SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 8,035,420
as of July 31, 2002
PROVIDENT BANCORP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2002
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
June 30, 2002 and September 30, 2001 3-4
Consolidated Statements of Income for the Three Months and
Nine Months Ended June 30, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended June 30, 2002 6
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 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 13-24
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 24
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
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 June 30, 2002 September 30, 2001
- ------ ------------- ------------------
Cash and due from banks $ 30,869 $ 16,447
Federal funds sold 11,580 --
----------- -----------
Total cash and cash equivalents 42,449 16,447
----------- -----------
Securities, including $29,630 and $40,582 pledged as collateral for borrowings
at June 30, 2002 and September 30, 2001, respectively: Available for sale,
at fair value (amortized cost of
$208,602 at June 30, 2002 and $156,404 at
September 30, 2001) 215,147 163,928
Held to maturity, at amortized cost (fair value of $94,155
at June 30, 2002 and $73,660 at September 30, 2001) 91,933 71,355
----------- -----------
Total securities 307,080 235,283
----------- -----------
Loans:
One- to four-family residential mortgage loans 365,843 358,198
Commercial real estate, commercial business
and construction loans 213,670 180,179
Consumer loans 80,339 76,892
----------- -----------
Total loans 659,852 615,269
Allowance for loan losses (Note 2) (10,222) (9,123)
----------- -----------
Total loans, net 649,630 606,146
----------- -----------
Accrued interest receivable, net 5,295 5,597
Federal Home Loan Bank stock, at cost 6,387 5,521
Premises and equipment, net 10,956 8,917
Deferred income taxes 1,699 371
Goodwill (Note 3) 13,063 --
Core deposit intangible, net (Note 3) 1,637 --
Other assets 2,608 2,978
----------- -----------
Total assets $ 1,040,804 $ 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 June 30, 2002 September 30, 2001
- ------------------------------------ ------------- ------------------
Liabilities:
Deposits:
Retail demand and NOW deposits $ 134,791 $ 104,789
Commercial demand deposits 55,853 33,081
Savings and money market deposits 358,857 269,903
Certificates of deposit 247,674 245,327
----------- -----------
Total deposits 797,175 653,100
Borrowings 113,127 110,427
Mortgage escrow funds 12,693 6,197
Other 9,498 8,916
----------- -----------
Total liabilities 932,493 778,640
----------- -----------
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; 8,035,420 and 8,024,166 shares
outstanding at June 30, 2002 and September 30, 2001,
respectively) 828 828
Additional paid-in capital 36,869 36,535
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (2,068) (2,350)
Common stock awards under recognition and retention plan ("RRP") (1,265) (1,729)
Treasury stock, at cost (244,580 shares at June 30, 2002 and
255,834 shares at September 30, 2001) (4,737) (4,298)
Retained earnings 74,920 69,252
Accumulated other comprehensive income, net of taxes (Note 4) 3,764 4,382
----------- -----------
Total stockholders' equity 108,311 102,620
----------- -----------
Total liabilities and stockholders' equity $ 1,040,804 $ 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 Nine Months
Ended June 30, Ended June 30,
-------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income:
Loans $11,211 $11,474 $33,434 $35,050
Securities 3,620 3,521 10,546 10,372
Other earning assets 179 160 349 463
------- ------- ------- -------
Total interest and dividend income 15,010 15,155 44,329 45,885
------- ------- ------- -------
Interest expense:
Deposits 2,879 4,792 8,881 15,068
Borrowings 1,337 1,620 4,319 5,325
------- ------- ------- -------
Total interest expense 4,216 6,412 13,200 20,393
------- ------- ------- -------
Net interest income 10,794 8,743 31,129 25,492
Provision for loan losses (Note 2) 200 360 600 1,080
------- ------- ------- -------
Net interest income after provision for loan losses 10,594 8,383 30,529 24,412
------- ------- ------- -------
Non-interest income:
Banking fees and service charges 1,021 843 2,932 2,444
Loan servicing fees 63 59 95 169
Gain on sales of securities available for sale 51 383 288 532
Other 205 192 538 406
------- ------- ------- -------
Total non-interest income 1,340 1,477 3,852 3,551
------- ------- ------- -------
Non-interest expense:
Compensation and employee benefits 4,394 3,670 12,227 10,354
Occupancy and office operations 1,229 1,076 3,495 3,111
Advertising and promotion 326 387 1,030 1,137
Data processing 473 376 1,316 1,125
Merger integration costs 286 -- 354 --
Amortization of intangible assets (Note 3) 150 65 150 359
Other 1,615 1,090 4,330 3,444
------- ------- ------- -------
Total non-interest expense 8,483 6,664 22,902 19,530
------- ------- ------- -------
