As filed with the Securities and Exchange Commission on November 10, 2003
Registration No. 333-108795
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO THE
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
PROVIDENT BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 6712 BEING APPLIED FOR
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
400 RELLA BOULEVARD
MONTEBELLO, NEW YORK 10901
(845) 369-8040
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
GEORGE STRAYTON
400 RELLA BOULEVARD
MONTEBELLO, NEW YORK 10901
(845) 369-8040
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
COPIES TO:
JOHN J. GORMAN, ESQ.
NED QUINT, ESQ.
LUSE GORMAN POMERENK & SCHICK, P.C.
5335 WISCONSIN AVENUE, N.W., SUITE 400
WASHINGTON, D.C. 20015
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: :
If this Form is filed to register additional shares for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: 9
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: 9
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: 9
CALCULATION OF REGISTRATION FEE
======================================== =================== ==================== ==================== =====================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ---------------------------------------- ------------------- -------------------- -------------------- ---------------------
Common Stock, $0.01 par value per share 19,973,000 shares $10.00 $199,730,000 (1) $16,159 (2)
- ---------------------------------------- ------------------- -------------------- -------------------- ---------------------
Participation Interests 835,650 interests -- -- (3)
======================================== =================== ==================== ==================== =====================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) A fee of $14,768 was previously paid.
(3) The securities of Provident Bancorp, Inc. to be purchased by the Provident
Bank 401(k) Plan are included in the amount shown for common stock.
However, pursuant to Rule 457(h) of the Securities Act of 1933, as amended,
no separate fee is required for the participation interests. Pursuant to
such rule, the amount being registered has been calculated on the basis of
the number of shares of common stock that may be purchased with the current
assets of such plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
PROSPECTUS
PROVIDENT BANCORP, INC.
(HOLDING COMPANY FOR PROVIDENT BANK)
UP TO 19,573,000 SHARES OF COMMON STOCK
Provident Bancorp, Inc., a Delaware corporation, is offering shares of
common stock for sale in connection with the conversion of Provident Bancorp,
MHC from the mutual to the stock form of organization. The shares of common
stock we are offering represent the ownership interest in Provident Bancorp,
Inc., a federal corporation, now owned by Provident Bancorp, MHC. The existing
shares of Provident Bancorp, Inc. common stock held by the public will be
exchanged for new shares of common stock of Provident Bancorp, Inc., a Delaware
corporation. All shares of common stock are being offered for sale at a price of
$10.00 per share. For a period of 20 trading days after the offering, our shares
of common stock will trade on the Nasdaq National Market under the symbol
"PBCPD." Thereafter, our trading symbol will revert to "PBCP."
IF YOU ARE OR WERE A DEPOSITOR OR ARE A BORROWER OF PROVIDENT BANK:
o You may have priority rights to purchase shares of common stock.
IF YOU ARE CURRENTLY A STOCKHOLDER OF PROVIDENT BANCORP, INC.:
o You may purchase additional shares of common stock in the offering
after priority orders are filled.
o Each of your shares of common stock will be exchanged at the
conclusion of the offering for between 2.8487 and 3.8542 new shares of
common stock of Provident Bancorp, Inc., a Delaware corporation.
o Your percentage ownership will remain essentially equivalent to your
current percentage ownership interest in Provident Bancorp, Inc.,
subject to the issuance of shares in connection with a pending
acquisition described in this document and the issuance of shares to a
charitable foundation, described below.
IF YOU ARE A PARTICIPANT IN THE PROVIDENT BANK 401(K) PLAN:
o You may direct that all or part of your current account balances in
this plan be invested in shares of common stock.
o You will receive a supplement to this prospectus that describes your
rights under the plan.
IF YOU FIT NONE OF THE CATEGORIES ABOVE, BUT ARE INTERESTED IN PURCHASING
SHARES OF OUR COMMON STOCK:
o You may purchase shares of common stock after priority orders are
filled.
We are offering up to 17,020,000 shares of common stock for sale on a best
efforts basis. We may sell up to 19,573,000 shares of common stock because of
demand for the shares or changes in market conditions, without resoliciting
subscribers. In addition, we will issue 400,000 shares of common stock and
contribute $1.0 million in cash to a charitable foundation to be established by
Provident Bank. We must issue a minimum of 12,580,000 shares in the offering in
order to complete the offering and the exchange of existing shares. Under
certain circumstances, we may include shares issued in connection with a pending
acquisition described in this document in order to meet this minimum
requirement.
The minimum number of shares you can order is 25 shares. The offering is
expected to expire at 10:00 a.m., New York Time, December 18, 2003. We may
extend this expiration date without notice to you until February 2, 2004, unless
the Office of Thrift Supervision approves a later date, which may not be beyond
January 6, 2006. Once submitted, orders are irrevocable unless the offering is
terminated or is extended beyond February 2, 2004 or the number of shares of
common stock to be sold is increased to more than 19,573,000 shares or decreased
to less than 12,580,000 shares. If the offering is extended beyond February 2,
2004, subscribers will have the right to modify or rescind their purchase
orders. Funds received during the offering will be held in a segregated account
at Provident Bank and will earn interest at our passbook savings rate.
Ryan Beck & Co., Inc. will assist us in selling our shares of common stock
on a best efforts basis. Ryan Beck & Co., Inc. is not required to purchase any
shares of the common stock that are being offered for sale. Purchasers will not
pay a commission to purchase shares of common stock in the offering.
OFFERING SUMMARY
PRICE: $10.00 PER SHARE
ADJUSTED
MINIMUM MAXIMUM MAXIMUM
------- ------- -------
Number of shares: 12,580,000 17,020,000 19,573,000
Gross offering proceeds: $ 125,800,000 $ 170,200,000 $ 195,730,000
Estimated offering expenses: $ 2,702,000 $ 3,124,000 $ 3,366,000
Estimated net proceeds: $ 123,098,000 $ 167,076,000 $ 192,364,000
Estimated net proceeds per share: $ 9.79 $ 9.82 $ 9.83
THIS INVESTMENT INVOLVES A DEGREE OF RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
PLEASE READ "RISK FACTORS" BEGINNING ON PAGE ___.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
RYAN BECK & CO.
The date of this prospectus is ___________, 2003
[MAP SHOWING PROVIDENT BANK'S AND ELLENVILLE NATIONAL BANK'S COMBINED
MARKET AREA APPEARS HERE]
i
TABLE OF CONTENTS
Page
----
SUMMARY........................................................................1
RISK FACTORS..................................................................17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF PROVIDENT BANCORP
AND SUBSIDIARIES............................................................25
RECENT DEVELOPMENTS...........................................................28
FORWARD-LOOKING STATEMENTS....................................................36
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING...........................37
OUR DIVIDEND POLICY...........................................................39
MARKET FOR THE COMMON STOCK...................................................39
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE........................42
CAPITALIZATION................................................................44
THE ACQUISITION OF E.N.B. HOLDING COMPANY, INC. AND RELATED PRO FORMA DATA....45
PRO FORMA CONVERSION AND ACQUISITION DATA.....................................54
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT
THE FOUNDATION..............................................................64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................66
BUSINESS OF PROVIDENT BANCORP AND PROVIDENT BANK..............................86
SUPERVISION AND REGULATION...................................................112
TAXATION.....................................................................120
MANAGEMENT OF PROVIDENT BANCORP..............................................122
BENEFICIAL OWNERSHIP OF COMMON STOCK.........................................132
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS............................133
THE CONVERSION...............................................................135
PROVIDENT BANK CHARITABLE FOUNDATION.........................................159
RESTRICTIONS ON ACQUISITION OF PROVIDENT BANCORP.............................163
DESCRIPTION OF CAPITAL STOCK OF PROVIDENT BANCORP FOLLOWING THE
CONVERSION.................................................................167
TRANSFER AGENT...............................................................168
EXPERTS......................................................................168
LEGAL MATTERS................................................................168
WHERE YOU CAN FIND ADDITIONAL INFORMATION....................................168
PROVIDENT BANCORP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...........F-1
ii
SUMMARY
The following summary explains the significant aspects of the conversion,
the offering and the exchange of existing shares of Provident Bancorp, Inc.
common stock for new shares of Provident Bancorp, Inc. common stock. It may not
contain all the information that is important to you. For additional
information, you should read this entire document carefully, including the
consolidated financial statements and the notes to the consolidated financial
statements.
THE COMPANIES
PROVIDENT BANCORP, MHC
Provident Bancorp, MHC is the federally chartered mutual holding company of
Provident Bancorp, Inc., a federal corporation. Provident Bancorp, MHC's
principal business activity is the ownership of 4,416,000 shares of common stock
of Provident Bancorp, or 55.5% of the issued and outstanding shares as of June
30, 2003. After the completion of the mutual-to-stock conversion, Provident
Bancorp, MHC will no longer exist.
Provident Bancorp, MHC's executive offices are located at 400 Rella
Boulevard, Montebello, New York 10901. Our telephone number at this address is
(845) 369-8040.
PROVIDENT BANCORP, INC. (A FEDERAL CORPORATION)
Provident Bancorp, Inc. is a federally chartered corporation that owns all
of the outstanding common stock of Provident Bank. At June 30, 2003, Provident
Bancorp had consolidated assets of $1.1 billion, deposits of $857.5 million and
stockholders' equity of $115.7 million. After the completion of the
mutual-to-stock conversion, Provident Bancorp will cease to exist, but will be
succeeded by a new Delaware corporation with the name Provident Bancorp, Inc. As
of June 30, 2003, Provident Bancorp had 7,953,075 shares of common stock issued
and outstanding. As of that date, Provident Bancorp, MHC owned 4,416,000 shares
of common stock of Provident Bancorp, representing 55.5% of the issued and
outstanding shares of common stock. The remaining 3,537,075 shares were held by
the public.
Provident Bancorp, Inc.'s executive offices are located at 400 Rella
Boulevard, Montebello, New York 10901. Our telephone number at this address is
(845) 369-8040.
PROVIDENT BANCORP, INC. (A DELAWARE CORPORATION)
Provident Bancorp, Inc. is a newly-formed Delaware corporation that will
own all of the outstanding common stock of Provident Bank upon completion of the
mutual-to-stock conversion and the offering. Provident Bancorp also proposes to
acquire E.N.B. Holding Company and its subsidiary, Ellenville National Bank.
Concurrently with the completion of the conversion and offering, Provident
Bancorp, a Delaware corporation, will be the successor to Provident Bancorp, a
federal corporation.
Our executive offices are located at 400 Rella Boulevard, Montebello, New
York 10901. Our telephone number at this address is (845) 369-8040.
1
PROVIDENT BANK
Provident Bank is a full-service, community-oriented savings association
that provides financial services to individuals, families and businesses through
18 branch offices and 25 ATMs throughout Rockland and Orange Counties, New York.
Originally organized in 1888 as a New York State-chartered mutual savings
and loan association, Provident Bank reorganized into the mutual holding company
structure in January 1999 and became the wholly-owned subsidiary of Provident
Bancorp. As part of the mutual holding company reorganization, Provident Bancorp
conducted an initial public offering and sold 46.7% of its shares of common
stock to depositors. At September 30, 1998, we operated 11 branch offices.
Subsequent to the mutual holding company reorganization and initial stock
offering, we have broadened our market reach through de novo branching and our
acquisition in April 2002 of The National Bank of Florida, located in Florida,
New York. At the time of the acquisition, The National Bank of Florida had
assets of $104.0 million and deposits of $88.2 million.
In April 2002, Provident Bank organized Provident Municipal Bank as a
wholly-owned subsidiary. Provident Municipal Bank is a New York State-chartered
commercial bank that is engaged in the business of accepting deposits from
municipalities in our market area.
Provident Bank's business consists primarily of accepting deposits from the
general public and investing those deposits, together with funds generated from
operations and borrowings, in one- to four-family residential, multi-family
residential and commercial real estate loans, commercial business loans and
leases, consumer loans and in investment securities and mortgage-backed
securities.
Provident Bank's executive offices are located at 400 Rella Boulevard,
Montebello, New York 10901. Our telephone number at this address is (845)
369-8040.
OUR ORGANIZATIONAL STRUCTURE
In 1999, Provident Bank's mutual predecessor reorganized into the mutual
holding company form of organization. As a part of the mutual holding company
reorganization, Provident Bancorp sold 46.7% of its shares of common stock to
depositors in a subscription offering. The majority of the outstanding shares of
common stock were issued to Provident Bancorp, MHC. Provident Bancorp, MHC is a
mutual holding company that has no stockholders. Provident Bancorp owns 100% of
the outstanding shares of Provident Bank.
Pursuant to the terms of Provident Bancorp, MHC's plan of conversion and
reorganization, Provident Bancorp, MHC will convert from the mutual holding
company to the fully public form of corporate structure. As part of the
conversion, we are offering for sale in a subscription offering and a community
offering the majority ownership interest of Provident Bancorp that is currently
held by Provident Bancorp, MHC. Upon the completion of the conversion and
offering, Provident Bancorp, MHC will cease to exist, and we will complete the
transition from partial to full public stock ownership. Existing public
stockholders of Provident Bancorp will receive new shares of common stock of
Provident Bancorp (our newly formed Delaware corporation that will be the
successor to the current Provident Bancorp) in exchange for their existing
shares of Provident Bancorp at the completion of the conversion.
2
The following chart shows our current organizational structure, which is
commonly referred to as the "two-tier" mutual holding company structure:
PUBLIC
PROVIDENT BANCORP, MHC STOCKHOLDERS
55.5% of Provident 44.5% of Provident
Bancorp common stock Bancorp common stock
PROVIDENT BANCORP, INC.
(A FEDERAL CORPORATION)
100% of common stock
PROVIDENT BANK
100% of common stock
PROVIDENT MUNICIPAL BANK
After the conversion and offering are completed, we will be organized as a fully
public holding company, as follows:
PUBLIC STOCKHOLDERS
(INCLUDING THE CHARITABLE FOUNDATION)
100% of common stock
PROVIDENT BANCORP, INC.
(A DELAWARE CORPORATION)
100% of common stock
PROVIDENT BANK
100% of common stock
PROVIDENT MUNICIPAL BANK
3
BUSINESS STRATEGY
Highlights of our business strategy are:
o Operating as a community bank;
o Enhancing customer service;
o Growing and diversifying our loan portfolio; and
o Expanding our retail banking franchise.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations --Management Strategy" for a discussion of our business strategy.
REASONS FOR THE CONVERSION
The primary reasons for converting and raising additional capital are:
o to provide us with the capital to acquire E.N.B. Holding Company and
its subsidiary, Ellenville National Bank, as discussed below;
o to facilitate growth through other acquisitions and de novo branching
as opportunities arise;
o to support internal growth through lending in communities we serve;
o to enhance existing products and services and support the development
of new products and services;
o to improve our overall competitive position; and
o to enhance stockholder returns through higher earnings and more
flexible capital management strategies.
As a fully converted stock holding company, we will have greater
flexibility in structuring further mergers and acquisitions, including the form
of consideration that we can use to pay for an acquisition. Our current mutual
holding company structure limits our ability to offer shares of our common stock
as consideration in a merger or acquisition since Provident Bancorp, MHC is
required to own a majority of our outstanding shares of common stock. Potential
sellers often want stock for at least part of the purchase price. Our new stock
holding company structure will enable us to offer stock or cash consideration,
or a combination thereof and will, therefore, enhance our ability to compete
with other bidders when acquisition opportunities arise. Other than our
agreement to acquire E.N.B. Holding Company, Inc., we currently have no
arrangements or understandings regarding any specific acquisition.
E.N.B. HOLDING COMPANY, INC. ACQUISITION
At the time we adopted our plan of conversion and reorganization, we
entered into an agreement to acquire E.N.B. Holding Company, Inc. E.N.B. Holding
Company is a New York corporation that
4
owns all of the outstanding common stock of Ellenville National Bank. As of June
30, 2003, E.N.B. Holding Company had consolidated assets of $341.7 million,
deposits of $307.7 million, and shareholders' equity of $29.9 million.
Ellenville National Bank is a national bank that was chartered in 1956.
Ellenville National Bank conducts its business through nine branch offices and
ten ATMs located in the New York Counties of Orange, Sullivan and Ulster.
Ellenville National Bank's business consists primarily of accepting deposits
from customers and investing those deposits, together with funds generated from
operations and borrowings, in commercial real estate loans, commercial business
loans, consumer loans, one- to four-family and multi-family residential real
estate loans and in investment securities and mortgage-backed securities.
As part of the acquisition of E.N.B. Holding Company, Ellenville National
Bank will be merged into Provident Bank, and as a result, Provident Bank will
operate 27 branch offices. The E.N.B. Holding Company acquisition will expand
our presence in Orange County, New York and will provide an entry for Provident
Bank into Ulster and Sullivan Counties, New York. Shareholders of E.N.B. Holding
Company will receive $4,830 for each share of E.N.B. Holding Company common
stock (with a total value of $73.5 million) in the form of:
(i) cash;
(ii) shares of common stock of Provident Bancorp, a Delaware corporation
(valued at $10.00 per share); or
(iii) a combination of cash and shares of common stock,
provided that the aggregate merger consideration to be paid to all
shareholders of E.N.B. Holding Company will consist of 50% cash and 50% shares
of Provident Bancorp common stock. We expect to issue 3,677,320 shares of common
stock to E.N.B. Holding Company's shareholders in exchange for their shares of
E.N.B. Holding Company common stock. In the event that we sell more than $181.3
million of shares of common stock in the offering (excluding shares we issue to
the Provident Bank Charitable Foundation and excluding shares we issue in
exchange for existing shares of common stock of Provident Bancorp, a federal
corporation), then the number of shares to be issued to shareholders of E.N.B.
Holding Company will be increased. The maximum number of shares of common stock
that can be issued to shareholders of E.N.B. Holding Company is 3,969,676
shares, assuming we sell 19,573,000 shares of common stock in the offering. The
cash portion of the merger consideration will not be affected if we sell more
than $181.3 million of shares of common stock in the offering.
The acquisition of E.N.B. Holding Company is not contingent on completion
of the conversion and the related stock offering. The merger agreement provides
that if the conversion and stock offering are not completed by March 31, 2004,
E.N.B. Holding Company can elect to: (i) proceed with the merger transaction and
E.N.B. Holding Company shareholders will receive merger consideration of $4,500
per share in cash, or (ii) terminate the merger and receive a fee of $3.7
million. The merger is subject to approval by the stockholders of Provident
Bancorp, Inc. and by the shareholders of E.N.B. Holding Company and by the
Office of Thrift Supervision. We anticipate completing simultaneously the
conversion, the stock offering and the merger in January 2004, although no
assurance can be given that we will be able to complete these transactions by
that date. In the event that we do not complete the merger, we will either
terminate the conversion or we will resolicit subscribers.
5
TERMS OF THE CONVERSION AND OFFERING
Pursuant to Provident Bancorp, MHC's plan of conversion and reorganization,
our organization will convert from a partially public to a fully public form of
holding company structure. In connection with the conversion, we are selling
shares that represent the ownership interest in Provident Bancorp currently held
by Provident Bancorp, MHC.
We are offering between 12,580,000 and 17,020,000 shares of common stock to
eligible depositors and borrowers of Provident Bank, our employee benefit plans
and, to the extent shares remain available, to our existing public stockholders,
depositors of Ellenville National Bank and the general public. The number of
shares of common stock to be sold may be increased up to 19,573,000 as a result
of demand for the shares or changes in the market for financial institution
stocks. Unless the number of shares of common stock to be offered is increased
to more than 19,573,000 or decreased to less than 12,580,000, or the offering is
extended beyond February 2, 2004, subscribers will not have the opportunity to
change or cancel their stock order.
We also will issue 400,000 shares of common stock and contribute $1.0
million in cash to a charitable foundation to be established by Provident Bank.
If we do not receive orders for at least 12,580,000 shares of common stock,
then we may issue up to 3,677,320 unsubscribed shares to E.N.B. Holding Company
shareholders as merger consideration, but only in order to complete the offering
and conversion at the minimum of the offering range. If 3,677,320 offering
shares are so issued to E.N.B. Holding Company, the minimum number of shares
that must be sold in the offering is 8,902,680. If none of the offering shares
are so issued because we receive orders for at least 12,580,000 shares of common
stock, then the 3,677,320 shares of common stock to be issued to E.N.B. Holding
Company shareholders will be in addition to the total shares issued in the
conversion and offering. The issuance of shares as merger consideration will not
affect the exchange ratio described in "--The Exchange of Existing Shares of
Provident Bancorp Common Stock," regardless of whether such shares are
unsubscribed offering shares. The purchase price of each share of common stock
to be issued in the offering is $10.00. All investors will pay the same purchase
price per share. Investors will not be charged a commission to purchase shares
of common stock. Ryan Beck & Co., Inc., our marketing advisor in the offering,
will use its best efforts to assist us in selling shares of our common stock.
Ryan Beck & Co. is not obligated to purchase any shares of common stock in the
offering.
PERSONS WHO MAY ORDER SHARES OF COMMON STOCK IN THE OFFERING
We are offering the shares of common stock of Provident Bancorp in a
"subscription offering" in the following descending order of priority:
(1) First, to depositors with accounts at Provident Bank with aggregate
balances of at least $50 on June 30, 2002.
(2) Second, to Provident Bancorp's and Provident Bank's tax-qualified
plans, including our employee stock ownership plan and 401(k) Plan.
(3) Third, to depositors with accounts at Provident Bank with aggregate
balances of at least $50 on September 30, 2003.
6
(4) Fourth, to depositors of Provident Bank as of November 10, 2003 and to
borrowers of Provident Bank as of January 7, 1999 whose borrowings
remained outstanding as of November 10, 2003.
Shares of common stock not purchased in the subscription offering may be
offered for sale to the general public in a "community offering," with a
preference given first to natural persons residing in the New York counties of
Rockland and Orange, then to Provident Bancorp public stockholders as of
November 7, 2003 and then to depositors of Ellenville National Bank as of
November 14, 2003. The community offering may begin concurrently with, during or
promptly after the subscription offering as we may determine at any time. We
also may offer for sale shares of common stock not purchased in the subscription
offering or community offering through a "syndicated community offering" managed
by Ryan Beck & Co. We have the right to accept or reject, in our sole
discretion, orders received in the community offering or syndicated community
offering.
If we receive orders for more shares than we are offering, we may not be
able to fully or partially fill your order. Shares will be allocated first to
categories in the subscription offering. A detailed description of share
allocation procedures can be found in the section entitled "The Conversion."
HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PER SHARE STOCK PRICE
The amount of common stock we are offering is based on an independent
appraisal of the estimated market value of Provident Bancorp, assuming the
conversion, offering and acquisition of E.N.B. Holding Company are completed. RP
Financial, LC., our independent appraiser, has estimated that, as of November 3,
2003, this market value ranged from $267.3 million to $347.3 million, with a
midpoint of $307.3 million. Based on this valuation, the ownership interest of
Provident Bancorp, MHC being sold in the offering and the $10.00 per share
price, the number of shares of common stock being offered for sale by Provident
Bancorp will range from 12,580,000 shares to 17,020,000 shares. In addition, we
will issue 400,000 shares and contribute $1.0 million in cash to the charitable
foundation. The contribution of cash and our shares of common stock to the
charitable foundation will have the effect of reducing our pro forma valuation.
See "Comparison of Valuation and Pro Forma Information With and Without the
Foundation." The $10.00 per share price was selected primarily because it is the
price most commonly used in mutual-to-stock conversions of financial
institutions. The appraisal is based in part on Provident Bancorp's financial
condition and results of operations, the effect of the additional capital raised
by the sale of shares of common stock in the offering, and an analysis of a peer
group of 11 publicly traded savings bank and thrift holding companies that RP
Financial considered comparable to Provident Bancorp.
The following table presents a summary of selected pricing ratios for the
peer group companies and Provident Bancorp. Provident Bancorp's pro forma
price-to-earnings multiple is annualized based on earnings for the nine months
ended June 30, 2003, while information for the peer group companies is based on
earnings for the twelve months ended June 30, 2003. All other information
presented is as of June 30, 2003. Compared to the average pricing of the peer
group, Provident Bancorp's pro forma pricing ratios at the maximum of the
offering range indicated a premium of 25% on a price-to-earnings basis, a
discount of 37% on a price-to-book basis and a discount of 26% on a
price-to-tangible book basis. The estimated appraised value and the resulting
premium/discount took into consideration the potential financial impact of the
conversion and offering.
7
PRO FORMA PRO FORMA PRO FORMA
PRICE-TO-EARNINGS PRICE-TO-BOOK PRICE-TO-TANGIBLE
MULTIPLE VALUE RATIO BOOK VALUE RATIO
----------------- ------------- -----------------
PROVIDENT BANCORP
Maximum............................... 24.19x 113.64% 145.14%
Minimum............................... 18.75 100.70 134.14
VALUATION OF PEER GROUP COMPANIES AS
OF OCTOBER 24, 2003
Averages.............................. 19.30x 177.25% 197.18%
Medians............................... 18.38 166.29 179.38
THE INDEPENDENT APPRAISAL DOES NOT INDICATE MARKET VALUE. DO NOT ASSUME OR
EXPECT THAT THE VALUATION OF PROVIDENT BANCORP AS INDICATED ABOVE MEANS THAT,
AFTER THE CONVERSION AND OFFERING, THE SHARES OF COMMON STOCK WILL TRADE AT OR
ABOVE THE $10.00 PURCHASE PRICE.
The independent appraisal will be updated prior to the completion of the
conversion. If the appraised value changes to either below $267.3 million or
above $396.2 million, we will resolicit persons who had submitted stock orders,
providing them an opportunity to modify or cancel their stock orders.
THE EXCHANGE OF EXISTING SHARES OF PROVIDENT BANCORP COMMON STOCK
If you are currently a stockholder of Provident Bancorp, a federal
corporation, your shares will be canceled and exchanged for shares of common
stock of Provident Bancorp, a Delaware corporation, at the conclusion of the
conversion. The number of shares of common stock you receive will be based on an
exchange ratio determined as of the closing of the conversion, which will depend
upon the final appraised value of Provident Bancorp. In addition, if options to
purchase shares of Provident Bancorp common stock are exercised before
consummation of the conversion, there will be an increase in the percentage of
shares of Provident Bancorp held by public stockholders, an increase in the
number of shares of common stock issued to public stockholders in the share
exchange and a decrease in the exchange ratio and the offering range. The
following table shows how the exchange ratio will adjust, based on the number of
shares of common stock issued in the offering. The table also shows how many
shares a hypothetical owner of Provident Bancorp common stock would receive in
the exchange for their shares of common stock owned at the consummation of the
conversion, depending on the number of shares of common stock issued in the
offering. The table excludes the effect of the issuance of shares of common
stock to the charitable foundation and the effect of the issuance of shares of
common stock to shareholders of E.N.B. Holding Company.
NEW SHARES TO BE EXCHANGED TOTAL SHARES OF NEW SHARES TO
NEW SHARES TO BE ISSUED FOR EXISTING SHARES OF COMMON STOCK TO BE RECEIVED
IN THIS OFFERING PROVIDENT BANCORP BE ISSUED IN FOR 100
-------------------------- -------------------------- CONVERSION AND EXCHANGE EXISTING
AMOUNT PERCENT AMOUNT PERCENT OFFERING RATIO SHARES
---------- ---------- ------------ ---------- --------------- -------- -------------
Minimum.................. 12,580,000 (1) 55.5% 10,076,178 44.5% 22,656,178 2.8487 284
Midpoint................. 14,800,000 55.5 11,854,327 44.5 26,654,327 3.3514 335
Maximum.................. 17,020,000 55.5 13,632,477 44.5 30,652,477 3.8542 385
15% above Maximum........ 19,573,000 55.5 15,677,348 44.5 35,250,348 4.4323 443
8
(1) If Provident Bancorp does not receive orders for at least 12,580,000 shares
of common stock in the offering, then Provident Bancorp may issue up to
3,677,320 unsubscribed offering shares to E.N.B. Holding Company, Inc.
shareholders as merger consideration in order to complete the offering at
the minimum of the offering range. If 3,677,320 shares of common stock are
so issued, the minimum number of shares of common stock that must be sold
in the offering is 8,902,680. If none of the offering shares are so issued,
the 3,677,320 shares of common stock to be issued to E.N.B. Holding
Company, Inc. shareholders will be in addition to the total shares issued
in the conversion and offering. The issuance of shares as merger
consideration will not affect the exchange ratio, regardless of whether
such shares are unsubscribed offering shares.
If you own shares of Provident Bancorp common stock in a brokerage account
in "street name," you do not need to take any action to exchange your shares of
common stock. If you own shares in the form of Provident Bancorp stock
certificates, you will receive a transmittal form with instructions to surrender
your stock certificates after consummation of the conversion. New certificates
of Provident Bancorp common stock will be mailed to you within five business
days after the exchange agent receives properly executed transmittal forms and
certificates.
No fractional shares of Provident Bancorp common stock will be issued to
any public stockholder of Provident Bancorp. For each fractional share that
would otherwise be issued, Provident Bancorp will pay in cash an amount equal to
the product obtained by multiplying the fractional share interest to which the
holder would otherwise be entitled by the $10.00 per share subscription price.
Current stockholders of Provident Bancorp do not have dissenters' or appraisal
rights in connection with the conversion.
Outstanding options to purchase shares of Provident Bancorp common stock
also will convert into and become options to purchase new shares of Provident
Bancorp common stock. The number of shares of common stock to be received upon
exercise of these options will be determined pursuant to the exchange ratio. The
aggregate exercise price, duration and vesting schedule of these options will
not be affected by the conversion. At June 30, 2003, there were 275,539
outstanding options to purchase shares of Provident Bancorp common stock,
209,586 of which were vested. Such options will be converted into options to
purchase 784,927 shares of common stock at the minimum of the offering range and
1,061,982 shares of common stock at the maximum of the offering range. If all
existing options were exercised for authorized, but unissued shares of common
stock following the conversion, stockholders would experience dilution of
approximately 2.9% at the minimum of the offering range and 3.0% at the maximum
of the offering range. Because Office of Thrift Supervision regulations prohibit
us from repurchasing our common stock during the first year following the
conversion unless compelling business reasons exist for such repurchases, we may
use authorized but unissued shares to fund option exercises that occur during
the first year following conversion.
LIMITS ON HOW MUCH COMMON STOCK YOU MAY PURCHASE
The minimum number of shares of common stock that may be purchased is 25.
IF YOU ARE NOT CURRENTLY A PROVIDENT BANCORP STOCKHOLDER -
No individual, or individual exercising subscription rights through a
qualifying deposit held jointly, may purchase more than 40,000 shares of common
stock. If any of the following persons purchase shares of common stock, their
purchases when combined with your purchases cannot exceed 80,000 shares:
o your spouse or relatives of you or your spouse living in your house;
9
o companies, trusts or other entities in which you have a financial
interest or hold a position; or
o other persons who may be acting in concert with you.
IF YOU ARE CURRENTLY A PROVIDENT BANCORP STOCKHOLDER -
In addition to the above purchase limitations, there is an ownership
limitation. Shares of common stock that you purchase in the offering
individually and together with persons described above, plus any new shares you
and they receive in the exchange for existing Provident Bancorp common stock,
may not exceed 5% of the total shares of common stock to be issued and
outstanding after the completion of the conversion. Subject to Office of Thrift
Supervision approval, we may increase or decrease the purchase and ownership
limitations at any time.
HOW YOU MAY PURCHASE SHARES OF COMMON STOCK
In the subscription offering and community offering, you may pay for your
shares only by:
(1) personal check, bank check or money order; or
(2) authorizing us to withdraw funds from the types of Provident Bank
deposit accounts designated on the stock order form.
Provident Bank is not permitted to lend funds to anyone for the purpose of
purchasing shares of common stock in the offering. Additionally, you may not use
a Provident Bank line of credit check or third party check to pay for shares of
common stock.
You can subscribe for shares of common stock in the offering by delivering
a signed and completed original stock order form, together with full payment
payable to Provident Bancorp, Inc. or authorization to withdraw from one or more
of your Provident Bank deposit accounts, provided that we receive the stock
order form before December 18, 2003, which is the end of the offering period.
Checks will be deposited upon receipt. We will pay interest at Provident Bank's
passbook savings rate from the date funds are received until completion or
termination of the conversion. Withdrawals from certificates of deposit to
purchase shares of common stock in the offering may be made without incurring an
early withdrawal penalty. All funds authorized for withdrawal from deposit
accounts with Provident Bank must be in the accounts at the time the stock order
is received. However, funds will not be withdrawn from the accounts until the
completion of the offering and will earn interest at the applicable deposit
account rate until that time. A hold will be placed on those funds when your
stock order is received, making the designated funds unavailable to you.
Additionally, you may not designate a direct withdrawal from Provident Bank
accounts with check-writing privileges. Please provide a check instead, because
we cannot place holds on checking accounts. If you request that we do so, we
reserve the right to interpret that as your authorization to treat those funds
as if we had received a check for the designated amount, and we will immediately
withdraw the amount from your checking account(s). After we receive an order,
the order cannot be withdrawn or changed.
By signing the stock order form, you are acknowledging receipt of a
prospectus and that the shares of common stock are not deposits or savings
accounts that are federally insured or otherwise guaranteed by Provident Bank or
the federal government.
10
You may be able to subscribe for shares of common stock using funds in your
individual retirement account, or IRA, at Provident Bank or elsewhere. However,
common stock must be held in a self-directed retirement account, such as those
offered by a brokerage firm or Provident Bank's Investment Management and Trust
Department. By regulation, Provident Bank's individual retirement accounts that
were not established through our Investment Management and Trust Department are
not self-directed, so they cannot be invested in our common stock. If you wish
to use some or all of the funds in your Provident Bank individual retirement
account, the applicable funds must be transferred to a self-directed account
maintained by an independent trustee, such as a brokerage firm or our Investment
Management and Trust Department. If you do not have such an account, you will
need to establish one before placing your stock order. An annual administrative
fee may be payable to the independent trustee. Because individual circumstances
differ and processing of retirement fund orders takes additional time, we
recommend that you contact our Stock Information Center promptly, preferably at
least two weeks before the end of the offering period, for assistance with
purchases using your individual retirement account or other retirement account
that you may have. Whether you may use such funds for the purchase of shares in
the stock offering may depend on timing constraints and, possibly, limitations
imposed by the institution where the funds are held.
OUR ISSUANCE OF SHARES OF COMMON STOCK AND OUR CONTRIBUTION OF CASH TO THE
CHARITABLE FOUNDATION
To further our commitment to our local community, we intend to establish a
charitable foundation as part of the conversion. We will issue shares of common
stock and cash to the charitable foundation. We will issue 400,000 shares of our
common stock, having an initial market value of $4.0 million. The value of the
shares of common stock to be issued to the charitable foundation (at $10.00 per
share), together with $1.0 million in cash, will equal $5.0 million. As a result
of the issuance of shares and the contribution of cash to the charitable
foundation, we will record a pre-tax expense of approximately $3.0 million
during the quarter in which the conversion is completed. The charitable
foundation will be dedicated exclusively to supporting charitable causes and
community development activities.
The issuance of these additional shares of common stock to the charitable
foundation will:
o dilute the voting interests of existing stockholders and purchasers of
shares of our common stock in the offering, and
o result in an expense, and a reduction in earnings, equal to the full
amount of the contribution to the charitable foundation, offset in
part by a corresponding tax benefit, during the quarter in which the
contribution is made.
The establishment and funding of the Provident Bank Charitable Foundation
must be approved by members of Provident Bancorp, MHC and stockholders of
Provident Bancorp, Inc. Consummation of the conversion and the offering of
common stock, however, is not conditioned upon member or stockholder approval of
the charitable foundation.
See "Risk Factors--The Issuance of Shares and Cash to the Charitable
Foundation Will Dilute Your Ownership Interests and Adversely Affect Net Income
in 2004," "Comparison of Valuation and Pro Forma Information With and Without
the Foundation" and "Provident Bank Charitable Foundation."
11
DELIVERY OF STOCK CERTIFICATES
Certificates representing shares of common stock sold in the offering will
be mailed to the persons entitled thereto at the certificate registration
address noted on the order form, as soon as practicable following consummation
of the offering and receipt of all necessary regulatory approvals. IT IS
POSSIBLE THAT, UNTIL CERTIFICATES FOR THE COMMON STOCK ARE DELIVERED TO
PURCHASERS, PURCHASERS MIGHT NOT BE ABLE TO SELL THE SHARES OF COMMON STOCK
WHICH THEY ORDERED, EVEN THOUGH THE COMMON STOCK WILL HAVE BEGUN TRADING.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
We estimate net proceeds from the offering will be between $123.1 million
and $167.1 million, or $192.4 million if the offering range is increased by 15%.
Provident Bancorp intends to retain between $42.2 million and $82.0 million of
the net proceeds, or $96.2 million if the offering range is increased by 15%.
Approximately $80.9 million to $85.1 million of the net proceeds (or $96.2
million if the offering range is increased by 15%) will be invested in Provident
Bank.
The net proceeds will be used for the cash merger consideration portion of
the acquisition of E.N.B. Holding Company, Inc. (approximately $36.8 million),
for the loan to the employee stock ownership plan to fund its purchase of shares
of common stock (between $6.5 million and $8.7 million, or $10.0 million if the
offering is increased by 15%) and for general corporate purposes. Provident
Bancorp may use the funds to pay cash dividends and repurchase shares of common
stock. Funds invested in Provident Bank will be used to support increased
lending and new products and services. The net proceeds retained by Provident
Bancorp and Provident Bank also may be used for future business expansion
through acquisitions of banking or financial services companies or by
establishing new branches. Initially, a substantial portion of the net proceeds
will be invested in short-term investments, investment-grade debt obligations
and mortgage-backed securities.
YOU MAY NOT SELL OR TRANSFER YOUR SUBSCRIPTION RIGHTS
Office of Thrift Supervision regulations prohibit you from transferring
your subscription rights. If you order shares of common stock in the
subscription offering, you will be required to state that you are purchasing the
common stock for yourself and that you have no agreement or understanding to
sell or transfer your subscription rights. We intend to take legal action,
including reporting persons to federal or state regulatory agencies, against
anyone who we believe has sold or given away his or her subscription rights. We
will not accept your order if we have reason to believe that you have sold or
transferred your subscription rights. You may not add the names of others for
joint stock registration unless they were eligible to purchase shares of common
stock in the subscription offering at your date of eligibility. In addition, the
stock order form requires that you list all deposit accounts, giving all names
on each account and the account number at the applicable eligibility date.
Failure to provide this information, or providing incomplete or incorrect
information, may result in a loss of part or all of your share allocation, if
there is an oversubscription.
DEADLINE FOR ORDERS OF COMMON STOCK
If you wish to purchase shares of common stock, a properly completed
original stock order form, together with full payment for the shares of common
stock, must be received (not postmarked) by the Stock Information Center no
later than 10:00 a.m., New York Time, on December 18, 2003, unless we extend
this deadline. You may submit your order form by mail using the return envelope
provided, by
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overnight courier to the indicated address on the order form, or by delivery to
our Stock Information Center. Stock order forms may not be delivered to our
branch offices. Once submitted, your order is irrevocable unless the offering is
terminated or extended beyond February 2, 2004 or the number of shares of common
stock to be sold is increased to more than 19,573,000 shares or decreased to
less than 12,580,000 shares. If the subscription offering and/or community
offering extend beyond February 2, 2004, we will be required to resolicit
subscriptions before proceeding with the offering.
Although we will make reasonable attempts to provide a prospectus and
offering materials to holders of subscription rights, the subscription offering
and all subscription rights will expire at 10:00 a.m., New York Time, on
December 18, 2003, whether or not we have been able to locate each person
entitled to subscription rights.
STEPS WE MAY TAKE IF WE DO NOT RECEIVE ORDERS FOR THE MINIMUM NUMBER OF SHARES
If we do not receive orders for at least 12,580,000 shares of common stock,
we may take several steps in order to issue the minimum number of shares of
common stock in the offering range. Specifically, we may:
(i) issue up to 3,677,320 unsubscribed shares to shareholders of E.N.B.
Holding Company, Inc. as merger consideration;
(ii) increase the purchase and ownership limitations; and
(iii) seek regulatory approval to extend the offering beyond the February
2, 2004 expiration date, provided that any such extension will
require us to resolicit subscriptions received in the offering.
PURCHASES BY OFFICERS AND DIRECTORS
We expect our directors and executive officers, together with their
associates, to subscribe for 311,000 shares of common stock in the offering. The
purchase price paid by them will be the same $10.00 per share price paid by all
other persons who purchase shares of common stock in the offering. Following the
conversion, our directors and executive officers, together with their
associates, are expected to own 2,659,946 shares of common stock, or 8.5% of our
total outstanding shares of common stock at the midpoint of the offering range.
BENEFITS TO MANAGEMENT AND POTENTIAL DILUTION TO STOCKHOLDERS RESULTING FROM THE
CONVERSION
Our tax-qualified employee stock ownership plan expects to purchase up to
5% of the shares of common stock we sell in the offering (including shares we
issue to the Provident Bank Charitable Foundation), or 871,000 shares of common
stock, assuming we sell the maximum of the shares proposed to be sold. If we
receive orders for more shares of common stock than the maximum of the offering
range, the employee stock ownership plan will have first priority to purchase
shares over this maximum, up to the total of 5% of shares of common stock sold
in the offering. We reserve the right to purchase shares of common stock in the
open market following the offering in order to fund the employee stock ownership
plan. This plan is a tax-qualified retirement plan for the benefit of all our
employees. Assuming the employee stock ownership plan purchases 871,000 shares
in the offering, we will recognize additional compensation expense of $8.7
million over a 20-year period, assuming the shares of common stock have a fair
market value of $10.00 per share for the full 20-year period. If, in the future,
13
the shares of common stock have a fair market value greater or less than $10.00,
the compensation expense will increase or decrease accordingly.
We also intend to consider the implementation of a stock based recognition
and retention plan and a stock option plan no earlier than six months after
completion of the conversion. Stockholder approval of these plans will be
required. If adopted within 12 months following the completion of the
conversion, the stock recognition and retention plan will reserve a number of
shares equal to 4% of the shares sold in the offering (including shares we issue
to the Provident Bank Charitable Foundation), or up to 696,800 shares of common
stock at the maximum of the offering range, for awards to key employees and
directors, at no cost to the recipients. If the shares of common stock awarded
under the stock recognition and retention plan come from authorized but unissued
shares of common stock, stockholders would experience dilution of up to
approximately 2.0% in their ownership interest in Provident Bancorp. The stock
option plan will reserve a number of shares equal to 10% of the shares of common
stock sold in the offering (including shares we issue to the Provident Bank
Charitable Foundation), or up to 1,742,000 shares of common stock at the maximum
of the offering range, for key employees and directors upon their exercise. If
the shares of common stock issued upon the exercise of options come from
authorized but unissued shares of common stock, stockholders would experience
dilution of approximately 4.8% in their ownership interest in Provident Bancorp.
Awards made under these plans would be subject to vesting over a period of
years.
We also will convert options previously awarded under our current stock
option plan into options to purchase shares of Provident Bancorp common stock
upon completion of the conversion, with the number and exercise price to be
adjusted, based on the exchange ratio. The term and vesting period of the
previously awarded options will remain unchanged.
The following table summarizes the number of shares of common stock and
aggregate dollar value of grants that are expected under the new stock
recognition and retention plan and the new stock option plan as a result of the
conversion. A portion of the stock grants shown in the table below may be made
to non-management employees.
NUMBER OF SHARES TO BE GRANTED OR PURCHASED VALUE OF GRANTS (1)
------------------------------------------- DILUTION --------------------------
AS A RESULTING
PERCENTAGE FROM
AT OF COMMON ISSUANCE
MINIMUM AT MAXIMUM STOCK TO OF SHARES AT AT
OF OF BE FOR STOCK MINIMUM MAXIMUM
OFFERING OFFERING ISSUED IN THE BENEFIT OF OFFERING OF OFFERING
RANGE RANGE OFFERING PLANS (2) RANGE RANGE
------------ ------------ ------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Employee stock ownership plan.... 649,000 871,000 5.0% -- $ 6,490 $ 8,710
Recognition and retention plan... 519,200 696,800 4.0 2.0 5,192 6,968
Stock option plan................ 1,298,000 1,742,000 10.0 4.8 -- --
Total......................... 2,466,200 3,309,800 19.0% 6.6% $ 11,682 $ 15,678
- --------------------------------
(1) The actual value of restricted stock grants will be determined based on
their fair value as of the date grants are made. For purposes of this
table, fair value is assumed to be the same as the offering price of $10.00
per share. No value is given for options because their exercise price will
be equal to the fair market value of the common stock on the day the
options are granted.
(2) Calculated at the maximum of the offering range.
14
MARKET FOR COMMON STOCK
Existing publicly held shares of our common stock trade on the Nasdaq
National Market under the symbol "PBCP." Upon completion of the conversion, the
new shares of common stock of Provident Bancorp will replace existing shares and
will be traded on the Nasdaq National Market. For a period of 20 trading days
following completion of the conversion, our trading symbol will be "PBCPD."
Thereafter it will revert to "PBCP." Ryan Beck & Co. currently intends to remain
a market maker in the common stock and will assist us in obtaining additional
market makers.
OUR DIVIDEND POLICY
Provident Bancorp currently pays a quarterly cash dividend of $0.15 per
share, which equals $0.60 per share on an annualized basis. After the
conversion, we intend to continue to pay cash dividends on a quarterly basis. We
expect the annualized dividends to equal $0.21, $0.18, $0.16 and $0.14 per share
at the minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively, which represents an annual dividend yield of 2.1%, 1.8%, 1.6% and
1.4%, at the minimum, midpoint, maximum and adjusted maximum of the offering
range, respectively, based upon a price of $10.00 per share. The amount of
dividends that we intend to pay after the conversion will preserve the dividend
amount that Provident Bancorp stockholders currently receive, as adjusted to
reflect the exchange ratio. The dividend rate and the continued payment of
dividends will depend on a number of factors, including our capital
requirements, our financial condition and results of operations, tax
considerations, statutory and regulatory limitations and general economic
conditions. No assurance can be given that we will continue to pay dividends or
that they will not be reduced in the future.
See "Selected Consolidated Financial and Other Data of Provident Bancorp
and Subsidiaries" and "Market for the Common Stock" for information regarding
our historical dividend payments.
TAX CONSEQUENCES
As a general matter, the conversion will not be a taxable transaction for
purposes of federal or state income taxes to Provident Bancorp, MHC, Provident
Bancorp, Provident Bank, persons eligible to subscribe in the subscription
offering, or existing stockholders of Provident Bancorp. Existing stockholders
of Provident Bancorp who receive cash in lieu of fractional share interests in
new shares of Provident Bancorp will recognize a gain or loss equal to the
difference between the cash received and the tax basis of the fractional share.
Conditions to Completion of the Conversion
We cannot complete the conversion and related offering unless:
o The plan of conversion and reorganization is approved by at least a
majority of votes eligible to be cast by members of Provident Bancorp,
MHC (depositors and certain borrowers of Provident Bank);
o The plan of conversion and reorganization is approved by at least
two-thirds of the votes eligible to be cast by stockholders of
Provident Bancorp common stock;
o The plan of conversion and reorganization is approved by at least a
majority of the outstanding shares of common stock of Provident
Bancorp, excluding those shares held by Provident Bancorp, MHC;
15
o We issue at least the minimum number of shares of common stock
offered, which may include up to 3,677,320 shares of common stock of
Provident Bancorp issued to the shareholders of E.N.B. Holding
Company, Inc. as merger consideration; and
o We receive the final approval of the Office of Thrift Supervision to
complete the conversion and offering.
Provident Bancorp, MHC intends to vote its ownership interest in favor of
the plan of conversion and reorganization. At June 30, 2003, Provident Bancorp,
MHC owned 55.5% of the outstanding shares of common stock of Provident Bancorp.
The directors and executive officers of Provident Bancorp and their affiliates
owned approximately _________ shares of Provident Bancorp, or _____% of the
outstanding shares of common stock, excluding shares that can be acquired upon
the exercise of stock options. They intend to vote those shares in favor of the
plan of conversion and reorganization.
HOW YOU CAN OBTAIN ADDITIONAL INFORMATION
Our branch office personnel may not, by law, assist with investment-related
questions about the offering. If you have any questions regarding the conversion
or stock offering, please call our Stock Information Center, toll free, at
1-(866) 680-PROV, Monday through Friday between 9:00 a.m. and 4:00 p.m., New
York Time. The Stock Information Center will be closed weekends and bank
holidays.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO
THE EXPIRATION DATE OF DECEMBER 18, 2003 IN ACCORDANCE WITH FEDERAL LAW, NO
PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO DECEMBER 18, 2003 OR
HAND-DELIVERED ANY LATER THAN TWO DAYS PRIOR TO DECEMBER 18, 2003.
16
RISK FACTORS
You should consider carefully the following risk factors in evaluating an
investment in the shares of common stock.
OUR COMMERCIAL REAL ESTATE, COMMERCIAL BUSINESS AND CONSTRUCTION LOANS EXPOSE US
TO INCREASED CREDIT RISKS.
At June 30, 2003, our portfolio of commercial real estate loans totaled
$179.9 million, or 25.9% of total loans, our portfolio of commercial business
loans totaled $45.3 million, or 6.5% of total loans, and our portfolio of
construction loans totaled $7.3 million, or 1.1% of total loans. We plan to
continue to emphasize originating these types of loans. Commercial real estate,
commercial business and construction loans generally have greater credit risk
than one- to four-family residential mortgage loans because repayment of the
loans often depends on the successful business operations of the borrowers.
These loans typically have larger loan balances to single borrowers or groups of
related borrowers compared to one- to four-family residential mortgage loans.
Many of our borrowers also have more than one commercial real estate, commercial
business or construction loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to
significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.
CHANGES IN THE VALUE OF GOODWILL COULD REDUCE OUR EARNINGS.
On April 23, 2002, we completed our acquisition of The National Bank of
Florida. We recorded the assets acquired and liabilities assumed from The
National Bank of Florida at their fair values at the closing date. The excess
amount we paid for The National Bank of Florida over the fair value of the net
assets acquired was recorded as goodwill, which is an intangible asset. At June
30, 2003, the balance of goodwill on our balance sheet was $13.5 million. In
addition, we expect to record between $48.5 million and $51.4 million in
goodwill as a result of our acquisition of E.N.B. Holding Company.
We are required by accounting principles generally accepted in the United
States to test goodwill for impairment at least annually. Testing for impairment
of goodwill involves the identification of reporting units and the estimation of
fair values. The estimation of fair values involves a high degree of judgment
and subjectivity in the assumptions used. If our goodwill (including the
goodwill we expect to record as a result of our acquisition of E.N.B. Holding
Company) were fully impaired and we were required to charge-off all of our
goodwill, the pro forma reduction to our stockholders' equity would be
approximately $2.02 per share, assuming we sell 14,800,000 shares in the
offering.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH, WHICH MAY DIVERT RESOURCES AND LIMIT
OUR ABILITY TO SUCCESSFULLY EXPAND OUR OPERATIONS.
We have grown substantially from $757.9 million of total assets and $595.1
million of total deposits at December 31, 1998 to $1.1 billion of total assets
and $857.5 million of total deposits at June 30, 2003. We expect that our
assets, deposits, number of customers and scale of our operations will continue
to grow significantly.
Since 1998, we have expanded our branch network by both acquiring financial
institutions and establishing de novo branches. At September 30, 1998, we had 11
branch offices, compared with 18 at June 30, 2003, and after our acquisition of
E.N.B. Holding Company, we will operate 27 branches. In addition, during the
next four years, we expect to open one new branch office per year. We cannot
assure
17
you that our ongoing branch expansion strategy will be accretive to our
earnings, or that it will be accretive to earnings within a reasonable period of
time. Numerous factors contribute to the performance of a new branch, such as a
suitable location, qualified personnel and an effective marketing strategy.
Additionally, it takes time for a new branch to generate significant deposits
and make sufficient loans to produce enough income to offset expenses, some of
which, like salaries and occupancy expense, are relatively fixed costs.
We have incurred substantial expenses to build our management team and
personnel, develop our delivery systems and establish our infrastructure to
support future growth. Our future success will depend on the ability of our
officers and key employees to continue to implement and improve our operational,
financial and management controls, reporting systems and procedures, and to
manage a growing number of client relationships. We may not be able to
successfully implement improvements to our management information and control
systems in an efficient or timely manner, and we may discover deficiencies in
our existing systems and controls. Thus, we cannot assure you that our growth
strategy will not place a strain on our administrative and operational
infrastructure or require us to incur additional expenditures beyond current
projections to support our future growth. Our future profitability will depend
in part on our continued ability to grow. We cannot assure you that we will be
able to sustain our historical growth rate or even be able to grow at all.
PROVIDENT BANCORP'S FINANCIAL SUCCESS DEPENDS ON THE SUCCESS OF THE MERGER.
Provident Bancorp's future growth and profitability depends, in part, on
its ability to successfully complete its acquisition with E.N.B. Holding Company
and manage the combined operations. For the merger to be successful, Provident
Bancorp will have to succeed in combining the personnel and operations of
Provident Bancorp and E.N.B. Holding Company and in achieving expense savings by
eliminating selected redundant operations. Provident Bancorp cannot assure you
that its plan to integrate and operate the combined operations will be timely or
efficient, or that it will successfully retain existing customer relationships
of Ellenville National Bank.
IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO COVER ACTUAL LOAN LOSSES,
OUR EARNINGS COULD DECREASE.
Our loan customers may not repay their loans according to the terms of the
loans, and the collateral securing the repayment of these loans may be
insufficient to cover any remaining loan balance. We may experience significant
loan losses, which could have a material adverse effect on our operating
results. We make various assumptions and judgments about the collectibility of
our loan portfolio, including the creditworthiness of our borrowers and the
value of the real estate and other assets, if any, serving as collateral for the
repayment of many of our loans. In determining the amount of the allowance for
loan losses, we rely on our loan quality reviews, our experience and our
evaluation of economic conditions, among other factors. If our assumptions are
incorrect, our allowance for loan losses may not be sufficient to cover losses
inherent in our loan portfolio, which may require additions to our allowance.
Any material additions to our allowance for loan losses would materially
decrease our net income.
Our business strategy calls for continued growth of commercial real estate
loans, commercial business loans and construction loans. These loans typically
expose us to greater risk than one- to four-family residential real estate
loans. As we further increase the amount of these loans in our loan portfolio,
we may increase our provisions for loan losses, which could adversely affect our
earnings.
In addition, bank regulators periodically review our allowance for loan
losses and may require us to increase our provisions for loan losses or
recognize further loan charge-offs. Any increase in our
18
allowance for loan losses or loan charge-offs as required by regulatory
authorities could have a material adverse effect on our results of operations
and financial condition.
