SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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)
Delaware 80-0091851
------------------------------ ----------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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
----------------------- ------------------
$0.01 per share 45,505,378
----- ----------
as of May 1, 2005
-----------
1
PROVIDENT BANCORP, INC.
QUARTERLY PERIOD ENDED MARCH 31, 2005
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
at March 31, 2005 and September 30, 2004 3
Consolidated Statements of Income for the Three Months
and Six Months Ended March 31, 2005 and 2004 5
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2005 6
Consolidated Statements of Cash Flows
for the Six Months Ended March 31, 2005 and 2004 7
Consolidated Statements of Comprehensive Income/(Loss) for the
Three Months and Six Months Ended March 31, 2005 and 2004 9
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 37
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 39
Item 3. Defaults upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 41
Item 6. Exhibits 41
Signature 42
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Provident Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Assets March 31, 2005 September 30, 2004
- ------ -------------- ------------------
Cash and due from banks $ 50,039 $ 107,571
Securities (Note 7):
Available for sale, at fair value (amortized cost of
$848,154 at March 31, 2005 and $534,512 at
September 30, 2004) 833,828 534,297
Held to maturity, at amortized cost (fair value of $64,999
at March 31, 2005 and $70,230 at September 30, 2004) 64,782 69,078
----------- -----------
Total securities 898,610 603,375
----------- -----------
Loans held for sale 653 855
Gross loans (Note 5) 1,302,217 997,634
Allowance for loan losses (Note 6) (22,249) (17,353)
----------- -----------
Total loans, net 1,279,968 980,281
----------- -----------
FHLB stock, at cost 20,569 10,247
Accrued interest receivable, net 5,390 6,815
Premises and equipment, net 29,081 16,846
Goodwill (Notes 2 and 3) 158,132 65,260
Core deposit intangible (Notes 2 and 3) 13,902 5,624
Bank owned life insurance 27,176 13,245
Other assets 34,593 16,032
----------- -----------
Total assets $ 2,518,113 $ 1,826,151
=========== ===========
(Continued)
3
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED
(Unaudited)
(Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity March 31, 2005 September 30, 2004
- ------------------------------------ -------------- ------------------
Liabilities:
Deposits (Note 8):
Non-interest bearing $ 362,098 $ 289,360
Interest bearing 1,322,181 950,172
----------- -----------
Total deposits 1,684,279 1,239,532
Borrowings 395,452 214,909
Mortgage escrow funds 7,848 2,526
Other 21,764 19,672
----------- -----------
Total liabilities 2,109,343 1,476,639
----------- -----------
Stockholders' equity:
Preferred stock (par value $0.01 per share; 10,000,000 shares
authorized; none issued or outstanding) -- --
Common stock (par value $0.01 per share; 75,000,000 shares
authorized; 45,929,552 shares and 39,655,167 shares issued;
45,505,378 shares and 39,618,373 shares outstanding at
March 31, 2005 and September 30, 2004, respectively) 459 397
Additional paid-in capital 344,869 269,325
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (1,360,139 shares at March 31, 2005
and 1,445,045 shares at September 30, 2004) (10,436) (10,854)
Common stock awards under recognition and retention plan ("RRP") (9,563) --
Treasury stock, at cost (424,174 shares at March 31, 2005 and
36,794 shares at September 30, 2004) (5,591) (432)
Retained earnings 97,689 91,373
Accumulated other comprehensive loss (8,657) (297)
----------- -----------
Total stockholders' equity 408,770 349,512
----------- -----------
Total liabilities and stockholders' equity $ 2,518,113 $ 1,826,151
=========== ===========
Book value per common share at period end $ 8.98 $ 8.82
See accompanying notes to unaudited consolidated financial statements.
4
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share and share data)
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2005 2004 2005 2004
---- ---- ---- ----
Interest and dividend income:
Loans $ 19,506 $ 13,821 $ 38,919 $ 24,351
Securities 8,641 5,222 17,027 8,987
Other earning assets 137 42 350 65
----------- ------------ ----------- -----------
Total interest and dividend income 28,284 19,085 56,296 33,403
----------- ------------ ----------- -----------
Interest expense:
Deposits 3,494 1,996 6,913 3,553
Borrowings 3,369 1,151 6,261 2,361
----------- ------------ ----------- -----------
Total interest expense 6,863 3,147 13,174 5,914
----------- ------------ ----------- -----------
Net interest income 21,421 15,938 43,122 27,489
Provision for loan losses (Note 6) 150 200 300 350
----------- ------------ ----------- -----------
Net interest income after provision for loan losses 21,271 15,738 42,822 27,139
----------- ------------ ----------- -----------
Non-interest income:
Deposit fees and service charges 2,405 1,679 4,940 2,964
Loan fees and late charges 248 227 631 404
Gains on sales of securities available for sale 263 518 317 1,448
Gains on sales of loans 21 84 80 170
Title insurance fees 300 -- 658 --
Bank owned life insurance 295 135 611 292
Other 309 141 629 309
----------- ------------ ----------- -----------
Total non-interest income 3,841 2,784 7,866 5,587
----------- ------------ ----------- -----------
Non-interest expense:
Compensation and employee benefits 7,955 6,017 15,787 10,453
Stock-based compensation plans 446 852 1,286 1,524
Occupancy and office operations 2,459 1,663 4,607 2,990
Advertising and promotion 650 567 1,812 1,035
Professional fees 610 521 1,279 1,004
Data and check processing 1,158 765 2,406 1,509
Stationery and office supplies 255 290 510 439
Merger integration costs 341 717 721 717
Amortization of intangible assets 990 703 2,117 787
ATM/debit card expense 304 211 630 364
Other 1,900 1,344 3,620 2,398
----------- ------------ ----------- -----------
Subtotal 17,068 13,650 34,775 23,220
Establishment of Charitable Foundation -- 5,000 -- 5,000
----------- ------------ ----------- -----------
Total non-interest expense 17,068 18,650 34.775 28,220
----------- ------------ ----------- -----------
Income (loss) before income tax expense 8,044 (128) 15,913 4,506
Income tax (benefit) expense 2,864 (200) 5,718 1,389
----------- ------------ ----------- -----------
Net income $ 5,180 $ 72 $ 10,195 $ 3,117
=========== ============ =========== ===========
Weighted average common shares:
Basic 43,868,765 37,269,062 44,098,312 35,777,054
Diluted 44,439,229 37,912,560 44,687,028 36,391,057
Per common share: (Note 10)
Basic $ 0.12 $ 0.00 $ 0.23 $ 0.09
Diluted $ 0.12 $ 0.00 $ 0.23 $ 0.09
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except share and per share data)
Common
Additional Stock
Number of Common Paid-In Unallocated Awards
Shares Stock Capital ESOP Shares Under RRP
------ ----- ------- ----------- ---------
Balance at September 30, 2004 39,618,373 $ 397 $ 269,325 $ (10,854) $ --
Net income
Other comprehensive loss
Total comprehensive income
Purchase of Warwick Community
Bancorp, Inc. 6,257,896 62 74,531
Stock option transactions 54,509 58
Stock-based compensation 955 418
RRP awards 762,400 (9,667)
Vesting of RRP shares 104
Purchase of treasury stock (1,187,800)
Cash dividends paid ($0.08 per
common share)
---------- -------- ---------- ---------- ----------
Balance at March 31, 2005 45,505,378 $ 459 $ 344,869 $ (10,436) $ (9,563)
========== ======== ========== ========== ==========
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Loss Equity
----- -------- ---- ------
Balance at September 30, 2004 $ (432) $ 91,373 $ (297) $ 349,512
Net income 10,195 10,195
Other comprehensive loss (8,360) (8,360)
---------
Total comprehensive income 1,835
Purchase of Warwick Community
Bancorp, Inc. 74,593
Stock option transactions 449 (416) 91
Stock-based compensation 1,373
RRP awards 9,803 (136) 0
Vesting of RRP shares 104
Purchase of treasury stock (15,275) (15,275)
Cash dividends paid ($0.08 per
common share) (3,463) (3,463)
-------- --------- ---------- ---------
Balance at March 31, 2005 $ (5,455) $ 97,553 $ (8,657) $ 408,770
======== ========= ========== =========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
Ended March 31
--------------
2005 2004
---- ----
Cash flows from operating activities:
Net income $ 10,195 $ 3,117
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 300 350
Depreciation and amortization of premises and equipment 1,504 1,065
Amortization of core deposit intangible 2,117 787
Gain on sales of securities available for sale (317) (1,448)
Gain on sales of loans held for sale (80) (170)
Gain on sales of fixed assets sold -- (46)
Net amortization of premiums and discounts on securities 2,172 1,176
ESOP and RRP expense 1,477 1,117
Originations of loans held for sale (7,689) (5,264)
Proceeds from sales of loans held for sale 7,971 6,852
Deferred income tax benefit (278) 5
Net changes in accrued interest receivable and payable (236) 293
Other adjustments (principally net changes in other assets and other
liabilities) (11,673) (3,361)
--------- ---------
Net cash provided by operating activities 5,463 4,473
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for Sale (310,254) (331,617)
Held to Maturity (6,671) (4,070)
Proceeds from maturities, calls and other principal payments on securities:
Available for Sale 59,789 44,942
Held to Maturity 13,130 10,908
Proceeds from sales of securities available for sale 63,735 90,892
Loan originations (213,240) (151,285)
Loan principal payments 198,132 123,303
(Purchase) redemption of FHLB stock (2,717) 1,496
Purchase of Warwick Community Bancorp, Inc. 164,486 --
