SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
----------------------- ------------------
7,997,512
$0.10 per share as of January 31, 2003
PROVIDENT BANCORP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED DECEMBER 31, 2002
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
December 31, 2002 and September 30, 2002 3-4
Consolidated Statements of Income for the Three Months
Ended December 31, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended December 31, 2002 6
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2002 and 2001 7-8
Notes to Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 25-28
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Assets December 31, 2002 September 30, 2002
- ------ ----------------- ------------------
Cash and due from banks 35,510 35,093
Securities, including $27,851 and $29,624 pledged
as collateral for borrowings at December 31, 2002
and September 30, 2002, respectively:
Available for sale, at fair value (amortized cost of
$199,705 at December 31, 2002 and $196,718 at
September 30, 2002) 208,090 206,146
Held to maturity, at amortized cost (fair value of $84,870
at December 31, 2002 and $90,706 at September 30, 2002) 81,281 86,791
----------- -----------
Total securities 289,371 292,937
----------- -----------
Loans:
One- to four-family residential mortgage loans 386,222 366,111
Commercial real estate, commercial business
and construction loans 223,904 221,669
Consumer loans 83,221 83,419
----------- -----------
Total loans 693,347 671,199
Allowance for loan losses (Note 2) (10,687) (10,383)
----------- -----------
Total loans, net 682,660 660,816
----------- -----------
Accrued interest receivable, net 4,866 5,491
Federal Home Loan Bank stock, at cost 5,871 5,348
Premises and equipment, net 11,167 11,071
Goodwill (Note 3) 13,540 13,540
Core deposit intangible, net (Note 3) 1,374 1,501
Other assets 13,789 1,904
----------- -----------
Total assets $ 1,058,148 $ 1,027,701
=========== ===========
(Continued)
3
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, cONTINUED
(Unaudited)
(Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity December 31, 2002 September 30, 2002
- ------------------------------------ ----------------- ------------------
Liabilities:
Deposits:
Retail demand and NOW deposits $ 141,829 $ 137,382
Commercial demand deposits 60,194 55,732
Savings and money market deposits 372,029 362,983
Certificates of deposit 247,665 243,529
----------- -----------
Total deposits 821,717 799,626
----------- -----------
Borrowings 104,009 102,968
Mortgage escrow funds 9,581 3,747
Other 9,770 10,493
----------- -----------
Total liabilities 945,077 916,934
----------- -----------
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; 20,000,000 shares
authorized; 8,280,000 shares issued; 7,997,512 shares
outstanding) 828 828
Additional paid-in capital 36,834 36,696
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (1,880) (1,974)
Common stock awards under recognition and retention plan ("RRP") (969) (1,108)
Treasury stock, at cost (282,488 shares) (5,874) (5,874)
Retained earnings 79,178 76,727
Accumulated other comprehensive income, net of taxes (Note 4) 4,954 5,572
----------- -----------
Total stockholders' equity 113,071 110,867
----------- -----------
Total liabilities and stockholders' equity $ 1,058,148 $ 1,027,701
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data) For the Three Months
Ended December 31,
------------------
2002 2001
---- ----
Interest and dividend income:
Loans $11,346 $11,220
Securities 3,595 3,463
Other earning assets 83 78
------- -------
Total interest and dividend income 15,024 14,761
------- -------
Interest expense:
Deposits 2,345 3,303
Borrowings 1,044 1,488
------- -------
Total interest expense 3,389 4,791
------- -------
Net interest income 11,635 9,970
Provision for loan losses (Note 2) 300 225
------- -------
Net interest income after provision for loan losses 11,335 9,745
------- -------
Non-interest income:
Banking fees and service charges 1,089 976
Gain on sales of securities available for sale 657 147
Other 257 161
------- -------
Total non-interest income 2,003 1,284
------- -------
Non-interest expense:
Compensation and employee benefits 4,695 3,857
Occupancy and office operations 1,236 1,084
Advertising and promotion 416 401
Data processing 573 403
Amortization of intangible assets (Note 3) 127 --
Other 1,426 1,408
------- -------
Total non-interest expense 8,473 7,153
------- -------
Income before income tax expense 4,865 3,876
