SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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
----------------------- -------------------
$0.10 per share 8,043,499
as of May 3, 2002
PROVIDENT BANCORP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2002
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
March 31, 2002 and September 30, 2001 3-4
Consolidated Statements of Income for the Three Months and
Six Months Ended March 31, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2002 6
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2002 and 2001 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-22
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 23
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
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)
March 31, 2002 September 30, 2001
-------------- ------------------
Assets
- ------
Assets:
Cash and due from banks $ 17,398 $ 16,447
Federal funds sold 15,700 --
Securities, including $34,062 and $40,582 pledged as
collateral for borrowings at March 31, 2002 and
September 30, 2001, respectively:
Available for sale, at fair value (amortized cost of
$164,969 at March 31, 2002 and $156,404 at
September 30, 2001) 169,510 163,928
Held to maturity, at amortized cost (fair value of $67,444
at March 31, 2002 and $73,660 at September 30, 2001) 66,238 71,355
--------- ---------
Total securities 235,748 235,283
--------- ---------
Loans:
One- to four-family residential mortgage loans 366,162 358,198
Commercial real estate, commercial business
and construction loans 189,681 180,179
Consumer loans 76,014 76,892
--------- ---------
Total loans 631,857 615,269
Allowance for loan losses (Note 2) (9,503) (9,123)
--------- ---------
Total loans, net 622,354 606,146
--------- ---------
Accrued interest receivable, net 5,449 5,597
Federal Home Loan Bank stock, at cost 6,629 5,521
Premises and equipment, net 9,109 8,917
Deferred income taxes 4,758 371
Other assets 2,407 2,978
--------- ---------
Total assets $ 919,552 $ 881,260
========= =========
(continued)
3
Provident Bancorp, Inc. and subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, cONTINUED
(Unaudited)
(Dollars in thousands, except per share data)
March 31, 2002 September 30, 2001
-------------- ------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits:
Retail demand and NOW deposits $ 118,472 $ 104,789
Commercial demand deposits 36,270 33,081
Savings and money market deposits 297,937 269,903
Certificates of deposit 225,203 245,327
--------- ---------
Total deposits 677,882 653,100
Borrowings 117,283 110,427
Mortgage escrow funds 8,036 6,197
Other 10,541 8,916
--------- ---------
Total liabilities 813,742 778,640
--------- ---------
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; 8,043,499 and 8,024,166
shares outstanding at March 31, 2002 and September 30, 2001,
respectively) 828 828
Additional paid-in capital 36,748 36,535
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (2,162) (2,350)
Common stock awards under recognition and retention plan ("RRP") (1,419) (1,729)
Treasury stock, at cost (236,501 shares at March 31, 2002 and
255,834 shares at September 30, 2001) (4,229) (4,298)
Retained earnings 73,429 69,252
Accumulated other comprehensive income, net of taxes (Note 4) 2,615 4,382
--------- ---------
Total stockholders' equity 105,810 102,620
--------- ---------
Total liabilities and stockholders' equity $ 919,552 $ 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 For the Six Months
Ended March 31, Ended March 31,
-------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income:
Loans $11,002 $11,627 $22,223 $23,576
Securities 3,463 3,572 6,925 6,851
Other earning assets 93 162 171 303
------- ------- ------- -------
Total interest and dividend income 14,558 15,361 29,319 30,730
------- ------- ------- -------
Interest expense:
Deposits 2,698 5,114 6,001 10,276
Borrowings 1,494 1,807 2,982 3,706
------- ------- ------- -------
Total interest expense 4,192 6,921 8,983 13,982
------- ------- ------- -------
Net interest income 10,366 8,440 20,336 16,748
Provision for loan losses (Note 2) 175 360 400 720
------- ------- ------- -------
Net interest income after provision for loan losses 10,191 8,080 19,936 16,028
------- ------- ------- -------
Non-interest income:
Banking fees and service charges 935 761 1,910 1,601
Gain on sales of securities available for sale 90 67 238 149
Other 205 195 366 324
------- ------- ------- -------
Total non-interest income 1,230 1,023 2,514 2,074
------- ------- ------- -------
Non-interest expense:
Compensation and employee benefits 3,976 3,566 7,834 6,684
Occupancy and office operations 1,182 1,043 2,266 2,036
Advertising and promotion 304 375 705 750
Data processing 440 387 843 750
Amortization of branch purchase premiums -- 147 -- 294
Other 1,368 1,221 2,775 2,350
------- ------- ------- -------
Total non-interest expense 7,270 6,739 14,423 12,864
------- ------- ------- -------
Income before income tax expense 4,151 2,364 8,027 5,238
Income tax expense 1,550 799 2,900 1,798
------- ------- ------- -------
Net income $ 2,601 $ 1,565 $ 5,127 $ 3,440
======= ======= ======= =======
Earnings per common share (Note 5).