Purchase of ENB Holding Co. -- 60,297
Increase in bank owned life insurance (611) (502)
Purchases of premises and equipment (1,574) (1,784)
Other adjustments (30) 22
--------- ---------
Net cash used in investing activities (35,825) (157,398)
--------- ---------
7
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Six Months
Ended March 31
--------------
2005 2004
---- ----
Cash flows from financing activities:
Net (decrease) increase in transaction and savings deposits (27,860) 8,857
Net (decrease) increase in time deposits (2,743) 2,680
Receipt of stock subscription funds -- 192,425
Net increase (decrease) in borrowings 21,264 (30,031)
Net increase in mortgage escrow funds 816 3,044
Establishment of ESOP Plan -- (9,987)
Common stock issued for formation of Charitable Foundation -- 4,000
Tax benefit: contribution of 400,000 shares to Charitable Foundation -- 115
Tax benefit: MHC contribution carry forward -- 512
Recapitalization -- 95
Treasury shares purchased (15,275) --
Stock option transactions 91 75
Cash dividends paid (3,463) (1,837)
--------- ---------
Net cash (used in) provided by financing activities (27,170) 169,948
--------- ---------
Net (decrease) increase in cash and cash equivalents (57,532) 17,023
Cash and cash equivalents at beginning of period 107,571 33,500
--------- ---------
Cash and cash equivalents at end of period $ 50,039 $ 50,523
========= =========
Supplemental information:
Interest payments $ 12,150 $ 5,620
Income tax payments 7,970 1,235
Fair value of assets acquired (incl. intangibles) 806,114 406,267
Fair value of liabilities assumed 658,919 329,797
--------- ---------
Net fair value $ 147,195 $ 76,470
========= =========
Cash portion of ENB Holding Co. purchase transaction -- $ 36,773
Stock portion of ENB Holding Co. purchase transaction -- 39,697
---------
Total paid for ENB Holding Co. -- $ 76,470
=========
Cash portion of Warwick Community Bancorp Inc. purchase transaction $ 72,601 --
Stock portion of Warwick Community Bancorp Inc. purchase transaction 74,594 --
---------
Total paid for Warwick Community Bancorp Inc. $ 147,195 --
=========
Transfer of loans to real estate owned 93 112
Net change in unrealized losses recorded on securities available for sale (13,934) 1,490
Change in deferred taxes on unrealized losses on securities available for sale 5,574 (596)
Issuance of recognition and retention plan shares 9,667 --
See accompanying notes to unaudited consolidated financial statements
8
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(Unaudited)
(In thousands)
Three Months Six Months
Ended March 31 Ended March 31
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
Net Income: $ 5,180 $ 72 $ 10,195 $ 3,117
Other Comprehensive Income (loss):
Net unrealized holding gains (losses)
arising during the year, net of taxes of
$4,242, $1,749, $5,447 and $1,179 (6,370) 2,623 (8,170) 1,769
Less reclassification adjustment for net
realized gains included in net income, net of
taxes of $102, $207, $127 and $579 (158) (311) (190) (869)
------- ------- -------- -------
Other comprehensive income (loss) (6,528) 2,312 (8,360) 900
------- ------- -------- -------
Total comprehensive income (loss) $(1,348) $ 2,384 $ 1,835 $ 4,017
======= ======= ======== =======
See accompanying notes to unaudited consolidated financial statements.
9
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
The consolidated financial statements and other financial information
presented in this document as of March 31, 2005, include the accounts of
Provident Bancorp, Inc., a Delaware corporation (the "Company"), Provident Bank
(the "Bank") and Hardenburgh Abstract Company of Orange County, Inc.
("Hardenburgh"), and each subsidiary of Provident Bank (Provest Services Corp.,
(an inactive subsidiary), Provest Services Corp. I, Provest Services Corp. II,
Provident REIT, Inc., WSB Funding, Inc., Warsave Development Corp., Provident
Municipal Bank and WSB Financial Services, Inc.). Collectively, these entities
are referred to herein as the "Company". Provident Bancorp, Inc. is a
publicly-held company and the parent of Provident Bank. Provest Services Corp. I
holds an investment in a low-income housing partnership that provides certain
favorable tax consequences. Warsave holds an investment in a rental property
that generates rental income. Hardenburgh is a title insurance agency that
generates title insurance fees and commissions. Provest Services Corp. II and
WSB Financial Services have engaged third-party providers to sell annuities to
the customers of Provident Bank. Through March 31, 2005, the activities of these
wholly-owned subsidiaries have had a minor impact on the Company's consolidated
financial condition and results of operations. Provident REIT, Inc. and WSB
Funding, Inc. hold a portion of the Company's real estate loans and are real
estate investment trusts for federal income tax purposes. Provident Municipal
Bank ("PMB") is a limited purpose New York State-chartered commercial bank 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 or, in
the case of letters of credit, on behalf of 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 clear. The results of operations for the six months ended March 31,
2005 are not necessarily indicative of results to be expected for other interim
periods or the entire fiscal year ending September 30, 2005. 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, 2004.
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.
10
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
A material estimate that is particularly susceptible to near-term change is the
allowance for loan losses (see Note 6), 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 pertaining
to stock options, 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.
Three Months Ended Six Months Ended
March 31, March 31,
2005 2004 2005 2004
---- ---- ---- ----
Net income, as reported $ 5,180 $ 72 $ 10,195 $ 3,117
Add RRP expense included in reported net
income, net of related tax effects 62 79 62 $ 163
Deduct RRP and stock option expense
determined under the fair-value-based method,
net of related tax effects (948) (150) (996) (234)
-------- -------- -------- --------
Pro forma net income $ 4,294 $ 1 $ 9,261 $ 3,046
======== ======== ======== ========
Earnings per share:
Basic, as reported $ 0.12 $ 0.00 $ 0.23 $ 0.09
Basic, pro forma 0.10 0.00 0.21 0.09
Diluted, as reported 0.12 0.00 0.23 0.09
Diluted, pro forma 0.10 0.00 0.21 0.08
In December 2004, the FASB Issued Statement of Financial Accounting
Standards No. 123R (Statement 123R), Share-Based Payments, the provisions of
which become effective for the company in fiscal 2006. This Statement eliminates
the alternative to use APB No. 25's intrinsic value method of accounting that
was provided in Statement 123 as originally issued. Statement 123R requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
While the fair-value-based method prescribed by Statement 123R is similar to the
fair-value-based method disclosed under the provisions of Statement 123 in most
respects, there are some differences. The Company estimates that annual expense
using the Black-Sholes method beginning in 2006 is approximately $1.2 million or
$939 after tax and the diluted earnings per share impact is $0.02. This impact
does not include the effect of reload options or forfeitures or options
11
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
accelerations due to termination or retirement of personnel, the effect of which
cannot be measured with any degree of certainty.
2. Acquisition of Warwick Community Bancorp, Inc.
----------------------------------------------
On October 1, 2004 the Company completed its acquisition of Warwick
Community Bancorp, Inc. ("WSB" or "Warwick"), located in Warwick, New York. WSB
was the holding company for The Warwick Savings Bank, headquartered in Warwick,
New York, The Towne Center Bank, headquartered in Lodi, New Jersey and
Hardenburgh Abstract Company of Orange County, Inc. headquartered in Goshen, New
York. In addition, Warwick Commercial Bank was a subsidiary of The Warwick
Savings Bank. On the merger date, WSB had net loans of $284.5 million, total
deposits of $475.1 million and total assets of $703.7 million.
Shareholders of WSB as of the close of business on October 1, 2004
received total merger consideration of approximately $147.2 million, consisting
of approximately 6,257,896 shares of common stock of the Company and
approximately $72.6 million in cash (including cash paid in lieu of fractional
shares).
Goodwill recorded in the WSB acquisition ($92.0 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 ($9.3 million at March 31, 2005) is recognized apart from
goodwill and amortized to expense over its estimated useful life (9 years) and
evaluated for impairment.
The following table presents unaudited pro forma information as if WSB had been
consummated on September 30, 2003. This pro forma information gives effect to
certain adjustments, including accounting adjustments related to fair value
adjustments, amortization of core deposit intangibles and related income tax
effects. The pro forma information does not include merger integration costs and
does not necessarily reflect the results of operations that would have occurred
had the Company acquired WSB on September 30, 2003.
Pro forma (unaudited)
Six Months Ended
March 31,
2005 2004
---- ----
Net interest income $ 43,122 $ 38,644
Non interest income 7,866 7,686
Non interest expense 34,054 38,425
Net income 10,628 4,690
========= =========
Basic earnings per share $ 0.24 $ 0.11
========= =========
Diluted earnings per share $ 0.24 $ 0.11
========= =========
3. Mutual Holding Company Conversion and Acquisition of E.N.B. Holding
-------------------------------------------------------------------
Company, Inc.
