SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ----------------------------------------- -----
(Address of Principal Executive Office) ( Zip Code)
(845) 369-8040
--------------
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
(2) Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
Par Value 8,042,507
$0.10 per share as of January 31, 2002
1
PROVIDENT BANCORP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED DECEMBER 31, 2001
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (Unaudited) PAGE
Consolidated Statements of Financial Condition at
December 31, 2001 and September 30, 2001 3-4
Consolidated Statements of Income for the Three Months
Ended December 31, 2001 and 2000 5
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended December 31, 2001 6
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2001 and 2000 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 19
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
Provident Bancorp, Inc. and subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Assets December 31, 2001 September 30, 2001
- ------ ----------------- ------------------
Cash and due from banks $ 16,804 $ 16,447
Securities, including $39,356 and $40,582 pledged
as collateral for borrowings at December 31, 2001
and September 30, 2001, respectively:
Available for sale, at fair value (amortized cost of
$163,910 at December 31, 2001 and $156,404 at
September 30, 2001) 170,006 163,928
Held to maturity, at amortized cost (fair value of $74,080
at December 31, 2001 and $73,660 at September 30, 2001) 73,057 71,355
Total securities 243,063 235,283
Loans:
One- to four-family residential mortgage loans 361,528 358,198
Commercial real estate, commercial business
and construction loans 183,401 180,179
Consumer loans 74,996 76,892
Total loans 619,925 615,269
Allowance for loan losses (Note 2) (9,334) (9,123)
Total loans, net 610,591 606,146
Accrued interest receivable, net 4,807 5,597
Federal Home Loan Bank stock, at cost 6,336 5,521
Premises and equipment, net 9,012 8,917
Deferred income taxes 1,150 371
Other assets 2,543 2,978
--------- ---------
Total assets $ 894,306 $ 881,260
========= =========
(Continued)
3
Provident Bancorp, Inc. and subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, cONTINUED
(Unaudited)
(Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity December 31, 2001 September 30, 2001
- ------------------------------------ ----------------- ------------------
Liabilities:
Deposits:
Retail demand and NOW deposits $ 112,099 $ 104,789
Commercial demand deposits 34,673 33,081
Savings and money market deposits 281,630 269,903
Certificates of deposit 226,400 245,327
--------- ---------
Total deposits 654,802 653,100
Borrowings 114,188 110,427
Mortgage escrow funds 11,343 6,197
Other 9,772 8,916
--------- ---------
Total liabilities 790,105 778,640
--------- ---------
Stockholders' equity:
Preferred stock (par value $0.10 per share; 10,000,000 shares
authorized; none issued or outstanding) -- --
Common stock (par value $0.10 per share; 10,000,000 shares
authorized; 8,280,000 shares issued; 8,040,707 and 8,024,166
shares outstanding at December 31, 2001 and September 30, 2001,
respectively) 828 828
Additional paid-in capital 36,629 36,535
Unallocated common stock held by employee stock ownership
plan ("ESOP") (2,256) (2,350)
Common stock awards under recognition and retention plan ("RRP") (1,572) (1,729)
Treasury stock, at cost (239,293 shares at December 31, 2001
and 255,834 shares at September 30, 2001) (4,186) (4,298)
Retained earnings 71,220 69,252
Accumulated other comprehensive income, net of taxes (Note 3) 3,538 4,382
--------- ---------
Total stockholders' equity 104,201 102,620
--------- ---------
Total liabilities and stockholders' equity $ 894,306 $ 881,260
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
Provident Bancorp, Inc. and subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Three Months
Ended December 31,
-------------------
2001 2000
---- ----
Interest and dividend income:
Loans $11,220 $11,949
Securities 3,463 3,278
Other earning assets 78 142
------- -------
Total interest and dividend income 14,761 15,369
------- -------
Interest expense:
Deposits 3,303 5,163
Borrowings 1,488 1,898
------- -------
Total interest expense 4,791 7,061
------- -------
Net interest income 9,970 8,308
Provision for loan losses (Note 2) 225 360
------- -------
Net interest income after provision for loan losses 9,745 7,948
------- -------