Income before income tax expense 3,451 3,196 11,479 8,433
Income tax expense 1,309 1,092 4,209 2,890
------- ------- ------- -------
Net income $ 2,143 $ 2,104 $ 7,270 5,543
======= ======= ======= =======
Earnings per common share (Note 5):
Basic $ 0.28 $ 0.27 $ 0.94 $ 0.72
======= ======= ======= =======
Diluted $ 0.27 $ 0.27 $ 0.93 $ 0.72
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2002 (Unaudited) (Dollars in thousands,
except per share data)
Common
Additional Unallocated Stock
Common Paid-In ESOP Awards Treasury Retained
Stock Capital Shares Under RRP Stock Earnings
----- ------- ------ --------- ----- --------
Balance at September 30, 2001 $ 828 $ 36,535 $ (2,350) $ (1,729) $ (4,298) $ 69,252
Net income 7,270
Cash dividends paid ($0.29 per share) (1,500)
Purchases of treasury stock (775)
Stock option transactions 336 (102)
ESOP shares allocated or committed
to be released for allocation 334 282
Vesting of RRP shares 464
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $419
Decrease in net unrealized loss on cash
flow hedges, net of taxes of $(19)
----- -------- -------- -------- -------- --------
Balance at June 30, 2002 $ 828 $ 36,869 $ (2,068) $ (1,265) $ (4,737) $ 74,920
===== ======== ======== ======== ======== ========
Accumulated
Other Total
Comprehensive Stockholders'
Income Equity
------ ------
Balance at September 30, 2001 $ 4,382 $102,620
Net income 7,270
Cash dividends paid ($0.29 per share) (1,500)
Purchases of treasury stock (775)
Stock option transactions 234
ESOP shares allocated or committed
to be released for allocation 616
Vesting of RRP shares 464
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $419 (646) (646)
Decrease in net unrealized loss on cash
flow hedges, net of taxes of $(19) 28 28
-------- --------
Balance at June 30, 2002 $ 3,764 $108,311
========================
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months
Ended June 30,
--------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 7,270 $ 5,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 1,080
Depreciation and amortization of premises
and equipment 1,345 1,311
Amortization of intangible assets 150 359
Gain on sales of securities available for sale (288) (532)
Net amortization of premiums and discounts 274 73
ESOP and RRP expense 1,080 829
Originations of loans held for sale (12,722) --
Proceeds from sales of loans held for sale 12,072 --
Deferred income tax benefit (928) (513)
Net changes in accrued interest receivable
and payable 100 62
Other adjustments (principally net changes
in other assets and other liabilities) 2,102 73
--------- ---------
Net cash provided by operating activities 11,055 8,285
--------- ---------
Cash flows from investing activities:
Purchase of The National Bank of Florida ("NBF"),
net of cash and cash equivalents acquired (5,801) --
Purchases of securities:
Available for sale (67,576) (47,780)
Held to maturity (34,480) (30,366)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale 15,137 21,304
Held to maturity 16,120 14,788
Proceeds from sales of securities available for sale 52,961 16,761
Loan originations (144,723) (104,509)
Loan principal payments 123,252 96,298
Purchases of Federal Home Loan Bank stock (866) (43)
Proceeds from sales of real estate owned -- 154
Purchases of premises and equipment (2,012) (1,427)
--------- ---------
Net cash used in investing activities (47,988) (34,820)
--------- ---------
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Nine Months
Ended June 30,
2002 2001
---- ----
Cash flows from financing activities:
Net increase in deposits 55,780 42,762
Net increase (decrease) in borrowings 2,700 (18,306)
Net increase in mortgage escrow funds 6,496 7,848
Treasury shares purchased (775) (427)
Stock option transactions 234 --
Cash dividends paid (1,500) (547)
-------- --------
Net cash provided by financing activities 62,935 31,330
-------- --------
Net increase in cash and cash equivalents 26,002 4,795
Cash and cash equivalents at beginning of period 16,447 12,785
-------- --------
Cash and cash equivalents at end of period $ 42,449 $ 17,580
======== ========
Supplemental information:
Interest payments $ 13,395 $ 20,979
Income tax payments 6,469 2,344
Purchase of NBF:
Fair value of non-cash assets acquired 94,383 --
Fair value of liabilities assumed 88,582 --
Transfer of securities from available for sale
to held to maturity -- 12,013
Transfer of loans to real estate owned 162 172
-------- --------
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.(the "Bank"), Provident Bank, and each subsidiary of Provident Bank
(Provest Services Corp. I, Provest Services Corp. II, Provident REIT, Inc. and
Provident Municipal Bank). 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 June 30, 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. Provident Municipal Bank ("PMB") is a limited purpose New York State
chartered commercial bank, which began operations on April 19, 2002 and is
authorized to accept deposits from municipalities in the Bank's business area.