Income tax expense 1,824 1,350
------- -------
Net income $ 3,041 $ 2,526
======= =======
Earnings per common share (Note 5):
Basic $ 0.39 $ 0.33
======= =======
Diluted $ 0.39 $ 0.32
======= =======
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 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, 2002 $ 828 $ 36,696 $ (1,974) $ (1,108) $ (5,874) $ 76,727 $ 5,572 $110,867
Net income 3,041 3,041
Other comprehensive income (note 4) (618) (618)
--------
Total comprehensive income 2,423
Cash dividends paid ($0.13 per share) (590) (590)
ESOP shares allocated or committed
to be released for allocation 138 94 232
Vesting of RRP shares 139 139
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002 $ 828 $ 36,834 $ (1,880) $ (969) $ (5,874) $ 79,178 $ 4,954 $113,071
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) For the Three Months
Ended December 31,
------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 3,041 $ 2,526
Adjustments to reconcile net income to net cash
(used in)/provided by operating activities:
Provision for loan losses 300 225
Depreciation and amortization of premises
and equipment 486 427
Amortization of intangible assets 127 --
Gain on sales of securities available for sale (657) (147)
Gain on sales of loans held for sale (4) (6)
Net amortization of premiums and discounts 267 47
Amortization of deferred loan fees (155) (121)
ESOP and RRP expense 371 345
Originations of loans held for sale (8,718) (1,926)
Proceeds from sales of loans held for sale 129 1,774
Deferred income tax benefit (1) (217)
Net changes in accrued interest receivable
and payable 527 545
Other adjustments (principally net changes
in other assets and other liabilities) (68) 2,571
--------- ---------
Net cash (used in)/ provided by
operating activities (4,355) 6,043
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (35,543) (15,316)
Held to maturity (4,386) (6,496)
Proceeds from maturities, calls and other
principal payments on securities:
Available for sale 17,377 3,786
Held to maturity 9,819 4,767
Proceeds from sales of securities available for sale 15,678 4,155
Loan originations (100,069) (57,722)
Loan principal payments 86,442 52,314
Purchases of Federal Home Loan Bank stock (523) (815)
Purchase of bank owned life insurance (12,000) --
Purchases of premises and equipment (582) (585)
Other adjustments 168 63
--------- ---------
Net cash used in investing activities (23,619) (15,849)
--------- ---------
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands) For the Three Months
Ended December 31,
------------------
2002 2001
---- ----
Cash flows from financing activities:
Net increase in deposits 22,106 1,702
Net increase in borrowings 1,041 3,761
Net increase in mortgage escrow funds 5,834 5,146
Stock option transactions -- 42
Cash dividends paid (590) (488)
-------- --------
Net cash provided by financing activities 28,391 10,163
-------- --------
Net increase in cash and cash equivalents 417 357
Cash and cash equivalents at beginning of period 35,093 16,447
-------- --------
Cash and cash equivalents at end of period $ 35,510 $ 16,804
======== ========
Supplemental information:
Interest payments $ 3,487 $ 5,036
Income tax payments 66 1,460
Transfer of loans to real estate owned -- 71
======== ========
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 (the "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 December 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. 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 three months ended
December 31, 2002 are not necessarily indicative of results to be expected for
other interim periods or the entire fiscal year ending September 30, 2003. 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, 2002.
9
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates. 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,
are made using a consistently-applied methodology that takes 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
Ended December 31,
------------------
2002 2001
---- ----
(Dollars in thousands)
Balance at beginning of period $ 10,383 $ 9,123
Provision for loan losses 300 225
Charge-offs (14) (27)
Recoveries 18 13
Balance at end of period -- --
$ 10,687 $ 9,334
======== ========
10
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated. At both dates, the Company had no
troubled debt restructurings (loans for which a portion of interest or principal
has been forgiven and loans modified at interest rates materially less than
current market rates).