Non-interest income:
Banking service fees and other income 976 840
Gain on sales of securities available for sale 147 82
Other 161 129
------- -------
Total non-interest income 1,284 1,051
------- -------
Non-interest expense:
Compensation and employee benefits 3,857 3,118
Occupancy and office operations 1,084 994
Advertising and promotion 401 375
Data processing 403 363
Amortization of branch purchase premiums -- 147
Other 1,408 1,128
------- -------
Total non-interest expense 7,153 6,125
------- -------
Income before income tax expense 3,876 2,874
Income tax expense 1,350 999
------- -------
Net income $ 2,526 $ 1,875
======= =======
Earnings per common share (Note 4):
Basic $ 0.33 $ 0.24
Diluted 0.32 0.24
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2001
(Unaudited)
(Dollars in thousands, except per share data)
Common
Additional Unallocated Stock
Common Paid-In ESOP Awards Treasury
Stock Capital Shares Under RRP Stock
----- ------- ------ --------- -----
Balance at September 30, 2001 $ 828 $ 36,535 $ (2,350) $ (1,729) $ (4,298)
Net income
Cash dividends paid ($0.08 per share)
Stock option transactions 112
ESOP shares allocated or committed
to be released for allocation
(7,728 shares) 94 94
Vesting of RRP shares 157
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $579
Decrease in net unrealized loss on cash
flow hedges, net of taxes of $(7)
--------- --------- --------- --------- ---------
Balance at December 31, 2001 $ 828 $ 36,629 $ (2,256) $ (1,572) $ (4,186)
========= ========= ========= ========= =========
Accumulated
Other Total
Retained Comprehensive Stockholders'
Earnings Income Equity
-------- ------ ------
Balance at September 30, 2001 $ 69,252 $ 4,382 $ 102,620
Net income 2,526 2,526
Cash dividends paid ($0.08 per share) (488) (488)
Stock option transactions (70) 42
ESOP shares allocated or committed
to be released for allocation
(7,728 shares) 188
Vesting of RRP shares 157
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $579 (854) (854)
Decrease in net unrealized loss on cash
flow hedges, net of taxes of $(7) 10 10
--------- --------- ---------
Balance at December 31, 2001 $ 71,220 $ 3,538 $ 104,201
========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months
Ended December 31,
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 2,526 $ 1,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 225 360
Depreciation and amortization of premises
and equipment 427 422
Amortization of branch purchase premiums -- 147
Gain on sales of securities available for sale (147) (82)
Net amortization of premiums and discounts
on securities 47 (5)
ESOP and RRP expense 345 268
Originations of loans held for sale (1,926) --
Proceeds from sales of loans held for sale 1,774 --
Deferred income tax benefit (217) (222)
Net changes in accrued interest receivable
and payable 545 (130)
Other adjustments (principally net changes
in other assets and other liabilities) 2,444 (1,865)
------- -------
Net cash provided by operating activities 6,043 768
------- -------
Cash flows from investing activities:
Purchases of securities:
Available for sale (15,316) (17,209)
Held to maturity (6,496) (10,212)
Proceeds from maturities, calls and other
principal payments on securities:
Available for sale 3,786 7,388
Held to maturity 4,767 2,815
Proceeds from sales of securities available for sale 4,155 7,488
Loan originations (57,722) (29,972)
Loan principal payments 52,314 27,958
Purchases of Federal Home Loan Bank stock (815) --
Purchases of premises and equipment (522) (622)
------- -------
Net cash used in investing activities (15,849) (12,366)
------- -------
(Continued)
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Three Months
Ended December 31,
2001 2000
---- ----
Cash flows from financing activities:
Net increase in deposits $ 1,702 $ 14,307
Net increase (decrease) in borrowings 3,761 (5,632)
Net increase in mortgage escrow funds 5,146 5,110
Stock option transactions 42 --
Cash dividends paid (488) (144)
------ ------
Net cash provided by financing activities 10,163 13,641
------ ------
Net increase in cash and cash equivalents 357 2,043
Cash and cash equivalents at beginning of period 16,447 12,785
------ ------
Cash and cash equivalents at end of period $ 16,804 $ 14,828
------ ------
Supplemental information:
Interest payments $ 5,036 $ 7,384
Income tax payments 1,460 2,547
Loans transferred to real estate owned 71 91
------ ------
See accompanying notes to unaudited consolidated financial statements.
