SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25233
PROVIDENT BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Federal To be applied for
- ------------------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ------------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
(914) 369-8040
--------------
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes No X
--- ---
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 Shares
Stock Outstanding
----- -----------
$0.10 Par 8,280,000 as of
Value January 29, 1999
PROVIDENT BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial
Condition at December 31, 1998 and
September 30, 1998 3
Consolidated Statements of Income for the
Three Months ended December 31, 1998
and 1997 5
Consolidated Statements of Cash Flows for
the Three Months ended December 31, 1998
and 1997 6
Notes to Unaudited Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 17
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
PROVIDENT BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) December 31, September 30,
(In thousands) 1998 1998
---- ----
Assets
Cash and due from banks $12,897 $ 7,572
Federal funds sold 17,308 --
Investment securities:
Held-to-maturity, at amortized cost (fair value
of $15,940 and $19,262 at December 31, 1998 and
September 30, 1998, respectively) 15,905 19,176
Available-for-sale, at fair value (amortized cost of $64,652 and
$47,163 at December 31, 1998 and September 30 1998,
respectively) 65,222 48,071
------ ------
Total investment securities 81,127 67,247
------ ------
Mortgage-backed securities:
Held to maturity, at amortized cost (fair value
of $71,014 and $80,410 at December 31, 1998 and September
30, 1998, respectively) 69,988 79,226
Available for sale, at fair value (amortized cost of $50,847 and
$49,303 at December 31, 1998 and September 30, 1998,
respectively) 51,178 49,912
------ ------
Total mortgage-backed securities 121,166 129,138
------- -------
Loans:
Residential mortgage loans 308,957 290,334
Commercial mortgage, commercial business and
construction loans 133,953 115, 570
Consumer loans 63,845 62,669
Allowance for loan losses (Note 3) (5,353) (4,906)
----- -----
Total loans, net 501,402 463,667
------- -------
Accrued interest receivable, net 4,471 4,087
Federal Home Loan Bank stock, at cost 3,690 3,690
Premises and equipment, net 7,037 7,058
Other assets 8,811 8,609
----- -----
Total assets $ 757,909 $ 691,068
======= =======
(continued)
3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED.
(Unaudited) December 31, September 30,
(In thousands) 1998 1998
---- ----
Liabilities and Equity
- ----------------------
Liabilities:
Deposits $ 595,126 $ 573,174
Borrowings 30,614 38,646
Bank overdraft -- 11,285
Mortgage escrow funds 11,850 5,887
Stock subscription proceeds 58,036 --
Other liabilities 6,726 6,876
----- -----
Total liabilities 702,352 635,868
------- -------
Equity:
Retained earnings 55,019 54,291
Accumulated other comprehensive income, net of income taxes of
$363 at December 31, 1998 and $608 at September 30, 1998
(Note 4) 538 909
--- ---
Total equity 55,557 55,200
------ ------
Total liabilities and equity $ 757,909 $ 691,068
======= =======
See accompanying notes to unaudited consolidated financial statements.
4
PROVIDENT BANK AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Three Months Ended
(In thousands) December 31,
------------
Interest and dividend income: 1998 1997
---- ----
Loans $ 9,513 $ 8,536
Mortgage-backed securities 1,931 2,227
Investment securities and other earning assets 1,064 1,055
----- -----
Total interest and dividend income 12,508 11,818
------ ------
Interest expense:
Deposits 4,661 4,739
Borrowings 672 414
------- ---
Total interest expense 5,333 5,153
------- -----
Net interest income 7,175 6,665
Provision for loan losses 360 270
--- ---
Net interest income after provision for loan losses 6,815 6,395
----- -----
Non-interest income:
Loan servicing 115 170
Banking service fees and other income 697 622
--- ---
Total non-interest income 812 792
--- ---
Non-interest expense:
Compensation and employee benefits 2,933 2,340
Occupancy and office operations 840 758
Advertising and promotion 289 275
Federal deposit insurance costs 72 99
Data processing 304 183
Amortization of branch purchase premiums 430 376
Other 1,604 914
----- ---
Total non-interest expense 6,472 4,945
----- -----
Income before income tax expense 1,155 2,242
Income tax expense 427 875
--- ---
Net income $ 728 $ 1,367
--- -----
See accompanying notes to the unaudited consolidated financial statements.