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 nine
months ended June 30, 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
9
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.
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 the amount that management has determined
to be necessary to absorb probable losses on existing 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. Changes in
the allowance for loan losses may be necessary in the future based on changes in
economic and real estate market conditions, new information obtained regarding
known problem loans, regulatory examinations, the identification of additional
problem loans, and other factors.
Activity in the allowance for loan losses is summarized below:
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Balance at beginning of period $ 9,503 $ 8,452 $ 9,123 $ 7,653
Provision for loan losses 200 360 600 1,080
Addition from acquisition 537 -- 537 --
Charge-offs (35) (45) (137) (119)
Recoveries 17 18 99 171
-------- -------- -------- --------
Balance at end of period $ 10,222 $ 8,785 $ 10,222 $ 8,785
======== ======== ======== ========
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).
June 30, September 30,
2002 2001
-------- -------------
(Dollars in thousands)
Non-accrual loans:
One- to four- family residential mortgage loans $2,634 $1,684
Commercial real estate, commercial business
and construction loans 1,866 418
Consumer loans 237 175
------ ------
Total non-performing loans 4,737 2,277
Real estate owned:
One- to four-family residential 200 109
Total non-performing assets $4,937 $2,386
====== ======
Non-performing loans as a % of total loans 0.72% 0.38%
Non-performing assets as a % of total assets 0.47 0.27
Allowance for loan losses as a % of total
non-performing loans 216 401
Allowance for loan losses as a % of total loans, net 1.57 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, in an
all-cash transaction. The Company acquired 100% of the outstanding common stock
of NBF for $28.1 million. The acquisition is consistent with the Company's
strategic objective of expanding its retail and commercial banking market share
in Orange County, New York, where NBF conducted its operations. At the
acquisition date, NBF had total assets of approximately $104 million (including
securities of $55.2 million, loans of $22.9 million and federal funds sold of
$20.9 million), and total deposits of approximately $88.2 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 total
acquisition cost (including direct transaction costs) exceeded the fair value of
the net assets acquired by approximately $14.9 million. This amount was
recognized as intangible assets, consisting of goodwill of $13.1 million and a
core deposit intangible asset of $1.8 million recognized apart from goodwill.
Amounts attributable to NBF are included in the Company's consolidated financial
statements from the date of acquisition. Pro forma combined
11
operating results for the three- and nine-month periods ended June 30, 2002 and
2001, as if NBF had been acquired at the beginning of those periods, have not
been presented since the NBF acquisition would not materially affect such
results.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
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 is being amortized to expense using an
accelerated method over its estimated useful life of approximately nine years,
and will be evaluated annually for impairment. Core deposit amortization expense
was $150,000 for the period from the acquisition date through June 30, 2002.
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 $6.7 million and $8.3 million for the nine months ended June 30, 2002
and 2001, respectively, and $3.3 million and $2.1 million for the three months
ended June 30, 2002 and 2001, respectively.
Accumulated other comprehensive income in the consolidated statements of
financial condition at June 30, 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 includes all shares issued to the mutual holding company, but
excludes 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 June 30, 2002 and 2001 were 7,713,880 and 7,656,424,
respectively. Weighted average common shares used in calculating basic earnings
per share for the nine months ended June 30, 2002 and 2001 were 7,700,978 and
7,661,627, respectively.
Diluted earnings per share was computed based on 7,851,393 shares for the
three months ended June 30, 2002 (including 137,513 common-equivalent shares)
and 7,828,946 shares for the nine months ended June 30, 2002 (including 127,968
common-equivalent shares). Diluted earnings per share was computed based on
7,734,407 shares for the three months ended June 30, 2001 (including 77,983
common-equivalent shares) and 7,703,575 shares for the nine months ended June
30, 2001 (including 41,948 common-equivalent shares). The common equivalent
shares are incremental shares (computed using the treasury stock method) that
would have been
12
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, 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 have been 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 June 30, 2002 and September 30, 2001
Total assets as of June 30, 2002 were $1.04 billion, an increase of $159.5
million, or 18.1%, over assets of $881.3 million at September 30, 2001. The
assets of NBF accounted for approximately $100 million of this increase.