THE ISSUANCE OF SHARES AND CASH TO THE CHARITABLE FOUNDATION WILL DILUTE YOUR
OWNERSHIP INTERESTS AND ADVERSELY AFFECT NET INCOME IN 2004
We intend to establish a charitable foundation in connection with the
conversion. We will make a contribution to the charitable foundation in the form
of shares of Provident Bancorp common stock and cash. We will issue 400,000
shares of common stock to the charitable foundation, or 2.7% of the shares of
common stock to be sold at the midpoint of the offering range. The balance of
the contribution to the charitable foundation will consist of a cash payment of
$1.0 million. The aggregate contribution will also have an adverse effect on our
net income for the quarter and year in which we make the issuance and
contribution to the charitable foundation. The after-tax expense of the
contribution will reduce net income in our 2004 fiscal year by approximately
$3.0 million. Persons purchasing shares in the offering will have their
ownership and voting interests in Provident Bancorp, Inc. diluted by 1.2% due to
the issuance of additional shares of common stock to the charitable foundation.
OUR CONTRIBUTION TO THE PROVIDENT BANK CHARITABLE FOUNDATION MAY NOT BE TAX
DEDUCTIBLE, WHICH COULD HURT OUR PROFITS.
We believe that the contribution to the Provident Bank Charitable
Foundation, valued at $5.0 million, pre-tax, will be deductible for federal
income tax purposes. However, we do not have any assurance that the Internal
Revenue Service will grant tax-exempt status to the charitable foundation. If
the contribution is not deductible, we would not receive any tax benefit from
the contribution. In addition, even if the contribution is tax deductible, we
may not have sufficient profits to be able to use the deduction fully.
OUR CONTINUING CONCENTRATION OF LOANS IN OUR PRIMARY MARKET AREA MAY INCREASE
OUR RISK.
Our success depends primarily on the general economic conditions in the
counties in which we conduct business, and in the New York metropolitan area in
general. Unlike larger banks that are more geographically diversified, we
provide banking and financial services to customers primarily in Rockland and
Orange Counties, New York. Following our proposed acquisition of E.N.B. Holding
Company, we will also provide banking services to customers in Sullivan and
Ulster Counties, New York. The local economic conditions in our market area have
a significant impact on our loans, the ability of the borrowers to repay these
loans and the value of the collateral securing these loans. A significant
decline in general economic conditions caused by inflation, recession,
unemployment or other factors beyond our control would affect these local
economic conditions and could adversely affect our financial condition and
results of operations. Additionally, because we have a significant amount of
commercial real estate loans, decreases in tenant occupancy may also have a
negative effect on the ability of many of our borrowers to make timely
repayments of their loans, which would have an adverse impact on our earnings.
CHANGES IN MARKET INTEREST RATES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Our financial condition and results of operations are significantly
affected by changes in market interest rates. Our results of operations depend
substantially on our net interest income, which is the difference between the
interest income that we earn on our interest-earning assets and the interest
expense that we pay on our interest-bearing liabilities. Because our
interest-bearing liabilities generally reprice or
19
mature more quickly than our interest-earning assets, an increase in interest
rates generally would tend to result in a decrease in our net interest income.
We have taken steps to mitigate this risk such as holding fewer longer-term
residential mortgages, as well as investing excess funds in short-term
investments.
We also are subject to reinvestment risk associated with changes in
interest rates. Changes in interest rates may affect the average life of loans
and mortgage-related securities. Decreases in interest rates often result in
increased prepayments of loans and mortgage-related securities, as borrowers
refinance their loans to reduce borrowing costs. Under these circumstances, we
are subject to reinvestment risk to the extent that we are unable to reinvest
the cash received from such prepayments in loans or other investments that have
interest at rates that are comparable to the interest rates on existing loans
and securities. Additionally, increases in interest rates may decrease loan
demand and/or may make it more difficult for borrowers to repay adjustable rate
loans.
Changes in interest rates also affect the value of our interest-earning
assets, and in particular our securities portfolio. Generally, the value of
securities fluctuates inversely with changes in interest rates. At June 30,
2003, our investment and mortgage-backed securities available for sale totaled
$251.9 million. Unrealized gains on securities available for sale, net of tax,
amounted to $4.0 million and are reported as a separate component of
stockholders' equity. Decreases in the fair value of securities available for
sale, therefore, could have an adverse effect on stockholders' equity.
OUR ABILITY TO GROW MAY BE LIMITED IF WE CANNOT MAKE ACQUISITIONS.
In an effort to fully deploy the additional capital we will raise in the
offering, and to increase our loan and deposit growth, we will continue to seek
to expand our banking franchise by acquiring other financial institutions or
branches primarily in our market area. Our ability to grow through selective
acquisitions of other financial institutions or branches will depend on
successfully identifying, acquiring and integrating them. We compete with other
financial institutions with respect to proposed acquisitions. We cannot assure
you that we will be able to identify attractive acquisition candidates or make
acquisitions on favorable terms. In addition, we cannot assure you that we can
successfully integrate any acquired financial institutions or branches into our
banking organization in a timely or efficient manner, that we will be successful
in retaining existing customer relationships or that we can achieve anticipated
operating efficiencies.
STRONG COMPETITION WITHIN OUR MARKET AREA MAY LIMIT OUR GROWTH AND
PROFITABILITY.
Competition in the banking and financial services industry is intense. In
our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, internet banks, credit unions, finance companies,
mutual funds, insurance companies and brokerage and investment banking firms
operating locally and elsewhere. Many of these competitors (whether regional or
national institutions) have substantially greater resources and lending limits
than we have, and may offer certain services that we do not or cannot provide.
Our profitability depends upon our continued ability to successfully compete in
our market area.
WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT AND WE MAY BE ADVERSELY AFFECTED BY
CHANGES IN LAWS AND REGULATIONS.
Provident Bank is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision, its chartering authority, and
by the Federal Deposit Insurance Corporation, which insures Provident Bank's
deposits. Provident Municipal Bank is subject to extensive regulation,
supervision and examination by the New York State Banking Department, its
chartering authority, and by
20
the Federal Deposit Insurance Corporation, which insures Provident Municipal
Bank's deposits. As a savings and loan holding company, Provident Bancorp is
subject to regulation and supervision by the Office of Thrift Supervision. Such
regulation and supervision govern the activities in which financial institutions
and their holding companies may engage and are intended primarily for the
protection of the insurance fund and depositors. These regulatory authorities
have extensive discretion in connection with their supervisory and enforcement
activities, including the imposition of restrictions on the operations of a
financial institution, the classification of assets by a financial institution
and the adequacy of a financial institution's allowance for loan losses. Any
change in such regulation and oversight, whether in the form of regulatory
policy, regulations, or legislation, could have a material impact on Provident
Bank, Provident Municipal Bank, Provident Bancorp and our operations.
Our operations are also subject to extensive regulation by other federal,
state and local governmental authorities, and are subject to various laws and
judicial and administrative decisions that impose requirements and restrictions
on our operations. These laws, rules and regulations are frequently changed by
legislative and regulatory authorities. There can be no assurance that changes
to existing laws, rules and regulations, or any other new laws, rules or
regulations, will not be adopted in the future, which could make compliance more
difficult or expensive or otherwise adversely affect our business, financial
condition or prospects.
OUR RETURN ON STOCKHOLDERS' EQUITY WILL BE REDUCED AS A RESULT OF THE OFFERING.
Net income divided by average stockholders' equity, known as "return on
equity," is a ratio many investors use to compare the performance of a financial
institution to its peers. We expect our return on equity to decrease as compared
to our performance in recent years until we are able to leverage the additional
capital raised in the offering. Until we can increase our net interest income
and non-interest income, we expect our return on equity to be below the industry
average, which may negatively affect the value of our common stock.
THE IMPLEMENTATION OF STOCK-BASED BENEFIT PLANS MAY DILUTE YOUR OWNERSHIP
INTEREST.
We will consider adopting a stock option plan and a recognition and
retention plan following the offering, subject to receipt of stockholder
approval. These stock-based benefit plans will be funded either through open
market purchases, if permitted, or from the issuance of authorized but unissued
shares of common stock of Provident Bancorp. While our intention is to fund
these plans through open market purchases, stockholders will experience a
reduction or dilution in ownership interest of approximately 6.6% (approximately
4.8% dilution for the stock option plan and approximately 2.0% dilution for the
recognition and retention plan) in the event newly issued shares are used to
fund stock options and stock awards made under these plans.
In addition, outstanding options to purchase shares of common stock of
Provident Bancorp, a federal corporation, will convert into and become options
to purchase new shares of common stock of Provident Bancorp, a Delaware
corporation. The number of shares of common stock to be received upon exercise
of these options will be determined pursuant to the exchange ratio. The
aggregate exercise price, duration and vesting schedule of these options will
not be affected by the conversion. If all existing options were exercised for
authorized, but unissued shares of common stock following the conversion,
stockholders would experience dilution of approximately 2.9% at the minimum of
the offering range and and 3.0% at the maximum of the offering range. Because
Office of Thrift Supervision regulations prohibit us from repurchasing our
common stock during the first year following the conversion unless compelling
business reasons exist for such repurchases, we may use authorized but unissued
shares to fund option exercises that occur during the first year following
conversion.
21
OUR RECOGNITION AND RETENTION PLAN WILL INCREASE OUR COSTS, WHICH WILL REDUCE
OUR PROFITABILITY AND STOCKHOLDERS' EQUITY.
We will consider implementing a recognition and retention plan after the
offering, subject to receipt of stockholder approval. Under this plan, our
officers and directors may be awarded, at no cost to them, shares of common
stock in an aggregate amount equal to 4% of the shares of common stock sold in
the offering (including shares we issue to the Provident Bank Charitable
Foundation). The shares of common stock awarded under the recognition plan will
be expensed by us over their vesting period at the fair market value of the
shares on the date they are awarded. The recognition and retention plan cannot
be implemented until at least six months after the completion of the offering.
If the plan is adopted within 12 months after the completion of the conversion,
it is subject to Office of Thrift Supervision regulations. If the shares of
common stock to be awarded under the plan are repurchased in the open market
(rather than issued directly by Provident Bancorp) and cost the same as the
purchase price in the offering, the reduction to stockholders' equity from the
plan would be between $5.2 million at the minimum of the offering range and $8.0
million at the adjusted maximum of the offering range.
WE MAY BE REQUIRED TO CHANGE THE WAY WE RECOGNIZE EXPENSE FOR OUR STOCK OPTIONS.
We account for our stock option plan in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, we recognize compensation
expense only if the exercise price of an option is less than fair value of the
underlying stock on the date of the grant. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," encourages the use
of a fair-value-based method of accounting for employee stock compensation
plans, but permits our continued use of the intrinsic-value-based method of
accounting prescribed by APB Opinion No. 25. Under Statement of Financial
Accounting Standards No. 123, the grant-date fair value of options is recognized
as compensation expense over the vesting period. Our net income will decrease if
the Financial Accounting Standards Board requires us to recognize expense using
the fair-value-based method of accounting for stock options. See Note 3 of the
Notes to Consolidated Financial Statements.
OUR FAILURE TO EFFECTIVELY UTILIZE THE NET PROCEEDS OF THE OFFERING COULD REDUCE
OUR PROFITABILITY.
Provident Bancorp intends to contribute between $80.9 million and $96.2
million of the net proceeds of the offering to Provident Bank. Provident Bancorp
may use the remaining net proceeds to finance the acquisition of other financial
institutions or financial services companies, establish or acquire branches, pay
dividends to stockholders, repurchase shares of common stock, purchase
investment securities, or for other general corporate purposes. Provident
Bancorp expects to use a portion of the net proceeds to fund the purchase of
shares of common stock in the offering by the employee stock ownership plan.
Provident Bank may use the proceeds it receives to establish or acquire new
branches, acquire financial institutions or financial services companies, fund
new loans, purchase investment securities, or for general corporate purposes. We
have not allocated specific amounts of proceeds for any of these purposes, and
we will have significant flexibility in determining how much of the net proceeds
we apply to different uses and the timing of such applications. Our failure to
utilize these funds effectively could reduce our profitability.
22
A BREACH OF INFORMATION SECURITY COULD NEGATIVELY AFFECT OUR EARNINGS.
Increasingly, we depend upon data processing, communication and information
exchange on a variety of computing platforms and networks, and over the
internet. We cannot be certain all our systems are entirely free from
vulnerability to attack, despite safeguards we have instituted. In addition, we
rely on the services of a variety of vendors to meet our data processing and
communication needs. If information security is breached, information can be
lost or misappropriated, resulting in financial loss or costs to us or damages
to others. These costs or losses could materially exceed the amount of insurance
coverage, if any, which would adversely affect our earnings.
THE FUTURE PRICE OF THE COMMON STOCK MAY BE LESS THAN THE PURCHASE PRICE IN THE
OFFERING.
We cannot assure you that if you purchase shares of common stock in the
offering you will be able to sell them later at or above the $10.00 purchase
price in the offering. In several cases, shares of common stock issued by newly
converted savings institutions or mutual holding companies have traded below the
price at which such shares were sold in the offering conducted by those
companies. The aggregate purchase price of the shares of common stock sold in
the offering will be based on an independent appraisal. The appraisal is not
intended, and should not be construed, as a recommendation of any kind as to the
advisability of purchasing shares of common stock. The valuation is based on
estimates and projections of a number of matters, all of which are subject to
change from time to time. After our shares begin trading, the trading price of
our common stock will be determined by the marketplace, and may be influenced by
many factors, including prevailing interest rates, the overall performance of
the economy, investor perceptions of Provident Bancorp, and the outlook for the
financial institutions industry in general.
VARIOUS FACTORS MAY MAKE TAKEOVER ATTEMPTS MORE DIFFICULT TO ACHIEVE.
Our board of directors has no current intention to sell control of
Provident Bancorp. Provisions of our certificate of incorporation and bylaws,
federal regulations, Delaware law and various other factors may make it more
difficult for companies or persons to acquire control of Provident Bancorp
without the consent of our board of directors. You may want a takeover attempt
to succeed because, for example, a potential acquiror could offer a premium over
the then prevailing price of our common stock. The factors that may discourage
takeover attempts or make them more difficult include:
o OFFICE OF THRIFT SUPERVISION REGULATIONS. Office of Thrift Supervision
regulations prohibit, for three years following the completion of a
mutual-to-stock conversion, the acquisition of more than 10% of any
class of equity security of a converted savings institution without
the prior approval of the Office of Thrift Supervision.
o CERTIFICATE OF INCORPORATION AND STATUTORY PROVISIONS. Provisions of
the certificate of incorporation and bylaws of Provident Bancorp and
Delaware law may make it more difficult and expensive to pursue a
takeover attempt that management opposes. These provisions also would
make it more difficult to remove our current board of directors or
management, or to elect new directors. These provisions include
limitations on voting rights of beneficial owners of more than 10% of
our common stock, supermajority voting requirements for certain
business combinations and the election of directors to staggered terms
of three years. Our bylaws also contain provisions regarding the
timing and content of stockholder proposals and nominations and
qualification for service on the board of directors.
23
o REQUIRED CHANGE IN CONTROL PAYMENTS AND ISSUANCE OF STOCK OPTIONS. We
have entered into employment agreements with certain executive
officers, which will require payments to be made to them in the event
their employment is terminated following a change in control of
Provident Bancorp or Provident Bank. We have also issued stock options
to key employees and directors that will require payments to them in
connection with a change in control of Provident Bancorp. These
payments may have the effect of increasing the costs of acquiring
Provident Bancorp, thereby discouraging future attempts.
24
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF PROVIDENT BANCORP AND SUBSIDIARIES
The following tables set forth selected consolidated historical financial
and other data of Provident Bancorp for the periods and at the dates indicated.
In January 1999, Provident Bank reorganized from a mutual savings association
into the mutual holding company structure. Prior to that date, Provident Bancorp
had no significant assets, liabilities or operations and, accordingly, the
financial and other data prior to that date represents the consolidated
financial condition and results of operations of Provident Bank. The information
at September 30, 2002 and 2001 and for the years ended September 30, 2002, 2001
and 2000 is derived in part from and should be read together with the audited
consolidated financial statements and notes thereto of Provident Bancorp
beginning at page F-2 of this prospectus. The information at September 30, 2000,
1999 and 1998 and for the years ended September 30, 1999 and 1998 was derived in
part from audited consolidated financial statements that are not included in
this prospectus. The information at and for the nine months ended June 30, 2003
and 2002 is unaudited. However, in the opinion of management of Provident
Bancorp, all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the results of operations for the unaudited periods
have been made. The selected operating data presented below for the nine months
ended June 30, 2003, are not necessarily indicative of the results that may be
expected for future periods.
AT SEPTEMBER 30,
AT JUNE 30, ------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets ........................... $ 1,114,698 $ 1,027,701 $ 881,260 $ 844,303 $ 814,518 $ 691,068
Loans, net (1) ......................... 682,555 660,816 606,146 589,822 566,521 463,667
Securities available for sale .......... 251,913 206,146 163,928 162,157 148,387 97,983
Securities held to maturity ............ 82,787 86,791 71,355 48,586 56,782 98,402
Deposits ............................... 857,534 799,626 653,100 608,976 586,640 573,174
Borrowings ............................. 116,732 102,968 110,427 127,571 117,753 49,931
Equity ................................. 115,737 110,867 102,620 90,986 90,299 55,200
NINE MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
------------ ------------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest and dividend income ........... $ 43,715 $ 44,329
Interest expense ....................... 9,311 13,200
------------ ------------
Net interest income ................. 34,404 31,129
Provision for loan losses .............. 800 600
------------ ------------
Net interest income after provision
for loan losses .................... 33,604 30,529
Non-interest income .................... 7,188 3,852
Non-interest expense ................... 27,136 22,902
------------ ------------
Income before income tax expense ....... 13,656 11,479
Income tax expense ..................... 4,989 4,209
------------ ------------
Net income .......................... $ 8,667 $ 7,270
============ ============
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest and dividend income ........... $ 59,951 $ 60,978 $ 58,899 $ 52,267 $ 47,948
Interest expense ....................... 17,201 26,244 26,034 21,589 20,880
------------ ------------ ------------ ------------ ------------
Net interest income ................. 42,750 34,734 32,865 30,678 27,068
Provision for loan losses .............. 900 1,440 1,710 1,590 1,737
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses .................... 41,850 33,294 31,155 29,088 25,331
Non-interest income .................... 5,401 4,706 3,391 3,103 3,080
Non-interest expense ................... 32,161 26,431 25,808 26,303 21,823
------------ ------------ ------------ ------------ ------------
Income before income tax expense ....... 15,090 11,569 8,738 5,888 6,588
Income tax expense ..................... 5,563 4,087 2,866 1,958 2,346
------------ ------------ ------------ ------------ ------------
Net income .......................... $ 9,527 $ 7,482 $ 5,872 $ 3,930 $ 4,242
============ ============ ============ ============ ============
(FOOTNOTES ON FOLLOWING PAGES)
25
AT OR FOR THE NINE
MONTHS ENDED JUNE 30,
----------------------------
2003 2002
------------ ------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net income to
average total assets) (2) .................. 1.09% 1.04%
Return on equity (ratio of net income to
average equity) (2) ........................ 10.27 9.20
Average interest rate spread (2)(3) ......... 4.38 4.25
Net interest margin (2)(4) .................. 4.64 4.68
Efficiency ratio (5) ..,,.................... 65.24 65.47
Non-interest expense to average total
assets (2) ................................. 3.41 3.28
Average interest-earning assets to
average interest-bearing liabilities ....... 120.65 121.20
PER SHARE AND RELATED DATA:
Basic earnings per share (6) ................ $ 1.12 $ 0.94
Diluted earnings per share .................. 1.11 0.93
Dividends per share (7) ..................... 0.42 0.29
Dividend payout ratio (8) ................... 37.50% 30.85%
Book value per share (9) .................... $ 14.55 $ 13.48
ASSET QUALITY RATIOS:
Non-performing assets to total assets ....... 0.48% 0.47%
Non-performing loans to total loans ......... 0.77 0.72
Allowance for loan losses to
non-performing loans ....................... 205.87 215.79
Allowance for loan losses to total loans .... 1.59 1.55
CAPITAL RATIOS:
Equity to total assets at end of period ..... 10.38% 10.41%
Average equity to average assets ............ 10.59 11.34
Tier 1 leverage ratio (bank only) ........... 8.34 8.10
OTHER DATA:
Number of full service offices .............. 18 17
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net income to
average total assets) (2) .................. 0.99% 0.87% 0.70% 0.52% 0.64%
Return on equity (ratio of net income to
average equity) (2) ........................ 8.92 7.71 6.58 5.03 7.94
Average interest rate spread (2)(3) ......... 4.33 3.56 3.51 3.66 3.78
Net interest margin (2)(4) .................. 4.71 4.20 4.12 4.24 4.28
Efficiency ratio (5) ..,,.................... 66.79 67.02 71.18 77.86 72.39
Non-interest expense to average total
assets (2) ................................. 3.36 3.06 3.08 3.47 3.29
Average interest-earning assets to
average interest-bearing liabilities ....... 120.03 120.20 118.54 119.28 114.88
PER SHARE AND RELATED DATA:
Basic earnings per share (6) ................ $ 1.24 $ 0.98 $ 0.76 $ 0.40 $ --
Diluted earnings per share .................. 1.22 0.97 0.76 0.40 --
Dividends per share (7) ..................... 0.41 0.22 0.15 0.06 --
Dividend payout ratio (8) ................... 33.06% 22.45% 19.74% 15.00% --
Book value per share (9) .................... $ 13.86 $ 12.79 $ 11.26 $ 10.91 $ --
ASSET QUALITY RATIOS:
Non-performing assets to total assets ....... 0.49% 0.27% 0.50% 0.62% 0.94%
Non-performing loans to total loans ......... 0.74 0.37 0.67 0.81 1.30
Allowance for loan losses to
non-performing loans ....................... 209.59 400.66 189.85 133.78 80.33
Allowance for loan losses to total loans .... 1.55 1.48 1.28 1.08 1.05
CAPITAL RATIOS:
Equity to total assets at end of period ..... 10.79% 11.64% 10.78% 11.09% 7.99%
Average equity to average assets ............ 11.15 11.24 10.67 10.29 8.05
Tier 1 leverage ratio (bank only) ........... 8.45 10.20 9.59 9.56 7.37
OTHER DATA:
Number of full service offices .............. 17 15 13 12 11
- -------------------------
(1) Excludes loans held for sale.
(2) Ratios for the nine months ended June 30, 2003 and 2002 are annualized.
(3) The average interest rate spread represents theodifference between the
weighted-average yieldron interest-earning assets and the weighted-average
cost of interest-bearing liabilities for the period.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(5) The efficiency ratio represents non-interest expense divided by the sum of
net interest incom and non-interest income.
(6) Basic earnings per share for fiscal 1999 was computed for the nine-month
period following the stock offering based on net income of approximately
$3.2 million for that period and 8,041,018 average common shares.
(7) The following table sets forth aggregate cash davidends paid per period,
which is calculated by multiplying the dividend declared per share by the
number of shares outstanding as of the applicable record date.
FOR THE NINE MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED SEPTEMBER 30,
----------------------- -------------------------------------------------
2003 2002 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Dividends paid to public
stockholders ..................... $ 1,418 $ 1,000 $ 1,435 $ 807 $ 563 $ 235
Dividends paid to Provident
Bancorp, MHC ..................... 453 500 500 -- 486 132
---------- ---------- ---------- ---------- ---------- ----------
Total dividends paid .............. $ 1,871 $ 1,500 $ 1,935 $ 807 $ 1,049 $ 367
========== ========== ========== ========== ========== ==========
No dividends were paid during the year ended September 30, 1998, as no common
stock was outstanding during that period. Payments listed above exclude cash
dividends waived by Provident Bancorp, MHC during the same periods of $1.4
million, $781,000, $1.3 million, $972,000, $177,000 and $132,000, respectively.
Provident Bancorp, MHC began waiving dividends in May 1999, and, as of June 30,
2003, had waived dividends totaling $4.0 million.
26
(8) The dividend payout ratio represents dividends per share divided by basic
earnings per share. For fiscal 1999, the payout ratio is based on dividends
of $0.06 per share and nine-month earnings of $0.40 per share. Based on
six-month earnings of $0.29 per share for the third and fourth quarters of
fiscal 1999, the dividend payout ratio would have been 20.69%.
FOOTNOTES CONTINUED ON FOLLOWING PAGES
(9) Book value per share is based on total stockholders' equity and 7,953,075,
8,035,420, 7,997,512, 8,024,166, 8,077,800 and 8,280,000 outstanding common
shares at June 30, 2003 and June 30, 2002, and September 30, 2002, 2001,
2000 and 1999, respectively. For this purpose, common shares include
unallocated the employee stock ownership plan shares but exclude treasury
shares.
27
RECENT DEVELOPMENTS
The following tables set forth selected consolidated historical financial
and other data of Provident Bancorp for the periods and at the dates indicated.
The information at and for the year ended September 30, 2002 is derived in part
from and should be read together with the audited consolidated financial
statements and notes thereto of Provident Bancorp beginning at page F-2 of this
prospectus. The information at and for the other dates and periods is unaudited.
However, in the opinion of management of Provident Bancorp, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results of operations for the unaudited periods have been made.
AT SEPTEMBER 30,
-------------------------
2003 2002
---------- ----------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets............................... $1,174,305 $1,027,701
Loans, net (1)............................. 703,184 660,816
Securities available for sale.............. 300,715 206,146
Securities held to maturity................ 73,544 86,791
Deposits................................... 869,553 799,626
Borrowings................................. 164,757 102,968
Equity..................................... 117,857 110,867
THREE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest and dividend income................ $ 14,075 $ 15,622 $ 57,790 $ 59,951
Interest expense............................ 2,749 4,001 12,060 17,201
-------- -------- -------- --------
Net interest income...................... 11,326 11,621 45,730 42,750
Provision for loan losses................... 100 300 900 900
-------- -------- -------- --------
Net interest income after provision for
loan losses............................ 11,226 11,321 44,830 41,850
Non-interest income......................... 2,367 1,549 9,555 5,401
Non-interest expense........................ 9,654 9,259 36,790 32,161
-------- -------- -------- --------
Income before income tax expense............ 3,939 3,611 17,595 15,090
Income tax expense.......................... 1,355 1,354 6,344 5,563
-------- -------- -------- --------
Net income............................... $ 2,584 $ 2,257 $ 11,251 $ 9,527
======== ======== ======== ========
28
AT OR FOR THE THREE
MONTHS ENDED AT OR FOR THE YEARS
SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net income to
average total assets) (2)....................... 0.90% 0.87% 1.04% 0.99%
Return on equity (ratio of net income to
average equity) (2)............................. 8.91 8.14 9.92 8.92
Average interest rate spread (2) (3).............. 4.06 4.51 4.30 4.33
Net interest margin (2)(4)........................ 4.30 4.79 4.55 4.71
Efficiency ratio (5).............................. 70.50 70.30 66.55 66.79
Non-interest expense to average total assets (2).. 0.85 0.90 3.40 3.36
Average interest-earning assets to
average interest-bearing liabilities............ 123.29 116.93 121.33 120.03
PER SHARE AND RELATED DATA:
Basic earnings per share.......................... $ 0.34 $ 0.29 $ 1.46 $ 1.24
Diluted earnings per share........................ 0.33 0.29 1.44 1.22
Dividends per share (6)........................... 0.15 0.12 0.57 0.41
Dividend payout ratio (7)......................... 44.12% 41.38% 39.04% 33.06%
Book value per share (8).......................... $ 14.83 $ 13.86 $ 14.83 $ 13.86
ASSET QUALITY RATIOS:
Non-performing assets to total assets............. 0.40% 0.49% 0.40% 0.49%
Non-performing loans to total loans............... 0.66 0.74 0.66 0.74
Allowance for loan losses to non-performing
loans........................................... 235.66 209.59 235.66 209.59
Allowance for loan losses to total loans.......... 1.55 1.55 1.55 1.55
CAPITAL RATIOS:
Equity to total assets at end of period........... 10.04% 10.79% 10.04% 10.79%
Average equity to average assets.................. 10.15 10.63 10.47 11.15
Tier 1 leverage ratio (bank only)................. 8.14 8.45 8.14 8.45
OTHER DATA:
Number of full service offices.................... 18 17 18 17
- ---------------------
(1) Excludes loans held for sale.
(2) Ratios for the three months ended September 30, 2003 and 2002
(3) The average interest rate spread represents the difference between the
weighted-average yield oninterest-earning assets and the weighted-average
cost of interest-bearing liabilities for the period.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(5) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(6) The following table sets forth aggregate cash dividends paid per period,
which is calculated by multiplying the dividend declared per share by the
number of shares outstanding as of the applicable record date.
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2002 2001
---------- ---------- ---------- ----------
(IN THOUSANDS)
Dividends paid to public
stockholders ..................... $ 550 $ 435 $ 1,968 $ 1,435
Dividends paid to Provident
Bancorp, MHC ..................... --- --- 453 500
---------- ---------- ---------- ----------
Total dividends paid .............. $ 550 $ 435 $ 2,421 $ 1,935
========== ========== ========== ==========
Payments listed above exclude cash dividends waived by Provident Bancorp,
MHC during the same periods of $662,000, $530,000, $2.1 million and $1.3
million, respectively. Provident Bancorp, MHC began waiving dividends in
May 1999, and, as of September 30, 2003, had waived dividends totaling $4.7
million.
(7) The dividend payout ratio represents dividends per share divided by basic
earnings per share.
(8) Book value per share is based on total stockholders' equity and 7,946,521
and 7,997,512, outstanding common shares at September 30, 2003 and 2002,
respectively. For this purpos, common shares include unallocated employee
stock ownership plan shares but exclude treasury shares.
29
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
TOTAL ASSETS. Total assets as of September 30, 2003 were $1.2 billion, an
increase of $146.6 million, or 14.3%, over total assets of $1.0 billion at
September 30, 2002. Average total assets for the year ended September 30, 2003
were $1.1 billion, an increase of $124.6 million, or 13.0%, over average total
assets of $957.9 million in fiscal 2002.
TOTAL SECURITIES. Total securities increased by $81.3 million, or 27.8%, to
$374.3 million at September 30, 2003 from $292.9 million at September 30, 2002.
Securities available for sale increased by $94.6 million, or 45.9%, primarily in
mortgage-backed securities. Securities held to maturity decreased by $13.2
million, or 15.3%, to $73.5 million at September 30, 2003 from $86.8 million at
September 30, 2002. The decrease in securities held to maturity resulted from
securities maturing and from payments on mortgage-backed securities. No
securities were sold during the fiscal year ended September 30, 2003.
NET LOANS. Net loans as of September 30, 2003 were $703.2 million, an
increase of $42.4 million, or 6.4%, over net loan balances of $660.8 million at
September 30, 2002. During fiscal 2003 the commercial loan portfolio, which
consists of commercial real estate, commercial business and construction loans
experienced growth of $31.2 million, or 14.1%. Residential mortgage loans grew
during fiscal 2003 as well, posting an increase (net of significant refinancing
activity) of $14.7 million, or 4.0%, over balances at September 30, 2002.
Consumer loans declined to $80.6 million, down from $83.4 million at September
30, 2002, a decrease of $2.8 million, or 3.4%, as many customers refinanced
their home equity loans with their first mortgages. Average total loans were
$683.1 million in fiscal 2003, an increase of $52.4 million, or 8.3%, over
average total loans of $630.7 million in fiscal 2002. At September 30, 2003,
non-performing loans totaled $4.7 million, or 0.66% of total loans, compared to
$5.0 million, or 0.74% of total loans at September 30, 2002.
DEPOSITS. Deposits as of September 30, 2003 were $869.6 million, up $69.9
million, or 8.7%, from September 30, 2002. Our deposit mix has continued to
shift along with our deposit growth. Transaction accounts (demand and NOW
deposits) represented 26% of deposits at September 30, 2003, compared to 24% at
September 30, 2002. Similarly, savings and money market account balances, which
totaled $407.9 million at September 30, 2003, represented 47% of deposits at
that date, compared to 45% at the prior year-end. Certificates of deposit
declined to 27% of deposits at September 30, 2003 from 31% a year ago. This
shift in mix to lower cost transaction and savings accounts had a positive
impact on earnings in fiscal 2003.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $7.0 million to
$117.9 million at September 30, 2003, compared to $110.9 million at September
30, 2002. In addition to net income of $11.3 million for the current fiscal
year, equity increased by $2.0 million due to the allocation of employee stock
ownership plan shares and the vesting of shares issued under our recognition and
retention plan, and by $520,000 related to transactions in our stock option
plan. Partially offsetting these increases were cash dividends, which reduced
stockholders' equity by $2.4 million, $2.3 million in stock repurchases, and a
reduction of $2.1 million in the after-tax net unrealized gains on securities
available for sale.
During fiscal 2003, we repurchased 69,004 shares of our common stock, of
which 22,815 shares were repurchased under our third repurchase program, which
was announced in March 2003, and which authorized the repurchase of up to
177,250 shares. We had repurchased a total of 376,740 shares under our two
previously announced and completed repurchase programs. We held a total of
333,479 treasury shares at September 30, 2003, net of stock option related
issuances.
30
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
AND SEPTEMBER 30, 2002
Net income for the three months ended September 30, 2003, was $2.6 million,
an increase of $327,000, or 14.5%, compared to net income of $2.3 million for
the three months ended September 30, 2002. Basic and diluted earnings per share
increased to $0.34 and $0.33, respectively, for the three months ended September
30, 2003, compared to $0.29 and $0.29, respectively, for the three months ended
September 30, 2002. The increase in net income reflected a $1.3 million, or
31.3%, decrease in interest expense and an $818,000, or 52.8%, increase in
non-interest income, which were partially offset by a $1.5 million, or 9.9%,
decrease in interest income and a $395,000, or 4.3%, increase in non-interest
expense.
INTEREST INCOME. Interest income for the three months ended September 30,
2003, decreased to $14.1 million, a decrease of $1.5 million, or 9.9%, compared
to the three months ended September 30, 2002. The decrease was primarily due to
lower average yields on loans and securities. Additionally, we invested $12.0
million in bank-owned life insurance contracts ("BOLI") in December 2002, which
decreased earning assets by the same amount and reclassified earnings of
$159,000 to non-interest income. Also, average loans as a percentage of average
interest earning assets declined to 66.5% of the total during fourth quarter
2003 compared to 67.9% of total average interest-earning assets during fourth
quarter 2002. This shift was due, in part, to the addition of Provident
Municipal Bank's assets, the majority of which are securities. Average total
interest-earning assets for the three months ended September 30, 2003, were $1.0
billion, an increase of $83.1 million, or 8.6%, over average total
interest-earning assets for the three months ended September 30, 2002 of $962.3
million. The $41.7 million, or 6.4%, increase in average loans to $694.9 million
from $653.2 million was attributable to increased balances in commercial loans,
which grew to $232.7 million compared to $206.8 million for the prior-year
quarter. Average residential mortgage loan balances increased to $382.5 million
compared to $365.0 million for the prior-year's quarter. The average yield on
the total loan portfolio declined to 6.06% from 7.01%. The largest decline in
yields was in the commercial loan category, which is made up in large part of
loans that bear interest rates that float with the prime rate. Balances of
securities and other earning assets increased by an average of $41.4 million, or
13.4%, and earned an average yield of 3.92%, which was 133 basis points lower
than the yield for the three-month period ended September 30, 2002.
INTEREST EXPENSE. Interest expense for the three-month period ended
September 30, 2003 fell to $2.7 million, a decline of $1.3 million, or 31.3%,
compared to the same period last year. The significant decrease was primarily
due to lower rates paid on interest-bearing deposits and wholesale borrowings,
as well as to lower balances in certificate of deposit accounts. The average
interest rate paid on certificates of deposit fell by 84 basis points to 1.92%
for the three months ended September 30, 2003, from 2.76% for the same period
last year. For the three months ended September 30, 2003, average balances of
lower-cost savings and money market accounts increased by $16.9 million and
$13.3 million, respectively, while average balances of certificates of deposit
declined by $8.2 million compared to the three months ended September 30, 2002.
Wholesale borrowings increased by $19.3 million, or 18.7%, to an average balance
of $122.8 million for the three-month period ended September 30, 2003.
NET INTEREST INCOME. Net interest income for the three months ended
September 30, 2003 was $11.3 million, compared to $11.6 million for the three
months ended September 30, 2002. This slight decrease in net interest income was
largely due to lower average yields on loans and securities, which offset an
$82.8 million increase in average earning assets to $1.045 billion during the
quarter ended September 30, 2003, as compared to $962.3 million for the same
quarter in the prior year. Additionally, we invested $12.0 million in BOLI
contracts, which decreased earning assets by the same amount and reclassified
earnings of $159,000 to non-interest income. The increase in average earning
assets was
31
offset by a decline in average yield of 110 basis points from 6.44% to 5.34%. A
decrease in the average cost of interest bearing liabilities of 64 basis points
led to a $1.3 million drop in interest expense for the quarter compared to the
same quarter in 2002, even as average interest-bearing liabilities increased by
$24.9 million. Net interest margin declined by 49 basis points to 4.30%, while
net interest spread declined by 45 basis points to 4.06%.
PROVISION FOR LOAN LOSSES. We record provisions for loan losses, which are
charged to earnings, in order to maintain the allowance for loan losses at a
level to absorb probable loan losses inherent in the existing portfolio. In
determining the allowance for loan losses, management considers past loss
experience, evaluations of real estate collateral, current economic conditions,
volume and type of lending, and the levels of non-performing and other
classified loans. The amount of the allowance 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 allowance at a level to absorb probable loan losses
inherent in the existing portfolio. We recorded $100,000 and $300,000 in loan
loss provisions during the three months ended September 30, 2003 and 2002,
respectively. At September 30, 2003 the allowance for loan losses totaled $11.1
million, or 1.55% of the loan portfolio, compared to $10.4 million at September
30, 2002, or 1.55% of the loan portfolio. The increase in the allowance was
primarily attributable to an increase in the loan portfolio, which was primarily
in the commercial real estate loan portfolio and commercial business loan
portfolio. See "Business of Provident Bancorp and Provident Bank--Delinquent
Loans, Other Real Estate Owned and Classified Assets--Allowance for Loan Losses"
for a discussion of how the allowance for loan losses is adjusted as a result of
these factors. These factors were partially offset by improved portfolio
performance and what we believed was an improvement in local and national
economic conditions during the fiscal year, as evidenced by increases in Gross
Domestic Product, consumer spending and business spending.
NON-INTEREST INCOME. Non-interest income for the three months ended
September 30, 2003 was $2.4 million compared to $1.5 million for the three
months ended September 30, 2002, an increase of $818,000, or 52.8%. This
increase was primarily attributable to an increase of $319,000, or 25.1%, in
banking fees and service charges. Also contributing to this increase was the
effect of net loan sales gains of $260,000 for the current three-month period,
compared to $54,000 for the same period last year. Other income increased from
$53,000 for the three-month period ended September 30, 2002 to $408,000 for the
same period in fiscal 2003. The increase was attributable to increases in loan
fees of $124,000, income of $159,000 in fiscal 2003 from the net increase in the
cash surrender value of BOLI contracts that were purchased in December 2002, and
a net gain on the sale of real estate owned of $109,000 in fiscal 2003.
NON-INTEREST EXPENSE. Non-interest expense for the three months ended
September 30, 2003 was $9.7 million, a $395,000, or 4.3% increase over expense
of $9.3 million for the three months ended September 30, 2002. The increase was
primarily attributable to increases in compensation expenses and occupancy
expenses of $575,000, or 11.5%, and $54,000, or 4.1%, respectively, due to
$382,000 related to stock based compensation plans and annual salary and benefit
increases, an increase of $88,000 in pension plan expense, a net increase of
$76,000 in medical benefits and the opening of a new branch in February 2003.
The expenses were partially offset by a $222,000 reduction in deferred loan
origination costs related to the higher production of loans in the fourth
quarter of fiscal 2002. Data and check processing expense also increased by
$43,000, or 6.0%, related to higher deposit and loan volumes. Integration costs
decreased by $173,000, as costs incurred in the fourth quarter of fiscal 2002
represent the final merger-related costs associated with the acquisition of The
National Bank of Florida, while the lower current period costs are for the
pending acquisition of E.N.B. Holding Company and its subsidiary, Ellenville
National Bank. Amortization of branch purchase premiums declined by $43,000 in
accordance
32
with the valuation schedule for the deposits acquired as part of the acquisition
of The National Bank of Florida. Other non-interest expenses for the current
three-month period increased by $21,000, or 1.8%, over the comparable period
last year, primarily due to an increase of $50,000 in charitable contributions.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND
SEPTEMBER 30, 2002
Net income for the year ended September 30, 2003, was $11.3 million, an
increase of $1.7 million, or 18.1%, compared to net income of $9.5 million for
the year ended September 30, 2002. Basic and diluted earnings per share
increased to $1.46 and $1.44, respectively, for the year ended September 30,
2003, compared to $1.24 and $1.22, respectively, for the year ended September
30, 2002. The increase in net income reflected a $5.1 million, or 29.9%,
decrease in interest expense and a $4.2 million, or 76.9%, increase in
non-interest income, which were partially offset by a $4.6 million, or 14.4%,
increase in non-interest expense and a $2.2 million, or 3.6%, decrease in
interest income.
INTEREST INCOME. Interest income for the year ended September 30, 2003
declined to $57.8 million, a decrease of $2.2 million, or 3.6% compared to the
prior year. The decrease was primarily due to lower average yields on loans and
securities, offset in large part by higher average balances in both asset
classes. Average interest-earning assets for the year ended September 30, 2003
were $1.0 billion, an increase of $96.8 million, or 10.7%, over average
interest-earning assets for the year ended September 30, 2002 of $907.7 million.
Average loan balances grew by $52.4 million and average balances of securities
and other earning assets increased by $44.4 million. Average yields on interest
earning assets fell by 85 basis points to 5.75% for the year ended September 30,
2003, from 6.60% for the year ended September 30, 2002. Lower market interest
rates were the primary reason for the decline in asset yields.
Total interest income on loans for the year ended September 30, 2003
declined 2.6% to $43.8 million from $45.0 million for the prior fiscal year.
Interest income on commercial loans for the year ended September 30, 2003
increased to $15.2 million, up 6.8% from commercial loan interest income of
$14.2 million for the prior fiscal year. Average balances of commercial loans
grew $32.0 million to $220.3 million, and the impact of that increase offset a
66 basis point decline in average yield. The lower average yield was due, in
part, to the effect on commercial business loans of the lower average prime rate
of 4.24% in fiscal 2003 compared to 4.86% in fiscal 2002. Interest income on
consumer loans declined by $715,000, or 15.0% for the year. Our fixed-rate
consumer loans have short average maturities, and our adjustable-rate consumer
loans float with the prime rate. Income earned on residential mortgage loans was
$24.6 million for the year ended September 30, 2003, down $1.4 million, or 5.4%,
from the prior year. Despite an increase of $16.7 million in average residential
mortgage loan balances, interest income was negatively impacted as yields
declined by 68 basis points to 6.44% from 7.12%, reflecting the impact of lower
market rates and refinancing activity.
Interest income on securities and other earning assets decreased to $14.0
million for the year ended September 30, 2003, compared to $15.0 million for the
prior year. A 106 basis-point decline in yields offset a $44.4 million increase
in the average balances of securities.
INTEREST EXPENSE. Interest expense for the year ended September 30, 2003
fell by $5.1 million to $12.1 million, a decrease of 29.9% compared to interest
expense of $17.2 million for the prior fiscal year. The decrease was primarily
due to lower rates paid on interest-bearing deposits and borrowings, as well as
to a higher concentration of non-interest-bearing and low interest-bearing
deposits in fiscal 2003. Average rates paid on interest-bearing liabilities for
the year ended September 30, 2003 declined by 82 basis points to 1.46% from
2.27% last year. The average interest rate paid on certificates of deposit fell
by 111 basis points to 2.13% for the year ended September 30, 2003, from 3.24%
for the prior year. For the year ended September 30, 2003, average balances of
lower cost savings and money market accounts
33
increased by $49.4 million and $15.7 million, respectively, while average
balances of certificates of deposit increased by only $4.0 million compared to
the year ended September 30, 2002. The average interest rate paid on savings and
money market accounts fell by 47 and 57 basis points to 0.54% and 0.78%,
respectively, for the year ended September 30, 2003, from 1.01% and 1.35% for
the prior year.
NET INTEREST INCOME. Net interest income for the year ended September 30,
2003 increased to $45.7 million, compared to $42.8 million for the year ended
September 30, 2002, an increase of $3.0 million or 7.0%, which was largely due
to a $25.1 million increase in average net earning assets. The decrease in
interest income of $2.2 million, or 3.6%, reflects a decline in yield of 85
basis points to 5.75% on average earning assets, mostly offset by an increase in
average earning asset balances of $96.8 million, or 10.7%, to $1.0 billion as of
September 30, 2003. The cost of interest bearing liabilities declined by $5.1
million as the average rate paid on interest bearing liabilities decreased 82
basis points to 1.46%, offsetting an increase in average balances of $71.7
million to $827.9 million. Net interest margin decreased from 4.71% to 4.55% and
net interest spread decreased from 4.33% to 4.30%.
This increase in our net interest income was due, in large part, to the
relative changes in the yield and cost of our assets and liabilities as a result
of decreasing market interest rates since 2001. This decrease in market interest
rates has reduced the cost of interest-bearing liabilities faster and to a
greater extent than the rates on interest-earning assets such as loans and
securities. However, if recently low interest rate levels persist for an
extended period of time, the prepayment of assets could continue at a rate
exceeding scheduled repayment. Such funds received would most likely be
reinvested at lower yields than that of our previously held assets. Also, as the
reduction in liability costs have already exceeded the pace at which assets
repriced downward, net interest margin may be further compressed. Conversely, if
market interest rates rise as a result of an economic recovery, competitive
pressures could cause us to increase our funding costs and lead to pressure on
the net interest margin.
PROVISION FOR LOAN LOSSES. We recorded $900,000 in loan loss provisions for
each of the years ended September 30, 2003 and September 30, 2002. At September
30, 2003 the allowance for loan losses totaled $11.1 million, or 1.55% of the
loan portfolio, compared to $10.4 million, or 1.55% of the loan portfolio at
September 30, 2003. See "Comparison of Operating Results for the Three Months
Ended September 30, 2003 and September 30, 2002--Provision for Loan Losses,"
above.
NON-INTEREST INCOME. Non-interest income for the fiscal year ended
September 30, 2003 was $9.6 million compared to $5.4 million for the fiscal year
ended September 30, 2002, an increase of $4.2 million, or 76.9%. This increase
was primarily attributable to realized gains on securities available for sale
and sales of loans of $2.0 million and $1.1 million, respectively, in the
current fiscal year, a combined increase of $2.5 million over the securities and
loan sales gains of $607,000 for the prior fiscal year. Other factors include an
increase of $786,000, or 18.7%, in banking fees and service charges, $483,000 in
income from the new BOLI program, which began in December 2002, and an increase
in prepayment fees of $264,000.
NON-INTEREST EXPENSE. Non-interest expense for the fiscal year ended
September 30, 2003 was $36.8 million, a $4.6 million, or 14.4%, increase over
expenses of $32.2 million for the fiscal year ended September 30, 2002. The
increase was primarily attributable to an increase in compensation and employee
benefits of $3.5 million, or 20.0%, primarily related to annual merit raises,
staff for new branches, the payout of an employment agreement and the increased
cost of stock-based compensation plans due to the increase in the market price
of our common stock.
Occupancy and office operations expense increased by $370,000, or 7.7%, due
primarily to the expenses associated with the branches acquired as part of the
acquisition of The National Bank of Florida;
34
we owned these branches for only five months in fiscal 2002. Advertising and
promotion costs increased by $187,000, or 12.7%, due to additional advertising
related to new branches and products. Increases in loan and deposit accounts
generated a volume-related increase of $472,000, or 19.3%, in data and check
processing costs. A focus on technological development and internal controls
resulted in an increase in professional fees over the same period in 2002 of
$427,000, or 42.0%, to $1.4 million. Amortization of intangible assets increased
by $152,000, or 53.1%, as the core deposit amortization for The National Bank of
Florida was in place for all of fiscal 2003, compared to five months in fiscal
2002. Other expenses increased by $91,000, or 2.1%, due primarily to an increase
of $226,000, or 54.6%, in ATM charges related to the increase in transaction
accounts and greater debit card usage.
35
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of such words such as "estimate," "project," "believe,"
"intend," "anticipate," "plan," "seek," "expect" and words of similar meaning.
These forward-looking statements include, but are not limited to:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and
operating strategies;
o statements regarding the asset quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and
expectations of our management and are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond our control. In addition, these forward-looking statements are
subject to assumptions with respect to future business strategies and decisions
that are subject to change.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements:
o general economic conditions, either nationally or in our market areas,
that are worse than expected;
o competition among depository and other financial institutions;
o inflation and changes in the interest rate environment that reduce our
margins or reduce the fair value of financial instruments;
o operating costs, customer losses and business disruption following the
merger, including adverse effects of relationships with employees, may
be greater than expected;
o governmental approvals of the merger may not be obtained, or adverse
regulatory conditions may be imposed in connection with governmental
approvals of the merger;
o adverse changes in the securities markets;
o changes in laws or government regulations or policies affecting
financial institutions, including changes in regulatory fees and
capital requirements;
o our ability to enter new markets successfully and capitalize on growth
opportunities;
o our ability to successfully integrate acquired entities;
o changes in consumer spending, borrowing and savings habits;
36
o changes in accounting policies and practices, as may be adopted by the
bank regulatory agencies and the Financial Accounting Standards Board;
and
o changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. Please see "Risk Factors" beginning on page ___.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
Although we cannot determine what the actual net proceeds from the sale of
the shares of common stock in the offering will be until the offering is
completed, we anticipate that the net proceeds will be between $123.1 million
and $167.1 million, or $192.4 million if the offering range is increased by 15%.
Provident Bancorp estimates that it will invest in Provident Bank between $80.9
million and $85.1 million, or $96.2 million if the offering range is increased
by 15%. We intend to retain between $42.2 million and $82.0 million of the net
proceeds, or $96.2 million if the offering range is increased by 15% of which
approximately $36.8 million will be used to finance the cash merger
consideration portion of the acquisition of E.N.B. Holding Company, Inc., and
between $6.5 million and $8.7 million (or $10.0 million if the offering range is
increased) will be used for the loan to the employee stock ownership plan to
fund its purchase of shares of common stock.
A summary of the anticipated net proceeds at the minimum, midpoint, maximum
and adjusted maximum of the offering range and distribution of the net proceeds
is as follows:
ADJUSTED
MINIMUM (1) MIDPOINT MAXIMUM MAXIMUM
-------------- -------------- -------------- --------------
Offering proceeds...................... $ 125,800,000 $ 148,000,000 $ 170,200,000 $ 195,730,000
Less offering expenses................. 2,702,000 2,913,000 3,124,000 3,366,000
Net offering proceeds............... $ 123,098,000 $ 145,087,000 $ 167,076,000 $ 175,335,000
Distribution of net proceeds:
To Provident Bank................... $ 80,872,000 $ 82,993,000 $ 85,114,000 $ 96,182,000
Retained by Provident Bancorp....... $ 42,226,000 $ 62,094,000 $ 81,962,000 $ 96,182,000
- ---------------------
(1) If Provident Bancorp does not receive orders for at least 12,580,000 shares
in the offering, then, at Provident Bancorp's discretion in order to issue
the minimum number of shares necessary to complete the conversion and stock
offering, up to 3,677,320 unsubscribed offering shares may be issued to
shareholders of E.N.B. Holding Company as merger consideration. If
3,677,320 unsubscribed shares are so issued as part of the conversion and
stock offering, then offering proceeds would be $89.0 million, net offering
proceeds would be $86.7 million, and Provident Bancorp would contribute
substantially all of the net offering proceeds to Provident Bank.
Payments for shares of common stock made through withdrawals from existing
deposit accounts will not result in the receipt of new funds for investment but
will result in a reduction of Provident Bank's deposits. The net proceeds may
vary because total expenses relating to the offering may be more or less
37
than our estimates. For example, our expenses would increase if a syndicated
community offering were used to sell shares of common stock not purchased in the
subscription and community offerings.
PROVIDENT BANCORP MAY USE THE PROCEEDS IT RETAINS FROM THE OFFERING:
o to finance the cash portion of the purchase price of E.N.B. Holding
Company, Inc. in the amount of approximately $36.8 million;
o to fund a loan to the employee stock ownership plan to purchase shares
of common stock in the offering (between $6.5 million and $8.7
million);
o to finance the acquisition of financial institutions, branches or
other financial service companies, although, except for the proposed
acquisition of E.N.B. Holding Company, Inc., we do not currently have
any agreements or understandings regarding any specific acquisition
transaction;
o to pay cash dividends to stockholders;
o to repurchase shares of our common stock;
o to invest in securities; and
o for other general corporate purposes.
Initially, a substantial portion of the net proceeds will be invested in
short-term investments, investment-grade debt obligations and mortgage-backed
securities.
Under current Office of Thrift Supervision regulations, we may not
repurchase shares of our common stock during the first year following the
conversion, except when extraordinary circumstances exist and with prior
regulatory approval.
PROVIDENT BANK MAY USE THE NET PROCEEDS IT RECEIVES FROM THE OFFERING:
o to fund new loans, including single-family mortgage loans,
multi-family residential and commercial mortgage loans, commercial
business loans, acquisition development and construction loans and
consumer loans;
o to expand its retail banking franchise, by establishing or acquiring
new branches or by acquiring other financial institutions or other
financial services companies, although, except for the proposed
acquisition of Ellenville National Bank, we do not now have any
agreements or understandings regarding any acquisition transaction;
o to enhance existing products and services and to support new products
and services;
o to invest in securities; and
o for other general corporate purposes.
38
Initially, the net proceeds will be invested in short-term investments,
investment-grade debt obligations and mortgage-backed securities.
OUR DIVIDEND POLICY
Provident Bancorp currently pays a quarterly cash dividend of $0.15 per
share, which equals $0.60 per share on an annualized basis. After the
conversion, we intend to continue to pay cash dividends on a quarterly basis. We
expect the annualized dividends to equal $0.21, $0.18, $0.16 and $0.14 per share
at the minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively, which represents an annual dividend yield of 2.1%, 1.8%, 1.6% and
1.4% at the minimum, midpoint, maximum and adjusted maximum of the offering
range, respectively, based upon a stock price of $10.00 per share. The amount of
dividends that we intend to pay to our stockholders following the conversion is
intended to preserve the per share dividend amount, adjusted to reflect the
exchange ratio, that our stockholders currently receive on their Provident
Bancorp common stock. The dividend rate and the continued payment of dividends
will depend on a number of factors including our capital requirements, our
financial condition and results of operations, tax considerations, statutory and
regulatory limitations, and general economic conditions. We cannot assure you
that we will not reduce or eliminate dividends in the future.
