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, 2003
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)
United States of America 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.
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 7,954,325
as of July 31, 2003
1
PROVIDENT BANCORP, INC.
QUARTERLY PERIOD ENDED JUNE 30, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
June 30, 2003 and September 30, 2002 3-4
Consolidated Statements of Income for the Three Months and
Nine Months Ended June 30, 2003 and 2002 5
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended June 30, 2003 and 2002 6-7
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2003 and 2002 8-9
Consolidated Statements of Comprehensive Income for the
Three Months and Nine Months Ended June 30, 2003 and 2002 10
Notes to Consolidated Financial Statements 11-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-34
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 35
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 37-38
Signature 39
Certifications Pursuant to Sarbanes-Oxley Act of 2002 40-42
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)
At At
Assets June 30, 2003 September 30, 2002
------------- ------------------
Cash and due from banks $ 32,473 $ 35,093
Federal funds sold 11,000 --
----------- -----------
Total cash and cash equivalents 43,473 35,093
Securities (Note 8):
Available for sale, at fair value (amortized cost of
$245,033 at June 30, 2003 and $196,718 at
September 30, 2002) 251,913 206,146
Held to maturity, at amortized cost (fair value of $85,576
at June 30, 2003 and $90,706 at September 30, 2002) 82,787 86,791
----------- -----------
Total securities 334,700 292,937
----------- -----------
Loans held for sale 2,554 --
Gross loans (Note 6) 693,610 671,199
Allowance for loan losses (Note 5) (11,055) (10,383)
----------- -----------
Total loans, net 682,555 660,816
----------- -----------
FHLB stock, at cost 5,819 5,348
Accrued interest receivable, net 4,426 5,491
Premises and equipment, net 11,616 11,071
Goodwill (Note 3) 13,540 13,540
Bank owned life insurance 12,324 --
Other assets 3,691 3,405
----------- -----------
Total assets $ 1,114,698 $ 1,027,701
=========== ===========
(Continued)
3
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, cONTINUED
(Unaudited)
(Dollars in thousands, except per share data)
At At
Liabilities and Stockholders' Equity June 30, 2003 September 30, 2002
------------- ------------------
Liabilities:
Deposits (Note 7):
Non interest bearing $ 147,673 $ 110,131
Interest bearing 709,861 689,495
----------- -----------
Total deposits 857,534 799,626
Borrowings 116,732 102,968
Mortgage escrow funds 13,055 3,747
Other 11,640 10,493
----------- -----------
Total liabilities 998,961 916,834
----------- -----------
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; 7,953,075 and 7,997,512
shares outstanding at June 30, 2003 and September 30, 2002,
respectively) 828 828
Additional paid-in capital 37,252 36,696
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (139,354 shares at June 30, 2003
and 162,538 shares at September 30, 2002, respectively) (1,691) (1,974)
Common stock awards under recognition and retention plan ("RRP") (618) (1,108)
Treasury stock, at cost (326,925 shares at June 30, 2003 and
282,488 shares at September 30, 2002, respectively) (7,469) (5,874)
Retained earnings 83,376 76,727
Accumulated other comprehensive income 4,059 5,572
----------- -----------
Total stockholders' equity 115,737 110,867
----------- -----------
Total liabilities and stockholders' equity $ 1,114,698 $ 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 share data)
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Interest and dividend income:
Loans $ 10,724 $ 11,212 $ 33,199 $ 33,434
Securities 3,414 3,620 10,224 10,546
Other earning assets 114 178 292 349
---------- ---------- ---------- ----------
Total interest and dividend income 14,252 15,010 43,715 44,329
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,837 2,880 6,147 8,881
Borrowings 1,138 1,337 3,164 4,319
---------- ---------- ---------- ----------
Total interest expense 2,975 4,217 9,311 13,200
---------- ---------- ---------- ----------
Net interest income 11,277 10,793 34,404 31,129
Provision for loan losses (Note 5) 200 200 800 600
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 11,077 10,593 33,604 30,529
---------- ---------- ---------- ----------
Non-interest income:
Banking fees and service charges 1,196 1,021 3,399 2,932
Gain on sales of securities available for sale 811 51 1,895 288
Gains on sales of loans 394 52 836 92
Other 417 214 1,058 540
---------- ---------- ---------- ----------
Total non-interest income 2,818 1,338 7,188 3,852
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits 5,110 4,394 15,109 12,227
Occupancy and office operations 1,321 1,229 3,811 3,495
Data processing 599 473 1,700 1,316
Advertising and promotion 378 325 1,289 1,030
Consulting fees 205 58 628 256
Amortization of core deposit intangible 103 150 345 150
Merger integration costs -- 286 -- 354
Other 1,390 1,564 4,254 4,074
---------- ---------- ---------- ----------
Total non-interest expense 9,106 8,479 27,136 22,902
---------- ---------- ---------- ----------
Income before income tax expense 4,789 3,452 13,656 11,479
Income tax expense 1,683 1,309 4,989 4,209
---------- ---------- ---------- ----------
Net income $ 3,106 $ 2,143 $ 8,667 $ 7,270
========== ========== ========== ==========
Weighted average common shares:
Basic 7,704,623 7,713,880 7,714,631 7,700,978
Diluted 7,824,603 7,851,393 7,828,819 7,828,946
Per common share: (Note 9)
Basic $ 0.40 $ 0.28 $ 1.12 $ 0.94
Diluted 0.40 0.27 1.11 0.93
Dividends declared 0.15 0.11 0.42 0.29
Book value at period end $ 14.55 $ 13.48 $ 14.55 $ 13.48
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, 2003
(Unaudited)
(In thousands, except share and per share data)
Common
Additional Unallocated Stock
Common Paid-In ESOP Awards
Stock Capital Shares Under RRP
----- ------- ------ ---------
Balance at September 30, 2002 $ 828 $ 36,696 $(1,974) $(1,108)
Net income
Cash dividends paid ($0.42 per share)
Purchases of treasury stock (60,700 shares)
Stock options exercised (22,448 shares) 117
ESOP shares allocated or committed
to be released for allocation
(23,184 shares) 439 283
Vesting (forfeiture) of RRP shares 490
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $1,014
Decrease in net unrealized loss on cash
flow hedges, net of taxes of $(6)
------- -------- ------- -------
Balance at June 30, 2003 $ 828 $ 37,252 $(1,691) $ (618)
======= ======== ======= =======
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Income Equity
----- -------- ------ ------
Balance at September 30, 2002 $(5,874) $76,727 $5,572 $110,867
Net income 8,667 8,667
Cash dividends paid ($0.42 per share) (1,871) (1,871)
Purchases of treasury stock (60,700 shares) (1,898) (1,898)
Stock options exercised (22,448 shares) 399 (147) 369
ESOP shares allocated or committed
to be released for allocation
(23,184 shares) 722
Vesting (forfeiture) of RRP shares (96) 394
Decrease in net unrealized gain
on securities available for sale,
net of taxes of $1,014 (1,523) (1,523)
Decrease in net unrealized loss on cash
flow hedges, net of taxes of $(6) 10 10
------- ------- ------ --------
Balance at June 30, 2003 $(7,469) $83,376 $4,059 $115,737
======= ======= ====== ========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2002
(Unaudited)
(In thousands, except share and per share data)
Common
Additional Unallocated Stock
Common Paid-In ESOP Awards
Stock Capital Shares Under RRP
----- ------- ------ ---------
Balance at September 30, 2001 $ 828 $ 36,535 $(2,350) $(1,729)
Net income
Cash dividends paid ($0.29 per share)
Purchases of treasury stock (27,700 shares)
Stock option exercises (38,954 shares)
ESOP shares allocated or committed
to be released for allocation
(23,184 shares) 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)
======= ======== ======= =======
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Income Equity
----- -------- ------ ------
Balance at September 30, 2001 $(4,298) $69,252 $4,382 $102,620
Net income 7,270 7,270
Cash dividends paid ($0.29 per share) (1,500) (1,500)
Purchases of treasury stock (27,700 shares) (775) (775)
Stock option exercises (38,954 shares) 336 (102) 234
ESOP shares allocated or committed
to be released for allocation
(23,184 shares) 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 $(4,737) $74,920 $3,764 $108,311
======= ======= ====== ========
See accompanying notes to unaudited consolidated financial statements.