Net loans as of June 30, 2002 were $649.6 million, an increase of $43.5
million, or 7.2%, over net loan balances of $606.1 million at September 30,
2001, and an increase of $53.2 million, or 8.9%, over balances of $596.5 million
at June 30, 2001. NBF's loans at the time of the acquisition were $22.9 million,
the majority of which were commercial loans. Including the addition of NBF's
commercial loans, the Bank experienced growth of $33.5 million in the commercial
loan portfolio compared to fiscal year-end. Benefiting from refinance activity,
residential loans grew during the nine-month period as well, posting an increase
of $7.6 million, or 2.1%, over balances at September 30, 2001. Consumer loans
grew to $80.3 million, up from $76.9 million at fiscal year-end, an increase of
$3.4 million, or 4.5%. At 0.47% of total assets, non-performing assets are up
from 0.27% at September 30, 2001.
The total securities portfolio increased to $307.1 million at June 30, 2002
from $235.3 million at September 30, 2001, an increase of $71.8 million, or
30.5%. The portfolio is invested primarily in US government agency issued
mortgage-backed securities and agency notes, as well as smaller positions in
short-term corporate notes and state, county and municipal securities. The
portfolio growth is primarily due to the acquisition of the NBF securities
portfolio which totaled $54.9 million at the time of acquisition. The Company
sold $36.9 million of these securities shortly after the acquisition and
replaced these with securities that better meet its investment strategies. Also,
the Company has experienced deposit inflows over the nine-month period, and has
chosen to invest a portion of these inflows in shorter-term assets, such as
securities, in order to mitigate interest rate risk.
Total deposits were $797.2 million at June 30, 2002, up $144.1 million, or
22.1%, from $653.1 million at September 30, 2001. NBF's deposits totaled
approximately $88.1 million at the time of the acquisition, and their $31.2
million in checking deposits and $36.6 million in savings deposits contributed
to the continuing shift of the Company's deposit mix. Transaction accounts
represented 24% of deposits at June 30, 2002, compared to 21% at September 30,
2001. Similarly, savings and money market account balances, which totaled $358.9
million at June 30, 2002, represented 45% of deposits at that date, compared to
41% at September 30, 2001. Certificates of deposit have declined during the
period, to 31% of deposits at June 30, 2002, compared to 38% at September 30,
2001. This shift in mix to lower cost accounts had a positive impact on earnings
for both the three-month and nine-month periods.
Borrowings from the Federal Home Loan Bank of New York (the "FHLB")
increased by $2.7 million during the nine-month period to $113.1 million at June
30, 2002 from $110.4 million at September 30, 2001. NBF held no borrowings at
the acquisition date.
14
Stockholders' equity increased by $5.7 million to $108.3 million at June
30, 2002 compared to $102.6 million at September 30, 2001. In addition to net
income of $7.3 million for the nine-month period, equity increased by $1.3
million due to activity related to the Company's ESOP, stock option and
management retention plans. Partially offsetting these increases were cash
dividends of $1.5 million, treasury stock purchases of $775,000, and a decrease
of $646,000 in after-tax unrealized gains on securities available for sale.
During the first nine months of fiscal 2002, the Company repurchased 27,700
shares of its common stock. Net of option-related reissuances, treasury shares
held by the Company at June 30, 2002 were 244,580.
Comparison of Operating Results for the Three Months Ended
June 30, 2002 and June 30, 2001
Net Income. Net income for the three months ended June 30, 2002 was $2.1
million, which was level with net income for the three months ended June 30,
2001, as higher net interest income was substantially offset by higher
non-interest expense and income tax expense. Excluding non-recurring costs of
$286,000 incurred to complete the integration of NBF following its acquisition
in April 2002, after-tax earnings for the three months ended June 30, 2002 were
$2.3 million, an increase of 10.0%. Basic and diluted earnings per share were
$0.28 and $0.27, respectively, compared to $0.27 for both basic and diluted
earnings per share for the same period last year.
