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, 1999
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25233
PROVIDENT BANCORP, INC.
-----------------------
(Exact Name of Registrant as Specified in its Charter)
Federal 06-1537499
- ------------------------------- ---------------------
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ----------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
(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 X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
----------------------- ------------------
$0.10 per share 8,280,000 as of
April 29, 1999
PROVIDENT BANCORP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 1999
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
March 31, 1999 and September 30, 1998 3 - 4
Consolidated Statements of Income for the Three Months and
Six Months Ended March 31, 1999 and 1998 5
Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended March 31, 1999 6
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 1999 and 1998 7-8
Notes to Consolidated Interim Financial Statements 9-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-22
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 22
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except share data)
MARCH 31, SEPTEMBER 30,
ASSETS 1999 1998
---- ----
CASH AND DUE FROM BANKS $ 10,440 $ 7,572
INVESTMENT SECURITIES:
AVAILABLE FOR SALE, AT FAIR VALUE (AMORTIZED COST OF $61,699 AT MARCH 31,
1999 AND $47,163 AT SEPTEMBER 30, 1998) HELD TO MATURITY, AT AMORTIZED COST
(FAIR VALUE OF $3,923 AT MARCH 31, 1999 AND $19,262 AT SEP61,698 30, 1998)
48,071
3,906 19,176
TOTAL INVESTMENT SECURITIES 65,604 67,247
-------------------- --------------------
MORTGAGE-BACKED SECURITIES:
AVAILABLE FOR SALE, AT FAIR VALUE (AMORTIZED COST OF $46,268
AT MARCH 31, 1999 AND $49,303 AT SEPTEMBER 30, 1998) 46,551 49,912
HELD TO MATURITY, AT AMORTIZED COST (FAIR VALUE OF $63,089 AT
MARCH 31, 1999 AND $80,410 AT SEPTEMBER 30, 1998) 62,724 79,226
TOTAL MORTGAGE-BACKED SECURITIES 109,275 129,138
-------------------- --------------------
LOANS:
RESIDENTIAL MORTGAGE LOANS 327,307 290,334
COMMERCIAL MORTGAGE, COMMERCIAL BUSINESS AND
CONSTRUCTION LOANS 144,020 115, 570
CONSUMER LOANS 62,485 62,669
ALLOWANCE FOR LOAN LOSSES (NOTE 3) (5,631) (4,906)
TOTAL LOANS, NET 528,181 463,667
-------------------- --------------------
ACCRUED INTEREST RECEIVABLE, NET 4,252 4,087
FEDERAL HOME LOAN BANK STOCK, AT COST 3,942 3,690
PREMISES AND EQUIPMENT, NET 7,486 7,058
OTHER ASSETS 9,173 8,609
TOTAL ASSETS $ 738,353 $ 691,068
==================== ====================
(continued)
3
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED
(Unaudited)
(In thousands, except share data)
MARCH 31, SEPTEMBER 30,
1999 1998
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
DEPOSITS $ 577,884 $ 573,174
BORROWINGS 53,582 38,646
BANK OVERDRAFT -- 11,285
MORTGAGE ESCROW FUNDS 10,474 5,887
OTHER LIABILITIES 6,695 6,876
TOTAL LIABILITIES 648,635 635,868
-------------------- --------------------
STOCKHOLDERS' EQUITY (NOTE 1):
PREFERRED STOCK (PAR VALUE $0.10 PER SHARE; 10,000,000 SHARES
AUTHORIZED; NONE ISSUED OR OUTSTANDING) -- --
COMMON STOCK (PAR VALUE $0.10 PER SHARE; 10,000,000 SHARES
AUTHORIZED; 8,280,000 SHARES ISSUED AND OUTSTANDING AT MARCH 31, 1999) 828
ADDITIONAL PAID-IN CAPITAL 36,266 --
UNALLOCATED COMMON STOCK HELD BY EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") (3,295) --
RETAINED EARNINGS 55,750 54,291
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES OF $113 AT
MARCH 31, 1999 AND $608 AT SEPTEMBER 30, 1998 (NOTE 4) 169 909
-------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 89,718 55,200
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 738,353 $ 691,068
==================== ====================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS.