5
PROVIDENT BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended
(Unaudited) December 31,
------------
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 728 $ 1,367
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of premiums and discounts
on securities 80 51
Depreciation and amortization of premises and
equipment 366 336
Provision for loan losses 360 270
Amortization of branch purchase premiums 430 376
Originations of loans held for sale (9,042) (952)
Proceeds from sales of loans held for sale 9,097 956
Net changes in accrued interest receivable
and payable (13) (371)
Net (decrease) increase in other liabilities (521) 569
Other adjustments, net (402) 68
----- --
Net cash provided by operating activities 1,083 2,670
----- -----
Cash flows from investing activities:
Purchases of securities:
Investment securities available for sale (23,514) (3,005)
Mortgage-backed securities held to maturity -- (7,304)
Mortgage-backed securities available for sale (5,016) (8,329)
Proceeds from maturities, calls and principal payments:
Investment securities held to maturity 3,281 3
Investment securities available for sale 6,000 8,000
Mortgage-backed securities held to maturity 3,472 1,091
Mortgage-backed securities available for sale 9,183 12,077
Proceeds from sales of investment securities available
for sale -- 5,997
Loan originations, net of principal repayments (38,095) (10,612)
Proceeds from sales of real estate owned -- 142
Purchases of premises and equipment (395) (256)
----- -----
Net cash used in investing activities (45,084) (2,196)
-------- -------
(continued)
6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Three Months Ended
December 31,
------------
1998 1997
---- ----
Cash flows from financing activities:
Net increase in deposits 21,952 7,218
Net (decrease) increase in borrowings (8,032) 3.000
Net decrease in bank overdraft (11,285) (17,623)
Net increase in mortgage escrow funds 5,963 6,080
Proceeds from stock subscriptions 58,036 --
------ -----
Net cash provided by (used in) financing activities 66,634 (1,325)
------ -------
Net increase (decrease) in cash and cash equivalents 22,633 (851)
Cash and cash equivalents at beginning of period 7,572 9,191
----- -----
Cash and cash equivalents at end of period $ 30,205 $ 8,340
====== =====
Supplemental information:
Interest paid $ 4,962 $ 5,204
Income taxes paid 746 177
Transfers of loans receivable to real estate owned -- 231
===== =====
See accompanying notes to unaudited consolidated financial statements.
7
PROVIDENT BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization and Offering
- --------------------------------
On January 7, 1999, Provident Bank (the "Bank") completed its
reorganization into a mutual holding company structure, and Provident Bancorp,
Inc., the Bank's holding company (the "Company"), issued 3,864,000 shares of
common stock to the public and 4,416,000 shares to Provident Bancorp, MHC. As a
result of the stock offering, the Company raised net proceeds of approximately
$37.4 million, prior to the purchase of stock by the Bank's Employee Stock
Ownership Plan ("ESOP"). The ESOP, which did not purchase shares in the
offering, has been authorized to purchase 8% of the shares issued to the public,
or approximately 309,100 shares. The ESOP has purchased approximately 190,000
shares through January 29, 1999, and intends to purchase the remaining shares in
the open markets within the next few months.
2. Basis of Presentation
- --------------------------
The reorganization and stock offering were completed subsequent to December
31, 1998. Therefore, the financial information set forth in this report is for
the Bank only, and earnings per share data is not applicable. The results of
operations and the financial condition will, in future periods, be reported on a
consolidated basis for the Company and the Bank.
The financial statements included herein have been prepared by the Bank
without audit. In the opinion of management, the unaudited financial statements
include all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the financial position and results of operations for the
periods presented. Certain information and footnote disclosures normally
included in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes that the disclosures are adequate to
make the information presented not misleading; however, the results for the
quarter ended December 31, 1998 are not necessarily indicative of results to be
expected for the entire fiscal year ending September 30, 1999.
The interim unaudited financial statements presented herein should be read
in conjunction with the annual audited financial statements of the Bank for the
fiscal year ended September 30, 1998, and with the Company's prospectus dated
November 12, 1998.
3. Allowance for Loan Losses
- ------------------------------
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.
8
The allowance for loan losses is an amount that management believes will be
adequate to absorb probable losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of the loans.
Management's evaluations, which are subject to periodic review by the Bank's
regulators, take into consideration such factors as the Bank's past loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and collateral values, and
current economic conditions that may affect the borrowers' ability to pay.