Interest Income. Total interest income for the three months ended June 30,
2002 declined slightly to $15.0 million, a decrease of $145,000, or 1.0%
compared to the year-ago period. The small decrease was primarily due to lower
average yields on loans and securities, offset in large part by higher average
balances in both asset classes, due, in part, to the NBF acquisition. Average
interest-earning assets for the three months ended June 30, 2002 were $944.6
million, an increase of $107.3 million, or 12.8%, over average interest-earning
assets for the three months ended June 30, 2001 of $837.3 million. Average loan
balances grew by $51.8 million and average balances of securities and other
earning assets increased by $55.5 million. Average yields on interest-earning
assets fell by 89 basis points to 6.37% for the three months ended June 30,
2002, from 7.26% for the three months ended June 30, 2001. The lower overall
yield was also due, in part, to a change in the interest-earning asset mix, as
the Company maintained high balances in cash and short-term securities in the
weeks before and after the Company's purchase of NBF, which took place April 23,
2002. Securities and cash equivalents are of shorter duration than most of the
Company's loan assets and better position the Company to accommodate a rising
interest rate environment in the near-term.
15
Interest income on loans decreased by $263,000 or 2.3%, 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 $228,000, or 16.3%, for the quarter. The Bank's
fixed-rate consumer loans have short average maturities, and its adjustable-rate
consumer loans float with the prime rate, which was 4.75% for the three-month
period ended June 30, 2002, compared to an average prime rate of 7.35% for the
same period last year. Income from commercial loans fell by $72,000 for the
period, as a 128 basis point decline in average rate overcame the $26.9 million
increase in average commercial loan balances. Income earned on residential loans
was flat for the two quarterly periods. Average yields on residential loans
declined slightly.
Interest income on securities and other earning assets for the three months
ended June 30, 2002 was $3.8 million, an increase of $118,000, or 3.2%, from
securities income of $3.7 million for the prior year period. This decline
reflects primarily a decrease of 95 basis points in the average yield to 5.06%
from 6.01%, as these assets were affected by lower market interest rates. The
lower yields were partially offset by a $55.5 million, or 22.6%, increase in the
average balances of securities and other earning assets to $301.0 million for
the quarter ended June 30, 2002 from $245.5 million for the quarter ended June
30, 2001.
Interest Expense. Total interest expense for the three months ended June
30, 2002 fell by $2.2 million to $4.2 million, a decrease of 34.3% compared to
interest expense of $6.4 million for the same period last year. The decrease was
primarily due to lower rates paid on interest-bearing deposits and borrowings,
as well as to lower balances in certificate of deposit accounts and a higher
concentration of non-interest-bearing and low interest-bearing savings, money
market and NOW checking deposits among total deposits for the period. Average
rates paid on interest-bearing liabilities for the three months ended June 30,
2002 declined by 156 basis points to 2.14% from 3.70% for the same period last
year. The lower average rates and change in mix more than offset the increase in
average total interest-bearing liabilities, which increased by $92.9 million, or
13.4%, to $788.6 million for the period ended June 30, 2002, compared to an
average of $695.7 million for the prior year period.
For the three months ended June 30, 2002, interest expense on deposits fell
by $1.9 million to $2.9 million from $4.8 million in the prior year period.
Interest expense on lower-cost savings, money market and NOW checking accounts
fell by $216,000 to $1.1 million from $1.3 million, due to lower rates. Average
balances of savings, money market and NOW checking accounts increased by $61.8
million, $19.1 million and $23.7 million, respectively, while their average
yields fell by 43, 116 and 8 basis points, respectively, compared to the three
months ended June 30, 2001. Interest expense on certificates of deposit fell by
$1.7 million to $1.8 million for the three months ended June 30, 2002, from $3.5
million for the same three-month period last year. The average interest rate
paid on certificates of deposit fell by 255 basis points to 2.95% for the three
months ended June 30, 2002, from 5.50% for the prior-year period. In addition,
average balances of certificates of deposit decreased by $12.0 million, or 4.7%,
to $241.4 million for the current quarter versus $253.4 million for the same
quarter last year.
16
For the three months ended June 30, 2002, interest expense on borrowings
fell by $283,000 to $1.3 million from $1.6 million in the prior year period. The
average rate paid on total borrowings for the three-month period ended June 30,
2002 decreased 103 basis points to 4.81% from 5.84% for the same period last
year. The average amount borrowed was almost level at $111.5 million for the
current quarter, compared to $111.2 million for the same period last year.
Net Interest Income. Net interest income for the three months ended June
30, 2002 was $10.8 million, compared to $8.7 million for the three months ended
June 30, 2001, an increase of $2.1 million or 23.5%. The increase in net
interest income was largely due to a $14.4 million increase in average net
earning assets to $156.0 million, from $141.6 million, as well as to a 67 basis
point increase in net interest rate spread, to 4.23% from 3.56% in the prior
year period. Net interest margin increased to 4.58% for the three months ended
June 30, 2002, up from 4.19% in the prior year period.