4
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31 ENDED MARCH 31,
-------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1999 1998
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
LOANS $ 9,690 $ 8,574 $ 19,203 $ 17,110
MORTGAGE-BACKED SECURITIES 1,813 2,310 3,744 4,537
INVESTMENT SECURITIES AND OTHER EARNING ASSETS 1,060 905 2,124 1,960
------- ------- ------- -------
TOTAL INTEREST AND DIVIDEND INCOME 12,563 11,789 25,071 23,607
------- ------- ------- -------
DEPOSITS 4,267 4,712 8,928 9,451
BORROWINGS 742 456 1,414 870
------- ------- ------- -------
TOTAL INTEREST EXPENSE 5,009 5,168 10,342 10,321
------- ------- ------- -------
NET INTEREST INCOME 7,554 6,621 14,729 13,286
PROVISION FOR LOAN LOSSES 360 537 720 807
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,194 6,084 14,009 12,479
------- ------- ------- -------
NON-INTEREST INCOME:
LOAN SERVICING 132 140 248 310
BANKING SERVICE FEES AND OTHER INCOME 633 504 1,330 1,127
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 765 644 1,578 1,437
------- ------- ------- -------
NON-INTEREST EXPENSE:
COMPENSATION AND EMPLOYEE BENEFITS 3,027 2,561 5,960 4,903
OCCUPANCY AND OFFICE OPERATIONS 838 776 1,678 1,534
ADVERTISING AND PROMOTION 389 275 678 550
FEDERAL DEPOSIT INSURANCE COSTS 75 73 147 173
DATA PROCESSING 222 214 526 397
AMORTIZATION OF BRANCH PURCHASE PREMIUMS 430 394 860 771
OTHER 1,651 923 3.257 1,836
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 6,632 5,216 13,106 10,164
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,327 1,512 2,481 3,752
INCOME TAX EXPENSE 492 551 919 1,427
------- ------- ------- -------
NET INCOME $ 835 $ 961 $ 1,562 $ 2,325
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER COMMON SHARE,
FROM DATE OF STOCK CONVERSION (JANUARY 7, 1999) $ 0.10
=======
(NOTE 5)
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1999
(Unaudited)
(In thousands, except share data)
Accumulated
Additional Unallocated Other
Preferred Common Paid-In Retained ESOP Comprehensive
Stock Stock Capital Earnings Shares Income Total
----- ----- ------- -------- ------ ------ -----
Balance at September 30, 1998 $ -- $ -- $ -- $ 54,291 $ -- $ 909 $ 55,200
Net income for the six-month period
Issuance of 8,280,000 common -- -- -- 1,562 -- -- 1,562
shares (Note 1)
-- 828 36,273 -- -- -- 37,101
Initial capitalization of Provident
Bancorp, MHC
-- -- -- (100) -- -- (100)
Shares purchased by ESOP
(309,120 shares)
-- -- -- -- (3,760) -- (3,760)
ESOP shares released for
allocation (38,640 shares)
-- -- (7) -- 465 -- 458
Decrease in net unrealized gain on
securities available for sale, net
of taxes of $495
-- -- -- -- -- (740) (740)
Other -- -- -- (3) -- -- (3)
Balance at March 31, 1999 $ -- $ 828 $ 36,266 $ 55,750 $ (3,295) $ 169 $ 89,718
See accompanying notes to unaudited consolidated interim financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Six Months Ended
(In thousands) March 31,
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 1,562 $ 2,325
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of premiums and discounts
on securities 104 121
Depreciation and amortization of premises
and equipment 744 688
ESOP expense 458 ---
Provision for loan losses 720 807
Amortization of branch purchase premiums 860 771
Proceeds from sales of loans held for sale 14,060 1,578
Originations of loans held for sale (12,155) (2,892)
Deferred income tax benefit (240) (591)
Net changes in accrued interest receivable
and payable 191 238
Net decrease in other liabilities (536) (368)
Other adjustments, net (833) (53)
---------- --------
Net cash provided by operating activities 4,935 2,624
---------- --------
Cash flows from investing activities:
Purchases of securities:
Investment securities available for sale (33,588) ---
Investment securities held to maturity --- (8,061)
Mortgage-backed securities available for sale (5,016) (13,100)
Mortgage-backed securities held to maturity --- (12,398)
Proceeds from maturities, calls and principal payments:
Investment securities available for sale 19,000 11,000
Investment securities held to maturity 15,292 5,006
Mortgage-backed securities available for sale 8,217 2,509
Mortgage-backed securities held to maturity 16,789 18,778
Proceeds from sales of investment securities available
for sale --- 5,997
Loan originations (121,886) (83,170)
Loan repayments 54,431 58,849
Purchases of Federal Home Loan Bank stock (252) (49)