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months
Ended June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 8,667 $ 7,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 800 600
Depreciation and amortization of premises
and equipment 1,456 1,345
Amortization of core deposit intangible 345 150
Gain on sales of securities available for sale (1,895) (288)
Gain on sales of loans held for sale (836) (92)
Net amortization of premiums and discounts
on securities 796 274
ESOP and RRP expense 1,116 1,080
Originations of loans held for sale (34,997) (12,722)
Proceeds from sales of loans held for sale 33,279 12,004
Deferred income tax expense (benefit) 485 (928)
Net changes in accrued interest receivable
and payable 920 100
Other adjustments (principally net changes
in other assets and other liabilities) 787 1,456
--------- ---------
Net cash provided by operating activities 10,923 10,249
--------- ---------
Cash flows from investing activities:
Purchase of The National Bank of Florida ("NBF")
net of cash and cash equivalents acquired -- (6,000)
Purchases of securities:
Available for sale (128,102) (67,576)
Held to maturity (27,458) (34,480)
Proceeds from maturities, calls and other
principal payments on securities:
Available for sale 58,113 15,137
Held to maturity 31,255 16,120
Proceeds from sales of securities available for sale 22,979 52,961
Loan originations (278,856) (150,372)
Loan principal payments 256,183 129,906
Proceeds from sales of other real estate owned 210 --
Purchases of FHLB stock (471) (866)
Purchase of bank owned life insurance (12,000) --
Purchases of premises and equipment (2,001) (2,012)
--------- ---------
Net cash used in investing activities (80,148) (47,182)
--------- ---------
(continued)
8
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Nine Months
Ended June 30,
--------------
2003 2002
---- ----
Cash flows from financing activities:
Net increase in transaction and savings deposits $ 69,140 $ 53,433
Net (decrease)/increase in time deposits (11,207) 2,347
Borrowings 44,000 27,884
Repayments of borrowings (30,236) (25,184)
Net increase in mortgage escrow funds 9,308 6,496
Treasury shares purchased (1,898) (775)
Exercises of stock options 369 234
Cash dividends paid (1,871) (1,500)
-------- ---------
Net cash provided by financing activities 77,605 62,935
-------- ---------
Net increase in cash and cash equivalents 8,380 26,002
Cash and cash equivalents at beginning of period 35,093 16,447
-------- ---------
Cash and cash equivalents at end of period $ 43,473 $ 42,449
======== =========
Supplemental information:
Interest payments $ 9,457 $ 13,395
Income tax payments 4,101 6,469
Purchase of NBF
Fair value of assets acquired, including intangibles -- 121,186
Fair value of liabilities assumed -- 93,086
Cash paid for common stock -- 28,100
Transfer of loans to real estate owned 99 162
Net change in unrealized gains recorded on
securities available for sale (2,549) (1,076)
Change in deferred taxes on unrealized gains
on securities available for sale 1,014 419
See accompanying notes to unaudited consolidated financial statements.
9
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Net income: $ 3,106 $ 2,143 $ 8,667 $ 7,270
Other comprehensive income (loss):
Net unrealized gains (losses) on securities
available for sale:
Net unrealized holding gains (losses)
arising during the year, net of taxes of
($92), ($792), $256 and $304 137 1,170 (386) (473)
Less reclassification adjustment for
net realized gains included in net income,
net of taxes of $323, $20, $758, and $115 (488) (31) (1,137) (173)
Net unrealized gain on
derivatives, net of taxes
of ($0), ($6), ($6) and ($19) -- 10 10 28
------- ------- ------- -------
Other comprehensive income (loss) (351) 1,149 (1,513) (618)
------- ------- ------- -------
Total comprehensive income $ 2,755 $ 3,292 $ 7,154 $ 6,652
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
10
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 June 30, 2003, 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 loan origination
commitments, lines of credit and letters of credit extended to customers in the
ordinary course of its lending activities. 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 and
nine months ended June 30, 2003 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.
11
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 5), which is a
critical accounting policy.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
Stock-Based Compensation
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its stock option plan.
No stock-based employee compensation cost is reflected in net income, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of the grant. SFAS No. 123,
Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income if the fair-value-based
method had been applied to all outstanding awards in each period. In April 2003
the FASB decided to require all companies to expense the value of employee stock
options but has not decided how to measure the fair value of the options. As
such, the financial statement impact of stock option expensing is not known at
this time.
Three-months Nine-months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 3,106 $ 2,143 $ 8,667 $ 7,270
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for awards
granted, modified, or settled, net of
related tax effects (98) (101) (297) (289)
Pro forma net income $ 3,008 $ 2,042 $ 8,370 $ 6,981
Earnings per share
Basic - as reported $ 0.40 $ 0.28 $ 1.12 $ 0.94
Basic - pro forma 0.39 0.26 1.08 0.91
Diluted - as reported 0.40 0.27 1.11 0.93
Diluted - pro forma 0.38 0.26 1.07 0.89
12
2. Mutual Holding Company Stock Conversion and Proposed Acquisition of ENB
Holding Company
On July 2, 2003, the Company announced that the Board of Directors of the
Company and Provident Bancorp, MHC (the "MHC") have adopted a Plan of Conversion
(the "Plan") pursuant to which the MHC will convert from mutual to capital stock
form (the "Conversion"). The MHC, headquartered in Montebello, New York, owns
approximately 55.5% of the outstanding shares of common stock of the Company.