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. Should market interest
rates continue to fall, the rates on interest-earning assets could fall to a
greater extent than rates on interest-bearing liabilities, as certain of the
latter rates may have already reached market minimums.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain an allowance for loan losses
to absorb probable loan losses inherent in the existing portfolio. In
determining the allowance for loan losses, management considers past and
anticipated loss experience, evaluations of real estate collateral, current
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 $200,000 and $360,000 in loan loss
provisions during the three months ended June 30, 2002 and 2001, respectively.
17
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. Non-interest income for the three
months ended June 30, 2002 was $1.3 million compared to $1.5 million for the
three months ended June 30, 2001, a decrease of $137,000, or 9.3%. This decrease
was primarily attributable to a decrease of $332,000 in net securities gains, as
the Company recorded net gains on sales of securities of $51,000 for the current
quarter, compared to securities gains of $383,000 in the same quarter a year
ago. This decrease was partially offset by an increase of $178,000, or 21.1%, in
banking fees and service charges, as increases in transaction account volumes
generated higher fee income.
Non-Interest Expense. Non-interest expenses for the three months ended June
30, 2002 were $8.5 million or $1.8 million more than expenses of $6.7 million
for the three months ended June 30, 2001. The increase was primarily
attributable to increases in compensation and employee benefits of $724,000, or
19.7%, relating to annual merit raises, the addition of former NBF employees who
continue to staff the two former NBF branches, and increased staffing for a new
branch opened by the Company prior to the NBF transaction. Additional occupancy
and data processing costs were also attributable largely to the addition of
these three new branches over the prior period, growing by $153,000 and $97,000,
respectively. Other non-interest expenses were $525,000 higher than the prior
three-month period, in part because the Company recorded a charge of $240,000 in
the current quarter to resolve a reconciliation issue relating to refinanced
residential mortgage loans. Non-recurring expenses associated with the
integration of NBF totaled $286,000 for the current quarter. Amortization of the
core deposit intangible recorded in the NBF acquisition totaled $150,000 for the
current quarter, an increase of $85,000 over similar expenses in the prior year
period, which represented the final amortization of intangible assets associated
with branches acquired in 1996.
Income Taxes. Income tax expense was $1.3 million for the three months
ended June 30, 2002 compared to $1.1 million for the same period in 2001, as tax
strategies implemented in the past had a smaller relative impact due to growth
in the Company's pre-tax income. The effective tax rates in the 2002 and 2001
quarters were 37.9% and 34.2%, respectively.
Comparison of Operating Results for the Nine Months Ended
June 30, 2002 and June 30, 2001
Net Income. Net income for the nine months ended June 30, 2002 was $7.3
million, compared to net income of $5.5 million for the nine months ended June
30, 2001, an increase of $1.8 million or 31.2%. Basic and diluted earnings per
share increased to $0.94 and $0.93, respectively, for the nine-month period
compared to $0.72 for both basic and diluted earnings per share for the same
period last year. A substantial increase in net interest income in the current
year was partially offset by increases in non-interest expense and income tax
expense.
18
Interest Income. Total interest income for the nine months ended June 30,
2002 was $44.3 million, a decrease of $1.6 million, or 3.4%, compared to the
prior-year period. The decrease was primarily due to lower average yields on
loans and securities, as well as the shift in mix more heavily toward investment
securities from loans. This decrease was partially offset by higher average
balances in both asset classes. Average interest-earning assets for the nine
months ended June 30, 2002 were $889.3 million, an increase of $67.6 million, or
8.2%, over average interest-earning assets of $821.7 million for the nine months
ended June 30, 2001.
Interest income on loans for the nine months ended June 30, 2002 was $33.4
million, a decrease of $1.7 million, or 4.8%, from income of $35.1 million in
the nine months ended June 30, 2001. As the impact of a 79 basis point decline
in average loan yields had a greater effect than the $34.5 million increase in
loan balances to $623.1 million from $588.6 million, attributable to increased
balances in all loan types. Average balances of commercial loans increased by
$13.4 million to $185.6 million at June 30, 2002, up from $172.2 million for the
prior-year period. Residential loans continued to see increased activity due to
refinancings with average balances growing by $17.8 million to $361.7 million,
compared to $343.8 million for the prior year period. Overall, average yields on
the higher loan balances declined to 7.17%, a decrease of 79 basis points, from
7.96% for the prior year period. The largest decline in yields came 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, and that fell significantly compared to
the prior year period.