Under the rules of the Office of Thrift Supervision, Provident Bank will
not be permitted to pay dividends on its capital stock to Provident Bancorp, its
sole stockholder, if Provident Bank's stockholder's equity would be reduced
below the amount of the liquidation account. In addition, Provident Bank will
not be permitted to make a capital distribution if, after making such
distribution, it would be undercapitalized. See "The Conversion--Liquidation
Rights." For information concerning additional federal and state law and
regulations regarding the ability of Provident Bank to make capital
distributions, including the payment of dividends to Provident Bancorp, see
"Taxation--Federal Taxation" and "Supervision and Regulation--Federal Banking
Regulation."
Unlike Provident Bank, Provident Bancorp is not restricted by Office of
Thrift Supervision regulations on the payment of dividends to its stockholders,
although the source of dividends will depend on the net proceeds retained by
Provident Bancorp and earnings thereon, and dividends from Provident Bank.
Provident Bancorp, however, is subject to the requirements of Delaware law,
which generally limits dividends to an amount equal to the excess of its
stockholders' equity over its statutory capital or, if there is no excess, to
its net earnings for the current and/or immediately preceding fiscal year.
Additionally, under the rules of the Office of Thrift Supervision, during
the three-year period following the completion of the conversion, Provident
Bancorp may not take any action to declare an extraordinary dividend to our
stockholders that would be treated as a tax-free return of capital for federal
income tax purposes.
See "Selected Consolidated Financial and Other Data of Provident Bancorp
and Subsidiaries" and "Market for the Common Stock" for information regarding
our historical dividend payments.
MARKET FOR THE COMMON STOCK
Provident Bancorp's common stock is currently traded on the Nasdaq National
Market under the trading symbol "PBCP." There is an established market for
Provident Bancorp's common stock. At August 31, 2003, we had 11 market makers,
including Ryan Beck & Co. Upon completion of the conversion, the new shares of
common stock of Provident Bancorp, a Delaware corporation, will replace existing
shares and be traded on the Nasdaq National Market. Ryan Beck & Co. intends to
remain a
39
market maker in the common stock following the conversion and will assist
Provident Bancorp in obtaining other market makers after the conversion. We
cannot assure you that other market makers will be obtained or that an active
and liquid trading market for the shares of common stock will develop or, if
developed, will be maintained. For a period of 20 trading days following
completion of our offering, our symbol will be "PBCPD," after which it will
revert back to "PBCP."
The development and maintenance of a public market having the desirable
characteristics of depth, liquidity and orderliness depends on the existence of
willing buyers and sellers, the presence of which is not within our control or
that of any market maker. The number of active buyers and sellers of our shares
of common stock at any particular time may be limited, which may have an adverse
effect on the price at which our common stock can be sold. There can be no
assurance that persons purchasing the shares of common stock will be able to
sell their shares at or above the $10.00 offering purchase price per share.
Purchasers of our shares of common stock should have a long-term investment
intent and should recognize that there may be a limited trading market in the
common stock.
The following table sets forth the high and low trading prices for shares
of Provident Bancorp common stock and cash dividends paid per share for the
periods indicated. As of June 30, 2003, there were 3,537,075 publicly held
shares of Provident Bancorp common stock issued and outstanding (excluding
shares held by Provident Bancorp, MHC). In connection with the conversion, each
existing share of common stock of Provident Bancorp will be converted into a
right to receive a number of new shares of common stock, based upon the exchange
ratio that is described in other parts of this prospectus.
FISCAL YEAR ENDING SEPTEMBER 30, 2004 HIGH LOW DIVIDEND PAID PER SHARE
- ------------------------------------- ---------- ---------- -----------------------
First quarter (through November 10) $ $ $ --/(1)/
FISCAL YEAR ENDED SEPTEMBER 30, 2003 HIGH LOW DIVIDEND PAID PER SHARE
- ------------------------------------- ---------- ---------- -----------------------
Fourth quarter $ 43.30 $ 31.97 $ 0.15
Third quarter 33.06 31.20 0.15
Second quarter 31.50 30.00 0.14
First quarter 31.50 27.75 0.13
FISCAL YEAR ENDED SEPTEMBER 30, 2002 HIGH LOW DIVIDEND PAID PER SHARE
- ------------------------------------- ---------- ---------- -----------------------
Fourth quarter $ 29.15 $ 27.69 $ 0.12
Third quarter 28.97 26.50 0.11
Second quarter 28.90 26.50 0.10
First quarter 29.64 21.58 0.08
- ----------
(1) Dividend for the first quarter [will be] paid on ____________, 2003 at
$_____ per share.
On July 1, 2003, the business day immediately preceding the public
announcement of the conversion, and on November 10, 2003, the closing prices of
Provident Bancorp common stock as reported on the Nasdaq National Market were
$33.10 per share and $____ per share, respectively. At November 10, 2003,
Provident Bancorp had approximately ______ stockholders of record. On the
effective date of the conversion, all publicly held shares of Provident Bancorp
common stock, including shares of common stock held by our officers and
directors, will be converted automatically into and become the right to receive
a number of shares of Provident Bancorp common stock determined pursuant to the
exchange ratio. See "The Conversion -- Share Exchange Ratio." Options to
purchase shares of
40
Provident Bancorp common stock will be converted into options to purchase a
number of shares of Provident Bancorp common stock determined pursuant to the
exchange ratio, for the same aggregate exercise price. See "Beneficial Ownership
of Common Stock."
41
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At June 30, 2003, Provident Bank exceeded all of the applicable regulatory
capital requirements. The table below sets forth the historical equity capital
and regulatory capital of Provident Bank at June 30, 2003 and the pro forma
regulatory capital of Provident Bank, after giving effect to the sale of shares
of common stock at a $10.00 per share purchase price, the issuance of up to
3,677,320 shares of common stock as partial consideration for the acquisition of
E.N.B. Holding Company, and the merger of Ellenville National Bank with and into
Provident Bank. The table further assumes the receipt by Provident Bank of
between $80.9 million and $96.2 million of the net offering proceeds.
PRO FORMA AT JUNE 30,
2003, BASED UPON
THE ACQUISITION AND SALE OR
PROVIDENT BANK ISSUANCE IN CONVERSION OF
HISTORICAL AT ----------------------------
JUNE 30, 2003 12,580,000 SHARES (1)
--------------------------- ----------------------------
PERCENT PERCENT
OF ASSETS OF ASSETS
AMOUNT (3) AMOUNT (3)
------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
Equity capital ....................... $ 109,251 9.82% $ 215,840 14.02%
Tangible capital ..................... $ 91,149 8.35% $ 146,185 10.00%
Tangible requirement ................. 16,372 1.50 21,928 1.50
------------ ------------ ------------ -------------
Excess ............................... $ 74,777 6.85% $ 124,257 8.50%
============ ============ ============ =============
Core (leverage) capital .............. $ 91,149 8.35% $ 146,185 10.00%
Core (leverage) requirement (4) ...... 43,658 4.00 58,474 4.00
------------ ------------ ------------ -------------
Excess ............................... $ 47,491 4.35% $ 87,711 6.00%
============ ============ ============ =============
Total risk-based capital (5) ......... $ 98,976 15.06% $ 156,673 17.43%
Risk-based requirement ............... 52,587 8.00 71,877 8.00
------------ ------------ ------------ -------------
Excess ............................... $ 46,389 7.06% $ 84,796 9.43%
============ ============ ============ =============
PRO FORMA AT JUNE 30, 2003, BASED UPON THE ACQUISITION AND SALE OR ISSUANCE IN CONVERSION OF
--------------------------------------------------------------------------------------------
14,800,000 SHARES 17,020,000 SHARES 19,573,000 SHARES (2)
--------------------------- --------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF ASSETS OF ASSETS OF ASSETS
AMOUNT (3) AMOUNT (3) AMOUNT (3)
------------ ------------ ------------ ------------ ------------ --------------
(DOLLARS IN THOUSANDS)
Equity capital ....................... $ 215,963 14.02% $ 216,086 14.02% $ 227,882 14.66%
Tangible capital ..................... $ 146,308 10.00% $ 146,431 10.00% $ 155,201 10.53%
Tangible requirement ................. 21,946 1.50 21,965 1.50 22,115 1.50
------------ ------------ ------------ ------------ ------------ --------------
Excess ............................... $ 124,362 8.50% $ 124,466 8.50% $ 133,086 9.03%
============ ============ ============ ============ ============ ==============
Core (leverage) capital .............. $ 146,308 10.00% $ 146,431 10.00% $ 155,201 10.53%
Core (leverage) requirement (4) ...... 58,523 4.00 58,573 4.00 58,974 4.00
------------ ------------ ------------ ------------ ------------ --------------
Excess ............................... $ 87,785 6.00% $ 87,858 6.00% $ 96,227 6.53%
============ ============ ============ ============ ============ ==============
Total risk-based capital (5) ......... $ 156,673 17.44% $ 156,796 17.45% $ 165,566 18.38%
Risk-based requirement ............... 71,877 8.00 71,897 8.00 72,058 8.00
------------ ------------ ------------ ------------ ------------ --------------
Excess ............................... $ 84,796 9.44% $ 84,899 9.45% $ 93,508 10.38%
============ ============ ============ ============ ============ ==============
- ----------------------------------------
(1) If Provident Bancorp does not receive orders for at least 12,580,000 shares
in the offering, then, at Provident Bancorp's discretion in order to issue
the minimum number of shares necessary to complete the conversion and stock
offering, up to 3,677,320 unsubscribed offering shares may be issued to
shareholders of E.N.B. Holding Company as merger consideration. If
3,677,320 unsubscribed shares are so issued as part of the conversion and
stock offering, then pro forma equity would be $216.0 million or 14.02% of
pro forma assets, pro forma tangible capital would be $146.2 million or
10.00% of pro forma assets, pro forma core capital would be $146.2 million
or 10.00% of pro forma assets, and pro forma total risk-based capital would
be $156.6 million or 17.43% of pro forma risk-based assets.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect demand
for the shares, changes in market or general financial conditions following
the commencement of the offering, or regulatory considerations.
(3) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets.
42
(4) The current Office of Thrift Supervision core capital requirement for
financial institutions is 3% of total adjusted assets for financial
institutions that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
financial institutions.
(5) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 50% risk weighting.
43
CAPITALIZATION
The following table presents the historical consolidated capitalization of
Provident Bancorp and E.N.B. Holding Company at June 30, 2003 and the pro forma
consolidated capitalization of Provident Bancorp after giving effect to the
conversion and acquisition of E.N.B. Holding Company, based upon the assumptions
set forth in the "Pro Forma Conversion and Acquisition Data" section.
PROVIDENT E.N.B. HOLDING
BANCORP COMPANY
HISTORICAL AT HISTORICAL AT
JUNE 30, 2003 JUNE 30, 2003
------------- --------------
(DOLLARS IN THOUSANDS)
Deposits (5) ................................ $ 857,534 $ 307,698
Borrowed funds .............................. 116,732 --
------------- --------------
Total deposits and borrowed funds ........ $ 974,266 $ 307,698
============- ==============
Stockholders' equity:
Preferred stock, $0.01 par value,
10,000,000 shares authorized
(post-conversion) (6)
Common stock $0.01 par value,
75,000,000 shares authorized
(post-conversion); shares to be
issued as reflected (6)(7) ............... 828 400
Additional paid-in capital (6) ........... 37,252 945
Retained earnings (8) ..................... 83,376 31,341
Accumulated other comprehensive
income ................................... 4,059 871
Less:
Expense of contribution to
foundation ............................... -- --
Plus:
The benefit of contribution to
foundation (9) ........................... -- --
Less:
Treasury stock (10) ....................... (7,469) (3,657)
Common stock to be acquired by
the employee stock ownership
plan (11) ................................ (1,691) --
Common stock to be acquired by
the recognition and retention
plan (12) ................................ (618) --
------------- --------------
Total stockholders' equity ................ $ 115,737 $ 29,900
============= ==============
Total stockholders' equity as a
percentage of total assets ............... 10.38% 8.75%
Tangible stockholders' equity as
a percentage of total assets ............. 9.06% 8.75%
PRO FORMA, BASED UPON THE ACQUISITION AND SALE OR ISSUANCE IN
CONVERSION OF
ACQUISITION -----------------------------------------------------------------
ADJUSTMENTS 12,580,000 14,800,000 17,020,000 19,573,000
(1)(2) SHARES (3) SHARES SHARES SHARES (3)
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS}
Deposits (5) ................................ $ 946 $ 1,166,178 $ 1,166,178 $ 1,166,178 $ 1,166,178
Borrowed funds .............................. -- 116,732 116,732 116,732 116,732
------------- -------------- ------------ ------------ ------------
Total deposits and borrowed funds ........ $ 946 $ 1,282,910 $ 1,282,910 $ 1,282,910 $ 1,282,910
============= ============== ============ ============ ============
Stockholders' equity:
Preferred stock, $0.01 par value,
10,000,000 shares authorized
(post-conversion) (6)
Common stock $0.01 par value,
75,000,000 shares authorized
(post-conversion); shares to be
issued as reflected (6)(7) ............... 3,277 267 307 347 396
Additional paid-in capital (6) ........... 32,151 194,215 216,164 238,114 266,378
Retained earnings (8) ..................... (31,341) 84,002 84,002 84,002 84,002
Accumulated other comprehensive income .... (871) 4,059 4,059 4,059 4,059
Less:
Expense of contribution to foundation ..... -- (5,000) (5,000) (5,000) (5,000)
Plus:
The benefit of contribution to
foundation (9) ........................... -- 2,000 2,000 2,000 2,000
Less:
Treasury stock (10) ....................... 3,657 -- -- -- --
Common stock to be acquired by
the employee stock ownership
plan (11) ................................ -- (8,181) (9,291) (10,401) (11,678)
Common stock to be acquired by
the recognition and retention
plan (12) ................................ -- (5,810) (6,698) (7,586) (8,607)
------------- -------------- ------------ ------------ ------------
Total stockholders' equity ................ $ 6,873 $ 265,552 $ 285,543 $ 305,535 $ 331,550
============= ============== ============ ============ ============
Total stockholders' equity as a
percentage of total assets ............... -- 16.82% 17.86% 18.88% 20.16%
Tangible stockholders' equity as
a percentage of total assets ............. -- 12.63% 13.72% 14.78% 15.95%
(footnotes on following page)
44
- -----------------------------------
(1) Acquisition adjustments include $6.822 million of after-tax expenses, net
of $626,000 of assets of Provident Bancorp, MHC consolidated with Provident
Bancorp, Inc. Acquisition adjustments do not reflect anticipated
integration costs of $720,000 ($432,000 net of taxes).
(2) E.N.B. Holding Company has 250,000 authorized shares of common stock, par
value $20.00 per share. E.N.B. Holding Company common stock and additional
paid-in capital have been reclassified to conform to the $0.01 par value
per share of Provident Bancorp common stock.
(3) If Provident Bancorp does not receive orders for at least 12,580,000 shares
in the offering, then, at Provident Bancorp's discretion in order to issue
the minimum number of shares necessary to complete the conversion and stock
offering, up to 3,677,320 shares of the unsubscribed offering shares may be
issued to shareholders of E.N.B. Holding Company as merger consideration.
If 3,677,320 unsubscribed shares are so issued as part of the conversion
and stock offering, then total stockholders' equity would be $229.1, total
stockholders' equity as a percentage of total assets would be 14.86%, and
tangible stockholders' equity as a percentage of total assets would be
10.56%. See "Pro Forma Conversion and Acquisition Data."
(4) As adjusted to give effect to an increase in the number of shares of common
stock which could occur due to a 15% increase in the offering range to
reflect demand for shares, changes in market or general financial
conditions following the commencement of the subscription and community
offerings, or regulatory considerations.
(5) Does not reflect withdrawals from deposit accounts for the purchase of
shares of common stock in the conversion and offering. These withdrawals
would reduce pro forma deposits by the amount of the withdrawals.
(6) Provident Bancorp, a federal corporation, currently has 10,000,000
authorized shares of preferred stock and 20,000,000 authorized shares of
common stock, par value $0.10 per share. Pro forma Provident Bancorp common
stock and additional paid-in capital have been increased to reflect the
number of shares of Provident Bancorp common stock to be outstanding,
including shares issued to the charitable foundation.
(7) No effect has been given to the issuance of additional shares of Provident
Bancorp common stock pursuant to an additional stock option plan. If this
plan is implemented, an amount up to 10% of the shares of Provident Bancorp
common stock sold in the offering will be reserved for issuance upon the
exercise of options under the stock option plan. No effect has been given
to the exercise of options currently outstanding. See "Management of
Provident Bancorp."
(8) The retained earnings of Provident Bank will be substantially restricted
after the conversion. See "The Conversion--Liquidation Rights" and
"Supervision and Regulation--Federal Banking Regulation." Pro forma
retained earnings reflects consolidation of $116.4 million of capital from
Provident Bancorp, MHC.
(9) Represents the tax effect of the contribution to the charitable foundation
based on a 40.0% tax rate. The realization of the deferred tax benefit is
limited annually to a maximum deduction for charitable contributions equal
to 10% of Provident Bancorp's annual taxable income, subject to our ability
to carry forward any unused portion of the deduction for five years
following the year in which the contribution is made.
(10) Pro forma data assumes the cancellation of treasury stock as a result of
the conversion and exchange of shares.
(11) Assumes that 5.0% of the shares sold in the offering will be acquired by
the employee stock ownership plan financed by a loan from Provident
Bancorp. The loan will be repaid principally from Provident Bank's
contributions to the employee stock ownership plan. Since Provident Bancorp
will finance the employee stock ownership plan debt, this debt will be
eliminated through consolidation and no liability will be reflected on
Provident Bancorp's consolidated financial statements. Accordingly, the
amount of shares of common stock acquired by the employee stock ownership
plan is shown in this table as a reduction of total stockholders' equity.
(12) Assumes a number of shares of common stock equal to 4% of the common stock
to be sold in the offering (including shares to be issued to the Provident
Bank Charitable Foundation) will be purchased by the stock recognition and
retention plan in open market purchases. The dollar amount of common stock
to be purchased is based on the $10.00 per share subscription price in the
offering and represents unearned compensation. This amount does not reflect
possible increases or decreases in the value of common stock relative to
the subscription price in the offering. As Provident Bancorp accrues
compensation expense to reflect the vesting of shares pursuant to the stock
recognition and retention plan, the credit to capital will be offset by a
charge to operations. Implementation of the stock recognition and retention
plan will require stockholder approval. If the shares to fund the plan are
assumed to come from authorized but unissued shares of Provident Bancorp,
the number of outstanding shares at the minimum, midpoint, maximum and the
maximum, as adjusted, of the offering range would be 27,252,698,
31,339,647, 35,426,597 and 40,418,944, respectively, total stockholders'
equity would be $270.7 million, $291.6 million, $312.5 million and $339.5
million, respectively, and total stockholders' ownership in Provident
Bancorp would be diluted by approximately 2.0% at the maximum of the
offering range.
(13) For financial statement presentation purposes, the common stock related to
the recognition and retention plan is included in treasury stock.
THE ACQUISITION OF E.N.B. HOLDING COMPANY, INC.
AND RELATED PRO FORMA DATA
GENERAL
On July 1, 2003, we entered into an agreement to acquire E.N.B. Holding
Company, Inc., which is the holding company of Ellenville National Bank, a
national bank headquartered in Ellenville, New York. Ellenville National Bank
operates nine branch offices and ten ATMs in the New York Counties of Orange,
Sullivan and Ulster. As of June 30, 2003, E.N.B. Holding Company, Inc. had
consolidated assets of $341.7 million, deposits of $307.7 million and
shareholders' equity of $29.9 million. Ellenville
45
National Bank will be merged with and into Provident Bank. Following this
merger, Provident Bank will operate 27 branch offices. The merger will give
Provident Bank a market presence in two adjacent counties in which it does not
currently operate: Sullivan and Ulster.
The merger agreement provides that each share of E.N.B. Holding Company,
Inc. common stock will be converted into the right to receive the merger
consideration of $4,830 per share, in the form of:
(i) cash;
(ii) shares of common stock of Provident Bancorp, a Delaware corporation;
or
(iii) a combination thereof.
The merger agreement provides that the aggregate merger consideration will
be 50% cash and 50% shares of Provident Bancorp common stock. At June 30, 2003,
E.N.B. Holding Company, Inc. had 15,227 shares of common stock issued and
outstanding. The shares of Provident Bancorp common stock to be issued to E.N.B.
Holding Company, Inc. shareholders in the merger will be valued at the $10.00
per share purchase price in the offering. Accordingly, if an E.N.B. Holding
Company, Inc. shareholder elects to receive all of the merger consideration in
the form of shares of Provident Bancorp common stock, and the election is
accepted, the shareholder will receive 483 shares of Provident Bancorp common
stock for each share of E.N.B. Holding Company, Inc. common stock held by such
shareholder. Provident Bancorp expects to issue 3,677,320 shares of common stock
to E.N.B. Holding Company, Inc. shareholders. The merger agreement provides that
in the event Provident Bancorp sells more than $181.3 million of shares of
common stock in the offering (excluding shares we issue to the Provident Bank
Charitable Foundation and shares we issue in exchange for existing shares of
common stock of Provident Bancorp, a federal corporation), the number of shares
to be issued to shareholders of E.N.B. Holding Company will be increased so that
shareholders of E.N.B. Holding Company would have the same percentage ownership
in Provident Bancorp following the conversion and merger as they would if
Provident Bancorp had sold $181.3 million of shares of common stock in the
offering.
Any shares of Provident Bancorp common stock to be issued in connection
with the merger will be issued immediately following completion of the
mutual-to-stock conversion of Provident MHC and related stock offering of
Provident Bancorp. If Provident Bancorp does not receive orders for at least
12,580,000 shares in the subscription and community offerings, then, in
Provident Bancorp's discretion, in order to issue the minimum number of shares
necessary to complete the conversion and stock offering, up to 3,677,320 shares
of the unsubscribed offering shares may be issued to shareholders of E.N.B.
Holding Company as merger consideration. However, the merger is not contingent
upon the completion of the mutual-to-stock conversion by Provident Bancorp, MHC.
The merger is subject to stockholder approval of Provident Bancorp, Inc. and
shareholder approval of E.N.B. Holding Company, as well as approval by the
Office of Thrift Supervision. If the conversion is not completed by March 31,
2004, E.N.B. Holding Company, Inc. can elect to (i) proceed with the merger
transaction and E.N.B. Holding Company shareholders will receive $4,500 per
share in cash, or (ii) terminate the merger and receive a termination fee of
$3.7 million.
We anticipate simultaneously completing the conversion, offering and merger
in January 2004, although no assurance can be given that we will be able to
complete these transactions by that date.
46
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF E.N.B. HOLDING COMPANY AND
SUBSIDIARIES
The following tables set forth selected consolidated historical financial
and other data of E.N.B. Holding Company, Inc. for the periods and at the dates
indicated. The information at and for the years ended December 31, 2002, 2001,
2000, 1999 and 1998 is derived in part from audited consolidated financial
statements that are not included in this prospectus. The information at and for
the six months ended June 30, 2003 and 2002 is unaudited. However, in the
opinion of management of E.N.B. Holding Company, Inc., all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results of operations for the unaudited periods have been made. The selected
operating data presented below for the six months ended June 30, 2003, are not
necessarily indicative of the results that may be expected for future periods.
JUNE 30, DECEMBER 31,
------------ ------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets ........................... $ 341,676 $ 310,197 $ 281,164 $ 246,324 $ 231,025 $ 206,149
Loans, net ............................. 199,758 182,320 156,767 135,760 112,052 96,047
Securities available for sale .......... 105,334 92,600 87,144 79,248 72,547 72,357
Securities held to maturity ............ 4,646 7,280 8,827 10,825 12,161 13,902
Deposits ............................... 307,698 277,876 254,571 222,611 211,735 185,782
Equity ................................. 29,900 28,182 24,630 21,658 17,741 18,768
SIX MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
------------ ------------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest and dividend income ........... $ 9,817 $ 9,440
Interest expense ....................... 1,934 2,230
------------ ------------
Net interest income ................. 7,883 7,210
Provision for loan losses .............. 268 370
------------ ------------
Net interest income after provision
for loan losses ................... 7,615 6,840
Non-interest income .................... 1,256 1,302
Non-interest expense ................... 6,142 5,444
------------ ------------
Income before income tax expense ....... 2,729 2,698
Income tax expense ..................... 996 918
------------ ------------
Net income .......................... $ 1,733 $ 1,780
============ ============
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest and dividend income ........... $ 19,110 $ 18,813 $ 17,553 $ 15,139 $ 14,117
Interest expense ....................... 4,407 6,506 6,276 5,043 4,941
------------ ------------ ------------ ------------ ------------
Net interest income ................. 14,703 12,307 11,277 10,096 9,176
Provision for loan losses .............. 580 1,100 500 350 425
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses ................... 14,123 11,207 10,777 9,746 8,751
Non-interest income .................... 2,588 2,758 2,376 2,080 1,944
Non-interest expense ................... 10,922 9,371 8,951 8,237 7,975
------------ ------------ ------------ ------------ ------------
Income before income tax expense ....... 5,789 4,594 4,202 3,589 2,720
Income tax expense ..................... 1,986 1,590 1,462 1,241 910
------------ ------------ ------------ ------------ ------------
Net income .......................... $ 3,803 $ 3,004 $ 2,740 $ 2,348 $ 1,810
============ ============ ============ ============ ============
47
AT OR FOR THE
SIX MONTHS ENDED JUNE 30,
----------------------------
2003 2002
------------ ------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average
total assets) (6) ............................... 1.07% 1.23%
Return on equity (ratio of net income to average
equity) (6) ..................................... 12.12% 14.42%
Average interest rate spread (1) (6) ............. 4.78% 4.82%
Net interest margin (2) (6)....................... 5.24% 5.39%
Efficiency ratio (3) ............................. 67.21% 63.96%
Non-interest expense to average total assets (6) 3.79% 3.76%
Average interest-earning assets to
average interest-bearing liabilities ............ 136.2% 134.6%
PER SHARE AND RELATED DATA:
Basic earnings per share ......................... $ 113.81 $ 118.25
Dividends per share .............................. $ 8.00 $ 8.00
Dividend payout ratio (4) ........................ 7.03% 6.77%
Book value per share (5) ......................... $ 1,963.62 $ 1,791.21
ASSET QUALITY RATIOS:
Non-performing assets to total assets ............ 0.17% 0.17%
Non-performing loans to total loans .............. 0.30% 0.28%
Allowance for loan losses to
non-performing loans ............................ 425.13% 435.30%
Allowance for loan losses to total
loans ........................................... 1.25% 1.23%
CAPITAL RATIOS:
Equity to total assets at end of period .......... 8.75% 9.12%
Average equity to average assets ................. 8.82% 8.52%
Tier 1 leverage ratio (bank only) ................ 8.50% 8.74%
AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average
total assets) ................................... 1.27% 1.12% 1.14% 1.07% 0.92%
Return on equity (ratio of net income to average
equity) ......................................... 14.38% 12.74% 14.52% 12.86% 10.02%
Average interest rate spread (1) ................. 4.71% 4.02% 4.20% 4.35% 4.27%
Net interest margin (2) .......................... 5.30% 4.97% 5.17% 5.09% 5.05%
Efficiency ratio (3) ............................. 63.17% 62.20% 65.56% 67.65% 71.71%
Non-interest expense to average total assets ..... 3.64% 3.50% 3.74% 3.76% 4.00%
Average interest-earning assets to average
interest-bearing liabilities .................... 137.3% 135.9% 133.9% 134.9% 137.6%
PER SHARE AND RELATED DATA:
Basic earnings per share ......................... $ 252.04 $ 201.50 $ 184.23 $ 159.75 $ 124.50
Dividends per share .............................. $ 76.00 $ 60.00 $ 60.00 $ 56.00 $ 48.00
Dividend payout ratio (4) ........................ 30.15% 29.78% 32.57% 35.36% 38.70%
Book value per share (5) ......................... $ 1,850.79 $ 1,636.22 $ 1,454.24 $ 1,194.97 $ 1,283.87
ASSET QUALITY RATIOS:
Non-performing assets to total assets ............ 0.28% 0.10% 0.43% 0.38% 0.77%
Non-performing loans to total loans .............. 0.48% 0.19% 0.72% 0.70% 1.29%
Allowance for loan losses to non-performing
loans ........................................... 262.06% 655.78% 168.38% 173.51% 92.45%
Allowance for loan losses to total loans ......... 1.25% 1.21% 1.21% 1.21% 1.20%
CAPITAL RATIOS:
Equity to total assets at end of period .......... 9.09% 8.76% 8.79% 7.68% 9.10%
Average equity to average assets ................. 8.80% 8.80% 7.88% 8.34% 9.14%
Tier 1 leverage ratio (bank only) ................ 8.61% 8.85% 8.83% 8.72% 8.90%
- ---------------------------
(1) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted- average
cost of interest-bearing liabilities for the period.
(2) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(3) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(4) The dividend payout ratio represents dividends per share divided by basic
earnings per share.
(5) Book value per share is based on total shareholders' equity and outstanding
common shares at the respective period ends. For this purpose, common
shares exclude treasury shares.
(6) Ratios for the six months ended June 30, 2003 and 2002 are annualized.
48
The following tables set forth selected consolidated historical financial
and other data of E.N.B. Holding Company, Inc. for the periods and at the dates
indicated. The information at December 31, 2002 is derived in part from audited
consolidated financial statements. The information at September 30, 2003 and
2002, and for the three-month and nine-month periods then ended, is unaudited.
However, in the opinion of management of E.N.B. Holding Company, Inc., all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial condition and results of operations for the
unaudited periods and dates have been made. The selected operating data
presented below for the three and nine months ended September 30, 2003, are not
necessarily indicative of the results that may be expected for future periods.
SEPTEMBER DECEMBER
30, 2003 31, 2002
------------ ------------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets............................... $ 357,140 $ 310,197
Loans, net ................................ 202,015 182,320
Securities available for sale.............. 117,485 92,600
Securities held to maturity................ 5,683 7,280
Deposits................................... 324,230 277,876
Equity..................................... 29,426 28,182
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest and dividend income................ $ 5,132 $ 4,828 $ 14,949 $ 14,268
Interest expense............................ 984 1,111 2,918 3,341
Net interest income....................... 4,148 3,717 12,031 10,927
Provision for loan losses................... 79 100 347 470
Net interest income after provision
for loan losses........................ 4,069 3,617 11,684 10,457
Non-interest income......................... 589 644 1,845 1,946
Non-interest expense ...................... 3,503 2,760 9,645 8,204
Income before income tax expense............ 1,155 1,501 3,884 4,199
Income tax expense.......................... 624 524 1,620 1,442
Net income .............................. $ 531 $ 977 $ 2,264 $ 2,757
49
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net income to
average total assets) (6)................ 0.60% 1.27% 0.91% 1.24%
Return on equity (ratio of net income to
average equity) (6)...................... 7.10% 13.98% 10.42% 14.10%
Average interest rate spread (1) (6)....... 4.53% 4.59% 4.76% 4.75%
Net interest margin (2) (6)................ 5.06% 5.21% 5.21% 5.34%
Efficiency ratio (3)....................... 73.95% 63.29% 69.51% 63.73%
Non-interest expense to average total
assets (6)............................... 3.97% 3.58% 3.86% 3.70%
Average interest-earning assets to average
interest-bearing liabilities............ 144.6% 139.6% 136.2% 136.1%
PER SHARE AND RELATED DATA:
Basic earnings per share .................. $ 34.88 $ 64.91 $ 148.70 $ 183.17
Dividends per share........................ $ 4.00 $ 4.00 $ 12.00 $ 12.00
Dividend payout ratio (4).................. 11.47% 6.16% 8.07% 6.55%
Book value per share (5)................... $1,932.50 $1,883.02 $1,932.50 $1,883.02
ASSET QUALITY RATIOS:
Non-performing assets to total assets...... 0.04% 0.16% 0.04% 0.16%
Non-performing loans to total loans........ 0.08% 0.27% 0.08% 0.27%
Allowance for loan losses to non-
performing loans......................... 1,632.61% 461.15% 1,632.61% 461.15%
Allowance for loan losses to total loans... 1.25% 1.26% 1.25% 1.26%
CAPITAL RATIOS:
Equity to total assets at end of period.... 8.24% 9.29% 8.24% 9.29%
Average equity to average assets........... 8.49% 9.07% 8.69% 8.81%
Tier 1 leverage ratio (bank only).......... 8.25% 8.83% 8.25% 8.83%
- ------------------------
(1) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted- average
cost of interest-bearing liabilities for the period.
(2) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(3) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(4) The dividend payout ratio represents dividends per share divided by basic
earnings per share.
(5) Book value per share is based on total shareholders' equity and outstanding
common shares at the respective period ends. For this purpose, common
shares exclude treasury shares.
(6) Ratios for the three-month and nine-month periods are annualized.
50
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet at
June 30, 2003 and unaudited pro forma condensed consolidated statements of
income for the nine months ended June 30, 2003 and for the year ended September
30, 2002, give effect to the merger based on the assumptions set forth below.
The unaudited pro forma consolidated financial information is based on unaudited
consolidated financial information of Provident Bancorp and E.N.B. Holding
Company, Inc. at and for the nine months ended June 30, 2003, the audited
consolidated financial statements of Provident Bancorp for the year ended
September 30, 2002 and the audited consolidated financial statements of E.N.B.
Holding Company for the year ended December 31, 2002. The unaudited pro forma
consolidated financial information gives effect to the E.N.B. Holding Company,
Inc. merger using the purchase method of accounting under accounting principles
generally accepted in the United States of America. However, integration costs
and expected cost savings related to integration are not included.
The unaudited pro forma information is provided for informational purposes
only. The pro forma financial information presented is not necessarily
indicative of the actual results that would have been achieved had the merger
been consummated on the dates or at the beginning of the periods presented, and
is not necessarily indicative of future results. The unaudited pro forma
financial information should be read in conjunction with the audited
consolidated financial statements and the notes thereto of Provident Bancorp
contained elsewhere in this document.
THE UNAUDITED PRO FORMA NET INCOME DERIVED FROM THE ABOVE ASSUMPTIONS IS
QUALIFIED BY THE STATEMENTS SET FORTH ABOVE AND SHOULD NOT BE CONSIDERED
INDICATIVE OF THE MARKET VALUE OF PROVIDENT BANCORP COMMON STOCK OR THE ACTUAL
OR FUTURE RESULTS OF OPERATIONS OF PROVIDENT BANCORP FOR ANY PERIOD. THE PRO
FORMA DATA MAY BE MATERIALLY AFFECTED BY THE ACTUAL GROSS AND NET PROCEEDS FROM
THE SALE OF SHARES IN THE STOCK OFFERING AND OTHER FACTORS.
51
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2003 (1)
----------------------------------------------------------------------------------
E.N.B. HOLDING PRO FORMA
PROVIDENT BANCORP COMPANY, INC. ACQUISITION COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS (2)(3) PRO FORMA
----------------- --------------- ---------------------- ---------------
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents........... $ 43,473 $ 22,075 $ (44,609) $ 20,939
Securities available for sale....... 251,913 105,334 -- 357,247
Securities held to maturity......... 82,787 4,646 -- 87,433
Loans, net (4) ..................... 685,109 199,758 3,700 888,567
Premises and equipment, net......... 11,616 6,441 (1,500) 16,557
Goodwill............................ 13,540 -- 48,460 62,000
Other identifiable intangibles...... 1,156 -- 3,093 4,249
Other assets........................ 25,104 3,422 -- 8,526
----------------- --------------- ---------------------- ---------------
Total assets...................... $ 1,114,698 $ 341,676 $ 9,144 $ 1,465,518
================= =============== ====================== ===============
LIABILITIES:
Deposits............................ $ 857,534 $ 307,698 $ 946 $ 1,166,178
Borrowed funds...................... 116,732 -- -- 116,732
Other liabilities................... 24,695 4,078 1,325 30,098
----------------- --------------- ---------------------- ---------------
Total liabilities................. 998,961 311,776 2,271 1,313,008
STOCKHOLDERS' EQUITY:
Common stock........................ 828 400 (32) N/A (5)
Additional paid-in capital.......... 37,252 945 35,460 N/A (5)
Retained earnings................... 83,376 31,341 (31,341) N/A (5)
Accumulated other comprehensive
income............................. 4,059 871 (871) N/A (5)
Less: Common stock held by
employee stock ownership plan...... (1,691) -- -- N/A (5)
Less: Common stock acquired by
recognition and retention plan.... (618) -- -- N/A (5)
Treasury stock...................... (7,469) (3,657) 3,657 N/A (5)
----------------- --------------- ---------------------- ---------------
Total stockholders' equity........ 115,737 29,900 6,873 N/A (5)
----------------- --------------- ---------------------- ---------------
N/A (5)
Total liabilities and
stockholders' quity.............. $ 1,114,698 $ 341,676 $ 9,144 $ N/A (5)
================= =============== ====================== ===============
- ---------------------
(1) Assumes that the acquisition of E.N.B. Holding Company, Inc. was completed
at June 30, 2003.
(2) Assumes a purchase price of $73.546 million to be paid in equal amounts of
common stock (3,677,320 shares at $10.00 per share) and cash ($36.773
million) paid from securities held for sale, along with after-tax
acquisition expenses of $6.8 million. Excludes estimated integration costs
of $432,000, after tax, in connection with the merger.
(3) Assumes purchase accounting adjustments at June 30, 2003. Adjustments
include an increase in value for loans ($3.7 million) and an increase in
the value of deposits ($946,000). In addition, an estimated core deposit
intangible asset is recorded ($3.1 million). A net deferred tax liability
is reflected at a marginal rate of 40.0% for the tax effect on the fair
market value adjustments and the deductible portion of the acquisition
expenses.
(4) Includes loans held for sale.
(5) The issuance of shares of common stock in the merger will occur only if the
acquisition and conversion are completed. Accordingly, pro forma
information regarding stockholders equity is not provided for the
acquisition only. For pro forma stockholders' equity information that
reflects the acquisition and the conversion, See "Pro Forma Conversion and
Acquisition Data."
52
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 2003 (1)
------------------------------------------------------------------------------
PROVIDENT E.N.B. HOLDING PRO FORMA
BANCORP COMPANY, INC. ACQUISITION COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS (2)(3) PRO FORMA
--------------- --------------- -------------------- --------------
Interest income........................ $ 43,715 $ 14,658 $ (1,760) $ 56,613
Interest expense....................... 9,311 2,999 (707) 11,603
--------------- --------------- -------------------- --------------
Net interest income............... 34,404 11,659 (1,053) 45,010
Provision for loan losses.............. 800 328 -- 1,128
--------------- --------------- -------------------- --------------
Net interest income after
provision ....................... 33,604 11,331 (1,053) 43,882
Noninterest income..................... 7,188 1,898 -- 9,086
Noninterest expense.................... 27,136 8,902 861/(4)/ 36,899
--------------- --------------- -------------------- --------------
Income before income taxes............. 13,656 4,327 (1,914) 16,069
Income taxes........................... 4,989 1,553 (766) 5,776
--------------- --------------- -------------------- --------------
Net income........................ $ 8,667 $ 2,774 $ (1,148) $ 10,293
=============== =============== ==================== ==============
EARNINGS PER SHARE:
Basic............................... $ 1.12 $ N/A (5)
Diluted............................. $ 1.11 $ N/A (5)
SHARES USED FOR CALCULATING:
Basic............................... 7,714,631 N/A (5)
Diluted............................. 7,828,819 N/A (5)
FOR THE YEAR ENDED SEPTEMBER 30, 2002 (1)
------------------------------------------------------------------------------
PROVIDENT E.N.B. HOLDING PRO FORMA
BANCORP COMPANY, INC. ACQUISITION COMBINED
HISTORICAL HISTORICAL (6) ADJUSTMENTS (2)(3) PRO FORMA
--------------- ---------------- -------------------- --------------
Interest income........................ $ 59,951 $ 19,110 $ (2,220) $ 76,841
Interest expense....................... 17,201 4,407 (804) 20,804
--------------- --------------- -------------------- --------------
Net interest income............... 42,750 14,703 (1,416) 56,037
Provision for loan losses.............. 900 580 -- 1,480
--------------- --------------- -------------------- --------------
Net interest income after
provision ....................... 41,850 14,123 (1,416) 54,557
Noninterest income..................... 5,401 2,588 -- 7,989
Noninterest expense.................... 32,161 10,922 1,061/(4)/ 44,144
--------------- --------------- -------------------- --------------
Income before income taxes............. 15,090 5,789 (2,477) 18,402
Income taxes........................... 5,563 1,986 (991) 6,558
--------------- --------------- -------------------- --------------
Net income........................ $ 9,527 $ 3,803 $ (1,486) $ 11,844
=============== =============== ==================== ==============
EARNINGS PER SHARE:
Basic............................... $ 1.24 $ N/A (5)
Diluted............................. $ 1.22 $ N/A (5)
SHARES USED FOR CALCULATING:
Basic............................... 7,702,253 N/A (5)
Diluted............................. 7,820,055 N/A (5)
- -------------------
(1) Assumes that the conversion and acquisition of E.N.B. Holding Company, Inc.
were completed at the beginning of the periods presented.
(2) Included in interest income is lost earnings on after-tax merger-related
costs that include 50% of the purchase price that is to be paid in cash
($36.773 million) and after-tax acquisition expenses ($6.8 million). These
funds were applied to a reinvestment rate of 1.09% for the nine months
ended June 30, 2003 for the year ended September 30, 2002.
(3) Purchase accounting adjustments are amortized using a level yield over the
estimated life of the related assets and liabilities.
(4) Noninterest expenses do not reflect anticipated cost savings.
(5) The issuance of shares of common stock in the acquisition will occur only
if the acquisition and conversion are completed. Accordingly, pro forma
information regarding earnings per share and share information is not
provided for the acquisition only. For pro forma earnings per share and
share information that reflects the merger and the conversion, see "Pro
Forma Conversion and Acquisition Data."
(6) E.N.B. Holding Company historical financial information is presented for
the year ended December 31, 2002.
53
PRO FORMA CONVERSION AND ACQUISITION DATA
The following tables summarize historical data of Provident Bancorp and pro
forma data of Provident Bancorp at or for the nine months ended June 30, 2003
and the year ended September 30, 2002. This information is based on assumptions
set forth in "Pro Forma Acquisition Data" and is also based on assumptions set
forth below and in the table, and should not be used as a basis for projections
of market value of the shares of common stock following the conversion, offering
and acquisition. No effect has been given in the table to the possible issuance
of additional shares of common stock pursuant to any stock option plan that may
be adopted by our stockholders no earlier than six months after the conversion.
Moreover, pro forma stockholders' equity per share does not give effect to the
liquidation account to be established in the conversion or, in the event of a
liquidation of Provident Bank, to the recoverability of intangibles or the tax
effect of the recapture of the bad debt reserve. See "The
Conversion--Liquidation Rights."
The net proceeds in the tables are based upon the following assumptions:
(1) all shares of common stock will be sold in the subscription and
community offerings;
(2) 311,000 shares of common stock will be purchased by our executive
officers and directors, and their associates;
(3) our employee stock ownership plan will purchase 5% of the shares of
common stock sold in the offering (including shares we issue to the
Provident Bank Charitable Foundation) with a loan from Provident
Bancorp. The loan will be repaid in substantially equal payments of
principal and interest over a period of 20 years;
(4) we will issue 400,000 shares of common stock and contribute $1.0
million in cash to the charitable foundation;
(5) Ryan Beck & Co. will receive a fee equal to 1.0% of the dollar amount
of shares of common stock sold in the offering. No fee will be paid
with respect to shares of common stock purchased by our qualified and
non-qualified employee stock benefit plans or by our officers,
directors and employees, and their immediate families, or shares
issued to the charitable foundation. No fee will be payable to Ryan
Beck & Co. with respect to shares issued to shareholders of E.N.B.
Holding Company, except under limited circumstances when such shares
are issued as part of the offering so that we can sell at least
12,580,000 shares of common stock in the offering; and
(6) total expenses of the offering, including the marketing fees to be
paid to Ryan Beck & Co., will be between $2.7 million at the minimum
of the offering range and $3.4 million at the maximum of the offering
range, as adjusted.
We calculated pro forma consolidated net earnings for the nine months ended
June 30, 2003 and the year ended September 30, 2002 as if the estimated net
proceeds we received had been invested at an assumed interest rate of 1.09%
(0.65% on an after-tax basis), which represents the yield on the one-year U.S.
Treasury Bill as of June 30, 2003 (which Provident Bancorp considers to more
accurately reflect the pro forma reinvestment rate than an arithmetic average
method in light of changes in interest rates in recent periods). The effect of
withdrawals from deposit accounts for the purchase of shares of common stock has
not been reflected. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of common stock. No effect
54
has been given in the pro forma stockholders' equity calculations for the
assumed earnings on the net proceeds. It is assumed that Provident Bancorp will
retain between $42.2 million and $82.0 million of the estimated net proceeds in
the offering, or $96.2 million if the offering range is increased by 15%. The
actual net proceeds from the sale of shares of common stock will not be
determined until the offering is completed. However, we currently estimate the
net proceeds to be between $123.1 million and $167.1 million, or $192.4 million
if the offering range is increased by 15%. It is assumed that all shares of
common stock will be sold in the subscription and community offerings.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur, and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amounts of our assets and liabilities. The pro
forma stockholders' equity is not intended to represent the fair market value of
the shares of common stock.
55
AT OR FOR THE NINE MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------
BASED UPON THE SALE AT $10.00 PER SHARE OF
12,580,000 14,800,000 17,020,000 19,573,000
SHARES (1) SHARES SHARES SHARES (2)
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds.................................... $ 125,800 $ 148,000 $ 170,200 $ 195,730
Expenses.......................................... 2,702 2,913 3,124 3,366
------------ ------------ ------------ ------------
Estimated net proceeds......................... 123,098 145,087 167,076 192,364
Common stock acquired by employee stock
ownership plan (3).............................. (6,490) (7,600) (8,710) (9,987)
Common stock acquired by recognition and
retention plan (4).............................. (5,192) (6,080) (6,968) (7,989)
Cash contribution to the charitable foundation.... (1,000) (1,000) (1,000) (1,000)
Assets received from the MHC...................... 626 626 626 626
------------ ------------ ------------ ------------
Estimated net proceeds, as adjusted............ $ 111,042 $ 131,033 $ 151,024 $ 174,014
============ ============ ============ ============
FOR THE NINE MONTHS ENDED JUNE 30, 2003
---------------------------------------
Consolidated net earnings (10):
Historical combined with acquisition........... $ 10,293 $ 10,293 $ 10,293 $ 10,293
Pro forma adjustments:
Income on adjusted net proceeds................ 545 643 741 854
Employee stock ownership plan (3).............. (146) (171) (196) (225)
Recognition and retention plan (4)............. (467) (547) (627) (719)
------------ ------------ ------------ ------------
Pro forma net earnings (10).................. $ 10,225 $ 10,218 $ 10,211 $ 10,203
============ ============ ============ ============
Earnings per share (5):
Historical combined with acquisition........... $ 0.40 $ 0.35 $ 0.31 $ 0.27
Pro forma adjustments:
Income on adjusted net proceeds................ 0.03 0.03 0.03 0.03
Employee stock ownership plan (3).............. (0.01) (0.01) (0.01) (0.01)
Recognition and retention plan (4)............. (0.02) (0.02) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma earnings per share (5) (6)......... $ 0.40 $ 0.35 $ 0.31 $ 0.27
============ ============ ============ ============
Offering price to pro forma net earnings per share 18.75x 21.43x 24.19x 27.78x
Number of shares used in earnings per share
calculations...................................... 25,754,863 29,583,709 33,412,556 38,108,084
AT JUNE 30, 2003
----------------
Stockholders' equity:
Historical combined with acquisition........... $ 152,510 $ 152,510 $ 152,510 $ 155,536
MHC capital consolidation...................... 626 626 626 626
Estimated net proceeds......................... 123,098 145,087 167,076 192,364
Shares issued to the charitable foundation..... 4,000 4,000 4,000 4,000
Tax benefit of contribution to the charitable
foundation..................................... (3,000) (3,000) (3,000) (3,000)
Common stock acquired by employee stock
ownership plan (3)............................ (6,490) (7,600) (8,710) (9,987)
Common stock acquired by recognition and
retention plan (4)............................ (5,192) (6,080) (6,968) (7,989)
Pro forma stockholders' equity (7)......... 265,552 285,543 305,534 331,550
Intangible assets (8).......................... 66,250 66,250 66,250 69,276
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity.... $ 199,302 $ 219,293 $ 239,284 $ 262,274
============ ============ ============ ============
(continued on following page)
56
(CONTINUED FROM PREVIOUS PAGE)
AT OR FOR THE NINE MONTHS ENDED JUNE 30, 2003
BASED UPON THE SALE AT $10.00 PER SHARE OF
-----------------------------------------------------------------
12,580,000 14,800,000 17,020,000 19,573,000
SHARES (1) SHARES SHARES SHARES (2)
------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Stockholders' equity per share (9):
Historical combined with acquisition........... $ 5.70 $ 4.96 $ 4.39 $ 3.93
MHC capital consolidation...................... 0.02 0.02 0.02 0.02
Estimated net proceeds......................... 4.60 4.72 4.81 4.86
Shares issued to the charitable foundation..... 0.15 0.13 0.12 0.10
Tax benefit of contribution to the charitable
foundation..................................... (0.11) (0.10) (0.09) (0.08)
Common stock acquired by employee stock
ownership plan (3)............................ (0.24) (0.25) (0.25) (0.25)
Common stock acquired by recognition and
retention plan (4)............................ (0.19) (0.20) (0.20) (0.20)
------------- ------------- ------------- -------------
Pro forma stockholders' equity per share
(7) (9).................................... $ 9.93 $ 9.28 $ 8.80 $ 8.38
============= ============= ============= =============
Pro forma tangible stockholders' equity
per share.................................. $ 7.46 $ 7.14 $ 6.89 $ 6.62
============= ============= ============= =============
Offering price as percentage of pro forma
stockholders' equity per share.......... 100.70% 107.76% 113.64% 119.33%
Offering price as percentage of pro forma
tangible stockholders' equity per share.... 134.14% 140.14% 145.14% 151.06%
Number of shares used in book value per share
calculations...................................... 26,733,498 30,731,647 34,729,797 39,620,024
- ----------------------------
(1) If Provident Bancorp does not receive orders for at least 12,580,000 shares
in the offering, then, at Provident Bancorp's discretion in order to issue
the minimum number of shares necessary to complete the conversion and stock
offering, up to 3,677,320 shares of the unsubscribed offering shares may be
issued to shareholders of E.N.B. Holding Company as merger consideration.
If 3,677,320 unsubscribed shares are so issued as part of the conversion
and stock offering, then estimated proceeds would be $86.7 million, pro
forma net earnings per share would be $0.46 and the offering price to pro
forma net earnings per share would be 16.30x, pro forma stockholders'
equity and tangible stockholders' equity per share would be $9.93 and
$7.07, respectively, and the offering price as a percentage of pro forma
stockholders' equity per share and the offering price as a percentage of
pro forma tangible stockholders' equity per share would be 100.70% and
141.54%, respectively.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect demand
for the shares, changes in market and financial conditions following the
commencement of the offering, or regulatory considerations.
(3) Assumes that 5% of shares of common stock sold in the offering (including
shares we issue to the Provident Bank Charitable Foundation) will be
purchased by the employee stock ownership plan. For purposes of this table,
the funds used to acquire these shares are assumed to have been borrowed by
the employee stock ownership plan from Provident Bancorp. Provident Bank
intends to make annual contributions to the employee stock ownership plan
in an amount at least equal to the required principal and interest payments
due on the debt. Provident Bank's total annual payments on the employee
stock ownership plan debt are based upon 20 equal annual installments of
principal and interest. Statement of Position 93-6 requires that an
employer record compensation expense in an amount equal to the fair value
of the shares committed to be released to employees. The pro forma
adjustments assume that the employee stock ownership plan shares are
allocated in equal annual installments based on the number of loan
repayment installments assumed to be paid by Provident Bank, the fair value
of the common stock remains equal to the subscription price and the
employee stock ownership plan expense reflects an effective combined
federal and state tax rate of 40.0%. The unallocated employee stock
ownership plan shares are reflected as a reduction of stockholders' equity.
No reinvestment is assumed on proceeds contributed to fund the employee
stock ownership plan. The pro forma net income further assumes that 24,337,
28,500, 32,662 and 37,449 shares were committed to be released during the
period at the minimum, midpoint, maximum, and adjusted maximum of the
offering range, respectively, and in accordance with Statement of Position
93-6, only the employee stock ownership plan shares committed to be
released during the period were considered outstanding for purposes of net
income per share calculations.
(4) If approved by Provident Bancorp's stockholders, the stock recognition and
retention plan may purchase an aggregate number of shares of common stock
equal to 4% of the shares to be sold in the offering (including shares we
issue to the Provident Bank Charitable Foundation). Stockholder approval of
the stock recognition and retention plan, and purchases by the plan may not
occur earlier than six months after the completion of the conversion. The
shares may be acquired directly from Provident Bancorp or through open
market purchases. The funds to be used by the stock recognition and
retention plan to purchase the shares will be provided by Provident
Bancorp. The table assumes that (i) the stock recognition and retention
plan acquires the shares through open market purchases at $10.00 per share,
(ii) 15% of the amount contributed to the stock recognition and retention
plan is amortized as an expense during the nine months ended June 30, 2003
and (iii) the stock recognition and retention plan expense reflects an
effective combined federal and state tax rate of 40.0%. Assuming
stockholder approval of the stock recognition and retention plan and that
shares of common stock are awarded through the use of authorized but
unissued shares of common stock, stockholders would have their ownership
and voting interests diluted by approximately 2.0% at the maximum of the
offering range.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
57
(5) Per share figures include publicly held shares of Provident Bancorp common
stock that will be exchanged for new shares of Provident Bancorp common
stock in the conversion. See "The Conversion -- Share Exchange Ratio." Net
income per share computations are determined by taking the number of shares
assumed to be sold in the offering and the number of new shares assumed to
be issued in exchange for publicly held shares and, in accordance with
Statement of Position 93-6, subtracting the recognition and retention plan
shares and the employee stock ownership plan shares which have not been
committed for release during the respective periods. See notes 3 and 4. The
number of shares of common stock actually sold and the corresponding number
of exchange shares may be more or less than the assumed amounts.