Proceeds from sales of real estate owned 213 350
Purchases of premises and equipment (1,456) (373)
---------- --------
Net cash used in investing activities (48,256) (14,662)
---------- --------
(continued)
7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Six Months Ended
March 31,
1999 1998
--------------- ---------------
Cash flows from financing activities:
Net increase in deposits $ 4,710 $ 25,491
Net increase in borrowings 14,936 1,979
Net decrease in bank overdraft (11,285) (17,623)
Net increase in mortgage escrow funds 4,587 4,339
Net proceeds from stock offering 37,101 ---
Shares purchased by ESOP (3,760) ---
Initial capitalization of Provident Bancorp, MHC (100) ---
Net cash provided by financing activities 46,189 14,186
-------------- ----------------
Net increase in cash and cash equivalents 2,868 2,148
Cash and cash equivalents at beginning of period 7,572 9,191
Cash and cash equivalents at end of period $10,440 $11,339
============== ================
Supplemental information:
Interest paid $ 10,502 $ 10,481
Income taxes paid 1,446 2,005
Transfers of loans receivable to real estate owned 311 231
============== ================
See accompanying notes to unaudited consolidated interim financial statements.
8
PROVIDENT BANCORP, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. Reorganization and Offering
- -------------------------------
On January 7, 1999, Provident Bank (the "Bank") completed its
reorganization into a mutual holding company structure. Provident Bancorp, Inc.,
the Bank's holding company (the "Company"), issued a total of 8,280,000 common
shares, consisting of 3,864,000 shares sold to the public and 4,416,000 shares
issued to Provident Bancorp, MHC. The Company raised net proceeds of $37.1
million (gross proceeds of $38.6 million less offering costs of $1.5 million)
from the sale of shares to the public. The Ban s Employee Stock Ownership Plan
("ESOP"), which did not purchase shares in the offering, was authorized to
purchase 8% of the shares issued to the public, or approximately 309,120 shares.
The ESOP completed its purchase of all authorized shares in the open market
during January and February of 1999.
2. Basis of Presentation
- ---------------------------
The reorganization and stock offering were completed subsequent to
September 30, 1998. Therefore, the results of operations and the financial
condition for the most recent quarter are reported on a consolidated basis for
the Company and the Bank (collectively, the "Company"). Financial information
for earlier periods pertains to the Bank.
The financial statements included herein have been prepared by the
management 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 interim periods ended March 31, 1999 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 for the fiscal year
ended September 30, 1998, and with the prospectus dated November 12, 1998.
9
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.
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 Company's
regulators, take into consideration such factors as the Company's past loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and collateral values, and
current economic conditions that may affect the borrowers' ability to pay.
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 Six Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
Balance at beginning of period $ 5,353 $ 4,009 $ 4,906 $ 3,779
Provision for loan losses 360 537 720 807
Charge-offs (132) (219) (177) (268)
Recoveries 50 179 182 188
---- ----- ----------- --------
Balance at end of period $ 5,631 $ 4,506 $ 5,631 $ 4,506
--------- ------- --------- --------
4. Comprehensive Income
- -------------------------
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", which 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 Company's total comprehensive income was $822,000 and $2.4 million for the
six months ended March 31, 1999 and 1998, respectively, and $465,000 and
$971,000 for the three months ended Marc 31, 1999 and 1998, respectively. The
difference between the Company's net income and total comprehensive income for
these periods equals the change in the after-tax net unrealized gain on
securities available for sale
10
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 March 31, 1999 and
September 30, 1998.
5. Earnings Per Common Share
- ------------------------------
The Company completed the reorganization and offering on January 7, 1999.