Interest income on securities and other earning assets for the nine months
ended June 30, 2002 was $10.9 million, an increase of $60,000, or 0.6%, compared
to the same period last year, primarily due to the increase in average balances
for these assets, which more than offset the effect of the decline in average
interest rates for the period. The average balance of securities increased by
$27.8 million, or 12.3%, to $253.7 million for the nine months ended June 30,
2002 from $225.9 million for the nine months ended June 30, 2001. The average
yield on the portfolio declined by 58 basis points, to 5.56% for the nine-month
period ended June 30, 2002 from 6.14% for the nine-month period ended June 30,
2001.
Interest Expense. Total interest expense for the nine-month period ended
June 30, 2002 fell to $13.2 million, a decline of $7.2 million, or 35.3%,
compared to the same period last year. The decrease was primarily due to lower
rates paid on interest-bearing deposits and wholesale borrowings, as well as to
lower 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. Average rates paid on interest-bearing liabilities for the nine
months ended June 30, 2002 declined by 158 basis points to 2.41% from 3.98% for
the same period last year. The lower average rates and change in mix more than
offset the increase in average total interest-bearing liabilities, which
increased to $733.8 million for the nine-month period ended June 30, 2002,
compared to an average of $684.7 million for the prior year period, an increase
of $49.0 million, or 7.2%.
19
The average interest rate paid on certificates of deposit fell by 226 basis
points to 3.42% for the nine months ended June 30, 2002, from 5.68% for the same
period last year. For the nine months ended June 30, 2002, average balances of
lower-cost savings and money market accounts increased by $53.6 million, while
average balances of certificates of deposit declined by $19.4 million compared
to the nine months ended June 30, 2001.
Total deposit interest expense for the nine-month period ended June 30,
2002 fell to $8.9 million, a decline of $6.2 million, or 41.1%, compared to
expense of $15.1 million the same period last year. 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 nine
months ended June 30, 2002, average balances of lower-cost savings, money market
and NOW checking accounts increased by $35.0 million, $18.6 million and $15.0
million, respectively, compared to the same period last year. The average rates
paid on these products in the current year were 1.03%, 1.40%, and 0.43%,
respectively. During the same time period, average balances of certificates of
deposit declined by $19.4 million. The average interest rate paid on
certificates of deposit fell by 226 basis points to 3.42% for the nine months
ended June 30, 2002, from 5.68% for the prior year period. Overall, the rate
paid on interest-bearing deposits declined by 163 basis points, to 1.92% for the
nine months ended June 30, 2002, compared to 3.55% 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
nine-month period ended June 30, 2002 decreased 115 basis points to 4.94% from
6.09% for the same period last year.
Net Interest Income. For the nine months ended June 30, 2002 and 2001, net
interest income was $31.1 million and $25.5 million, respectively, an increase
of $5.6 million, or 22.1%. The increase was primarily attributable to a 76 basis
point increase in the net interest rate spread to 4.25% from 3.49% and also to
the increase of $18.5 million, or 13.5%, in average net earning assets
(interest-earning assets less interest-bearing liabilities). The Company's net
interest margin was 4.68% for the nine months ended June 30, 2002 and 4.15% for
the nine months ended June 30, 2001.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain an allowance for loan losses
to absorb probable loan losses inherent in the existing portfolio. The Company
recorded $600,000 and $1.1 million in loan loss provisions during the nine
months ended June 30, 2002 and 2001, respectively.
Non-Interest Income. Non-interest income for the nine months ended June
30, 2002 was $3.9 million compared to $3.6 million for the nine months ended
June 30, 2001, an increase of $302,000, or 8.5%. This increase was primarily
attributable to an increase of $488,000, or 20.0%, in banking fees and service
charges. Partially offsetting this increase was the effect of net securities
gains, which were $288,000 for the current nine-month period, or $244,000 less
than
20
the $532,000 of such gains recorded in the same period a year ago. Loan
servicing fees of $95,000 for the current nine-month period were $74,000 lower
than the prior year's period, primarily because the Company accelerated
amortization of its originated mortgage servicing asset by $60,000 for the first
nine months of the current fiscal year to reflect higher prepayment rates during
the period. The Company's mortgage servicing asset as of June 30, 2002 was
$211,000.