-------------
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC. As a result of the
conversion, the Company became the
12
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
stock holding company of the Bank. In the stock offering, shares representing
Provident Bancorp, MHC's ownership interest in Provident Bancorp., Inc., a
federal corporation ("Provident Federal") were sold to investors. In addition,
the Company simultaneously completed its acquisition of E.N.B. Holding Company,
Inc. ("ENB"), located in Ellenville, New York.
The Company sold 19,573,000 shares of common stock at $10.00 per share to
depositors of the Bank as of June 30, 2002 and September 30, 2003. The new
holding company also issued 400,000 shares of common stock and contributed $1.0
million in cash to the Provident Bank Charitable Foundation. In addition, each
outstanding share of common stock of Provident Federal as of January 14, 2004
was converted into 4.4323 new shares of the Company's common stock.
Shareholders of ENB as of the close of business on January 14, 2004
received total merger consideration of approximately $76.5 million, consisting
of 3,969,676 shares of common stock of the Company and approximately $36.8
million in cash.
As a result of the above transactions, the Company had 39,608,586 issued
and outstanding shares at January 14, 2004.
Goodwill recorded in the ENB acquisition ($52.7 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 ($4.0 million at March 31, 2005), is recognized apart from
goodwill and amortized to expense over its estimated useful life (7.5 years) and
evaluated for impairment.
4. Critical Accounting Policies
----------------------------
The accounting and reporting policies of the Company 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 is unlikely 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 2 (Summary of Significant Accounting
Policies) of the Annual Report on Form 10-K for the year ending September 30,
2004 provides 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 30, 2004.
13
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
5. Loans
-----
Major classifications of loans, excluding loans held for sale, are
summarized below:
March 31, 2005 September 30, 2004
-------------- ------------------
Real estate - residential mortgage $ 437,386 $380,749
Real estate - commercial mortgage 496,769 327,414
Real estate - construction 63,891 54,294
Commercial and industrial 136,450 105,196
Consumer loans 167,721 129,981
---------- --------
Total $1,302,217 $997,634
========== ========
6. 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.
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2005 2004 2005 2004
---- ---- ---- ----
Balance at beginning of period $ 22,165 $ 11,249 $ 17,353 $ 11,069
Allowance acquired through acquisition -- 5,750 4,880 5,750
Provision for loan losses 150 200 300 350
Charge-offs (119) (136) (385) (148)
Recoveries 53 30 101 72
-------- -------- -------- --------
Net charge-offs (66) (106) (284) (76)
-------- -------- -------- --------
Balance at end of period $ 22,249 $ 17,093 $ 22,249 $ 17,093
======== ======== ======== ========
Net charge-offs to average loans outstanding
(annualized) 0.02% 0.05% 0.04% 0.02%
14
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
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).
March 31, 2005 September 31, 2004
-------------- ------------------
Non-accrual loans:
One- to four-family residential mortgage loans $ 952 $ 1,597
Commercial real estate, commercial business and construction loans 1,702 962
Consumer loans 113 178
-------- --------
Total non-performing loans 2,767 2,737
Real estate owned:
One to four family residential mortgage loans 93 --
-------- --------
Total non-performing assets $ 2,860 $ 2,737
======== ========
Ratios:
Non-performing loans to total loans, net 0.21% 0.27%
Non-performing assets to total assets 0.11% 0.15%
Allowance for loan losses to total non-performing loans 804.00% 634.00%
Allowance for loan losses to total loans 1.71% 1.74%
15
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
7. Securities
----------
The following is a summary of securities available for sale at March 31, 2005
and September 30, 2004:
Available for Sale Portfolio
March 31, 2005
====================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
====================================================
Mortgage-backed and SBA Securities
Mortgage-backed securities $536,132 $ 93 $ (8,829) $527,396
Collateralized mortgage obligations 20,854 14 (209) 20,659
SBAs and other 137 -- (1) 136
-------- -------- -------- --------
Total mortgage-backed and SBA securities 557,123 107 (9,039) 548,191
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency securities 268,259 -- (5,041) 263,218
State and municipal securities 21,826 35 (343) 21,518
Equity securities 946 6 (51) 901
-------- -------- -------- --------
Total investment securities 291,031 41 (5,435) 285,637
-------- -------- -------- --------
Total available for sale $848,154 $ 148 $(14,474) $833,828
======== ======== ======== ========
Available for Sale Portfolio
September 30, 2004
====================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
====================================================
Mortgage-backed and SBA Securities
Mortgage-backed securities $304,578 $ 1,155 $ (1,452) $304,281
Collateralized mortgage obligations 9,711 -- (95) 9,616
SBAs and other 5,948 377 -- 6,325
-------- -------- -------- --------
Total mortgage-backed and SBA securities 320,237 1,532 (1,547) 320,222
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency securities 192,788 522 (1,008) 192,302
State and municipal securities 20,482 172 (95) 20,559
Equity securities 1,005 337 (128) 1,214
-------- -------- -------- --------
Total investment securities 214,275 1,031 (1,231) 214,075
-------- -------- -------- --------
Total available for sale $534,512 $ 2,563 $ (2,778) $534,297
======== ======== ======== ========
16
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
The following is a summary of securities held to maturity at March 31, 2005 and
September 30, 2004:
Held to Maturity Portfolio
March 31, 2005
====================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
====================================================
Mortgage-backed securities
Mortgage-backed securities $ 30,631 $ 446 $ (345) $ 30,732
Collateralized mortgage obligations 2,339 51 -- 2,390
-------- -------- -------- --------
Total mortgage-backed securities 32,970 497 (345) 33,122
-------- -------- -------- --------
Investment securities
State and municipal securities 31,504 483 (380) 31,607
Other investments 308 -- (38) 270
-------- -------- -------- --------
Total investment securities 31,812 483 (418) 31,877
-------- -------- -------- --------
Total held to maturity $ 64,782 $ 980 $ (763) $ 64,999
======== ======== ======== ========
Held to Maturity Portfolio
September 30, 2004
====================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
====================================================
Mortgage-backed securities
Mortgage-backed securities $ 35,402 $ 741 $ (266) $ 35,877
Collateralized mortgage obligations 2,788 55 -- 2,843
Other 685 37 -- 722
-------- -------- -------- --------
Total mortgage-backed securities 38,875 833 (266) 39,442
-------- -------- -------- --------
Investment securities
State and municipal securities 29,894 922 (293) 30,523
Other 309 -- (44) 265
-------- -------- -------- --------
Total investments 30,203 922 (337) 30,788
-------- -------- -------- --------
Total held to maturity $ 69,078 $ 1,755 $ (603) $ 70,230
======== ======== ======== ========
17
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
At March 31, 2005 and September 30, 2004, the accumulated unrealized net
loss on securities available for sale (net of tax of $5,780 and $86,
respectively) that was included in accumulated other comprehensive income, a
separate component of stockholders' equity, was ($8,546) and $(186)
respectively. Gross realized gains were $810 and $518, respectively and gross
realized losses were $547 and $0, respectively, for the three months ended March
31, 2005 and 2004. Gross realized gains were $859 and $1,448 respectively, and
gross realized losses were $542 and $0, respectively, for the six months ended
March 31, 2005 and 2004.
Securities with a carrying amount of $301,141 and $168,310 were pledged as
collateral for municipal deposits, borrowings and other purposes at March 31,
2005 and September 30, 2004, respectively.
The following table summarizes, for all securities in an unrealized loss
position at March 31, 2005, the aggregate fair value and gross unrealized loss
by length of time those securities have continuously been in an unrealized loss
position:
-----------------------------------------------------------------------------------
Less than 12 Months 12 months or longer Total
------------------------- ------------------------ -------------------------
Unrealized Unrealized Unrealized
Losses Fair Value Losses Fair Value Losses Fair Value
-----------------------------------------------------------------------------------
Available For Sale:
Mortgage-backed securities $ (6,555) $435,400 $ (2,483) $ 92,652 $ (9,038) $528,052
U.S. Government & Agency Securities (2,680) 159,150 (2,361) 85,586 (5,041) 244,736
Municipal Securities (193) 12,295 (151) 5,524 (344) 17,819
Equity Securities -- -- (51) 790 (51) 790
-----------------------------------------------------------------------------------
Total available-for-sale: (9,428) 606,845 (5,046) 184,552 (14,474) 791,397
-----------------------------------------------------------------------------------
Held to Maturity:
Mortgage-backed securities -- -- (345) 13,673 (345) 13,673
State and municipal securities (134) 10,167 (246) 2,422 (380) 12,589
Other securities -- -- (38) 270 (38) 270
-----------------------------------------------------------------------------------
Total held to maturity: (134) 10,167 (629) 16,365 (763) 26,532
-----------------------------------------------------------------------------------
Total securities: $ (9,562) $617,012 $ (5,675) $200,917 $(15,237) $817,929
===================================================================================
Substantially all of the unrealized losses at March 31, 2005 relate to
investment grade securities and are attributable to changes in market interest
rates subsequent to purchase. There were no securities with unrealized losses
that were individually significant dollar amounts at March 31, 2005. A total of
353 securities were in a continuous unrealized loss position for less than 12
months, and 80 securities for 12 months or longer. For fixed maturities, there
are no securities past due or securities for which the Company currently
believes it is not probable that it will collect all amounts due according to
the contractual terms of the investment. Because the Company has the ability and
intent to hold securities with unrealized losses until a market price recovery
18
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
(which, for fixed maturities, may be until maturity) the Company did not
consider these investments to be other-than-temporarily impaired at March 31,
2005, except for an investment in FHLMC perpetual preferred stock which had been
determined that an impairment loss of $93 existed on a recorded basis of $883.