Public stockholders own the remaining shares. Provident Bancorp, Inc. owns 100%
of the outstanding capital stock of Provident Bank.
Pursuant to the Plan, a new Delaware stock holding company, organized to
be Provident Bank's parent holding company, will conduct a subscription offering
of shares of common stock to eligible depositors of Provident Bank and the
eligible employee benefit plans of Provident Bank. Shares not purchased in the
subscription offering are expected to be offered for sale in a community
offering to the general public. The number and price of shares to be sold in the
Conversion offering (the "Offering") will be based on an independent appraisal
that has yet to be performed, and will represent the shares of Provident Bancorp
common stock owned by the MHC. Upon consummation of the Conversion, the MHC will
cease to exist. Existing shares of Provident Bancorp, Inc.'s common stock held
by its public stockholders will be exchanged for new shares of the new Delaware
stock holding company, pursuant to an exchange ratio based on the minority
ownership percentage of the independent appraisal described above.
The Company also announced that it and E.N.B. Holding Company ("ENB"),
located in Ellenville, New York have entered into a definitive merger agreement
(the "Agreement"), pursuant to which, among other things, the Company will
acquire all of the outstanding shares of common stock of ENB (the
"Acquisition"). ENB is the holding company of Ellenville National Bank. ENB's
common stock is not currently traded on any securities market.
Under the terms of the Agreement, the Company will pay $4,830 per share
for each outstanding share of common stock of ENB. 50% of the consideration will
be in shares of common stock of the new Delaware stock holding company, and 50%
will be in cash. It is expected that the aggregate purchase price of the
transaction will be approximately $73.5 million. In the event that the
Conversion and Offering cannot be completed by March 31, 2004, ENB may elect to
require the Company to proceed with the Acquisition at an all cash price of
$4,500 per share, or approximately $68.5 million, or terminate the Agreement and
receive a breakup fee of $3.7 million. Election of an all cash transaction may
require additional regulatory approval. The Agreement also provides for an
increase in the merger consideration in the event that the independent appraisal
exceeds a certain threshold. The Agreement provides for breakup fees if the
Agreement is terminated under certain circumstances, including acceptance by ENB
of a "Superior Proposal," as defined in the Agreement. As of June 30, 2003, ENB
had consolidated assets of $341.7 million, deposits of $307.7 million and
stockholders' equity of $29.8 million.
13
The Conversion, Offering and Acquisition are expected to be completed in
the second quarter of fiscal 2004 and will be consummated simultaneously. The
Acquisition is subject to the approval of stockholders of both the Company and
ENB. The Conversion is subject to the approval of Provident Bancorp, MHC's
members (depositors of Provident Bank) and Provident Bancorp, Inc.'s
stockholders, including public stockholders. The transactions are also subject
to the approval of bank regulatory authorities, as well as other customary
conditions.
3. Acquisition of The National Bank of Florida
On April 23, 2002, the Company consummated its acquisition, for cash, of
The National Bank of Florida ("NBF"), which was merged with and into Provident
Bank. The transaction was valued at approximately $28.1 million. At the
acquisition date, NBF had total assets of approximately $104 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 excess
of the total acquisition cost over the fair value of the net assets acquired was
recorded as intangible assets (consisting of both goodwill and a core deposit
intangible asset recognized apart from goodwill) and is accounted for in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Amounts
attributable to NBF are included in the Company's consolidated financial
statement from the date of acquisition.
In accordance with SFAS No. 142, goodwill recorded in the NBF acquisition
($13.5 million) is not amortized to expense, but instead is reviewed for
impairment at least annually, with impairment losses charged to expense, if and
when they occur. The core deposit intangible asset, ($1.2 million and $1.5
million at June 30, 2003 and September 30, 2002, respectively), is recognized
apart from goodwill and amortized to expense over its estimated useful life and
evaluated for impairment.
14
4. Critical Accounting Policies
The accounting and reporting policies of Provident Bancorp, Inc. are
prepared in accordance with accounting principles generally accepted within the
United States of America and conform to general practices within the banking
industry. Accounting policies considered critical to the Company's financial
results include the allowance for loan losses, accounting for goodwill and the
recognition of interest income. The methodology for determining the allowance
for loan losses is considered by management to be a critical accounting policy
due to the high degree of judgment involved, the subjectivity of the
assumptions utilized and the potential for changes in the economic environment
that could result in changes to the amount of the allowance for loan losses
considered necessary. Accounting for goodwill is considered to be a critical
policy because goodwill must be tested for impairment at least annually using a
"two-step" approach that involves the identification of reporting units and the
estimation of fair values. The estimation of fair values involves a high degree
of judgment and subjectivity in the assumptions utilized. Interest income on
loans, securities and other interest-earning assets is accrued monthly unless
management considers the collection of interest to be doubtful. Loans are placed
on nonaccrual status when payments are contractually past due 90 days or more,
or when management has determined that the borrower may be unable to meet
contractual principal or interest obligations. At such time, unpaid interest is
reversed by charging interest income. Interest payments received on nonaccrual
loans (including impaired loans) are recognized as income unless future
collections are doubtful. Loans are returned to accrual status when
collectibility is no longer considered doubtful (generally, when all payments
have been brought current). Application of assumptions different than those used
by management could result in material changes in the Company's financial
position or results of operations. Footnote 3 (Summary of Significant Accounting
Policies) of the 2002 Annual Report on Form 10-K, provide detail with regard to
the Company's accounting for the allowance for loan losses. There have been no
significant changes in the application of accounting policies since September
2002.
5. 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 loan losses inherent in the existing
portfolio. 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.