(6) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which is expected to be adopted by
Provident Bancorp following the offering and presented to stockholders for
approval not earlier than six months after the completion of the
conversion. If the stock option plan is approved by stockholders, a number
of shares up to 10% of the shares sold in the offering (including shares we
issue to the Provident Bank Charitable Foundation) will be reserved for
future issuance upon the exercise of options to be granted under the stock
option plan. The issuance of authorized but previously unissued shares of
common stock pursuant to the exercise of options under such plan would
dilute existing stockholders' ownership and voting interests by
approximately 4.8% at the maximum of the offering range.
(7) The retained earnings of Provident Bank will be substantially restricted
after the conversion. See "Our Dividend Policy," "The
Conversion--Liquidation Rights" and "Supervision and Regulation--Federal
Banking Regulation--Capital Distributions."
(8) Intangible assets represents the outstanding balance of goodwill ($62.0
million) and customer lists ($4.3 million) as of June 30, 2003.
(9) Per share figures include publicly held shares of Provident Bancorp common
stock that will be exchanged for new shares of Provident Bancorp common
stock in the conversion. Stockholders' equity per share calculations are
based upon the sum of (i) the number of subscription shares assumed to be
sold in the offering and (ii) new shares to be issued in exchange for
publicly held shares at the minimum, midpoint, maximum and adjusted maximum
of the offering range, respectively. The exchange shares reflect an
exchange ratio of 2.8487, 3.3514, 3.8542 and 4.4323, respectively, at the
minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively. The number of subscription shares actually sold and the
corresponding number of exchange shares may be more or less than the
assumed amounts.
(10) Does not give effect to the non-recurring expense that will be recognized
in 2004 as a result of the establishment of the charitable foundation. We
will recognize an after-tax expense for the amount of the aggregate
contribution to the charitable foundation, which after-tax expense is
expected to be $3.0 million.
58
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 2002
BASED UPON THE SALE AT $10.00 PER SHARE OF
----------------------------------------------------------------
12,580,000 14,800,000 17,020,000 19,573,000
SHARES (1) SHARES SHARES SHARES (2)
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds...................................... $ 125,800 $ 148,000 $ 170,200 $ 195,730
Expenses............................................ 2,702 2,913 3,124 3,366
------------ ------------- ------------ ------------
Estimated net proceeds........................... 123,098 145,087 167,076 192,364
Common stock acquired by employee stock
ownership plan (3)................................ (6,490) (7,600) (8,710) (9,987)
Common stock acquired by recognition and retention
plan (4)............................................ (5,192) (6,080) (6,968) (7,989)
Cash contributed to the charitable foundation....... (1,000) (1,000) (1,000) (1,000)
Assets received from the MHC........................ 626 626 626 626
------------ ------------- ------------ ------------
Estimated net proceeds, as adjusted.............. $ 111,042 $ 131,033 $ 151,024 $ 174,014
============ ============ ============ ============
FOR THE YEAR ENDED SEPTEMBER 30, 2002
-------------------------------------
Consolidated net earnings (10):
Historical combined with acquisition............. $ 11,844 $ 11,844 $ 11,844 $ 11,844
Pro forma adjustments:
Income on adjusted net proceeds.................. 726 857 988 1,138
Employee stock ownership plan (3)................ (195) (228) (261) (300)
Recognition and retention plan (4)............... (623) (730) (836) (959)
------------ ------------- ------------ ------------
Pro forma net earnings (10).................... $ 11,752 $ 11,743 $ 11,735 $ 11,723
============ ============ ============ ============
Earnings per share (5):
Historical combined with acquisition............. $ 0.46 $ 0.40 $ 0.35 $ 0.31
Pro forma adjustments:
Income on adjusted net proceeds.................. 0.03 0.03 0.03 0.03
Employee stock ownership plan (3)................ (0.01) (0.01) (0.01) (0.01)
Recognition and retention plan (4)............... (0.02) (0.02) (0.03) (0.03)
------------ ------------- ------------ ------------
Pro forma earnings per share (5) (6)........... $ 0.46 $ 0.40 $ 0.34 $ 0.30
============ ============= ============ ============
Offering price to net earnings per share............ 21.74x 25.00x 29.41x 33.33x
Number of shares used in earnings per share
calculations........................................ 25,738,009 29,563,837 33,389,666 38,081,723
AT SEPTEMBER 30, 2002
---------------------
Stockholders' equity:
Historical combined with acquisition............. $ 146,147 $ 146,147 $ 146,147 $ 149,173
MHC capital consolidation........................ 626 626 626 626
Estimated net proceeds........................... 123,098 145,087 167,076 192,364
Shares issued to the charitable foundation....... 4,000 4,000 4,000 4,000
After tax cost of contribution to the charitable
foundation....................................... (3,000) (3,000) (3,000) (3,000)
Common stock acquired by employee stock
ownership
plan (3)........................................ (6,490) (7,600) (8,710) (9,987)
Common stock acquired by recognition and
retention plan (4).............................. (5,192) (6,080) (6,968) (7,989)
------------ ------------- ------------ ------------
Pro forma stockholders' equity (7)........... 259,189 279,180 299,171 325,187
Intangible assets (8)............................ 66,594 66,594 66,594 69,620
------------ ------------- ------------ ------------
Pro forma tangible stockholders' equity...... $ 192,595 $ 212,586 $ 232,577 $ 255,567
============ ============= ============ ============
(CONTINUED ON FOLLOWING PAGE)
59
(continued from previous page)
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 2002
BASED UPON THE SALE AT $10.00 PER SHARE OF
-------------------------------------------------------------
12,580,000 14,800,000 17,020,000 19,573,000
SHARES (1) SHARES SHARES SHARES (2)
----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Stockholders' equity per share (9):
Historical combined with acquisition............... $ 5.47 $ 4.76 $ 4.21 $ 3.77
MHC capital consolidation.......................... 0.02 0.02 0.02 0.02
Estimated net proceeds............................. 4.60 4.72 4.81 4.86
Shares issued to the charitable foundation......... 0.15 0.13 0.12 0.10
Tax benefit of contribution to the charitable
foundation......................................... (0.11 (0.10) (0.09) (0.08)
Common stock acquired by employee stock
ownership plan (3)................................ (0.24) (0.25) (0.25) (0.25)
Common stock acquired by recognition and
retention plan (4)................................ (0.19) (0.20) (0.20) (0.20)
Pro forma stockholders' equity per share (7) (9). $ 9.70 $ 9.08 $ 8.62 $ 8.22
Pro forma tangible stockholders' equity per
share............................................ $ 7.20 $ 6.92 $ 6.70 $ 6.45
Offering price as percentage of pro forma
stockholders' equity per share...................... 103.09% 110.13% 116.01% 121.65%
Offering price as percentage of pro forma
tangible stockholders' equity per share............. 138.81% 144.56% 149.33% 155.03%
Number of shares used in book value per share
calculations........................................... 26,733,498 30,731,647 34,729,797 39,620,024
- -------------------------
(1) If Provident Bancorp does not receive orders for at least 12,580,000 shares
in the offering, then, at Provident Bancorp's discretion in order to issue
the minimum number of shares necessary to complete the conversion and stock
offering, up to 3,677,320 shares of the unsubscribed offering shares may be
issued to shareholders of E.N.B. Holding Company as merger consideration.
If 3,677,320 unsubscribed shares are so issued as part of the conversion
and stock offering, then estimated proceeds would be $86.9 million, pro
forma net earnings per share would be $0.52 and the offering price to pro
forma net earnings per share would be 17.54x, pro forma stockholders'
equity and tangible stockholders' equity per share would be $9.66 and
$6.77, respectively, and the offering price as a percentage of pro forma
stockholders' equity per share and the offering price as a percentage of
pro forma tangible stockholders' equity per share would be 103.52% and
147.62%, respectively.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect demand
for the shares, changes in market and financial conditions following the
commencement of the offering, or regulatory considerations.
(3) Assumes that 5% of shares of common stock sold in the offering (including
shares we issue to the Provident Bank Charitable Foundation) will be
purchased by the employee stock ownership plan. For purposes of this table,
the funds used to acquire these shares are assumed to have been borrowed by
the employee stock ownership plan from Provident Bancorp. Provident Bank
intends to make annual contributions to the employee stock ownership plan
in an amount at least equal to the required principal and interest payments
on the debt. Provident Bank's total annual payments on the employee stock
ownership plan debt are based upon 20 equal annual installments of
principal and interest. Statement of Position 93-6 requires that an
employer record compensation expense in an amount equal to the fair value
of the shares committed to be released to employees. The pro forma
adjustments assume that the employee stock ownership plan shares are
allocated in equal annual installments based on the number of loan
repayment installments assumed to be paid by Provident Bank, the fair value
of the common stock remains equal to the subscription price and the
employee stock ownership plan expense reflects an effective combined
federal and state tax rate of 40.0%. The unallocated employee stock
ownership plan shares are reflected as a reduction of stockholders' equity.
No reinvestment is assumed on proceeds contributed to fund the employee
stock ownership plan. The pro forma net income further assumes that 32,450,
38,000, 43,550 and 49,932 shares were committed to be released during the
period at the minimum, midpoint, maximum, and adjusted maximum of the
offering range, respectively, and in accordance with Statement of Position
93-6, only the employee stock ownership plan shares committed to be
released during the period were considered outstanding for purposes of net
income per share calculations.
(4) If approved by Provident Bancorp's stockholders, the stock recognition and
retention plan may purchase an aggregate number of shares of common stock
equal to 4% of the shares to be sold in the offering (including shares we
issue to the Provident Bank Charitable Foundation). Stockholder approval of
the stock recognition and retention plan, and purchases by the plan may not
occur earlier than six months after the completion of the conversion. The
shares may be acquired directly from Provident Bancorp or through open
market purchases. The funds to be used by the stock recognition and
retention plan to purchase the shares will be provided by Provident
Bancorp. The table assumes that (i) the stock recognition and retention
plan acquires the shares through open market purchases at $10.00 per share,
(ii) 20% of the amount contributed to the stock recognition and retention
plan is amortized as an expense during the year ended September 30, 2002
and (iii) the stock recognition and retention plan expense reflects an
effective combined federal and state tax rate of 40.0%. Assuming
stockholder approval of the stock recognition and retention plan and that
shares of common stock are awarded through the use of authorized but
unissued shares of common stock, stockholders would have their ownership
and voting interests diluted by approximately 2.0% at the maximum of the
offering range.
60
(footnotes continued on following page)
61
(5) Per share figures include publicly held shares of Provident Bancorp common
stock that will be exchanged for new shares of Provident Bancorp common
stock in the conversion. See "The Conversion -- Share Exchange Ratio." Net
income per share computations are determined by taking the number of shares
assumed to be sold in the offering and the number of new shares assumed to
be issued in exchange for publicly held shares and, in accordance with
Statement of Position 93-6, subtracting the recognition and retention plan
shares and the employee stock ownership plan shares which have not been
committed for release during the respective periods. See notes 3 and 4. The
number of shares of common stock actually sold and the corresponding number
of exchange shares may be more or less than the assumed amounts.
(6) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which is expected to be adopted by
Provident Bancorp following the offering and presented to stockholders for
approval not earlier than six months after the completion of the
conversion. If the stock option plan is approved by stockholders, a number
of shares up to 10% of the shares sold in the offering (including shares we
issue to the Provident Bank Charitable Foundation) will be reserved for
future issuance upon the exercise of options to be granted under the stock
option plan. The issuance of authorized but previously unissued shares of
common stock pursuant to the exercise of options under such plan would
dilute existing stockholders' ownership and voting interests by
approximately 4.8% at the maximum of the offering range.
(7) The retained earnings of Provident Bank will be substantially restricted
after the conversion. See "Our Dividend Policy," "The
Conversion--Liquidation Rights" and "Supervision and Regulation--Federal
Banking Regulation--Capital Distributions."
(8) Intangible assets represents the outstanding balance of goodwill ($62.0
million) and customer lists ($4.250 million) as of September 30, 2002.
(9) Per share figures include publicly held shares of Provident Bancorp common
stock that will be exchanged for new shares of Provident Bancorp common
stock in the conversion. Stockholders' equity per share calculations are
based upon the sum of (i) the number of subscription shares assumed to be
sold in the offering and (ii) new shares to be issued in exchange for
publicly held shares at the minimum, midpoint, maximum and adjusted maximum
of the offering range, respectively. The exchange shares reflect an
exchange ratio of 2.8487, 3.3514, 3.8542 and 4.4323, respectively, at the
minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively. The number of subscription shares actually sold and the
corresponding number of exchange shares may be more or less than the
assumed amounts.
(10) Does not give effect to the non-recurring expense that will be recognized
in 2004 as a result of the establishment of the charitable foundation. We
will recognize an after-tax expense for the amount of the aggregate
contribution to the charitable foundation, which after-tax expense is
expected to be $3.0 million.
62
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE FOUNDATION
As reflected in the table below, if the charitable foundation is not
established and funded as part of the conversion, RP Financial estimates that
the pro forma valuation of Provident Bancorp would be greater, and as a result a
greater number of shares of common stock would be issued in the offering. At the
minimum, midpoint, maximum and adjusted maximum of the valuation range, the pro
forma valuation of Provident Bancorp is $267.3 million, $307.3 million, $347.3
million and $396.2 million with the charitable foundation, as compared to $271.0
million, $312.3 million, $353.7 million and $405.5 million, respectively,
without the charitable foundation. There is no assurance that in the event the
charitable foundation were not formed that the appraisal prepared at that time
would conclude that the pro forma market value of Provident Bancorp would be the
same as that estimated herein. Any appraisal prepared at that time would be
based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios at and for the nine months ended June 30, 2003 at
the minimum, midpoint, maximum and adjusted maximum of the offering range,
assuming the conversion was completed at June 30, 2003, with and without the
charitable foundation. Pro forma financial ratios are annualized. The valuation
amounts referred to in the table below relate to the value of the shares sold to
the depositors and the public and the shares issued to shareholders of E.N.B.
Holding Company.
12,580,000 Shares Sold (1) 14,800,000 Shares Sold
---------------------------------- ----------------------------------
With Without With Without
Foundation Foundation Foundation Foundation
--------------- --------------- --------------- ---------------
(Dollars in thousands, except Per Share amounts)
Estimated offering amount ........................... $ 125,800 $ 130,050 $ 148,000 $ 153,000
Pro forma market capitalization ..................... 267,335 270,989 307,316 312,321
Total assets ........................................ 1,578,560 1,581,746 1,598,551 1,602,411
Total liabilities ................................... 1,313,073 1,313,073 1,313,073 1,313,073
Pro forma stockholders' equity ...................... 265,552 268,738 285,543 289,403
Pro forma net income ................................ 10,225 10,249 10,218 10,241
Pro forma stockholders' equity per share ............ 9.93 9.92 9.28 9.26
Pro forma net income per share ...................... 0.40 0.39 0.35 0.34
Pro forma pricing ratios:
Offering price as a percentage of pro forma
stockholders' equity per share .................... 100.70% 100.81% 107.76% 107.99%
Offering price to pro forma net income per share .... 18.75x 19.23x 21.43x 22.06x
Pro forma financial ratios:
Return on assets .................................... 0.86% 0.86% 0.85% 0.85%
Return on equity .................................... 5.13% 5.08% 4.77% 4.72%
Equity to assets .................................... 16.82% 16.99% 17.86% 18.06%
17,020,000 Shares Sold 19,573,000 Shares Sold
---------------------------------- ----------------------------------
With Without With Without
Foundation Foundation Foundation Foundation
--------------- --------------- --------------- ---------------
(Dollars in thousands, except Per Share amounts)
Estimated offering amount ........................... $ 170,200 $ 175,950 $ 195,730 $ 202,343
Pro forma market capitalization ..................... 347,298 353,654 396,200 405,450
Total assets ........................................ 1,618,542 1,623,078 1,644,558 1,651,259
Total liabilities ................................... 1,313,073 1,313,073 1,313,073 1,313,073
Pro forma stockholders' equity ...................... 305,535 310,071 331,550 338,251
Pro forma net income ................................ 10,211 10,235 10,203 10,226
Pro forma stockholders' equity per share ............ 8.80 8.77 8.38 8.35
Pro forma net income per share ...................... 0.31 0.30 0.27 0.26
Pro forma pricing ratios:
Offering price as a percentage of pro forma
stockholders' equity per share .................... 113.64% 114.03% 119.33% 119.76%
Offering price to pro forma net income per share .... 24.19x 25.00x 27.78x 28.85x
Pro forma financial ratios:
Return on assets .................................... 0.84% 0.84% 0.83% 0.83%
Return on equity .................................... 4.46% 4.40% 4.10% 4.03%
Equity to assets .................................... 18.88% 19.10% 20.16% 20.48%
63
(1) If Provident Bancorp does not receive orders for at least 12,580,000 shares
in the offering, then, at Provident Bancorp's discretion in order to issue
the minimum number of shares necessary to complete the conversion and stock
offering, up to 3,677,320 unsubscribed offering shares may be issued to
shareholders of E.N.B. Holding Company as merger consideration. If
3,677,320 unsubscribed shares are so issued, the offering price as a
percentage of pro forma stockholders' equity per share, the offering price
to pro forma net income per share, return on assets and return on equity
without the foundation would be 100.81%, 16.67x, 0.85% and 5.78%,
respectively, compared to 100.70%, 16.30x, 0.85% and 5.85% with the
charitable foundation, respectively.
64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion and analysis that follows focuses on the factors affecting
our consolidated financial condition at June 30, 2003, September 30, 2002 and
September 30, 2001 and our consolidated results of operations for the nine
months ended June 30, 2003 and 2002 and for the years ended September 30, 2002,
2001 and 2000. The consolidated financial statements and related notes appearing
elsewhere in this prospectus should be read in conjunction with this review. The
financial condition and results of operations reported at June 30, 2003 and for
the nine-month period ended June 30, 2003 are not necessarily indicative of the
financial condition and results of operations for the fiscal year ending
September 30, 2003.
On April 23, 2002, we completed our acquisition of The National Bank of
Florida, a commercial bank in Orange County, New York, which had assets of
$104.0 million and deposits of $88.2 million. The acquisition was accounted for
as a purchase, resulting in goodwill and other intangible assets of $15.3
million. Amounts attributable to The National Bank of Florida, which was merged
into Provident Bank, are included in our consolidated financial statements from
the date of acquisition.
Following the completion of the conversion, our non-interest expense can be
expected to increase because of the increased compensation expenses associated
with the purchases of shares of common stock by our employee stock ownership
plan and the adoption of the recognition and retention plan, if approved by our
stockholders.
Assuming that 19,573,000 shares are sold in the offering and 400,000 shares
are issued to the Provident Bank Charitable Foundation:
(i) the employee stock ownership plan will acquire 998,700 shares of
common stock with a $10.0 million loan that is expected to be repaid
over 20 years, resulting in an annual expense (pre-tax) of
approximately $499,000 (assuming that the common stock maintains a
value of $10.00 per share); and
(ii) the recognition and retention plan would award a number of shares
equal to 4% of the shares sold in the offering (including shares we
issue to the Provident Bank Charitable Foundation), or 798,920 shares
to eligible participants, which would be expensed as the awards vest.
Assuming all shares are awarded under the recognition and retention
plan at a price of $10.00 per share, and that the awards vest over
five years, the corresponding annual expense (pre-tax) associated with
shares awarded under the recognition and retention plan would be
approximately $1.6 million.
The actual expense that will be recorded for the employee stock ownership plan
will be determined by the market value of the shares of common stock as they are
released to employees over the term of the loan, and whether the loan is repaid
faster than its contractual term. Accordingly, increases in the stock price
above $10.00 per share will increase the total employee stock ownership plan
expense, and accelerated repayment of the loan will increase the annual employee
stock ownership plan expense. Further, the actual expense of the recognition and
retention plan will be determined by the fair market value of the stock on the
grant date, which might be greater than $10.00 per share.
65
GENERAL
Our results of operations depend primarily on our net interest income,
which is the difference between the interest income on our earning assets, such
as loans and securities, and the interest expense paid on our deposits and
borrowings. Results of operations are also affected by non-interest income and
expense, the provision for loan losses and income tax expense. Non-interest
income consists primarily of banking fees and service charges, gains (losses) on
sales of loans and securities available for sale and net increases in the cash
surrender value of bank-owned life insurance ("BOLI") contracts. Our
non-interest expense consists primarily of salaries and employee benefits,
occupancy and office expenses, advertising and promotion expense and data
processing expenses. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies are prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. Accounting policies
considered critical to our financial results include the allowance for loan
losses, accounting for goodwill and other intangible assets, accounting for
deferred income taxes and the recognition of interest income.
The methodology for determining the allowance for loan losses is considered
by management to be a critical accounting policy due to the high degree of
judgment involved, the subjectivity of the assumptions utilized and the
potential for changes in the economic environment that could result in changes
to the amount of the allowance for loan losses considered necessary. We evaluate
our assets at least quarterly, and review their risk components as a part of
that evaluation. See Note 3, Summary of Significant Accounting
Policies--Allowance for Loan Losses in our Notes to Consolidated Financial
Statements for a discussion of the risk components. We consistently review the
risk components to identify any changes in trends. Accounting for goodwill is
considered to be a critical policy because goodwill must be tested for
impairment at least annually using a "two-step" approach that involves the
identification of reporting units and the estimation of fair values. The
estimation of fair values involves a high degree of judgment and subjectivity in
the assumptions utilized. If goodwill is determined to be impaired, it would be
expensed in the period in which it became impaired.
We also use judgment in the valuation of other intangible assets (core
deposit base intangibles). A core deposit base intangible asset has been
recorded for core deposits (defined as checking, money market and savings
deposits) that were acquired in an acquisition that was accounted as a purchase
business combination. The core deposit base intangible asset has been recorded
using the assumption that the acquired deposits provide a more favorable source
of funding than more expensive wholesale borrowings. An intangible asset has
been recorded for the present value of the difference between the expected
interest to be incurred on these deposits and interest expense that would be
expected if these deposits were replaced by wholesale borrowings, over the
expected lives of the core deposits. If we find these deposits have a shorter
life than was estimated, we will write down the asset by expensing the amount
that is impaired.
We use the asset and liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. If current available information raises doubt as to the realization of
the deferred tax assets, a valuation allowance is established. Deferred tax
assets and liabilities are measured using enacted tax rates
66
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We exercise significant
judgment in evaluating the amount and timing of recognition of the resulting tax
liabilities and assets, including projections of future taxable income. These
judgments and estimates are reviewed on a continual basis as regulatory and
business factors change.
Interest income on loans, securities and other interest-earning assets is
accrued monthly unless management considers the collection of interest to be
doubtful. Loans are placed on nonaccrual status when payments are contractually
past due 90 days or more, or when management has determined that the borrower is
unlikely to meet contractual principal or interest obligations. At such time,
unpaid interest is reversed by charging interest income. Interest payments
received on nonaccrual loans (including impaired loans) are recognized as income
unless future collections are doubtful. Loans are returned to accrual status
when collectibility is no longer considered doubtful (generally, when all
payments have been brought current).
MANAGEMENT STRATEGY
We operate as an independent community bank that offers a broad range of
customer-focused financial services as an alternative to money center banks in
our market area. Over the years, management has invested in the infrastructure
and staffing to support our strategy of serving the financial needs of
individuals, businesses and municipalities in our market area. This has resulted
in a change in our business mix, providing a favorable platform for long-term
sustainable growth. Highlights of management's business strategy are as follows:
OPERATING AS A COMMUNITY BANK. As an independent community bank, we
emphasize the local nature of our decision-making to respond more effectively to
the needs of our customers while providing a full range of financial services to
the individuals, corporations and municipalities in our market area. We offer a
broad range of financial products to meet the changing needs of the marketplace,
including internet banking, cash management services and sweep accounts. In
addition, we offer asset management and trust services to meet the investing
needs of individuals, corporations and not-for-profit entities. As a result, we
are able to provide locally the financial services required to meet the needs of
the majority of existing and potential customers in our market.
ENHANCING CUSTOMER SERVICE. We are committed to providing superior customer
service as a way to differentiate us from our competition. As part of our
commitment to service, we have established Sunday banking and extended service
hours. In addition, we offer multiple access channels to our customers,
including our branch and ATM network, internet banking, our Customer Care
Telephone Center and our Automated Voice Response system. We reinforce in our
employees a commitment to customer service through extensive training,
recognition programs and measurement of service standards.
GROWING AND DIVERSIFYING OUR LOAN PORTFOLIO. We offer a broad range of loan
products to commercial businesses, real estate owners, developers and
individuals. To support this activity, we have developed commercial, consumer
and residential loan departments staffed with experienced professionals to
promote the continued growth and prudent management of loan assets. We have
experienced consistent and significant growth in our commercial loan portfolio
over the years while continuing to grow our residential mortgage and consumer
lending businesses. As a result, we believe that we have developed a diversified
loan portfolio with a favorable mix of loan types, maturities and yields.
EXPANDING OUR RETAIL BANKING FRANCHISE. Management intends to continue
expansion of its retail banking franchise and to increase the number of
households and businesses served in our market
67
area. Our strategy is to deliver exceptional customer service, which depends on
up-to-date technology and convenient access, as well as courteous personal
contact from a trained and motivated workforce. This approach has resulted in
continued growth in core deposits, which has improved our overall cost of funds.
Management intends to maintain this strategy, which will require ongoing
investment in retail banking locations and technology to support exceptional
service levels for the Bank's customers.
MANAGEMENT OF INTEREST RATE RISK
Management believes that our most significant form of market risk is
interest rate risk. The general objective of our interest rate risk management
is to determine the appropriate level of risk given our business strategy, and
then manage that risk in a manner that is consistent with our policy to reduce
the exposure of our net interest income to changes in market interest rates.
Provident Bank's asset/liability management committee ("ALCO"), which consists
of senior management, evaluates the interest rate risk inherent in certain
assets and liabilities, our operating environment, and capital and liquidity
requirements, and modifies our lending, investing and deposit gathering
strategies accordingly. A committee of the Board of Directors reviews the ALCO's
activities and strategies, the effect of those strategies on our net interest
margin, and the effect that changes in market interest rates would have on the
economic value of our loan and securities portfolios as well as the intrinsic
value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending,
investing, and deposit activities. We emphasize the origination of residential
fixed-rate mortgage loans that are repaid monthly and bi-weekly, fixed-rate
commercial mortgage loans, adjustable-rate residential and commercial mortgage
loans, and consumer loans. Depending on market interest rates and our capital
and liquidity position, we may retain all of the fixed-rate, fixed-term
residential mortgage loans that we originate or we may sell all or a portion of
such longer-term loans, generally on a servicing-retained basis. We also invest
in short-term securities, which generally have lower yields compared to
longer-term investments. Shortening the average maturity of our interest-earning
assets by increasing our investments in shorter-term loans and securities helps
to better match the maturities and interest rates of our assets and liabilities,
thereby reducing the exposure of our net interest income to changes in market
interest rates. These strategies may adversely affect net interest income due to
lower initial yields on these investments in comparison to longer-term,
fixed-rate loans and investments.
Management monitors interest rate sensitivity primarily through the use of
a model that simulates net interest income under varying interest rate
assumptions. Management also evaluates this sensitivity using a model that
estimates the change in Provident Bank's net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. Both models
assume estimated loan prepayment rates, reinvestment rates and deposit decay
rates that seem most likely based on historical experience during prior interest
rate changes.
68
The table below sets forth, as of June 30, 2003, the estimated changes in
our NPV and our net interest income that would result from the designated
instantaneous changes in the U.S. Treasury yield curve. Computations of
prospective effects of hypothetical interest rate changes are based on numerous
assumptions including relative levels of market interest rates, loan prepayments
and deposit decay, and should not be relied upon as indicative of actual
results.
NPV NET INTEREST INCOME
--------------------------------------------- ---------------------------------------------
ESTIMATED INCREASE (DECREASE) INCREASE (DECREASE) IN
CHANGE IN IN NPV ESTIMATED NET ESTIMATED NET INTEREST INCOME
INTEREST RATES ESTIMATED ----------------------------- INTEREST -----------------------------
(BASIS POINTS) NPV AMOUNT PERCENT INCOME AMOUNT PERCENT
----------- ----------- ------------ ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
+300 $ 121,580 $ (37,328) (23.5)% $ 40,939 $ (1,904) (4.4)%
+200 139,047 (19,861) (12.5) 41,606 (1,237) (2.9)
+100 153,163 (5,745) (3.6) 42,575 (268) (0.6)
0 158,908 -- -- 42,843 -- --
-100 158,023 (885) (0.6) 41,953 (890) (2.1)
-200 155,071 (3,837) (2.4) 40,565 (2,278) (5.3)
The table set forth above indicates that at June 30, 2003, in the event of
an immediate 100 basis point decrease in interest rates, we would be expected to
experience a 0.6% decrease in NPV and a 2.1% decrease in net interest income. In
the event of an immediate 200 basis point increase in interest rates, we would
be expected to experience a 12.5% decrease in NPV and a 2.9% decrease in net
interest income.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV and net interest income
requires making certain assumptions that may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. The
NPV and net interest income table presented above assumes that the composition
of our interest-rate sensitive assets and liabilities existing at the beginning
of a period remains constant over the period being measured and, accordingly,
the data does not reflect any actions management may undertake in response to
changes in interest rates. The table also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or the repricing characteristics of specific assets and
liabilities. Accordingly, although the NPV and net interest income table
provides an indication of our sensitivity to interest rate changes at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our net interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them,
respectively.
69
The following tables set forth average balance sheets, average yields and
costs, and certain other information for the periods indicated. No
tax-equivalent yield adjustments were made, as the effect thereof was not
material. All average balances are daily average balances. Non-accrual loans
were included in the computation of average balances, but have been reflected in
the table as loans carrying a zero yield. The yields set forth below include the
effect of deferred fees, discounts and premiums that are amortized or accreted
to interest income or expense.
AT NINE MONTHS ENDED JUNE 30,
JUNE 30,---------------------------------------------------------------------------------------
2003 2003 2002
-------- --------------------------------------- -------------------------------------------
AVERAGE AVERAGE
YIELD/ OUTSTANDING OUTSTANDING
RATE BALANCE INTEREST YIELD/RATE/(1)/ BALANCE INTEREST YIELD/RATE/(1)/
-------- ----------- ---------- --------------- ----------- ----------- ---------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans (2)........................ 6.08% $ 679,212 $ 33,199 6.54% $ 623,140 $ 33,434 7.17%
Securities available for sale.... 4.21 218,738 7,158 4.38 178,150 7,209 5.41
Securities held to maturity...... 4.81 81,652 3,066 5.02 73,385 3,337 6.08
Other............................ 2.59 11,173 292 3.49 14,648 349 3.19
----------- ---------- ----------- -----------
Total interest-earning
assets....................... 5.61 990,775 43,715 5.90 889,323 44,329 6.66
---------- -----------
Non-interest-earning assets...... 74,639 42,837
----------- -----------
Total assets.................. $ 1,065,414 $ 932,160
=========== ===========
INTEREST-BEARING LIABILITIES:
Savings deposits (3)............. 0.40 $ 269,528 1,207 0.60 $ 209,202 1,610 1.03
Money market deposits............ 0.55 119,100 786 0.88 102,591 1,074 1.40
NOW deposits..................... 0.20 82,189 169 0.27 71,617 230 0.43
Certificates of deposit.......... 2.03 241,683 3,985 2.20 233,546 5,967 3.42
Borrowings....................... 3.80 108,688 3,164 3.89 116,805 4,319 4.94
----------- ---------- ----------- -----------
Total interest-bearing
liabilities.................. 1.34 821,188 9,311 1.52 733,761 13,200 2.41
---------- -----------
Non-interest-bearing
liabilities..................... 131,425 92,693
----------- -----------
Total liabilities............. 952,613 826,454
Stockholders' equity............. 112,801 105,706
----------- -----------
Total liabilities and
stockholders' equity......... $ 1,065,414 $ 932,160
=========== ===========
Net interest income.............. $ 34,404 $ 31,129
========== ===========
Net interest rate spread (4)..... 4.38% 4.25%
Net interest-earning assets (5).. $ 169,587 $ 155,562
=========== ===========
Net interest margin (6).......... 4.64% 4.68%
Ratio of interest-earning
assets to interest-bearing
liabilities..................... 120.65% 121.20%
(FOOTNOTES ON FOLLOWING PAGE)
70
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
----------- ---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans (1)........................ $ 630,710 $ 44,967 7.13% $ 590,298 $ 46,434 7.87%
Securities available for sale.... 185,326 9,869 5.33 159,185 9,598 6.03
Securities held to maturity 73,548 4,627 6.29 66,253 4,318 6.52
Other............................ 18,138 488 2.69 10,983 628 5.72
----------- ---------- ----------- ----------
Total interest-earning assets. 907,722 59,951 6.60 826,719 60,978 7.38
---------- ----------
Non-interest-earning assets 50,192 36,624
----------- -----------
Total assets.................. $ 957,914 $ 863,343
=========== ===========
INTEREST-BEARING LIABILITIES:
Savings deposits (2)............. $ 227,143 2,289 1.01 $ 177,994 2,898 1.63
Money market deposits............ 106,133 1,435 1.35 86,717 2,245 2.59
NOW deposits..................... 73,403 315 0.43 57,806 365 0.63
Certificates of deposit.......... 236,133 7,662 3.24 251,299 13,915 5.54
Borrowings....................... 113,446 5,500 4.85 113,975 6,821 5.98
----------- ---------- ----------- ----------
Total interest-bearing
liabilities.................. 756,258 17,201 2.27 687,791 26,244 3.82
---------- ----------
Non-interest-bearing
liabilities..................... 94,869 78,547
----------- -----------
Total liabilities............. 851,127 766,338
Stockholders' equity............. 106,787 97,005
----------- -----------
Total liabilities and
stockholders' equity......... $ 957,914 $ 863,343
=========== ===========
Net interest income.............. $ 42,750 $ 34,734
========== ==========
Net interest rate spread (3)..... 4.33% 3.56%
Net interest-earning assets (4).. $ 151,464 $ 138,928
=========== ===========
Net interest margin (5).......... 4.71% 4.20%
Ratio of interest-earning
assets to interest-bearing
liabilities..................... 120.03% 120.20%
YEARS ENDED SEPTEMBER 30,
---------------------------------
2000
---------------------------------
AVERAGE
OUTSTANDING
BALANCE INTEREST YIELD/RATE
----------- -------- ----------
INTEREST-EARNING ASSETS:
Loans (1)........................ $ 577,119 $ 45,043 7.80%
Securities available for sale.... 159,287 9,719 6.10
Securities held to maturity 52,515 3,549 6.76
Other............................ 9,119 588 6.45
----------- --------
Total interest-earning assets. 798,040 58,899 7.38
--------
Non-interest-earning assets 38,770
-----------
Total assets.................. $ 836,810
===========
INTEREST-BEARING LIABILITIES:
Savings deposits (2)............. $ 177,077 3,435 1.94
Money market deposits............ 77,475 2,029 2.62
NOW deposits..................... 52,052 470 0.90
Certificates of deposit.......... 244,279 12,787 5.23
Borrowings....................... 122,315 7,313 5.98
----------- --------
Total interest-bearing
liabilities.................. 673,198 26,034 3.87
--------
Non-interest-bearing
liabilities..................... 74,316
-----------
Total liabilities............. 747,514
Stockholders' equity............. 89,296
-----------
Total liabilities and
stockholders' equity......... $ 836,810
===========
Net interest income.............. $ 32,865
========
Net interest rate spread (3)..... 3.51%
Net interest-earning assets (4).. $ 124,842
===========
Net interest margin (5).......... 4.12%
Ratio of interest-earning
assets to interest-bearing
liabilities..................... 118.54%
- --------------------------
(1) Yields and rates for the nine months ended June 30, 2003 and 2002 are
annualized.
(2) Balances include the effect of net deferred loan origination fees and
costs, and the allowance for loan losses.
(3) Includes club accounts and interest-bearing mortgage escrow balances.
(4) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average total
interest-earning assets.
71
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of our interest-earning
assets and interest-bearing liabilities. Information is provided for each
category of interest-earning assets and interest-bearing liabilities with
respect to (i) changes attributable to changes in volume (i.e., changes in
average balances multiplied by the prior-period average rate) and (ii) changes
attributable to rate (i.e., changes in average rate multiplied by prior-period
average balances). For purposes of this table, changes attributable to both rate
and volume, which cannot be segregated, have been allocated proportionately to
the change due to volume and the change due to rate.
YEARS ENDED SEPTEMBER 30,
NINE MONTHS ENDED JUNE 30, -------------------------------------------------------------------
2003 VS. 2002 2002 VS. 2001 2001 VS. 2000
--------------------------------- -------------------------------- --------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO TOTAL DUE TO TOTAL DUE TO TOTAL
------------------- INCREASE ------------------- INCREASE ------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------- --------- ---------- ------- --------- ---------- ------- -------- ----------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................... $ 2,924 $ (3,159) $ (235) $ 3,093 $ (4,560) $ (1,467) $ 1,060 $ 331 $ 1,391
Securities available
for sale............... 1,472 (1,523) (51) 1,464 (1,193) 271 (6) (115) (121)
Securities held to
maturity............... 351 (622) (271) 465 (156) 309 899 (130) 769
Other................... (88) 31 (57) 290 (430) (140) 112 (72) 40
------- --------- ---------- ------- --------- ---------- ------- -------- ----------
Total interest-earning
assets............... 4,659 (5,273) (614) 5,312 (6,339) (1,027) 2,065 14 2,079
------- --------- ---------- ------- --------- ---------- ------- -------- ----------
INTEREST-BEARING
LIABILITIES:
Savings deposits........ 387 (790) (403) 680 (1,289) (609) 23 (560) (537)
Money market deposits 155 (443) (288) 427 (1,237) (810) 239 (23) 216
NOW deposits............ 31 (92) (61) 83 (133) (50) 48 (153) (105)
Certificates of
deposit................ 204 (2,186) (1,982) (793) (5,460) (6,253) 369 759 1,128
Borrowings.............. (285) (870) (1,155) (32) (1,289) (1,321) (492) -- (492)
------- --------- ---------- ------- --------- ---------- ------- -------- ----------
Total interest-bearing
liabilities.......... 492 (4,381) (3,889) 365 (9,408) (9,043) 187 23 210
------- --------- ---------- ------- --------- ---------- ------- -------- ----------
Change in net interest
income.................... $ 4,167 $ (892) $ 3,275 $ 4,947 $ 3,069 $ 8,016 $ 1,878 $ (9) $ 1,869
======= ========= ========== ======= ========= ========== ======= ======== ==========
72
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2003 AND SEPTEMBER 30, 2002
TOTAL ASSETS. Total assets as of June 30, 2003 were $1.11 billion, an
increase of $87.0 million, or 8.5% over assets of $1.03 billion at September 30,
2002. The increase resulted from increases in both loans and securities.
SECURITIES. Total securities increased to $334.7 million at June 30, 2003
from $292.9 million at September 30, 2002. The increase was primarily in
mortgage backed securities, which increased $52.7 million during the nine-month
period ended June 30, 2003, as we continued to purchase additional securities
funded by growth in deposits and advances from the Federal Home Loan Bank of New
York.
LOANS HELD FOR SALE. Loans held for sale increased to 2.6 million at June
30, 2003 compared to none as of September 30, 2002. The $2.6 million in loans
held for sale represented loans that were held for sale that had not yet been
funded by the secondary market.
NET LOANS. Net loans as of June 30, 2003 were $682.6 million, an increase
of $21.8 million, or 3.3%, over net loan balances of $660.8 million at September
30, 2002. Residential loans continued to grow during the nine-month period,
posting an increase of $13.7 million, or 3.7%, over balances at September 30,
2002. Most of the net loan growth was primarily in bi-weekly mortgages.
Commercial mortgages increased by $16.6 million, or 10.2%, as originations of
$64.1 million surpassed repayments of $47.5 million. Commercial and industrial
loans increased by $4.0 million, or 9.6%, as we continued our efforts to expand
our customer account relationships through the extension of these general
business purpose loans. At $5.4 million, or 0.48% of total assets,
non-performing assets were up slightly from $5.0 million, or 0.49% of total
assets at September 30, 2002.
OTHER ASSETS. Other assets increased by $13.0 million to $14.9 million at
June 30, 2003 from $1.9 million at September 30, 2002, primarily as a result of
Provident Bank's purchase of $12.0 million of BOLI contracts in December 2002.
DEPOSITS. Deposits increased by $57.9 million to $857.5 million at June 30,
2003, an increase of 7.2% over balances of $799.6 million at September 30, 2002.
Deposit growth occurred in transaction account, savings and money market account
products, while certificates of deposit declined slightly. The largest deposit
growth occurred in savings and money market accounts, which increased to $406.6
million at June 30, 2003 from $363.0 million at September 30, 2002, an increase
of $43.6 million, or 12.0%. Transaction accounts posted an increase of $25.5
million, or 13.2%, to $218.6 million. During the same time period, total
certificates of deposit declined by $11.2 million as municipal certificates of
deposit grew to $7.9 million, while all other certificates decreased to $224.4
million. The overall deposit increase was primarily due to improved marketing
efforts, coupled with new product offerings. Total municipal deposits amounted
to $19.8 million at June 30, 2003 compared to $8.8 million at September 30,
2002. We began accepting municipal deposits in April 2002 after we formed
Provident Municipal Bank.
BORROWINGS. Borrowings from the Federal Home Loan Bank of New York
increased by $13.7 million during the nine-month period to $116.7 million at
June 30, 2003 from $103.0 million at September 30, 2002, primarily to fund new
loans and investments as noted above.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $4.8 million to
$115.7 million at June 30, 2003 compared to $110.9 million at September 30,
2002. In addition to net income of $8.7 million for the nine-month period,
equity increased by $1.4 million due to the allocation of employee stock
ownership plan shares, the vesting of shares issued under our recognition and
retention plan and the exercise of stock options. Partially offsetting these
increases were cash dividends and stock repurchases,
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each of which reduced stockholders' equity by $1.9 million, and the change in
after-tax unrealized gains on securities available for sale, which decreased
equity by $1.5 million.
During the first nine months of fiscal 2003, we repurchased 60,700 shares
of our common stock, bringing the total shares repurchased to 391,251 shares
under our previously announced repurchase programs, which authorized the
repurchase of up to 553,990 shares including the March 2003 authorization of
177,250 shares. We held a total of 326,925 treasury shares at June 30, 2003, net
of option-related reissuances.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
TOTAL ASSETS. Total assets as of September 30, 2002 were $1.03 billion, an
increase of $146.4 million, or 16.6%, over total assets of $881.3 million at
September 30, 2001. Total assets increased by $90.7 million in April 2002 as a
result of the acquisition of The National Bank of Florida. Average total assets
for the year ended September 30, 2002 were $957.9 million, an increase of $94.6
million, or 11.0%, over average total assets of $863.3 million in fiscal 2001.
SECURITIES. The total securities portfolio increased by $57.6 million, or
24.5%, to $292.9 million at September 30, 2002 from $235.3 million at September
30, 2001. Securities of The National Bank of Florida retained in our portfolio
totaled $18.2 million, most of which were classified as available for sale.
Securities of The National Bank of Florida that did not meet the rating
guidelines established within our investment policy were sold shortly after the
acquisition was completed. Securities available for sale increased by $42.2
million, or 25.8%, primarily reflecting an increase in U.S. Government and
Agency securities. Available for sale mortgage-backed securities declined
slightly to $58.6 million at September 30, 2002 from $59.5 million at the
previous year-end. Securities held to maturity increased by $15.4 million, or
21.6%, to $86.8 million at September 30, 2002 from $71.4 million at September
30, 2001. Mortgage-backed securities held to maturity increased by $10.9
million, while state and municipal securities held to maturity increased by $4.5
million during the current fiscal year.
NET LOANS. Net loans as of September 30, 2002 were $660.8 million, an
increase of $54.7 million, or 9.0%, over net loan balances of $606.1 million at
September 30, 2001. Net loans of The National Bank of Florida of $23.1 million
were recorded at the acquisition date. Including the addition of The National
Bank of Florida's commercial loans, we experienced fiscal 2002 growth of $41.5
million, or 23.0%, in the commercial loan portfolio, which consisted of
commercial real estate, commercial business and construction loans. Within the
commercial portfolio, commercial business loans contributed $9.9 million, or
23.9%, of the increase. We originated these loans primarily for the purpose of
financing equipment acquisition or other general small business purposes, and
the increase is of significance in that we actively pursue such loans in an
effort to expand our customer account relationships. Commercial real estate
loans accounted for the largest portion of the commercial loan portfolio growth,
increasing by $34.0 million, or 26.3%. This increase was a result of our focus
on generating high-quality real estate transactions, which contribute high
yields with relatively low risk. Despite heavy refinancing activity, residential
mortgage loans grew during fiscal 2002 as well, posting an increase of $7.9
million, or 2.2%, over balances on September 30, 2001. Consumer loans grew to
$83.4 million, up from $76.9 million at September 30, 2001, an increase of $6.5
million, or 8.5%. As our market area realized substantial increases in real
estate values, our customers took advantage of additional real estate equity,
generating an increase of $8.6 million in home equity lines of credit. Average
total loans were $630.7 million in fiscal 2002, an increase of $40.4 million, or
6.8%, over average total loans of $590.3 million in fiscal 2001. At September
30, 2002, non-performing loans were 0.74% of total loans, compared to 0.37% at
September 30, 2001.
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DEPOSITS. Deposits as of September 30, 2002 were $799.6 million, up $146.5
million, or 22.4%, from September 30, 2001. We recorded deposits of $88.2
million on the date we acquired The National Bank of Florida. Our deposit mix
shifted along with our deposit growth. Transaction accounts (demand and NOW
deposits) represented 24% of deposits at September 30, 2002, compared to 21% at
September 30, 2001. Similarly, savings and money market account balances, which
totaled $363.0 million at September 30, 2002, represented 45% of deposits at
that date, compared to 41% at the prior year end. Certificates of deposit
declined to 31% of deposits at September 30, 2002 from 38% at September 30,
2001. This shift in mix to lower cost transaction and savings accounts had a
positive impact on earnings in fiscal 2002.
BORROWINGS. Total borrowings decreased by $7.4 million, or 6.8%, to $103.0
million at September 30, 2002 from $110.4 million at September 30, 2001. The
significant deposit growth was sufficient to fund increases in the securities
and loan portfolios, and we were therefore able to pay down our borrowings.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $8.3 million to
$110.9 million at September 30, 2002, compared to $102.6 million at September
30, 2001. In addition to net income of $9.5 million for the 2002 fiscal year,
equity increased by $1.2 million for the change in after-tax net unrealized
gains on securities available for sale. The allocation of employee stock
ownership plan shares and the vesting of shares issued under our recognition and
retention plan increased equity by a total of $1.5 million. Partially offsetting
these increases were cash dividends and purchases of treasury stock, which
reduced stockholders' equity by $1.9 million and $2.0 million, respectively.
During fiscal 2002, we repurchased 69,317 shares of our common stock. As of
September 30, 2002 we had repurchased a total of 330,551 shares under our two
previously announced repurchase programs, which authorized total repurchases of
up to 376,740 shares. We held a total of 282,488 treasury shares at September
30, 2002, net of stock option-related reissuances.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND JUNE
30, 2002
Net income for the nine months ended June 30, 2003, was $8.7 million, an
increase of $1.4 million, or 19.2%, compared to net income of $7.3 million for
the nine months ended June 30, 2002. Basic and diluted earnings per share
increased to $1.12 and $1.11, respectively, for the nine months ended June 30,
2003, compared to $0.94 and $0.93, respectively, for the nine months ended June
30, 2002. The increase in net income reflected a $3.3 million, or 86.6%,
increase in non-interest income and a $3.3 million, or 10.5% increase in net
interest income, which was partially offset by a $4.2 million, or 18.5% increase
in non-interest expense, a $780,000, or 18.5% increase in income tax expense and
a $200,000 increase in the provision for loan losses.
INTEREST INCOME. Interest income declined $614,000, or 1.4%, to $43.7
million for the nine months ended June 30, 2003 from $44.3 million for the nine
months ended June 30, 2002. The decrease was due to lower average yields on
loans and investment securities, which was offset in large part by higher
average balances in both assets classes. The decrease in yields was primarily
due to lower market interest rates, while the increase in loans and investment
securities was due to increased loan originations between periods and our
acquisition of The National Bank of Florida in April 2002. Average
interest-earning assets for the nine months ended June 30, 2003 were $990.8
million, an increase of $101.5 million, or 11.4%, over average interest-earning
assets for the nine-months ended June 30, 2002 of $889.3 million. Average yields
on interest earning assets decreased by 76 basis points, to 5.90% for the nine
months ended June 30, 2003 to 6.66% for the nine months ended June 30, 2002.
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Total interest income on loans declined $235,000 to $33.2 million for the
nine months ended June 30, 2003 from $33.4 million for the nine months ended
June 30, 2002. The decrease was due to slight decreases in interest income on
residential mortgage loans and consumer loans. Income earned on residential
mortgage loans decreased $857,000, or 4.4%, to $18.8 million from $19.6 million,
as a 73 basis point decrease in the average yield offset a $22.9 million, or
6.3% increase in average residential mortgage loans. Income earned on consumer
loans decreased $436,000, or 12.2%, to $3.1 million from $3.6 million, as a 115
basis point decrease in the yield offset a $5.7 million, or 7.5% increase in
average consumer loans. Interest income on the commercial loan portfolio
increased $1.1 million, or 10.3%, as a $27.6 million increase in average
commercial loans to $213.2 million offset a 29 basis point decrease in average
yield.
Interest income on investment securities and other earning assets decreased
$379,000 to $10.5 million for the nine months ended June 30, 2003. A 96 basis
point decrease in the average yield offset a $45.4 million, or 17.0%, increase
in the average portfolio.
INTEREST EXPENSE. Interest expense for the nine months ended June 30, 2003
decreased by $3.9 million, or 29.5%, to $9.3 million compared to interest
expense of $13.2 million for the nine months ended June 30, 2002, as decreases
in rates in all categories of interest-bearing deposits offset increases in
average balances in all categories of interest bearing deposits, and accompanied
a decrease in the average balance of borrowings. A 122 basis point decrease in
the rate paid on certificate of deposit accounts, from 3.42% to 2.20%, offset an
$8.1 million, or 3.5%, increase in the average balance of these accounts to
$241.7 million, resulting in a $2.0 million reduction in interest expense. The
average interest rate paid on savings and money market accounts decreased by 43
and 52 basis points, respectively, to 0.60% and 0.88%, respectively, for the
nine months ended June 30, 2003, from 1.03% and 1.40%, respectively, for the
nine months ended June 30, 2002. Interest expense on borrowings decreased by
$1.2 million, or 26.7%, due to both a 105 basis point decrease in the average
rate to 3.89% and a decrease in the average balance of $8.1 million, or 6.9%, to
$108.7 million for the nine months ended June 30, 2003.
NET INTEREST INCOME. For the nine months ended June 30, 2003, net interest
income increased by $3.3 million, or 10.5% to $34.4 million from $31.1 million
for the same period in 2002. Interest income decreased by $614,000, or 1.4%, as
an increase in average earning assets of $101.5 million to $990.8 million, was
completely offset by a decline in yield of 76 basis points to 5.90%. The cost of
interest bearing-liabilities declined by $3.9 million as the average rate paid
on interest-bearing liabilities dropped 89 basis points to 1.52%, which
partially offset an increase in average balances of $87.4 million to $821.2
million. Net interest margin decreased from 4.68% to 4.64% and net interest
spread improved from 4.25% to 4.38%.
PROVISION FOR LOAN LOSSES. We record provisions for loan losses, which are
charged to earnings, in order to maintain the allowance for loan losses at a
level to absorb probable loan losses inherent in the existing portfolio. In
determining the allowance for loan losses, management considers past loss
experience, evaluations of real estate collateral, current economic conditions,
volume and type of lending, and the levels of non-performing and other
classified loans. The amount of the allowance 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 allowance at a level to absorb probable loan losses
inherent in the existing portfolio. We recorded $800,000 and $600,000 in loan
loss provisions during the nine months ended June 30, 2003 and 2002,
respectively. An additional $537,000 in the allowance for loan losses was
recorded, however, because we absorbed the loan portfolio of The National Bank
of Florida in April 2002. At June 30, 2003 the allowance for loan losses totaled
$11.1 million, or 1.59% of the loan portfolio, compared to $10.2 million at June
30, 2002, or 1.55% of the loan portfolio. Net charge-offs totaled $128,000 (an
annual rate of 0.03% of the average
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loan portfolio) and $38,000 (an annual rate of 0.01% of the average loan
portfolio) for the nine months ended June 30, 2003 and June 30, 2002,
respectively. The increase in the allowance was primarily attributed to an
increase in the loan portfolio of $34.8 million, or 5.29%. See "Business of
Provident Bancorp and Provident Bank--Delinquent Loans, Other Real Estate Owned
and Classified Assets--Allowance for Loan Losses" for a discussion of how the
allowance for loan losses is adjusted as a result of this factor.
In considering the amount of the allowance for loan losses, we consider
long-term historical loss rates and we add or subtract amounts based on current
trends and conditions. In addition, we apply set percentages on loans that are
non-performing, criticized or classified. For commercial loans, we have
established a broad range of percentages based upon the type of loan and the
severity of the classification. We review each loan quarterly to assess the
percentage within the range to apply to the loan based upon the risk of loss we
attribute to the loan. For residential mortgages and consumer loans, the
percentages are fixed in relation to the increased risk of loss we attribute to
loans that are not performing according to terms compared to the remaining
portfolio. Based on the relative consistency of the loss experience and
aggregate adjustments we have made in these portfolios, we have not changed
these percentages; however we feel they continue to accurately reflect the
increased probable loss we attribute to these loans. We increased the allowance
for loan losses between periods as a result of increases in the commercial real
estate loan portfolio (to $179.9 million at June 30, 2003 from $163.3 million at
September 30, 2002) and commercial business loan portfolio (to $45.3 million at
June 30, 2003 from $41.3 million at September 30, 2002), which are generally
higher-risk loan categories; continued growth in larger and more complex loan
transactions; and a modest increase in our assessment of risk in the
non-classified business loan portfolio, primarily commercial mortgage and
commercial and industrial loans. See "Business of Provident Bancorp and
Provident Bank--Delinquent Loans, Other Real Estate Owned and Classified
Assets--Allowance for Loan Losses" for a discussion of how the allowance for
loan losses is adjusted as a result of these factors.