(See Recent Accounting Standards for discussion of a new accounting
pronouncement that will provide additional guidance with respect to impairment
evaluations).
8. Deposits
--------
Major classifications of deposits are summarized below:
March 31, 2005 September 30, 2004
-------------- ------------------
Demand deposits:
Retail $ 156,697 $ 122,276
Commercial and municipal 205,401 167,084
NOW 135,780 83,439
---------- ----------
Total transaction accounts 497,878 372,799
Money market 225,920 173,272
Savings 545,538 360,138
Time under $100 297,448 239,411
Time over $100 117,495 93,912
---------- ----------
Total $1,684,279 $1,239,532
========== ==========
9. FHLB and Other Borrowings
-------------------------
The Company's FHLB and other borrowings and weighted average interest
rates are summarized as follows:
March 31, 2005 September 30, 2004
--------------------------- ---------------------------
Amount Rate Amount Rate
------ ---- ------ ----
By type of borrowing:
Advances $ 223,697 3.30% $ 164,947 2.81%
Repurchase agreements 171,755 3.46 49,962 3.49
---------- ----------
Total borrowings $ 395,452 3.37% $ 214,909 2.97%
========== ==========
By remaining period to maturity:
One year or less $ 176,498 3.09% $ 94,961 2.11%
One to two years 28,581 3.33 28,000 3.18
Two to three years 38,054 3.70 18,651 3.65
Three to four years 39,344 3.84 29,443 3.78
Four to five years 30,784 3.38 40,017 3.76
Five years or greater 82,191 3.56 3,837 4.89
---------- ----------
Total borrowings $ 395,452 3.37% $ 214,909 2.97%
========== ==========
19
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
As a member of the FHLB of New York, the Bank may borrow in the form of
term and overnight borrowings up to the amount of eligible mortgages that have
been pledged as collateral under a blanket security agreement. As of March 31,
2005 and September 30, 2004, the Bank had pledged mortgages totaling $290,177
and $267,457, respectively. Based on outstanding borrowings under the line
totaling $221,484 and $164,969 as of March 31, 2005 and September 30, 2004, the
Bank had unused borrowing capacity under the FHLB of New York Line of Credit of
$68,693 and $102,489, respectively. The Bank may borrow additional amounts by
pledging securities not required to be pledged for other purposes with a market
value of $614,382 as of March 31, 2005.
10. 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 for all
periods through January 14, 2004, but excludes unallocated ESOP shares that have
not been released or committed to be released to participants.
The common stock 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.
Prior period share information has been adjusted to reflect the
4.4323-to-one exchange ratio in connection with the second-step conversion
completed January 14, 2004.
Basic earnings per common share is computed as follows:
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2005 2004 2005 2004
Weighted average common shares
outstanding (basic) 43,872 37,269 44,100 35,777
------- ------- ------- -------
Net income $ 5,180 $ 72 $10,195 $ 3,117
Basic earnings per common share $ 0.12 $ 0.00 $ 0.23 $ 0.09
20
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
Diluted earnings per common share is computed as follows:
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2005 2004 2005 2004
Weighted average common shares outstanding 43,872 37,269 44,100 35,777
Effect of common stock equivalents 570 644 588 614
------- ------- ------- -------
Total diluted shares 44,442 37,913 44,688 36,391
======= ======= ======= =======
Net income $ 5,180 $ 72 $10,195 $ 3,117
Diluted earnings per common share $ 0.12 $ 0.00 $ 0.23 $ 0.09
11. Pension and Other Post Retirement Plans
---------------------------------------
Net post retirement cost, which is recorded within salaries and employee
benefits expense in the consolidated statements of income, is comprised of the
following:
Pension Plans Other Post Retirement Plans
--------------------------- ---------------------------
Six Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2005 2004 2005 2004
--------------------------- ---------------------------
Service cost $ 645 $ 393 $ 51 $ 4
Interest cost 806 337 75 11
Expected return on plan assets (895) (395) -- --
Unrecognized net transition obligation 5 13 5 5
Amortization of prior service cost (5) (6) 3 3
Amortization of gain or loss 167 86 (1) (1)
--------------------------- ---------------------------
Net periodic cost $ 723 $ 428 $ 133 $ 22
=========================== ===========================
The Company previously disclosed in its consolidated financial statements
for the year ended September 30, 2004, that it expected to contribute $692 to
its pension plan in fiscal 2005. As of March 31, 2005, there were no
contributions made. As part of the acquisition of WSB, the Company assumed the
WSB Pension Plan, a defined benefit plan. The WSB plan was frozen on April 30,
2002. As part of the acquisition of ENB the Company assumed the ENB Pension
Plan, a defined benefit plan. The ENB plan was frozen in connection with the
merger of ENB into the Company.
21
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
12. 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 March 31, 2005, the Company had $17.2 million in outstanding letters
of credit, of which $5.9 million were secured by cash collateral.
13. Branch Purchase Commitment
--------------------------
On January 25, 2005 the Bank announced that it has executed an agreement
with HSBC Bank USA, National Association ("HSBC") to acquire HSBC's branch
office located in South Fallsburg, New York, and to acquire approximately $3.2
million of loans and assume approximately $30.3 million of deposit liabilities
held at the South Fallsburg branch office. The Bank expects to pay a premium of
approximately $2.2 million for the deposit liabilities.
It is anticipated that the transaction will be completed in the second
calendar quarter of 2005 and is conditioned upon receiving requisite regulatory
approvals.
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 2005 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.
22
The Company's significant accounting policies are summarized in Note 2 to
the consolidated financial statements included in its September 30, 2004 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
and non-performing loans is considered a critical accounting policy by
management 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 in the necessary allowance.
As of January 14, 2004, the Company completed its stock offering and
acquisition of ENB in connection with Provident Bancorp, MHC's mutual-to-stock
conversion. The acquisition was accounted for as a purchase and, accordingly,
amounts attributable to ENB have been included in the Company's consolidated
financial statements from the date of acquisition. See Note 3 to the
accompanying consolidated financial statements included in Item 1 of this
quarterly report.
As discussed in Note 2 to the consolidated financial statements included
in Item 1 of this quarterly report, the Company completed its acquisition of WSB
on October 1, 2004. The acquisition was accounted for as a purchase and,
accordingly, amounts attributable to Warwick have been included in the Company's
consolidated financial statements from the date of acquisition.
Comparison of Financial Condition at March 31, 2005 and September 30, 2004
--------------------------------------------------------------------------
Total assets as of March 31, 2005 were $2.5 billion, an increase of $692.0
million, or 37.9%, over assets of $1.8 billion at September 30, 2004. The
increase from September 30, 2004 was primarily due to the October 2004
acquisition of Warwick, whose assets totaled $703.7 million on the merger date,
which was partially offset by a $57.5 million decrease in cash and due from
banks as the balance in these accounts at September 30, 2004 reflected the cash
portion of the Warwick acquisition. Goodwill and intangibles increased by $101.2
million from September 30, 2004 as a result of the completion of the Warwick
acquisition.
Net loans (excluding loans held for sale) as of March 31, 2005 were $1.3
billion, an increase of $299.7 million, or 30.6%, over the net loan balances of
$980.3 million at September 30, 2004. Loans acquired from Warwick Savings Bank
totaled $288.2 million, while allowances for loan losses acquired in connection
with Warwick Savings Bank were $4.9 million, or 1.70% of Warwick Savings Bank's
outstanding loan balances. Inclusive of Warwick loans acquired, commercial loans
increased by $210.2 million, or 43.2%, over balances at September 30, 2004.
Consumer loans increased by $37.7 million, or 29.0%, during the six-month period
ended March 31, 2005, while residential loans increased by $56.6 million, or
14.9%. Total loan originations have increased from $156.5 million for the six
months ended March 31, 2004 to $220.9 million for the 2005 period. However,
repayments and sales of loans have also increased from $130.2 million in the six
months ended March 31, 2004 to $206.1 million in the 2005 period.
Asset quality continues to be strong. At $2.9 million, non-performing
assets as of March 31, 2005 as a percentage of total assets were 0.11%, down
from 0.15% at September 30, 2004.
Total securities increased by $295.2 million, or 48.9%, to $898.6 million
at March 31, 2005 from $603.4 million at September 30, 2004. Securities acquired
from Warwick totaled $135.8 million. Investments were made primarily in
mortgage-backed securities, which increased by $222.0 million, or
23
61.8%, and in U.S. Government and Federal Agency Securities, which increased by
$72.2 million, or 37.5%.
Total deposits as of March 31, 2005 were $1.7 billion, up $444.7 million,
or 35.9%, from September 30, 2004. Deposits acquired from Warwick totaled $475.1
million. As of March 31, 2005 retail and commercial transaction accounts were
29.6% of deposits compared to 30.1% at September 30, 2004.
Borrowings from the Federal Home Loan Bank of New York (the "FHLB")
increased by $180.8 million during the six-month period to $385.7 million at
March 31, 2005 from $204.9 million at September 30, 2004. Borrowings acquired
from Warwick totaled $160.5 million.