Future adjustments to the allowance for loan losses may be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding known problem loans, regulatory examinations, the
identification of additional problem loans, and other factors.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Three Months Ended
December 31,
(In Thousands)
--------------
1998 1997
---- ----
Balance at beginning of period $ 4,906 $ 3,779
Provision for loan losses 360 270
Charge-offs (45) (49)
Recoveries 132 9
---- ---
Balance at end of period $ 5,353 $ 4,009
===== =====
4. Comprehensive Income
- -------------------------
During the quarter ended December 31, 1998, the Bank adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses). In accordance with the provisions of SFAS No. 130, the Bank's total
comprehensive income was $357,000 and $1.4 million for the three months ended
December 31, 1998 and 1997, respectively. The difference between the Bank's net
income and total comprehensive income for these periods equals the change in the
net unrealized gain on securities available for sale during the applicable
periods. Accumulated other comprehensive income in the consolidated statements
of financial condition represents the after-tax net unrealized gain on
securities available for sale as of December 31, 1998 and September 30, 1998.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believe", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuations in interest rates, real estate
conditions in the Bank's lending areas, general and local economic conditions,
unanticipated Year 2000 issues, the Bank's continued ability to attract and
retain deposits, the Company's ability to control costs, new accounting
pronouncements, and changing regulatory requirements. The Company undertakes no
obligation to publicly release the results of any revisions to those
forward-looking statements which may be made to reflect events of circumstances
after the date hereof or to reflect occurence of unanticipated events.
Comparison of Financial Condition at December 31, 1998 and September 30, 1998
Total assets increased to $757.9 million at December 31, 1998 from $691.1
million at September 30, 1998, an increase of $66.8 million, or 9.7%. The asset
growth was primarily attributable to a $37.7 million increase in loans
receivable combined with a $13.9 million increase in investment securities and a
$17.3 million increase in Federal funds sold, partially offset by an $8.9
million decrease in mortgage-backed securities.
Net loans receivable increased by $37.7 million in the quarter ended
December 31, 1998 primarily due to an increase of $20.6 million in fixed-rate
residential mortgage loan balances and an overall increase of $18.4 million in
the commercial loan portfolio. The increase in the commercial loan portfolio was
attributable to increases in commercial mortgage loans of $10.7 million,
construction and land loans of $2.1 million and commercial business loans of
$5.9 million, which were partially offset by a decrease in multi-family loan
balances of $300,000. In addition, total consumer loans increased by $1.2
million in the current quarter. Partially offsetting the above increases was a
decrease of $1.9 million in adjustable-rate residential mortgage loan balances.
The allowance for loan losses increased by $447,000 to $5.4 million at December
31, 1998 from $4.9 million at September 30, 1998.
The Bank's total securities portfolio increased by $4.9 million to $201.3
million at December 31, 1998 from $196.4 million at September 30, 1998. This
increase reflects a $13.9 million increase in investment securities offset, in
part, by an $8.9 million decrease in mortgage-backed securities.
Total deposits increased by $22.0 million, or 3.8%, to $595.1 million at
December 31, 1998 from $573.2 million at September 30, 1998. Total transaction
account balances increased $13.1 million, or 14.1%, in the quarter ended
December 31, 1998, and total savings account balances increased by $8.6 million,
or 5.5%. Borrowings decreased $8.0 million to $30.6 million at December 31, 1998
from $38.6 million at September 30, 1998. Stock subscription proceeds of $58.0
million were held at December 31, 1998, of which approximately $19.4 million was
refunded to subscribers after the stock offering closed in January.
Total equity increased $357,000 to $55.6 million at December 31, 1998 from
$55.2 million at September 30, 1998 reflecting net income of $728,000 offset, in
part, by a decrease of $371,000 in accumulated other comprehensive income
(after-tax net unrealized gains on the Bank's available-for-sale securities).
10
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
December 31, 1997
Net income for the three months ended December 31, 1998 was $728,000, a
decrease of $639,000, or 46.7%, from $1.4 million for the three months ended
December 31, 1997. The decrease was due primarily to increases in non-interest
expenses associated with the Bank's conversion to a new computer system and the
establishment of the its ESOP.