15
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands)
Balance at beginning of period $ 10,901 $ 9,503 $ 10,383 $ 9,123
Provision for loan losses 200 200 800 600
Addition from NBF acquisition -- 537 -- 537
Charge-offs (100) (35) (232) (137)
Recoveries 54 17 104 99
-------- -------- -------- --------
Balance at end of period $ 11,055 $ 10,222 $ 11,055 $ 10,222
======== ======== ======== ========
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, 2003 September 30, 2002
------------- ------------------
(Dollars in thousands)
Non-accrual loans:
One- to four-family residential mortgage loans $1,727 $2,291
Commercial real estate, commercial business
and construction loans 3,527 2,492
Consumer loans 116 171
------ ------
Total non-performing loans 5,370 4,954
Real estate owned:
One- to four-family residential -- 41
------ ------
Total non-performing assets $5,370 $4,995
====== ======
Ratios:
Non-performing loans to total loans 0.77% 0.74%
Non-performing assets to total assets 0.48 0.49
Allowance for loan losses to total
non-performing loans 205.87 209.59
Allowance for loan losses to total loans 1.59 1.55
16
6. Loans
Major classifications of loans, excluding loans held for sale, are
summarized below (in thousands):
June 30, 2003 September 30, 2002
------------- ------------------
Real estate - residential mortgage $379,794 $366,111
Real estate - commercial mortgage 179,945 163,329
Real estate - construction 7,312 17,020
Commercial and industrial 45,306 41,320
Consumer loans 81,253 83,419
-------- --------
Total $693,610 $671,199
======== ========
7. Deposits
Major classifications of deposits are summarized below (in thousands):
June 30, 2003 September 30, 2002
------------- ------------------
Demand deposits:
Retail $ 83,165 $ 54,399
Commercial and municipal 64,508 55,732
NOW 70,963 82,983
-------- --------
Total transaction accounts 218,636 193,114
Money market 127,560 115,065
Savings 279,016 247,918
Time under $100,000 192,578 204,967
Time over $100,000 39,744 38,562
-------- --------
Total $857,534 $799,626
======== ========
17
8. Securities
The following is a summary of securities available for sale (AFS) at June 30,
2003 and September 30, 2002 (in thousands):
Available for Sale Portfolio
June 30, 2003
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=========================================================
Mortgage-backed and SBA Securities
Mortgage-backed securities $ 82,722 $ 2,208 $ (103) $ 84,827
Collateralized mortgage obligations 26,568 58 (60) 26,566
SBAs and other 1,043 8 -- 1,051
-------- -------- -------- --------
Total mortgage-backed securities 110,333 2,274 (163) 112,444
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency
securities 120,336 3,702 (3) 124,035
State and municipal securities 1,293 -- (19) 1,274
Corporate debt securities 12,020 835 -- 12,855
Equity securities 1,051 339 (85) 1,305
-------- -------- -------- --------
Total investment securities 134,700 4,876 (107) 139,469
-------- -------- -------- --------
Total available for sale $245,033 $ 7,150 $ (270) $251,913
======== ======== ======== ========
Available for Sale Portfolio
September 30, 2002
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=========================================================
Mortgage-backed and SBA Securities
Mortgage-backed Securities $ 35,097 $ 2,048 $ -- $ 37,145
Collateralized mortgage obligations 21,352 161 (10) 21,503
SBAs and other 1,105 5 -- 1,110
-------- -------- -------- --------
Total mortgage-backed securities 57,554 2,214 (10) 59,758
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency
securities 107,972 4,201 -- 112,173
Corporate debt securities 30,079 2,065 -- 32,144
Equity securities 1,113 1,060 (102) 2,071
-------- -------- -------- --------
Total investment securities 139,164 7,326 (102) 146,388
-------- -------- -------- --------
Total available for sale $196,718 $ 9,540 $ (112) $206,146
======== ======== ======== ========
18
The following is a summary of securities held to maturity (HTM) at June 30, 2003
and September 30, 2002 (in thousands):
Held to Maturity Portfolio
June 30, 2003
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
======================================================
Mortgage-backed Securities
Mortgage-backed securities $59,942 $ 1,644 $ (34) $61,552
Collateralized mortgage obligations 4,301 58 -- 4,359
------- ------- ------- -------
Total mortgage-backed securities 64,243 1,702 (34) 65,911
------- ------- ------- -------
Investment Securities
State and municipal securities 18,544 1,121 -- 19,665
------- ------- ------- -------
Total held to maturity $82,787 $ 2,823 $ (34) $85,576
======= ======= ======= =======
Held to Maturity Portfolio
September 30, 2002
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
======================================================
Mortgage-backed Securities
Mortgage-backed securities $66,078 $ 2,896 $ (21) $68,953
Collateralized mortgage obligations 4,304 124 -- 4,428
------- ------- ------- -------
Total mortgage-backed securities 70,382 3,020 (21) 73,381
------- ------- ------- -------
Investment Securities
State and municipal securities 16,409 916 -- 17,325
------- ------- ------- -------
Total held to maturity $86,791 $ 3,936 $ (21) $90,706
======= ======= ======= =======
19
At June 30, 2003 and September 30, 2002, the unrealized net gain on
securities available for sale (net of tax of $2,705,000 and $3,720,000,
respectively) that was included in accumulated other comprehensive income, a
separate component of stockholders' equity, was $4,059,000 and $5,582,000
respectively. Gross realized gains were $811,000 and $51,000 respectively, for
the three months ended June 30, 2003 and 2002, and $1,895,000 and $288,000,
respectively, for the nine months ended June 30, 2003 and 2002.
Securities with a carrying amount of $75,973,000 and $45,280,000 were
pledged as collateral for municipal deposits, borrowings and other purposes at
June 30, 2003 and September 30, 2002, respectively.
9. Earnings Per Common Share
The number of shares used in the computation of both basic and diluted
earnings per share includes all shares issued to Provident Bancorp, MHC, but
excludes unallocated ESOP shares that have not been released or committed to be
released to participants. Unvested RRP shares are excluded from basic earnings
per share calculations only.
The common equivalent shares are incremental shares (computed using the
treasury stock method) that would have been outstanding if all potentially
dilutive stock options and unvested RRP shares were exercised or became vested
during the periods.
Basic earnings per common share is computed as follows ($ in thousands,
except share data):
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Weighted average common shares
outstanding 7,704,623 7,713,880 7,714,631 7,700,978
---------- ---------- ---------- ----------
Total basic shares 7,704,623 7,713,880 7,714,631 7,700,978
Net income $ 3,106 $ 2,143 $ 8,667 $ 7,270
Basic earnings per common share $ 0.40 $ 0.28 $ 1.12 $ 0.94
Diluted earnings per common share is computed as follows ($ in thousands,
except share data):
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Weighted average common shares
outstanding 7,704,623 7,713,880 7,714,631 7,700,978
Effect of common stock equivalents 119,980 137,513 114,188 127,968
---------- ---------- ---------- ----------
Total diluted shares 7,824,603 7,851,393 7,828,819 7,828,946
Net income $ 3,106 $ 2,143 $ 8,667 $ 7,270
Diluted earnings per common share $ 0.40 $ 0.27 $ 1.11 $ 0.93
20
10. Guarantor's Obligations Under Guarantees
Standby letters of credit are commitments issued by the Company on behalf
of its customer/obligor in favor of a beneficiary that specify an amount the
Company can be called upon to pay upon the beneficiary's compliance with the
terms of the letter of credit. 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 June 30, 2003, the Company had $8.1 million in outstanding letters
of credit, of which $1.6 million were secured by cash collateral.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 2003 and, in certain instances, subsequent periods. The
Company cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements for subsequent periods
are subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; pricing
pressures on loan and deposit products; changes in local and national economic
conditions; the extent and timing of actions of the Company's regulators;
customer deposit disintermediation; changes in customers' acceptance of the
Company's products and services; general actions of competitors, other normal
business risks such as credit losses, litigation, increases in the levels of
non-performing assets, revenues following acquisitions if such revenues are
lower than expected, and costs or difficulties related to the integration of
acquired and existing businesses that are greater than expected. The Company's
forward-looking statements speak only as of the date on which such statements
are made. The Company assumes no duty to update forward-looking statements to
reflect new, changing or unanticipated events or circumstances.