Stockholders' equity increased by $59.3 million to $408.8 million at March
31, 2005 compared to $349.5 million at September 30, 2004. Shares of common
stock with a value of $74.6 million were issued for the purchase of Warwick. Net
income of $10.2 million and ESOP allocations of $1.4 million for the six month
period also increased equity. Partially offsetting the increases were the
payments of cash dividends totaling $3.5 million and net declines in accumulated
comprehensive income of $8.4 million.
On January 27, 2005 the Company announced a stock repurchase plan of up to
2,295,000 shares. The Company, under this plan, repurchased 1,187,800 shares at
a cost of $15.3 million during the quarter ended March 31, 2005. Also during the
quarter, restricted stock awards of 762,400 shares were granted from the
repurchased treasury shares. Stock options on 1,718,300 shares were also
granted, with no effect on capital. Tangible capital to assets stands at 10.42%
at March 31, 2005. The Board of Directors declared a quarterly cash dividend of
$0.045 per share, payable on May 19, 2005 to holders of record as of May 9,
2005.
Supplemental Reporting of Non-GAAP Results of Operations. The Company is
providing supplemental reporting of its results on a "net operating" basis, from
which the Company excludes the after-tax charge for expenses associated with
merging acquired operations into the Company and excludes the after-tax charge
for establishing the charitable foundation. Although "net operating income" as
defined by the Company is not a GAAP measure, management believes that this
information helps investors understand the effects of acquisition activity and
the establishment of the charitable foundation on reported results. Merger
integration costs were $205 ($0.005 per diluted share) and $430 ($0.01 per
diluted share), after-tax for the three months ended March 31, 2005 and 2004.
Similar merger expenses for the six months ended March 31, 2005 and 2004 were
$433 ($0.01 per diluted share) and $430 ($0.01 per diluted share) respectively.
The after-tax effect of the establishment of the charitable foundation was $3.0
million ($0.08 per share for both the three and six months ended March 31,
2004).
Net operating income on this basis for the most recent quarter was $5.4
million, an increase of 53.8% from $3.5 million in the prior year. Net operating
income on this basis for the current six-month period was $10.6 million, an
increase of 62.3% from $6.5 million in the comparable period in fiscal 2004. Net
operating income, as an annualized rate of return on average assets and average
stockholders' equity, was 0.85% and 5.12% respectively, in the quarter ended
March 31, 2005, compared with 0.84% and 4.51% in the quarter ended March 31,
2004. Net operating income, as an annualized rate of return on average assets
and stockholders' equity, was 0.84% and 5.0%, respectively, for the six months
ended
24
March 31, 2005, compared with 0.92% and 6.13%, respectively for the six months
ended March 31, 2004.
Reconciliation of GAAP and Non-GAAP results of operations: A
reconciliation of diluted earnings per share and net income with diluted net
operating earnings per share and net operating income follows (in thousands,
except per share amounts):
Three Months Ended Six Months Ended
March 31, March 31
--------- --------
2005 2004 2005 2004
---- ---- ---- ----
Diluted cash earnings per share $ 0.12 $ 0.00 $ 0.23 $ 0.09
Charge for establishment of Charitable Foundation(1) -- 0.08 -- 0.08
Merger integration expenses(1) 0.00 0.01 0.01 0.01
---------- ---------- ---------- ----------
Diluted net operating earnings $ 0.12 $ 0.09 $ 0.24 $ 0.18
========== ========== ========== ==========
Net income $ 5,180 $ 72 $ 10,195 $ 3,117
Charge for establishment of Charitable Foundation(1) -- 3,000 -- 3,000
Merger integration expenses(1) 205 430 433 430
---------- ---------- ---------- ----------
Net operating income $ 5,385 $ 3,502 $ 10,628 $ 6,547
- -------------------- ========== ========== ========== ==========
(1) After related tax effect at 40% marginal rate
Comparison of Operating Results for the Three Months Ended
March 31, 2005 and March 31, 2004
Net Income. For the three months ended March 31, 2005 net income was $5.2
million, an increase of $5.1 million, compared to $72 for the same period in
fiscal 2004. Net interest income after provision for loan losses for the three
months ended March 31, 2005 increased by $5.6 million, or 35.2%, compared to the
same period in the prior year. Non-interest income increased $1.0 million or
38.0% to $3.8 million for the three months ended March 31, 2005 compared to $2.8
million for the three months ended March 31, 2004. Non-interest expense
decreased $1.6 million, or 8.5%, to $17.1 million for the three months ended
March 31, 2005 compared to $18.7 million for the same prior-year period.
The relevant performance measures follow:
Three Months Ended
March 31,
---------
2005 2004
---- ----
Per common share:
Basic earnings $ 0.12 $ 0.000
Diluted earnings 0.12 0.000
Dividends declared 0.04 0.035
Return on average (annualized):
Assets 0.83% 0.02%
Equity 5.00% 0.09%
25
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).
Three Months Ended March 31,
----------------------------
2005 2004
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and commercial mortgage loans(1) $ 677,753 $ 11,223 6.72% $ 363,857 $ 6,000 6.63%
Consumer loans(1) 163,041 2,046 5.09 116,433 1,457 5.03
Residential mortgage loans(1) 430,670 6,237 5.87 421,165 6,364 6.08
---------- ---------- ---------- --------
Total loans 1,271,464 19,506 6.22 901,455 13,821 6.17
---------- ---------- ---------- --------
Securities-taxable 874,647 8,160 3.78 527,719 4,881 3.72
Securities-tax exempt(2) 50,687 740 5.92 40,131 525 5.26
Other earning assets 20,881 137 2.66 10,949 42 1.54
---------- ---------- ---------- --------
Total securities and other earning assets 946,215 9,037 3.87 578,799 5,448 3.79
---------- ---------- ---------- --------
Total interest-earning assets 2,217,679 28,543 5.22 1,480,254 19,269 5.24
---------- ---------- ---- ---------- -------- ----
Non-interest-earning assets: 315,161 189,748
---------- ----------
Total assets $2,532,840 $1,670,002
========== ==========
Interest bearing liabilities:
Savings, clubs and escrow $ 553,936 786 0.58 $ 384,097 425 0.45
Money market accounts 234,592 605 1.05 143,320 200 0.56
NOW checking 156,838 127 0.33 86,460 50 0.23
Certificate accounts 393,508 1,976 2.04 335,190 1,321 1.59
---------- ---------- ---------- --------
Total interest-bearing deposits 1,338,874 3,494 1.06 949,067 1,996 0.85
Borrowings 417,952 3,369 3.27 150,460 1,151 3.08
---------- ---------- ---------- --------
Total interest-bearing liabilities 1,756,826 6,863 1.58 1,099,527 3,147 1.15
---------- ---------- ---- ---------- -------- ----
Non-interest-bearing liabilities: 355,595 259,617
---------- ----------
Total liabilities 2,112,421 1,359,144
Stockholders' equity 420,419 310,858
---------- ----------
Total liabilities and equity $2,532,840 $1,670,002
========== ==========
Net interest income $ 21,680 $ 16,122
========== ========
Net interest rate spread 3.64% 4.09%
==== ====
Net earning assets $ 460,853 $ 380,727
========== ==========
Net interest margin 3.96% 4.38%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 126.23% 134.63%
========== ========
- ----------
(1) Includes non-accrual loans.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
26
The table below details the changes in interest income and interest
expense for the periods indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Three Months Ended March 31,
2005 vs. 2004
Increase/(Decrease) Due to
--------------------------
Volume(1) Rate(1) Total
--------- ------- -----
Interest-earning assets
Commercial and commercial mortgage loans $ 5,142 $ 81 $ 5,223
Consumer loans 572 17 589
Residential mortgage loans 124 (251) (127)
Securities-taxable 3,201 78 3,279
Securities-tax exempt(2) 146 69 215
Other earning assets 52 43 95
------- ------- -------
Total interest income 9,237 37 9,274
------- ------- -------
Interest-bearing liabilities
Savings 218 143 361
Money market 171 234 405
NOW checking 50 27 77
Certificates of deposit 250 406 656
Borrowings 2,143 74 2,217
------- ------- -------
Total interest-bearing liabilities 2,832 884 3,716
------- ------- -------
Net interest margin 6,405 (847) 5,558
------- ------- -------
Less tax equivalent adjustment(2) (107) 32 (75)
------- ------- -------
Net interest income $ 6,298 $ (815) $ 5,483
======= ======= =======
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
Net Interest Income. Net interest income for the three months ended March
31, 2005 was $21.4 million, compared to $15.9 million for the three months ended
March 31, 2004, an increase of $5.5 million or 34.4%. The increase in interest
income was largely due to a $737.4 million increase in average earning assets to
$2.2 billion during the quarter ended March 31, 2005, as compared to $1.5
billion for the same quarter in the prior year. The increase was primarily due
to the Warwick acquisition and continued internal growth. The increase in
average earning assets was partially offset by a decline in average yield of two
basis points from 5.24% to 5.22%, on a fully taxable equivalent basis. Despite
yield increases in the loan and securities portfolios of five basis points and
eight basis points, respectively, the overall yield on total interest-earning
assets declined due to the disproportionate volume increases between the two
portfolios and their relative weights as a percentage of total earning assets.
