspense account are allocated
to participants on the basis of their relative compensation in the year of
allocation. Participants become vested in the allocated shares over a period not
to exceed five years. Any forfeited shares are allocated to other participants
in the same proportion as contributions.
ESOP expense was $555, $470 and $635 for the years ended September 30, 2001,
2000 and 1999, respectively. The fiscal 1999 expense consisted of (i) $371
attributable to the allocation of shares to participants with respect to the
initial plan year ended December 31, 1998, and (ii) $264 attributable to shares
committed to be released to participants during the nine months ended September
30, 1999. Through September 30, 2001, a cumulative total of 115,670 shares have
been allocated to participants or committed to be released for allocation. 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
(193,450 shares with a cost of $2,350 at September 30, 2001). The fair value of
these shares was approximately $4,200 at that date.
74
Recognition and Retention Plan
In February 2000, the Company's stockholders approved the Provident Bank 2000
Recognition and Retention Plan (the "RRP"). The principal purpose of the RRP is
to provide executive officers and directors a proprietary interest in the
Company in a manner designed to encourage their continued performance and
service. A total of 193,200 shares were awarded under the RRP in February 2000,
and the grant-date fair value of these shares ($2,995) was charged to
stockholders' equity. The awards vest at a rate of 20% on each of five annual
vesting dates, the first of which was September 30, 2000. RRP expense was $577
and $689 for the years ended September 30, 2001 and 2000, respectively.
Stock Option Plan
The stockholders also approved the Provident Bank 2000 Stock Option Plan (the
"Stock Option Plan") in February 2000. A total of 386,400 shares of authorized
but unissued common stock has been reserved for issuance under the Stock Option
Plan, although the Company may also fund option exercises using treasury shares.
Options have a ten-year term and may be either non-qualified stock options or
incentive stock options. 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.
75
The following is a summary of activity in the Stock Option Plan:
Shares Subject Weighted Average
to Option Exercise Price
-------------- ----------------
Granted in February 2000 366,650 $ 15.50
Forfeited (11,250) 15.50
-------- ---------
Outstanding at September 30, 2000 355,400 15.50
Forfeited (1,200) 15.50
Exercised (10,851) 15.50
Granted 5,451 21.15
-------- ---------
Outstanding at September 30, 2001 348,800 $ 15.59
======== =========
Exercisable at September 30, 2001
(weighted average remaining term of 8.4 years) 137,815 $ 15.50
======== =========
Available for future option grants 32,200
======
In accordance with the provisions of APB Opinion No. 25 related to fixed stock
options, compensation expense is not recognized with respect to the Company's
options since the exercise price equals the fair value of the common stock at
the grant date. Under the alternative fair-value-based method defined in SFAS
No. 123, the grant-date fair value of fixed stock options is recognized as
expense over the vesting period. The estimated per share fair value of options
granted in February 2000 was $5.90, estimated using the Black-Scholes
option-pricing model with assumptions as follows: dividend yield of 1%; expected
volatility rate of 22%; risk-free interest rate of 6.6%; and expected option
life of 8 years. Had the fair-value-based method of SFAS No. 123 been applied to
the options granted, net income would have been approximately $7,100 and $5,300
for the years ended September 30, 2001 and 2000, respectively. Basic and diluted
earnings per common share would have been $0.93 and $0.92, respectively, for
fiscal 2001 and $0.68 for fiscal 2000.