As a result, earnings per share data has been presented for only the three month
period following the offering. Weighted average common shares of 8,091,756 were
used in calculating basic and diluted earnings per share for the quarter ended
March 31, 1999. In computing both basic and diluted earnings per share,
outstanding shares include all shares issued to the mutual holding company but
exclude unallocated ESOP shares that have not been committed to be released to
participants.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believe", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Company's continued
ability to originate quality loans, fluctuations in interest rates, real estate
conditions in the Company's lending areas, general and local economic
conditions, unanticipated Year 2000 issues, the Company's continued ability to
attract and retain deposits, the Company's ability to control costs, and the
effect of 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 or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Comparison of Financial Condition at March 31, 1999 and September 30, 1998
Total assets increased to $738.4 million at March 31, 1999 from $691.1
million at September 30, 1998, an increase of $47.3 million, or 6.8%. The asset
growth was primarily attributable to a $64.5 million increase in loans
receivable, partially offset by a $19.9 million decrease in mortgage-backed
securities.
Net loans receivable increased by $64.5 million in the six months ended
March 31, 1999 primarily due to an increase of $38.5 million in fixed-rate
residential mortgage loans and an
11
overall increase of $28.5 million in the commercial loan portfolio. The increase
in the commercial loan portfolio was attributable to increases in commercial
mortgage loans of $18.3 million, multi-family loans of $3.7 million and
commercial business loans of $8.4 million, which were partially offset by a
decrease in construction and land loans of $1.9 million. Partially offsetting
the above increases were decreases of $1.5 million in adjustable-rate
residential mortgage loans and $184,000 in total consumer loans. The allowance
for loan losses increased by $725,000 to $5.6 million at March 31, 1999 from
$4.9 million at September 30, 1998.
The total securities portfolio decreased by $21.5 million to $174.9 million
at March 31, 1999 from $196.4 million at September 30, 1998. This decrease
reflects a $1.6 million decrease in investment securities and a $19.9 million
decrease in mortgage-backed securities.
Total deposits increased by $4.7 million to $577.9 million at March 31,
1999 from $573.2 million at September 30, 1998. Total transaction account
balances increased $13.1 million, or 14.3%, in the six months ended March 31,
1999, and total savings account balances increased by $1.8 million, or 1.2%.
Total certificates of deposit decreased $12.3 million, or 5.0%, to $236.8
million at March 31, 1999 from $249.2 million at September 30, 1998. Borrowings
increased $14.9 million to $53.6 million at March 31, 1999 from $38.7 million at
September 30, 1998 while the bank overdraft liability decreased $11.3 million
during the six-month period. Deposit growth was impacted by the stock offering,
since nearly one third of the stock purchases were funded from the Bank's
customer deposits.
Total equity increased $34.5 million to $89.7 million at March 31, 1999
from $55.2 million at September 30, 1998, reflecting the infusion of $37.1
million in net proceeds from the stock offering, which closed in January, and
net income of $1.6 million. Partially offsetting these increases was a decrease
of $740,000 in accumulated other comprehensive income (after-tax net unrealized
gains on available-for-sale securities) and the establishment of the ESOP and
subsequent transactions which resulte in a net decrease in total equity of $3.3
million.
Comparison of Operating Results for the Three Months Ended March 31, 1999 and
March 31, 1998
Net income for the three months ended March 31, 1999 was $835,000 or $0.10
per common share, a decrease of $126,000 or 13.1% from net income of $961,000
for the three months ended March 31, 1998. The decrease was due primarily to
increases in non-interest expenses (including expenses associated with the
conversion to a new computer system), partially offset by an increase in net
interest income. Excluding the impact of costs of $522,000 related to the
conversion to a new computer system, net income would have been approximately
$1.2 million (or $0.14 per common share) for the quarter ended March 31, 1999.
Interest Income. Interest income increased by $774,000 or 6.6%, to $12.6
million for the three months ended March 31, 1999 from $11.8 million for the
three months ended March 31, 1998. The increase was primarily due to a $1.1
million or 13.0% increase in income from loans,
12
partially offset by a $497,000 or 21.5% decrease in income from mortgage-backed
securities. The increase in income from loans was attributable to a $94.5
million increase in the average balance to $515.0 million from $420.6 million,
partially offset by a 64 basis point decrease in the average yield from 8.27% to
7.63%. The continued growth of the one-to-four family residential mortgage loan
portfolio was responsible for the majority of the loan increase, together with a
$26.2 million or 28.6% increase in the average commercial loan portfolio. The
decrease in income from mortgage-backed securities was attributable to a $29.7
million decrease in the average balance to $113.0 million from $142.7 million,
combined with a 6 basis point decrease in the average yield to 6.51% from 6.57%.