NON-INTEREST INCOME. Non-interest income for the nine-month period ended
June 30, 2003 increased to $7.2 million, an increase of $3.3 million, or 86.6%,
compared to $3.9 million for the same nine-month period last year. Realized
gains on securities available for sale and sales of loans were $1.9 million and
$836,000, respectively, for the current period, representing a combined increase
of $2.4 million over the securities and loan sales gains of $380,000 for the
same period last year. Banking fees and services charges increased to $3.4
million for the current nine-month period, an increase of $467,000, or 15.9%,
over the same period in the prior fiscal year. The increase was primarily
attributable to volume-related increases in transaction account fees of $333,000
resulting from the new and acquired branches. Other income increased by
$518,000, or 95.9%, to $1.1 million for the nine-month period ended June 30,
2003, from $540,000 for the same period in the prior fiscal year. The increase
is primarily due to $324,000 in income from $12.0 million in BOLI contracts that
we purchased in December 2002 and an increase of $217,000 in loan prepayment
penalties, which totaled $306,000 for the current nine-month period compared to
$89,000 for the same period in the prior fiscal year.
NON-INTEREST EXPENSE. Non-interest expense increased by $4.2 million, or
18.5%, to $27.1 million for the nine months ended June 30, 2003, compared to
$22.9 million for the nine months ended June 30, 2002. Increases in compensation
and benefits and in occupancy and office operations directly attributable to new
branches were $592,000 and $279,000, respectively. Compensation and benefits
increased by an additional $2.3 million, of which $324,000 represented the
payout of an employment agreement, $253,000 was attributable to the increased
cost of stock-based compensation plans, $261,000 was due to additional
retirement plan and other deferred compensation expense, $167,000 was related to
higher health insurance premiums and the remaining increase was due to annual
salary increases of
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approximately 4.0% and additional administration staff. Additional increases in
non-interest expense categories for the nine months ended June 30, 2003 were
additional advertising costs of $259,000, or 25.1%, related to new branches and
products, and a volume-related increase of $384,000, or 29.2%, in data
processing costs. Consulting fees increased by $372,000 as we retained
professional assistance for technological development.
Amortization of the core deposit intangible increased by $195,000 as the
premium associated with the acquisition of The National Bank of Florida in April
2002 was amortized for the nine-month period in 2003. Other non-interest expense
increased by $180,000, or 4.4%, primarily due to increases in correspondent bank
expense and charitable contributions of $63,000 and $109,000, respectively.
INCOME TAXES. Income tax expense was $5.0 million for the nine months ended
June 30, 2003 compared to $4.2 million for the same period in 2002. The
effective tax rates were 36.5% and 36.7%, respectively, as a greater portion of
our increase in pre-tax income was subject to the marginal tax rates, which
offset increases in tax-advantaged investments.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2002 AND
SEPTEMBER 30, 2001
Net income for the year ended September 30, 2002 was $9.5 million, an
increase of $2.0 million, or 27.3%, compared to net income of $7.5 million in
fiscal 2001. Basic and diluted earnings per share increased to $1.24 and $1.22,
respectively, for the 2002 fiscal year compared to $0.98 and $0.97,
respectively, for fiscal 2001. The increase in net income reflects an $8.0
million or 23.1% increase in net interest income, a $695,000, or 14.8%, increase
in non-interest income and a $540,000 decrease in the provision for loan losses,
offset in part by increases of $5.7 million or 21.7% in non-interest expense and
$1.5 million or 36.1% in income tax expense.
INTEREST INCOME. Interest income for the fiscal year ended September 30,
2002 declined slightly to $60.0 million, a decrease of $1.0 million, or 1.7%
compared to the prior year. The small decrease was primarily due to lower
average yields on loans and securities, offset in large part by higher average
balances in both asset classes, due, in part, to our acquisition of The National
Bank of Florida. Average interest-earning assets for the year ended September
30, 2002 were $907.7 million, an increase of $81.0 million, or 9.8%, over
average interest-earning assets for the year ended September 30, 2001 of $826.7
million. Average loan balances grew by $40.4 million and average balances of
securities and other earning assets increased by $40.6 million. Average yields
on interest earning assets fell by 78 basis points to 6.60% for the year ended
September 30, 2002, from 7.38% for the year ended September 30, 2001. Lower
market interest rates were the primary reason for the decline in asset yields.
Lower yields were also due, in part, to the change in interest-earning asset
mix, as we maintained high balances in cash and short-term securities in the
weeks before and after our acquisition of The National Bank of Florida.
Total interest income on loans for the year ended September 30, 2002
declined to $45.0 million, down 3.2% from $46.4 million for the prior fiscal
year. Interest income on the commercial loan portfolio (commercial real estate,
commercial business and construction loans) for the year ended September 30,
2002 decreased to $14.2 million, down 4.1% from commercial loan interest income
of $14.8 million for the prior fiscal year. The average commercial loan
portfolio grew $17.1 million to $189.5 million, but the impact of that increase
was more than offset by a 110 basis-point decline in average yield. The lower
average yield was due, in part, to the effect on commercial business loans of
the significantly lower average prime rate of 4.86% in fiscal 2002 compared to
6.57% in fiscal 2001. Interest income on consumer loans declined by $1.0
million, or 17.4% for the year. Our fixed-rate consumer loans have short average
maturities, and our adjustable-rate consumer loans float with the prime rate.
Income earned on residential mortgage loans was $26.0 million for the year ended
September 30, 2002, up 0.6%
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compared to the prior year, as yields declined by 34 basis points to 7.15% from
7.49%, reflecting the impact of lower market rates and refinancing activity,
while average balances increased.
Interest income on securities and other earning assets increased to $15.0
million for the year ended September 30, 2002, compared to $14.5 million for the
prior fiscal year. Average balances of securities and other earning assets grew
by $40.6 million, or 17.2% to $277.0 million, which more than offset a 74
basis-point decline in yields.
INTEREST EXPENSE. Interest expense for the fiscal year ended September 30,
2002 fell by $9.0 million to $17.2 million, a decrease of 34.5% compared to
interest expense of $26.2 million for fiscal 2001. The sharp decrease was
primarily due to lower rates paid on interest-bearing deposits and borrowings,
as well as lower average balances in certificate-of-deposit accounts and a
higher concentration of non-interest-bearing and low interest-bearing deposits
in fiscal 2002. Average rates paid on interest-bearing liabilities (deposits and
borrowings) for the year ended September 30, 2002 declined by 155 basis points
to 2.27% from 3.82% in the prior fiscal year. The average interest rate paid on
certificates of deposit fell by 230 basis points to 3.24% for the year ended
September 30, 2002, from 5.54% for the prior year. For the year ended September
30, 2002, average balances of lower-cost savings and money market accounts
increased by $49.1 million and $19.4 million, respectively, while average
balances of certificates of deposit declined by $15.2 million compared to
average balances for the year ended September 30, 2001. The average interest
rates paid on savings and money market accounts fell by 62 and 124 basis points
to 1.01% and 1.35%, respectively, for the year ended September 30, 2002, from
1.63% and 2.59% for the prior year. Interest expense on borrowings declined by
$1.3 million, primarily due to the 113 basis point decrease in the average rate
to 4.85% in fiscal 2002 from 5.98% in fiscal 2001.
NET INTEREST INCOME. Net interest income for the year ended September 30,
2002 increased to $42.7 million, compared to $34.7 million for the year ended
September 30, 2001, an increase of $8.0 million or 23.1%. Net interest income
increased due to a $12.6 million increase in average net earning assets to
$151.5 million, from $138.9 million, as well as a 77 basis-point increase in net
interest rate spread, to 4.33%, from 3.56% in the prior year. Net interest
margin increased to 4.71% for the year ended September 30, 2002, up from 4.20%
in the prior year.
The significant increase in net interest income in fiscal 2002 was due, in
large part, to the relative changes in the yield and cost of our assets and
liabilities as a result of decreasing market interest rates in calendar 2001 and
2002. This decrease in market interest rates reduced our cost of
interest-bearing liabilities faster and to a greater extent than the rates on
our interest-earning assets such as loans and securities. However, even in the
current rate environment, this trend is not likely to continue, as average
yields on assets such as residential mortgage and consumer loans have more
recently declined at an accelerated pace. The presently high net interest
margins could come under near-term pressure in both rising rate and falling rate
scenarios. Should market interest rates increase with an economic recovery, the
cost of our interest-bearing liabilities would likely increase faster than the
rates on its interest-earning assets. In addition, the impact of rising rates
could be compounded if deposit customers move funds from savings accounts back
to higher-rate certificate of deposit accounts. Should market interest rates
continue to fall, management anticipates that the rates on interest-earning
assets would likely decline to a greater extent than the cost of
interest-bearing liabilities, as the latter rates may have reached market
minimums.
PROVISION FOR LOAN LOSSES. We recorded $900,000 and $1.4 million in loan
loss provisions for the years ended September 30, 2002 and September 30, 2001
respectively. At September 30, 2002 the allowance for loan losses totaled $10.4
million, or 1.55% of the loan portfolio, compared to $9.1 million, or 1.48% of
the loan portfolio at September 30, 2001. Net charge-offs for the year ended
September 30,
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2002 were $177,000 (an annual rate of 0.03% of the average loan portfolio) and
there were net recoveries of $30,000 for the year ended September 30, 2001.
The increase in the allowance for loan losses was primarily attributable to
growth in the loan portfolio of $55.9 million, representing an increase of
9.09%. In addition, higher risk loan categories, primarily commercial real
estate loans and commercial business loans provided most of this increase. In
April 2002, we acquired $23.6 million in loans as part of our acquisition of The
National Bank of Florida. An additional $537,000 in the allowance for loan
losses was recorded for the addition of the loan portfolio of The National Bank
of Florida. The allowance for loan losses was also increased as loans that were
delinquent, criticized or classified grew to $9.0 million at September 30, 2002
from $7.5 million at September 30, 2001, an increase of $1.5 million. An
increase in commercial mortgage loans of $2.9 million was partially offset by a
decrease in the retail categories (residential mortgages, equity lines of credit
and consumer loans) of $1.2 million and a decrease in commercial and industrial
loans of $294,000.
We decreased the percentage allowance requirements in the retail loan
portfolio to reflect the lower level of delinquencies, the benefits of lower
interest rates in the credit portfolio, and appreciation in residential real
estate values. Conversely, we increased the percentage allowance requirements
for commercial business loans and commercial mortgages primarily to reflect the
negative trends in delinquencies and classifications, continued growth in
larger, more complex loans, and some negative trends in the risk ratings of the
performing loan portfolio. See "Business of Provident Bancorp and Provident
Bank--Delinquent Loans, Other Real Estate Owned and Classified Assets--Allowance
for Loan Losses" for a discussion of how the allowance for loan losses is
adjusted as a result of these factors.
NON-INTEREST INCOME. Non-interest income for the fiscal year ended
September 30, 2002 was $5.4 million compared to $4.7 million for the fiscal year
ended September 30, 2001, an increase of $695,000, or 14.8%. This increase was
primarily attributable to an increase of $646,000, or 18.2%, in banking fees and
service charges, reflecting increases in transaction account volumes and the use
of debit cards for which fee income increased by $231,000, or 196.0%. Also, our
trust services grew during 2002, generating fee income of $139,000 for the
current year compared to $66,000 for the prior year, an increase of $73,000, or
110.6%. Sales of securities available for sale and residential mortgage loans
resulted in a combined gain of $607,000 in fiscal 2002 compared to $531,000 in
fiscal 2001, an increase of $76,000.
NON-INTEREST EXPENSE. Non-interest expense for the fiscal year ended
September 30, 2002 was $32.2 million, a $5.8 million, or 21.7%, increase over
non-interest expense of $26.4 million for the fiscal year ended September 30,
2001. The increase was primarily attributable to an increase in compensation and
employee benefits of $3.1 million, or 22.1%, relating to annual merit raises of
approximately 4.0%, the addition of former employees of The National Bank of
Florida who continue to staff its two former branches, and increased staffing
for a new branch we opened prior to the acquisition of The National Bank of
Florida. Additional occupancy and data processing costs were also attributable
largely to the addition of these three new branches, growing by $547,000 and
$329,000, respectively, compared to fiscal 2001. Other non-interest expenses
were $1.3 million higher than the prior fiscal year, reflecting growth in our
business as well as a charge of $240,000 in the current year to resolve a
reconciliation issue relating to refinanced residential mortgage loans. Expenses
associated with the integration of The National Bank of Florida totaled $531,000
for the current year. Amortization of the core deposit intangible recorded in
the acquisition of The National Bank of Florida totaled $286,000 for the 2002
fiscal year, a decrease of $73,000 compared to similar expenses in the prior
fiscal year, which represented the final amortization of intangible assets
associated with two 1996 branch acquisitions.
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INCOME TAXES. Income tax expense was $5.6 million for the fiscal year ended
September 30, 2002 compared to $4.1 million for fiscal 2001, representing
effective tax rates of 36.9% and 35.3%, respectively. The higher effective tax
rate in fiscal 2002 primarily reflects a higher level of non-deductible employee
stock ownership plan expenses and the effect of graduated federal tax rates.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND
SEPTEMBER 30, 2000
Net income for the year ended September 30, 2001 was $7.5 million, an
increase of $1.6 million, or 27.4%, compared to net income of $5.9 million for
the year ended September 30, 2000. Basic and diluted earnings per share
increased to $0.98 and $0.97, respectively, for the 2001 fiscal year compared to
$0.76 for fiscal 2000. The growth and changes in mix of assets and liabilities
provided a 5.7% increase in net interest income, to $34.7 million from $32.9
million. Non-interest income grew by 38.8%, to $4.7 million from $3.4 million,
while non-interest expense increased by $623,000, or 2.4%.
INTEREST INCOME. Interest income for the fiscal year ended September 30,
2001 grew by $2.1 million, or 3.5%, over the prior fiscal year to $61.0 million,
primarily due to increased loan and securities volumes. Average interest-earning
assets for the fiscal year ended September 30, 2001 were $826.7 million, an
increase of $28.7 million, or 3.6%, compared to average interest-earning assets
in the fiscal year ended September 30, 2000 of $798.0 million. Average loan
balances grew by $13.2 million, while the average balances of securities and
other earning assets increased by a combined $15.5 million. Although market
interest rates declined significantly during fiscal 2001, the average yield on
total earning assets remained the same as the average yield for the prior fiscal
year. The average yield on loans increased by seven basis-points, to 7.87%, from
7.80%, reflecting the higher rates in effect when the loans were originated, as
many of these loans carry fixed rates. The average yield on securities, which
have shorter average maturities, declined somewhat during fiscal 2001, leaving
the average earning asset yield unchanged on an overall basis.
INTEREST EXPENSE. Interest expense increased by $210,000, or 0.8%, to $26.2
million for the fiscal year ended September 30, 2001 from $26.0 million for the
fiscal year ended September 30, 2000. This was the net result of a $14.6
million, or 2.2%, increase in the average balance of total interest-bearing
liabilities in fiscal 2001 compared to fiscal 2000, offset by a five basis-point
decrease in the average rate paid on such liabilities over the same period.
Interest expense on savings and NOW accounts decreased in fiscal 2001 by
$537,000 and $105,000, respectively, attributable to declines in the average
rates paid of 31 basis points and 27 basis points, respectively. An increase of
$216,000 in interest expense on money market deposits, to $2.2 million from $2.0
million, partially offset the lower interest expense on savings and NOW
accounts. This increase was due to a $9.2 million increase in the average
balance to $86.7 million from $77.5 million, which was partially offset by a
three basis-point decrease in the average rate paid to 2.59% from 2.62%.
Interest expense on certificates of deposit increased by $1.1 million to
$13.9 million from $12.8 million, due to a 31 basis-point increase in the
average rate paid to 5.54% from 5.23%, as well as a $7.0 million increase in the
average balance to $251.3 million from $244.3 million. The increase in average
rate paid occurred despite a decline in market interest rates, as certificates
of deposit added to the portfolio from June through December of 2000 were opened
at relatively high rates as part of management's strategy to increase
certificate of deposit balances.
Interest expense on borrowings from the Federal Home Loan Bank of New York
decreased by $492,000 due to a decrease of $8.3 million in the average balance
to $114.0 million from $122.3 million.
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NET INTEREST INCOME. For the fiscal years ended September 30, 2001 and
2000, net interest income was $34.7 million and $32.9 million, respectively. The
$1.9 million increase in net interest income was primarily attributable to a
$14.1 million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), to $138.9 million from $124.8 million, combined
with a five basis-point increase in the net interest rate spread to 3.56% from
3.51%. Our net interest margin increased to 4.20% in the year ended September
30, 2001 from 4.12% in the year ended September 30, 2000.
PROVISION FOR LOAN LOSSES. We recorded $1.4 million and $1.7 million in
loan loss provisions for the years ended September 30, 2001 and September 30,
2000 respectively. At September 30, 2001 the allowance for loan losses totaled
$9.1 million, or 1.48% of the loan portfolio, compared to $7.7 million, or 1.28%
of the loan portfolio at September 30, 2000. For the year ended September 30,
2001 there was a net recovery of $30,000 compared to net charge-offs of $259,000
(an annual rate of 0.04% of the average loan portfolio) for the year ended
September 30, 2000.
The increase in the allowance for loan losses was primarily attributable to
a national and local economic recession, which was notably exacerbated by the
events of September 11, 2001; an increase in the overall loan portfolio of $17.8
million; growth in the criticized and classified business loan categories
(primarily commercial business loans and commercial real estate loans); and
growth in the origination of larger, more complex loans. In September 2000, the
national unemployment rate was 4.0% compared to 5.0% in September 2001.
Similarly, in Rockland County, New York, the unemployment rate in September 2000
was 3.2% compared to 3.5% in September 2001. See "Business of Provident Bancorp
and Provident Bank--Delinquent Loans, Other Real Estate Owned and Classified
Assets--Allowance for Loan Losses" for a discussion of how the allowance for
loan losses is adjusted as a result of these factors.
NON-INTEREST INCOME. Non-interest income for the fiscal year ended
September 30, 2001 was $4.7 million, an increase of $1.3 million over
non-interest income for the fiscal year ended September 30, 2000, primarily
reflecting higher collection of service charges on deposits, fees on asset
management and trust services, and other fee income, which together increased by
$561,000, or 20.3%. We also recorded gains on sales of securities of $531,000
for the 2001 fiscal year, compared to only $9,000 of such gains for fiscal 2000.
Other non-interest income increased by $263,000 over the prior fiscal year,
including a $118,000 gain recognized in connection with the final repayment of a
construction loan.
NON-INTEREST EXPENSE. Non-interest expense for the fiscal year ended
September 30, 2001 totaled $26.4 million, or $623,000 more than non-interest
expense of $25.8 million for the fiscal year ended September 30, 2000.
Compensation expense increased by $620,000 and occupancy and office operations
increased by $456,000, both related partially to the opening of the new branch
in Bardonia and preparation for opening a new supermarket branch in New City,
which began operations in October 2001. Compensation expense also grew due to
normal annual merit increases and staff additions. Also, advertising and
promotion expenses increased by $411,000, or $37.5%, which related to the
opening of the new branches and the introduction of new product lines. In
addition, other non-interest expense in the 2001 fiscal year were higher by
$335,000, or 7.8%, primarily because expenses in fiscal 2000 were reduced by the
reversal of $318,000 in accruals made in fiscal 1999 for operational losses that
did not materialize as originally expected. These increases were partially
offset by a decrease of $1.3 million in the amortization of intangible assets
arising from branch purchases, as the amounts associated with 1996 branch
purchases became fully amortized in fiscal 2001.
INCOME TAXES. Income tax expense was $4.1 million for the fiscal year ended
September 30, 2001 compared to $2.9 million for fiscal 2000, representing
effective tax rates of 35.3% and 32.8%, respectively. The higher effective tax
rate in fiscal 2001 primarily reflects a lower level of state tax benefits from
the real estate investment trust subsidiary in relation to total pre-tax income.
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IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related notes of Provident Bancorp have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than the effects of inflation.
LIQUIDITY AND CAPITAL RESOURCES
The overall objective of our liquidity management is to ensure the
availability of sufficient cash funds to meet all financial commitments and to
take advantage of investment opportunities. We manage liquidity in order 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.
Our primary sources of funds are deposits, principal and interest payments
on loans and securities, and, to a lesser extent, wholesale borrowings, the
proceeds from maturing securities and short-term investments, and the proceeds
from the sales of loans and securities. The scheduled amortization of loans and
securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows, mortgage
prepayments and mortgage loan sales are greatly influenced by market interest
rates, economic conditions and competition.
Our cash flows are derived from operating activities, investing activities
and financing activities as reported in the Consolidated Statements of Cash
Flows in our consolidated financial statements beginning on page F-2 of this
document. Our primary investing activities are the origination of residential
one- to four-family and commercial real estate loans, and the purchase of
investment securities and mortgage-backed securities. During the nine months
ended June 30, 2003 and 2002 and the years ended September 30, 2002, 2001 and
2000, our loan originations totaled $278.9 million, $150.4 million, $202.5
million, $139.3 million and $135.5 million, respectively. Purchases of
securities available for sale totaled $128.1 million, $67.6 million, $73.5
million, $51.4 million and $35.7 million for the nine months ended June 30, 2003
and 2002 and the years ended September 30, 2002, 2001 and 2000, respectively.
Purchases of securities held to maturity totaled $27.5 million, $34.5 million,
$34.4 million, $30.4 million and $4.7 million for the nine months ended June 30,
2003 and 2002 and the years ended September 30, 2002, 2001 and 2000,
respectively. These activities were funded primarily by deposit growth (a
financing activity), and by principal repayments on loans and securities. Loan
origination commitments totaled $104.5 million at June 30, 2003, and consisted
of $46.3 million at adjustable or variable rates and $58.2 million at fixed
rates. Unused lines of credit granted to customers were $71.2 million at June
30, 2003. We anticipate that we will have sufficient funds available to meet
current loan commitments and lines of credit.
In December 2002 we invested $12.0 million in BOLI contracts. These
investments are illiquid and are therefore classified as other assets. Earnings
from BOLI are derived from the net increase in cash surrender value of the BOLI
contracts.
Deposit flows are generally affected by the level of market interest rates,
the interest rates and other conditions on deposit products offered by our
banking competitors, and other factors. The net increase in total deposits
(excluding deposits acquired as part of the acquisition of The National Bank of
Florida) was $57.9 million, $55.8 million, $58.4 million, $44.1 million and
$22.3 million for the nine
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months ended June 30, 2003 and 2002 and the years ended September 30, 2002, 2001
and 2000, respectively. Certificates of deposit that are scheduled to mature in
one year or less from June 30, 2003 totaled $168.8 million. Based upon prior
experience and our current pricing strategy, management believes that a
significant portion of such deposits will remain with us.
Although we sold $11.0 million in federal funds in June 2003, we generally
remain fully invested and utilize additional sources of funds through Federal
Home Loan Bank overnight advances, of which none were outstanding at June 30,
2003. At June 30, 2003 we had the ability to borrow an additional $202.7 million
under our credit facilities with the Federal Home Loan Bank.
If the conversion and stock offering are not completed by March 31, 2004,
E.N.B. Holding Company can elect to: (i) proceed with the merger transaction and
E.N.B. Holding Company shareholders will receive merger consideration of $4,500
per share in cash, or (ii) terminate the merger and receive a fee of $3.7
million. In the event that E.N.B. Holding Company determined to proceed with an
all-cash election and the conversion is not completed, Provident Bancorp would
likely need to raise additional capital to achieve pro forma regulatory capital
levels that would permit the receipt of regulatory approvals of the merger.
Provident Bancorp's existing mutual holding company structure does not permit
the issuance of additional shares of common stock as merger consideration
without completion of the conversion. The capital to be raised would likely be
in the form of debt, preferred securities or trust preferred securities issued
by Provident Bancorp. The ability to complete such an offering and the terms of
such an offering would be subject to market conditions at that time, and there
can be no assurance that Provident Bancorp would be able to complete such an
offering and subsequently complete the merger on an all-cash basis.
RECENT ACCOUNTING STANDARDS
In October 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 147, "Acquisitions of Certain Financial
Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This statement removes acquisitions of financial
institutions from the scope of both Statement of Financial Accounting Standards
No. 72 and FASB Interpretation No. 9, and requires that those transactions be
accounted for in accordance with Statement of Financial Accounting Standards No.
141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." As a result, the requirement in paragraph 5 of Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of intangible assets acquired as an
unidentifiable intangible asset (SFAS No. 72 goodwill) no longer applies to
acquisitions within the scope of the statement. We do not currently have any
SFAS No. 72 goodwill and, as a result, the adoption of this statement is not
expected to have a material impact on our financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effects of the method used on reported results. The
provisions of this standard are not expected to have a material impact on our
consolidated financial statements.
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In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," for certain decisions made by the Board as
part of the Derivative Implementation Group process. This statement is effective
for contracts entered into or modified after June 30, 2003 and hedging
relationships designated after June 30, 2003. Management does not expect that
the provisions of Statement of Financial Accounting Standards No. 149 will have
a material impact on our financial condition or results of operations.
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" was issued in May 2003. Under this statement, certain freestanding
financial instruments that embody obligations for the issuer and that are now
classified in equity, must be classified as liabilities (or as assets in some
circumstances). Generally, Statement of Financial Accounting Standards No. 150
is effective for financial instruments entered into or modified after May 31,
2003 and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of this standard is not expected to have
a material impact on our consolidated financial statements.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was issued in November 2002. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
interpretation also requires a guarantor to recognize, at fair value, a
liability for the obligation at inception of the guarantee (effective for
guarantees issued or modified after December 31, 2002). The provisions of this
interpretation are not expected to have a material impact on our consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"), to provide guidance on the
identification of entities controlled through means other than voting rights.
FIN No. 46 specifies how a business enterprise should evaluate its interests in
a variable interest entity to determine whether to consolidate that entity. A
variable interest entity must be consolidated by its primary beneficiary if the
entity does not effectively disperse risks among the parties involved. A public
company with a variable interest in an entity created before February 1, 2003
must apply FIN No. 46 in the first interim or annual period beginning after June
15, 2003. The adoption of FIN No. 46 is not expected to have a material impact
on our consolidated financial statements.
BUSINESS OF PROVIDENT BANCORP
AND PROVIDENT BANK
PROVIDENT BANCORP, INC.
Provident Bancorp, Inc. is a federally chartered corporation that owns all
of the outstanding common stock of Provident Bank. At June 30, 2003, Provident
Bancorp had consolidated assets of $1.1 billion, deposits of $857.5 million and
stockholders' equity of $115.7 million. As of June 30, 2003, Provident Bancorp
had 7,953,075 shares of common stock issued and outstanding. As of that date,
Provident Bancorp, MHC owned 4,416,000 shares of common stock of Provident
Bancorp, representing 55.5% of the issued and outstanding shares of common
stock. The remaining 3,537,075 shares are held by the public. Upon completion of
the conversion and stock offering, Provident Bancorp, Inc., a
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Delaware corporation, will succeed to all of the business and operations of
Provident Bancorp, Inc., a federal corporation, and the federal corporation will
cease to exist.
PROVIDENT BANK
Provident Bank is a full-service, community-oriented savings bank that
provides financial services to individuals, families and businesses through 18
branch offices and 25 ATMs throughout Rockland and Orange Counties, New York.
Originally organized in 1888 as a New York State-chartered mutual savings
and loan association, in January 1999 Provident Bank reorganized into the mutual
holding company structure as the wholly-owned subsidiary of Provident Bancorp,
which simultaneously conducted an initial public offering. On September 30, 1998
we operated 11 branch offices. Subsequent to the mutual holding company
reorganization and initial stock offering, we have broadened our market reach
through de novo branching and our acquisition of The National Bank of Florida in
April 2002, which had assets of $104.0 million and deposits of $88.2 million.
In April 2002, Provident Bank organized Provident Municipal Bank as a
wholly-owned subsidiary. Provident Municipal Bank is a New York State-chartered
commercial bank that is engaged in the business of accepting deposits from
municipalities in our market area, as New York State law requires municipalities
located in the State of New York to deposit funds with commercial banks,
effectively forbidding these municipalities from depositing funds with savings
institutions, including federally chartered savings associations, such as
Provident Bank.
We have entered into an agreement to acquire E.N.B. Holding Company, Inc.,
which through its subsidiary, Ellenville National Bank, operated nine branches
and had assets of $341.7 million and deposits of $307.7 million at June 30,
2003. This acquisition will increase our presence in Orange County and will
provide an initial branch presence in the New York counties of Ulster and
Sullivan.
Provident Bank's business consists primarily of accepting deposits from the
general public and investing those deposits, together with funds generated from
operations and borrowings, in one- to four-family residential, multi-family
residential and commercial real estate loans, commercial business loans and
leases, consumer loans and in investment securities and mortgage-backed
securities.
MARKET AREA
Provident Bank is an independent community bank offering a broad range of
financial services to businesses and individuals as an alternative to money
center banks in our market area. At June 30, 2003, our 18 full-service banking
offices consisted of 13 offices in Rockland County, New York and five offices in
contiguous Orange County, New York. We acquired two of the Orange County offices
as part of our acquisition of The National Bank of Florida, located in Florida,
New York, which was completed in April 2002. Our primary market for deposits is
currently concentrated around the areas where our full-service banking offices
are located. Our primary lending area consists of Rockland and Orange Counties
as well as contiguous counties.
Rockland and Orange counties constitute a suburban market with a broad
employment base. They also serve as bedroom communities for nearby New York City
and other suburban areas including Westchester County and northern New Jersey.
Orange County is one of the two fastest growing counties in New York State. The
economic environment in Rockland, Orange and contiguous counties continues to be
favorable and has supported increased commercial and residential activity in
recent years.
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The population of Rockland and Orange Counties increased by approximately
9% and 12%, respectively, between 1990 and 2002, while the population of the
State of New York as a whole increased by 6% during the same period.
The economy of our primary market area is based on a mixture of service,
manufacturing and wholesale/retail trade. Approximately 44% and 45% of the
workforces of Rockland and Orange Counties, respectively, are employed in
managerial, professional or administrative support positions. Other employment
is provided by a variety of industries and state and local governments. The
diversity of the employment base is evidenced by the many major employers in our
market area, including Rockland and Orange Counties also have numerous small
business employers. As of April 2003, the unemployment rates in Rockland County
(3.3%) and Orange County (4.1%) were lower than the rates for the State of New
York (5.9%) and the United States as a whole (6.0%).
LENDING ACTIVITIES
GENERAL. We originate commercial real estate loans, commercial business
loans and construction loans (collectively referred to as the "commercial loan
portfolio"). We are also one of the largest originators in our market area of
fixed-rate and adjustable-rate ("ARM") residential mortgage loans collateralized
by one- to four-family residential real estate. In addition, we originate
consumer loans such as home equity lines of credit, homeowner loans and personal
loans. We retain most of the loans we originate, although we may sell
longer-term one- to four-family residential loans and participations in some
commercial loans.
COMMERCIAL REAL ESTATE LENDING. We originate real estate loans secured
predominantly by first liens on commercial real estate. The commercial real
estate properties are predominantly non-residential properties such as office
buildings, shopping centers, retail strip centers, industrial and warehouse
properties and, to a lesser extent, more specialized properties such as
churches, mobile home parks, restaurants and motel/hotels. We may, from time to
time, purchase commercial real estate loan participations. We target commercial
real estate loans with initial principal balances between $1.0 million and $3.0
million. Loans secured by commercial real estate totaled $179.9 million, or
25.9% of our total loan portfolio at June 30, 2003, and consisted of 342 loans
outstanding with an average loan balance of approximately $527,000, although
there are a large number of loans with balances substantially greater than this
average. Substantially all of our commercial real estate loans are secured by
properties located in our primary market area.
Most of our commercial real estate loans are written as five-year
adjustable-rate or ten-year fixed-rate mortgages and typically have balloon
maturities of ten years. Amortization on these loans is typically based on 15-
to 20-year payout schedules. We also originate some 15- to 20-year fixed-rate,
fully amortizing loans. Margins generally range from 175 basis points to 300
basis points above the applicable Federal Home Loan Bank advance rate.
In the underwriting of commercial real estate loans, we generally lend up
to 75% of the property's appraised value. Decisions to lend are based on the
economic viability of the property and the creditworthiness of the borrower. In
evaluating a proposed commercial real estate loan, we emphasize primarily the
ratio of the property's projected net cash flow to the loan's debt service
requirement (generally requiring a ratio of 120%), computed after deduction for
a vacancy factor and property expenses we deem appropriate. In addition, a
personal guarantee of the loan is generally required from the principal(s) of
the borrower. We require title insurance insuring the priority of our lien, fire
and extended coverage casualty insurance, and flood insurance, if appropriate,
in order to protect our security interest in the underlying property.
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Commercial real estate loans generally carry higher interest rates and have
shorter terms than those on one- to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
general economy.
COMMERCIAL BUSINESS LOANS. We make various types of secured and unsecured
commercial loans to customers in our market area for the purpose of financing
equipment acquisition, expansion, working capital and other general business
purposes. The terms of these loans generally range from less than one year to
seven years. The loans are either negotiated on a fixed-rate basis or carry
adjustable interest rates indexed to (i) a lending rate that is determined
internally, or (ii) a short-term market rate index. At June 30, 2003, we had 720
commercial business loans outstanding with an aggregate balance of $45.3
million, or 6.5% of the total loan portfolio. As of June 30, 2003, the average
commercial business loan balance was approximately $63,000, although there are a
large number of loans with balances substantially greater than this average.
Commercial credit decisions are based upon a credit assessment of the loan
applicant. A determination is made as to the applicant's ability to repay in
accordance with the proposed terms as well as an overall assessment of the risks
involved. An evaluation is made of the applicant to determine character and
capacity to manage. Personal guarantees of the principals are generally
required. In addition to an evaluation of the loan applicant's financial
statements, a determination is made of the probable adequacy of the primary and
secondary sources of repayment to be relied upon in the transaction. Credit
agency reports of the applicant's credit history supplement the analysis of the
applicant's creditworthiness. Checking with other banks and trade investigations
also may be conducted. Collateral supporting a secured transaction also is
analyzed to determine its marketability. For small business loans and lines of
credit, generally those not exceeding $250,000, we use a credit scoring system
that enables us to process the loan requests quickly and efficiently. Commercial
business loans generally bear higher interest rates than residential loans of
like duration, but they also involve a higher risk of default since their
repayment is generally dependent on the successful operation of the borrower's
business and the sufficiency of collateral, if any.
ONE- TO FOUR-FAMILY REAL ESTATE LENDING. We offer conforming and
non-conforming, fixed-rate and adjustable-rate residential mortgage loans with
maturities of up to 30 years and maximum loan amounts generally of up to $1.1
million. This portfolio totaled $379.8 million, or 54.8% of our total loan
portfolio at June 30, 2003.
We currently offer both fixed- and adjustable-rate conventional mortgage
loans with terms of 10 to 30 years that are fully amortizing with monthly or
bi-weekly loan payments. One- to four-family residential mortgage loans are
generally underwritten according to Fannie Mae and Freddie Mac guidelines, and
loans that conform to such guidelines are referred to as "conforming loans." We
generally originate both fixed-rate and ARM loans in amounts up to the maximum
conforming loan limits as established by Fannie Mae and Freddie Mac, which are
currently $322,700 for single-family homes. Private mortgage insurance is
generally required for loans with loan-to-value ratios in excess of 80%. We also
originate loans above conforming limits, referred to as "jumbo loans," that have
been underwritten to the credit standards of Fannie Mae or Freddie Mac. These
loans are generally eligible for sale to various firms that specialize in the
purchase of such non-conforming loans, although we retained in our portfolio all
such loans originated in fiscal 2002, totaling $8.1 million, and for the first
nine months of fiscal 2003, totaling $15.6 million. In our market area, due to
our proximity to New York City, such larger residential
88
loans are not uncommon. We also originate loans at higher rates that do not meet
the credit standards of Fannie Mae or Freddie Mac, but are deemed to be
acceptable risks. The amount of such loans originated for the first nine months
of fiscal 2003 was $9.1 million, all of which were retained in our loan
portfolio.
We actively monitor our interest rate risk position to determine the
desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and our capital and liquidity position, we may retain all of our
newly originated longer term fixed-rate, fixed-term residential mortgage loans
or from time to time we may decide to sell all or a portion of such loans in the
secondary mortgage market to government sponsored entities such as Fannie Mae
and Freddie Mac or other purchasers. Our bi-weekly one- to four-family
residential mortgage loans that are retained in our portfolio result in shorter
repayment schedules than conventional monthly mortgage loans, and are repaid
through an automatic deduction from the borrower's savings or checking account.
As of June 30, 2003, bi-weekly loans totaled $150.1 million, or 39.3% of our
residential loan portfolio. We retain the servicing rights on a large majority
of loans sold to generate fee income and reinforce our commitment to customer
service, although we may also sell non-conforming loans to mortgage banking
companies, generally on a servicing-released basis. As of June 30, 2003, loans
serviced for others totaled $79.7 million.
We currently offer several ARM loan products secured by residential
properties with rates that are fixed for a period ranging from six months to
seven years. After the initial term, the interest rate on these loans is
generally reset every year based upon a contractual spread or margin above the
average yield on U.S. Treasury securities, adjusted to a constant maturity of
one year, as published weekly by the Federal Reserve Board and subject to
certain periodic and lifetime limitations on interest rate changes. Many of the
borrowers who select these loans have shorter-term credit needs than those who
select long-term, fixed-rate loans. ARM loans generally pose different credit
risks than fixed-rate loans primarily because the underlying debt service
payments of the borrowers rise as interest rates rise, thereby increasing the
potential for default. At June 30, 2003, our ARM portfolio included $6.9 million
in loans that re-price every six months, $49.6 million in loans that re-price
once a year and $181,000 in loans that reprice periodically after an initial
fixed-rate period of three years or more.
We require title insurance on all of our one- to four-family mortgage
loans, and we also require that borrowers maintain fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) in an amount at least
equal to the lesser of the loan balance or the replacement cost of the
improvements. Loans with initial loan-to-value ratios in excess of 80% must have
private mortgage insurance, although occasional exceptions may be made. Nearly
all residential loans must have a mortgage escrow account from which
disbursements are made for real estate taxes and for hazard and flood insurance.
CONSTRUCTION LOANS. We originate land acquisition, development and
construction loans to builders in our market area. These loans totaled $7.3
million, or 1.1% of our total loan portfolio at June 30, 2003.
Acquisition loans help finance the purchase of land intended for further
development, including single-family houses, multi-family housing, and
commercial income property. In some cases, we may make an acquisition loan
before the borrower has received approval to develop the land as planned. In
general, the maximum loan-to-value ratio for a land acquisition loan is 60% of
the appraised value of the property. We also make development loans to builders
in our market area to finance improvements to real estate, consisting mostly of
single-family subdivisions, typically to finance the cost of utilities, roads,
sewers and other development costs. Builders generally rely on the sale of
single-family homes to repay development loans, although in some cases the
improved building lots may be sold to another builder.
89
The maximum amount loaned is generally limited to the cost of the improvements.
Advances are made in accordance with a schedule reflecting the cost of the
improvements.
We also grant construction loans to area builders, often in conjunction
with development loans. In the case of residential subdivisions, these loans
finance the cost of completing homes on the improved property. Advances on
construction loans are made in accordance with a schedule reflecting the cost of
construction. Repayment of construction loans on residential subdivisions is
normally expected from the sale of units to individual purchasers. In the case
of income-producing property, repayment is usually expected from permanent
financing upon completion of construction. We commit to provide the permanent
mortgage financing on most of our construction loans on income-producing
property.
Land acquisition, development and construction lending exposes us to
greater credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event we make an acquisition loan on
property that is not yet approved for the planned development, there is the risk
that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property.
Development and construction loans also expose us to the risk that improvements
will not be completed on time in accordance with specifications and projected
costs. In addition, the ultimate sale or rental of the property may not occur as
anticipated.
CONSUMER LOANS. We originate a variety of consumer and other loans,
including homeowner loans, home equity lines of credit, new and used automobile
loans, and personal unsecured loans, including fixed-rate installment loans and
variable lines-of-credit. As of June 30, 2003, consumer loans totaled $81.3
million, or 11.7% of the total loan portfolio.
At June 30, 2003, the largest group of consumer loans consisted of $75.8
million of loans secured by junior liens on residential properties. We offer
fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans,
and we also offer adjustable-rate home equity lines of credit. As of June 30,
2003, homeowner loans totaled $27.8 million or 4.0% of our total loan portfolio.
The disbursed portion of home equity lines of credit totaled $48.0 million, or
6.9% of our total loan portfolio at June 30, 2003, with $24.2 million remaining
undisbursed.
Other consumer loans include personal loans and loans secured by new or
used automobiles. As of June 30, 2003, these loans totaled $5.5 million, or 0.8%
of our total loan portfolio. We originate automobile loans directly to our
customers and have no outstanding agreement with automobile dealerships to
generate indirect loans. We require borrowers to maintain collision insurance on
automobiles securing consumer loans, with us listed as loss payee. Personal
loans also include secured and unsecured installment loans for other purposes.
Unsecured installment loans generally have shorter terms than secured consumer
loans, and generally have higher interest rates than rates charged on secured
installment loans with comparable terms. Personal loans are generally unsecured
and carry higher interest rates and shorter terms than homeowner loans or
automobile loans.
Our procedures for underwriting consumer loans include an assessment of an
applicant's credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount.
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as
90
automobiles. In addition, the repayment of consumer loans depends on the
borrower's continued financial stability, as their repayment is more likely than
a single family mortgage loan to be adversely affected by job loss, divorce,
illness or personal bankruptcy.
91
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of our loan portfolio, excluding loans held for sale, by type of loan at the
dates indicated.
SEPTEMBER 30,
------------------------------------------------------------
JUNE 30, 2003 2002 2001 2000
------------------- ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- --------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
One- to four-family
residential mortgage
loans.................... $ 379,794 54.8% $ 366,111 54.6% $ 358,198 58.2% $ 343,871 57.5%
---------- ------- --------- ------- --------- ------- --------- -------
Commercial real estate
loans.................... 179,945 25.9 163,329 24.3 129,295 21.0 124,988 20.9
Commercial business loans. 45,306 6.5 41,320 6.2 31,394 5.1 27,483 4.6
Construction loans........ 7,312 1.1 17,020 2.5 19,490 3.2 29,599 5.0
---------- ------- --------- ------- --------- ------- --------- -------
Total commercial loans. 232,563 33.5 221,669 33.0 180,179 29.3 182,070 30.5
---------- ------- --------- ------- --------- ------- --------- -------
Home equity lines of
credit................... 48,026 6.9 39,727 5.9 31,125 5.1 28,021 4.7
Homeowner loans........... 27,771 4.0 36,880 5.5 39,501 6.4 37,027 6.2
Other consumer loans...... 5,456 0.8 6,812 1.0 6,266 1.0 6,486 1.1
---------- ------- --------- ------- --------- ------- --------- -------
Total consumer loans... 81,253 11.7 83,419 12.4 76,892 12.5 71,534 12.0
---------- ------- --------- ------- --------- ------- --------- -------
Total loans............... 693,610 100.0% 671,199 100.0% 615,269 100.0% 597,475 100.0%
======= ======= ======= =======
Allowance for loan losses. (11,055) (10,383) (9,123) (7,653)
---------- --------- --------- ---------
Total loans, net.......... $ 682,555 $ 660,816 $ 606,146 $ 589,822
========== ========= ========= =========
SEPTEMBER 30,
---------------------------------------
1999 1998
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
One- to four-family
residential mortgage
loans.................... $ 344,731 60.2% $ 290,334 62.0%
--------- ------- --------- -------
Commercial real estate
loans.................... 110,382 19.3 71,149 15.1
Commercial business loans. 30,768 5.4 24,372 5.2
Construction loans........ 19,147 3.3 20,049 4.3
--------- ------- --------- -------
Total commercial loans. 160,297 28.0 115,570 24.6
--------- ------- --------- -------
Home equity lines of
credit................... 25,380 4.4 26,462 5.7
Homeowner loans........... 34,852 6.1 27,208 5.8
Other consumer loans...... 7,463 1.3 8,999 1.9
--------- ------- --------- -------
Total consumer loans... 67,695 11.8 62,669 13.4
--------- ------- --------- -------
Total loans............... 572,723 100.0% 468,573 100.0%
======= =======
Allowance for loan losses. (6,202) (4,906)
--------- ---------
Total loans, net.......... $ 566,521 $ 463,667
========= =========
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LOAN PORTFOLIO MATURITIES AND YIELDS. The following table summarizes the
scheduled repayments of our loan portfolio at September 30, 2002. Demand loans,
loans having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
ONE- TO FOUR-FAMILY COMMERCIAL REAL ESTATE COMMERCIAL BUSINESS CONSTRUCTION /(2)/
------------------- ---------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Due During the Years
Ending September 30,
--------------------
2003 (1)............... $ 11,205 7.03% $ 25,236 6.93% $ 29,133 6.10% $ 15,222 5.39%
2004 to 2007........... 33,627 6.94 50,789 7.36 9,244 7.47 1,722 5.58
2008 and beyond........ 321,279 6.90 87,304 7.80 2,943 7.32 76 8.56
--------- --------- --------- ---------
Total......... $ 366,111 6.91% $ 163,329 7.53% $ 41,320 6.49% $ 17,020 5.42%
========= ========= ========= =========
CONSUMER TOTAL
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Due During the Years
Ending September 30,
- --------------------
2003 (1)............... $ 47,035 5.57% $ 127,831 6.06%
2004 to 2007........... 17,229 8.24 112,611 7.35
2008 and beyond........ 19,155 7.32 430,757 7.11
--------- ---------
Total......... $ 83,419 6.52% $ 671,199 6.95%
========= =========
- -------------------------------------
(1) Includes demand loans, loans having no stated repayment schedule or
maturity, and overdraft loans.
(2) Includes land acquisition loans.
The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at September 30, 2002 that are contractually due after
September 30, 2003.
DUE AFTER SEPTEMBER 30, 2003
---------------------------------------
FIXED ADJUSTABLE TOTAL
----------- ----------- -----------
(IN THOUSANDS)
One- to four-family residential mortgage loans... $ 287,069 $ 67,837 $ 354,906
----------- ----------- -----------
Commercial real estate loans..................... 52,004 86,089 138,093
Commercial business loans........................ 9,460 2,727 12,187
Construction loans............................... 226 1,572 1,798
----------- ----------- -----------
Total commercial loans.................. 61,690 90,388 152,078
----------- ----------- -----------
Consumer loans................................... 36,384 -- 36,384
----------- ----------- -----------
Total loans............................. $ 385,143 $ 158,225 $ 543,368
=========== =========== ===========
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LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon borrower demand, market interest rates, borrower preference for
fixed- versus adjustable-rate loans, and the interest rates offered on each type
of loan by other lenders in our market area. This includes competing banks,
savings banks, credit unions, mortgage banking companies and life insurance
companies that may also actively compete for local commercial real estate loans.
Loan originations are derived from a number of sources, including branch office
personnel, existing customers, borrowers, builders, attorneys, real estate
broker referrals and walk-in customers.
Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in decreased loan
demand, while declining interest rates may stimulate increased loan demand.
Accordingly, the volume of loan origination, the mix of fixed and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines,
and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold,
the sales are conducted using standard Fannie Mae/Freddie Mac purchase contracts
and master commitments as applicable. One- to four-family mortgage loans may be
sold both to Fannie Mae and Freddie Mac on a non-recourse basis whereby
foreclosure losses are generally the responsibility of the purchaser and not
Provident Bank.
We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our
policy has been to retain the servicing rights for all conforming loans sold,
and to continue to collect payments on the loans, maintain tax escrows and
applicable fire and flood insurance coverage, and supervise foreclosure
proceedings if necessary. We retain a portion of the interest paid by the
borrower on the loans as consideration for its servicing activities.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. We have four levels of lending
authority beginning with the Board of Directors. The Board grants lending
authority to the Director Loan Committee, the majority of the members of which
are Directors. The Director Loan Committee, in turn, may grant authority to the
Management Loan Committee and individual loan officers. In addition, designated
members of management may grant authority to individual loan officers up to
specified limits. Our lending activities are subject to written policies
established by the Board. These policies are reviewed periodically.
The Director Loan Committee may approve loans in accordance with applicable
loan policies, up to the limits established in our policy governing loans to one
borrower. This policy places limits on the aggregate dollar amount of credit
that may be extended to any one borrower and related entities. Loans exceeding
the maximum loan-to-one borrower limit described below require approval by the
Board of Directors. The Management Loan Committee may approve loans of up to an
aggregate of $650,000 to any one borrower and related borrowers. Two loan
officers with sufficient loan authority acting together may approve loans up to
$350,000. The maximum individual authority to approve an unsecured loan is
$50,000, however, for credit-scored small business loans, the maximum individual
authority is $150,000.
94
We have established a risk rating system for our commercial business loans,
commercial and multi-family real estate loans, and acquisition, development and
construction loans to builders. The risk rating system assesses a variety of
factors to rank the risk of default and risk of loss associated with the loan.
These ratings are performed by commercial credit personnel who do not have
responsibility for loan originations. We determine our maximum
loan-to-one-borrower limits based upon the rating of the loan. The large
majority of loans fall into three categories. The maximum for the best-rated
borrowers is $11.5 million, for the next group of borrowers is $8.5 million, and
for the third group is $4.0 million. Sublimits apply based on reliance on any
single property, and for commercial business loans.
In connection with our residential and commercial real estate loans, we
generally require property appraisals to be performed by independent appraisers
who are approved by the Board. Appraisals are then reviewed by the appropriate
loan underwriting areas. Under certain conditions, appraisals may not be
required for loans under $250,000 or in other limited circumstances. We also
require title insurance, hazard insurance and, if indicated, flood insurance on
property securing mortgage loans. Title insurance is not required for consumer
loans under $100,000, such as home equity lines of credit and homeowner loans.
LOAN ORIGINATION FEES AND COSTS. In addition to interest earned on loans,
we also receive loan origination fees. Such fees vary with the volume and type
of loans and commitments made, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money. We defer
loan origination fees and costs, and amortize such amounts as an adjustment to
yield over the term of the loan by use of the level-yield method. Deferred loan
origination costs (net of deferred fees) were $1.0 million at June 30, 2003.
To the extent that originated loans are sold with servicing retained, we
capitalize a mortgage servicing asset at the time of the sale in accordance with
applicable accounting standards (Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities"). The capitalized amount is amortized
thereafter (over the period of estimated net servicing income) as a reduction of
servicing fee income. The unamortized amount is fully charged to income when
loans are prepaid. Originated mortgage servicing rights with an amortized cost
of $557,000 are included in other assets at June 30, 2003. See also Notes 3 and
6 of the Notes to Consolidated Financial Statements.
LOANS TO ONE BORROWER. At June 30, 2003, our five largest aggregate amounts
loaned to any one borrower and certain related interests (including any unused
lines of credit) consisted of secured and unsecured financing of $8.2 million,
$7.1 million, $7.0 million, $6.8 million and $6.5 million. See "Supervision and
Regulation--Federal Banking Regulation--Loans to One Borrower" for a discussion
of applicable regulatory limitations.
DELINQUENT LOANS, OTHER REAL ESTATE OWNED AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. A computer-generated late notice is sent by the 16th
day after the payment due date on a loan requesting the payment due plus any
late charge that was assessed. Accounts are distributed to a collector or
account officer to contact borrowers, determine the reason for delinquency and
arrange for payment, and accounts are monitored electronically for receipt of
payments. If payments are not received within 30 days of the original due date,
a letter demanding payment of all arrearages is sent and contact efforts are
continued. If payment is not received within 60 days of the due date, loans are
generally accelerated and payment in full is demanded. Failure to pay within 90
days of the original due date generally results in legal action, notwithstanding
ongoing collection efforts. Unsecured consumer
95
loans are charged-off after 120 days. For commercial loans, procedures may vary
depending upon individual circumstances.
LOANS PAST DUE AND NON-PERFORMING ASSETS. Loans are reviewed on a regular
basis, and are placed on non-accrual status when either principal or interest is
90 days or more past due. In addition, loans are placed on non-accrual status
when, in the opinion of management, there is sufficient reason to question the
borrower's ability to continue to meet contractual principal or interest payment
obligations. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is reversed from interest income. Interest payments received
on non-accrual loans are not recognized as income unless warranted based on the
borrower's financial condition and payment record. At June 30, 2003, we had
non-accrual loans of $5.4 million.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses.
The following table sets forth certain information with respect to our loan
portfolio delinquencies at the dates indicated.
LOANS DELINQUENT FOR
----------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
------------------------ ------------------------ ------------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
At June 30, 2003
- ----------------
One- to four-family........ 11 $ 915 14 $ 1,727 25 $ 2,642
Commercial real estate..... 4 601 6 3,488 10 4,089
Commercial business........ 3 120 3 39 6 159
Construction............... -- -- -- -- -- --
Consumer................... 12 77 3 116 15 193
---------- ---------- ---------- ---------- ---------- ----------
Total.................... 30 $ 1,713 26 $ 5,370 56 $ 7,083
========== ========== ========== ========== ========== ==========
At September 30, 2002
- ---------------------
One- to four-family........ 6 $ 577 22 $ 2,291 28 $ 2,868
Commercial real estate..... -- -- 3 2,492 3 2,492
Commercial business........ -- -- -- -- -- --
Construction............... -- -- -- -- -- --
Consumer................... 7 37 14 171 21 208
---------- ---------- ---------- ---------- ---------- ----------
Total.................... 13 $ 614 39 $ 4,954 52 $ 5,568
========== ========== ========== ========== ========== ==========
At September 30, 2001
- ---------------------
One- to four-family........ 9 $ 935 21 $ 1,684 30 2,619
Commercial real estate..... 2 213 3 418 5 631
Commercial business........ -- -- -- -- -- --
Construction............... -- -- -- -- -- --
Consumer................... 9 277 8 175 17 452
---------- ---------- ---------- ---------- ---------- ----------
Total.................... 20 $ 1,425 32 $ 2,277 52 $ 3,702
========== ========== ========== ========== ========== ==========
At September 30, 2000
- ---------------------
One- to four-family........ 14 $ 1,180 26 $ 2,496 40 $ 3,676
Commercial real estate..... 2 270 5 1,149 7 1,419
Commercial business........ -- -- -- -- -- --
Construction............... -- -- 1 27 1 27
Consumer................... 7 162 18 359 25 521
---------- ---------- ---------- ---------- ---------- ----------
Total.................... 23 $ 1,612 50 $ 4,031 73 $ 5,643
========== ========== ========== ========== ========== ==========
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NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we 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).