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.
As discussed in Note 3 to the consolidated financial statements included
in Item 1 of this quarterly 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, a commercial
bank subsidiary of Provident Bank, to serve the banking needs of municipalities
throughout our service area, primarily Rockland and Orange Counties. Provident
Bank is a federally chartered savings association and municipalities in New York
State may only deposit funds in commercial banks. The formation of PMB provides
a vehicle for the deposits that may not be deposited with Provident Bank.
22
Comparison of Financial Condition at June 30, 2003 and September 30, 2002
Total assets as of June 30, 2003 were $1,114.7 million, an increase of
$87.0 million, or 8.5% over assets of $1,027.7 million at September 30, 2002.
Net loans as of June 30, 2003 were $682.6 million, an increase of $21.8
million, or 3.3%, over net loan balances of $660.8 million at September 30,
2002. Residential loans continued to grow during the nine-month period, posting
an increase of $13.7 million, or 3.7%, over balances at September 30, 2002,
primarily in bi-weekly mortgages. Commercial mortgages increased by $16.6
million, or 10.2%, as originations of $64.1 million surpassed repayments of
$47.5 million. Commercial and industrial loans increased by $4.0 million, or
9.6%, as the Company continued in its efforts to expand its customer account
relationships through the extension of these general business purpose loans.
Asset quality continues to be strong. At $5.4 million, or 0.48% of total assets,
non-performing assets were up slightly from $5.0 million, or 0.49% of total
assets at September 30, 2002.
Total securities increased to $334.7 million at June 30, 2003 from $292.9
million at September 30, 2002, as the Company continued to purchase additional
securities funded by growth in deposits and advances from the Federal Home Loan
Bank.
Total deposits increased by $57.9 million to $857.5 million, an increase
of 7.2% over balances of $799.6 million at September 30, 2002. Deposit growth
has occurred in transaction account, savings and money market account products,
while certificates of deposit declined slightly. The largest deposit growth has
occurred in savings and money market accounts, which increased to $406.6 million
at June 30, 2003 from $363.0 million at September 30, 2002, an increase of $43.6
million, or 12.0%. Transaction accounts posted an increase of $25.5 million, or
13.2%, to $218.6 million. During the same time period, total certificates of
deposit declined by $11.2 million as municipal certificates of deposit grew to
$7.9 million, while all other certificates decreased to $224.4 million. The
overall deposit increase is primarily due to improved marketing efforts, coupled
with new product offerings. Total municipal deposits amounted to $19.8 million
at June 30, 2003 compared to $8.8 million at September 30, 2002. The Company
began taking in municipal deposits in April 2002 after the formation of PMB.
Borrowings from the Federal Home Loan Bank of New York (the "FHLB")
increased by $13.7 million during the nine-month period to $116.7 million at
June 30, 2003 from $103.0 million at September 30, 2002, primarily to fund loans
and investments as noted above.
Stockholders' equity increased by $4.8 million to $115.7 million at June
30, 2003 compared to $110.9 million at September 30, 2002. In addition to net
income of $8.7 million for the nine-month period, equity increased by $1.4
million due to activity related to the Company's ESOP, stock option and
management retention plans. Partially offsetting these increases were cash
dividends and treasury share purchases, each of which reduced stockholders'
equity by $1.9 million, and the change in after-tax unrealized gains on
securities available for sale, which decreased equity by $1.5 million.
23
During the first nine months of fiscal 2003, the Company repurchased
60,700 shares of common stock, bringing the total shares repurchased to 391,251
shares under its previously announced repurchase programs, which authorized the
repurchase of up to 553,990 shares including the March 2003 authorization of
177,250 shares. Net of option-related reissuances, treasury shares held by the
Company at June 30, 2003 were 326,925 shares.
Comparison of Operating Results for the Three Months Ended
June 30, 2003 and June 30, 2002
Net Income. Interest income for the three months ended June 30, 2003 of
$14.3 million declined by $758,000, or 5.0%, compared to $15.0 million for the
same period in 2002. Interest expense decreased by $1.2 million or 29.5%. This
resulted in an increase in net interest income of $484,000 or 4.5%. The
provision for loan losses, at $200,000 for the quarter ended June 30, 2003, was
unchanged compared to the same period in 2002. Total non-interest income, which
includes an increase in securities gains of $760,000 and an increase in gains on
sales of loans of $342,000, increased $1.5 million, or 110.6%. Non-interest
expense increased by $627,000 or 7.4%. Net income (after taxes) increased
$963,000 to $3.1 million.
The relevant performance measures follow:
Three Months Ended
------------------
June 30, 2003 June 30, 2002
------------- -------------
Per common share:
Basic earnings $ 0.40 $ 0.28
Diluted earnings 0.40 0.27
Dividends declared 0.15 0.11
Return on average (annualized):
Assets 1.13% 0.86%
Equity 10.89% 8.08%
Tangible equity 12.50% 9.06%
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
24
Three Months Ended June 30,
---------------------------
2003 2002
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial loans (1) $ 210,276 $ 3,679 7.02% $ 198,878 $ 3,514 7.09%
Consumer loans (1) 79,802 967 4.86 77,767 1,169 6.03
Residential loans (1) 392,516 6,078 6.21 366,954 6,529 7.14
---------- ------- ---------- -------
Total loans 682,594 10,724 6.30 643,599 11,212 6.99
---------- ------- ---------- -------
AFS Investments & MBS 235,594 2,507 4.27 194,790 2,496 5.14
HTM Investments & MBS 84,402 907 4.31 77,745 1,124 5.80
Other earning assets 17,283 114 2.65 28,482 178 2.52
---------- ------- ---------- -------
Total securities & other earning assets 337,279 3,528 4.20 301,017 3,798 5.06
---------- ------- ---------- -------
Total interest-earning assets 1,019,873 14,252 5.61 944,616 15,010 6.37
---------- ------- ---------- -------
Non-interest-earning assets:
Cash & Due from Banks 31,528 25,615
Premises & Equipment 11,331 9,700
Other assets 38,119 22,648
---------- ----------
Total assets $1,100,851 $1,002,579
========== ==========
Interest bearing liabilities:
Savings, clubs & escrow $ 283,360 328 0.46% $ 243,702 652 1.07%
Money market accounts 124,046 245 0.79 108,867 367 1.35
NOW checking 80,067 52 0.26 83,161 83 0.40
Certificate accounts 236,363 1,212 2.06 241,422 1,778 2.95
---------- ------- ---------- -------
Total interest-bearing deposits 723,836 1,837 1.02 677,152 2,880 1.71
Borrowings 117,954 1,138 3.87 111,467 1,337 4.81
---------- ------- ---------- -------
Total interest-bearing liabilities 841,790 2,975 1.42 788,619 4,217 2.14
------- -------
Non-interest-bearing liabilities:
Demand deposits 132,737 96,791
Other 11,899 10,736
---------- ----------
Total liabilities 986,426 896,146
Equity 114,425 106,433
---------- ----------
Total liabilities and equity $1,100,851 $1,002,579
========== ==========
Net interest income $11,277 $10,793
======= =======
Net interest rate spread 4.19% 4.23%
==== ====
Net earning assets $ 178,083 $ 155,997
========== ==========
Net interest margin 4.44% 4.58%
==== ====
Average interest-earning assets
to average interest-bearing liabilities 121.16% 119.78%
======= =======
(1) Includes non-accrual loans.