Interest Expense. Interest expense decreased by $159,000 or 3.1%, to $5.0
million for the three months ended March 31, 1999 from $5.2 million for the
three months ended March 31, 1998. This decrease was the result of a 37 basis
point decrease in the average rate paid on total interest-bearing liabilities in
the 1999 period compared to the 1998 period, which was more than offset by a
$38.1 million or 7.0% increase in the average balance over the same period. The
decrease in total interest expens resulted primarily from a $280,000 decrease in
interest expense on certificates of deposit to $2.9 million from $3.2 million,
primarily due to a 44 basis point decrease in the average rate paid to 4.91%
from 5.35%. In addition, interest expense on savings deposits decreased by
$131,000 to $804,000 from $935,000 due to a 38 basis point decrease in the
average rate paid on such deposits to 1.97% from 2.35%, offset, in part, by a
$3.9 million increase in the average balance to $165.2 million from $161.3
million. Interest expense on borrowings from the Federal Home Loan Bank ("FHLB")
increased, as the average balance of such borrowings increased by $24.4 million
to $54.6 million for the 1999 period, from $30.2 million in 1998, offset, in
part, by a decrease of 61 basis points in the average rate paid to 5.52% from
6.13%.
Net Interest Income. For the three months ended March 31, 1999 and 1998,
net interest income was $7.6 million and $6.6 million, respectively. The $1.0
million increase in net interest income was primarily attributable to a $43.3
million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), partially offset by a 7 basis point decline in
the net interest rate spread to 3.72% from 3.79%. The Company's net interest
margin increased to 4.34% in the three months ended March 31, 1999 from 4.30% in
the three months ended March 31, 1998.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level which is considered appropriate to absorb probable loan losses
inherent in the existing portfolio. In determining the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, evaluations of real estate collateral, current and anticipated
economic conditions, volume and type of lending, and the levels of
non-performing and other classified loans. The amount of the allowance is based
on estimates and the ultimate losses may vary from such estimates. Management
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses in order to maintain the adequacy of the allowance. The Company
recorded $360,000 and $537,000 in loan loss provisions during the three months
ended March 31, 1999 and 1998, respectively. The provision in the current
quarter reflects continued
13
loan growth, including commercial mortgage and commercial business loans, and an
increase in non-performing loans to $7.8 million at March 31, 1999 from $6.1
million at September 30, 1998. The loan loss provision for the quarter ended
March 31, 1998 included $250,000 for one large commercial real estate loan,
which was subsequently charged off.
The table below 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, September 30,
1999 1998
---- ----
(Dollars In Thousands)
Non-performing loans:
First mortgage loans:
One-to-four family $ 3,284 $ 2,965
Multi-family 140 --
Commercial mortgage 1,886 871
Construction and land 1,269 1,256
Total first mortgage loans 6,579 5,092
Consumer loans 650 647
Commercial business loans 537 368
Total non-performing loans 7,766 6,107
------------ -----------
Real estate owned:
One-to-four family 382 92
Commercial real estate 21 274
Total real estate owned 403 366
------------ -----------
Total non-performing assets $ 8,169 $ 6,473
=========== =========
Ratios:
Non-performing loans to total loans 1.47% 1.32%
Non-performing assets to total assets 1.11 0.94
Allowance for loan losses to total non-performing loans 72.51 80.33
Allowance for loan losses to total loans 1.07 1.06
============ ===========
Non-Interest Income. Non-interest income is composed primarily of fee
income for bank services, and also includes gains and losses from the sale of
loans and securities. Total non-interest income for the three months ended March
31, 1999 increased $121,000 or 18.8%, to $765,000 for the three months ended
March 31, 1999 from $644,000 for the three months ended
14
March 31, 1998. The gain on sale of loans increased by $38,000 to $46,000 for
the three months ended March 31, 1999 from $8,000 for the three months ended
March 31, 1998. Loan sales increased in the current quarter as the result of the
Company's strategy to limit the amount of its longer duration loans outstanding,
which is part of its overall interest rate risk management policy.