SEPTEMBER 30,
JUNE 30, --------------------------------------------------------------
2003 2002 2001 2000 1999 1998
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
One- to four-family.............. $ 1,727 $ 2,291 $ 1,684 $ 2,496 $ 2,839 $ 2,965
Commercial real estate........... 3,488 2,492 418 1,149 1,133 871
Commercial business.............. 39 -- -- -- 208 368
Construction..................... -- -- -- 27 27 1,256
Consumer......................... 116 171 175 359 429 647
--------- --------- --------- --------- --------- ---------
Total non-performing loans..... 5,370 4,954 2,277 4,031 4,636 6,107
--------- --------- --------- --------- --------- ---------
Real estate owned:
One- to four-family.............. -- 41 109 154 403 92
Commercial real estate........... -- -- -- -- -- 274
--------- --------- --------- --------- --------- ---------
Total real estate owned........ -- 41 109 154 403 366
--------- --------- --------- --------- --------- ---------
Total non-performing assets......... $ 5,370 $ 4,995 $ 2,386 $ 4,185 $ 5,039 $ 6,473
========= ========= ========= ========= ========= =========
Ratios:
Non-performing loans to total
loans........................... 0.77% 0.74% 0.37% 0.67% 0.81% 1.30%
Non-performing assets to total
assets.......................... 0.48 0.49 0.27 0.50 0.62 0.94
For the nine months ended June 30, 2003 and the year ended September 30,
2002, gross interest income that would have been recorded had the non-accrual
loans at the end of the period remained on accrual status throughout the period
amounted to $294,000 and $371,000, respectively. Interest income actually
recognized on such loans totaled $153,000 and $83,000, respectively.
CLASSIFICATION OF ASSETS. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets that are
considered to be of lesser quality as substandard, doubtful, or loss assets. An
asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the savings institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets is not warranted. Assets that do not
expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess potential weaknesses that deserve
our close attention, are required to be designated as special mention. As of
June 30, 2003, we had $3.1 million of assets designated as special mention.
When we classify assets as either substandard or doubtful, we allocate a
portion of the related general loss allowances to such assets as deemed prudent
by management. The allowance for loan losses represents amounts that have been
established to recognize losses inherent in the loan portfolio that are both
probable and reasonably estimable at the date of the financial statements. When
we classify problem assets as loss, we charge-off such amount. Our determination
as to the classification of our assets and the amount of our loss allowances are
subject to review by our regulatory agencies, which can order the establishment
of additional loss allowances. Management regularly reviews our asset portfolio
to determine whether any assets require classification in accordance with
applicable regulations. On the
97
basis of management's review of our assets at June 30, 2003, classified assets
consisted of substandard assets of $4.4 million and doubtful assets of $31,000
(loans).
ALLOWANCE FOR LOAN LOSSES. We provide for loan losses based on the
allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes provisions for
loan losses in order to maintain the allowance for loan losses in accordance
with accounting principles generally accepted in the United States of America.
The allowance for loan losses consists of amounts specifically allocated to
non-performing loans and other criticized or classified loans (if any) as well
as allowances determined for each major loan category. After we establish a
provision for loans that are known to be non-performing, criticized or
classified, we calculate a percentage to apply to the remaining loan portfolio
to estimate the probable losses inherent in that portion of the portfolio. When
the loan portfolio increases, therefore, the percentage calculation results in a
higher dollar amount of estimated probable losses than would be the case without
the increase, and when the loan portfolio decreases, the percentage calculation
results in a lower dollar amount of estimated probable losses than would be the
case without the decrease. These percentages are determined by management based
on historical loss experience for the applicable loan category, which may be
adjusted to reflect our evaluation of:
o levels of, and trends in, delinquencies and non-accruals;
o trends in volume and terms of loans;
o effects of any changes in lending policies and procedures;
o experience, ability, and depth of lending management and staff;
o national and local economic trends and conditions;
o concentrations of credit by such factors as location, industry,
inter-relationships, and borrower; and
o for commercial loans, trends in risk ratings.
We consider commercial real estate loans, commercial business loans, and
land acquisition, development and construction loans to be riskier than one-to
four-family residential mortgage loans. Commercial real estate loans entail
significant additional credit risks compared to one- to four-family residential
mortgage loans, as they typically involve large loan balances concentrated with
single borrowers or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties typically depends on
the successful operation of the related real estate project and thus may be
subject to a greater extent to adverse conditions in the real estate market and
in the general economy. Commercial business loans involve a higher risk of
default then residential loans of like duration since their repayment is
generally dependent on the successful operation of the borrower's business and
the sufficiency of collateral, if any. Land acquisition, development and
construction lending exposes us to greater credit risk than permanent mortgage
financing. The repayment of land acquisition, development and construction loans
depends upon the sale of the property to third parties or the availability of
permanent financing upon completion of all improvements. In the event we make an
acquisition loan on property that is not yet approved for the planned
development, there is the risk that
98
approvals will not be granted or will be delayed. These events may adversely
affect the borrower and the collateral value of the property. Development and
construction loans also expose us to the risk that improvements will not be
completed on time in accordance with specifications and projected costs. In
addition, the ultimate sale or rental of the property may not occur as
anticipated.
The carrying value of loans are periodically evaluated and the allowance is
adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the information used in making the
evaluations. In addition, as an integral part of their examination process, our
regulatory agencies periodically review the allowance for loan losses. Such
agencies may require us to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
The following table sets forth activity in our allowance for loan losses
for the periods indicated.
AT OR FOR THE
NINE MONTHS ENDED
JUNE 30, AT OR FOR THE YEARS ENDED SEPTEMBER 30,
------------------- -----------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of year........ $ 10,383 $ 9,123 $ 9,123 $ 7,653 $ 6,202 $ 4,906 $ 3,779
-------- -------- -------- -------- -------- -------- --------
Charge-offs:
One- to four-family.............. -- -- -- (25) (168) (9) (13)
Commercial real estate........... (132) -- (31) -- (1) -- (87)
Commercial business.............. -- -- (130) (1) (6) (567) (10)
Construction..................... -- -- -- -- -- -- (355)
Consumer......................... (100) (137) (163) (133) (195) (346) (200)
-------- -------- -------- -------- -------- -------- --------
Total charge-offs.............. (232) (137) (324) (159) (370) (922) (665)
Recoveries:
One- to four-family.............. -- -- -- -- 24 -- --
Commercial real estate........... -- -- -- 96 -- 101 --
Commercial business.............. 27 -- 40 42 24 194 --
Construction..................... -- -- -- -- -- 286 2
Consumer......................... 77 99 107 51 63 47 53
-------- -------- -------- -------- -------- -------- --------
Total recoveries............... 104 99 147 189 111 628 55
Net (charge-offs) recoveries........ (128) (38) (177) 30 (259) (294) (610)
Allowance recorded in acquisition
of The National Bank of Florida... -- 537 537 -- -- -- --
Provision for loan losses 800 600 900 1,440 1,710 1,590 1,737
-------- -------- -------- -------- -------- -------- --------
Balance at end of year $ 11,055 $ 10,222 $ 10,383 $ 9,123 $ 7,653 $ 6,202 $ 4,906
======== ======== ======== ======== ======== ======== ========
Ratios:
Net charge-offs to average loans
outstanding (annualized)........... 0.02% 0.01% 0.03% --% 0.04% 0.06% 0.14%
Allowance for loan losses to
non-performing loans............... 205.87 215.79 209.59 400.66 189.85 133.78 80.33
Allowance for loan losses to
total loans........................ 1.59 1.55 1.55 1.48 1.28 1.08 1.05
99
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following tables set forth the
allowance for loan losses allocated by loan category, the total loan balances by
category (excluding loans held for sale), and the percent of loans in each
category to total loans at the dates indicated. The allowance for loan losses
allocated to each category is not necessarily indicative of future losses in any
particular category and does not restrict the use of the allowance to absorb
losses in other categories.
SEPTEMBER 30,
--------------------------------------------
JUNE 30, 2003 2002
-------------------------------------------- --------------------------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
ALLOWANCE FOR LOAN BALANCES CATEGORY TO ALLOWANCE FOR LOAN BALANCES CATEGORY TO
LOAN LOSSES BY CATEGORY TOTAL LOANS LOAN LOSSES BY CATEGORY TOTAL LOANS
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
One- to four-family..... $ 1,789 $ 379,794 54.8% $ 3,315 $ 366,111 54.6%
Commercial real estate.. 5,734 179,945 25.9 4,275 163,329 24.3
Commercial business..... 2,249 45,306 6.5 925 41,320 6.2
Construction............ 249 7,312 1.1 871 17,020 2.5
Consumer................ 1,034 81,253 11.7 997 83,419 12.4
------------- ------------- ------------- ------------- ------------- -------------
Total................ $ 11,055 $ 693,610 100.0% $ 10,383 $ 671,199 100.0%
============= ============= ============= ============= ============= =============
SEPTEMBER 30,
--------------------------------------------
2001
--------------------------------------------
PERCENT OF
LOANS IN EACH
ALLOWANCE FOR LOAN BALANCES CATEGORY TO
LOAN LOSSES BY CATEGORY TOTAL LOANS
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
One- to four-family..... $ 2,638 $ 358,198 58.2%
Commercial real estate.. 3,930 129,295 21.0
Commercial business..... 841 31,394 5.1
Construction............ 871 19,490 3.2
Consumer................ 843 76,892 12.5
------------- ------------- -------------
Total................ $ 9,123 $ 615,269 100.0%
============= ============= =============
September 30,
------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- --------------------------------------------
Percent of Percent of
Loans in Each Loans in Each
Allowance for Loan Balances Category to Allowance for Loan Balances Category to
Loan Losses by Category Total Loans Loan Losses by Category Total Loans
------------- ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
One- to four-family..... $ 2,423 $ 343,871 57.5% $ 2,091 $ 344,731 60.2%
Commercial real estate.. 3,210 124,988 20.9 2,416 110,382 19.3
Commercial business..... 481 27,483 4.6 254 30,768 5.4
Construction............ 733 29,599 5.0 614 19,147 3.3
Consumer................ 806 71,534 12.0 827 67,695 11.8
------------- ------------- ------------- ------------- ------------- -------------
Total................ $ 7,653 $ 597,475 100.0% % 6,202 $ 572,723 100.0%
============= ============= ============= ============= ============= =============
September 30,
--------------------------------------------
1998
--------------------------------------------
Percent of
Loans in Each
Allowance for Loan Balances Category to
Loan Losses by Category Total Loans
------------- ------------- -------------
(Dollars in thousands)
One- to four-family..... $ 1,320 $ 290,334 62.0%
Commercial real estate.. 1,976 71,149 15.1
Commercial business..... 376 24,372 5.2
Construction............ 301 20,049 4.3
Consumer................ 933 62,669 13.4
------------- ------------- -------------
Total................ $ 4,906 $ 468,573 100.0%
============= ============= =============
100
SECURITIES ACTIVITIES
Our securities investment policy is established by our Board of Directors.
This policy dictates that investment decisions be made based on the safety of
the investment, liquidity requirements, potential returns, cash flow targets,
and consistency with our interest rate risk management strategy. The Board's
asset/liability committee oversees our investment program and evaluates on an
ongoing basis our investment policy and objectives. Our chief financial officer,
or our chief financial officer acting with our chief executive officer, is
responsible for making securities portfolio decisions in accordance with
established policies. Our chief financial officer, chief executive officer and
certain other executive officers have the authority to purchase and sell
securities within specific guidelines established by the investment policy. In
addition, all transactions are reviewed by the Board's asset/liability committee
at least quarterly.
Our current investment policy generally permits securities investments in
debt securities issued by the U.S. Government and U.S. Agencies, municipal
bonds, and corporate debt obligations, as well as investments in preferred and
common stock of government agencies and government sponsored enterprises such as
Fannie Mae, Freddie Mac and the Federal Home Loan Bank of New York (federal
agency securities) and, to a lesser extent, other equity securities. Securities
in these categories are classified as "investment securities" for financial
reporting purposes. The policy also permits investments in mortgage-backed
securities, including pass-through securities issued and guaranteed by Fannie
Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations
("CMOs") issued or backed by securities issued by these government agencies.
Also permitted are investments in securities issued or backed by the Small
Business Administration, privately issued mortgage-backed securities and
asset-backed securities collateralized by auto loans, credit card receivables,
and home equity and home improvement loans. Our current investment strategy uses
a risk management approach of diversified investing in fixed-rate securities
with short- to intermediate-term maturities, as well as adjustable-rate
securities, which may have a longer term to maturity. The emphasis of this
approach is to increase overall investment securities yields while managing
interest rate risk.
SFAS No. 115 requires that, at the time of purchase, we designate a
security as held to maturity, available for sale, or trading, depending on our
ability and intent. Securities available for sale are reported at fair value,
while securities held to maturity are reported at amortized cost. We do not have
a trading portfolio.
GOVERNMENT SECURITIES. At June 30, 2003, we held government securities
available for sale with a fair value of $125.1 million, consisting primarily of
U.S. Treasury and agency obligations with short- to medium-term maturities (one
to five years). While these securities generally provide lower yields than other
investments such as mortgage-backed securities, our current investment strategy
is to maintain investments in such instruments to the extent appropriate for
liquidity purposes, as collateral for borrowings, and for prepayment protection.
CORPORATE AND MUNICIPAL BONDS. At June 30, 2003, we held $12.9 million in
corporate debt securities, at fair value, all of which were classified as
available for sale. Although corporate bonds may offer a higher yield than that
of a U.S. Treasury or agency security of comparable duration, corporate bonds
also have a higher risk of default due to adverse changes in the
creditworthiness of the issuer. In recognition of this potential risk, our
policy limits investments in corporate bonds to securities with maturities of
ten years or less and rated "A" or better by at least one nationally recognized
rating agency, and to a total investment of no more than $5.0 million per issuer
and a total corporate bond portfolio limit of $40.0 million. The policy also
limits investments in municipal bonds to securities with maturities of 20 years
or less and rated AA or better by at least one nationally recognized rating
agency, and favors issues
101
that are insured unless the issuer is a local government entity within our
service area. Such local entity obligations generally are not rated, and are
subject to internal credit reviews. In addition, the policy imposes an
investment limitation of $2.0 million per municipal issuer and a total municipal
bond portfolio limit of 5% of assets. At June 30, 2003, we held $19.8 million in
bonds issued by states and political subdivisions, $18.5 million of which were
classified as held to maturity at amortized cost and $1.3 million of which were
classified as available for sale at fair value.
EQUITY SECURITIES. At June 30, 2003, our equity securities available for
sale had a fair value of $1.3 million and consisted of stock issued by Freddie
Mac and Fannie Mae, and certain other equity investments. We also held $5.8
million (at cost) of Federal Home Loan Bank of New York common stock, a portion
of which must be held as a condition of membership in the Federal Home Loan Bank
System, with the remainder held as a condition to our borrowing under the
Federal Home Loan Bank advance program.
MORTGAGE-BACKED SECURITIES. We purchase mortgage-backed securities in order
to: (i) generate positive interest rate spreads with minimal administrative
expense; (ii) lower credit risk as a result of the guarantees provided by
Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase liquidity. We invest
primarily in mortgage-backed securities issued or sponsored by Fannie Mae,
Freddie Mac, and Ginnie Mae. To a lesser extent, we also invest in securities
backed by agencies of the U.S. Government. At June 30, 2003, our mortgage-backed
securities portfolio totaled $175.6 million, consisting of $111.4 million
available for sale at fair value and $64.2 million held to maturity at amortized
cost. The total mortgage-backed securities portfolio includes CMOs of $30.9
million, consisting of $26.6 million available for sale at fair value and $4.3
million held to maturity at amortized cost. The remaining mortgage-backed
securities of $144.7 million were pass-through securities, consisting of $84.8
million available for sale at fair value and $59.9 million held to maturity at
amortized cost.
Mortgage-backed securities are created by pooling mortgages and issuing a
security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of our mortgage-backed
securities are collateralized by single-family mortgages. The issuers of such
securities (generally U.S. Government agencies and government sponsored
enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell
the participation interests in the form of securities to investors, such as us,
and guarantee the payment of principal and interest to these investors.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater or less than the prepayment rate estimated at the time of
purchase, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments, thereby affecting the
net yield on such securities. We review prepayment estimates for our
mortgage-backed securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the securities at issue and
current interest rates, and to determine the yield and estimated maturity of the
mortgage-backed securities portfolio. Periodic reviews of current prepayment
speeds are performed in order to ascertain whether prepayment estimates require
modification, that would cause amortization or accretion adjustments.
A portion of our mortgage-backed securities portfolio is invested in CMOs
or collateralized mortgage obligations, including Real Estate Mortgage
Investment Conduits ("REMICs"), backed by Fannie Mae and Freddie Mac. CMOs and
REMICs are types of debt securities issued by a special-purpose entity that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of securities with varying maturities and amortization
schedules, as well as a residual interest, with each class possessing different
risk characteristics. The cash flows from the underlying collateral are
generally divided into "tranches" or classes that have descending priorities
with respect to the distribution
102
of principal and interest cash flows, while cash flows on pass-through
mortgage-backed securities are distributed pro rata to all security holders. Our
practice is to limit fixed-rate CMO investments primarily to the
early-to-intermediate tranches, which have the greatest cash flow stability.
Floating rate CMOs are purchased with emphasis on the relative trade-offs
between lifetime rate caps, prepayment risk, and interest rates.
AVAILABLE FOR SALE PORTFOLIO. The following table sets forth the
composition of our available for sale portfolio at the dates indicated.
SEPTEMBER 30,
----------------------------------------------------------------------
JUNE 30, 2003 2002 2001 2000
---------------------- ---------------------- ---------------------- ----------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(IN THOUSANDS)
INVESTMENT SECURITIES:
U.S. Government securities.... $ 15,271 $ 15,399 $ 21,199 $ 21,658 $ 22,125 $ 22,975 $ 33,004 $ 32,851
Federal agency obligations.... 106,108 109,687 87,878 91,625 26,744 28,182 37,934 37,546
Corporate debt securities..... 12,020 12,855 30,079 32,144 48,367 50,872 30,975 30,588
State and municipal
securities................... 1,293 1,274 -- -- -- -- 11,697 10,981
Equity securities............. 1,051 1,305 1,113 2,071 1,290 2,372 3,201 4,383
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total investment securities
available for sale........... 135,743 140,520 140,269 147,498 98,526 104,401 116,811 116,349
--------- ---------- --------- ---------- --------- ---------- --------- ----------
MORTGAGE-BACKED SECURITIES:
Pass-through securities:
Fannie Mae.................. 69,903 70,836 20,076 21,121 18,225 18,815 17,767 17,723
Freddie Mac................. 8,429 8,961 10,591 11,023 6,361 6,842 2,344 2,383
Other....................... 4,390 5,030 4,430 5,000 4,481 4,529 6,582 6,494
CMOs and REMICs............... 26,568 26,566 21,352 21,504 28,811 29,341 19,553 19,208
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total mortgage-backed
securities available for
sale......................... 109,290 111,393 56,449 58,648 57,878 59,527 46,246 45,808
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total securities available
for sale..................... $ 245,033 $ 251,913 $ 196,718 $ 206,146 $ 156,404 $ 163,928 $ 163,057 $ 162,157
========= ========== ========= ========== ========= ========== ========= ==========
At June 30, 2003, our available for sale U. S. Treasury securities
portfolio, at fair value, totaled $15.4 million, or 1.4% of total assets, and
the federal agency securities portfolio, at fair value, totaled $109.7 million,
or 9.8% of total assets. Of the combined U.S. Government and agency portfolio,
based on amortized cost, $23.0 million had maturities of one year or less and a
weighted average yield of 4.40%, and $98.3 million had maturities of between one
and five years and a weighted average yield of 3.74%. The agency securities
portfolio includes both non-callable and callable debentures. The agency
debentures are callable on a quarterly basis following an initial holding period
of from twelve to twenty-four months.
Available for sale corporate debt securities, at fair value, totaled $12.9
million at June 30, 2003. These securities all had maturities of less than five
years, with a weighted average yield of 6.50%. Equity securities available for
sale at June 30, 2003 had a fair value of $1.3 million.
At June 30, 2003, $84.8 million of our available for sale mortgage-backed
securities, at fair value, consisted of pass-through securities, which totaled
7.6% of total assets. At the same date, the fair value of our available for sale
CMO portfolio totaled $26.6 million, or 2.4% of total assets, and consisted of
CMOs issued by government sponsored agencies such as Fannie Mae and Freddie Mac
with a weighted average yield of 3.60%. We own both fixed-rate and floating-rate
CMOs. The underlying mortgage collateral for our portfolio of CMOs available for
sale at June 30, 2003 had contractual maturities of over ten years. However, as
with mortgage-backed pass-through securities, the actual maturity of a CMO may
103
be less than its stated contractual maturity due to prepayments of the
underlying mortgages and the terms of the CMO tranche owned.
HELD TO MATURITY PORTFOLIO. The following table sets forth the composition
of our held to maturity portfolio at the dates indicated.
SEPTEMBER 30,
----------------------------------------------------------------------
JUNE 30, 2003 2002 2001 2000
---------------------- ---------------------- ---------------------- ----------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(IN THOUSANDS)
INVESTMENT SECURITIES:
State and municipal
securities................... $ 18,544 $ 19,665 $ 16,409 $ 17,325 $ 11,906 $ 12,160 $ 2,991 $ 2,957
Equity securities............. -- -- -- -- -- -- 397 397
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total investment
securities held to maturity. 18,544 19,665 16,409 17,325 11,906 12,160 3,388 3,354
--------- ---------- --------- ---------- --------- ---------- --------- ----------
MORTGAGE-BACKED SECURITIES:
Pass-through securities:
Ginnie Mae.................. 1,259 1,334 2,785 2,988 3,510 3,611 4,279 4,275
Fannie Mae.................. 27,321 28,156 28,600 30,177 23,616 24,421 16,578 16,440
Freddie Mac................. 31,362 32,062 34,693 35,788 26,477 27,394 17,105 16,902
Other....................... -- -- -- -- 1,491 1,542 2,283 2,343
CMOs and REMICs............... 4,301 4,359 4,304 4,428 4,355 4,532 4,953 5,060
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total mortgage-backed
securities held to maturity.. 64,243 65,911 70,382 73,381 59,449 61,500 45,198 45,020
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total securities held to
maturity..................... $ 82,787 $ 85,576 $ 86,791 $ 90,706 $ 71,355 $ 73,660 $ 48,586 $ 48,374
========= ========== ========= ========== ========= ========== ========= ==========
At June 30, 2003, our held to maturity mortgage-backed securities portfolio
totaled $64.2 million at amortized cost, consisting of: $60.4 million with a
weighted average yield of 5.04% and contractual maturities within five years;
$466,000 with a weighted average yield of 8.10% and contractual maturities of
five to ten years; and $3.4 million with a weighted average yield of 6.08% and
contractual maturities of over ten years. CMOs of $4.3 million are included in
this portfolio. While the contractual maturity of the CMOs underlying collateral
is greater than ten years, the actual period to maturity of the CMOs may be
shorter due to prepayments on the underlying mortgages and the terms of the CMO
tranche owned.
104
PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the
investment debt securities portfolio and the mortgage-backed securities
portfolio at June 30, 2003 are summarized in the following table. Maturities are
based on the final contractual payment dates, and do not reflect the impact of
prepayments or early redemptions that may occur. State and municipal securities
yields have not been adjusted to a tax-equivalent basis.
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS MORE THAN TEN YEARS
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE:
MORTGAGE-BACKED SECURITIES
Fannie Mae............ $ 363 6.05% $ 53,541 4.26% $ 15,999 4.22% $ -- --%
Freddie Mac........... 163 1.59 17,155 4.75 605 4.22 -- --
Other................. -- -- 17,074 3.64 4,390 6.32 -- --
--------- -------- --------- -------- --------- -------- --------- --------
Total............... 526 4.67 87,770 4.24 20,994 4.66 -- --
--------- -------- --------- -------- --------- -------- --------- --------
INVESTMENT SECURITIES
U.S. Government and
agency securities.... 23,042 4.40 98,337 3.74 -- -- -- --
Corporate debt
securities........... 5,986 6.28 6,034 6.71 351 -- -- --
State and municipal
securities........... -- -- 157 2.05 785 2.74 351 3.23
--------- -------- --------- -------- --------- -------- --------- --------
Total............... 29,028 4.79 104,528 3.91 785 2.74 351 3.23
--------- -------- --------- -------- --------- -------- --------- --------
Total debt securities
available for sale..... $ 29,554 4.79% $ 192,298 4.06% $ 21,779 4.59% $ 351 3.23%
========= ======== ========= ======== ========= ======== ========= ========
HELD TO MATURITY:
MORTGAGE-BACKED SECURITIES
Fannie Mae............ $ -- --% $ 31,260 4.87% $ -- --% $ 362 4.92%
Freddie Mac........... 95 3.34 27,756 5.12 466 8.10 3,045 6.22
Other................. -- -- 1,259 7.51 -- -- -- --
--------- -------- --------- -------- --------- -------- --------- --------
Total............... 95 3.34 60,275 5.04 466 8.10 3,407 6.08
INVESTMENT SECURITIES
State and municipal
securities........... 270 1.62 7,937 2.99 10,015 4.13 322 6.75
--------- -------- --------- -------- --------- -------- --------- --------
Total debt securities
held to maturity....... $ 365 2.07% $ 68,212 4.80% $ 10,481 4.31% $ 3,729 6.14%
========= ======== ========= ======== ========= ======== ========= ========
TOTAL SECURITIES
--------------------------------
WEIGHTED
AMORTIZED AVERAGE
COST FAIR VALUE YIELD
--------- ---------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE:
MORTGAGE-BACKED SECURITIES
Fannie Mae............ $ 69,903 $ 70,836 4.26%
Freddie Mac........... 17,923 18,482 4.70
Other................. 21,464 22,075 4.19
--------- ---------- --------
Total............... 109,290 111,393 4.32
--------- ---------- --------
INVESTMENT SECURITIES
U.S. Government and
agency securities.... 121,379 125,086 3.87
Corporate debt
securities........... 12,020 12,855 6.50
State and municipal
securities........... 1,293 1,274 2.79
--------- ---------- --------
Total............... 134,692 139,215 4.09
--------- ---------- --------
Total debt securities
available for sale..... $ 243,982 $ 250,608 4.19%
========= ========== ========
HELD TO MATURITY:
MORTGAGE-BACKED SECURITIES
Fannie Mae............ $ 31,622 $ 32,515 4.87%
Freddie Mac........... 31,362 32,062 5.27
Other................. 1,259 1,334 7.51
--------- ---------- --------
Total............... 64,243 65,911 5.12
INVESTMENT SECURITIES
State and municipal
securities........... 18,544 19,665 3.65
--------- ---------- --------
Total debt securities
held to maturity....... $ 82,787 $ 85,576 4.79%
========= ========== ========
105
SOURCES OF FUNDS
GENERAL. Deposits, borrowings, repayments and prepayments of loans and
securities, proceeds from sales of loans and securities, proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes.
DEPOSITS. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings accounts, NOW accounts,
checking accounts, money market accounts, club accounts, certificates of deposit
and IRAs and other qualified plan accounts. We provide commercial checking
accounts for businesses. In addition, we provide low-cost checking account
services for low-income customers.
At June 30, 2003, our deposits totaled $857.5 million. Interest-bearing
deposits totaled $709.9 million, and non-interest-bearing demand deposits
totaled $147.7 million. NOW, savings and money market deposits totaled $477.5
million at June 30, 2003. Also at that date, we had a total of $232.3 million in
certificates of deposit, of which $168.8 million had maturities of one year or
less. Although we have a significant portion of our deposits in shorter-term
certificates of deposit, management monitors activity on these accounts and,
based on historical experience and our current pricing strategy we believe we
will retain a large portion of such accounts upon maturity.
Our deposits are obtained predominantly from the areas in which our branch
offices are located. We rely on our favorable locations, customer service and
competitive pricing to attract and retain these deposits. While we accept
certificates of deposit in excess of $100,000 for which we may provide
preferential rates, we do not actively solicit such deposits as they are more
difficult to retain than core deposits. With the commencement of operations of
our limited purpose commercial bank subsidiary, Provident Municipal Bank, in
April 2002, we began accepting municipal deposits. Municipal time accounts
(certificates of deposit) are generally obtained through a bidding process, and
tend to carry higher average interest rates than retail certificates of deposit
of similar term.
The following tables set forth the distribution of total deposit accounts,
by account type, at the dates indicated.
JUNE 30, 2003 SEPTEMBER 30, 2002
-------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
--------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Demand deposits:
Retail.................. $ 83,165 9.7% --% $ 54,399 6.8% --%
Commercial.............. 64,508 7.5 -- 55,732 6.9 --
--------- --------- --------- ---------
Total demand deposits... 147,673 17.2 -- 110,131 13.7 --
NOW deposits............... 70,963 8.3 0.20 82,983 10.4 0.40
Savings deposits........... 279,016 32.5 0.40 247,918 31.0 0.99
Money market deposits...... 127,560 14.9 0.55 115,065 14.4 1.23
--------- --------- --------- ---------
625,212 72.9 0.41 556,097 69.5 0.76
Certificates of deposit.... 232,322 27.1 2.03 243,529 30.5 2.64
--------- --------- --------- ---------
Total deposits.......... $ 857,534 100.0% 0.78% $ 799,626 100.0% 1.33%
========= ========= ========= =========
106
SEPTEMBER 30,
---------------------------------------------------------------------
2001 2000
-------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
--------- --------- -------- --------- --------- --------
Demand deposits:
Retail.................. $ 41,280 6.3% --% $ 38,145 6.3% --%
Commercial.............. 33,081 5.1 -- 28,324 4.7 --
--------- --------- --------- ---------
Total demand deposits... 74,361 11.4 -- 66,469 11.0 --
NOW deposits............... 63,509 9.7 0.49 54,800 9.0 1.01
Savings deposits........... 160,777 24.6 1.05 161,987 26.6 2.02
Money market deposits...... 109,126 16.7 1.81 76,332 12.5 2.55
--------- --------- --------- ---------
407,773 62.4 1.00 359,588 59.1 1.61
Certificates of deposit.... 245,327 37.6 4.63 249,388 40.9 5.83
--------- --------- --------- ---------
Total deposits.......... $ 653,100 100.0% 2.31% $ 608,976 100.0% 3.34%
========= ========= ========= =========
The following table sets forth, by interest rate ranges, information
concerning certificates of deposit at the dates indicated.
AT JUNE 30, 2003
------------------------------------------------------------------------------
PERIOD TO MATURITY
------------------------------------------------------------------------------ TOTAL AT SEPTEMBER 30,
LESS THAN ONE TO TWO TWO TO MORE THAN PERCENT OF -------------------------
ONE YEAR YEARS THREE YEARS THREE YEARS TOTAL TOTAL 2002 2001
----------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
INTEREST RATE RANGE:
2.00% and below... $ 136,128 $ 13,614 $ 341 $ 48 $ 150,131 64.6% $ 107,202 $ --
2.01% to 3.00%.... 23,868 8,965 3,906 229 36,968 15.9 73,101 --
3.01% to 4.00%.... 6,723 13,385 1,229 6,354 27,691 11.9 27,373 108,161
4.01% to 5.00%.... 1,744 6,811 1,121 4,682 14,358 6.2 20,245 33,785
5.01% to 6.00%.... 179 1,985 244 31 2,439 1.1 6,563 30,416
6.01% and above... 126 163 446 -- 735 0.3 9,045 72,965
----------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Total............. $ 168,768 $ 44,923 $ 7,287 $ 11,344 $ 232,322 100.0% $ 243,529 $ 245,327
=========== =========== =========== =========== =========== ========== =========== ===========
The following table sets forth certificates of deposit by time remaining
until maturity as of June 30, 2003.
MATURITY
---------------------------------------------------------
3 MONTHS OR OVER 3 TO 6 OVER 6 TO 12 OVER 12
LESS MONTHS MONTHS MONTHS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Certificates of deposit less than $100,000...... $ 55,638 $ 42,602 $ 45,950 $ 48,388 $ 192,578
Certificates of deposit of $100,000 or
more /(1)/..................................... 9,205 4,473 10,900 15,166 39,744
------------ ------------ ------------ ------------ ------------
Total of certificates of deposit............. $ 64,843 $ 47,075 $ 56,850 $ 63,554 $ 232,322
============ ============ ============ ============ ============
- --------------------------
(1) The weighted average interest rates for these accounts, by maturity period,
are 1.46% for 3 months or less; 1.47% for 3 to 6 months; 1.94% for 6 to 12
months; and 2.28% for over 12 months. The overall weighted average interest
rate for accounts of $100,000 or more was 1.90%.
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BORROWINGS. Our borrowings consist of advances and repurchase agreements.
At June 30, 2003, we had access to additional Federal Home Loan Bank advances of
up to $202.7 million. The following table sets forth information concerning
balances and interest rates on our Federal Home Loan Bank advances and
repurchase agreements at the dates and for the periods indicated.
AT OR FOR THE NINE MONTHS
ENDED JUNE 30, AT OR FOR THE YEARS ENDED SEPTEMBER 30,
------------------------- ---------------------------------------
2003 2002 2002 2001 2000
------------ ---------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS)
Balance at end of period $ 116,732 $ 113,127 $ 102,968 $ 110,427 $ 121,975
Average balance during period 108,688 116,805 113,446 113,975 122,315
Maximum outstanding at any month end 119,388 131,637 131,637 135,727 131,458
Weighted average interest rate at end
of period 3.79% 4.42% 4.37% 5.32% 6.36%
Average interest rate during period 3.88% 4.93% 4.85% 5.98% 5.98%
ACTIVITIES OF SUBSIDIARIES AND AFFILIATED ENTITIES
Provident Municipal Bank is a wholly-owned subsidiary of Provident Bank.
Provident Municipal Bank is a New York State-chartered commercial bank whose
purpose is limited to accepting municipal deposits and investing funds obtained
into investment securities. New York State law requires municipalities located
in the State of New York to deposit funds with commercial banks, effectively
forbidding these municipalities from depositing funds with savings institutions,
including federally chartered savings associations, such as Provident Bank.
Provident Municipal Bank began operations on April 19, 2002, and at June 30,
2003 had $19.8 million in deposits from municipal entities in the communities
served by Provident Bank.
Provest Services Corp. I is a wholly-owned subsidiary of Provident Bank,
holding an investment in a limited partnership that operates an assisted-living
facility. A percentage of the units in the facility are for low-income
individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident
Bank that has engaged a third-party provider to sell annuities, mutual funds,
life and health insurance products to Provident Bank's customers. Through June
30, 2003, the activities of these subsidiaries have had an insignificant effect
on our consolidated financial condition and results of operations. During fiscal
1999, Provident Bank established Provident REIT, Inc., a wholly-owned subsidiary
in the form of a real estate investment trust. Provident REIT, Inc. holds both
residential and commercial real estate loans.
At the time of our initial public offering, approximately 46.7% of our
common stock was sold to the public, and the remaining 53.3% was retained by
Provident Bancorp, MHC, the successor to our original mutual savings
association. The accounts of Provident Bancorp, MHC are not included in our
consolidated financial statements. Provident Bancorp, MHC's primary activity is
to hold its majority ownership interest in us. Provident Bancorp, MHC waives the
receipt of most cash dividends with respect to its shares of our common stock,
but uses the proceeds of those dividends it accepts principally to make
charitable contributions in the communities Provident Bank serves. In fiscal
2002, Provident Bancorp, MHC accepted $500,000 in dividends and made charitable
contributions of $557,000. Provident Bancorp, MHC has commitments to make future
charitable contributions of $43,000. These commitments will be assumed by
Provident Bank following the conversion.
COMPETITION
We face significant competition in both originating loans and attracting
deposits. The New York metropolitan area has a high concentration of financial
institutions, many of which are significantly larger institutions with greater
financial resources than us, and many of which are our competitors to varying
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degrees. Our competition for loans comes principally from commercial banks,
savings banks, mortgage banking companies, credit unions, insurance companies
and other financial service companies. Our most direct competition for deposits
has historically come from commercial banks, savings banks and credit unions. We
face additional competition for deposits from non-depository competitors such as
the mutual fund industry, securities and brokerage firms and insurance
companies. We have emphasized personalized banking and the advantage of local
decision making in our banking business and this strategy appears to have been
well received in our market area. We do not rely on any individual, group, or
entity for a material portion of our deposits.
EMPLOYEES
As of June 30, 2003, we had 285 full-time employees and 49 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
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PROPERTIES
As of June 30, 2003, Provident Bank leased 11 properties, including its
headquarters location, from third parties. In addition, Provident Bank owns
eight properties. At June 30, 2003, the net book value of our properties was
$9.5 million. The following is a list of our locations:
CORPORATE OFFICE, COMMERCIAL LENDING DIVISION, AND INVESTMENT MANAGEMENT AND
TRUST DEPARTMENT:
400 Rella Boulevard
Montebello, NY 10901
(845) 369-8040
ROCKLAND COUNTY BRANCHES: 26 North Middletown Road
(In the ShopRite Supermarket)
44 West Route 59 Pearl River, NY 10965
Nanuet, NY 10954 (845) 627-6170
(845) 627-6180
196 Route 59
38-40 New Main Street Suffern, NY 10901
Haverstraw, NY 10927 (845) 369-8360
(845) 942-3880
1633 Route 202
375 Route 303 at Kings Highway Pomona, NY 10970
Orangeburg, NY 10962 (845) 364-5690
(845) 398-4810
44 North Main Street
148 Route 9W (In the ShopRite Supermarket)
Stony Point, NY 10980 New City, NY 10956
(845) 942-3890 (845) 639-7650
179 South Main Street ORANGE COUNTY BRANCHES:
New City, NY 10956
(845) 639-7750
125 Dolson Avenue
72 West Eckerson Rd. (In the ShopRite Supermarket)
Spring Valley, NY 10977 Middletown, NY 10940
(845) 426-7230 (845) 342-5777
715 Route 304 153 Route 94
Bardonia, NY 10954 (In the ShopRite Supermarket)
(845) 623-6340 Warwick, NY 10990
(845) 986-9540
1 Lake Road West 7 Edward J. Lempka Drive
Congers, NY 19020 Florida, NY 10921
(845) 267-2180 (845) 651-4091
71 Lafayette Avenue 1992 Route 284
Suffern, NY 10901 Slate Hill, NY 10973
(845) 369-8350 (845) 355-6181
300 Larkin Drive
Harriman Commons
Monroe, NY 10950
(845) 782-7226
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LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business which, in the
aggregate, involve amounts which are believed by management to be immaterial to
our financial condition and results of operations.
SUPERVISION AND REGULATION
GENERAL
As a federally-chartered savings association, Provident Bank is regulated
and supervised by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. Provident Municipal Bank is regulated by the New York
State Department of Banking and the Federal Deposit Insurance Corporation. This
regulation and supervision establishes a comprehensive framework of activities
in which a financial institution may engage and is intended primarily for the
protection of the Federal Deposit Insurance Corporation's deposit insurance
funds and depositors. Under this system of federal regulation, financial
institutions are periodically examined to ensure that they satisfy applicable
standards with respect to their capital adequacy, assets, management, earnings,
liquidity and sensitivity to market interest rates. After completing an
examination, the federal agency critiques the financial institution's operations
and assigns its rating (known as an institution's CAMELS). Under federal law, an
institution may not disclose its CAMELS rating to the public. Provident Bank
also is a member of, and owns stock in, the Federal Home Loan Bank of New York,
which is one of the twelve regional banks in the Federal Home Loan Bank System.
Provident Bank also is regulated to a lesser extent by the Board of Governors of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision examines Provident Bank and
prepares reports for the consideration of its board of directors on any
operating deficiencies. Provident Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws,
especially in matters concerning the ownership of deposit accounts and the form
and content of Provident Bank's loan documents.
Any change in these laws or regulations, whether by the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the New York State
Department of Banking or Congress, could have a material adverse impact on
Provident Bancorp, Inc., Provident Bank, Provident Municipal Bank and their
respective operations.
FEDERAL BANKING REGULATION
BUSINESS ACTIVITIES. A federal savings association derives its lending and
investment powers from the Home Owners' Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, Provident Bank may invest in mortgage loans secured by residential
and commercial real estate, commercial business and consumer loans, certain
types of debt securities and certain other loans and assets. Provident Bank also
may establish subsidiaries that may engage in activities not otherwise
permissible for Provident Bank directly, including real estate investment,
securities brokerage and insurance agency.
CAPITAL REQUIREMENTS. Office of Thrift Supervision regulations require
savings associations to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital ratio. The
prompt corrective action standards discussed below, in effect, establish a
minimum 2% tangible capital standard.
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The risk-based capital standard for savings associations requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core
capital is defined as common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45%
of net unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
At June 30, 2003, Provident Bank's capital exceeded all applicable
requirements.
LOANS TO ONE BORROWER. A federal savings association generally may not make
a loan or extend credit to a single or related group of borrowers in excess of
15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which generally does not
include real estate. As of June 30, 2003, Provident Bank was in compliance with
the loans-to-one-borrower limitations.
QUALIFIED THRIFT LENDER TEST. As a federal savings association, Provident
Bank is subject to a qualified thrift lender, or "QTL," test. Under the QTL
test, Provident Bank must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings association's business.
"Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans.
Provident Bank also may satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
A savings association that fails the QTL test must either convert to a bank
charter or operate under specified restrictions. At June 30, 2003, Provident
Bank maintained approximately 72.1% of its portfolio assets in qualified thrift
investments, and therefore satisfied the QTL test.
CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the institution's
capital account. A savings association must file an application for approval of
a capital distribution if:
o the total capital distributions for the applicable calendar year
exceed the sum of the savings association's net income for that year
to date plus the savings association's retained net income for the
preceding two years;
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o the savings association would not be at least adequately capitalized
following the distribution;
o the distribution would violate any applicable statute, regulation,
agreement or Office of Thrift Supervision-imposed condition; or
o the savings association is not eligible for expedited treatment of its
filings.
Even if an application is not otherwise required, every savings association
that is a subsidiary of a holding company must still file a notice with the
Office of Thrift Supervision at least 30 days before the board of directors
declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application if:
o the savings association would be undercapitalized following the
distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in any
statute, regulation or agreement.
LIQUIDITY. A federal savings association is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. All savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
connection with its examination of a federal savings association, the Office of
Thrift Supervision is required to assess the savings association's record of
compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. A savings association's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by
the Office of Thrift Supervision, as well as other federal regulatory agencies
and the Department of Justice. Provident Bank received an "outstanding"
Community Reinvestment Act rating in its most recent federal examination.
TRANSACTIONS WITH RELATED PARTIES. A federal savings association's
authority to engage in transactions with its "affiliates" is limited by Office
of Thrift Supervision regulations and by Sections 23A and 23B of the Federal
Reserve Act. The term "affiliates" for these purposes generally means any
company that controls or is under common control with an institution. Provident
Bancorp, Inc. and its non-savings institution subsidiaries will be affiliates of
Provident Bank. In general, transactions with affiliates must be on terms that
are as favorable to the savings association as comparable transactions with
non-affiliates. In addition, certain types of these transactions are restricted
to an aggregate percentage of the savings association's capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive
loans from the savings association. In addition, Office of Thrift Supervision
regulations prohibit a savings association from lending to any of its affiliates
that are engaged in activities that are not
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permissible for bank holding companies and from purchasing the securities of any
affiliate, other than a subsidiary.
Provident Bank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions require that extensions of credit to insiders (i)
be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features, and
(ii) not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of Provident Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by Provident Bank's board of
directors.
ENFORCEMENT. The Office of Thrift Supervision has primary enforcement
responsibility over federal savings institutions and has the authority to bring
enforcement action against all "institution-affiliated parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institution, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal
law. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The guidelines address
internal controls and information systems, internal audit systems, credit
underwriting, loan documentation, interest rate risk exposure, asset growth,
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five categories
based on the savings association's capital:
o well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based
capital and 10% total risk-based capital);
114
o adequately capitalized (at least 4% leverage capital, 4% tier 1
risk-based capital and 8% total risk-based capital);
o undercapitalized (less than 3% leverage capital, 4% tier 1 risk-based
capital or 8% total risk-based capital);
o significantly undercapitalized (less than 3% leverage capital, 3% tier
1 risk-based capital or 6% total risk-based capital); and
o critically undercapitalized (less than 2% tangible capital).
Generally, the banking regulator is required to appoint a receiver or
conservator for a savings association that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
Office of Thrift Supervision within 45 days of the date a bank receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the savings association, including, but not limited
to, restrictions on growth, investment activities, capital distributions and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
savings associations, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At June 30, 2003, Provident Bank met the criteria for being considered
"well-capitalized."
INSURANCE OF DEPOSIT ACCOUNTS. Deposit accounts in Provident Bank are
insured by the Savings Association Insurance Fund and, to a limited extent, the
Bank Insurance Fund of the Federal Deposit Insurance Corporation, generally up
to a maximum of $100,000 per separately insured depositor. Provident Bank's
deposits, therefore, are subject to Federal Deposit Insurance Corporation
deposit insurance assessments. The Federal Deposit Insurance Corporation has
adopted a risk-based system for determining deposit insurance assessments. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates as necessary to maintain the required ratio of reserves to insured
deposits of 1.25%. In addition, all Federal Deposit Insurance
Corporation-insured institutions must pay assessments to the Federal Deposit
Insurance Corporation at an annual rate of approximately .0212% of insured
deposits to fund interest payments on bonds maturing in 2017 that were issued by
a federal agency to recapitalize the predecessor to the Savings Association
Insurance Fund.
PROHIBITIONS AGAINST TYING ARRANGEMENTS. Federal savings associations are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
FEDERAL HOME LOAN BANK SYSTEM. Provident Bank is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank System provides a central credit facility primarily
for member institutions. As a member of The Federal Home Loan Bank of New York,
Provident Bank is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank, whichever is greater. As of June 30, 2003, Provident
Bank was in compliance with this requirement.
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FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings associations to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At June 30, 2003,
Provident Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements imposed by the Office of Thrift
Supervision.
The USA PATRIOT Act
In response to the events of September 11th, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October
26, 2001. The USA PATRIOT Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Title III of the USA PATRIOT Act amended the Bank
Secrecy Act to encourage information sharing among bank regulatory agencies and
law enforcement bodies. Moreover, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions, including
banks, savings associations, brokers, dealers, credit unions, money transfer
agents and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls; (ii) specific designation of an
anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
o Section 326 authorizes the Secretary of the Department of Treasury, in
conjunction with other bank regulators, to issue regulations that
provide for minimum standards with respect to customer identification
at the time new accounts are opened. On July 23, 2002, the Office of
Thrift Supervision and the other federal bank regulators jointly
issued proposed rules to implement Section 326. The proposed rules
require financial institutions to establish a program specifying
procedures for obtaining identifying information from customers
seeking to open new accounts. This identifying information would be
essentially the same information currently obtained by most financial
institutions for individual customers.
o Section 312 requires financial institutions that establish, maintain,
administer, or manage private banking accounts or correspondence
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United
States) to establish appropriate, specific, and, where necessary,
enhanced due diligence policies, procedures, and controls designed to
detect and report money laundering.
o Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do
not have a physical presence in any country), and will be subject to
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certain record keeping obligations with respect to correspondent
accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
HOLDING COMPANY REGULATION
Upon completion of the conversion, Provident Bancorp, Inc. will be a
unitary savings and loan holding company, subject to regulation and supervision
by the Office of Thrift Supervision. The Office of Thrift Supervision will have
enforcement authority over Provident Bancorp, Inc. and its non-savings
institution subsidiaries. Among other things, this authority permits the Office
of Thrift Supervision to restrict or prohibit activities that are determined to
be a risk to Provident Bank.
Under prior law, a unitary savings and loan holding company generally had
no regulatory restrictions on the types of business activities in which it could
engage, provided that its subsidiary savings association was a qualified thrift
lender. The Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings
and loan holding companies not existing on, or applied for before, May 4, 1999
to those activities permissible for financial holding companies or for multiple
savings and loan holding companies. Provident Bancorp, Inc. will not be a
grandfathered unitary savings and loan holding company and, therefore, will be
limited to the activities permissible for financial holding companies or for
multiple savings and loan holding companies. A financial holding company may
engage in activities that are financial in nature, including underwriting equity
securities and insurance, incidental to financial activities or complementary to
a financial activity. A multiple savings and loan holding company is generally
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Office of Thrift Supervision, and certain additional activities authorized by
Office of Thrift Supervision regulations.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the acquisition
or retention of, with specified exceptions, more than 5% of the equity
securities of a company engaged in activities that are not closely related to
banking or financial in nature or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by holding
companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources and future prospects of the
savings institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002 the President signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which provides for corporate governance, disclosure and
accounting reforms intended to address corporate and accounting fraud. The Act
establishes a new accounting oversight board that will enforce auditing, quality
control and independence standards, and will be funded by fees from all publicly
traded companies. The Act also places certain restrictions on the scope of
services that may be provided by accounting firms to their public company audit
clients. Any non-audit services being provided to a public company audit client
will require preapproval by the company's audit committee. In addition, the Act
makes certain changes to the requirements for audit partner rotation after a
period of time. The Act also requires chief executive officers and chief
financial officers, or their equivalent, to certify to the accuracy
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of periodic reports filed with the Securities and Exchange Commission, subject
to civil and criminal penalties if they knowingly or willingly violate this
certification requirement. In addition, under the Act, counsel will be required
to report to the chief executive officer or chief legal officer of the company,
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company and, if such officer does not appropriately respond, to report
such evidence to the audit committee or other similar committee of the board of
directors or the board itself.
Under the Act, longer prison terms will apply to corporate executives who
violate federal securities laws; the period during which certain types of suits
can be brought against a company or its officers is extended; and bonuses issued
to top executives prior to restating a company's financial statements are now
subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in beneficial ownership in a company's
securities within two business days of the change.
The Act also increases the oversight of, and codifies certain requirements
relating to, audit committees of public companies and how they interact with the
company's "registered public accounting firm." Audit Committee members must be
independent and are absolutely barred from accepting consulting, advisory or
other compensatory fees from the public company. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term will be defined by the Securities and Exchange Commission) and if
not, why not. Under the Act, a company's registered public accounting firm will
be prohibited from performing statutorily mandated audit services for a company
if such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statements
materially misleading. The Act also requires the Securities and Exchange
Commission to prescribe rules requiring inclusion of any internal control report
and assessment by management in the annual report to shareholders. The Act
requires the company's registered public accounting firm that issues the audit
report to attest to and report on management's assessment of the company's
internal controls.
Although we will incur additional expense in complying with the provisions
of the Sarbanes-Oxley Act and the resulting regulations, management does not
expect that such compliance will have a material impact on our results of
operations or financial condition.
FEDERAL SECURITIES LAWS
Provident Bancorp, Inc. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, for the registration of the shares of common stock to be issued
pursuant to the conversion. Upon completion of the conversion, shares of
Provident
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Bancorp, Inc. common stock will continue to be registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended.
Provident Bancorp, Inc. will be subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Securities
Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of common stock
to be issued in the offering does not cover the resale of those shares. Shares
of common stock purchased by persons who are not affiliates of Provident
Bancorp, Inc. may be resold without registration. Shares purchased by an
affiliate of Provident Bancorp, Inc. will be subject to the resale restrictions
of Rule 144 under the Securities Act of 1933. If Provident Bancorp meets the
current public information reporting requirements of Rule 144 under the
Securities Act of 1933, each affiliate of Provident Bancorp, Inc. that complies
with the other conditions of Rule 144, including those that require the
affiliate's sale to be aggregated with those of other persons, would be able to
sell in the public market, without registration, a number of shares not to
exceed, in any three-month period, the greater of 1% of the outstanding shares
of Provident Bancorp, Inc., or the average weekly volume of trading in the
shares during the preceding four calendar weeks. In the future, Provident
Bancorp may permit affiliates to have their shares registered for sale under the
Securities Act of 1933.
TAXATION
FEDERAL TAXATION
GENERAL. Provident Bancorp and Provident Bank are subject to federal income
taxation in the same general manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize material federal income tax matters and is not a comprehensive
description of the tax rules applicable to Provident Bancorp and Provident Bank.
METHOD OF ACCOUNTING. For federal income tax purposes, Provident Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending September 30 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 eliminated the use
of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
BAD DEBT RESERVES. Prior to the Small Business Protection Act of 1996,
Provident Bank was permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions could, within specified formula
limits, be deducted in arriving at Provident Bank's taxable income. As a result
of the Small Business Protection Act, Provident Bank must use the specific
charge off method in computing its bad debt deduction.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business Protection
Act of 1996, bad debt reserves created prior to 1988 were subject to recapture
into taxable income should Provident Bank fail to meet certain thrift asset and
definitional tests. New federal legislation eliminated these thrift related
recapture rules. However, under current law, pre-1988 reserves remain subject to
recapture should Provident Bank make certain distributions from its tax bad debt
reserve or cease to maintain a bank charter. At June 30, 2003, Provident Bank's
total federal pre-1988 reserve was approximately $4.6 million. This reserve
reflects the cumulative effects of federal tax deductions by Provident Bank for
which no federal income tax provision has been made.
MINIMUM TAX. The Internal Revenue Code of 1986, as amended imposes an
alternative minimum tax ("AMT") at a rate of 20% on a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI"). The AMT is payable to the extent such AMTI is
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in excess of an exemption amount. Net operating losses can, in general, offset
no more than 90% of AMTI. Certain payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. Provident Bank
has not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding five taxable years (for losses incurred in
2001 and 2002) and forward to the succeeding 20 taxable years. This provision
applies to losses incurred in taxable years beginning after 1986. At June 30,
2002, Provident Bank had no net operating loss carryforwards for federal income
tax purposes.
CORPORATE DIVIDENDS. Provident Bancorp may exclude from its income 100% of
dividends received from Provident Bank as a member of the same affiliated group
of corporations.
The Internal Revenue Service completed an audit of Provident Bancorp's
federal income tax returns for the fiscal year ended September 30, 1998.
STATE AND LOCAL TAXATION
We are subject to the New York State Franchise Tax on Banking Corporations
in the annual amount equal to the greater of 7 1/2% of "entire net income"
allocable to New York State during the taxable year, or (ii) the applicable
alternative minimum tax. The alternative minimum tax is generally the greatest
of (a) 0.01% of the value of taxable assets allocable to New York State with
certain modifications, (b) 3% of "alternative entire net income" allocable to
New York State, or (c) $250. Entire net income is similar to taxable income,
subject to certain modifications and alternative entire net income is equal to
entire net income without certain deductions. Provident Bank is also subject to
a similarly calculated New York City tax of 9% on income allocated to New York
City and similar alternative taxes.
A temporary Metropolitan Transportation Business Tax Surcharge on banking
corporations doing business in the metropolitan district has been applied since
1982. Provident Bank does most of its business within this district (except for
the anticipated branch offices in Ulster and Sullivan counties), and is subject
to this surcharge rate of 17% of the New York State tax liability computed as
though the franchise tax rate was still 9%.
As a Delaware business corporation, Provident Bancorp will be required to
file annual returns and pay annual fees and an annual franchise tax to the State
of Delaware.
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MANAGEMENT OF PROVIDENT BANCORP
Provident Bancorp, Inc.'s Board of Directors is comprised of ten members.