25
The table below details the changes in interest income and interest
expense for the period indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Three Months Ended June 30,
2003 vs. 2002
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Consumer loans $ 30 $ (232) $ (202)
Commercial loans 200 (35) 165
Residential loans 438 (889) (451)
Available for sale securities 475 (464) 11
Held to maturity securities 91 (308) (217)
Other earning assets (74) 10 (64)
------- ------- -------
Total interest income 1,160 (1,918) (758)
Interest-bearing liabilities
Savings 93 (417) (324)
Money market 46 (168) (122)
NOW Checking (3) (28) (31)
Certificates of deposit (36) (530) (566)
Borrowings 73 (272) (199)
------- ------- -------
Total interest expense 173 (1,415) (1,242)
------- ------- -------
Net interest income $ 987 $ (503) $ 484
======= ======= =======
(1) Changes in rate/volume have been allocated to rate and volume.
26
Net Interest Income. Net interest income after provision for loan losses
for the three months ended June 30, 2003 was $11.1 million, compared to $10.6
million for the three months ended June 30, 2002, an increase of $484,000, or
4.6%. The increase in net interest income was largely due to a $75.3 million
increase in average earning assets to $1,019.9 million during the quarter ended
June 30, 2003, as compared to $944.6 million for the same quarter in the prior
year, due primarily to the NBF acquisition. The increase in average earning
assets was partially offset by a decline in average yield of 76 basis points
from 6.37% to 5.61%. A decrease in the average cost of interest-bearing
liabilities of 72 basis points led to a $1.2 million drop in interest expense
for the quarter compared to the same quarter in 2002, even as interest-bearing
liabilities increased by $53.2 million. Net interest margin declined by 14 basis
points to 4.44%, while net interest spread decreased by 4 basis points to 4.19%.
This 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 since 2001. 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. However, if recently low interest rate levels persist for
an extended period of time, the prepayment of assets could continue at a rate
exceeding scheduled repayment. Such funds received would most likely be
reinvested at lower yields than that of its previously held assets. Also, as the
reduction in liability costs have already exceeded the pace at which assets
repriced downward, net interest margin may be further compressed. Conversely, if
the geopolitical factors and an economic recovery become more apparent, market
interest rates could rise. Competitive pressures could cause a rise in the
Company's funding costs and lead to pressures on net interest margin.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level which is considered appropriate to absorb probable loan losses
inherent in the existing portfolio. In determining the appropriate level of the
allowance for loan losses, management considers average historical losses and
the volatility of those losses; levels of, and trends in, delinquencies and
nonaccruals; trends in volume and terms of loans; effects of any changes in
lending policies and procedures; capacity of lending management and staff;
national and local trends and conditions; concentrations in the portfolio and
quality trends in the commercial portfolio. Management assesses the allowance
for loan losses on a quarterly basis and makes provisions for loan losses in
order to maintain the proper level of the allowance. The Company recorded
$200,000 in loan loss provisions each for the three-month periods ended June 30,
2003 and 2002, respectively.
Non-Interest Income. Non-interest income for the three months ended June
30, 2003 was $2.8 million compared to $1.3 million for the three months ended
June 30, 2002, an increase of $1.5 million, or 110.6%. Realized gains on
securities available for sale were $811,000 for the current three-month period,
compared to $51,000 for the same period in the prior year. The Company also
recorded gains on sale of loans totaling $394,000, while there was only $52,000
of such gains for the same period last year. Excluding the effects of gains on
sales of securities and loans, the increase in non-interest income was $378,000,
or 30.6%. Banking fees and services charges increased by $175,000 or 17.1%, due
primarily to volume-driven increases in overdraft, insufficient funds, and debit
card fees.
27
Loan fees and charges increased by $96,000, or 70.6%. In addition, the
formation of a Bank Owned Life Insurance ("BOLI") program in December 2002,
generated $163,000 in other income during the current three-month period.
Non-Interest Expense. Non-interest expenses for the three months ended
June 30, 2003 increased by $627,000, or 7.4%, to $9.1 million, compared to $8.5
million for the three months ended June 30, 2002. The opening of a new branch in
February 2003, and to a lesser extent, the NBF acquisition in late April 2002,
played a major role in the increases in most categories. The Company experienced
related increases in compensation and employee benefits of $716,000, in
occupancy and office operations costs of $92,000 and in data processing costs of
$126,000. The increase in compensation and benefits is primarily due to an
increase of $82,000 in required pension plan expense, a net increase of $50,000
in medical benefits and an increase of $664,000 in salary expense. The increase
in salary expense consists of annual salary increases of 4% and additional
resources in the commercial lending group and loan servicing area, as well as
added staff required to operate the new branches. Advertising and promotion
expense increased by $53,000, or 16.3%, as the Company actively solicited new
deposits in its market area. An increase of $147,000 in consulting fees was
incurred in the quarter primarily to improve the Company's technological
infrastructure. Other expenses decreased by $174,000, or 11.1%, due primarily to
a reduction of recorded losses as last year's expenses included a charge of
$240,000 to resolve a residential loans reconciliation issue relative to
refinanced loans. Non-recurring expenses associated with the integration of NBF
totaled $286,000 for the third quarter last year.
Income Taxes. Income tax expense was $1.7 million for the three months
ended June 30, 2003, as compared to $1.3 million for the same period in 2002, a
result of changes in pre-tax income. The effective tax rates were 35.1% and
37.9%, respectively, an improvement based on the increased utilization of a
state tax advantaged subsidiary, municipal securities, and the effects of the
BOLI program implemented in late December 2002.