76
(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 Company's other comprehensive income (loss) is summarized as follows for the
years ended September 30:
2001 2000 1999
------- ------- -------
Net unrealized holding gain (loss) arising during the year on
securities available for sale, net of related income taxes
of $(3,526), ($606) and $1,570, respectively
$ 5,289 $ 908 $(2,352)
Reclassification adjustment for net realized gains included in net
income, net of related income taxes of $212 and $4 in 2001
and 2000, respectively
(319) (5) --
------- ------- -------
4,970 903 (2,352)
Net unrealized loss on derivatives qualifying as cash flow
hedges, net of related income taxes of $32 in 2001 (note 16)
(48) -- --
------- ------- -------
Other comprehensive income (loss) $ 4,922 $ 903 $(2,352)
======= ======= =======
The Company's accumulated other comprehensive income at September 30, 2001
consists of (i) the after-tax net unrealized gain of $4,430 on securities
available for sale, including securities transferred to held to maturity, and
(ii) the after-tax net unrealized loss of $48 on derivatives qualifying as cash
flow hedges. At September 30, 2000, accumulated other comprehensive loss
represented the after-tax net unrealized loss of $540 on securities available
for sale.
77
(14) Earnings Per Common Share
The following is a summary of the calculation of earnings per share ("EPS") for
the years ended September 30, 2001 and 2000, and for the nine-month period ended
September 30, 1999 subsequent to the Reorganization and Offering. For purposes
of computing basic EPS, net income applicable to common stock equaled net income
for each period presented.
2001 2000 1999
------- ------- -------
(In thousands, except per share data)
Net income $ 7,482 $ 5,872 $ 3,202 (1)
======= ========= ===========
Weighted average common shares outstanding for
computation of basic EPS (2) 7,661 7,773 8,041
Common-equivalent shares due to the dilutive effect of
stock options and RRP awards (3) 50 -- --
------- --------- -----------
Weighted average common shares for computation of
diluted EPS 7,711 7,773 8,041
======= ========= ===========
Earnings per common share:
Basic $ 0.98 $ 0.76 $ 0.40
Diluted 0.97 0.76 0.40
======= ========= ===========
(1) Represents net income for the nine-month period subsequent to the
Reorganization and Offering.
(2) Includes all shares issued to the Mutual Holding Company, but excludes
unvested RRP shares and unallocated ESOP shares that have not been released
or committed to be released to participants.
(3) Computed using the treasury stock method.
(15) Regulatory Matters
Capital Requirements
OTS regulations require savings institutions to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%, a minimum ratio of Tier 1
(core) capital to total adjusted assets of 4.0%, and a minimum ratio of total
(core and supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories -- well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a Tier 1 (core) capital
ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the OTS about capital 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.
78
Management believes that, as of September 30, 2001 and 2000, the Bank met all
capital adequacy requirements to which it was subject. Further, the most recent
OTS notification categorized the Bank as a well-capitalized institution under
the prompt corrective action regulations. There have been no conditions or
events since that notification that management believes have changed the Bank's
capital classification.
The following is a summary of the Bank's actual regulatory capital amounts and
ratios at September 30, 2001 and 2000, compared to the OTS requirements for
minimum capital adequacy and for classification as a well-capitalized
institution:
OTS Requirements
------------------------------------------------------------------
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
-------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- ------- ------- ------
September 30, 2001
Tangible capital $88,526 10.2% $13,015 1.5% $ -- --%
Tier 1 (core) capital 88,526 10.2 34,706 4.0 43,383 5.0
Risk-based capital:
Tier 1 88,526 16.9 -- -- 31,404 6.0
Total 95,100 18.2 41,873 8.0 52,341 10.0
======= ==== ======= === ======= ====
September 30, 2000
Tangible capital $80,097 9.6% $12,526 1.5% $ -- --%
Tier 1 (core) capital 80,097 9.6 33,402 4.0 41,752 5.0
Risk-based capital:
Tier 1 80,097 15.6 -- -- 30,738 6.0
Total 86,497 16.9 40,985 8.0 51,231 10.0
======= ==== ======= === ======= ====
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 $2,000 to Provident Bancorp, Inc. during the year ended September
30, 2000 (none during the years ended September 30, 2001 and 1999).
Unlike the Bank, Provident Bancorp, Inc. is not subject to OTS regulatory
limitations on the payment of dividends to its shareholders. Through September
30, 2001, the Mutual Holding Company has waived receipt of $1,281 in cash
dividends with respect to its shares of Provident Bancorp, Inc. common stock.