Interest Income. Interest income increased by $690,000, or 5.8%, to $12.5
million for the three months ended December 31, 1998 from $11.8 million for the
three months ended December 31, 1997. The increase was primarily due to a
$977,000 or 11.4% increase in income from loans, partially offset by a $296,000
or 13.3% decrease in income from mortgage-backed securities. The increase in
income from loans was attributable to a $73.1 million increase in the average
balance of total loans to $480.1 million from $407.0 million, partially offset
by a 46 basis point decrease in the average yield on total loans from 8.32% to
7.86%. The continued growth of the Bank's one-to-four family residential
mortgage loan portfolio was responsible for the majority of the loan increase,
together with a $21.5 million or 23.4% increase in the average commercial loan
portfolio. The decrease in income from mortgage-backed securities was
attributable to a $10.6 million decrease in the average balance of
mortgage-backed securities to $123.9 million from $134.4 million, combined with
a 38 basis point decrease in the average yield to 6.19% from 6.57%.
Interest Expense. Interest expense increased by $180,000, or 3.5%, to $5.3
million for the three months ended December 31, 1998 from $5.2 million for the
three months ended December 31, 1997. This increase was the result of a $48.3
million or 9.1% increase in the average balance of total interest-bearing
liabilities in the 1998 period compared to the 1997 period, offset, in part, by
a 20 basis point decrease in the average rate paid on such liabilities over the
same period. The increase in total interest expense resulted primarily from a
$258,000 increase in interest expense on borrowings from the Federal Home Loan
Bank ("FHLB") due to an increase of $17.5 million in the average balance of such
borrowings to $46.8 million from $29.3 million, combined with an increase of 8
basis points in the average rate paid to 5.69% from 5.61%. The higher interest
expense on borrowings was partially offset by a decrease of $61,000 in interest
expense on savings deposits to $835,000 from $896,000. This increase was due to
a 23 basis point decrease in the average rate paid to 2.01% from 2.24%, offset,
in part, by a $6.2 million increase in the average balance to $165.2 million
from $159.0 million.
Provision for Loan Losses. The Bank records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level which is considered appropriate to absorb probable loan losses
inherent in the existing portfolio. In determinig the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, evaluations of real estate collateral, current anticipated economic
conditions, volume and type of lending, and the levels of nonperforming and
other classified loans. The amount of the allowance is based on estimates and
the ultimate losses may vary from such estimates. Management of the Bank
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses in order to maintain the adequacy of the allowance. The Bank
recorded $360,000 and $270,000 in loan loss provisions during the three months
ended December 31, 1998 and 1997, respectively. The increased provision in the
current quarter reflects continued loan growth, including commercial mortgage
and commercial business loans, and an increase in non-performing loans to $6.7
million at December 31, 1998 from $6.1 million at September 30, 1998.
11
The table below sets forth the amounts and categories of the Bank's
non-performing assets at the dates indicated. At both dates presented, the Bank
had no troubled debt restructurings (loans for which a portion of interest or
principal has been forgiven and loans modified at interest rates materially less
than current market rates).
December 31, September 30,
1998 1998
---- ----
(Dollars in thousands)
Non-accrual loans:
One-to-four family $ 2,648 $ 2,965
Commercial mortgage 1,013 871
Construction and land 1,788 1,256
Consumer 780 647
Commercial business 434 368
------- -------
Total non-performing loans 6,663 6,107
------- -------
Real estate owned:
One-to-four family 92 92
Commercial real estate 274 274
------- -------
Total real estate owned 366 366
------- -------
Total non-performing assets $ 7,029 $ 6,473
======== ========
Ratios:
Non-performing loans to total loans 1.33% 1.32%
Non-performing assets to total assets 0.93 0.94
Allowance for loan losses
to total loans 0.68 0.58
Allowance for loan losses
to non-performing loans 80.34 80.33
======== ======
Non-Interest Income. Non-interest income is composed primarily of fee
income for bank services, but also includes gains and losses from the sale of
loans and securities. Total non-interest income for the three months ended
December 31, 1998 increased $20,000, or 2.5%, to $812,000 from $792,000 for the
three months ended December 31, 1997. The gain on sale of loans increased by
$104,000, to $113,000 for the three months ended December 31, 1998 from $9,000
for the three months ended December 31, 1997. Loan sales increased in the
current quarter as the result of the Bank's strategy to limit the amount of its
longer duration loans outstanding, which is part of its overall interest rate
risk management policy. The higher gain on loan sales was partially offset by a
loss of $50,000 on the early disposal of fixed assets in the three months ended
December 31, 1998.