Basic $ 0.34 $ 0.20 $ 0.67 $ 0.45
======= ======= ======= =======
Diluted $ 0.33 $ 0.20 $ 0.66 $ 0.45
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2002
(Unaudited)
(Dollars in thousands, except per share data)
Common Accumulated
Additional Unallocated Stock Other Total
Common Paid-In ESOP Awards Treasury Retained Comprehensive Stockholders'
Stock Capital Shares Under RRP Stock Earnings Income Equity
----- ------- ------ --------- ----- -------- ------ ------
Balance at September 30, 2001 $ 828 $36,535 $(2,350) $(1,729) $(4,298) $69,252 $ 4,382 $ 102,620
Net income 5,127 5,127
Cash dividends paid ($0.18 per share) (851) (851)
Purchases of treasury stock (8,000 shares) (219) (219)
Stock option transactions 288 (99) 189
ESOP shares allocated or committed
to be released for allocation 213 188 401
Vesting of RRP shares 310 310
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $1,190 (1,786) (1,786)
Decrease in net unrealized loss on cash
flow hedges, net of taxes of $ (12) 19 19
------ ------- ------- ------- ------- ------- ------- ---------
Balance at March 31, 2002 $ 828 $36,748 $(2,162) $(1,419) $(4,229) $73,429 $ 2,615 $ 105,810
====== ======= ======= ======= ======= ======= ======= =========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
Ended March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 5,127 $ 3,440
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 400 720
Depreciation and amortization of premises
and equipment 872 862
Amortization of branch purchase premiums -- 294
Gain on sales of securities available for sale (238) (149)
Net amortization of premiums and discounts
on securities 102 6
ESOP and RRP expense 711 538
Originations of loans held for sale (8,659) --
Proceeds from sales of loans held for sale 8,009 --
Deferred income tax benefit (3,209) (197)
Net changes in accrued interest receivable
and payable (14) (738)
Other adjustments (principally net changes
in other assets and other liabilities) 3,278 (2,649)
--------- ---------
Net cash provided by operating activities 6,379 2,127
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (27,913) (21,203)
Held to maturity (6,332) (25,150)
Proceeds from maturities, calls and other
principal payments on securities:
Available for sale 7,461 15,643
Held to maturity 11,414 9,543
Proceeds from sales of securities available for sale 12,060 9,828
Loan originations (113,797) (59,296)
Loan principal payments 96,955 58,718
Purchases of Federal Home Loan Bank stock (1,108) (43)
Proceeds from sales of real estate owned -- 154
Purchases of premises and equipment (1,064) (1,155)
--------- ---------
Net cash used in investing activities (22,324) (12,961)
--------- ---------
(continued)
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Six Months
Ended March 31,
---------------
2002 2001
---- ----
Cash flows from financing activities:
Net increase in deposits $ 24,782 $ 32,211
Net increase (decrease) in borrowings 6,856 (18,269)
Net increase in mortgage escrow funds 1,839 2,881
Treasury shares purchased (219) (335)
Stock option transactions 189 --
Cash dividends paid (851) (327)
-------- --------
Net cash provided by financing activities 32,596 16,161
-------- --------
Net increase in cash and cash equivalents 16,651 5,327
Cash and cash equivalents at beginning of period 16,447 12,785
-------- --------
Cash and cash equivalents at end of period $ 33,098 $ 18,112
======== ========
Supplemental information:
Interest payments $ 9,145 $ 14,628
Income tax payments 4,422 2,876
Transfer of securities from available for sale
to held to maturity -- 12,013
Transfer of loans to real estate owned 162 147
======== ========
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 March 31, 2002, the
activities of these two wholly-owned subsidiaries have had a minor impact on the
Company's consolidated financial condition and results of operations. Provident
REIT, Inc. holds a portion of the Company's real estate loans and is a real
estate investment trust for federal income tax purposes.