8
PROVIDENT BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Provident
Bancorp, Inc., Provident Bank, and each subsidiary of Provident Bank (Provest
Services Corp. I, Provest Services Corp. II and Provident REIT, Inc.).
Collectively, these entities are referred to herein as "the Company". Provident
Bancorp, Inc. is a majority-owned subsidiary of Provident Bancorp, MHC, a mutual
holding company. Provest Services Corp. I holds an investment in a low-income
housing partnership which provides certain favorable tax consequences. Provest
Services Corp. II has engaged a third-party provider to sell annuities and
mutual funds to the customers of Provident Bank. Through December 31, 2001, the
activities of these two wholly-owned subsidiaries have had a minor impact on the
Company's consolidated financial condition and results of operations. Provident
REIT, Inc. holds a portion of the Company's real estate loans and is a real
estate investment trust for income tax purposes.
The Company's off-balance sheet activities are limited to (i) loan
origination commitments, lines of credit and letters of credit extended to
customers in the ordinary course of its lending activities, and (ii) interest
rate cap agreements used as part of its interest rate risk management. The
Company does not engage in off-balance sheet financing transactions or other
activities involving the use of special-purpose entities.
The consolidated financial statements have been prepared by management
without audit, but, in the opinion of management, include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the Company's financial position and results of operations as of the dates and
for the periods presented. Although certain information and footnote disclosures
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form 10-Q,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The results of operations for the quarter ended
December 31, 2001 are not necessarily indicative of results to be expected for
other interim periods or the entire fiscal year ending September 30, 2002.
The unaudited financial statements presented herein should be read in
conjunction with the annual audited financial statements included in the
Company's Form 10-K for the fiscal year ended September 30, 2001.
9
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 in Note 2.
2. Allowance for Loan Losses and Non-Performing Assets
The allowance for loan losses is established through provisions for
losses charged to earnings. Loan losses are charged against the allowance when
management believes that the collection of principal is unlikely. Recoveries of
loans previously charged-off are credited to the allowance when realized.
The allowance for loan losses is an amount that management believes
will be adequate to absorb probable losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of the loans.
Management's evaluations, which are subject to periodic review by the Company's
regulators, take into consideration such factors as the Company's past loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and collateral values, and
current economic conditions that may affect the borrowers' ability to pay.
Future adjustments to the allowance for loan losses may be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding known problem loans, results of regulatory examinations, the
identification of additional problem loans, and other factors.
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months
Ended December 31,
------------------
2001 2000
---- ----
(In thousands)
Balance at beginning of period $ 9,123 $7,653
Provision for loan losses 225 360
Charge-offs (27) (40)
Recoveries 13 7
Balance at end of period ------- ------
$ 9,334 $7,980
======= ======
10
The following table sets forth the amounts and categories of the
Company's non-performing assets at the dates indicated. At both dates, the
Company had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).