Comparison of Operating Results for the Nine Months Ended
June 30, 2003 and June 30, 2002
Net Income. For the nine months ended June 30, 2003 net interest income
after provision for loan losses was $33.6 million, up $3.1 million or 10.1%
compared to $30.5 million for the same period of 2002. Non-interest income was
$7.2 million for the nine months ended June 30, 2003 compared to $3.9 million
for the same period last year, an increase of $3.3 million, or 86.6%. Increases
in securities gains and gains on sales of loans were $1.6 million and $744,000,
respectively, and were primarily responsible for the increase in non-interest
income. Non-interest expenses increased $4.2 million, or 18.5% to $27.1 million
for the nine months ended June 30, 2003 compared to $22.9 million for the same
prior year period. Net income after taxes improved to $8.7 million compared to
$7.3 million, an increase of $1.4 million, or 19.2%.
28
The relevant performance measures follow:
Nine Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Per common share:
Basic earnings $ 1.12 $ 0.94
Diluted earnings 1.11 0.93
Dividends declared 0.42 0.29
Return on average (annualized):
Assets 1.09% 1.04%
Equity 10.27% 9.20%
Tangible equity 11.83% 9.54%
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
29
Nine Months Ended June 30,
--------------------------
2003 2002
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial loans (1) $ 213,152 $11,306 7.09% $ 185,592 $10,248 7.38%
Consumer loans (1) 81,550 3,136 5.14 75,888 3,572 6.29
Residential loans (1) 384,510 18,757 6.52 361,660 19,614 7.25
---------- ------- ---------- -------
Total loans 679,212 33,199 6.54 623,140 33,434 7.17
---------- ------- ---------- -------
AFS Investments & MBS 218,738 7,158 4.38 178,150 7,209 5.41
HTM Investments & MBS 81,652 3,066 5.02 73,385 3,337 6.08
Other earning assets 11,173 292 3.49 14,648 349 3.19
---------- ------- ---------- -------
Total securities & other earning assets 311,563 10,516 4.51 266,183 10,895 5.47
---------- ------- ---------- -------
Total interest-earning assets 990,775 43,715 5.90 889,323 44,329 6.66
------- -------
Non-interest-earning assets:
Cash & due from banks 30,026 20,443
Premises & equipment 10,549 8,990
Other assets 34,064 13,404
---------- ----------
Total assets $1,065,414 $ 932,160
========== ==========
Interest bearing liabilities:
Savings, clubs & escrow $ 269,528 $ 1,207 0.60% $ 209,202 $ 1,610 1.03%
Money market accounts 119,100 786 0.88 102,591 1,074 1.40
NOW checking 82,189 169 0.27 71,617 230 0.43
Certificate accounts 241,683 3,985 2.20 233,546 5,967 3.42
---------- ------- ---------- -------
Total interest-bearing deposits 712,500 6,147 1.15 616,956 8,881 1.92
Borrowings 108,688 3,164 3.89 116,805 4,319 4.94
---------- ------- ---------- -------
Total interest-bearing liabilities 821,188 9,311 1.52 733,761 13,200 2.41
------- -------
Non-interest-bearing liabilities:
Demand deposits 119,997 82,835
Other 11,428 9,858
---------- ----------
Total liabilities 952,613 826,454
Equity 112,801 105,706
---------- ----------
Total liabilities and equity $1,065,414 $ 932,160
========== ==========
Net interest income $34,404 $31,129
======= =======
Net interest rate spread 4.38% 4.25%
==== ====
Net earning assets $ 169,587 $ 155,562
========== ==========
Net interest margin 4.64% 4.68%
==== ====
Average interest-earning assets 120.65% 121.20%
======= =======
To average interest-bearing liabilities
(1) Includes non-accrual loans.
30
The table below details the changes in interest income and interest
expense for the period indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Nine Months Ended June 30,
2003 vs. 2002
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Consumer loans $ 253 $ (689) $ (436)
Commercial loans 1,475 (417) 1,058
Residential loans 1,196 (2,053) (857)
Available for sale securities 1,472 (1,523) (51)
Held to maturity securities 351 (622) (271)
Other earning assets (88) 31 (57)
------- ------- -------
Total interest income 4,659 (5,273) (614)
Interest-bearing liabilities
Savings 387 (790) (403)
Money market 155 (443) (288)
NOW Checking 31 (92) (61)
Certificates of deposit 204 (2,186) (1,982)
Borrowings (285) (870) (1,155)
------- ------- -------
Total interest expense 492 (4,381) (3,889)
------- ------- -------
Net interest income $ 4,167 $ (892) $ 3,275
======= ======= =======
(1) Changes in rate/volume have been allocated to rate and volume.
31
Net Interest Income. For the nine months ended June 30, 2003, net interest
income after provision for loan losses increased by $3.1 million, or 10.1% to
$33.6 million from $30.5 million for the same period in 2002. Interest income
decreased by $614,000, or 1.4%, as an increase in average earning assets of
$101.5 million to $990.8 million, was completely offset by a decline in yield of
76 basis points to 5.90%. The cost of interest bearing- liabilities declined by
$3.9 million as the average rate paid on interest- bearing liabilities dropped
89 basis points to 1.52%, which partially offset an increase in average balances
of $87.4 million to $821.2 million. Net interest margin decreased from 4.68% to
4.64% and net interest spread improved from 4.25% to 4.38%.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level which is considered appropriate to absorb probable loan losses
inherent in the existing portfolio. The Company recorded $800,000 and $600,000
in loan loss provisions during the nine months ended June 30, 2003 and 2002,
respectively. The increase in the provision reflects the increased emphasis of
commercial lending activity in the Bank.
Non-Interest Income. Non-interest income for the nine-month period ended
June 30, 2003 increased to $7.2 million, an increase of $3.3 million, or 86.6%,
compared to $3.9 million for the same nine-month period last year. Realized
gains on securities available for sale and sales of loans were $1.9 million and
$836,000, respectively, for the current period, generating a combined increase
of $2.4 million over the securities and loan sales gains of $380,000 for the
same period last year. Banking fees and services charges increased to $3.4
million for the current nine-month period, an increase of $467,000, or 15.9%,
over the same period last year. The increase is primarily attributable to
volume-related increases in transaction account fees of $333,000 resulting from
the new and acquired branches. Other income increased by $518,000, or 95.9%, to
$1.1 million for the nine-month period ended June 30, 2003, from $540,000 for
the same period last year. The increase is primarily due to $324,000 in income
from the new BOLI program and an increase of $217,000 in loan prepayment
penalties which totaled $306,000 for the current nine-month period compared to
$89,000 for the same period last year.
Non-Interest Expense. Non-interest expense increased by $4.2 million, or
18.5%, to $27.1 million for the nine-month period ended June 30, 2003, compared
to $22.9 million for the same nine-month period last year. Increases in
compensation and benefits and in occupancy and office operations directly
attributable to the new branches were $592,000 and $279,000, respectively.