December 31, September 30,
2002 2002
---- ----
(Dollars in thousands)
Non-accrual loans:
One- to four- family residential mortgage loans $2,262 $2,291
Commercial real estate, commercial business
and construction loans 2,999 2,492
Consumer loans 95 171
------ ------
Total non-performing loans 5,356 4,954
Real estate owned:
One- to four-family residential 41 41
------ ------
Total non-performing assets $5,397 $4,995
====== ======
Non-performing loans as a % of total loans 0.77% 0.74%
Non-performing assets as a % of total assets 0.51 0.49
Allowance for loan losses as a % of total
non-performing loans 199.5 209.6
Allowance for loan losses as a % of total loans 1.54 1.55
====== ======
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 $15.3 million. This amount was
recognized as intangible assets, consisting of goodwill of $13.5 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.
11
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
(with approximately 75% amortized in the first four years), and will be
evaluated annually for impairment. Core deposit amortization expense was
$127,000 for the three-month period ending December 31, 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 net of any gain (loss) on
securities sold during the period. The Company's total comprehensive income was
$2.4 million and $1.7 million for the three months ended December 31, 2002 and
2001, respectively.
Accumulated other comprehensive income in the consolidated statements of
financial condition at December 31, 2002 and September 30, 2002 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 December 31, 2002 and 2001 were 7,721,560 and
7,686,230, respectively.
Diluted earnings per share was computed based on 7,858,438 shares for the
three months ended December 31, 2002 (including 136,878 common-equivalent
shares) and 7,807,529 shares for the three months ended December 31, 2001
(including 121,299 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
6. Guarantor's Obligations under Guarantees
----------------------------------------
Standby letters of credit are conditional commitments issued by the Company
to assure the performance of financial obligations of a customer to a third
party. These commitments are primarily issued in favor of local municipalities
to support the obligor's completion of real estate development projects. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
As of December 31, 2002, the Company had $8.1 million in outstanding
letters of credit commitments, of which $1.6 million were secured by cash
collateral. Management does not expect that the provisions of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (see
"Recent Accounting Standards") will impact the Company's results of operations
or financial condition.
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, 2002 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.
13
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 was 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 PMB to serve the
banking needs of municipalities throughout Rockland and Orange Counties. The
formation of PMB eliminated the regulatory barriers previously preventing
Provident Bank from accepting the deposit of public funds.
Comparison of Financial Condition at December 31, 2002 and September 30, 2002
Total assets at December 31, 2002 were $1.1 billion, an increase of $30.4
million, or 3.0%, over assets of $1.0 billion at September 30, 2002. Average
total assets for the three months ended December 31, 2002 were $1.0 billion, an
increase of $144.3 million, or 16.1%, over average total assets of $895.5
million in the three months ended December 31, 2001.
Net loans at December 31, 2002 were $682.7 million, an increase of $21.9
million, or 3.3%, over net loan balances of $660.8 million at September 30,
2002. Over the first three months of its new fiscal year, the Bank experienced
growth of $20.1 million in the residential loan portfolio, reflecting continued
refinancing activity. The allowance for loan losses was increased by $300,000 to
$10.7 million at December 31, 2002 from $10.4 million at September 30, 2002.
The total securities portfolio decreased to $289.4 million at December 31,
2002 from $292.9 million at September 30, 2002, a decrease of $3.5 million, or
1.2%. 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
decrease in the investment securities balance is due primarily to the sale of
securities to fund bank owned life insurance ("BOLI"), the cash value of which
is included in "other assets". In addition, accelerated paydowns of certain of
the Company's mortgage-backed securities, related to nation-wide refinancing
activity, caused the balance held in those securities to decline.
Total deposits were $821.7 million at December 31, 2002, up $22.1 million,
or 2.8%, from $799.6 million at September 30, 2002. The Company generally sees a
seasonal increase in deposits in the months of November and December, followed
by a similar outflow in January, as local depositors prepare to pay real estate
taxes in January. Also, the growing municipal deposit business brought in
balances in checking, savings, and certificates of deposit during the quarter.
14
Borrowings from the Federal Home Loan Bank of New York (the "FHLB")
increased by $1.0 million during the three-month period to $104.0 million at
December 31, 2002 from $103.0 million at September 30, 2002, supplementing
deposit growth to fund the $21.9 million increase in net loans over the
three-month period.