Stock Repurchase Programs
The Company completed a stock repurchase program during the year ended September
30, 2000, purchasing 193,200 common shares for the treasury at a total cost of
$3,061. In July 2000, the Company announced a second repurchase program to
acquire up to 5%, or approximately 185,000, of its publicly-traded shares as
market conditions warrant. A total of 68,034 shares have been purchased for the
treasury under the second program through September 30, 2001 at a total cost of
$1,297.
79
Liquidation Rights
All depositors who had liquidation rights with respect to the Bank as of the
effective date of the Reorganization continue to have such rights solely with
respect to the Mutual Holding Company, as long as they continue to hold deposit
accounts with the Bank. In addition, all persons who become depositors of the
Bank subsequent to the Reorganization will have liquidation rights with respect
to the Mutual Holding Company.
(16) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to off-balance-sheet
financial instruments that involve, to varying degrees, elements of credit risk
and interest rate risk in addition to the amounts 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 at September
30:
2001 2000
------- -------
Lending-Related Instruments:
Loan origination commitments:
Fixed-rate loans $ 9,983 $ 9,412
Adjustable-rate loans 2,282 1,993
Unused lines of credit 37,748 35,529
Standby letters of credit 6,716 7,548
Interest Rate Risk Management:
Interest rate cap agreements 50,000 50,000
======= =======
Lending-Related Instruments
The contractual amounts of loan origination commitments, unused lines of credit
and standby letters of credit represent the Company's maximum potential exposure
to credit loss, assuming (i) the instruments are fully funded at a later date,
(ii) the borrowers do not meet the contractual payment obligations, and (iii)
any collateral or other security proves to be worthless. The contractual amounts
of these instruments do not necessarily represent future cash requirements since
certain of these instruments may expire without being funded and others may not
be fully drawn upon. Substantially all of these lending-related instruments have
been entered into with customers located in the Company's primary market area
described in note 6.
Loan origination commitments are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments have fixed expiration dates (generally ranging up to 60
days) or other termination clauses, and may require payment of a fee by the
customer. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral, if any, obtained by the Company
upon extension of credit, is based on management's credit evaluation of the
borrower. Collateral varies but may include mortgages on residential and
commercial real estate, deposit accounts with the Company, and other property.
The Company's fixed-rate loan origination commitments at September 30, 2001
provide for interest rates ranging from 6.00% to 7.13%.
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.
80
Standby letters of credit are conditional commitments issued by the Company to
assure the performance of financial obligations of a customer to a third party.
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.
Interest Rate Cap Agreements
The Company's derivative instruments consist solely of two interest rate cap
agreements with a total notional amount of $50,000 at both September 30, 2001
and 2000. The agreements mature in March and April 2003, and 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. 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 are 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 at fair value the interest rate cap agreements
designated as cash flow hedging instruments. SFAS No. 133 requires that
derivative instruments be reported as either assets or liabilities, at fair
value, in the consolidated statement of financial condition. Changes in the fair
value of derivative instruments used for hedging purposes are reported in either
current earnings or in stockholders' equity (accumulated other comprehensive
income or loss), depending on whether the derivatives are used in a cash flow
hedge, a fair value hedge, or a foreign currency hedge, and whether the
pertinent hedge criteria specified in SFAS No. 133 are met. These criteria
include a requirement that derivatives used for hedging purposes be highly
effective in offsetting changes in the fair values or cash flows of the hedged
items. If a derivative ceases to be highly effective, hedge accounting is
discontinued prospectively.