December 31, September 30,
2001 2001
---- ----
(Dollars in thousands)
Non-accrual loans:
One- to four- family residential mortgage loans $2,006 $1,684
Commercial real estate, commercial business
and construction loans 358 418
Consumer loans 235 175
------ ------
Total non-performing loans 2,599 2,277
Real estate owned:
One- to four-family residential 180 109
------ ------
Total non-performing assets $2,779 $2,386
====== ======
Ratios:
Non-performing loans to total loans 0.42% 0.38%
Non-performing assets to total assets 0.31% 0.27%
Allowance for loan losses to total
non-performing loans 359% 401%
Allowance for loan losses to total loans, net 1.53% 1.51%
====== ======
3. 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's total comprehensive
income was $1.7 million for the three months ended December 31, 2001, compared
to $3.6 million for the three months ended December 31, 2000.
Accumulated other comprehensive income in the consolidated statements
of financial condition substantially represented the after-tax net unrealized
gain on securities available for sale at the respective dates.
11
4. Earnings Per Common Share
The number of shares used in the computation of both basic and diluted
earnings per share include all shares issued to the mutual holding company, but
exclude unallocated ESOP shares that have not been released or committed to be
released to participants. RRP shares are not included in outstanding shares
until they become vested.
Weighted average common shares used in calculating basic earnings per
share for the three months ended December 31, 2001 and 2000 were 7,686,230 and
7,662,394, respectively. Weighted average common shares used in the computation
of diluted earnings per share for the three months ended December 31, 2001 and
2000 were 7,807,529 and 7,673,191, respectively. The diluted shares 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 periods.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to historical information, this quarterly report on Form
10-Q contains forward-looking statements. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words "believe",
"anticipates", "plans", "expects" and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause the Company's actual results to differ materially from those
contemplated by such forward-looking statements. These important factors
include, without limitation, the Company's continued ability to originate
quality loans, fluctuations in interest rates, real estate conditions in the
Company's lending areas, general and local economic conditions, the Company's
continued ability to attract and retain deposits, the Company's ability to
control costs, and the effect of new accounting pronouncements and changing
regulatory requirements. The Company undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
12
Comparison of Financial Condition at December 31, 2001 and September 30, 2001
Total assets at December 31, 2001 were $894.3 million, up $13.0 million
or 1.5% from $881.3 million at September 30, 2001. Cash levels increased to
$16.8 million at December 31, 2001, from $16.4 million at September 30, 2001, an
increase of $357,000, or 2.2%, due in part to increased deposits at the Federal
Reserve Bank of New York for reserve requirements and higher correspondent bank
balances to cover activity levels.
Net loans at December 31, 2001 were $610.6 million, an increase of $4.5
million, or 0.7%, from $606.1 million at September 30, 2001. Residential and
commercial loans grew moderately during the three-month period, posting
increases of $3.3 million, or 0.9%, and $3.2 million, or 1.8%, respectively. A
slowdown in market demand, combined with refinance activity on homeowner loans,
resulted in a decrease in consumer loans of $1.9 million, or 2.5%, to $75.0
million at December 31, 2001 from $76.9 million at September 30, 2001. The
Company originated $59.6 million in overall loans during the three-month period
ended December 31, 2001, which was $5.5 million more than paydowns and loan
sales of $54.1 million. Both originations and paydowns were impacted by the
heavy refinancing activity related to lower interest rates during the period.
For the same quarter a year ago, loan originations and repayments were $30.0
million and $28.0 million, respectively. Asset quality continues to be strong,
with non-performing assets at 0.31% of total assets, compared to 0.27% at
September 30, 2001. The allowance for loan losses increased by $211,000 to $9.3
million at December 31, 2001 from $9.1 million at September 30, 2001.
The total securities portfolio increased by $7.8 million, or 3.3%, to
$243.1 million at December 31, 2001 from $235.3 million at September 30, 2001.
This increase reflects a $6.1 million increase in securities available for sale
and a $1.7 million increase in securities held to maturity.