Non-Interest Expenses. Non-interest expenses increased by $1.5 million, or
30.9%, to $6.5 million for the three months ended December 31, 1998 from $4.9
million for the three months ended December 31, 1997. The increase was primarily
due to $667,000 in incremental costs associated
12
with the Bank's conversion to a new computer system in the current quarter.
These costs included overtime, temporary help and consulting fees as well as
direct data center, data processing and other conversion expenses. Of this
increase, approximately $592,000 can be considered non-recurring costs, while
approximately $75,000 represents the higher ongoing costs of the new data system
and the proof-of-deposit processing environment. Non-interest expenses for the
quarter ending March 31, 1999 may include some residual system
conversion-related expenses.
The increase in total non-interest expenses in the current quarter also
reflects the inclusion of ESOP costs of $371,000 in the compensation and
employee benefits category. The Bank's ESOP was established during 1998. A total
of 30,910 ESOP shares (or 10% of total authorized ESOP shares) was allocated to
participants for the plan year ended December 31, 1998 and, accordingly, the
entire amount of compensation expense related to this allocation was recognized
in the quarter ended December 31, 1998. Beginning in the quarter ending March
31, 1999, ESOP expense will be recognized each quarter as shares for the
calendar 1999 plan year are committed to be released to participants.
Total occupancy and office operations expenses increased $82,000, or 10.8%,
to $840,000 in the current quarter from $758,000 in the quarter ended December
31, 1997. Other non-interest expenses increased $707,000 to $1.6 million for the
three months ended December 31, 1998 from $899,000 for the three months ended
December 31, 1997. This increase includes $398,000 of the total non-recurring
conversion costs for the new data processing system referred to above, $58,000
in interest payable on stock subscription proceeds, $32,000 for higher
recruitment expenses and $15,000 for higher legal expenses.
Income Taxes. Income tax expense was $427,000 for the three months ended
December 31, 1998 compared to $875,000 for the same period in 1997. The
effective tax rates were 37.0% and 39.1%, respectively.
Liquidity and Capital Resources
The objective of the Bank'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
Bank'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 Bank's primary sources of funds are deposits, proceeds from principal
and interest payments on loans and securities, and to a lesser extent,
borrowings and proceeds from maturities of investment securities and short-term
investments and the sale of fixed-rate loans in the secondary mortgage market.
While maturities and scheduled amortization of loans and securities, and
proceeds from borrowings, are predictable sources of funds, other funding
sources such as deposit inflows, mortgage prepayments and mortgage loan sales
are greatly influenced by market interest rates, economic conditions and
competition.
13
The Bank's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the three months
ended December 31, 1998 and 1997, the Bank's loan originations totaled $76.6
million and $41.6 million, respectively; purchases of mortgage-backed securities
totaled $5.0 million and $15.6 million, respectively; and purchases of
investment securities totaled $23.5 million and $3.0 million, respectively.
These investing activities were funded primarily by deposit growth and by
principal repayments on loans and securities. Also, although not routinely a
source of funds, significant funds were received in the three months ended
December 31, 1998 from the stock offering subscriptions ($58.0 million). Loan
sales totaling $9.1 million provided an additional source of liquidity during
the three months ended December 31, 1998. Loan origination commitments totaled
$28.8 million at December 31, 1998. In addition, commitments to sell fixed-rate
residential loans totaled $2.0 million at the same date. The Bank anticipates
that it will have sufficient funds available to meet current loan commitments.
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, and other factors. The
net increase in total deposits for the three months ended December 31, 1998 was
$22.0 million, compared to $7.2 million for the three months ended December 31,
1997. Based upon its prior experience and current pricing strategy, the Bank
believes that a significant portion of such deposits will remain with the Bank.
The Bank monitors its liquidity position on a daily basis. Excess
short-term liquidity, if any, is usually invested in overnight federal funds
sold. The Bank generally remains fully invested and utilizes additional sources
of funds through FHLB advances, which amounted to $30.6 million at December 31,
1998.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $51.8 million, or 6.9% of adjusted
assets (which is above the required level of $22.6 million, or 3.0%) and a
risk-based capital level of $57.1 million, or 13.4% of risk-weighted assets
(which is above the required level of $34.2 million, or 8.0%).