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 and six
months ended March 31, 2002 are not necessarily indicative of results to be
expected for other interim periods or the entire fiscal year ending September
30, 2002. The unaudited consolidated financial statements presented herein
should be read in conjunction with the annual audited financial statements
included in the Company's Form 10-K for the fiscal year ended September 30,
2001.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates. A material estimate that is particularly susceptible to
near-term change is the allowance for loan losses (see Note 2), which is a
critical accounting policy.
9
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, regulatory examinations, the
identification of additional problem loans, and other factors.
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Balance at beginning of period $ 9,334 $ 7,980 $ 9,123 $ 7,653
Provision for loan losses 175 360 400 720
Charge-offs (75) (34) (102) (74)
Recoveries 69 146 82 153
------- ------- ------- -------
Balance at end of period $ 9,503 $ 8,452 $ 9,503 $ 8,452
======= ======= ======= =======
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated. At both dates, the Company had no
troubled debt restructurings (loans for which a portion of interest or principal
has been forgiven and loans modified at interest rates materially less than
current market rates).
10
March 31, September 30,
2002 2001
---- ----
(Dollars in thousands)
Non-accrual loans:
One- to four- family residential mortgage loans $2,050 $1,684
Commercial real estate, commercial business
and construction loans 1,048 418
Consumer loans 271 175
------ ------
Total non-performing loans 3,369 2,277
Real estate owned:
One- to four-family residential 248 109
------ ------
Total non-performing assets $3,617 $2,386
====== ======
Ratios:
Non-performing loans to total loans 0.53% 0.38%
Non-performing assets to total assets 0.39 0.27
Allowance for loan losses to total
non-performing loans 282 401
Allowance for loan losses to total loans, net 1.53 1.51
====== ======
3. Acquisition of The National Bank of Florida
On April 23, 2002, the Company consummated its acquisition of The National
Bank of Florida ("NBF"), which was merged with and into Provident Bank. This was
an all-cash transaction valued at approximately $28.1 million. At the
acquisition date, NBF had total assets of approximately $105 million and total
deposits of approximately $88 million.
The acquisition was accounted for using the purchase method of accounting
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations". Accordingly, the assets acquired and liabilities
assumed were 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 was
recorded as intangible assets (consisting of both goodwill and a core deposit
intangible asset recognized apart from goodwill) that will be accounted for in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Amounts
attributable to NBF will be included in the Company's consolidated financial
statement from the date of acquisition.
In accordance with SFAS No. 142, goodwill recorded in the NBF acquisition
will not be amortized to expense, but instead will be reviewed for impairment at
least annually, with impairment losses charged to expense if and when they
occur. The core deposit intangible asset recognized apart from goodwill will be
amortized to expense over its estimated useful life and evaluated for
impairment.
11
4. 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 $3.4 million and $6.3 million for the six months ended March 31, 2002
and 2001, respectively, and $1.7 million and $2.7 million for the three months
ended March 31, 2002 and 2001, respectively.
Accumulated other comprehensive income in the consolidated statements of
financial condition at March 31, 2002 and September 30, 2001 substantially
represented the after-tax net unrealized gain on securities available for sale.
5. 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 March 31, 2002 and 2001 were 7,703,009 and 7,665,241,
respectively. Weighted average common shares used in calculating basic earnings
per share for the six months ended March 31, 2002 and 2001 were 7,694,528 and
7,663,802, respectively.
Diluted earnings per share was computed based on 7,847,100 shares for the
three months ended March 31, 2002 (including 144,091 common-equivalent shares)
and 7,825,278 shares for the six months ended March 31, 2002 (including 130,750
common-equivalent shares). Diluted earnings per share was computed based on
7,695,541 shares for the three months ended March 31, 2001 (including 30,300
common-equivalent shares) and 7,684,754 shares for the six months ended March
31, 2001 (including 20,952 common-equivalent shares). The common equivalent
shares are incremental shares (computed using the treasury stock method) that
would have been outstanding if all potentially dilutive stock options and
unvested RRP shares were exercised or became vested during the periods.
12
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, the effect of new accounting pronouncements and changing
regulatory requirements, and the ability to realize cost savings and integrate
operations following the recent acquisition of NBF. 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.
The Company's significant accounting policies are summarized in Note 3 to
the consolidated financial statements included in its September 30, 2001 Annual
Report on Form 10-K. An accounting policy considered particularly critical to
the Company's financial results is the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance for loan losses
is considered a critical accounting policy by management due to the high degree
of judgement involved, the subjectivity of the assumptions utilized, and the
potential for changes in the economic environment that could result in changes
in the necessary allowance.