Total deposits were relatively unchanged, increasing by $1.7 million,
or 0.3%, to $654.8 million at December 31, 2001 from $653.1 million at September
30, 2001. Savings and money market accounts increased by $11.7 million to $281.6
million at December 31, 2001from $269.9 million at September 30, 2001 and demand
and NOW accounts grew by $8.9 million, to $146.8 million from $137.9 million at
September 30, 2001. Certificate of deposit balances fell by $18.9 million to
$226.4 million from $245.3 million during the same time period. As a result of
this shift in the mix of deposits, checking and low-cost savings and money
market deposits accounted for 65% of total deposits at December 31, 2001, up
from 62% at the beginning of the fiscal year. Certificates of deposit fell to
35% from 38% over the same period. Management believes that the shift from CDs
to these lower cost products is a result of customer reluctance to deposit funds
into historically low-yielding time deposits. The resulting mix contributed
significantly to the increase in the Company's net interest margin for the
three-month period. Should market interest rates rise, management expects that
13
consumers may redeploy their deposits into higher yielding certificates of
deposit over the months ahead, which would put pressure on the Company's net
interest margin.
Mortgage escrow funds increased to $11.3 million at December 31, 2001
from $6.2 million at September 30, 2001, reflecting regular escrow collection
over the quarter following seasonal annual escrow outflow at September 30 to pay
regional real estate taxes. Borrowings from the Federal Home Loan Bank of New
York (the "FHLB") increased by $3.8 million during the three-month period to
$114.2 million at December 31, 2001 from $110.4 million at September 30, 2001,
as asset growth outpaced deposit and escrow growth.
Stockholders' equity increased by $1.6 million to $104.2 million at
December 31, 2001 compared to $102.6 million at September 30, 2001. Net income
contributed a $2.5 million increase in equity for the three-month period.
Stockholders' equity rose by an additional $387,000 as a result of allocation
commitments of ESOP shares, the amortization of common stock awards under the
RRP and the exercise of certain stock options. These increases in stockholders'
equity were partially offset by decreases in equity of $488,000 for cash
dividend payments and $854,000 resulting from a decrease in after-tax net
unrealized gains on securities available for sale, due to the increase in market
interest rates in the two to five year range during the period from September
30, 2001 to December 31, 2001. Through December 31, 2001, a total of 286,689
shares have been repurchased under the Company's previously announced repurchase
programs, which authorized the repurchase of up to 376,740 shares. From the
total repurchased, 47,396 shares have been reissued in connection with the
exercise of employee stock options.
Comparison of Operating Results for the Three Months Ended
December 31, 2001 and December 31, 2000
Net Income. For the three months ended December 31, 2001, net income
was $2.5 million, an increase of $651,000 or 34.7% from net income of $1.9
million for the three months ended December 31, 2000. Basic and diluted earnings
per common share for the current quarter increased to $0.33 and $0.32 per share,
respectively, compared to $0.24 per share for both basic and diluted for the
same period last year.
Interest Income. Total interest income for the three months ended
December 31, 2001 fell by $608,000, or 4.0%, compared to the prior period,
primarily due to lower average yields on both loans and securities attributable
to the decline in overall market rates, net of the impact of increased volumes
in both asset classes. Interest income was $14.8 million for the three months
ended December 31, 2001 compared to $15.4 million for the three months ended
December 31, 2000.
Average interest-earning assets for the three months ended December 31,
2001 were $854.4 million, an increase of $50.1 million, or 6.2%, over average
interest-earning assets of $804.3 million for the three months ended December
14
31, 2000. Average loan balances grew by $20.3 million, while average balances of
securities and other earning assets increased by $29.8 million.
Interest income on loans decreased by $729,000, or 6.1%. The decreased
income was attributable to a decrease in the average yields partially offset by
an increase in average loan balances. Interest rates earned on loans, fell by 74
basis points to 7.32%, compared to 8.06% for the prior-year period. Average
rates earned on consumer loans, which include many prime-based adjustable-rate
loans and short-term loans, fell by 185 basis points, to 6.55% for the quarter
ended December 31, 2001 from 8.40% for the three months ended December 31, 2000.