Interest expense increased by
27
$3.7 million for the quarter compared to the same quarter in 2004, as average
interest-bearing liabilities increased by $657.3 million and the average cost of
interest-bearing liabilities increased 43 basis points to 1.58%. Net interest
margin declined by 42 basis points to 3.96%, while net interest spread declined
by 45 basis points to 3.64%. This was primarily the result of assets acquired in
the Warwick acquisition recorded at current market interest rates coupled with
the impact of the increase in the cost of interest-bearing liabilities resulting
from the 175 basis point increase in the target federal funds rate since May of
2004.
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 to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $150 and $200 in loan loss provisions during the
three months ended March 31, 2005 and 2004. Net charge-offs for the three months
ended March 31, 2005 were $66, compared to a net charge-off of $106 for the same
period in 2004 (See Note 6 for further discussion).
Non-Interest Income was $3.8 million for the three months ended March 31,
2005 compared to $2.8 million for the three months ended March 31, 2004. Deposit
fees and service charges increased by $726, or 43.2%, of which $419 was
generated from the acquired Warwick branches, while $307 was primarily due to
volume-driven increases in overdraft, non-sufficient funds, and ATM and debit
card fees. Income derived from the Company's bank owned life insurance ("BOLI")
investments increased by $160, or 118.5% due to additional BOLI investments of
$13.3 million from the Warwick acquisition. Income derived from the Company's
new wholly-owned title subsidiary Hardenburgh Abstract Company, Inc. was $300.
Net gains on the sale of securities were $263 for the current three-month
period, compared to $518 for the same period last year. During the three-month
period ended March 31, 2005, the Company also recorded gains on sales of loans
totaling $21, compared to $84 for the same period last year.
Non-Interest Expense for the three months ended March 31, 2005 decreased
by $1.6 million, or 8.50%, due to the $5.0 million charge in 2004 for the
establishment of the Charitable Foundation. Excluding the 2004 charge of $5.0
million, pre-tax, non-interest expense for the three months ended March 31, 2005
increased by $3.4 million, or 25.0%, to $17.1 million. The acquisition of
Warwick in October 2004 played a major role in the increases in most categories.
Compensation and employee benefits increased by $1.9 million, or 32.2%, to $8.0
million for the three months ended March 31, 2005. The increase was primarily
attributable to the Warwick acquisition. A decrease in the cost of stock-based
compensation benefits of $406, or 47.7%, occurred during the current three-month
period primarily due to stock-based deferred compensation programs directly tied
to the Company's stock price, which was lower in the current period. Occupancy
and office operations increased by $796, or 47.9%, for the three months ended
March 31, 2005, of which $472 was attributable to the acquired Warwick
properties. The remaining increase is also attributable to the harsh winter in
2005 and increases in real estate taxes. Advertising and promotion increased
$83, or 14.6%, primarily as a result of the Company's new brand identity.
Professional fees increased by $89, or 17.1%, primarily due to fees associated
with the Company's regulatory filings. Amortization of core deposit intangible
increased by $287 as a result of the Warwick deposits acquired. Data and check
processing increased $393, or 51.4%, primarily due to the higher volume of
services related to the accounts acquired in the Warwick merger, and only half
of the 2004 quarter included accounts acquired in the ENB acquisition. Other
expenses increased by $556, or 41.4%, due primarily due to increases in
correspondent bank expense, postage, telephone expense and insurance premium
expense, all directly related to the increased size of Provident Bank following
the mergers. Further, merger integration expenses decreased $376, pre-tax, or
52.4%.
28
The GAAP efficiency ratio was 66.8% and 98.6% respectively, for the
quarter ended March 31, 2005 and 2004. The efficiency ratio, as defined by
management, (which excludes securities gains, merger costs, amortization of
intangible assets and the $5.0 million charitable contribution) has improved to
62.3% for the current quarter from 66.5% for the quarter ending March 31, 2004,
reflecting the strides we have made in combining the Warwick and Ellenville
Banks into Provident and the operating leverage derived from those efforts.
Income Taxes. Income tax expense was $2.9 million for the three months
ended March 31, 2005, compared to a tax benefit of $200 for the same period in
2004. The effective tax rates were 35.6% and 36.9%, respectively.
Comparison of Operating Results for the Six Months Ended
March 31, 2005 and March 31, 2004
Net Income. For the six months ended March 31, 2005 net income was $10.2
million, an increase of $7.1 million compared to $3.1 million for the same
period in fiscal 2004. Net interest income after provision for loan losses for
the six months ended March 31, 2005 increased by $15.7 million, or 57.8%,
compared to the same period in fiscal 2004. Non-interest income increased $2.3
million or 40.8% to $7.9 million for the six months ended March 31, 2005
compared to $5.6 million for the six months ended March 31, 2004. Non-interest
expense increased $6.6 million, or 23.2%, to $34.8 million for the six months
ended March 31, 2005 compared to $28.2 million for the same period in fiscal
2004.
The relevant performance measures follow:
Six Months Ended
March 31,
2005 2004
---- ----
Per common share:
Basic earnings $0.23 $ 0.09
Diluted earnings 0.23 0.09
Dividends declared 0.08 0.07
Return on average (annualized):
Assets 0.81% 0.44%
Equity 4.84% 2.92%
29
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).
Six Months Ended March 31,
--------------------------
2005 2004
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and commercial
mortgage loans(1) $ 670,034 $ 22,321 6.68% $ 310,471 $ 10,104 6.51%
Consumer loans(1) 161,713 3,930 4.87 98,265 2,334 4.75
Residential mortgage loans(1) 432,633 12,668 5.87 397,523 11,913 5.99
---------- ---------- ---------- ----------
Total loans 1,264,380 38,919 6.17 806,259 24,351 6.04
---------- ---------- ---------- ----------
Securities-taxable 850,550 16,093 3.79 444,016 8,459 3.81
Securities-tax exempt(2) 49,354 1,437 5.84 30,627 811 5.30
Other earning assets 30,980 350 2.27 11,615 65 1.12
---------- ---------- ---------- ----------
Total securities and other
earning assets 930,884 17,880 3.85 486,258 9,335 3.84
---------- ---------- ---------- ----------
Total interest-earning assets 2,195,264 56,799 5.19 1,292,517 33,686 5.21
---------- ---------- ---- ---------- ---------- ----
Non-interest-earning assets: 326,380 132,082
---------- ----------
Total assets $2,521,644 $1,425,599
========== ==========
Interest bearing liabilities:
Savings, clubs and escrow $ 556,635 1,658 0.60 $ 318,634 739 0.46
Money market accounts 258,573 1,197 0.93 139,112 377 0.54
NOW checking 149,671 259 0.35 74,974 81 0.22
Certificate accounts 398,847 3,799 1.91 281,485 2,356 1.67
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,363,726 6,913 1.02 814,205 3,553 0.87
Borrowings 386,379 6,261 3.25 149,826 2,361 3.15
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 1,750,105 13,174 1.51 964,031 5,914 1.23
---------- ---------- ---- ---------- ---------- ----
Non-interest-bearing liabilities: 349,327 246,851
--------- ---------
Total liabilities 2,099,432 1,210,882
Stockholders' equity 422,212 213,717
--------- ---------
Total liabilities and equity 2,521,644 1,424,599
========= =========
Net interest income $ 43,625 $ 27,772
========== ==========
Net interest rate spread 3.68% 3.98%
==== ====
Net earning assets $ 445,159 $ 328,486
========== ==========
Net interest margin 3.99% 4.30%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 125.44% 134.07%
========== ==========
- ----------
(1) Includes non-accrual loans
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
30
The table below details the changes in interest income and interest expense for
the periods indicated due to both changes in average outstanding balances and
changes in average interest rates (in thousands):
Six Months Ended March 31,
2005 vs. 2004
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Commercial and commercial mortgage loans $ 11,948 $ 269 $ 12,217
Consumer loans 1,536 60 1,596
Residential mortgage loans 1,005 (250) 755
Securities-taxable 7,678 (44) 7,634
Securities-tax exempt(2) 536 90 626
Other earning assets 176 109 285
-------- -------- --------
Total interest income 22,879 234 23,113
-------- -------- --------
Interest-bearing liabilities
Savings 653 266 919
Money market 446 374 820
NOW checking 111 67 178
Certificates of deposit 1,073 371 1,444
Borrowings 3,822 77 3,899
-------- -------- --------
Total interest expense 6,105 1,155 7,260
-------- -------- --------
Net interest margin 16,774 (921) 15,853
-------- -------- --------
Less tax equivalent adjustment(2) (340) 120 (220)
-------- -------- --------
Net interest income $ 16,434 $ (801) $ 15,633
======== ======== ========
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
Net Interest Income. Net interest income for the six months ended March
31, 2005 was $43.1 million, compared to $27.5 million for the six months ended
March 31, 2004, an increase of $15.6 million or 56.9%. The increase in interest
income was largely due to a $902.7 million increase in average earning assets to
$2.2 billion during the period ended March 31, 2005, as compared to $1.3 billion
for the same period in the prior fiscal year. The increase was primarily due to
the Warwick acquisition and continued internal growth. The increase in average
earning assets was partially offset by a decline in average yield of two basis
points from 5.21% to 5.19%, on a fully taxable equivalent basis. Despite yield
increases in the loan and securities portfolios of 13 basis points and one basis
point, respectively, the overall yield on total interest-earning assets declined
due to the disproportionate volume increases between the two portfolios and
their relative weights as a percentage of total earning assets. Interest expense
increased by $7.3 million for the six months ended March 31, 2005 from $5.9
million for the same period in fiscal 2004 to $13.2 million, as average
interest-bearing liabilities increased by $786.1 million and the average cost of
interest-bearing liabilities increased 28 basis points. The net interest margin
declined by 31 basis points to 3.99%, while the net interest spread declined by
30 basis points to 3.68%, due to the assets
31
acquired in the Warwick acquisition being recorded at current market interest
rates and the increase in short-term interest rates. The Board of Governors of
the Federal Reserve has increased short term rates seven times since May 2004,
increasing the target federal funds rate from 1% to 2.75%. However, longer term
interest rates (10-year treasury) have only increased from an average of 4.13%
for the six months ended March 31, 2004 to 4.23% for the six months ended March
31, 2005. As the yield has increased on short-term rates faster than longer term
rates, the Bank's average cost of interest-bearing liabilities has increased
faster than the average increase in asset yields. Should the yield curve
continue to "flatten," a continued decline in net interest margin may occur,
offsetting a portion of gains in net interest income arising from increasing
volume of assets generated.