The Company's interest rate cap agreements are accounted for as cash flow hedges
under SFAS No. 133 and are reported at their fair value. Other assets at
September 30, 2001 include the Company's interest rate cap agreements at a fair
value of $4. Interest expense for the year ended September 30, 2001 includes a
charge of $157 for the change in the agreements' time value. There were no gains
or losses recognized in earnings hedge ineffectiveness during fiscal 2001, and
no cash flow hedges were discontinued during the year. Accumulated other
comprehensive income at September 30, 2001 includes an after-tax unrealized loss
of $48 from adjusting the interest rate cap agreements to fair value. Due to the
near-term maturity of the two outstanding agreements, the majority of the amount
reported in accumulated other comprehensive income at September 30, 2001 will be
reclassified into earnings during the fiscal year ending September 30, 2002.
(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
non-cancelable operating leases with initial or remaining terms of more than one
year at September 30, 2001 are $1,839 for fiscal 2002; $1,847 for fiscal 2003;
$1,833 for fiscal 2004; $1,629 for fiscal 2005; $1,146 for fiscal 2006; and a
total of $3,291 for later years.
81
Occupancy and office operations expense includes net rent expense of $1,076,
$1,008 and $910 for the years ended September 30, 2001, 2000 and 1999,
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.
The following is a summary of the carrying amounts and estimated fair values of
financial assets and liabilities at September 30 (none of which were held for
trading purposes):
2001 2000
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial Assets:
Cash and due from banks $ 16,447 $ 16,447 $ 12,785 $ 12,785
Securities available for sale 163,928 163,928 162,157 162,157
Securities held to maturity 71,355 73,660 48,586 48,374
Loans 606,146 624,020 589,822 576,568
Accrued interest receivable 5,597 5,597 5,495 5,495
FHLB stock 5,521 5,521 7,023 7,023
Financial Liabilities:
Deposits 653,100 655,675 608,976 608,450
Borrowings 110,427 113,970 127,571 127,015
Mortgage escrow funds 6,197 6,197 5,971 5,971
======== ======== ======== ========
The following methods and assumptions were used by management to estimate the
fair value of the Company's financial instruments:
Securities
The estimated fair values of securities were based on quoted market prices.
82
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. Residential loans were also segmented by maturity.
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.
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 unrecognized value
separate from the deposit balances.
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. The bank overdraft included in total borrowings at September
30, 2000 has an estimated fair value equal to the carrying amount.
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 value of the Company's interest rate cap agreements described in note
16 was estimated by reference to market terms for similar agreements at the
valuation date. The fair values of the Company's lending-related
off-balance-sheet financial instruments described in note 16 were estimated
based on the interest rates and fees currently charged to enter into similar
agreements, considering the remaining terms of the agreements and the present
credit worthiness of the counterparties. At September 30, 2001 and 2000, the
estimated fair values of these instruments approximated the related carrying
amounts which were not significant.
83
(19) Recent Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
Among other things, SFAS No. 141 requires the use of the purchase method to
account for all business combinations; use of the pooling-of-interests method is
not permitted for business combinations initiated after June 30, 2001. SFAS No.
141 also specifies criteria that intangible assets must meet in order to be
recognized and reported apart from goodwill. SFAS No. 142 requires that (i)
goodwill not be amortized to expense, but instead be reviewed for impairment at
least annually, with impairment losses charged to expense when they occur, and
(ii) acquisition-related intangible assets recognized apart from goodwill be
amortized to expense over their estimated useful lives.
The Company is required to adopt the provisions of SFAS No. 141 immediately, and
SFAS No. 142 effective October 1, 2002. However, goodwill acquired in a purchase
business combination completed after June 30, 2001 (but before SFAS No. 142 is
adopted in full) will not be amortized. Accordingly, if the pending acquisition
of NBF described in note 2 is consummated in fiscal 2002, the resulting goodwill
will not be amortized and the separately-recognized intangible assets (such as
core deposit values) will be amortized over their estimated useful lives.
(20) Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition of Provident
Bancorp, Inc. at September 30, 2001 and 2000, together with the related
condensed statements of income and cash flows for the years then ended and for
the period from January 7, 1999 (date of the Reorganization and Offering)
through September 30,1999.