Non-Interest Expense. Non-interest expenses for the nine months ended June
30, 2002 were $22.9 million or $3.4 million more than expenses for the nine
months ended June 30, 2001. The increase was primarily attributable to increases
in compensation and occupancy expenses of $1.9 million, or 18.1%, and $384,000,
or 12.3%, respectively, due to annual salary and benefit increases, the opening
of two new branches, and the addition of NBF branches and staff. Data processing
expense also increased by $191,000, or 17.0%, related to higher deposit and loan
volumes. Other expenses for the current nine-month period increased by $886,000,
or 25.7%, over the comparable period last year. Of this increase, $240,000
relates to the previously mentioned resolution of a reconciliation issue.
Professional services increased by $157,000, or 28.6%, as a result of capital
management and technology strategies being developed by the Company and the
associated legal and consulting fees. Recruitment expense increased by $80,000,
or 103.9%, as the Company sought qualified personnel to administer new products
and to develop business in its expanded market. ATM service charges and check
processing expenses increased by $100,000, or 45.7%, and $112,000, or 36.7%,
respectively, due to new products and services and higher deposit levels.
Additionally, the Company incurred $354,000 in integration costs related to the
acquisition of NBF, which was completed in April 2002. These increases were
partially offset by a $209,000 decrease in the expense to amortize intangible
assets. Amortization of the NBF core deposit intangible totaled $150,000 for the
current nine-month period, compared to $359,000 in similar expenses in the prior
year, which represented the final amortization of intangible assets associated
with branches acquired in 1996. Excluding non-recurring integration expenses and
the amortization of intangibles, non-interest expenses for the nine months ended
June 30, 2002 were $22.4 million, compared to $19.2 million for the year-ago
period.
Income Taxes. Income tax expense was $4.2 million for the nine months ended
June 30, 2002 compared to $2.9 million for the same period in 2001. The
effective tax rates were 36.7% and 34.3%, respectively, as tax strategies
implemented in the past had a smaller relative impact due to growth in the
Company's pre-tax income.
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.
21
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 nine months
ended June 30, 2002, loan originations totaled $144.7 million and purchases of
securities totaled $102.1 million. During the nine months ended June 30, 2001,
loan originations totaled $104.5 million and purchases of securities totaled
$78.1 million. Cash paid in the NBF acquisition, net of cash and cash
equivalents acquired, amounted to $5.8 million. For the nine-month periods ended
June 30, 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 $38.8
million at June 30, 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 nine months ended June 30, 2002 was
$144.1 million, of which $88.2 million represented NBF deposits at the
acquisition date, compared to a $42.8 million increase for the nine months ended
June 30, 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 June 30, 2002, federal funds sold amounted to $11.6 million, as the
Company continued to hold additional liquidity as a result of deposit inflow.
The Company generally remains fully invested and utilizes additional sources of
funds through FHLB borrowings, which amounted to $113.1 million at June 30,
2002.
At June 30, 2002, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $85.2 million, or 8.4% of adjusted
assets (which is above the required level of $40.6 million, or 4.0%) and a total
risk-based capital level of $92.2 million, or 15.5% of risk-weighted assets
(which is above the required level of $47.5 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 June 30,
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
June 30, 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)
June 30, 2002
- -------------
Tangible capital $85,232 8.4% $15,243 1.5% $ -- --%
Tier 1 (core) capital 85,232 8.4 40,649 4.0 50,811 5.0
Risk-based capital:
Tier 1 85,232 14.3 -- -- 35,643 6.0
Total 92,169 15.5 47,524 8.0 59,405 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
has been to reduce the Bank's regulatory capital ratios below the levels shown
at September 30, 2001. However, the Bank continues to be classified as a
well-capitalized institution.
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 nine 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 current levels, the Company's net interest margin
might 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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
George Strayton, Chief Executive Officer and Katherine A. Dering, Chief
Financial Officer of Provident Bancorp, Inc. (the "Company") each certify in his
or her capacity as an officer of the Company that he or she has reviewed the
quarterly report on Form 10-Q for the quarter ended June 30, 2002 and that to
the best of his or her knowledge:
(1) the report fully complies with the requirements of Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations.
Aug 14, 2002 /s/ George Strayton
- --------------------- -----------------------
Date George Strayton
Chief Executive Officer
Aug 14, 2002 /s/ Katherine A. Dering
- --------------------- -----------------------
Date Katherine A. Dering
Chief Financial Officer
25
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/ George Strayton
--------------------------------
George Strayton
President and Chief Executive Officer
Duly Authorized Representive
Aug 14, 2002
Date: --------------------------------
By: /s/ Katherine A. Dering
--------------------------------
Katherine A. Dering
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: Aug 14, 2002
--------------------------------