As discussed in Note 3 to the consolidated financial statements included in
Item 1 of this report, the Company completed its acquisition of NBF in April
2002. The acquisition has been accounted for as a purchase and, accordingly,
amounts attributable to NBF will be included in the Company's consolidated
financial statements from the date of acquisition.
In April 2002, the Company announced the formation of Provident Municipal
Bank, a commercial bank subsidiary of Provident Bank, to serve the banking needs
of municipalities throughout Rockland and Orange Counties. The formation of
Provident Municipal Bank eliminated the regulatory barriers previously
preventing Provident Bank from accepting the deposits of public funds.
13
Comparison of Financial Condition at March 31, 2002 and September 30, 2001
Total assets as of March 31, 2002 were $919.6 million, an increase of $38.3
million, or 4.3% over assets of $881.3 million at September 30, 2001, and an
increase of $54.9 million, or 6.3%, over assets of $864.7 million at March 31,
2001.
Net loans as of March 31, 2002 were $622.4 million, an increase of $16.2
million, or 2.7%, over net loan balances of $606.1 million at September 30,
2001. As the local economy began to recover from setbacks last fall and winter,
the Company achieved growth of $9.5 million, or 5.3%, in the commercial loan
portfolio compared to fiscal year-end. Residential loans continued to grow
during the six-month period as well, posting an increase of $8.0 million, or
2.2%, over balances at September 30, 2001. Asset quality continues to be strong,
although at 0.39% of total assets, non-performing assets are up slightly from
the 0.27% at September 30, 2001. The allowance for loan losses increased by
$380,000 to $9.5 million at March 31, 2002 from $9.1 million at September 30,
2001.
The total securities portfolio increased slightly to $235.7 million at
March 31, 2002 from $235.3 million at September 30, 2001.
Total deposits increased by $24.8 million to $677.9 million, an increase of
3.8% over balances of $653.1 million at September 30, 2001. Deposit growth has
occurred in transaction account and savings account products, while certificates
of deposit have declined. The largest deposit growth has occurred in savings and
money market accounts, which increased to $297.9 million at March 31, 2002 from
$269.9 million at September 30, an increase of $28.0 million, or 10.4%. Retail
demand and NOW deposits posted an increase of $13.7 million, or 13.1%, while
commercial demand accounts added $3.2 million, or 9.6%. During the same time
period, total certificates of deposit declined by $20.1 million. The overall
deposit increase is primarily due to improved marketing efforts, coupled with
new product offerings. Borrowings from the Federal Home Loan Bank of New York
(the "FHLB") increased by $6.9 million during the six-month period to $117.3
million at March 31, 2002 from $110.4 million at September 30, 2001.
Stockholders' equity increased by $3.2 million to $105.8 million at March
31, 2002 compared to $102.6 million at September 30, 2001. In addition to net
income of $5.1 million for the six-month period, equity increased by $900,000
due to activity related to the Company's ESOP, stock option and management
retention plans. Partially offsetting these increases were cash dividends and
treasury share purchases which reduced stockholders' equity by $851,000 and
$219,000, respectively, and the change in after-tax unrealized gains on
securities available for sale, which decreased equity by $1.8 million.
During the first six months of fiscal 2002, the Company repurchased 35,188
common shares, bringing the total shares repurchased to 296,422 shares under its
previously announced repurchase programs, which authorized the repurchase of up
to 376,740 shares. Net of option-related reissuances, treasury shares held by
the Company at March 31, 2002 were 236,501.
14
Comparison of Operating Results for the Three Months Ended
March 31, 2002 and March 31, 2001
Net Income. For the three months ended March 31, 2002, net income was $2.6
million, an increase of $1.0 million or 66.2% from net income of $1.6 million
for the three months ended March 31, 2001. Basic and diluted earnings per common
share for the current quarter increased to $0.34 and $0.33 per share,
respectively, compared to $0.20 per share for both basic and diluted for the
same period last year.
Interest Income. Total interest income for the three months ended March 31,
2002 declined to $14.6 million, a decrease of $803,000, or 5.2%, compared to
interest income of $15.4 million for the year-ago period. The decrease was
primarily due to lower average yields on loans and securities, partially offset
by higher average balances in both asset classes. Average interest-earning
assets for the three months ended March 31, 2002 were $869.6 million, an
increase of $45.9 million, or 5.6%, over average interest-earning assets of
$823.8 million for the three months ended March 31, 2001. The average yield on
interest-earning assets for the three months ended March 31, 2002 was 6.79 %, a
decrease of 77 basis points from the average interest-earning assets yield of
7.56% for the three months ended March 31, 2001.