At September 30,
----------------------
2001 2000
-------- --------
Condensed Statements of Financial Condition
-------------------------------------------
Assets
Cash and cash equivalents $ 2,847 $ 129
Securities available for sale 6,510 10,396
Loan receivable from ESOP 2,632 3,008
Investment in Provident Bank 90,419 77,084
Other assets 305 434
-------- --------
Total assets $102,713 $ 91,051
======== ========
Liabilities $ 93 $ 65
Stockholders' Equity 102,620 90,986
-------- --------
Total liabilities and stockholders' equity $102,713 $ 91,051
======== ========
84
Year Ended September 30, Period Ended
------------------------- September 30,
2001 2000 1999
-------- -------- --------
Condensed Statements of Income
Interest income $ 626 $ 902 $ 425
Dividends from Provident Bank -- 2,000 --
Gain on sales of securities available for sale 431 -- --
Non-interest expense (180) (180) --
Income tax expense (338) (279) (174)
-------- -------- --------
Income before equity in undistributed earnings
of Provident Bank 539 2,443 251
Equity in undistributed earnings of Provident Bank 6,943 3,429 2,951
-------- -------- --------
Net income $ 7,482 $ 5,872 $ 3,202
======== ======== ========
Condensed Statements of Cash Flows
Cash Flows from Operating Activities:
Net income $ 7,482 $ 5,872 $ 3,202
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of
Provident Bank (6,943) (3,429) (2,951)
Other adjustments, net (298) (405) (312)
-------- -------- --------
Net cash provided by (used in)
operating activities 241 2,038 (61)
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of securities available for sale (2,431) (1,008) (10,218)
Proceeds from sales of securities available for sale 6,810 984 --
Capital contribution to Provident Bank -- -- (24,000)
-------- -------- --------
Net cash provided by (used in)
investing activities 4,379 (24) (34,218)
-------- -------- --------
Cash Flows from Financing Activities:
Treasury shares purchased (1,155) (3,203) --
Cash dividends paid (807) (1,049) (367)
Stock option transactions 60 -- --
Net proceeds from stock offering -- -- 37,113
Initial capitalization of Provident Bancorp, MHC -- -- (100)
-------- -------- --------
Net cash (used in) provided by
financing activities (1,902) (4,252) 36,646
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,718 (2,238) 2,367
Cash and cash equivalents at beginning of period 129 2,367 --
-------- -------- --------
Cash and cash equivalents at end of period $ 2,847 $ 129 $ 2,367
======== ======== ========
85
(21) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for the
years ended September 30, 2001 and 2000:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended September 30, 2001
Interest and dividend income $15,369 $15,361 $15,155 $15,093
Interest expense 7,061 6,921 6,412 5,850
------- ------- ------- -------
Net interest income 8,308 8,440 8,743 9,243
Provision for loan losses 360 360 360 360
Non-interest income 1,051 1,023 1,477 1,155
Non-interest expense 6,125 6,739 6,664 6,903
------- ------- ------- -------
Income before income tax expense 2,874 2,364 3,196 3,135
Income tax expense 999 799 1,092 1,197
------- ------- ------- -------
Net income $ 1,875 $ 1,565 $ 2,104 $ 1,938
======= ======= ======= =======
Earnings per common share:
Basic $ 0.24 $ 0.20 $ 0.27 $ 0.27
Diluted 0.24 0.20 0.27 0.26
======= ======= ======= =======
Year Ended September 30, 2000
Interest and dividend income $14,298 $14,522 $14,811 $15,268
Interest expense 6,194 6,324 6,642 6,874
------- ------- ------- -------
Net interest income 8,104 8,198 8,169 8,394
Provision for loan losses 450 450 450 360
Non-interest income 847 794 843 907
Non-interest expense 6,385 6,623 6,365 6,435
------- ------- ------- -------
Income before income tax expense 2,116 1,919 2,197 2,506
Income tax expense 716 691 681 778
------- ------- ------- -------
Net income $ 1,400 $ 1,228 $ 1,516 $ 1,728
======= ======= ======= =======
Basic and diluted earnings per common
share $ 0.17 $ 0.16 $ 0.20 $ 0.23
======= ======= ======= =======
86
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The "Proposal 1 -"Election of Directors" section of the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held in February
2002 (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.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
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.