Average rates earned on the residential loan portfolio, in which fixed rates
loans predominate, fell by only 20 basis points, to 7.30% from 7.50%. Average
loan balances grew by $20.3 million, or 3.4%, to $608.2 million for the three
months ended December 31, 2001, from $587.9 million for the three months ended
December 31, 2000. The increase in average loan balances reflects primarily the
$14.2 million increase in the average balance of the residential loan portfolio.
Interest income on securities and other earning assets for the three
months ended December 31, 2001 was $3.5 million, an increase of $121,000, or
3.5%, over the prior period. The higher interest income reflects a $29.8
million, or 13.8%, increase in the average balances of securities and other
earning assets to $246.2 million for the quarter ended December 31, 2001 from
$216.4 million for the quarter ended December 31, 2000, net of a decrease of 56
basis points in the average yield to 5.71% from 6.27%. The short duration of the
Company's securities portfolios and the acquisition of assets during a period of
declining rates contributed to the decline in average yields.
Interest Expense. Total interest expense fell by $2.3 million, to $4.8
million for the three months ended December 31, 2001, a decrease of 32.2%, due
to lower rates paid on all classes of interest-bearing deposit accounts and
borrowings. The average rate paid on total interest-bearing liabilities in the
current three-month period was 2.68%, compared to 4.17% for the same period last
year. Average rates paid on savings accounts fell by 94 basis points, to 1.01%
from 1.95%, and average rates paid on NOW accounts fell by 50 basis points, to
an average of 0.39% from 0.89%. In addition, the average rates paid on time
deposit accounts decreased by 173 basis points, to 4.04% compared to 5.77% for
the three months ended December 31, 2000. Although balances of time deposits
have declined, as discussed above, management expects that they may rise if
rates rise over the coming months. The average rates paid on borrowings fell by
128 basis points to 5.08% from 6.36% for the prior period. Overall, the average
balance of interest-bearing liabilities increased by $37.0 million to $708.3
million for the current three-month period, from $671.3 million during the same
period last year. Average balances of savings, money market and NOW checking
grew by $19.6 million, $17.7 million and $17.9 million, respectively, with the
highest percentage growth occurring in NOW checking, which grew by 33.2%.
15
Net Interest Income. For the three months ended December 31, 2001 and
2000, net interest income was $10.0 million and $8.3 million, respectively. The
Company's net interest margin was 4.63% for the current quarterly period, an
increase of 53 basis points, or 12.9%, compared to the year ago period. The $1.7
million increase in net interest income was partially attributable to a $12.9
million, or 9.7%, increase in average net earning assets (interest-earning
assets less interest-bearing liabilities), combined with a 76 basis point
increase in the net interest rate spread to 4.17% from 3.41%.
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 for loan
losses 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. The Company recorded $225,000 and $360,000 in loan loss
provisions during the three months ended December 31, 2001 and 2000,
respectively, reflecting the stable asset quality and the adequate coverage
ratio of the allowance for loan losses to non-performing loans.
Non-Interest Income. Non-interest income is composed primarily of fee
income for bank services, and also includes loan servicing fees and gains and
losses from the sale of loans and securities. Total non-interest income
increased by $233,000, or 22.2%, to $1.3 million for the three months ended
December 31, 2001 from $1.1 million for the three months ended December 31,
2000. The increase includes a $136,000 increase in deposit fees and charges and
a $65,000 increase in gains on sales of available-for-sale securities. Other
non-interest income, which includes items such as fees earned for mutual fund
sales, loan servicing, and trust and investment management, increased to
$161,000 from $129,000.