Non-Interest Expenses. Non-interest expenses increased by $1.4 million or
27.2%, to $6.6 million for the three months ended March 31, 1999 from $5.2
million for the three months ended December 31, 1998. The increase was primarily
due to $522,000 in incremental costs associated with the recent conversion to a
new computer system. These costs included overtime, temporary help and
consulting fees as well as direct costs for data center, data processing and
other conversion expenses.
Total compensation and employee benefits expense increased $466,000 or
18.2% due, in part, to higher salary expense of $225,000. The higher expense
reflects new branch and product expansion, as well as higher overtime and
temporary help expense of $98,000.
Total advertising and promotion expenses increased $114,000 or 41.5%, to
$389,000 in the current quarter from $275,000 in the quarter ended March 31,
1998 primarily as a result of the timing of expenditures. Other non-interest
expenses increased $686,000 to $1.6 million for the three months ended March 31,
1999 from $905,000 for the three months ended March 31, 1998. This increase
includes the $522,000 of conversion costs for the new data processing system
referred to above.
Income Taxes. Income tax expense was $492,000 for the three months ended
March 31, 1999 compared to $551,000 for the same period in 1998. The effective
tax rates were 37.1% and 36.4%, respectively.
Comparison of Operating Results for the Six Months Ended March 31, 1999 and
March 31, 1998
Net income for the six months ended March 31, 1999 was $1.6 million, a
decrease of $763,000 or 32.8%, from net income of $2.3 million for the six
months ended March 31, 1998. The decrease was due primarily to increases in
non-interest expenses (including expenses associated with the conversion to a
new computer system and the establishment of the ESOP), partially offset by an
increase in net interest income. Excluding the impact of costs of $1.5 million
related to the conversion to a new computer system and the establishment of the
ESOP, net income would have been approximately $2.5 million for the six-month
period ended March 31, 1999.
Interest Income. Interest income increased by $1.5 million or 6.2%, to
$25.1 million for the six months ended March 31, 1999 from $23.6 million for the
six months ended March 31, 1998. The increase was primarily due to a $2.1
million or 12.2% increase in income from loans,
15
partially offset by a $793,000 or 17.5% decrease in income from mortgage-backed
securities. The increase in income from loans was attributable to a $83.7
million increase in the average balance to $497.4 million from $413.7 million,
partially offset by a 55 basis point decrease in the average yield from 8.29% to
7.74%. The continued growth of the one-to-four family residential mortgage loan
portfolio was responsible for the majority of the loan increase, together with a
$22.4 million or 25.1% increase in the average commercial loan portfolio. The
decrease in income from mortgage-backed securities was attributable to a $20.1
million decrease in the average balance to $118.5 million from $138.5 million,
combined with a 23 basis point decrease in the average yield to 6.34% from
6.57%.
Interest Expense. Interest expense was $10.3 million for the six months
ended March 31, 1999 and 1998. This stable expense was the net result of a $43.2
million or 8.1% increase in the average balance of total interest-bearing
liabilities in the 1999 period compared to the 1998 period, substantially offset
by a 28 basis point decrease in the average rate paid on such liabilities over
the same period. Interest expense on borrowings from the FHLB increased by
$544,000 due to an increase of $20.9 million in the average balance of such
borrowings to $50.6 million from $29.7 million, offset, in part, by a decrease
of 27 basis points in the average rate paid to 5.60% from 5.87%. The higher
interest expense on borrowings was partially offset by a decrease of $284,000 in
interest expense on certificates of deposit to $6.1 million from $6.4 million.
This decrease was due to a 32 basis point decrease in the average rate paid to
5.02% from 5.34%, offset, in part, by a $4.1 million increase in the average
balance to $242.8 million from $238.7 million. Also partially offsetting the
higher interest expense on borrowings was a decrease of $147,000 in interest
expense on savings deposits to $1.6 million from $1.8 million. This decrease was
due to a 25 basis point decrease in the average rate paid to 1.99% from 2.24%
offset, in part, by a $5.1 million increase in the average balance to $165.2
million from $160.1 million.
Net Interest Income. For the six months ended March 31, 1999 and 1998, net
interest income was $14.7 million and $13.3 million, respectively. The $1.4
million increase in net interest income was primarily attributable to a $30.0
million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), partially offset by an 11 basis point decline in
the net interest rate spread to 3.71% from 3.82%. The Company's net interest
margin decreased to 4.28% in the six months ended March 31, 1999 from 4.32% in
the six months ended March 31, 1998.