Our bylaws provide that approximately one-third of the directors are to be
elected annually. Directors of Provident Bancorp, Inc. are generally elected to
serve for a three-year period and until their respective successors shall have
been elected and shall qualify.
The table below sets forth certain information, as of June 30, 2003,
regarding current members of our Board of Directors and Executive Officers who
are not Directors, including the terms of office of board members.
Position(s) Held With
Name Provident Bancorp, Inc. Age Director Since/(1)/ Current Term Expires
- ---------------------- --------------------------------- --- ------------------- --------------------
DIRECTORS
William F. Helmer Chairman of the Board 69 1974 2004
Dennis L. Coyle Vice Chairman 67 1984 2005
George Strayton President, Chief Executive 59 1991 2005
Officer and Director
Judith Hershaft Director 62 2000 2006
Thomas F. Jauntig, Jr. Director 58 2000 2006
Donald T. McNelis Director 70 1987 2006
Richard A. Nozell Director 69 1990 2006
William R. Sichol, Jr. Director 63 1990 2004
Burt Steinberg Director 58 2000 2005
F. Gary Zeh Director 65 1979 2004
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Daniel G. Rothstein Executive Vice President, 56 N/A N/A
Chief Risk Management
Officer and Regulatory
Counsel
Robert J. Sansky Executive Vice President and 56 N/A N/A
Chief Retail Banking
Officer
Paul A. Maisch Senior Vice President and 47 N/A N/A
Chief Financial Officer
Stephen G. Dormer Senior Vice President 52 N/A N/A
John F. Fitzpatrick Senior Vice President and 51 N/A N/A
Director of Support Services
- -------------------------------
(1) Includes service with Provident Bank in mutual form.
The merger agreement between Provident Bancorp and E.N.B. Holding Company,
Inc. provides that upon completion of the merger, two current directors of
E.N.B. Holding Company, Inc. will be appointed to the board of directors of
Provident Bancorp and Provident Bank.
The business experience for the past five years for each of our directors
and executive officers is as follows:
WILLIAM F. HELMER has served as the Chairman of the board of directors of
Provident Bank since 1994 and Chairman of the board of directors of Provident
Bancorp, Inc. since its formation in 1999. Mr. Helmer is the President of
Helmer-Cronin Construction, Inc., a construction company.
DENNIS L. COYLE has served as Vice Chairman of the board of directors of
Provident Bank since 1994 and Vice Chairman of the board directors of Provident
Bancorp, Inc. since its formation in 1999. Mr. Coyle is the owner and President
of Denlo Realty Corp., the owner of Dennis L. Coyle Rental Properties, and is
formerly the co-owner of the Coyle Insurance Agency, Inc.
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GEORGE STRAYTON has been employed by Provident Bank since 1982, was named
President and Chief Executive Officer of Provident Bank in 1986, and has served
as President and Chief Executive Officer of Provident Bancorp, Inc. since its
formation in 1999.
JUDITH HERSHAFT is the Chief Executive Officer of Innovative Plastics
Corp., a manufacturer of custom plastic products. She is also the Chairman of
Greenway Plastics and Innovative Plastics South Corp.
THOMAS F. JAUNTIG, JR, is a partner in Korn, Rosenbaum, Phillips & Jauntig
LLP, certified public accountants.
DR. DONALD T. MCNELIS served as President of St. Thomas Aquinas College in
Sparkill, New York from 1974 until his retirement in 1995.
RICHARD A. NOZELL is the owner of Richard Nozell Building Construction and
serves as a general building contractor.
WILLIAM R. SICHOL, JR. is a principal of Sichol & Hicks, P.C., a private
law firm.
BURT STEINBERG is the Executive Director of The Dress Barn, Inc., a woman's
specialty store retailer.
F. GARY ZEH is the President of Haverstraw Transit Inc., a bus contracting
company, and President of Quality Bus Sales and Service, Inc.
DANIEL G. ROTHSTEIN has been employed by Provident Bank since 1983, and was
named Executive Vice President in 1989. Mr. Rothstein served as Provident Bank's
Chief Credit Officer and Regulatory Counsel from 1996 until August 2003, when he
was appointed Chief Risk Management Officer.
ROBERT J. SANSKY has been employed by Provident Bank since 1985, and was
named Executive Vice President in 1989. Mr. Sansky served as Provident Bank's
Director of Human Resources from 1996 until August 2003, when he was appointed
Chief Retail Banking Officer.
Paul A. Maisch has served as Senior Vice President and Chief Financial
Officer of Provident Bank and Provident Bancorp, Inc. since March 2003. From
1998 through 2001, Mr. Maisch served as Executive Vice President and Chief
Financial Officer of Premier National Bancorp, Inc., and had been employed by
Premier National Bancorp, Inc. and its predecessors since 1984.
STEPHEN G. DORMER was named Senior Vice President of Provident Bank in 1994
and served as Provident Bank's Director of Business Development from 1996 until
August 2003, when he was appointed Assistant to the Office of the President,
Strategic Planning and Commercial Lending Officer.
JOHN F. FITZPATRICK has been employed by Provident Bank since 1986, and was
named Senior Vice President and Director of Support Services in 1997.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of Provident Bancorp, Inc. is conducted at regular and special
meetings of the Board and its standing committees. The standing committees
consist of the Executive and Audit Committees.
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The full Board of Directors currently acts as Nominating Committee for Provident
Bancorp. During the fiscal year ended September 30, 2002, the Board of Directors
met at 11 regular meetings and no special meetings. No member of the board or
any committee thereof attended less than 75% of said meetings.
The Executive Committee consists of Chairman Helmer, President, Chief
Executive Officer and Director Strayton, and Directors Coyle, McNelis and
Sichol. The Executive Committee meets as necessary when the board is not in
session to exercise general control and supervision in all matters pertaining to
the interests of Provident Bancorp, Inc., subject at all times to the direction
of the board of directors. The Executive Committee met three times during the
fiscal year ended September 30, 2002.
The Audit Committee consists of Directors Nozell, who serves as Chairman,
Jauntig and Steinberg. This committee meets with the independent auditors to
review the results of the annual audit and other related matters. In addition,
the Audit Committee meets with the internal auditor to review audit programs and
the results of audits of specific areas. Each member of the Audit Committee is
"independent" as defined in the listing standards of the National Association of
Securities Dealers. The Audit Committee met five times during the fiscal year
ended September 30, 2002.
COMPENSATION OF DIRECTORS
FEES. For the fiscal year ended September 30, 2002, directors of Provident
Bank received an annual retainer fee that enabled them to purchase 1,000 shares
of common stock of Provident Bancorp, Inc., paid in quarterly installments,
except for Chairman Helmer. Mr. Helmer received a retainer fee of $75,000, which
was utilized to purchase 1,000 shares of common stock, and Mr. Helmer received
the remainder in cash. Directors also received a fee of $1,000 per Board meeting
attended and $500 per committee meeting attended. The chairman of each committee
received an additional $2,000 per year. Directors who are also employees of
Provident Bank are not eligible to receive any fees for their service as a
director.
DEFERRED COMPENSATION AGREEMENTS. Provident Bank has entered into
non-qualified deferred compensation agreements for the benefit of all of
Provident Bank's directors. The deferred compensation agreements comprise a
non-qualified deferred compensation plan into which a non-employee director can
defer up to 100% of his or her board fees earned during the calendar year. When
a director reaches the mandatory retirement age, the director's account will be
paid to him or her in generally equal quarterly installments beginning on the
first day of the first calendar quarter after the director becomes entitled to
such payments and continuing for up to ten years. A director may elect to
receive distributions from the deferred compensation prior to the director's
mandatory retirement age, and such distributions may be paid over a longer
period of time. In the event of the director's death, the balance of the
director's account will be paid to the director's designated beneficiary in the
first calendar quarter after death. A director may also request a distribution
from his or her account in the event the director suffers a hardship, such as a
sudden or unexpected illness or accident, affecting the director, his
beneficiary, or family member. Whether to grant a hardship distribution is
within the sole discretion of the board of directors. All obligations arising
under the deferred compensation agreements are payable from Provident Bank's
general assets; however, Provident Bank has established a trust to ensure that
sufficient assets will be available to pay the benefits under the deferred
compensation agreements. All record keeping, distributions and investments are
accomplished through a trustee that maintains complete control over all deferred
balances.
STOCK BENEFIT PLANS. During the fiscal year ended September 30, 2000,
Provident Bank adopted, and Provident Bancorp, Inc.'s stockholders approved, the
Provident Bank 2000 Recognition and Retention Plan and the Provident Bank 2000
Stock Option Plan. Pursuant to the recognition and retention
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plan, 7,245 shares of Provident Bancorp, Inc. common stock were awarded to
non-employee directors Coyle, Helmer, McNelis, Nozell, Sichol, and Zeh. Pursuant
to the stock option plan, options to purchase 11,000 shares of common stock were
granted to non-employee Directors Coyle, Helmer, Hershaft, Jauntig, McNelis,
Nozell, Sichol, Steinberg and Zeh. During the fiscal year ended September 30,
2002, there were no grants of shares of common stock or options to purchase
shares of common stock to directors of Provident Bancorp.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth for the three
years ended September 30, 2002, certain information as to the total remuneration
paid by Provident Bancorp, Inc. to its Chief Executive Officer, and Provident
Bancorp's other five most highly compensated Executive Officers at September 30,
2002 who received total annual compensation in excess of $100,000 (together,
"Named Executive Officers").
Long-Term Compensation
-----------------------------------------------------------------------
Annual Compensation Awards Payouts
--------------------------- ----------------------------- ----------------------------------------
Year Other Annual Restricted Options/ All Other
Name and Principal Ended Compensation Stock SARS LTIP Compensation
Position /(1)/ 9/30 Salary Bonus /(2)/ Awards /(3)/ (#) Payouts /(4)/
- ------------------------- ----- --------- --------- -------------- ------------ --------- ------- ---------------
George Strayton, 2002 $ 368,750 $ 183,750 $ -- $ -- 7,746 (5) $ -- $ 43,057
President, Chief 2001 344,000 145,800 -- -- 4,731 (5) -- 32,982
Executive Officer and 2000 326,209 120,000 -- 754,688 90,000 -- 32,831
Director
Daniel G. Rothstein, 2002 $ 191,250 $ 68,625 $ -- $ -- 11,785 (5) $ -- $ 20,748
Executive Vice 2001 180,693 64,875 -- -- -- -- 16,011
President, Chief Credit 2000 171,385 58,100 -- 332,063 20,200 -- 15,732
Officer and Regulatory
Counsel
Robert J. Sansky, 2002 $ 167,625 $ 62,063 $ -- $ -- 4,885 (5) $ -- $ 19,937
Executive Vice President 2001 163,469 58,763 -- -- -- -- 15,508
and Director of Human 2000 155,815 52,745 -- 301,875 18,200 -- 15,279
Resources
Stephen G. Dormer, 2002 $ 154,075 $ 55,388 $ -- $ -- 1,994 (5) $ -- $ 10,150
Senior Vice President 2001 146,085 52,762 -- -- -- -- 7,646
and Director of Business 2000 139,365 47,145 -- 241,500 16,200 -- 7,443
Development
John F. Fitzpatrick, 2002 $ 144,231 $ 47,813 $ -- $ -- 1,994 (5) $ -- $ 6,511
Senior Vice President 2001 124,231 40,594 -- -- -- -- 5,407
and Director of Support 2000 106,146 40,594 -- 241,500 241,200 -- 4,864
Services
Katherine A. Dering, 2002 $ 154,975 $ 55,725 $ -- $ -- 7,252 (5) -- $ 11,081
Senior Vice President 2001 146,754 52,725 -- -- -- -- 7,565
and Chief Financial 2000 139,035 46,760 -- 241,500 16,200 -- 7,332
Officer (6)
- -------------------------
(1) Information is not included for Senior Vice President and Chief Financial
Officer Paul Maisch, who commenced employment in March 2003.
(2) Provident Bank provides certain members of senior management with certain
other personal benefits, the aggregate value of which did not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for
each officer. The value of such personal benefits is not included in this
table.
(3) Represents the fair market value of shares granted pursuant to the
Provident Bank 2000 Recognition and Retention Plan. Dividends are paid on
the restricted stock and participants can vote the restricted stock to the
extent shares have vested or are available for issuance. At September 30,
2002 the following shares of unvested restricted stock awards were held by
the named executive officers: 19,320 shares for Mr. Strayton with a market
value of $549,654; 8,499 shares for Mr. Rothstein with a market value of
$241,797; 7,728 shares for Mr. Sansky with a market value of $219,862;
6,183 shares for Mr. Dormer with a market value of $175,906; 6,183 shares
for Mr. Fitzpatrick with a market value of $175,906; and 6,183 shares for
Ms. Dering with a market value of $175,906.
(4) Includes employer contributions to a 401(k) plan, allocations under the
Supplemental Executive Retirement Plan as well as the payment of premiums
for life insurance policies.
(5) Represents reload options received upon the exercise of stock options when
previously-owned shares of common stock were utilized to pay the option
exercise price.
(6) Ms. Dering retired from Provident Bancorp and Provident Bank, effective
March 11, 2003.
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EMPLOYMENT AGREEMENTS. In January 1996, Provident Bank entered into an
employment agreement with President and Chief Executive Officer George Strayton,
which agreement was amended in 1998. On each day during the term of the
agreement, the term of the agreement automatically renews so that the agreement
shall continually be for a three-year term unless notice of non-renewal is
provided at least 60 days prior to the anniversary date of the agreement. In the
event that notice of non-renewal is given, the agreement will expire at the end
of its then three-year term. Under the agreement, Mr. Strayton will be paid an
annual rate of salary, which was $375,000 as of September 30, 2002. For each
calendar year beginning after a change in control (as defined in the agreement)
of Provident Bank or Provident Bancorp, Inc., Mr. Strayton's annual salary will
be increased by a formula set forth in the agreement. In addition to his annual
salary, Mr. Strayton is entitled to participate in all of Provident Bank's
tax-qualified plans and other incentive programs, and Provident Bank's group
life, health, dental and disability plans.
In the event Provident Bank terminates Mr. Strayton's employment for any
reason other than for cause (as defined in the agreement), in the event of his
voluntary resignation within one year following a demotion in title or duties or
a change in control of Provident Bank or Provident Bancorp, Inc., or in the
event of termination of his employment due to total and permanent disability,
Mr. Strayton will be entitled to certain benefits payable by Provident Bank.
These benefits include his earned but unpaid salary, continuation of his life,
health and disability insurance benefits for the remaining unexpired employment
period under the agreement, and continued health insurance for Mr. Strayton and
his spouse for their remaining lifetimes. Mr. Strayton also will be entitled to
certain lump sum payments, such as the present value of any salary and
director's fees that he would have earned for the remaining unexpired employment
period under the agreement, although Mr. Strayton does not currently receive
director's fees. Within 60 days of termination of his employment, Mr. Strayton
also will be entitled to payments relating to Provident Bank's defined benefit
pension plan, 401(k) Plan, employee stock ownership plan and Supplemental
Executive Retirement Plan. Mr. Strayton will also be entitled to immediate
vesting of any unearned options or shares of restricted stock awarded to him
under any stock benefit plan maintained by Provident Bancorp, Inc., and the
payments that would have been made to him under all incentive compensation plans
and programs adopted by Provident Bank, including the Management Incentive
Program. In the event that Provident Bank gives Mr. Strayton a notice of
non-renewal, or if Provident Bank does not extend the employment period at least
60 days prior to any renewal date set forth under the agreement, Mr. Strayton
may resign from Provident Bank at any time and will receive a lump sum cash
benefit within 30 days equal to the amounts set forth above. Also, in such event
Provident Bank will provide the life and health insurance benefits set forth
above. In the event that Mr. Strayton becomes subject to an excise tax on
payments made under the agreement in connection with a change in control, Mr.
Strayton will be reimbursed an amount determined pursuant to a formula set forth
in the agreement for payment of such excise taxes by Provident Bank, so long as
during the six-month period prior to such change in control Provident Bank was
in compliance with all applicable minimum regulatory capital requirements. For a
period of one year following the date of his termination with Provident Bank for
cause, the agreement provides that Mr. Strayton shall not compete with Provident
Bank.
Provident Bank has entered into employment agreements with Messrs.
Rothstein, Sansky, Dormer and Fitzpatrick. The employment agreements are for
terms of up to two years and renew on a daily basis so that the remaining term
under the agreements is for up to two years unless notice of non-renewal is
given. In the event of a change in control (as defined in the agreements), the
terms of the employment agreements extend to three years. Each executive officer
covered by an employment agreement receives an annual rate of salary, as
specified in the employment agreement, and will be entitled to participate in
all of Provident Bank's tax-qualified plans and other incentive programs, and
any group life, health, and disability plans maintained by Provident Bank from
time to time. The employment
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agreements for these officers are substantially similar to the agreement with
Mr. Strayton except that health insurance for the remaining officers does not
continue for their lifetimes.
STOCK OPTION PLAN. During the fiscal year ended September 30, 2000,
Provident Bank adopted, and Provident Bancorp, Inc.'s stockholders approved, the
Provident Bank 2000 Stock Option Plan. Set forth in the table that follows is
information relating to options granted under the stock option plan to the Named
Executive Officers during the fiscal year ended September 30, 2002.
OPTION GRANTS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------
Individual Grants
- ------------------------------------------------------------------------------------------------------------------
Percent of Total
Options Granted Exercise or
Options Granted to Employees in Base Price Expiration Grant Date Present Value
Name (1) FY 2002 ($)(2) Date ($)(3)
- ----------------------- --------------- ---------------- ----------- ---------- ------------------------
George Strayton 4,293 9.68% 23.29 2/22/2010 30,609
3,453 7.79% 28.95 2/22/2010 24,620
Daniel G. Rothstein 5,302 11.96% 23.62 2/22/2010 37,803
6,483 14.62% 28.97 2/22/2010 46,224
Robert J. Sansky 2,393 5.40% 28.97 2/22/2010 17,062
2,492 5.62% 24.42 2/22/2010 17,768
Stephen G. Dormer 1,994 4.50% 24.70 2/22/2010 14,217
John F. Fitzpatrick 1,994 4.50% 24,70 2/22/2010 14,217
Katherine A. Dering 4,043 9.12% 23.00 2/22/2010 28,827
3,209 7.24% 28.97 2/22/2010 22,880
- ---------------
(1) Represents reload options received upon the exercise of stock options when
previously owned shares of common stock were utilized to pay the option
exercise price.
(2) The exercise price of the options is equal to the fair market value of the
underlying shares on the date of the award.
(3) Based on a grant date present value of $7.13 per share derived using the
Black-Scholes option pricing model with the following assumptions:
volatility of 22.32%; risk free rate of return of 4.25%; dividend yield of
1.43%; and a 5.77-year option life.
Set forth below is certain information concerning options outstanding to the
Named Executive Officers at September 30, 2002, and the options exercised by the
Named Executive Officers during 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options at In-The-Money Options at
Year-End Year-End (1)
Value ------------------------- -------------------------
Shares Acquired Realized Exercisable/Unexercisable Exercisable/Unexercisable
Name Upon Exercise ($) (#) ($)
- ------------------- --------------- -------- ------------------------- -------------------------
George Strayton 19,353 173,362 47,124 / 36,000 505,446 / 466,200
Daniel G. Rothstein 17,422 148,394 6,483 / 8,080 -- / 104,636
Robert J. Sansky 8,400 95,280 7,405 / 7,280 42,677 / 94,276
Stephen G. Dormer 3,178 29,328 8,536 / 6,480 92,196 / 83,916
John F. Fitzpatrick 3,188 29,528 11,766 / 6,480 133,925 / 83,916
Katherine A. Dering 10,043 69,137 6,959 / 6,480 48,174 / 83,916
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- ---------------------------------
(1) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of common stock that
would be received upon exercise, assuming such exercise occurred on
September 30, 2002, at which date the last trade price of the common stock
as quoted on the Nasdaq National Market was $28.45.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Provident Bank maintains a
non-qualified supplemental executive retirement plan to compensate executives
whose benefits under Provident Bank's tax-qualified benefit plans are limited by
the Internal Revenue Code of 1986, as amended. The supplemental executive
retirement plan provides executives with retirement benefits generally equal to
the difference between (i) the annual benefit the executive would have received
under Provident Bank's defined benefit pension plan if such benefits were
computed without giving effect to the limitations on benefits imposed by the
Internal Revenue Code, and (ii) the amounts actually payable to the executive
under the terms of the defined benefit pension plan. In addition, the executive
is entitled to a 401(k) benefit under the supplemental executive retirement plan
equal to the product of (i) Provident Bank's contributions that could not be
credited to his or her account in the Provident Bank 401(k) Plan due to
applicable limitations plus an earnings factor, and (ii) his or her vested
percentage in the 401(k) Plan. The supplemental executive retirement plan was
amended in connection with the adoption of the employee stock ownership plan so
that an executive who does not receive the maximum contribution under the
employee stock ownership plan due to an applicable limitation will be entitled
to an employee stock ownership plan benefit under the supplemental executive
retirement plan, credited in units of common stock, equal to the difference
between the fair market value of the number of shares of common stock that would
have been allocated to the account of the executive under the employee stock
ownership plan had the limitations under the Internal Revenue Code not been
applicable, and the fair market value of the number of shares of common stock
actually allocated to the account of the executive. The supplemental executive
retirement plan is considered an unfunded plan for tax and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") purposes. All
obligations arising under the supplemental executive retirement plan are payable
from the general assets of Provident Bank; however, Provident Bank has
established a trust to ensure that sufficient assets will be available to pay
the benefits under the supplemental executive retirement plan. The trust is
entitled to purchase shares of common stock to fund the employee stock ownership
plan benefit under the supplemental executive retirement plan.
As of December 31, 2002, Messrs. Strayton and Rothstein had accrued annual
benefits of $60,060 and $1,848, respectively, under the Retirement Plan portion
of the supplemental executive retirement plan, which would be payable upon their
reaching age 65. Contributions to the supplemental executive retirement plan
under the 401(k) and employee stock ownership plan portions of the supplemental
executive retirement plan are included in "--Summary Compensation Table" above.
DEFINED BENEFIT PENSION PLAN. Provident Bank maintains the Provident Bank
Defined Benefit Pension Plan, which is a qualified, tax-exempt defined benefit
plan. Employees age 21 or older who have worked at Provident Bank for a period
of one year and have been credited with 1,000 or more hours of service with
Provident Bank during the year are eligible to accrue benefits under this plan.
Provident Bank contributes each year, if necessary, an amount to the Retirement
Plan at least equal to the actuarially determined minimum funding requirements
in accordance with ERISA. For the plan year ended September 30, 2002, a
contribution of $600,000 was made to the Retirement Plan. At September 30, 2002,
the total market value of the Defined Benefit Pension Plan trust fund assets was
approximately $6.2 million.
In the event of retirement at normal retirement age (i.e., the later of age
65 or the 5th anniversary of participation in the Defined Benefit Pension Plan),
the plan provides a single life annuity. For a married participant, the normal
form of benefit is an actuarially reduced joint and survivor annuity where,
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upon the participant's death, the participant's spouse is entitled to receive a
benefit equal to 50% of that paid during the participant's lifetime.
Alternatively, a participant may elect (with proper spousal consent, if
necessary) a joint and 100% survivor annuity, a joint and 75% survivor annuity,
a different form of annuity, or installments payable over a period of not more
than the life of the participant (and spouse, if applicable). Payment may be
made in a lump sum in cash, provided the participant has completed 20 years of
service with Provident Bank and attained age 55 or has attained normal
retirement age. All forms in which a participant's benefit may be paid will be
actuarially equivalent to the single life annuity. The monthly retirement
benefit provided is an amount equal to the greater of a participant's frozen
accrued benefit (as provided for in the Retirement Plan) or 1.6% of a
participant's average monthly compensation, multiplied by the participant's
years of service (up to a maximum of 35 years) plus 0.5% of the participant's
average monthly compensation in excess of one-twelfth of the participant's
Covered Compensation (as defined in the Defined Benefit Pension Plan) multiplied
by the participant's months of service (up to a maximum of 35 years), computed
to the nearest dollar. Retirement benefits are also payable upon retirement due
to early and late retirement or death and disability. A reduced benefit is
payable upon early retirement at or after age 55 and the completion of 10 years
of vested service with Provident Bank. No reduction in benefit will occur as a
result of special early retirement on or after age 62 and the completion of 20
years of vested service, if payment is made at the time of retirement. Upon
termination of employment other than as specified above, a participant who has
five years of vested service is eligible to receive his or her accrued benefit
commencing on such participant's retirement date, death or disability.
The following table indicates the annual retirement benefit that would be
payable under the Defined Benefit Pension Plan upon retirement at age 65 in
calendar year 2002, expressed in the form of a single life annuity for the
average monthly salary and benefit service classifications specified below.
Average Years of Service and Annual Benefit Payable at Retirement
Monthly ---------------------------------------------------------------
Compensation 15 20 25 30 35
------------ ----------- ----------- ----------- ----------- -----------
$4,167 $ 13,416 $ 17,892 $ 22,356 $ 26,832 $ 31,306
6,250 21,288 28,392 35,484 42,576 49,678
8,333 29,160 38,880 48,612 58,332 68,050
10,417 37,044 49,392 61,740 74,088 86,431
$14,167 and above (1) 51,000 68,000 85,000 102,000 119,000
- -------------------
(1) Reflects the maximum benefit payable under the Retirement Plan due to tax
law limitations.
As of September 30, 2002, Messrs. Strayton, Rothstein, Sansky, Dormer and
Fitzpatrick, and Ms. Dering had 20, 20, 17, 8, 16 and 8 years, respectively, of
credited service (i.e., benefit service) under the Retirement Plan.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
No directors, executive officers or immediate family members of such
individuals were engaged in transactions with Provident Bancorp, Inc. or any
subsidiary involving more than $60,000 (other than through a loan) during the
fiscal year ended September 30, 2002. In addition, during the fiscal year ended
September 30, 2002, no directors, executive officers or immediate family members
of such individuals were involved in loans from Provident Bancorp, Inc. or
Provident Bank involving more than $60,000 which had not been made in the
ordinary course of business and on substantially the same terms and conditions,
including interest rate and collateral, as those of comparable transactions
prevailing at the time
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with other persons, and do not include more than the normal risk of
collectibility or present other unfavorable features.
BENEFITS TO BE CONSIDERED FOLLOWING COMPLETION OF THE CONVERSION
STOCK OPTION PLAN. We will consider the submission for stockholder approval
of a stock option plan no earlier than six months after the completion of the
conversion. If approved by the stockholders, the new stock option plan would
reserve an amount equal to 10% of the shares of common stock sold in the
offering (including shares we issue to the Provident Bank Charitable Foundation)
for issuance when options granted to recipients are exercised. 10% of the shares
of common stock issued in the offering would amount to 1,298,000 shares,
1,520,000 shares, 1,742,000 shares or 1,997,300 shares at the minimum, midpoint,
maximum and adjusted maximum of the offering range, respectively. No options
would be granted under the new stock option plan until stockholder approval of
the plan is received. In the event that shares underlying options come from
authorized but unissued shares of common stock, stockholders would experience
dilution of approximately 4.7% in their ownership interest in Provident Bancorp
at the midpoint of the offering range.
The exercise price of the options granted under the new stock option plan
will be equal to the fair market value of Provident Bancorp common stock on the
date of grant of the stock options. If the stock option plan is adopted within
one year following the conversion, options may vest no faster than 20% per year
beginning 12 months after the date of grant. Options granted under the stock
option plan would be adjusted for capital changes such as stock
reclassification, splits and stock dividends. Awards will be 100% vested upon
termination of employment due to death or disability or upon a change in
control, and if the stock option plan is adopted more than one year after the
conversion, awards would be 100% vested upon normal retirement. Under Office of
Thrift Supervision rules, if the stock option plan is adopted within one year of
the conversion, no individual officer may receive more than 25% of the awards
under the plan, no non-employee director may receive more than 5% of the awards
under the plan, and all non-employee directors as a group may receive in the
aggregate no more than 30% of the awards under the plan.
The stock option plan would be administered by a committee of non-employee
members of the Provident Bancorp's Board of Directors. Options granted under the
stock option plan to employees may be "incentive" stock options, which are
designed to result in a beneficial tax treatment to the employee but no tax
deduction to Provident Bancorp. Non-qualified stock options may also be granted
to employees under the stock option plan, and will be granted to the
non-employee directors who receive stock options. In the event an option
recipient terminated his or her employment or service as an employee or
director, the options would terminate during certain specified periods.
STOCK RECOGNITION AND RETENTION PLAN. We will consider the submission for
stockholder approval of a new stock recognition and retention plan, no earlier
than six months after the completion of the conversion. If approved by
stockholders, the new stock recognition and retention plan would, if implemented
within one year of conversion, reserve an amount equal to 4% of the shares of
common stock sold in the offering (including shares we issue to the Provident
Bank Charitable Foundation, and assuming Provident Bank has a tangible capital
to assets ratio in excess of 10%) or 519,200 shares, 608,000 shares, 696,800
shares or 798,920 shares at the minimum, midpoint, maximum and adjusted maximum
of the offering range, respectively. We must recognize an expense for shares of
common stock awarded over their vesting period at the fair market value of the
shares on the date they are awarded. The recipients will be awarded shares of
common stock under the stock recognition and retention plan at no cost to them.
No awards would be made under the stock recognition and retention plan until the
plan is approved by stockholders. If the shares awarded
129
under the stock recognition and retention plan come from authorized but unissued
shares of the common stock totaling 4% of the shares sold in the offering,
stockholders would experience dilution of approximately 1.9% in their ownership
interest in Provident Bancorp at the midpoint of the offering range.
Awards granted under the stock recognition and retention plan would be
nontransferable and nonassignable. Under Office of Thrift Supervision
regulations, if the stock recognition and retention plan is adopted within one
year following the conversion, the shares of common stock which are subject to
an award may vest no faster than 20% per year beginning 12 months after the date
of grant of the award. Awards would be adjusted for capital changes such as
stock reclassifications, dividends and stock splits. Awards would be 100% vested
upon termination of employment or service due to death, disability, or following
a change in control, and if the stock recognition and retention plan is adopted
more than one year after the conversion, awards also would be 100% vested upon
normal retirement. If employment or service were to terminate for other reasons,
the award recipient would forfeit any nonvested award. If employment or service
were to terminate for cause (as defined), shares not already delivered would be
forfeited. Under Office of Thrift Supervision rules, if the stock recognition
and retention plan is adopted within one year of the conversion, no individual
officer may receive more than 25% of the awards under the plan, no non-employee
director may receive more than 5% of the awards under the plan, and all
non-employee directors as a group may receive no more than 30% of the awards
under the plan in the aggregate.
The recipient of an award will recognize income equal to the fair market
value of the stock earned, determined as of the date of vesting, unless the
recipient makes an election under Section 83(b) of the Internal Revenue Code of
1986, as amended, to be taxed earlier. The amount of income recognized by the
recipient would be a deductible expense for tax purposes for Provident Bancorp.
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BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table provides the beneficial ownership of our common stock
held by our directors and executive officers, individually and as a group, and
all individuals known to management to own more than 5% of our common stock as
of August 31, 2003. The business address of each director and executive officer
is 400 Rella Boulevard, Montebello, New York 10901.
Number of Shares of Common Percent of All Common
Name of Beneficial Owner Stock Beneficially Owned(1)(2) Stock Outstanding(3)
- ----------------------------------------------- ------------------------------ ---------------------
William F. Helmer 75,233 *
Dennis L. Coyle 84,282 1.1
George Strayton 162,625 2.0
Judith Hershaft 15,911 *
Thomas F. Jauntig, Jr. 12,017 *
Donald T. McNelis 37,357 *
Richard A. Nozell 27,208 *
William R. Sichol, Jr. 40,851 *
Burt Steinberg 23,517 *
F. Gary Zeh 59,282 *
Daniel G. Rothstein 58,250 *
Robert J. Sansky 41,043 *
Paul A. Maisch 1,805 *
Stephen G. Dormer 32,417 *
John F. Fitzpatrick 29,116 *
All directors and executive officers as a group
(15 persons) 700,914 8.6%
Provident Bancorp, MHC
400 Rella Boulevard, Montebello, NY 10901 4,416,000 55.5%
Provident Bancorp, MHC and all directors and
executive officers as a group (15 persons) 5,116,914 62.9%
========= ====
BL Advisers, Inc.
Barry Lewis
177 S. Mountain Road
New City, New York 10956(4) 450,777 5.7%
- ------------------------
* Less than 1%.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table of
any shares of common stock if he has sole or shared voting or investment
power with respect to such security, or has a right to acquire beneficial
ownership at any time within 60 days from the date as of which beneficial
ownership is being determined. As used herein, "voting power" is the power
to vote or direct the voting of shares and "investment power" is the power
to dispose or direct the disposition of shares. Includes all shares held
directly as well as by spouses and minor children, in trust and other
indirect ownership, over which shares the named individuals effectively
exercise sole or shared voting and investment power.
(2) The shares of common stock in this column include 179,308 shares in total
and by individual the following shares which may be acquired by the persons
indicated pursuant to the exercise of stock options within 60 days of
August 31, 2003: 7,941 for Mr. Helmer; 7,932 for Mr. Coyle; 61,858 for Mr.
Strayton; 8,800 for Ms. Hershaft; 8,800 for Mr. Jauntig; 6,145 for Dr.
McNelis; 8,800 for Mr. Nozell; 8,800 for Mr. Sichol; 8,800 for Mr.
Steinberg; 7,932 for Mr. Zeh; 8,913 for Mr. Rothstein; 11,045 for Mr.
Sansky; 0 for Mr. Maisch; 11,776 for Mr. Dormer; and 11,766 for Mr.
Fitzpatrick.
(3) Calculated by dividing the number of shares by the total shares of common
stock outstanding at August 31, 2003 (7,954,825 shares) plus the number of
shares that each individual may acquire pursuant to the exercise of stock
options within 60 days of August 31, 2003.
(4) Based on a joint schedule 13G filed with the Securities and Exchange
Commission on January 3, 2003.
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SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth, for each of Provident Bancorp's directors and
executive officers and for all of the directors and executive officers as a
group, the following information:
(1) the number of exchange shares to be held upon consummation of the
conversion, based upon their beneficial ownership of Provident Bancorp
common stock as of August 31, 2003;
(2) the proposed purchases of subscription shares, assuming sufficient
shares of common stock are available to satisfy their subscriptions;
and
(3) the total amount of Provident Bancorp common stock to be held upon
consummation of the conversion.
In each case, it is assumed that subscription shares are sold at the
midpoint of the offering range. See "The Conversion--Limitations on Common Stock
Purchases."
132
PROPOSED PURCHASES
OF STOCK IN THE TOTAL COMMON STOCK TO
OFFERING (1) BE HELD
----------------------- ---------------------------
NUMBER OF PERCENTAGE OF
EXCHANGE SHARES TO NUMBER OF NUMBER OF TOTAL
NAME OF BENEFICIAL OWNER BE HELD (2) SHARES AMOUNT SHARES OUTSTANDING (3)
- ------------------------- ------------------ ----------- ----------- ---------- ---------------
William F. Helmer 252,135 50,000 $ 500,000 302,135 1.0
Dennis L. Coyle 282,462 40,000 400,000 322,462 1.0
George Strayton 545,021 10,000 100,000 555,021 1.8
Judith Hershaft 53,234 52,000 520,000 105,234 *
Thomas F. Jauntig, Jr. 40,273 10,000 100,000 50,273 *
Donald T. McNelis 125,198 10,000 100,000 135,198 *
Richard A. Nozell 91,184 4,000 25,000 93,684 *
William R. Sichol, Jr. 136,908 20,000 200,000 156,908 *
Burt Steinberg 78,814 50,000 500,000 128,814 *
F. Gary Zeh 198,677 15,000 150,000 213,677 *
Total 1,803,906 261,000 $2,610,000 2,064,906 6.6%
Daniel G. Rothstein 195,219 10,000 $ 100,000 205,219 *
Robert J. Sansky 137,551 5,000 50,000 142,551 *
Paul A. Maisch 6,049 25,000 250,000 31,049 *
Stephen G. Dormer 108,642 5,000 50,000 113,642 *
John F. Fitzpatrick 97,579 5,000 50,000 102,579 *
Total 545,040 50,000 $ 500,000 595,040 1.9%
Total for Directors
and Executive
Officers 2,348,946 311,000 $3,110,000 2,659,946 8.5%
- --------------------------
* Less than 1%.
(1) Includes proposed subscriptions, if any, by associates.
(2) Based on information presented in "Beneficial Ownership of Common Stock."
(3) Calculated by dividing the total shares of Provident Bancorp common stock
to be issued at the midpoint of the offering range (30,731,647 shares) plus
the number of shares each individual may acquire pursuant to the exercise
of stock options within 60 days of August 31, 2003, as described in
"Beneficial Ownership of Common Stock."
133
THE CONVERSION
The Boards of Directors of Provident Bancorp and Provident Bancorp, MHC
have approved the plan of conversion and reorganization. The plan of conversion
and reorganization must also be approved by the members of Provident Bancorp,
MHC (depositors and certain borrowers of Provident Bank) and the stockholders of
Provident Bancorp. A special meeting of members and a special meeting of
stockholders have been called for this purpose. The Office of Thrift Supervision
also has conditionally approved the plan of conversion and reorganization;
however, such approval does not constitute a recommendation or endorsement of
the plan of conversion and reorganization by that agency.
GENERAL
The respective Boards of Directors of Provident Bancorp, MHC and Provident
Bancorp adopted the plan of conversion and reorganization on July 1, 2003.
Pursuant to the plan of conversion and reorganization, our organization will
convert from the mutual holding company form of organization to the fully stock
form. Provident Bancorp, MHC, the mutual holding company parent of Provident
Bancorp, will be merged into Provident Bank, and Provident Bancorp, MHC will no
longer exist. Provident Bancorp, Inc., which owns 100% of Provident Bank, will
be succeeded by a new Delaware corporation with the same name. As part of the
conversion, the ownership interest of Provident Bancorp, MHC, will be offered
for sale in the stock offering, and we will issue shares of common stock and
contribute cash to a newly established charitable foundation. When the
conversion is completed, all of the capital stock of Provident Bank will be
owned by Provident Bancorp, Inc., our newly formed Delaware holding company, and
all of the common stock of Provident Bancorp will be owned by public
stockholders. A diagram of our corporate structure before and after the
conversion is set forth in the Summary of this document.
Under the plan of conversion and reorganization, at the conclusion of the
conversion and offering, each share of Provident Bancorp common stock owned by
persons other than Provident Bancorp, MHC will be converted automatically into
the right to receive new shares of Provident Bancorp common stock determined
pursuant to an exchange ratio. The exchange ratio will ensure that immediately
after the exchange of existing shares of Provident Bancorp for new shares, the
public stockholders of Provident Bancorp common stock will own the same
aggregate percentage of shares of common stock of Provident Bancorp, a Delaware
corporation, that they owned immediately prior to the conversion, excluding any
shares they purchased in the offering, excluding shares issued to the charitable
foundation and excluding any shares issued in connection with the acquisition of
E.N.B. Holding Company (except offering shares issued as merger consideration).
We intend to retain between $42.2 million and $96.2 million of the net
proceeds of the offering and to contribute the balance of the net proceeds to
Provident Bank. The conversion will be consummated only upon the issuance of at
least the minimum number of shares of our common stock offered pursuant to the
plan of conversion and reorganization, which may include shares of common stock
of Provident Bancorp issued in connection with the acquisition of E.N.B. Holding
Company.
The plan of conversion and reorganization provides that we will offer
shares of common stock for sale in the subscription offering to eligible account
holders, our tax-qualified employee benefit plans, including the employee stock
ownership plan and 401(k) plan, supplemental eligible account holders and other
members. Subject to the prior rights of these holders of subscription rights, we
will offer common stock for sale in a community offering to members of the
general public, with a preference given in the following order:
134
(1) Natural persons residing in the New York counties of Rockland and
Orange;
(2) Provident Bancorp's public stockholders as of November 7, 2003; and
(3) Ellenville National Bank's depositors as of November 14, 2003.
We have the right to accept or reject, in whole or in part, any orders to
purchase shares of the common stock received in the community offering. The
community offering may begin at the same time as the subscription offering and
must be completed within 45 days after the completion of the subscription
offering unless otherwise extended by the Office of Thrift Supervision. See
"--Community Offering."
We determined the number of shares of common stock to be offered in the
offering based upon an independent valuation appraisal of the estimated pro
forma market value of Provident Bancorp. All shares of common stock to be sold
in the offering will be sold at $10.00 per share. Investors will not be charged
a commission to purchase shares of common stock. The independent valuation will
be updated and the final number of the shares of common stock to be issued in
the offering will be determined at the completion of the offering. See "--Stock
Pricing and Number of Shares to be Issued" for more information as to the
determination of the estimated pro forma market value of the common stock.
The following is a brief summary of the conversion and is qualified in its
entirety by reference to the provisions of the plan of conversion and
reorganization. A copy of the plan of conversion and reorganization is available
for inspection at each branch office of Provident Bank and at the Northeast
Regional and the Washington, D.C. offices of the Office of Thrift Supervision.
The plan of conversion and reorganization is also filed as an exhibit to
Provident Bancorp's application to convert from mutual to stock form of which
this prospectus is a part, copies of which may be obtained from the Office of
Thrift Supervision. See "Where You Can Find Additional Information."
REASONS FOR THE CONVERSION
The primary reasons for the conversion and related stock offering are:
o to provide us with the capital to acquire E.N.B. Holding Company and
its subsidiary, Ellenville National Bank;
o to facilitate growth through other acquisitions and de novo branching
opportunities arise;
o to support internal growth through lending in communities we serve;
o to enhance existing products and services and support the development
of new products and services;
o to improve our overall competitive position; and
o to enhance stockholder returns through higher earnings and more
flexible capital management strategies.
As a fully converted stock holding company, we will have greater
flexibility in structuring further mergers and acquisitions, including the form
of consideration that we can use to pay for an acquisition. Our current mutual
holding company structure limits our ability to offer shares of our common stock
135
as consideration for a merger or acquisition since Provident Bancorp, MHC is
required to own a majority of our shares of common stock. Potential sellers
often want stock for at least part of the purchase price. Our new stock holding
company structure will enable us to offer stock or cash consideration, or a
combination thereof, and will therefore enhance our ability to compete with
other bidders when acquisition opportunities arise. Except for the agreement to
acquire E.N.B. Holding Company, Inc., we do not have any agreement or
understanding as to any specific acquisition.
APPROVALS REQUIRED
The affirmative vote of a majority of the total eligible votes of the
members of Provident Bancorp, MHC at the special meeting of members is required
to approve the plan of conversion and reorganization. By their approval of the
plan of conversion and reorganization, the members of Provident Bancorp, MHC
will also be approving the merger of Provident Bancorp, MHC into Provident Bank.
The affirmative vote of the holders of at least two-thirds of the outstanding
shares of common stock of Provident Bancorp and the affirmative vote of the
holders of a majority of the outstanding shares of common stock of Provident
Bancorp held by the public stockholders of Provident Bancorp are also required
to approve the plan of conversion and reorganization. The plan of conversion and
reorganization also must be approved by the Office of Thrift Supervision, which
has given its conditional approval.
The establishment and funding of the Provident Bank Charitable Foundation
must be approved by members of Provident Bancorp, MHC and stockholders of
Provident Bancorp, Inc. Consummation of the conversion and the offering of
common stock, however, is not conditioned upon member or stockholder approval of
the charitable foundation.
SHARE EXCHANGE RATIO
Office of Thrift Supervision regulations provide that in a conversion of a
mutual holding company to fully stock form, the public stockholders will be
entitled to exchange their shares for common stock of the new holding company,
provided that the mutual holding company demonstrates to the satisfaction of the
Office of Thrift Supervision that the basis for the exchange is fair and
reasonable. Each publicly held share of Provident Bancorp common stock will, on
the effective date of the conversion, be automatically converted into the right
to receive a number of new shares of Provident Bancorp common stock. The number
of new shares of common stock will be determined pursuant to the exchange ratio
which ensures that the public stockholders of Provident Bancorp common stock
will own the same percentage of new common stock in Provident Bancorp after the
conversion as they held in Provident Bancorp immediately prior to the
conversion, exclusive of their purchase of additional shares of common stock in
the offering, their receipt of cash in lieu of fractional exchange shares and
the issuance of shares of common stock to the charitable foundation and to
shareholders of E.N.B. Holding Company (except for offering shares issued as
merger consideration). In addition, if options to purchase shares of Provident
Bancorp are exercised before consummation of the conversion, there will be an
increase in the percentage of shares of Provident Bancorp held by public
stockholders, an increase in the number of shares issued to public stockholders
in the share exchange and a decrease in the exchange ratio and the offering
range. At June 30, 2003, there were 7,953,075 shares of Provident Bancorp common
stock outstanding and 3,537,075 shares were publicly held. The exchange ratio is
not dependent on the market value of Provident Bancorp common stock. The
exchange ratio is calculated based on the percentage of Provident Bancorp common
stock held by the public, the independent valuation of Provident Bancorp
prepared by RP Financial, LC and the number of shares of common stock in the
offering. The exchange ratio is expected to range from approximately 2.8487
exchange shares for each publicly held share of Provident Bancorp at the minimum
of the offering range to 4.4323 exchange shares for each publicly held share of
Provident Bancorp at the adjusted maximum of the offering range.
136
If you are currently a stockholder of Provident Bancorp, a federal
corporation, your existing shares will be canceled and exchanged for new shares
of Provident Bancorp, Inc., a Delaware corporation. The number of shares you
receive will be based on the final exchange ratio determined as of the closing
of the conversion.
The following table shows how the exchange ratio will adjust, based on the
number of shares of common stock issued in the offering. The table also shows
how many shares a hypothetical owner of Provident Bancorp common stock would
receive in the exchange, adjusted for the number of shares sold in the offering.
The table excludes the effect of the issuance of shares of common stock to the
charitable foundation and the effect of the issuance of shares of common stock
to shareholders of E.N.B. Holding Company.
NEW SHARES TO BE
NEW SHARES TO BE EXCHANGED FOR EXISTING TOTAL SHARES OF
ISSUED IN THIS SHARES OF PROVIDENT COMMON STOCK TO NEW SHARES TO
OFFERING BANCORP BE ISSUED IN BE RECEIVED
------------------------ ---------------------- CONVERSION AND EXCHANGE FOR 100
AMOUNT PERCENT AMOUNT PERCENT OFFERING RATIO EXISTING SHARES
----------- ------- ---------- ------- --------------- -------- ---------------
Minimum........... 12,580,000(1) 55.5% 10,076,178 44.5% 22,656,178 2.8487 284
Midpoint.......... 14,800,000 55.5 11,854,327 44.5 26,654,327 3.3514 335
Maximum.......... 17,020,000 55.5 13,632,477 44.5 30,652,477 3.8542 385
15% above Maximum 19,573,000 55.5 15,677,348 44.5 35,250,348 4.4323 443
- -----------------------
(1) If we do not receive orders for at least 12,580,000 shares of common stock
in the offering then we may issue up to 3,677,320 unsubscribed offering
shares to E.N.B. Holding Company, Inc. shareholders as merger consideration
in order to complete the offering at the minimum of the offering range. If
shares of common stock are so issued, the minimum number of shares that
must be sold in offering is 8,902,680. If none of the offering shares are
so issued, the 3,677,320 shares of common stock to be issued to E.N.B.
Holding Company, Inc. shareholders will be in addition to the total shares
issued in the conversion and offering. The issuance of shares as merger
consideration will not affect the exchange ratio, regardless of whether
such shares are unsubscribed offering shares.
Outstanding options to purchase shares of Provident Bancorp common stock
also will convert into and become options to purchase new shares of Provident
Bancorp common stock. The number of shares of common stock to be received upon
exercise of these options will be determined pursuant to the exchange ratio. The
aggregate exercise price, duration and vesting schedule of these options will
not be affected by the conversion. At June 30, 2003, there were 275,539
outstanding options to purchase shares of Provident Bancorp common stock,
209,586 of which were vested. Such options will be converted into options to
purchase 784,927 shares of common stock at the minimum of the offering range and
1,061,982 shares of common stock at the maximum of the offering range. If all
existing options were exercised for authorized, but unissued shares of common
stock following the conversion, stockholders would experience dilution of
approximately 2.9% at the minimum of the offering range and 3.0% at the maximum
of the offering range. Because Office of Thrift Supervision regulations prohibit
us from repurchasing our common stock during the first year following the
conversion unless compelling business reasons exist for such repurchases, we may
use authorized but unissued shares to fund option exercises that occur during
the first year following conversion.
OWNERSHIP OF PROVIDENT BANCORP AFTER THE TRANSACTIONS
The following table shows information regarding the shares of common stock
that we will issue in the stock offering and the acquisition, and that we will
issue to the charitable foundation. The table also shows the number of shares
that will be owned by Provident Bancorp's public stockholders at the
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completion of the conversion who will receive our shares of common stock in
exchange for their existing shares of common stock.
Information is presented at the adjusted minimum of the offering range to
reflect the discretionary issuance of unsubscribed shares to E.N.B. Holding
Company's shareholders, and at the minimum, midpoint, maximum and adjusted
maximum of the offering range. The number of shares of common stock to be issued
is based, in part, on our independent appraisal.
12,580,000 Shares
Issued at Adjusted 12,580,000 Shares 14,800,000 Shares 17,020,000 Shares
Minimum of Offering Issued at Minimum Issued at Midpoint Issued at Maximum
Range(1) Offering Range of Offering Range of Offering Range
--------------------- --------------------- --------------------- ---------------------
Percent Percent Percent Percent
Number of Total Number of Total Number of Total Number of Total
---------- -------- ---------- -------- ---------- -------- ---------- --------
SHARES OUTSTANDING
AFTER CONVERSION,
STOCK OFFERING AND
MERGER:
Purchasers in the
stock offering......... 8,902,680 38.5% 12,580,000 47.1% 14,800,000 48.2% 17,020,000 49.0%
Charitable foundation..... 400,000 1.7 400,000 1.5 400,000 1.3 400,000 1.2
Provident Bancorp
public stockholders in
the share exchange..... 10,076,178 43.6 10,076,170 37.7 11,854,320 38.6 13,632,470 39.3
E.N.B. Holding Company
shareholders in the
merger (1)............. 3,677,320 15.9 3,677,328 13.8 3,677,327 12.0 3,677,327 10.6
Total shares
outstanding after
conversion, stock
offering and
merger (2)........... 23,096,178 100.0% 26,733,49 100.0% 30,731,64 100.0% 34,729,79 100.0%
19,573,000 Shares
Issued at Maximum
of Offering Range
---------------------
Percent
Number of Total
---------- --------
SHARES OUTSTANDING
AFTER CONVERSION,
STOCK OFFERING AND
MERGER:
Purchasers in the
stock offering......... 19,573,000 49.4%
Charitable foundation..... 400,000 1.0
Provident Bancorp
public stockholders in
the share exchange..... 15,677,346 39.6
E.N.B. Holding Company
shareholders in the
merger (1)............. 3,969,674 10.0
Total shares
outstanding after
conversion, stock
offering and
merger (2)........... 39,620,02 100.0%
- ------------------------------
(1) If Provident Bancorp does not receive orders for at least 12,580,000 shares
in the offering, then, at Provident Bancorp's discretion in order to issue
the minimum number of shares necessary to complete the stock offering and
conversion, up to 3,677,320 unsubscribed offering shares may be issued to
shareholders of E.N.B. Holding Company as merger consideration. Assumes
that 3,677,320 unsubscribed shares are so issued, that 8,902,680 shares are
sold for cash, and that all 12,580,000 of such shares are issued in the
stock offering.
(2) Does not include options that were unexercised as of June 30, 2003.
Information regarding outstanding options to purchase shares of common
stock of Provident Bancorp is set forth in "Beneficial Ownership of Common
Stock."
EFFECTS OF CONVERSION ON DEPOSITORS, BORROWERS AND MEMBERS
CONTINUITY. While the conversion is being accomplished, the normal business
of Provident Bank of accepting deposits and making loans will continue without
interruption. Provident Bank will continue to be a federally chartered savings
association and will continue to be regulated by the Office of Thrift
Supervision. After the conversion, Provident Bank will continue to offer
existing services to depositors, borrowers and other customers. The directors
serving Provident Bancorp at the time of the conversion will be the directors of
Provident Bancorp after the conversion, although two existing directors of
E.N.B. Holding Company will become additional directors of Provident Bancorp and
Provident Bank at the completion of the acquisition of E.N.B. Holding Company.
EFFECT ON DEPOSIT ACCOUNTS. Pursuant to the plan of conversion and
reorganization, each depositor of Provident Bank at the time of the conversion
will automatically continue as a depositor after the conversion, and the deposit
balance, interest rate and other terms of such deposit accounts will not change
as a result of the conversion. Each such account will be insured by the Federal
Deposit Insurance
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Corporation to the same extent as before the conversion. Depositors will
continue to hold their existing certificates, passbooks and other evidences of
their accounts.
EFFECT ON LOANS. No loan outstanding from Provident Bank will be affected
by the conversion, and the amount, interest rate, maturity and security for each
loan will remain as it was contractually fixed prior to the conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of Provident
Bank and certain borrowers of Provident Bank are members of, and have voting
rights in, Provident Bancorp, MHC as to all matters requiring membership action.
Upon completion of the conversion, depositors and borrowers will cease to be
members of Provident Bancorp, MHC and will no longer have voting rights. Upon
completion of the conversion, all voting rights in Provident Bank will be vested
in Provident Bancorp as the sole stockholder of Provident Bank. The stockholders
of Provident Bancorp will possess exclusive voting rights with respect to
Provident Bancorp common stock.
TAX EFFECTS. Provident Bancorp will receive an opinion of counsel or tax
advisor with regard to federal and state income tax consequences of the
conversion to the effect that the conversion will not be taxable for federal or
state income tax purposes to Provident Bancorp, MHC, Provident Bancorp, the
public stockholders of Provident Bancorp, members of Provident Bancorp, MHC,
eligible account holders, supplemental eligible account holders, or Provident
Bank. See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. Each depositor in Provident Bank has both a
deposit account in Provident Bank and a pro rata ownership interest in the net
worth of Provident Bancorp, MHC based upon the deposit balance in his or her
account. This ownership interest is tied to the depositor's account and has no
tangible market value separate from the deposit account. This interest may only
be realized in the event of a complete liquidation of Provident Bancorp, MHC and
Provident Bank. Any depositor who opens a deposit account obtains a pro rata
ownership interest in Provident Bancorp, MHC without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his or her
account receives a portion or all of the balance in the deposit account but
nothing for his or her ownership interest in the net worth of Provident Bancorp,
MHC, which is lost to the extent that the balance in the account is reduced or
closed.