Stockholders' equity increased by $2.2 million to $113.1 million at
December 31, 2002, compared to $110.9 million at September 30, 2002. In addition
to net income of $3.0 million for the three months ended December 31, 2002,
equity increased by $371,000 due to activity related to the Company's ESOP and
management retention plans. Offsetting these increases were cash dividends of
$590,000 and a $618,000 decrease in after-tax net unrealized gains on securities
available for sale, related primarily to the sale of securities to fund the
acquisition of bank owned life insurance ("BOLI").
The Company has repurchased a total of 330,551 shares of its common stock
under its two previously announced repurchase programs, which authorized total
repurchases of up to 376,740 shares. Net of stock option-related reissuances, a
total of 282,488 treasury shares were held by the Company at December 31, 2002.
Comparison of Operating Results for the Three Months Ended
December 31, 2002 and December 31, 2001
Net Income. Net income for the three months ended December 31, 2002 was
$3.0 million, an increase of $515,000 over net income of $2.5 million for the
three months ended December 31, 2001, due primarily to the Bank's strong net
interest margin, net of higher operating costs related to its branch expansion.
Basic and diluted earnings per share were both $0.39 for the three months ended
December 31, 2002, compared to $0.33 and $0.32, respectively, for the same
period last year.
Interest Income. Total interest income for the three months ended December
31, 2002 increased to $15.0 million, an increase of $263,000, or 1.8%, compared
to the $14.8 million earned in the prior-year period. The increase was primarily
due to higher average balances of interest-earning assets, largely offset by
lower average yields on loans and securities, due to lower market interest
rates, as well as a shift in asset mix more heavily toward securities than
loans. This shift was due, in part, to the addition of NBF assets, the majority
of which were securities and other earning assets. Average total
interest-earning assets for the three months ended December 31, 2002 were $978.2
million, an increase of $123.8 million, or 14.5%, over average total
interest-earning assets for the three months ended December 31, 2001 of $854.4
million.
The $63.2 million, or 10.4%, increase in average loans to $671.4 million
from $608.2 million was attributable to increased balances in all loan types,
but especially commercial loans, which grew to an average balance of $213.0
million compared to $175.7 million for the prior-year quarter, an increase of
21.2%. Average residential mortgage loan balances also grew, reaching an average
balance of $374.4 million compared to $356.0 million for the prior-year quarter,
benefiting from increased activity due to the low market rates. Average yields
on the higher loan balances declined to 6.70% from 7.32%. The largest decline in
yields was in the consumer loan
15
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 a year
ago. Average rates paid on consumer loans for the three-month period fell to
5.34% from 6.55%.
Interest income on securities and other earning assets for the three months
ended December 31, 2002 was $3.7 million, an increase of $137,000, or 3.9%, from
securities income of $3.5 million for the prior year period. This increase is
the net result of a decrease of 95 basis points in the average yield to 4.76%
from 5.71%, which was more than offset by a $60.6 million, or 24.6%, increase in
the average balances of securities and other earning assets to $306.8 million
for the quarter ended December 31, 2002 compared to $246.2 million for the
quarter ended December 31, 2001. The decline in yields in securities was due to
lower market interest rates as well as to heavy prepayments on mortgage-backed
securities, which resulted in faster-than-anticipated amortization of premiums
on those securities.
Interest Expense. Total interest expense for the three months ended
December 31, 2002 fell by $1.4 million to $3.4 million, a decrease of 29.3%
compared to interest expense of $4.8 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 slow growth 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
December 31, 2002 declined by 101 basis points to 1.67% from 2.68% 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 $96.7
million, or 13.7%, to $805.0 million for the period ended December 31, 2002,
compared to an average of $708.3 million for the prior year period.
For the three months ended December 31, 2002, interest expense on deposits
fell by $958,000, or 29.0%, to $2.3 million from $3.3 million in the prior year
period. Interest expense on savings accounts increased by $26,000, or 5.4%, to
$509,000 from $483,000, due to a 36.7% increase in average balances to $258.4
million from $189.0 million, offsetting the 23 basis points decline in average
rates paid to 0.78% from 1.01%. Average balances of money market and NOW
checking increased by $20.1 million, or 20.8%, and $8.4 million, or 11.7%,
respectively, while their average yields fell by 48 and 9 basis points,
respectively, compared to the three months ended December 31, 2001. Interest
expense on certificates of deposit fell by $910,000, or 38.1%, to $1.5 million
for the three months ended December 31, 2002, from $2.4 million for the same
three-month period last year. The average interest rate paid on certificates of
deposit fell by 166 basis points to 2.38% for the three months ended December
31, 2002, from 4.04% for the prior-year period. Average balances of certificates
of deposit increased by $11.9 million, or 5.1%, to $246.3 million for the
current quarter versus $234.4 million for the same quarter last year, partly due
to the above-mentioned increased municipal deposit activity.