Interest income on loans decreased by $625,000, or 5.4%, primarily due to
lower average yields, partially offset by higher average loan balances. The
largest percentage decline in income came from the consumer loan category, which
saw interest income decline by $376,000, or 24.8%, for the quarter. Provident's
fixed-rate consumer loans have short average maturities, and its adjustable-rate
consumer loans float with the prime rate, which averaged 4.75% for the
three-month period ended March 31, 2002, while the prime rate averaged 8.62% for
the same period last year. Lower market interest rates also impacted the yields
on commercial loans, which saw interest income decline to $3.3 million from $3.7
million, primarily due to a decline in average yield to 7.39% from 8.86%.
Average yields on residential loans declined slightly.
Partially offsetting these lower yields were higher average balances in all
loan categories. Average loan balances grew by $32.2 million, or 5.5%, to $618.2
million for the three months ended March 31, 2002, from $586.1 million for the
three months ended March 31, 2001. The increase in average loan balances
reflects an $18.9 million, or 5.5%, increase in the average balance of the
residential loan portfolio; a $12.0 million, or 7.1 %, increase in the average
balance of the commercial loan portfolio; and an increase of $1.2 million, or
1.7%, in the average consumer loan portfolio.
Interest income on securities and other earning assets for the three months
ended March 31, 2002 was $3.6 million, an decrease of $178,000, or 4.8%, from
securities income of $3.7 million for the prior year period. This decline
reflects primarily a decrease of 63 basis points in the average yield to 5.74%
from 6.37%, as the portfolio repriced with lower market interest rates.
15
These lower yields were partially offset by a $13.7 million, or 5.8%, increase
in the average balances of securities and other earning assets to $251.4 million
for the quarter ended March 31, 2002 from $237.7 million for the quarter ended
March 31, 2001. Lower yields were also due, in small part, to higher liquidity
maintained in anticipation of the Company's acquisition of NBF of Florida, which
took place on April 23, 2002.
Interest Expense. Interest expense for the three-month period ended March
31, 2002 fell by $2.7 million to $4.2 million, a decrease of 39.4% compared to
interest expense of $6.9 million for the three-month period ended March 31,
2001. The decrease was primarily due to lower rates paid on interest-bearing
deposits and borrowings, as well as to lower balances in certificates of deposit
accounts, partially offset by higher balances of non-interest-bearing and low
interest-bearing savings, money market and NOW checking deposits. The average
rates paid on interest-bearing liabilities for the three months ended March 31,
2002 declined by 170 basis points to 2.38% from 4.08% for the same period last
year. Average total interest-bearing liabilities increased to $712.9 million for
the period ended March 31, 2002, compared to an average of $687.3 million for
the prior period, an increase of $25.6 million, or 3.7%.
Interest expense on certificates of deposit fell by $1.8 million to $1.8
million for the three months ended March 31, 2002, from $3.6 million for the
same three-month period last year. The average interest rate paid on these
deposits fell by 250 basis points to 3.26%, from 5.76% for the prior-year
period. In addition, average balances of certificates of deposit decreased by
$30.6 million, or 12.0%, to $224.7 million for the current quarter versus $255.2
million for the same quarter last year. Conversely, for the three months ended
March 31, 2002, average balances of lower-cost savings, money market and NOW
checking accounts increased by $23.6 million, $19.1 million and $11.9 million,
respectively. The total interest paid on these deposits also declined due to the
decline in their average yields, which fell by 90, 149, and 30 basis points,
respectively, compared to the three months ended March 31, 2001. Overall, the
rate paid on interest-bearing deposits decreased by 181 basis points, to 1.85%
for the quarter ended March 31, 2002, compared to 3.66% for the same period last
year.
The average rate paid on total borrowings for the three-month period ended
March 31, 2002 decreased 112 basis points to 4.93% from 6.05% for the same
period last year. The lower rates more than offset a small increase in the
average amount borrowed to $122.8 million from $121.2 million, resulting in a
$313,000 reduction in interest expense on borrowings.