Provision for Loan Losses. The Company recorded $720,000 and $807,000 in
loan loss provisions during the six months ended March 31, 1999 and 1998,
respectively. The provisions reflect continued loan portfolio growth in both
six-month periods; the higher level of non-performing loans in the current year
period; and the $250,000 provision in the prior year period for a commercial
real estate loan, as previously discussed.
16
Non-Interest Income Total non-interest income for the six months ended
March 31, 1999 increased $141,000 or 9.8%, to $1.6 million from $1.4 million for
the six months ended March 31, 1998. The gain on sale of loans increased by
$141,000 to $159,000 for the six months ended March 31, 1999 from $18,000 for
the six months ended March 31, 1998. Loan sales increased in the current
six-month period as the result of the Company's strategy to limit the amount of
its longer duration loans outstanding, which is part of its overall interest
rate risk management policy. In addition, deposit related fees increased by
$116,000 to $1.3 million from $1.2 million. The higher gain on loan sales and
increased deposit related fees were partially offset by a loss of $79,000 on the
early disposal of fixed assets in the six months ended March 31, 1999.
Non-Interest Expenses. Non-interest expenses increased by $2.9 million or
28.9%, to $13.1 million for the six months ended March 31, 1999 from $10.2
million for the six months ended March 31, 1998. The increase was primarily due
to $1.1 million in incremental costs associated with the recent conversion to a
new computer system.
The increase in total non-interest expenses for the first six months of the
current year also reflects ESOP costs of $458,000 in the compensation and
employee benefits category. The ESOP was established during 1998. A total of
30,912 ESOP shares (or 10% of total 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 ($371,000) was recognized in the
quarter ended December 31, 1998 ESOP expense of $87,000 was recognized in the
quarter ended March 31, 1999 for the portion of shares committed to be released
to participants for the calendar 1999 plan year.
Total occupancy and office operations expenses increased $144,000 or 9.4%,
to $1.7 million for the six months ended March 31, 1999 from $1.5 million for
the six months ended March 31, 1998. Total amortization of branch purchase
premiums increased $89,000 or 11.5%, to $860,000 in the current six month period
from $771,000 for the six months ended March 31, 1998. Other non-interest
expenses increased $1.4 million to $3.2 million for the six months ended March
31, 1999 from $1.8 million for the six months ended March 31, 1998. This
increase includes $920,000 of the total conversion costs for the new data
processing system referred to above, $58,000 in interest on stock subscription
proceeds and $66,000 for higher recruitment expenses.
Income Taxes. Income tax expense was $919,000 for the six months ended
March 31, 1999 compared to $1.4 million for the same period in 1998. The
effective tax rates were 37.0% and 38.0%, respectively.
17
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,
borrowings and proceeds from maturities of 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.
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, 1999 and 1998, loan originations totaled $79.5 million and $27.2
million, respectively; purchases of mortgage-backed securities totaled $5.0
million and $25.5 million, respectively; and purchases of investment securities
totaled $33.6 million and $8.1 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, net proceeds from
the stock offering of $37.1 million were received in the six months ended March
31, 1999, including stock purchases funded from Bank savings accounts and
certificates of deposit. Loan sales totaling $14.1 million provided an
additional source of liquidity during the six months ended March 31, 1999. There
were no commitments to sell fixed-rate residential loans at March 31, 1999. Loan
origination commitments totaled $25.8 million at March 31, 1999. The Company
anticipates that it will have sufficient funds available to meet current loan
commitments.
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, and other factors. The
net increase in total deposits for the six months ended March 31, 1999 was $4.7
million, compared to $25.5 million for the six months ended March 31, 1998.
Based upon its prior experience and current pricing strategy, the Company
believes that a significant portion of such deposits will remain with the
Company.
The Company monitors its liquidity position on a daily basis. Excess
short-term liquidity, if any, is usually invested in overnight federal funds
sold. The Company generally remains fully invested and utilizes additional
sources of funds through FHLB advances, which amounted to $53.6 million at March
31, 1999.
18
At March 31, 1999, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $73.7 million, or 10.0% of
adjusted assets (which is above the required level of $21.9 million, or 3.0%)
and a risk-based capital level of $79.1 million, or 18.1% of risk-weighted
assets (which is above the required level of $34.9 million, or 8.0%). These
capital requirements, which are applicable to the Bank only, do not consider
additional capital retained at the holding company level.