16
For the three months ended December 31, 2002, interest expense on
borrowings fell by $444,000, or 29.8%, to $1.0 million from $1.5 million in the
prior year period. The average rate paid on total borrowings for the three-month
period ended December 31, 2002 decreased 106 basis points to 4.02% from 5.08%
for the same period last year. The average amount borrowed declined by $13.1
million, or 11.3%, to $103.1 million for the current quarter, compared to $116.2
million for the same period last year.
Net Interest Income. Net interest income for the three months ended
December 31, 2002 was $11.6 million, compared to $10.0 million for the three
months ended December 31, 2001, an increase of $1.6 million or 16.0%. The
increase in net interest income was largely due to a $27.2 million increase in
average net earning assets to $173.2 million, from $146.0 million, as well as to
a 25 basis point increase in net interest rate spread, to 4.42% from 4.17% in
the prior year period. Net interest margin increased to 4.72% for the three
months ended December 31, 2002, up from 4.63% in the prior year period. Average
non interest-earning assets for the three months ended December 31, 2002
increased by $20.4 million compared to the prior year period, while average non
interest-bearing liabilities increased by $40.0 million for the same periods.
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. Also, customers have allowed more of their deposits to linger in
checking and savings accounts, as rates in certificate of deposit accounts have
appeared unattractive to them. 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 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 determined
based on various 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 using a consistently-applied
methodology. The Company recorded $300,000 and $225,000 in loan loss provisions
during the three months ended December 31, 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 December 31, 2002 was $2.0 million compared to $1.3 million for the
three months ended December 31, 2001, an increase of $719,000, or 56.0%. This
increase was primarily attributable to net securities gains which were $657,000
for the current three-month period, compared to gains of $147,000 recorded in
the same period a year ago. Also contributing to this increase was an increase
of $113,000, or 11.6%, in banking fees and service charges, as increases in
transaction account volumes generated higher fee income. Other non-interest
income increased to $257,000, up from $161,000 in the prior year, due primarily
to volume-related increases in loan fee income ($75,000) and net debit card fees
($39,000).
Non-Interest Expense. Non-interest expenses for the three months ended
December 31, 2002 were $8.5 million, a $1.3 million or 18.5% increase over
expenses of $7.2 million for the three months ended December 31, 2001. The
increase was primarily attributable to increases in compensation and occupancy
expenses of $838,000, or 21.7%, and $152,000, or 14.0%, respectively, due to
annual salary and benefit increases, the opening of a new branch, and the
addition of NBF branches and staff. Of the $838,000 increase in compensation
expenses, $156,000 or 18.6% of the total increase, was attributable to increased
costs for the Company's stock-based compensation plans based on an increase in
the average market value of its common stock to $29.96 per share for the three
months ended December 31, 2002 from $24.34 per share for the same period last
year. Data processing expense also increased by $170,000, or 42.2%, related to
higher deposit and loan volumes. Additionally, the Company incurred $127,000 in
costs related to the amortization of the NBF core deposit intangible during the
current three-month period, while there were no similar expenses in the prior
year.
Income Taxes. Income tax expense was $1.8 million for the three months
ended December 31, 2002 compared to $1.3 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. On December 30, 2002 the Company
contributed $12.0 million to fund a Bank Owned Life Insurance ("BOLI") program.
The BOLI will generate a federal tax benefit in subsequent reporting periods.
The effective tax rates in the 2002 and 2001 first quarters were 37.5% and
34.8%, respectively.
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.