Net Interest Income. Net interest income for the three months ended March
31, 2002 was $10.4 million, compared to $8.4 million for the three months ended
March 31, 2001, an increase of $2.0 million or 22.8%. The increase in net
interest income was largely due to a $23.8 million increase in average net
earning assets to $156.7 million, from $136.4 million, as well as to a 92 basis
point increase in net interest rate spread, to 4.40%, from 3.48% in the prior
year. Net interest margin increased to 4.83% for the three months ended March
31, 2002, up from 4.16% in the prior year period.
16
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 $175,000 and $360,000 in loan loss
provisions during the three months ended March 31, 2002 and 2001, respectively.
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 for the
three months ended March 31, 2002 increased by $207,000 or 20.2%, to $1.2
million for the three months ended March 31, 2002 from $1.0 million for the
three months ended March 31, 2001. This increase was primarily attributable to
an increase of $174,000 in banking fees and service charges. The Company also
recorded net gains on sales of securities available for sale of $90,000 for the
current quarter, compared to securities gains of $67,000 in the same quarter a
year ago.
Non-Interest Expense. Non-interest expenses for the three months ended
March 31, 2002 increased by $531,000 to $7.3 million from $6.7 million for the
three months ended March 31, 2001. The increase was primarily attributable to
increases in compensation and employee benefits of $410,000, or 11.5%, and in
occupancy and office operations of $139,000, or 13.3%. Compensation increased as
a result of staff additions and annual merit increases, and additional occupancy
costs were attributable to the opening of a new branch. In addition, expenses
associated with the upcoming integration of NBF totaled $68,000 for the current
quarter.
Income Taxes. Income tax expense was $1.5 million for the three months
ended March 31, 2002 compared to $799,000 for the same period in 2001, as tax
management strategies implemented in the past had a smaller relative impact due
to growth in the Company's pre-tax income. The effective tax rates were 37.3%
and 33.8%, respectively.
17
Comparison of Operating Results for the Six Months Ended
March 31, 2002 and March 31, 2001
Net Income. For the six months ended March 31, 2002, net income was
$5.1million, an increase of $1.7 million or 49.0% from net income of $3.4
million for the six months ended March 31, 2001. Year-to-date basic and diluted
earnings per common share increased to $0.67 and $0.66, respectively, compared
to basic and diluted earnings of $0.45 per share for the same period last year.
Interest Income. Total interest income for the six months ended March 31,
2002 declined to $29.3 million from $30.7 million earned in the six months ended
March 31, 2001, a decrease of $1.4 million, or 4.6%, compared to the year-ago
period. The decrease was primarily due to lower average yields on loans and
securities, partially offset by higher average balances in both asset classes.
Average interest-earning assets for the six months ended March 31, 2002 were
$861.9 million, an increase of $48.0 million, or 5.9%, over average
interest-earning assets for the six months ended March 31, 2001 of $813.9
million.
Interest income on loans for the six months ended March 31, 2002 was $22.2
million, a decrease of $1.4 million, or 5.7%, from income of $23.6 million in
the six months ended March 31, 2001. A $26.1 million increase in average loans
to $613.1 million from $587.0 million was attributable to increased balances in
all loan types, but especially to increases in residential mortgage loans, which
saw increased activity due to the recent wave of refinancings. Average yields on
the higher loan balances declined to 7.27% from 8.05%, with the largest decline
in yields coming from the consumer loan category, which is made up almost
equally of fixed-rate loans with short average maturities and home equity lines
of credit, which bear interest rates that float with the prime rate.
Interest income on securities and other earning assets for the six months
ended March 31, 2002 was $7.1 million, a decrease of $58,000, or 0.8%, compared
to the same period last year, primarily due to the decline in average interest
rates for the period. The average balance of securities increased by $22.6
million, or 10.2%, to $243.2 million March 31, 2002 from $220.6 million at March
31, 2001. The average yield on the portfolio declined by 60 basis points, to
5.72% for the six-month period ended March 31, 2002 from 6.32% for the six-month
period ended March 31, 2001.
Interest Expense. Total interest expense for the six-month period ended
March 31, 2002 fell to $9.0 million, a decline of $5.0 million, or 35.8%,
compared to interest expense of $14.0 million for the same period last year. The
decrease was primarily due to significantly lower average rates paid on deposits
and wholesale borrowings (2.55% in the current year period compared to 4.13% a
year ago), net of an increase in average interest-bearing liabilities. Average
total interest-bearing liabilities increased to $706.3 million for the six-month
period ended March 31, 2002, compared to an average of $679.2 million for the
prior period, an increase of $27.1 million, or 4.0%.