14
The following table sets forth the Bank's regulatory capital position at
December 31, 1998 and September 30, 1998, compared to OTS requirements:
OTS Requirements
------------- ------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
December 31, 1998
- -----------------
Tangible capital $51,779 6.9% $11,311 1.5% $ - -%
Tier 1 (core) capital 51,779 6.9 22,621 3.0 37,702 5.0
Risk-based capital:
Tier 1 51,779 12.1 - - 25,687 6.0
Total 57,132 13.4 34,249 8.0 42,812 10.0
September 30, 1998
- ------------------
Tangible capital $50,626 7.4% $10,301 1.5% $ - -%
Tier 1 (core) capital 50,626 7.4 20,601 3.0 34,335 5.0
Risk-based capital:
Tier 1 50,626 12.9 - - 23,472 6.0
Total 55,532 14.2 31,296 8.0 39,120 10.0
Year 2000 Considerations
(The following information constitutes "Year 2000 Readiness Disclosure" under
the Year 2000 Information and Readiness Disclosure Act.)
The Bank, like all companies that utilize computer technology, is facing
the significant challenge of ensuring that its computer systems will be able to
process time-sensitive data accurately beyond the Year 1999 (referred to as the
"Year 2000 issue"). The Year 2000 issue has arisen since many existing computer
programs use two digits rather than four in date fields that define the year.
Such computer programs may recognize a date field using 00 as the Year 1900
rather than the Year 2000. Software, hardware and equipment both within and
outside the Bank's direct control (and with which the Bank interfaces either
electronically or operationally), are likely to be affected by the Year 2000
issue.
The Bank has conducted a comprehensive review of its computer systems to
identify systems that could be affected by the Year 2000 issue, and has
developed an implementation plan (including establishing priorities for
mission-critical applications) to modify or replace the affected systems and
test them for Year 2000 compliance. The Bank's plan includes actions to identify
Year 2000 issues attributable to its own systems as well as those of third
parties who supply products and services to the Bank, or who have material
business relationships with the Bank.
The Bank realizes that the Year 2000 issue extends beyond the computer
systems associated with its operations. The Bank has identified and begun a
process of quantifying external risks posed
15
by the Year 2000 problem. The Bank's Year 2000 plan addresses each of these
factors and, in cases where risks may be high, the Bank has begun to take action
to protect its interests, including establishing contingency plans to be
activated in the event of system failures. In addition to its internal efforts,
the Bank has employed the services of an outside firm to help it with this
planning effort. Although no guaranty can be given that all internal systems
and/or third parties will be prepared for the Year 2000 issue, the actions being
taken by the Bank in response to Year 2000 issues are consistent with the
guidelines set forth in policy statements issued by the bank regulatory
agencies.
The Bank has identified six mission-critical systems including its core
data processing system for loans, deposits and the general ledger. In November
1998, the Bank converted to a new core system which it believes will enhance the
quality of its information technology and result in improved customer service.
Like the Bank's prior core system, the new system is maintained by a third-party
vendor. Because other users of the Bank's new core system have already tested
the applications at their sites, the Bank has secured approval to conduct proxy
testing of its core system. Proxy testing limits the number of dates for which
testing is required, and limits the number of tests which must be performed;
however, the Bank intends to conduct its own testing of the core system. The
Bank anticipates that it will complete this testing by March 31, 1999 and a
detailed report of testing results will be produced. These results will be
validated for accuracy by internal bank staff as well.
The Bank is currently in the process of seeking assurances from third
parties with whom it does business, either as to their current Year 2000
compliance or assurance that they are in the process of complying with the Year
2000 issue. For example, the Bank exchanges data with a number of other
entities, such as credit bureaus, the Federal Reserve Bank, and governmental
sponsored enterprises. The failure of these entities to adequately address the
Year 2000 issue could adversely affect the Bank's ability to conduct its
business. The risk also exists that some of the Bank's commercial borrowers may
not be prepared for Year 2000 issues and may suffer financial harm as a result.