18
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. Deposit flows are generally affected by the level of interest
rates, the interest rates and products offered by local competitors, and other
factors.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the three months
ended December 31, 2002, originations of loans for portfolio totaled $100.1
million, originations of loans held for sale totaled $8.7 million and purchases
of securities totaled $39.9 million. During the three months ended December 31,
2001, loan originations (including loans held for sale) totaled $59.6 million
and purchases of securities totaled $21.8 million. For the three-month period
ended December 31, 2002, these investing activities were funded primarily by
principal repayments on loans ($86.4 million), by proceeds from sales and
maturities of securities ($43.5 million), and by deposit growth ($22.1 million).
Loan origination commitments totaled $71.9 million at December 31, 2002. The
Company anticipates that it will have sufficient funds available to meet current
loan commitments.
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 December 31, 2002, the Company held no federal funds sold. The Company
generally remains fully invested and utilizes additional sources of funds
through FHLB borrowings, which amounted to $104.0 million at December 31, 2002.
At December 31, 2002, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $87.5 million, or 8.5% of adjusted
assets (which is above the required level of $41.2 million, or 4.0%) and a total
risk-based capital level of $95.1 million, or 15.6% of risk-weighted assets
(which is above the required level of $48.7 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. At December
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.
19
The following table sets forth the Bank's regulatory capital position at
December 31, 2002 and September 30, 2002, compared to OTS requirements.
OTS Requirements
-----------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
----------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
December 31, 2002
Tangible capital $87,485 8.5% $15,460 1.5% $ -- --%
Tier 1 (core) capital 87,485 8.5 41,227 4.0 51,534 5.0
Risk-based capital:
Tier 1 87,485 14.4 -- -- 36,548 6.0
Total 95,137 15.6 48,730 8.0 60,913 10.0
September 30, 2002
Tangible capital $84,307 8.5% $14,963 1.5% $ -- --%
Tier 1 (core) capital 84,307 8.5 39,901 4.0 49,875 5.0
Risk-based capital:
Tier 1 84,307 14.2 -- -- 35,552 6.0
Total 91,747 15.5 47,403 8.0 59,254 10.0
The intangible assets recorded in the April 2002 NBF acquisition are
deducted from capital for purposes of calculating regulatory capital measures.
However, the Bank continues to be classified as a well-capitalized institution.
Recent Accounting Standards
In November 2002, the Financial Accounting Standards Board ("the FASB")
issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN No. 45 is an interpretation of FASB Statements No.
5, 57 and 107 and rescinds FIN No. 35. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The disclosure requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company has adopted the provisions of FIN No. 45 in this Form 10-Q (see Note 6).
20
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. This statement is effective
for fiscal years ending after December 15, 2002. Management does not expect that
the provisions of SFAS No. 148 will impact our results of operations or
financial condition.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities," which is an interpretation of ARB
No. 51. This Interpretation addresses consolidation by business enterprises of
variable interest entities. The Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period in which an enterprise holds a
variable interest that it acquired before February 1, 2003. Management does not
expect that the provisions of FIN No. 46 will impact our results of operations
or financial condition.
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, 2002, 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.
21
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Company's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures were effective
in timely alerting them to any material information relating to the Company and
its subsidiaries required to be included in the Company's Exchange Act filings.
There were no significant changes made in the Company's internal controls
or in other factors that that could significantly affect these disclosure
controls and procedures subsequent to the date of the evaluation performed by
the Company's Chief Executive Officer and Chief Financial Officer.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which,
in the aggregate, involved amounts which are believed to be immaterial to the
consolidated financial condition and operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
22
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 December 31, 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.
----------------------------
Date: February , 2003 George Strayton
Chief Executive Officer
----------------------------
Date: February , 2003 Katherine A. Dering
Chief Financial Officer
23
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 Representative)
Date: February 12, 2003
By: \s\ Katherine A. Dering
--------------------------------------------
Katherine A. Dering
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 12, 2003
24
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
---------------------------------------------------------
I, George Strayton, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Provident Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
25
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
February 12, 2003 \s\ George Strayton
----------------- -------------------------------------
Date George Strayton
President and Chief Executive Officer
26
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
---------------------------------------------------------
I, Katherine A. Dering, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Provident Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
27
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
February 12, 2003 \s\ Katherine A. Dering
----------------- -------------------------------------
Date Katherine A. Dering
Senior Vice President and
Chief Financial Officer
28