Non-Interest Expense. Non-interest expenses for the three months ended
December 31, 2001 were $7.2 million, or $1.0 million more than expenses for the
three months ended December 31, 2000. The increase was primarily attributable to
increases in compensation and employee benefits of $739,000, or 23.7%, and in
occupancy and office operations of $90,000, or 9.1%. Compensation increased as a
result of staff additions and annual merit increases, and additional occupancy
costs were attributable to the opening of the Company's two new branches in
Bardonia and New City, New York. Growth in loan and deposit volumes created
additional data processing expense, which
16
increased by $40,000, or 11.0%. Other non-interest expenses increased by
$280,000, or 24.8%, due primarily to new product supplies, postage and
stationery and printing costs related to the new branches, and professional
services engaged for franchise growth strategies. These increases were partially
offset by a decrease of $147,000 in the amortization of branch purchase
premiums, as the premiums associated with two branches purchased in 1996 became
fully amortized during fiscal year 2001.
Income Taxes. Income tax expense was $1.35 million for the three months
ended December 31, 2001 compared to $999,000 for the same period in 2000. The
effective tax rate for both periods was approximately 34.8%.
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources however, such as deposit inflows and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the three months
ended December 31, 2001 and December 31, 2000, loan originations totaled $59.6
million and $28.0 million, respectively, and purchases of securities totaled
$21.8 million and $27.4 million, respectively. For the three-month period ended
December 31, 2001, these investing activities were funded primarily by proceeds
from sales and maturities of securities, by deposit growth, by principal
repayments on loans and securities, and by operating cash flows. Loan
origination commitments totaled $50.9 million at December 31, 2001. 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,
17
such as perceived safety or risk of alternative investments. The net increase in
total deposits for the three months ended December 31, 2001 was $1.7 million,
compared to a $14.3 million increase during the three months ended December 31,
2000.
The Company monitors its liquidity position on a daily basis. Excess
short-term liquidity, if any, is usually invested in overnight federal funds
sold. The Company generally remains fully invested and utilizes additional
sources of funds through FHLB advances, which amounted to $114.2 million at
December 31, 2001.
At December 31, 2001, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $91.4 million, or 10.4% of
adjusted assets (which is above the required level of $35.3 million, or 4.0%)
and a total risk-based capital level of $98.0 million, or 18.7% of risk-weighted
assets (which is above the required level of $41.9 million, or 8.0%). In order
to be classified as well-capitalized, the regulatory requirements call for
leverage and total risk-based capital ratios of 5.0% and 10.0%, respectively. At
December 31, 2001, the Bank exceeded all capital requirements for
well-capitalized classification. These capital requirements, which are
applicable to the Bank only, do not consider additional capital retained at the
holding company level.
The following table sets forth the Bank's regulatory capital position
at December 31, 2001 and September 30, 2001, compared to OTS requirements.
OTS Requirements
-------------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
--------------- --------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
December 31, 2001
Tangible capital $91,430 10.4% $13,233 1.5% $ -- --%
Tier 1 (core) capital 91,430 10.4 35,287 4.0 44,109 5.0
Risk-based capital:
Tier 1 91,430 17.5 -- -- 31,412 6.0
Total 98,009 18.7 41,883 8.0 52,354 10.0
====== ==== ====== === ====== ====
September 30, 2001
Tangible capital $88,526 10.2% $13,015 1.5% $ -- --%
Tier 1 (core) capital 88,526 10.2 34,706 4.04 3,383 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
====== ==== ====== === ====== ====
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate
risk, as the majority of its assets and liabilities are sensitive to changes in
interest rates. Despite market fluctuations, there have been no material changes
in the Company's interest rate risk position since September 30, 2001. Other
types of market risk, such as foreign exchange rate risk and commodity price
risk, do not arise in the normal course of the Company's business activities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which,
in the aggregate, involved amounts which are believed to be immaterial to the
consolidated financial condition and operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
On November 2, 2001, the Company reported that it had entered into an
agreement to purchase The National Bank of Florida, a commercial bank with total
assets of $99.7 million at September 30, 2001. This all-cash transaction valued
at approximately $28.1 million is expected to close by April 30, 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Bancorp, Inc.
(Registrant)
By: /s/ Katherine A. Dering
--------------------------
Katherine A. Dering
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and duly authorized representative)
Date: February 14, 2002
-----------------