87
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements filed in Item 8 of this Form 10-K are as
follows:
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition as
of September 30, 2001 and 2000
(C) Consolidated Statements of Income for the years
ended September 30, 2001, 2000 and 1999
(D) Consolidated Statements of Changes in
Stockholders' Equity for the years ended
September 30, 2001, 2000 and 1999
(E) Consolidated Statements of Cash Flows for the
years ended September 30, 2001, 2000 and 1999
(F) Notes to Consolidated Financial Statements
88
(a)(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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2001.
(c) Exhibits
3.1 Stock Holding Company Charter of Provident Bancorp, Inc.
(incorporated herein by reference to the Company's Registration
Statement on Form S-1, file No. 333-63593 (the "S-1")
3.2 Bylaws of Provident Bancorp, Inc. (incorporated herein by
reference to the S-1)
4 Form of Stock Certificate of Provident Bancorp, Inc.
(incorporated herein by reference to the S-1)
10.1 Form of Employee Stock Ownership Plan (incorporated herein by
reference to the S-1)
10.2 Employment Agreement with George Strayton, as amended
(incorporated herein by reference to the S-1)
10.3 Form of Employment Agreement (incorporated herein by reference
to the S-1)
10.4 Deferred Compensation Agreement (incorporated herein by
reference to the S-1)
10.5 Supplemental Executive Retirement Plan, as amended
(incorporated herein by reference to the S-1)
10.6 Management Incentive Program (incorporated herein by reference
to the S-1)
10.7 1996 Long-Term Incentive Plan for Officers and Directors, as
amended (incorporated herein by reference to the S-1)
10.8 Provident Bank Stock Option Plan (incorporated herein by
reference to the Company's Proxy Statement for the 2000 Annual
Meeting of Stockholders, filed with the SEC on January 18,
2000.)
10.9 Provident Bank Recognition and Retention Plan (incorporated
herein by reference to the Company's Proxy Statement for the
2000 Annual Meeting of Stockholders, filed with the SEC on
January 18, 2000.)
21 Subsidiaries of the Company
23.1 Consent of KPMG LLP
89
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Provident Bancorp, Inc.
Date: December 20, 2001 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\ Katherine Dering
--------------------------------------- -----------------------------------
George Strayton Katherine Dering
President, Chief Executive Officer and Chief Financial Officer and Senior
Director Vice President
Date: December 20, 2001 Date: December 20, 2001
By: \s\ William F. Helmer By: \s\ Dennis L. Coyle
--------------------------------------- -----------------------------------
William F. Helmer Dennis L. Coyle, Vice Chairman
Chairman of the Board
Date: December 20, 2001 Date: December 20, 2001
By: \s\ Judith Hershaft By: \s\ Thomas F. Jauntig, Jr.
--------------------------------------- -----------------------------------
Judith Hershaft, Director Thomas F. Jauntig, Jr., Director
Date: December 20, 2001 Date: December 20, 2001
By: \s\ Donald T. McNelis By: \s\ Richard A. Nozell
--------------------------------------- -----------------------------------
Donald T. McNelis, Director Richard A. Nozell, Director
Date: December 20, 2001 Date: December 20, 2001
By: \s\ William R. Sichol, Jr. By: \s\ Burt Steinberg
--------------------------------------- -----------------------------------
William R. Sichol, Jr., Director Burt Steinberg, Director
Date: December 20, 2001 Date: December 20, 2001
By: \s\ Wilbur C. Ward By: \s\ F. Gary Zeh
--------------------------------------- -----------------------------------
Wilbur C. Ward, Director F. Gary Zeh, Director
Date: December 20, 2001 Date: December 20, 2001