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 to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $300 and $350, respectively, in loan loss
provisions during the six months ended March 31, 2005 and 2004. Net charge-offs
for the six months ended March 31, 2005 were $284 compared to net charge-offs of
$76 for the same period in 2004. (See Note 6 for further discussion).
Non-Interest Income was $7.9 million for the six months ended March 31,
2005 compared to $5.6 million for the six months ended March 31, 2004. Deposit
fees and service charges increased by $2.0 million, or 66.7%, of which $1.8
million was generated from the acquired Warwick and ENB branches, while $200 was
due primarily to volume-driven increases in overdraft, non-sufficient funds, and
ATM and debit card fees. Income derived from the Company's insurance BOLI
investments increased by $319, or 109.2% due to the additional BOLI investment
previously discussed. Income derived from the new Hardenburgh Abstract Company,
Inc. was $658. Net gains on the sale of securities were $317 for the current
six-month period, compared to $1.4 million for the same period in the prior
fiscal year. During the six-month period ended March 31, 2005, the Company also
recorded net gains on sales of loans totaling $80 compared to $170 for the same
period last year.
Non-Interest Expense for the six months ended March 31, 2005 increased by
$6.6 million, or 23.2%, to $34.8 million, compared to $28.2 million, including
the Charitable Foundation contribution of $5.0 million, pre-tax, for the six
months ended March 31, 2004. Excluding the 2004 charge of $5.0 million, pre-tax,
non-interest expense for the six months ended March 31, 2005 increased by $11.6
million, or 50.0%, to $34.8 million. The acquisition of ENB in January 2004 and
Warwick in October 2004 played a major role in the increases in most categories.
Compensation and employee benefits increased by $5.3 million, or 51.0%, to $15.8
million for the six-month period ended March 31, 2005. The increase was
primarily attributable to the Warwick and ENB acquisitions. A decrease in the
cost of stock-based compensation benefits of $238, or 15.6%, occurred during the
current six-month period primarily due to stock-based deferred compensation
programs directly tied to the Company's stock price. Occupancy and office
operations increased by $1.6 million, or 54.1%, for the six months ended March
31, 2005, almost all of which was attributable to the acquired ENB and Warwick
properties. Advertising and promotion increased $777, or 75.1%, primarily as a
result of the new brand identity the Company has unveiled and the additional
promotions in the Orange County market due to the acquisitions of Warwick and
ENB. Professional fees increased by $275, or 27.4%, due primarily to fees
associated with the Company's compliance with the provisions of Section 404 of
the Sarbanes-Oxley Act of 2002 and fees previously noted. Amortization of core
deposit intangible increased by $1.3 million as a result of the Warwick and ENB
deposits acquired. Stationery and office supplies increased by $71, or 16.2%,
due to the doubling of our branches compared to the prior year. Data and check
processing increased $897, or 59.4%, primarily due to the higher level of
services related to the accounts acquired in the mergers. Other expenses
increased by $1.2 million, or 51.0%, due primarily to increases in correspondent
bank expense,
32
postage, telephone expense and insurance premium expense, all directly related
to the increased size of Provident Bank following the mergers. ATM and debit
card expense increased $266, or 73.1%, primarily as a result of the accounts
acquired in the mergers.
Income Taxes. Income tax expense was $5.7 million for the six months ended
March 31, 2005 compared to $1.4 million expense for the same period in 2004. The
effective tax rates were 35.9% and 30.8%, 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.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the six-months
ended March 31, 2005 and March 31, 2004, loan originations, excluding loans
originated for sale, totaled $213.2 million and $151.3 million, respectively,
and purchases of securities totaled $316.9 million and $335.7 million,
respectively. For the six-month periods ended March 31, 2005 and 2004, these
investing activities were funded primarily by principal repayments on loans, by
proceeds from sales and maturities of securities, and by deposit growth. Loan
origination commitments totaled $71.9 million at March 31, 2005. The Company
anticipates that it will have sufficient funds available to meet current loan
commitments. At September 30, 2004 the Company had investments of $13.2 million
in BOLI contracts. The Company recorded an additional $13.3 million in BOLI as a
result of the Warwick acquisition. In April 2005, the Company invested an
additional $10.0 million in BOLI contracts. Such investments are illiquid and
are therefore classified as other assets. Earnings from BOLI are derived from
the net increase in cash surrender value of the BOLI contracts and the proceeds
from the payment on the insurance policies, if any.
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. Excluding the acquisition of
Warwick, the net decrease in total deposits for the six months ended March 31,
2005 was $30.6 million, primarily in money market deposit accounts, compared to
a $11.5 million increase for the six months ended March 31, 2004.
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC. As a result of the
conversion, the Company became the stock holding company of the Bank. In the
stock offering, shares representing Provident Bancorp, MHC's ownership interest
in Provident Federal were sold to investors. In addition, the Company
33
simultaneously completed its acquisition of E.N.B. Holding Company, Inc.,
located in Ellenville, New York.
The Company sold 19,573,000 shares of common stock at $10.00 per share to
depositors of the Bank as of June 30, 2002 and September 30, 2003. The Company
also issued 400,000 shares of common stock and contributed $1.0 million in cash
to the Provident Bank Charitable Foundation. In addition, each outstanding share
of common stock of the Company as of January 14, 2004 was converted into 4.4323
new shares of the Company's common stock.
Shareholders of ENB as of the close of business on January 14, 2004
received total merger consideration of approximately $76.47 million, consisting
of 3,969,676 shares of common stock of the Company and approximately $36.77
million in cash.
Shareholders of Warwick as of the close of business on October 1, 2004
received total merger consideration of approximately $147.2 million, consisting
of 6,257,896 shares of common stock of the Company and approximately $72.6
million in cash.
The Company monitors its liquidity position on a daily basis. We generally
remain fully invested and utilize additional sources of funds through Federal
Home Loan Bank of New York overnight and term advances, of which $223.7 million
were outstanding at March 31, 2005. The Company has the ability to borrow an
additional $68.7 million under its credit facilities with the Federal Home Loan
Bank of New York. The Company may borrow additional amounts by pledging
securities not required to be pledged for other purposes with a market value of
$614,382 as of March 31,2005.
At March 31, 2005, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital (leverage) level of $193.0 million, or 8.2%
of adjusted assets (which is above the required level of $94.0 million, or 4.0%)
and a total risk-based capital level of $213.4 million, or 13.11% of
risk-weighted assets (which is above the required level of $130.2 million, or
8.0%). Regulations require leverage and total risk-based capital ratios of 5.0%
and 10.0%, respectively, in order to be classified as well-capitalized. In
performing this calculation, the intangible assets recorded in the NBF, ENB, and
Warwick acquisitions are deducted from capital and from total adjusted assets
for purposes of regulatory capital measures. At March 31, 2005, the Bank
exceeded all capital requirements for the 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 March
31, 2005 and September 30, 2004, compared to OTS requirements.
OTS Requirements
----------------
Minimum Capital For Classification as
Bank Actual Adequacy Well Capitalized
----------- -------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
----------------------
March 31, 2005
- --------------
Tangible Capital $193,042 8.2% $ 35,245 1.5% $ -- --%
Tier 1 (core) capital 193,042 8.2 93,988 4.0 117,485 5.0
Risk-based capital:
Tier 1 193,042 11.9 -- 97,652 6.0
Total 213,410 13.1 130,202 8.0 162,753 10.0
September 30, 2004
- ------------------
Tangible Capital $189,486 11.3% $ 25,285 1.5% $ -- --%
Tier 1 (core) capital 189,486 11.3 67,427 4.0 84,284 5.0
Risk-based capital:
Tier 1 189,486 16.6 -- 68,593 6.0
Total $203,776 17.8 $ 91,458 8.0 $114,322 10.0
Recent Accounting Standards
In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 (revised), Consolidation of Variable Interest
Entities ("FIN 46R"), which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and, accordingly, should consolidate the variable interest
entity ("VIE"). FIN 46R replaces FASB Interpretation No. 46, which was issued in
January 2003. As a public company that is not a small business issuer (as
defined in applicable SEC regulations), the Company is required to apply FIN 46R
to variable interests generally as of March 31, 2004 and to special-purpose
entities as of December 31, 2003. For any VIE's that must be consolidated under
FIN 46R that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts and any difference between the net amount added to the balance
sheet and any previously recognized interest would be recorded as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure
the assets, liabilities and noncontrolling interest of the VIE. The adoption of
FIN 46R did not and is not expected to have a significant effect on the
Company's consolidated financial statements.