The following table sets forth the Bank's regulatory capital position at
March 31, 1999 and September 30, 1998, compared to OTS requirements. The
increase in the Bank's capital level during the six months ended March 31, 1999
primarily reflects the Bank's issuance of its common stock to the holding
company for $24.0 million, representing a portion of the net proceeds raised in
the stock offering. The remainder has been retained and invested by the holding
company, after funding the ESOP shares.
OTS Requirements
--------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
--------------- --------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
March 31, 1999
- --------------------
Tangible capital $73,682 10.0% $10,968 1.5 % $-- -- %
Tier 1 (core) capital $73,682 10.0 21,935 3.0 36,559 5.0
Risk-based capital:
Tier 1 $73,682 16.8 -- -- 26,189 6.0
Total $79,138 18.1 34,919 8.0 43,649 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
19
Year 2000 Considerations
(The following information constitutes "Year 2000 Readiness Disclosure" under
the Year 2000 Information and Readiness Disclosure Act.)
The Company, 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 Company's direct control (and with which the Company interfaces
either electronically or operationally), are likely to be affected by the Year
2000 issue.
The Company 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 readiness. The Company'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 Company, or who have
material business relationships with the Company.
The Company realizes that the Year 2000 issue extends beyond the computer
systems associated with its operations. The Company has identified and begun a
process of quantifying certain external risks posed by the Year 2000 problem.
The Company's Year 2000 plan addresses each identified external risk and, in
cases where risks may be high, the Company 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 Company has
employed the services of an outside consulting 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 Company in response to Year 2000 issues are consistent with the
guidelines set forth in policy statements issued by the bank regulatory
agencies.
The Company has identified six mission-critical systems including its core
data processing system for loans, deposits and the general ledger. In November
1998, the Company 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 Company's prior core system, the new system is maintained by a
third-party vendor. The Company has completed it own testing of the core system.
A detailed report of testin results has been produced, and the results have been
validated for accuracy by internal staff.
The Company has obtained assurances from certain third parties with whom it
does business, either as to their current Year 2000 compliance or assurance that
they are in the process
20
of addressing the Year 2000 issue. For example, the Company 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 Company's
ability to conduct its business. The risk also exists that some of the Company'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 Company
regarding the repayment of loans from those commercial customers. The Company
has surveyed its existing commercial customers with aggregate outstanding loan
balances of $250,000 or more regarding their Year 2000 preparedness, and has
conducted follow-up interviews with its larger commercial borrowers to determine
their readiness. While the Company does not have specific financial data
regarding the potential effect of the Year 2000 issues on its commercial
customers, the Company recognizes this as a risk and will continue to seek
evidence of preparedness from its major borrowers. During the past 6 months,
the Company also has been assessing Year 2000 readiness as a component of its
risk evaluation for new commercial borrowers.
While the Company expects to complete its Year 2000 plan on a timely basis,
there can be no assurance that required remediation, if any, of its own systems
or the systems of other companies will be identified or 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 Company's overall contingency planning
process. In preparing its contingency plan, the Company has categorized
potential events as uncontrollable and controllable. Uncontrollable events, such
as loss of electric power and telephone service failures, will affect all
companies, government and customers. These uncontrollable events cannot be
remedied by anyone other than the appropriate responsible party, but require th
preparation of a business resumption contingency plan.
The Company 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 Company's Year 2000 inventory list. For example, the Company
is reviewing 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 Company will conduct a business impact
analysis to identify potentially disruptive events 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
Company will establish a recovery program by June 30, 1999 that identifies
participants, processes and equipment that might be necessary for the Company to
function adequately. The basic priorities for restoring service will be based on
the essential application processing required to ensure that the Company can
continue to serve its customers. The Company is also in the process of
instituting 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 Company. Direct costs include potential
charges by third-party software vendors for
21
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 Company'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 Company'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 March 31, 1999.
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 the assets and liabilities are sensitive to changes in
interest rates. There have been no material changes in the Company's interest
rate risk position since September 30, 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 Company's business activities.
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 Company 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 consolidated financial condition and operations.
22
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
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)
Date May 14, 1999 By: /s/ Katherine A. Dering
----------------------------------
Katherine A. Dering
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer and duly
authorized representative)
23