18
The decrease in deposit interest expense was primarily due to lower rates
paid on all interest-bearing deposits, as well as to lower average balances in
certificate of deposit accounts and a higher concentration of
non-interest-bearing and low interest-bearing deposits among total deposits for
the period. For the six months ended March 31, 2002, average balances of
lower-cost savings, NOW and money market accounts increased by $50.6 million,
while average balances of certificates of deposit declined by $23.2 million
compared to the six months ended March 31, 2001. The average interest paid on
certificates of deposit fell by 211 basis points to 3.66% for the six months
ended March 31, 2002, from 5.77% for the prior year period. Overall, the rate
paid on interest-bearing deposits declined by 163 basis points, to 2.05% for the
six months ended March 31, 2002, compared to 3.68% for the same period last
year.
The Company also paid less for its wholesale borrowings, as the cost to
borrow funds from the FHLB decreased and the average amount borrowed remained
approximately the same. The average rate paid on total borrowings for the
six-month period ended March 31, 2002 decreased 120 basis points to 5.01% from
6.21% for the same period last year.
Net Interest Income. For the six months ended March 31, 2002 and 2001, net
interest income was $20.3 million and $16.7 million, respectively, an increase
of $3.6 million, or 24.4%. The $3.6 million increase was primarily attributable
to an 83 basis point increase in the net interest rate spread to 4.27% from
3.44% and also to the increase of $20.8 million, or 15.5%, in average net
earning assets (interest-earning assets less interest-bearing liabilities). The
Company's net interest margin was 4.73% for the six months ended March 31, 2002
and 4.13% for the six months ended March 31, 2001.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level which is considered appropriate to absorb probable loan losses
inherent in the existing portfolio. The Company recorded $400,000 and $720,000
in loan loss provisions during the six months ended March 31, 2002 and 2001,
respectively.
As noted in the above discussion, the increase in the Company's net
interest income is due, in large part, to the relative changes in the yield and
cost of the Company's assets and liabilities as a result of decreasing market
interest rates in calendar 2001 and early 2002. This decrease in market interest
rates has reduced the cost of interest-bearing liabilities faster, and to a
greater extent, than the rates on interest-earning assets such as loans and
securities. Should market interest rates increase with the expected economic
recovery, the cost of the interest-bearing liabilities will increase faster than
the rates on interest-earning assets. In addition, the impact of rising rates
could be compounded if deposit customers move funds from savings accounts back
to higher-rate certificate of deposit accounts. Such movements may cause a
decrease in interest rate spread and net interest margin.
19
Non-Interest Income. Non-interest income for the six months ended March 31,
2002 was $2.5 million compared to $2.1 million for the six months ended March
31, 2001, an increase of $440,000, or 21.2%. This increase was primarily
attributable to an increase of $309,000, or 19.3%, in fees and service charges
primarily due to the expanded deposit base. The Company also recorded net gains
of $238,000 on sales of securities available for sale in the current year,
compared to $149,000 of such gains for the same period a year ago. Other
non-interest income in the current six-month period gains included gains on
residential loan sales of $40,000. No residential loans were sold during the
comparable period last year.
Non-Interest Expense. Non-interest expenses for the six months ended March
31, 2002 were $14.4 million, or $1.5 million more than expenses for the six
months ended March 31, 2001. Increases in compensation expenses and occupancy
expenses of $1.1 million, or 17.2%, and $230,000, or 11.3%, respectively, were
attributable to annual salary and benefit increases and to the opening of two
new branches. Data processing expense also increased by $93,000, or 12.4%,
related to the new branches and new product offerings. Other expenses for the
current six-month period increased by $425,000, or 18.1%, over the comparable
period last year. Professional services increased by $143,000, or 39.4%, as a
result of new product offerings and the associated legal and consulting fees.
ATM service charges and check processing expenses increased by $72,000 and
$67,000, respectively, due to new products and services and higher deposit
levels. Additionally, the Company incurred $68,000 in integration costs relative
to the acquisition of NBF, which took place on April 23, 2002. Partially
offsetting these increases was a decrease of $294,000 in the amortization of
deposit premiums, as the premiums associated with two branches purchased in 1996
became fully amortized in the 2001 fiscal year.
Income Taxes. Income tax expense was $2.9 million for the six months ended
March 31, 2002 compared to $1.8 million for the same period in 2001. The
effective tax rates were 36.1% and 34.3%, respectively, as tax management
strategies implemented in the past had a smaller relative impact due to growth
in the Company's pre-tax income.