35
In December 2003, the FASB also issued Statement of Financial Accounting
Standards No. 132 (revised), Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132R"). This standard prescribes employers'
disclosures about pension plans and other postretirement benefit plans, but does
not change the measurement or recognition of those plans. SFAS No. 132R retains
and revises the disclosure requirements contained in the original standard. It
also requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. As a public company, the Company was required to
provide substantially all of the revised disclosures beginning with its
September 30, 2004 consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
requires that an issuer classify financial instruments that are considered a
liability (or an asset in some circumstances) when that financial instrument
embodies an obligation of the issuer.
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. SFAS No. 150 had no impact
on the Company's consolidated statement of financial condition or results of
operations upon implementation during the third quarter of 2003. In November
2003, the FASB also issued a staff position that indefinitely deferred the
effective date of SFAS No. 150 for certain mandatorily redeemable
non-controlling interests. The Company currently believes that the deferral of
the effective date of SFAS No. 150 for certain mandatorily redeemable
non-controlling interests will not have any impact on its consolidated statement
of financial condition or results of operations when implemented.
The issuance of SFAS No. 150 and FIN 46 has also resulted in the Federal
Reserve Board announcing potential future reconsideration of trust preferred
securities as elements of regulatory capital. The Company currently has no
issuances of trust preferred securities.
Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments ("EITF 03-1") was issued. EITF 03-1 provides guidance for
determining the meaning of "other-than-temporarily impaired" and its application
to certain debt and equity securities within the scope of Statement of Financial
Accounting Standards No. 115 Accounting for Certain Investments in Debt and
Equity Securitie" ("SFAS 115") and investments accounted for under the cost
method. The guidance requires that investments which have declined in value due
to credit concerns or solely due to changes in interest rates must be recorded
as other-than-temporarily impaired unless the corporation can assert and
demonstrate its intention to hold the security for a period of time sufficient
to allow for a recovery of fair value up to or beyond the cost of the
investment, which might mean maturity. This Issue also requires disclosures
assessing the ability and intent to hold investments in instances in which an
investor determines that an investment with a fair value less than cost is not
other-than-temporarily impaired.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
36
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effects of the method used on reported results.
In December 2004, the FASB Issued Statement of Financial Accounting
Standards No. 123R (Statement 123R), "Share-Based Payments", the provisions of
which become effective for the corporation in fiscal 2006. This Statement
eliminates the alternative to use APB No. 25's intrinsic value method of
accounting that was provided in Statement 123 as originally issued. Statement
123R requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards. While the fair-value-based method prescribed by Statement 123R is
similar to the fair-value-based method disclosed under the provisions of
Statement 123 in most respects, there are some differences. The Company
estimates that annual expense using the Black Sholes method beginning in 2006 is
approximately $1,151 or $939 after tax and the diluted earnings per share impact
is $0.02. This impact does not include the effect of reload options or
forfeitures or options accelerations due to termination or retirement of
personnel, the effect of which cannot be measured with any degree of certainty.
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. Quantitative and qualitative disclosure about market risk is
presented at September 30, 2004 in Item 7A in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on December 14,
2004. The following is an update of the discussion provided therein.
The table below sets forth, as of March 31, 2005, the estimated changes in
our NPV and our net interest income that would result from the designated
instantaneous changes in the U.S. Treasury yield curve. Computations of
prospective effects of hypothetical interest rate changes are based on numerous
assumptions including relative levels of market interest rates, loan prepayments
and deposit decay, and should not be relied upon as indicative of actual
results.
NPV Net Interest Income
----------------------------------------------------- --------------------------------------------------
Estimated Increase (Decrease) in
Change in Estimated Increase (Decrease) in NPV Estimated Net Interest Income
Interest Rates Estimated ------------------------------------ Net Interest --------------------------------
(basis points) NPV Amount Percent Income Amount Percent
-------------- --------- ------ ------- ------------ ------ -------
(Dollars in thousands)
+300 $ 299,310 $ (69,096) -18.8% $ 87,522 $ (484) -0.6%
+200 328,984 (39,422) -10.7% 87,919 (87) -0.1%
+100 359,485 (8,921) -2.4% 88,244 238 0.3%
0 368,406 -- 0.0% 88,006 0.0%
-100 391,214 22,808 6.2% 86,444 (1,562) -1.8%
-200 386,382 17,976 4.9% 81,746 (6,260) -7.1%
The table set forth above indicates that at March 31, 2005, in the event
of an immediate 100 basis point decrease in interest rates, we would be expected
to experience a 6.2% increase in NPV and a 1.8% decrease in net interest income.
In the event of an immediate 200 basis point increase in interest rates, we
would be expected to experience a 10.7% decrease in NPV and a 0.1% decrease in
net interest income.
37
The Bank's interest rate profile has not changed significantly since
September 30, 2004. Although the acquisition of Warwick was completed, the
nature of the assets and liabilities acquired is consistent with the Bank's
previously existing assets. As a result, the Bank has maintained an overall
relatively neutral sensitivity position. As the Federal Reserve has increased
term rates seven times since May 2004, increasing the target Federal Funds Rate
from 1% to 2.75%, while longer term interest rates (10 year treasury) have only
increased from an average of 4.13% per the six months ended March 31, 2004 to
4.23% for the six months ended March 31, 2005, the Bank's average cost of
interest bearing liabilities has increased faster than the average increase in
asset yields. Should the yield curve continue to "flatten", a continued decline
in net interest margin may occur, offsetting a portion of gains in net interest
income arising from increasing volume of assets generated. Conversely, should
market interest rates continue to fall below today's level the Company's net
interest margin could also be negatively affected, as competitive pressures
could keep the Bank from lowering rates on its deposits, and prepayments and
curtailments on assets may continue. Such movements may cause a decrease in the
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.
General: The Company's largest component of market risk continues to be
interest rate risk. The Company is not subject to foreign currency exchange or
commodity price risk. At March 31, 2005, neither the Company nor the Bank owned
any trading assets, nor did they utilize hedging transactions such as interest
rate swaps and caps.
Interest Rate Risk Compliance: The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at September 30, 2004. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value change at March 31, 2005 compared to September 30, 2004, and the impact of
possible changes within the Company's models continue to fall within all board
approved limits for potential interest rate volatility.
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
over financial reporting or in other factors that could significantly affect the
Company's internal control over financial reporting during the period covered by
this report
38
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. Unregistered Sales of Equity Securities and Use of Proceeds
(a) - (d) Not applicable
(e)
Issuer Purchases of Equity Securities
-------------------------------------
Maximum Number
Total Number of (or Approximate
Shares (or Units) Dollar Value) of
Total Number Average Purchased as Part Shares (or Units)
of Shares (or Price Paid of Publicly that may yet be
Units) per Share Announced Plans Purchased Under the
Period (2005) Purchased(1) (or Unit) or Programs(2) Plans or Programs
January 1 - January 31 46,607 $ 12.74 40,000 2,255,000
February 1 - February 28 751,100 12.87 751,100 1,503,900
March 1 - March 31 402,076 12.86 396,700 1,107,200
--------- -------- ---------
Total 1,199,783 $ 12.86 1,187,800
========= ======== =========
- ----------
(1) The total number of shares purchased during the periods indicated
represent shares deemed to have been received from employees who exercised
stock options by submitting previously acquired shares of common stock in
satisfaction of the exercise price, as is permitted under the Company's
stock benefit plans and shares repurchased as part of a previously
authorized repurchase program.
(2) The Company announced on January 27, 2005 that it authorized the
repurchase 2,295,000 shares, or approximately 5% of common shares
currently outstanding.
39
Item 3 Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On February 24, 2005, the Company held its annual meeting of stockholders
for the purpose of the election of four Directors to three year terms, the
approval of the Provident Bancorp, Inc. 2004 Stock Incentive Plan and the
ratification of the appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending September 30, 2005.
The number of votes cast at the meeting as to each matter acted upon was
as follows:
1. ELECTION OF DIRECTORS:
VOTES FOR % VOTES WITHHELD %
Dennis L. Coyle 38,173,442 97.6 953,680 2.4
Victoria Kossover 38,528,833 98.5 598,289 1.5
Burt Steinberg 38,886,366 99.4 240,756 0.6
George Strayton 38,790,651 99.1 336,471 0.9
2. The approval of the Provident Bancorp, Inc. 2004 Stock Incentive Plan.
FOR % AGAINST % ABSTAIN % NON VOTE %
26,094,225 66.7 2,973,607 7.6 218,352 0.6 9,840,938 25.1
3. The ratification of the appointment of KPMG LLP as the Company's
independent registered public accounting firm for the fiscal year ending
September 30,2005.
FOR % AGAINST % ABSTAIN %
38,490,020 98.4 484,160 1.2 152,942 0.4
40
Item 5. Other Information
None
Item 6. 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
41
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: May 9, 2005
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: May 9, 2005
42