This, in turn, represents risk to the Bank regarding the repayment of loans from
those commercial customers. The Bank has surveyed its existing commercial
customers with aggregate outstanding loan balances of $250,000 or more regarding
their Year 2000 preparedness, and is now conducting follow-up interviews with
its larger commercial borrowers to determine their readiness. Thus, while the
Bank does not yet have specific financial data regarding the potential effect of
the Year 2000 issues on its commercial customers, the Bank recognizes this as a
risk and will continue to seek evidence of preparedness from its major
borrowers. The Bank also has begun a process to assess Year 2000 readiness as a
component of its risk evaluation for new commercial borrowers.
While the Bank expects to complete its Year 2000 plan on a timely basis,
there can be no assurance that its own systems or the systems of other companies
will be completed in a timely fashion. Contingency plans are being developed for
its in-house systems on a department-by-department basis in anticipation of the
possibility of unplanned system difficulties. It is expected that most of these
plans will provide for some type of manual record keeping and reporting
procedures, and will be completed by June 30, 1999 as part of the Bank's overall
contingency planning process. In preparing its contingency plan, the Bank has
categorized potential events as uncontrollable and controllable. Uncontrollable
events, such as loss of the global power grid and
16
telephone service failures, will affect all companies, government and customers.
These global events cannot be remedied by anyone other than the appropriate
responsible party, but require the preparation of a business resumption
contingency plan. The Bank has documented pre-determined actions to help it
resume normal operations in the event of failure of any mission-critical service
and product, as specified in the Bank's Year 2000 inventory list. For example,
the Bank is ensuring the availability of cash to meet potential depositor demand
due to concerns about the availability of funds after December 31, 1999. As part
of its contingency planning process, the Bank will conduct a business impact
analysis to identify potential disruption and the effect such disruption could
have on business operations should a service provider or software vendor be
unable to restore systems and/or business operations. The Bank will establish a
recovery program that identifies participants, processes and equipment that
might be necessary for the Bank to function adequately. The basic priorities for
restoring service will be based on the essential application processing required
to ensure that the Bank can continue to serve its customers. The Bank will also
institute a resumption tracking system for critical operations to ensure that
appropriate pre-determined actions are identified. The tracking system will also
identify any required resources (equipment, personnel etc.) needed to restore
operations.
Monitoring and managing the Year 2000 issue will result in additional
direct and indirect costs for the Bank. Direct costs include potential charges
by third-party software vendors for product enhancements, costs involved in
testing software products for Year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products, and implementing any necessary contingency plans.
The Bank's direct and indirect costs of addressing the Year 2000 issue are
charged to expense as incurred, except for costs incurred in the purchase of new
software or hardware, which are capitalized. To date, costs incurred primarily
relate to the dedication of internal resources employed in the assessment and
development of the Bank's Year 2000 plan, as well as the testing of hardware and
software owned or licensed for its personal computers. Based on knowledge as of
the date hereof, total direct and indirect Year 2000 costs are not expected to
exceed $500,000, of which less than $200,000 was incurred through December 31,
1998.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Bank's most significant form of market risk is interest rate risk, as
the majority of the Bank's assets and liabilities are sensitive to changes in
interest rates. There have been no material changes in the Bank's interest rate
risk position since September 30, 1998. Other types of market risk, such as
foreign exchange rate risk and commodity price risk, do not arise in the normal
course of the Bank's business activities.
17
Part II. OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
The Bank is a defendant in a lawsuit, Patrick Gawrysiak a/k/a Patrick Gray
v. Provident Bank, brought by a prospective purchaser of a real estate owned
property, alleging breach of contract, negligence, consumer fraud and civil
conspiracy. The plaintiff brought the lawsuit in the Superior Court of New
Jersey, Bergen County Law Division, and is seeking compensatory damages of
$500,000, exemplary damages of $1.0 million, "nominal" damages of $1.0 million
and punitive damages of $1.0 million. Although there can be no certainty as to
the outcome of this matter, management believes the claim is baseless and has
retained counsel to vigorously contest the claim.
The Bank is not involved in any other pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involved amounts which are believed by management to be
immaterial to the financial condition and operations of the Bank.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27-Financial Data Schedule
(submitted only with filing in electronic format)
(b) Reports on Form 8-K
None
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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)
/s/ Katherine A. Dering
Date: February 9, 1999 By: ------------------------
Katherine A. Dering
Senior Vice President and
Chief Financial Officer
19