Compensation and benefits increased by an additional $2.3 million, of which
$324,000 represented the payout of an employment agreement, $253,000 was
attributable to the increased cost of stock-based compensation plans, $261,000
was due to additional retirement plan and other deferred compensation expense,
$167,000 was related to higher health insurance premiums and the remaining
increase was due to annual salary increases of approximately 4.0% and additional
administration staff. Additional increases in non-interest expense categories
for the current year to date period are additional advertising costs of
$259,000, or 25.1%, related to new branches and products, and a volume-related
increase of $384,000, or 29.2%, in data processing costs. Consulting fees
increased by $372,000 as the Company retained professional assistance for
technological development.
32
Amortization of the core deposit intangible increased by $195,000 as the premium
associated with the acquisition of NBF in third quarter 2002 was amortized for
the nine-month period in 2003. Other non-interest expense increased by $180,000,
or 4.4%, primarily due to increases in correspondent bank expense and charitable
contributions of $63,000 and $109,000, respectively.
Income Taxes. Income tax expense was $5.0 million for the nine months
ended June 30, 2003 compared to $4.2 million for the same period in 2002. The
effective tax rates were 36.5% and 36.7%, respectively, as a greater portion of
the Company's increase in pre-tax income was subject to the marginal tax rates,
which offset increased investment in tax advantaged vehicles.
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the nine months
ended June 30, 2003 and June 30, 2002, loan originations, excluding loans
originated for sale, totaled $278.9 million and $150.4 million, respectively,
and purchases of securities totaled $155.6 million and $102.1 million,
respectively. For the nine-month periods ended June 30, 2003 and 2002, these
investing activities were funded primarily by principal repayments on loans, by
proceeds from sales and maturities of securities, by deposit growth and
additional borrowings. Loan origination commitments totaled $79.9 million at
June 30, 2003. The Company anticipates that it will have sufficient funds
available to meet current loan commitments. In December 2002 the Company
invested $12 million in BOLI contracts. Such investments are illiquid and are
therefore classified as other assets. As the Company's quarterly earnings
exceeded $2.5 million, it is expected that the funds will be replaced by
retained earnings in approximately 1.5 years, thereby not having a significant
impact on capital and liquidity. Earnings from BOLI are derived from the net
increase in cash surrender value.
33
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, the appeal of
non-deposit investments, and other factors. The net increase in total deposits
for the nine months ended June 30, 2003 was $57.9 million, compared to $144.1
million for the nine months ended June 30, 2002, of which $88.2 million
represented NBF deposits at the acquisition date.
As previously discussed, the Company has entered into an agreement to
acquire E.N.B. Holding Company, Inc. ("ENB"). The Board of Directors of the
Company and the Company's majority shareholder, Provident Bancorp, MHC ("MHC")
has adopted a plan of conversion and reorganization to convert the MHC to a
capital stock corporation. Concurrent with the conversion, the Company will
conduct a subscription offering. Upon completion of the conversion, the Company
would then issue common stock to acquire ENB. If the Acquisition does not close
by March 31, 2004, ENB may elect an all cash purchase price of $68.5 million or
require the Company to pay a breakup fee of $3.7 million. The effect of an all
cash election would be to reduce the Company's current tier I capital and risk
based capital ratios to below the well capitalized levels and near the minimum
capital adequacy levels. The Company would possibly be required to raise
additional tier I capital sufficient to increase its proforma capital ratios
prior to the acquisition of ENB. The ability to complete and the terms of such
an offering would be subject to market conditions at that time.
The Company monitors its liquidity position on a daily basis. Although the
Company sold $11 million in federal funds at period end, it generally remains
fully invested and utilizes additional sources of funds through FHLB overnight
advances, of which none were outstanding at June 30, 2003. The Company has the
ability to borrow an additional $202.7 million under its credit facilities with
the Federal Home Loan Bank.
At June 30, 2003, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital (leverage) level of $91.1 million, or 8.30%
of adjusted assets (which is above the required level of $43.7 million, or 4.0%)
and a total risk-based capital level of $98.9 million, or 15.04% of
risk-weighted assets (which is above the required level of $52.6 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. In performing this calculation, the intangible assets
recorded in the April 2002 NBF acquisition are deducted from capital for
purposes of regulatory capital measures. At June 30, 2003, 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.
34
The following table sets forth the Bank's regulatory capital position at
June 30, 2003 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)
June 30, 2003
Tangible capital $91,053 8.30% $16,372 1.5% $ -- --%
Tier 1 (core) capital 91,053 8.34 43,658 4.0 54,573 5.0
Risk-based capital:
Tier 1 91,053 13.85 -- -- 39,440 6.0
Total 98,880 15.04 52,587 8.0 65,734 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
Recent Accounting Standards
In April 2003, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," for certain decisions made by
the Board as part of the Derivative Implementation Group process. This Statement
is effective for contracts entered into or modified after June 30, 2003 and
hedging relationships designated after June 30, 2003. Management does not expect
that the provisions of SFAS No. 149 will have a material impact on the Company's
results of operations or financial condition.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" was issued in May 2003. Under
the Statement, certain freestanding financial instruments that embody
obligations for the issuer and that are now classified in equity, must be
classified as liabilities (or as assets in some circumstances). Generally, SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of this standard is not expected
to have a significant effect on the Company's consolidated financial statements.
35
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 six months could be adversely impacted by a rise
in short term interest rates. As noted in Item 2, Management's Discussion and
Analysis, the increase in the Company's net interest income is due, in large
part, to the relative changes in the yield and cost of the Company's assets and
liabilities as a result of decreasing market interest rates beginning in 2001.
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
could 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 continue to fall below today's levels,
the Company's net interest margin could also be negatively affected, as
competitive pressures could keep the Company from reducing rates much lower on
its deposits and prepayments and curtailments on assets may continue. 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.
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-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the
"Exchange Act") as of the end of the period covered by this report. Based upon
that evaluation, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures were effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time frames specified in the SEC's rules and
forms.
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 during the period covered by this report.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which,
in the aggregate, involved amounts which are believed to be immaterial to the
consolidated financial condition and operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
37
(b) Reports on Form 8-K:
The Company filed the following report on Form 8-K during the three
months ended June 30, 2003:
On April 30, 2003 the Company filed a Form 8-K announcing that a
press release was issued on April 24, 2003 regarding its earnings
for the fiscal quarter ended March 31, 2003 and that on April 29,
2003 the Company issued a press release regarding its quarterly
dividend declaration.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Bancorp, Inc.
-----------------------
(Registrant)
By: /s/ George Strayton
--------------------------------------------
George Strayton
President and Chief Executive Officer
(Duly Authorized Representative)
Date: August 13, 2003
By: /s/ Paul A. Maisch
--------------------------------------------
Paul A. Maisch
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Representative)
Date: August 13, 2003
39