20
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the six months
ended March 31, 2002 and March 31, 2001, loan originations totaled $122.4
million and $59.3 million, respectively, and purchases of securities totaled
$34.2 million and $46.4 million, respectively. For the six-month periods ended
March 31, 2002 and 2001, these investing activities were funded primarily by
principal repayments on loans, by proceeds from sales and maturities of
securities, and by deposit growth. Loan origination commitments totaled $49.4
million at March 31, 2002. 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 for the six months ended March 31, 2002 was $24.8
million, compared to $32.2 million for the six months ended March 31, 2001.
The Company monitors its liquidity position on a daily basis. Excess
short-term liquidity, if any, is usually invested in overnight federal funds
sold. At March 31, 2002, federal funds sold amounted to $15.7 million, as the
Company held additional liquidity in anticipation of funding the
previously-described cash acquisition of NBF. The Company generally remains
fully invested and utilizes additional sources of funds through FHLB advances,
which amounted to $117.3 million at March 31, 2002.
At March 31, 2002, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $94.3 million, or 10.4% of
adjusted assets (which is above the required level of $36.4 million, or 4.0%)
and a total risk-based capital level of $101.0 million, or 18.9% of
risk-weighted assets (which is above the required level of $42.7 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.
21
At March 31, 2002, 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.
22
The following table sets forth the Bank's regulatory capital position at
March 31, 2002 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)
March 31, 2002
- --------------
Tangible capital $ 94,291 10.4% $13,633 1.5% $ -- --%
Tier 1 (core) capital 94,291 10.4 36,354 4.0 45,442 5.0
Risk-based capital:
Tier 1 94,291 17.6 -- -- 32,049 6.0
Total 101,003 18.9 42,732 8.0 53,415 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 4.0 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
The intangible assets recorded in the April 2002 NBF acquisition are
deducted from capital for purposes of calculating regulatory capital measures.
The combined effect of this deduction and the asset growth from the acquisition
will be to reduce the Bank's regulatory capital ratios below the levels shown
above as of March 31, 2002. However, the Bank continues to be classified as a
well-capitalized institution following the acquisition.
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate risk,
as the majority of its assets and liabilities are sensitive to changes in
interest rates. There have been no material changes in the Company's interest
rate risk position since September 30, 2001, although the dramatic increase in
net interest spread in the past six months could be adversely impacted by a rise
in short term interest rates. As noted in Item 2, Management's Discussion and
Analysis, the increase in the Company's net interest income is due, in large
part, to the relative changes in the yield and cost of the Company's assets and
liabilities as a result of decreasing market interest rates in calendar 2001 and
early 2002. This decrease in market interest rates has reduced the cost of
interest-bearing liabilities faster, and to a greater extent, than the rates on
interest-earning assets such as loans and securities. Should market interest
rates increase with the expected economic recovery, the cost of the
interest-bearing liabilities will increase faster than the rates on
interest-earning assets. In addition, the impact of rising rates could be
compounded if deposit customers move funds from savings accounts back to
higher-rate certificate of deposit accounts. Conversely, should market interest
rates fall significantly below today's levels, the Company's net interest margin
would also be negatively affected, as competitive pressures could keep the
Company from reducing rates much lower on its deposits. Such movements may cause
a decrease in interest rate spread and net interest margin. Other types of
market risk, such as foreign exchange rate risk and commodity price risk, do not
arise in the normal course of the Company's business activities.
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
24
Item 4. Submission of Matters to a Vote of Security Holders
On February 21, 2002, the Company held its annual meeting of stockholders
for the purpose of the election of three Directors to three year terms and the
ratification of the appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending September 30, 2002.
The number of votes cast at the meeting as to each matter acted upon was as
follows:
VOTES VOTES
FOR WITHHELD
----- --------
1. Election of Directors:
William F. Helmer 7,189,727 10,493
William R. Sichol, Jr. 7,191,105 9,115
F. Gary Zeh 7,192,106 8,114
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
--- ------- ----------
2. Ratification of the
Appointment of KPMG LLP as
the Company's Independent
Auditors 7,182,647 7,537 10,036
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Bancorp, Inc.
(Registrant)
By: /s/ Katherine A. Dering
---------------------------
Katherine A. Dering
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and duly authorized representative)
Date: May , 2002
----------------------------