Consequently, depositors in a stock subsidiary of a mutual holding company
normally have no way of realizing the value of their ownership interest, which
has realizable value only in the unlikely event that Provident Bancorp, MHC and
Provident Bank are liquidated. If this occurs, the depositors of record at that
time, as owners, would share pro rata in any residual surplus and reserves of
Provident Bancorp, MHC after other claims, including claims of depositors to the
amounts of their deposits, are paid.
In the unlikely event that Provident Bank were to liquidate after the
conversion, all claims of creditors, including those of depositors, also would
be paid first, followed by distribution of the "liquidation account" to
depositors as of June 30, 2002 and September 30, 2003 who continue to maintain
their deposit accounts as of the date of liquidation, with any assets remaining
thereafter distributed to Provident Bancorp as the holder of Provident Bank's
capital stock. Pursuant to the rules and regulations of the Office of Thrift
Supervision, a post-conversion merger, consolidation, sale of bulk assets or
similar combination or transaction with another insured savings institution
would not be considered a liquidation and, in such a transaction, the
liquidation account would be assumed by the surviving institution. See
"--Liquidation Rights."
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STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The plan of conversion and reorganization and federal regulations require
that the aggregate purchase price of the common stock sold in the offering must
be based on the appraised pro forma market value of the common stock, as
determined by an independent valuation. Provident Bank and Provident Bancorp
have retained RP Financial, LC to prepare an independent valuation appraisal.
For its services in preparing the initial valuation, RP Financial, LC will
receive a fee of $150,000. This amount does not include a fee of $30,000 to be
paid to RP Financial, LC for assistance in the preparation of a business plan.
Provident Bank and Provident Bancorp have agreed to indemnify RP Financial, LC
and its employees and affiliates against specified losses, including any losses
in connection with claims under the federal securities laws, arising out of its
services as independent appraiser, except where such liability results from its
negligence or bad faith.
The independent valuation appraisal considered the pro forma impact of the
offering, the acquisition of E.N.B. Holding Company and the issuance of shares
to the charitable foundation. Consistent with the Office of Thrift Supervision
appraisal guidelines, the appraisal applied three primary methodologies: the pro
forma price-to-book value approach applied to both reported book value and
tangible book value; the pro forma price-to-earnings approach applied to
reported and core earnings; and the pro forma price-to-assets approach. The
market value ratios applied in the three methodologies were based upon the
current market valuations of the peer group companies, subject to valuation
adjustments applied by RP Financial, LC to account for differences between
Provident Bancorp and the peer group. RP Financial, LC placed the greatest
emphasis on the price-to-earnings and price-to-book approaches in estimating pro
forma market value.
The independent valuation was prepared by RP Financial, LC in reliance upon
the information contained in this prospectus, including the consolidated
financial statements of Provident Bancorp. RP Financial, LC also considered the
following factors, among others:
o the present and projected operating results and financial condition of
Provident Bancorp, including the pro forma impact of the acquisition
of E.N.B. Holding Company;
o the economic and demographic conditions in Provident Bancorp's
existing market area;
o certain historical, financial and other information relating to
Provident Bancorp;
o a comparative evaluation of the operating and financial
characteristics of Provident Bancorp with those of other similarly
situated publicly traded savings institutions located in the State of
New York, and other nearby areas including the mid-Atlantic and New
England regions;
o the aggregate size of the offering of the common stock;
o the impact of the conversion and offering on Provident Bancorp's
stockholders' equity and earnings potential, including the pro forma
impact of the acquisition of E.N.B. Holding Company and the
contribution to the charitable foundation;
o the proposed dividend policy of Provident Bancorp; and
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o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
Included in RP Financial, LC's independent valuation were certain
assumptions as to the pro forma earnings of Provident Bancorp after the
conversion that were utilized in determining the appraised value. These
assumptions included estimated expenses, an assumed after-tax rate of return on
the net offering proceeds and purchases in the open market of 4% of the common
stock issued in the offering by the recognition and retention plan at the $10.00
purchase price. See "Pro Forma Conversion and Acquisition Data" for additional
information concerning these assumptions. The use of different assumptions may
yield different results.
The independent valuation states that as of November 3, 2003, the estimated
pro forma market value, or valuation range, of Provident Bancorp ranged from a
minimum of $267.3 million to a maximum of $347.3 million, with a midpoint of
$307.3 million. The Board of Directors of Provident Bancorp decided to offer the
shares of common stock for a price of $10.00 per share. The aggregate offering
price of the shares will be equal to the valuation range multiplied by the
percentage of Provident Bancorp common stock owned by Provident Bancorp, MHC.
The number of shares offered will be equal to the aggregate offering price of
the shares divided by the price per share. Based on the valuation range, the
percentage of Provident Bancorp common stock owned by Provident Bancorp, MHC and
the $10.00 price per share, the minimum of the offering range will be 12,580,000
shares, the midpoint of the offering range will be 14,800,000 shares and the
maximum of the offering range will be 17,020,000 shares.
The Board of Directors of Provident Bancorp reviewed the independent
valuation and, in particular, considered the following:
o Provident Bancorp's financial condition and results of operations,
including the pro forma impact of the acquisition of E.N.B. Holding
Company;
o comparison of financial performance ratios of Provident Bancorp to
those of other financial institutions of similar size;
o market conditions generally and in particular for financial
institutions;
o the historical trading price of the publicly held shares of Provident
Bancorp common stock; and
o the valuation attributed to the acquisition of E.N.B. Holding Company.
All of these factors are set forth in the independent valuation. The Board
of Directors also reviewed the methodology and the assumptions used by RP
Financial, LC in preparing the independent valuation and believes that such
assumptions were reasonable. The offering range may be amended with the approval
of the Office of Thrift Supervision, if required, as a result of subsequent
developments in the financial condition of Provident Bancorp or Provident Bank
or market conditions generally. In the event the independent valuation is
updated to amend the pro forma market value of Provident Bancorp to less than
$267.3 million or more than $396.2 million, the appraisal will be filed with the
Securities and Exchange Commission by a post-effective amendment to Provident
Bancorp's registration statement.
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THE INDEPENDENT VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING OUR COMMON
STOCK. RP FINANCIAL, LC DID NOT INDEPENDENTLY VERIFY OUR CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION THAT WE PROVIDED TO THEM, NOR DID RP FINANCIAL,
LC INDEPENDENTLY VALUE OUR ASSETS OR LIABILITIES. THE INDEPENDENT VALUATION
CONSIDERS PROVIDENT BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF PROVIDENT BANK. MOREOVER, BECAUSE THE
VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH MAY CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN
THAT PERSONS PURCHASING OUR COMMON STOCK IN THE OFFERING WILL THEREAFTER BE ABLE
TO SELL THEIR SHARES AT PRICES AT OR ABOVE THE $10.00 PRICE PER SHARE.
Following commencement of the subscription offering, the maximum of the
valuation range may be increased by up to 15% without resoliciting subscribers
to up to $396.2 million, which will result in a corresponding increase of up to
15% in the maximum of the offering range to up to 19,573,000 shares, to reflect
changes in the market and financial conditions or demand for the shares. We will
not decrease the minimum of the valuation range and the minimum of the offering
range without a resolicitation of subscribers. The subscription price of $10.00
per share will remain fixed. See "--Limitations on Common Stock Purchases" as to
the method of distribution and allocation of additional shares that may be
issued in the event of an increase in the offering range to fill unfilled orders
in the offering.
If the update to the independent valuation at the conclusion of the
offering results in an increase in the maximum of the valuation range to more
than $396.2 million and a corresponding increase in the offering range to more
than 19,573,000 shares, or a decrease in the minimum of the valuation range to
less than $267.3 million and a corresponding decrease in the offering range to
fewer than 12,580,000 shares, then, after consulting with the Office of Thrift
Supervision, we may terminate the plan of conversion and reorganization, cancel
deposit account withdrawal authorizations and promptly return by check all funds
received with interest at Provident Bank's passbook savings rate of interest.
Alternatively, we may hold a new offering, establish a new offering range,
extend the offering period and commence a resolicitation of subscribers or take
other actions as permitted by the Office of Thrift Supervision in order to
complete the conversion or offering. In the event that a resolicitation is
commenced, we will promptly cancel deposit account withdrawal authorizations and
return all funds received to investors as described above. Any resolicitation
following the conclusion of the subscription and community offerings would not
exceed 45 days unless further extended by the Office of Thrift Supervision for
periods of up to 90 days.
An increase in the number of shares to be issued in the offering would
decrease both a subscriber's ownership interest and Provident Bancorp's pro
forma earnings and stockholders' equity on a per share basis while increasing
pro forma earnings and stockholders' equity on an aggregate basis. A decrease in
the number of shares to be issued in the offering would increase both a
subscriber's ownership interest and Provident Bancorp's pro forma earnings and
stockholders' equity on a per share basis, while decreasing pro forma earnings
and stockholders' equity on an aggregate basis. For a presentation of the
effects of these changes, see "Pro Forma Conversion and Acquisition Data."
The merger agreement with E.N.B. Holding Company provides that, in the
event Provident Bancorp sells more than $181.3 million of shares of common stock
in the offering following an update to the independent appraisal (excluding
shares we issue to the Provident Bank Charitable Foundation and excluding shares
we issue in exchange for existing shares of common stock of Provident Bancorp, a
federal corporation), the number of shares to be issued to shareholders of
E.N.B. Holding Company will be increased so that shareholders of E.N.B. Holding
Company would have the same ownership
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percentage in Provident Bancorp following the conversion and merger as they
would if Provident Bancorp sold $181.3 million of shares of common stock in the
offering. The maximum number of shares of common stock that can be issued to
shareholders of E.N.B. Holding Company is 3,969,676 shares, assuming we sell
19,573,000 shares of common stock in the offering.
Copies of the independent valuation appraisal report of RP Financial, LC
and the detailed memorandum setting forth the method and assumptions used in the
appraisal report are available for inspection at the Administrative Offices of
Provident Bank and as specified under "Where You Can Find Additional
Information."
EXCHANGE OF STOCK CERTIFICATES
The conversion of existing outstanding shares of Provident Bancorp common
stock into the right to receive new shares of Provident Bancorp common stock
will occur automatically on the effective date of the conversion. As soon as
practicable after the effective date of the conversion, we or a bank or trust
company or other entity designated by us in the capacity of exchange agent, will
send a transmittal form to each public stockholder of Provident Bancorp who
holds stock certificates. The transmittal forms are expected to be mailed within
five business days after the effective date of the conversion and will contain
instructions on how to exchange old shares of Provident Bancorp common stock for
new shares of Provident Bancorp common stock. We expect that stock certificates
evidencing new shares of Provident Bancorp common stock will be distributed
within five business days after we receive properly executed transmittal forms
and other required documents. Shares held by public stockholders in street name
will be exchanged automatically upon the effective date of the conversion; no
transmittal forms will be mailed relating to these shares.
No fractional shares of Provident Bancorp common stock will be issued to
any public stockholder of Provident Bancorp when the conversion is completed.
For each fractional share that would otherwise be issued to a stockholder who
holds a stock certificate, we will pay by check an amount equal to the product
obtained by multiplying the fractional share interest to which the holder would
otherwise be entitled to by the $10.00 offering purchase price per share.
Payment for fractional shares will be made as soon as practicable after the
receipt by the exchange agent of the transmittal forms and the surrendered
Provident Bancorp stock certificates. If your shares of common stock are held in
street name, you will automatically receive cash in lieu of fractional shares.
YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES UNTIL YOU HAVE RECEIVED
TRANSMITTAL FORMS, WHICH WILL INCLUDE FORWARDING INSTRUCTIONS.
After the conversion, until existing certificates representing shares of
Provident Bancorp common stock are surrendered for exchange in compliance with
the terms of the transmittal form, stockholders will not receive new shares of
Provident Bancorp common stock and will not be paid dividends on the new shares
of Provident Bancorp common stock. When stockholders surrender their
certificates, any unpaid dividends will be paid without interest. For all other
purposes, however, each certificate that represents shares of Provident Bancorp
common stock outstanding at the effective date of the conversion will be
considered to evidence ownership of new shares of Provident Bancorp common stock
into which those shares have been converted by virtue of the conversion.
If a certificate for Provident Bancorp common stock has been lost, stolen
or destroyed, our exchange agent will issue a new stock certificate upon receipt
of appropriate evidence as to the loss, theft or destruction of the certificate,
appropriate evidence as to the ownership of the certificate by the
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claimant, and appropriate and customary indemnification, which is normally
effected by the purchase of a bond from a surety company at the stockholder's
expense.
All new shares of Provident Bancorp common stock that we issue in exchange
for existing shares of Provident Bancorp common stock will be considered to have
been issued in full satisfaction of all rights pertaining to such shares of
common stock, subject, however, to our obligation to pay any dividends or make
any other distributions with a record date prior to the effective date of the
conversion that may have been declared by us on or prior to the effective date
and which remain unpaid at the effective date.
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the plan of conversion and reorganization, rights to
subscribe for shares of common stock in the subscription offering have been
granted in the following descending order of priority. The filling of all
subscriptions that we receive will depend on the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum, minimum and overall purchase
limitations set forth in the plan of conversion and reorganization and as
described below under "--Limitations on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Provident Bank depositor with
aggregate deposit account balances of $50.00 or more (a "Qualifying Deposit") on
June 30, 2002 ("Eligible Account Holders") will receive, without payment
therefor, nontransferable subscription rights to purchase up to 40,000 shares of
our common stock, subject to the overall purchase limitations. See
"--Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, shares will first be allocated so as to
permit each Eligible Account Holder to purchase a number of shares sufficient to
make his or her total allocation equal to the lesser of 100 shares or the number
of shares for which he or she subscribed. Thereafter, unallocated shares will be
allocated to each Eligible Account Holder whose subscription remains unfilled in
the proportion that the amount of his or her Qualifying Deposit bears to the
total amount of Qualifying Deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. If an amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated among those Eligible Account Holders whose subscriptions
are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of our shares of common stock, each Eligible
Account Holder must list on his or her stock order form all deposit accounts in
which he or she has an ownership interest on June 30, 2002. In the event of
oversubscription, failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. In the event of an
oversubscription, the subscription rights of Eligible Account Holders who are
also executive directors or officers of Provident Bancorp or their associates
will be subordinated to the subscription rights of other Eligible Account
Holders to the extent attributable to increased deposits in the twelve months
preceding June 30, 2002.
PRIORITY 2: TAX-QUALIFIED PLANS. Our tax-qualified employee stock benefit
plans, including our employee stock ownership plan and 401(k) plan, will
receive, without payment therefor, nontransferable subscription rights to
purchase in the aggregate up to 10% of the common stock issued in the offering
(although we anticipate our employee stock ownership plan will purchase 5% of
the shares of common stock issued in the offering, including shares we issue to
the Provident Bank Charitable Foundation).
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that there
are sufficient shares of common stock remaining after satisfaction of
subscriptions by Eligible Account Holders and our tax-qualified employee stock
benefit plans, each Provident Bank depositor with a Qualifying Deposit on
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September 30, 2003 who is not an Eligible Account Holder ("Supplemental Eligible
Account Holder") will receive, without payment therefor, nontransferable
subscription rights to purchase up to 40,000 shares of common stock, subject to
the overall purchase limitations. See "--Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares will be allocated so as to permit each Supplemental Eligible Account
Holder to purchase a number of shares sufficient to make his or her total
allocation equal to the lesser of 100 shares of common stock or the number of
shares for which he or she subscribed. Thereafter, unallocated shares will be
allocated to each Supplemental Eligible Account Holder whose subscription
remains unfilled in the proportion that the amount of his or her Qualifying
Deposit bears to the total amount of Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unfilled.
To ensure proper allocation of common stock, each Supplemental Eligible
Account Holder must list on the stock order form all deposit accounts in which
he or she has an ownership interest at September 30, 2003. In the event of
oversubscription, failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed.
PRIORITY 4: OTHER MEMBERS. To the extent that there are shares of common
stock remaining after satisfaction of subscriptions by Eligible Account Holders,
our tax-qualified employee stock benefit plans, and Supplemental Eligible
Account Holders, each depositor of Provident Bank on the voting record date of
November 10, 2003 and each borrower of Provident Bank as of January 7, 1999
whose borrowings remained outstanding as of November 10, 2003 who is not an
Eligible Account Holder or Supplemental Eligible Account Holder ("Other
Members") will receive, without payment therefor, nontransferable subscription
rights to purchase up to 40,000 shares of common stock, subject to the overall
purchase limitations. See "--Limitations on Common Stock Purchases." If there
are not sufficient shares available to satisfy all subscriptions, available
shares will be allocated on a pro rata basis based on the size of the order of
each Other Member whose order remains unfilled.
EXPIRATION DATE. The Subscription Offering will expire at 10:00 a.m., New
York Time, on December 18, 2003, unless extended by us for up to 45 days or such
additional periods with the approval of the Office of Thrift Supervision, if
necessary. Subscription rights will expire whether or not each eligible
depositor or borrower can be located. We may decide to extend the expiration
date of the subscription offering for any reason, whether or not subscriptions
have been received for shares at the minimum, midpoint or maximum of the
offering range. Subscription rights which have not been exercised prior to the
expiration date will become void.
We will not execute orders until at least the minimum number of shares of
common stock have been issued, which can include up to 3,677,320 shares
allocated to E.N.B. Holding Company, Inc. shareholders as merger consideration.
If at least 12,580,000 shares have not been issued within 45 days after the
expiration date and the Office of Thrift Supervision has not consented to an
extension, all funds delivered to us to purchase shares of common stock in the
offering will be returned promptly to the subscribers with interest at Provident
Bank's passbook savings rate and all deposit account withdrawal authorizations
will be canceled. If an extension beyond the 45-day period following the
expiration date is granted by the Office of Thrift Supervision, all funds
delivered to us to purchase shares of common stock in the offering will be
returned promptly to the subscribers with interest at Provident Bank's passbook
savings rate and all deposit account withdrawal authorizations will be canceled.
We will notify subscribers of the extension of time and of the rights of
subscribers to resubmit their subscriptions for a specified period of time.
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Extensions may not go beyond January 6, 2006, which is two years after the
special meeting of members of Provident Bancorp, MHC to vote on the conversion.
Community Offering
To the extent that shares of common stock remain available for purchase
after satisfaction of all subscriptions of the Eligible Account Holders, our
tax-qualified employee stock benefit plans, Supplemental Eligible Account
Holders and Other Members, we may offer shares pursuant to the plan of
conversion and reorganization to members of the general public in a community
offering. Shares may be offered with the following preferences:
(1) Natural persons residing in the New York counties of Rockland and
Orange;
(2) Provident Bancorp's public stockholders as of November 7, 2003;
(3) Ellenville National Bank's depositors as of November 14, 2003; and
(4) Other members of the general public.
Subscribers in the community offering may purchase up to 40,000 shares of
common stock, subject to the overall purchase limitations. See "--Limitations on
Common Stock Purchases." The minimum purchase is 25 shares. THE OPPORTUNITY TO
PURCHASE SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO
OUR RIGHT, IN OUR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE
OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE
FOLLOWING THE EXPIRATION DATE OF THE OFFERING.
If we do not have sufficient shares of common stock available to fill the
orders of natural persons residing in the New York counties of Rockland and
Orange, we will allocate the available shares among those persons in a manner
that permits each of them, to the extent possible, to purchase the lesser of 100
shares or the number of shares subscribed for by such person. Thereafter,
unallocated shares will be allocated among natural persons residing in the New
York counties of Rockland and Orange whose orders remain unsatisfied based on
the size of the unfilled order of each such person relative to the size of the
aggregate unfilled orders of other natural persons residing in the New York
counties of Rockland and Orange. In addition, orders received for shares of
common stock in the community offering will first be filled up to a maximum of
two percent (2%) of the shares sold in the offering, and thereafter any
remaining shares will be allocated on an equal number of shares basis per order.
If oversubscription occurs due to the orders of public stockholders of Provident
Bancorp as of November 7, 2003, the allocation procedures described above will
apply to the stock orders of such persons. If oversubscription occurs due to the
orders of depositors of Ellenville National Bank as of November 14, 2003, the
allocation procedures described above will apply to the stock orders of such
persons. If oversubscription occurs due to the orders of members of the general
public, the allocation procedures described above will apply to the stock orders
of such persons.
The term "residing" or "resident" as used in this prospectus means any
person who occupies a dwelling within the New York counties of Rockland and
Orange, has a present intent to remain within this community for a period of
time, and manifests the genuineness of that intent by establishing an ongoing
physical presence within the community, together with an indication that this
presence within the community is something other than merely transitory in
nature. We may utilize deposit or loan records or other evidence provided to us
to decide whether a person is a resident. In all cases, however, the
determination shall be in our sole discretion.
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EXPIRATION DATE. The community offering may begin with or during the
subscription offering and is expected to terminate at the same time as the
subscription offering, and must terminate no more than 45 days following the
subscription offering. Provident Bancorp may decide to extend the community
offering for any reason and is not required to give purchasers notice of any
such extension unless such period extends beyond February 2, 2004. If 12,580,000
shares have not been issued by February 2, 2004, unless this period is further
extended with the consent of the Office of Thrift Supervision, all funds
delivered to us will be returned promptly to the purchasers with interest at
Provident Bank's passbook savings rate and all withdrawal authorizations will be
canceled. If an extension is granted, all funds delivered to us will be returned
promptly to the purchasers with interest at Provident Bank's passbook savings
rate and all withdrawal authorizations will be canceled. We will notify
purchasers of the extension of time and of the rights of purchasers to resubmit
their orders for a specified period of time. These extensions may not go beyond
January 6, 2006, which is two years after the special meeting of members of
Provident Bancorp, MHC to vote on the conversion.
SYNDICATED COMMUNITY OFFERING
If feasible, our Board of Directors may decide to offer for sale all shares
of common stock not subscribed for or purchased in the subscription and
community offerings in a syndicated community offering, subject to such terms,
conditions and procedures as we may determine, in a manner that will achieve the
widest distribution of our shares of common stock. However, we retain the right
to accept or reject in whole or in part any orders in the syndicated community
offering. In the syndicated community offering, any person may purchase up to
40,000 shares of common stock, subject to the overall maximum purchase
limitations. Unless the syndicated community offering begins during the
community offering, the syndicated community offering will begin as soon as
possible after the completion of the subscription and community offerings.
Since all shares of common stock are being offered on a best-efforts basis,
broker-dealers offering shares in the syndicated community offering must conform
with certain Securities and Exchange Commission rules. To comply with these
rules in a practical and efficient manner, Ryan Beck & Co. expects it will
utilize procedures that permit prospective investors in the syndicated community
offering to transmit their funds to Ryan Beck & Co., which will deposit the
funds it receives prior to the closing date in a non-interest bearing bank
account with an independent bank. Pursuant to the agreement with the independent
bank, such funds will be released to us on the closing or returned, without
interest, to prospective purchasers if the conversion is terminated. Because
Ryan Beck & Co. will be selling to its existing customers, standard sales
confirmation procedures will be employed instead of subscription procedures. If
other broker-dealers are involved, such broker-dealers must comply with the same
Securities and Exchange Commission rules.
If for any reason we cannot effect a syndicated community offering of
shares of common stock not purchased in the subscription and community
offerings, or in the event that there is an insignificant number of shares
remaining unsold after the subscription and community offerings or in the
syndicated community offering, we will try to make other arrangements for the
sale of unsubscribed shares, if possible. The Office of Thrift Supervision must
approve any such arrangements.
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LIMITATIONS ON COMMON STOCK PURCHASES
The plan of conversion and reorganization includes the following
limitations on the number of shares of common stock that may be purchased in the
offering:
(1) No person may purchase fewer than 25 shares of common stock or more
than 40,000 shares;
(2) Our tax-qualified employee stock benefit plans, including our employee
stock ownership plan and 401(k) plan, may purchase in the aggregate up
to 10% of the shares of common stock issued in the offering, including
shares issued in the event of an increase in the offering range of up
to 15%.
(3) Except for the employee benefit plans, as described above, no person
or entity, together with associates or persons acting in concert with
such person or entity, may purchase more than 80,000 shares in all
categories of the offering combined;
(4) Current stockholders of Provident Bancorp are subject to an ownership
limitation. As previously described, current stockholders of Provident
Bancorp will receive new shares of Provident Bancorp common stock in
exchange for their existing shares of Provident Bancorp common stock.
The number of shares of common stock that a stockholder may purchase
in the offering, together with associates or persons acting in concert
with such stockholder, when combined with the shares that the
stockholder and his or her associates will receive in exchange for
existing Provident Bancorp common stock, may not exceed 5% of the
shares of common stock of Provident Bancorp to be issued and
outstanding at the completion of the conversion; and
(5) The maximum number of shares of common stock that may be purchased in
all categories of the offering by executive officers and directors of
Provident Bank and their associates, in the aggregate, when combined
with new shares of common stock issued in exchange for existing
shares, may not exceed 25% of the shares issued in the conversion.
Depending upon market or financial conditions, our Board of Directors, with
the approval of the Office of Thrift Supervision and without further approval of
members of Provident Bancorp, MHC, may decrease or increase the purchase and
ownership limitations. If a purchase limitation is increased, subscribers in the
subscription offering who ordered the maximum amount will be, and, in our sole
discretion, some other large subscribers who through their subscriptions
evidence a desire to purchase the maximum allowable number of shares may be
given the opportunity to increase their subscriptions up to the then applicable
limit. The effect of this type of resolicitation will be an increase in the
number of shares of common stock owned by subscribers who choose to increase
their subscriptions.
In the event of an increase in the offering range of up to 15% of the total
number of shares of common stock offered in the offering, shares will be
allocated in the following order of priority in accordance with the plan of
conversion and reorganization:
(1) to fill the employee benefit plans' subscription for up to 10% of the
total number of shares of common stock issued in the offering;
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(2) in the event that there is an oversubscription at the Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member levels,
to fill unfulfilled subscriptions of these subscribers according to
their respective priorities; and
(3) to fill unfulfilled subscriptions in the community offering, with
preference given first to natural persons residing in the New York
counties of Rockland and Orange, then to Provident Bancorp's public
stockholders as of November 7, 2003, then to Ellenville National
Bank's depositors as of November 14, 2003 and then to other members of
the general public.
The term "associate" of a person means:
(1) any corporation or organization, other than Provident Bancorp,
Provident Bank or a majority-owned subsidiary of Provident Bank, of
which the person is a senior officer, partner or 10% beneficial
stockholder;
(2) any trust or other estate in which the person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary
capacity; provided, however, it does not include any employee stock
benefit plan in which the person has a substantial beneficial interest
or serves as trustee or in a similar fiduciary capacity; and
(3) any blood or marriage relative of the person, who either has the same
home as the person or who is a director or officer of Provident
Bancorp or Provident Bank.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an
express agreement; or
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether
written or otherwise.
A person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
tax-qualified employee stock benefit plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for
the purpose of determining whether common stock held by the trustee and common
stock held by the employee stock benefit plan will be aggregated.
Our directors are not treated as associates of each other solely because of
their membership on the Board of Directors. We have the right to determine
whether prospective purchasers are associates or acting in concert. Common stock
purchased in the offering will be freely transferable except for shares
purchased by executive officers and directors of Provident Bancorp or Provident
Bank and except as described below. Any purchases made by any associate of
Provident Bancorp or Provident Bank for the explicit purpose of meeting the
minimum number of shares of common stock required to be sold in order to
complete the offering shall be made for investment purposes only and not with a
view toward redistribution. In addition, under NASD guidelines, members of the
NASD and their associates are subject to certain restrictions on transfer of
securities purchased in accordance with subscription rights and to certain
reporting requirements upon purchase of these securities. For a further
discussion of
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limitations on purchases of our shares of common stock at the time of conversion
and thereafter, see "--Certain Restrictions on Purchase or Transfer of Our
Shares after Conversion" and "Restrictions on Acquisition of Provident Bancorp."
PLAN OF DISTRIBUTION; SELLING AGENT COMPENSATION
To assist in the marketing of our common stock, we have retained Ryan Beck
& Co., which is a broker/dealer registered with the National Association of
Securities Dealers, Inc. Ryan Beck & Co. will assist us in the offering by:
(1) acting as our financial advisor for the conversion, providing
administration services and managing the Stock Information Center;
(2) targeting our sales efforts, including assisting in the preparation of
marketing materials;
(3) soliciting orders for common stock; and
(4) assisting in soliciting proxies of our members.
For these services, Ryan Beck & Co. will receive a management fee of
$50,000 and a marketing fee equal to 1.0% of the dollar amount of shares of
common stock sold in the subscription and community offerings. No fee will be
payable to Ryan Beck & Co. with respect to shares purchased by officers,
directors and employees or their immediate families, shares purchased by our
tax-qualified and non-qualified employee benefit plans and shares issued to the
charitable foundation. No fee will be payable to Ryan Beck & Co. with respect to
shares issued to shareholders of E.N.B. Holding Company, except under limited
circumstances when such shares are issued as part of the offering so that we can
sell at least 12,580,000 shares of common stock in the offering. In the event
that Ryan Beck & Co. sells common stock through a group of broker-dealers in a
syndicated community offering, it will be paid a fee equal to 1.0% of the dollar
amount of total shares sold in the syndicated community offering, which fee and
the fee payable to selected dealers (which may include Ryan Beck & Co.) will not
exceed 6.0% in the aggregate. Ryan Beck & Co. will also be reimbursed for
allocable expenses in an amount not to exceed $15,000, and for attorney's fees
in an amount not to exceed $60,000.
We will indemnify Ryan Beck & Co. against liabilities and expenses,
including legal fees, incurred in connection with certain claims or litigation
arising out of or based upon untrue statements or omissions contained in the
offering materials for the common stock, including liabilities under the
Securities Act of 1933, as amended.
Some of our directors and executive officers may participate in the
solicitation of offers to purchase common stock. These persons will be
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with the solicitation. Other regular, full-time employees of Provident Bank may
assist in the offering, but only in ministerial capacities, and may provide
clerical work in effecting a sales transaction. No offers or sales may be made
by tellers or at the teller counters. All sales activity will be conducted in a
segregated or separately identifiable area of Provident Bank's Administrative
Offices apart from the area accessible to the general public. Other questions of
prospective purchasers will be directed to executive officers or registered
representatives of Ryan Beck & Co. Our other employees have been instructed not
to solicit offers to purchase shares of common stock or provide advice regarding
the purchase of common stock. We will rely on Rule 3a4-1 under the Securities
Exchange Act of 1934, as amended, and sales of common stock will be conducted
within the requirements of Rule 3a4-1, so as to
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permit officers, directors and employees to participate in the sale of common
stock. None of our officers, directors or employees will be compensated in
connection with their participation in the offering.
PROCEDURE FOR PURCHASING SHARES
EXPIRATION DATE. The offering will expire at 10:00 a.m., New York Time, on
December 18, 2003, unless we extend it for up to 45 days, with the approval of
the Office of Thrift Supervision, if required. This extension may be approved by
us, in our sole discretion, without further approval or additional notice to
purchasers in the offering. Any extension of the subscription and/or community
offering beyond February 2, 2004 would require the Office of Thrift
Supervision's approval. All funds delivered to us to purchase shares of common
stock in the offering would be returned promptly to the subscribers with
interest at Provident Bank's passbook savings rate and all deposit account
withdrawal authorizations would be canceled. Potential purchasers would be given
the right to resubmit their orders for common stock. If we have not sold the
minimum number of shares offered in the offering by the expiration date or any
extension thereof, we may issue up to 3,677,320 of such unsubscribed shares as
merger consideration in the acquisition of E.N.B. Holding Company, Inc. to
complete the offering or we may terminate the offering and promptly refund all
orders for shares of common stock. If the number of shares offered is reduced
below the minimum of the offering range, or increased above the adjusted maximum
of the offering range, all funds delivered to us to purchase shares of common
stock in the offering will be returned promptly to the subscribers with interest
at Provident Bank's passbook savings rate and all deposit account withdrawal
authorizations will be canceled. Purchasers will be given an opportunity to
resubmit their orders.
To ensure that each purchaser receives a prospectus at least 48 hours
before the expiration date of the offering in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to this date or hand delivered any later than two days prior to
this date. Execution of an order form will confirm receipt of delivery in
accordance with Rule 15c2-8. Order forms will be distributed only with a
prospectus. Subscription funds will be maintained in a segregated account at
Provident Bank and will earn interest at our passbook savings rate from the date
of receipt.
We reserve the right in our sole discretion to terminate the offering at
any time and for any reason, in which case we will cancel any deposit account
withdrawal orders and promptly return all funds submitted, with interest at
Provident Bank's passbook savings rate from the date of receipt.
We have the right to reject any order submitted in the offering by a person
who we believe is making false representations or who we otherwise believe,
either alone or acting in concert with others, is violating, evading,
circumventing, or intends to violate, evade or circumvent the terms and
conditions of the plan of conversion.
USE OF ORDER FORMS. In order to purchase shares of common stock in the
subscription offering and community offering, you must complete an order form
and remit full payment. Incomplete order forms or order forms that are not
signed are not required to be accepted. We will not be required to accept orders
submitted on photocopied or facsimiled order forms. All order forms must be
received (not postmarked) prior to 10:00 a.m. New York Time, on December 18,
2003. We are not required to accept order forms that are not received by that
time, are executed defectively or are received without full payment or without
appropriate withdrawal instructions. We are not required to notify subscribers
of incomplete or improperly executed order forms, and we have the right to waive
or permit the correction of incomplete or improperly executed order forms. We do
not represent, however, that we will do so and we have no affirmative duty to
notify any prospective subscriber of any such defects. You may submit your order
form and payment by mail using the return envelope provided, by bringing your
order form to our
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Stock Information Center, or by overnight delivery to the indicated address on
the order form. Order forms may not be delivered to Provident Bank branches.
Once tendered, an order form cannot be modified or revoked without our consent.
We reserve the absolute right, in our sole discretion, to reject orders received
in the community offering, in whole or in part, at the time of receipt or at any
time prior to completion of the offering. If you are ordering shares, you must
represent that you are purchasing shares for your own account and that you have
no agreement or understanding with any person for the sale or transfer of the
shares. Our interpretation of the terms and conditions of the plan of conversion
and reorganization and of the acceptability of the order forms will be final.
By signing the order form, you will be acknowledging that the common stock
is not a deposit or savings account and is not federally insured or otherwise
guaranteed by Provident Bank or the federal government, and that you received a
copy of this prospectus. However, signing the order form will not result in you
waiving your rights under the Securities Act of 1933 or the Securities Exchange
Act of 1934.
PAYMENT FOR SHARES. Payment for all shares of common stock will be required
to accompany all completed order forms for the purchase to be valid. Payment for
shares may be made by:
(1) personal check, bank check or money order, made payable to Provident
Bancorp, Inc.; or
(2) authorization of withdrawal from Provident Bank deposit accounts
designated on the stock order form.
Appropriate means for designating withdrawals from deposit accounts at
Provident Bank are provided in the order forms. The funds designated must be
available in the account(s) at the time the order form is received. A hold will
be placed on these funds, making them unavailable to the depositor. Funds
authorized for withdrawal will continue to earn interest within the account at
the contract rate until the offering is completed, at which time the designated
withdrawal will be made. Interest penalties for early withdrawal applicable to
certificate accounts will not apply to withdrawals authorized for the purchase
of shares of common stock; however, if a withdrawal results in a certificate
account with a balance less than the applicable minimum balance requirement, the
certificate will be canceled at the time of withdrawal without penalty and the
remaining balance will earn interest at the current passbook rate subsequent to
the withdrawal. In the case of payments made by check or money order, these
funds must be available in the account(s) and will be immediately cashed and
placed in a segregated account at Provident Bank and will earn interest at
Provident Bank's passbook savings rate from the date payment is received until
the offering is completed or terminated.
You may not remit Provident Bank line of credit checks or third party
checks. Additionally, you may not designate a direct withdrawal from Provident
Bank accounts with check-writing privileges. Please provide a check instead,
because we cannot place holds on checking accounts. If you request that we do
so, we reserve the right to interpret that as your authorization to treat those
funds as if we had received a check for the designated amount, and we will
immediately withdraw the amount from your checking account. Once we receive your
executed order form, it may not be modified, amended or rescinded without our
consent, unless the offering is not completed by the expiration date, in which
event purchasers may be given the opportunity to increase, decrease or rescind
their orders for a specified period of time.
If you are interested in using your individual retirement account funds to
purchase shares of common stock, you must do so through a self-directed
individual retirement account such as a brokerage firm individual retirement
account or those offered by Provident Bank's Investment Management and Trust
Department. By regulation, Provident Bank's individual retirement accounts that
were not
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established through our Investment Management and Trust Department are not
self-directed, so they cannot be invested in our shares of common stock.
Therefore, if you wish to use your funds that are currently in a Provident Bank
individual retirement account, you may not designate on the order form that you
wish funds to be withdrawn from the account for the purchase of common stock.
The funds you wish to use for the purchase of common stock will have to be
transferred to a brokerage account or Provident Bank's Investment Management and
Trust Department. There will be no early withdrawal or Internal Revenue Service
interest penalties for these transfers. Depositors interested in using funds in
an individual retirement account or any other retirement account to purchase
shares of common stock should contact our Stock Information Center as soon as
possible, preferably at least two weeks prior to the end of the offering period,
because processing such transactions takes additional time, and whether such
funds can be used may depend on limitations imposed by the institutions where
such funds are currently held. We cannot guarantee that you will be able to use
such funds.
Provident Bancorp shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with the legally
binding commitment for payment and to thereafter pay for the shares of common
stock for which they subscribe in the community offering at any time prior to 48
hours before the completion of the reorganization. This payment may be made by
wire transfer.
If our employee stock benefit plans purchase shares in the offering, they
will not be required to pay for such shares until consummation of the offering,
provided there is a loan commitment from an unrelated financial institution or
Provident Bancorp to lend to the employee stock ownership plan the necessary
amount to fund the purchase.
Regulations prohibit Provident Bank from lending funds or extending credit
to any persons to purchase shares of common stock in the offering.
DELIVERY OF STOCK CERTIFICATES. Certificates representing shares of common
stock issued in the offering and Provident Bank checks representing any
applicable refund and/or interest paid on subscriptions made by check or money
order will be mailed to the persons entitled thereto at the certificate
registration address noted on the order form, as soon as practicable following
consummation of the offering and receipt of all necessary regulatory approvals.
Any certificates returned as undeliverable will be held by the transfer agent
until claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. UNTIL CERTIFICATES FOR THE COMMON STOCK ARE
AVAILABLE AND DELIVERED TO PURCHASERS, PURCHASERS MAY NOT BE ABLE TO SELL THE
SHARES OF COMMON STOCK WHICH THEY ORDERED, EVEN THOUGH THE COMMON STOCK WILL
HAVE BEGUN TRADING.
OTHER RESTRICTIONS. Notwithstanding any other provision of the plan of
conversion and reorganization, no person is entitled to purchase any shares of
common stock to the extent the purchase would be illegal under any federal or
state law or regulation, including state "blue sky" registrations, or would
violate regulations or policies of the National Association of Securities
Dealers, Inc., particularly those regarding free riding and withholding. We may
ask for an acceptable legal opinion from any purchaser as to the legality of his
or her purchase and we may refuse to honor any purchase order if an opinion is
not timely furnished. In addition, we are not required to offer shares of common
stock to any person who resides in a foreign country.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
OFFICE OF THRIFT SUPERVISION REGULATIONS PROHIBIT ANY PERSON WITH
SUBSCRIPTION RIGHTS, INCLUDING THE ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL
ELIGIBLE ACCOUNT HOLDERS AND OTHER MEMBERS, FROM TRANSFERRING OR ENTERING INTO
ANY AGREEMENT OR UNDERSTANDING TO TRANSFER THE LEGAL
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OR BENEFICIAL OWNERSHIP OF THE SUBSCRIPTION RIGHTS ISSUED UNDER THE PLAN OF
CONVERSION AND REORGANIZATION OR THE SHARES OF COMMON STOCK TO BE ISSUED UPON
THEIR EXERCISE. THESE RIGHTS MAY BE EXERCISED ONLY BY THE PERSON TO WHOM THEY
ARE GRANTED AND ONLY FOR HIS OR HER ACCOUNT. EACH PERSON EXERCISING SUBSCRIPTION
RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE IS PURCHASING SHARES SOLELY
FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING
REGARDING THE SALE OR TRANSFER OF SUCH SHARES. THE REGULATIONS ALSO PROHIBIT ANY
PERSON FROM OFFERING OR MAKING AN ANNOUNCEMENT OF AN OFFER OR INTENT TO MAKE AN
OFFER TO PURCHASE SUBSCRIPTION RIGHTS OR SHARES OF COMMON STOCK TO BE ISSUED
UPON THEIR EXERCISE PRIOR TO COMPLETION OF THE OFFERING.
WE WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT WE
BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS, AND WE WILL NOT HONOR
ORDERS THAT WE BELIEVE INVOLVE THE TRANSFER OF SUBSCRIPTION RIGHTS.
STOCK INFORMATION CENTER
If you have any questions regarding the offering, please call our Stock
Information Center, toll free, at 1-(866) 680-PROV, from 9:00 a.m. to 4:30 p.m.,
New York Time, Monday through Friday. The Stock Information Center is located at
Provident Bancorp's headquarters, 400 Rella Boulevard, Montebello, New York. The
Stock Information Center will be closed weekends and bank holidays.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of Provident Bancorp prior
to the conversion, all claims of creditors of Provident Bancorp, including those
of depositors of Provident Bank (to the extent of their deposit balances), would
be paid first. Thereafter, if there were any assets of Provident Bancorp
remaining, these assets would be distributed to stockholders, including
Provident Bancorp, MHC. In the unlikely event that Provident Bancorp, MHC and
Provident Bancorp liquidated prior to the conversion, all claims of creditors
would be paid first. Then, if there were any assets of Provident Bancorp, MHC
remaining, members of Provident Bancorp, MHC would receive those remaining
assets, pro rata, based upon the deposit balances in their deposit account in
Provident Bank immediately prior to liquidation. In the unlikely event that
Provident Bank were to liquidate after the conversion, all claims of creditors,
including those of depositors, would be paid first, followed by distribution of
the "liquidation account" to certain depositors, with any assets remaining
thereafter distributed to Provident Bancorp as the holder of Provident Bank
capital stock. Pursuant to the rules and regulations of the Office of Thrift
Supervision, a post-conversion merger, consolidation, sale of bulk assets or
similar combination or transaction with another insured savings institution
would not be considered a liquidation and, in these types of transactions, the
liquidation account would be assumed by the surviving institution.
The plan of conversion and reorganization provides for the establishment,
upon the completion of the conversion, of a special "liquidation account" for
the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders in an amount equal to the greater of:
(1) Provident Bancorp, MHC's ownership interest in the retained earnings
of Provident Bancorp as of the date of its latest balance sheet
contained in this prospectus; or
(2) the retained earnings of Provident Bank at the time that Provident
Bank reorganized into Provident Bancorp, MHC on January 7, 1999.
The purpose of the liquidation account is to provide Eligible Account
Holders and Supplemental Eligible Account Holders who maintain their deposit
accounts with Provident Bank after the conversion
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with a liquidation interest in the unlikely event of the complete liquidation of
Provident Bank after the conversion. Each Eligible Account Holder and
Supplemental Eligible Account Holder that continues to maintain his or her
deposit account at Provident Bank, would be entitled, on a complete liquidation
of Provident Bank after the conversion, to an interest in the liquidation
account prior to any payment to the stockholders of Provident Bancorp. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in the liquidation account for each deposit account, including
savings accounts, transaction accounts such as negotiable order of withdrawal
accounts, money market deposit accounts, and certificates of deposit, with a
balance of $50 or more held in Provident Bank on June 30, 2002, or September 30,
2003. Each Eligible Account Holder and Supplemental Eligible Account Holder
would have a pro rata interest in the total liquidation account for each such
deposit account, based on the proportion that the balance of each such deposit
account on June 30, 2002, or September 30, 2003 bears to the balance of all
deposit accounts in Provident Bank on such dates.
If, however, on any December 31 annual closing date commencing after the
effective date of the conversion, the amount in any such deposit account is less
than the amount in the deposit account on June 30, 2002 or September 30, 2003 or
any other annual closing date, then the interest in the liquidation account
relating to such deposit account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Payment pursuant to liquidation rights of Eligible Account Holders and
Supplemental Eligible Account Holders would be separate and apart from the
payment of any insured deposit accounts to such depositor. Any assets remaining
after the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to Provident Bancorp
as the sole stockholder of Provident Bank.
TAX ASPECTS
Consummation of the conversion is subject to the prior receipt of an
opinion of counsel or tax advisor with respect to federal and state income
taxation that the conversion will not be a taxable transaction to Provident
Bancorp, MHC, Provident Bancorp, Provident Bank, Eligible Account Holders,
Supplemental Eligible Account Holders, and other members of Provident Bancorp,
MHC. Unlike private letter rulings, opinions of counsel or tax advisors are not
binding on the Internal Revenue Service or any state taxing authority, and such
authorities may disagree with such opinions. In the event of such disagreement,
there can be no assurance that Provident Bancorp or Provident Bank would prevail
in a judicial proceeding.
Provident Bancorp, MHC and Provident Bancorp have received an opinion of
counsel, Luse Gorman Pomerenk & Schick, P.C., regarding all of the material
federal income tax consequences of the conversion, which includes the following:
1. The conversion of Provident Bancorp to a federally chartered interim
stock savings bank will qualify as a tax-free reorganization within
the meaning of Section 368(a)(1)(F) of the Internal Revenue Code, and
the merger of Provident Bancorp with and into Provident Bank qualifies
as a tax-free reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code.
2. Neither Provident Bancorp, Provident Bank, nor the stockholders of
Provident Bancorp will recognize any gain or loss upon the transfer of
assets of Provident Bancorp to Provident Bank in exchange for shares
of common stock of Provident Bank, which will
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be constructively received by Provident Bancorp's stockholders.
(Sections 361 and 1032(a) of the Internal Revenue Code.)
3. The basis of the assets of Provident Bancorp and the holding period of
such assets to be received by Provident Bank will be the same as the
basis and holding period in such assets in the hands of Provident
Bancorp immediately before the exchange. (Sections 362(b) and 1223(2)
of the Internal Revenue Code).
4. The conversion of Provident Bancorp, MHC, to a federally chartered
interim stock savings bank will qualify as a tax-free reorganization
within the meaning of Section 368(a)(1)(F) of the Internal Revenue
Code and the merger of Provident Bancorp, MHC with and into Provident
Bank qualifies as a tax-free reorganization within the meaning of
Section 368(a)(1)(A) of the Internal Revenue Code.
5. The exchange of Eligible Account Holders' and Supplemental Account
Holders' interests in Provident Bancorp, MHC for interests in a
liquidation account established in Provident Bank will satisfy the
continuity of interest requirement of Section 1.368-1(b) of the
Federal Income Tax Regulations.
6. None of Provident Bancorp, MHC, Provident Bancorp, Provident Bank nor
eligible account holders, supplemental eligible account holders or
other members will recognize any gain or loss on the transfer of the
assets of Provident Bancorp, MHC to Provident Bank in exchange for an
interest in a liquidation account established in Provident Bank for
the benefit of eligible account holders and supplemental eligible
account holders who remain depositors of Provident Bank.
7. Current stockholders of Provident Bancorp will not recognize any gain
or loss upon their constructive exchange of Provident Bancorp common
stock for shares of Provident Bank which will in turn be exchanged for
new shares of Provident Bancorp common stock.
8. Each stockholder's aggregate basis in new shares of Provident Bancorp
common stock (including fractional share interests) received in the
exchange will be the same as the aggregate basis of Provident Bancorp
common stock surrendered in exchange therefor.
9. Each stockholder's holding period in his or her Provident Bancorp
common stock received in the exchange will include the period during
which Provident Bancorp common stock surrendered was held, provided
that the Provident Bancorp common stock surrendered is a capital asset
in the hands of the stockholder on the date of the exchange.
10. Cash received by any current stockholder of Provident Bancorp in lieu
of a fractional share interest in new shares of Provident Bancorp
common stock will be treated as having been received as a distribution
in full payment in exchange for a fractional share interest of new
Provident Bancorp common stock, which such stockholder would otherwise
be entitled to receive. Accordingly, a stockholder will recognize gain
or loss equal to the difference between the cash received and the
basis of the fractional share. If the common stock is held by the
stockholder as a capital asset, the gain or loss will be capital gain
or loss.
11. Assuming that nontransferable subscription rights have no value, no
gain or loss will be recognized by eligible account holders,
supplemental eligible account holders or other
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members upon distribution to them of nontransferable subscription
rights to purchase shares of Provident Bancorp common stock, provided
that the amount to be paid for Provident Bancorp common stock is equal
to the fair market value of Provident Bancorp common stock.
12. The basis of the shares of Provident Bancorp common stock purchased in
the offering will be its purchase price. The holding period of the
Provident Bancorp common stock purchased pursuant to the exercise of
nontransferable subscription rights will commence on the date on which
the right to acquire such stock was exercised.
13. No gain or loss will be recognized by Provident Bancorp on the receipt
of money in exchange for Provident Bancorp common stock sold in the
offering.
In the view of RP Financial, LC., which view is not binding on the Internal
Revenue Service, the subscription rights do not have any value, based on the
fact that these rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the common stock at a price equal to its estimated fair market
value, which will be the same price as the subscription price for the
unsubscribed shares of common stock. If the subscription rights granted to
eligible account holders and supplemental eligible account holders are deemed to
have an ascertainable value, receipt of these rights could result in taxable
gain to those eligible account holders and supplemental eligible account holders
who exercise the subscription rights in an amount equal to the value and
Provident Bancorp could recognize gain on a distribution. Eligible account
holders and supplemental eligible account holders are encouraged to consult with
their own tax advisors as to the tax consequences in the event that subscription
rights are deemed to have an ascertainable value.
Unlike private letter rulings, an opinion of counsel is not binding on the
Internal Revenue Service and the Internal Revenue Service could disagree with
the conclusions reached therein. Depending on the conclusion or conclusions with
which the Internal Revenue Service disagrees, the Internal Revenue Service may
take the position that the transaction is taxable to any one or more of
Provident Bancorp, MHC and/or the members of Provident Bancorp, MHC, Provident
Bancorp, the public stockholders of Provident Bancorp, and/or the eligible
account holders and supplemental eligible account holders who exercise their
subscription rights. In the event of a disagreement, there can be no assurance
that the Internal Revenue Service would not prevail in a judicial or
administrative proceeding.
The federal tax opinion has been filed with the Securities and Exchange
Commission as an exhibit to Provident Bancorp's registration statement. Advice
regarding the New York state income tax consequences consistent with the federal
tax opinion has been issued by KPMG LLP, tax advisors to Provident Bancorp, MHC
and Provident Bancorp.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF OUR SHARES AFTER CONVERSION
All shares of common stock purchased in the offering by a director or an
executive officer of Provident Bank generally may not be sold for a period of
one year following the closing of the conversion, except in the event of the
death of the director or executive officer. Each certificate for restricted
shares will bear a legend giving notice of this restriction on transfer, and
instructions will be issued to the effect that any transfer within this time
period of any certificate or record ownership of the shares other than as
provided above is a violation of the restriction. Any shares of common stock
issued at a later date as a stock dividend, stock split, or otherwise, with
respect to the restricted stock will be similarly restricted. The directors and
executive officers of Provident Bancorp also will be restricted by the insider
trading rules promulgated pursuant to the Securities Exchange Act of 1934.
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Purchases of shares of our common stock by any of our directors, executive
officers and their associates, during the three-year period following the
closing of the conversion may be made only through a broker or dealer registered
with the Securities and Exchange Commission, except with the prior written
approval of the Office of Thrift Supervision. This restriction does not apply,
however, to negotiated transactions involving more than 1% of our outstanding
common stock or to purchases of our common stock by our stock option plan or any
of our tax-qualified employee stock benefit plans or nontax-qualified employee
stock benefit plans, including any recognition and retention plans or restricted
stock plans.
Office of Thrift Supervision regulations prohibit Provident Bancorp from
repurchasing its common stock during the first year following conversion unless
compelling business reasons exist for such repurchases. After one year, the
Office of Thrift Supervision does not impose any repurchase restrictions.
PROVIDENT BANK CHARITABLE FOUNDATION
GENERAL
In furtherance of our commitment to our local community, the plan of
conversion provides that we will establish the Provident Bank Charitable
Foundation as a non-stock, nonprofit Delaware corporation in connection with the
conversion. The charitable foundation will be funded with cash and shares of
Provident Bancorp, Inc. common stock, as further described below. By further
enhancing our visibility and reputation in our local community, we believe that
the charitable foundation will enhance the long-term value of Provident Bank's
community banking franchise. The conversion presents us with a unique
opportunity to provide a substantial and continuing benefit to our community and
to receive the associated tax benefits.
PURPOSE OF THE CHARITABLE FOUNDATION
The purpose of the charitable foundation is to enhance the relationship
between Provident Bank and the communities in which it operates and to enable
the communities to share in our long-term growth. The Provident Bank Charitable
Foundation will be dedicated completely to community activities and the
promotion of charitable causes, and may be able to support such activities in
manners that are not presently available to us. We believe that the Provident
Bank Charitable Foundation will enable us to assist the communities within our
market area in areas beyond community development and lending and will enhance
our current activities under the Community Reinvestment Act. Provident Bank
received an "Outstanding" rating in its last Community Reinvestment Act
examination by the Office of Thrift Supervision.
We further believe that the funding of the Provident Bank Charitable
Foundation with cash and shares of Provident Bancorp common stock will allow our
community to share in the potential growth and success of Provident Bank long
after the conversion. The Provident Bank Charitable Foundation will accomplish
that goal by providing for continued ties between it and Provident Bank, thereby
forming a partnership within the communities in which Provident Bank operates
and surrounding marketing areas.
We do not expect the contribution to Provident Bank Charitable Foundation
to take the place of our traditional community lending and charitable
activities. For the nine months ended June 30, 2003, Provident Bank contributed
$131,000 to various organizations. We expect to continue making charitable
contributions within our community. In connection with the closing of the
conversion, Provident
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Bancorp intends to issue 400,000 shares of common stock to the Provident Bank
Charitable Foundation and contribute $1.0 million in cash to the charitable
foundation.
STRUCTURE OF THE CHARITABLE FOUNDATION
The Provident Bank Charitable Foundation will be incorporated under
Delaware law as a non-stock, nonprofit corporation. The certificate of
incorporation of the Provident Bank Charitable Foundation will provide that the
corporation is organized exclusively for charitable purposes as set forth in
Section 501(c)(3) of the Internal Revenue Code. The Provident Bank Charitable
Foundation's certificate of incorporation will further provide that no part of
the net earnings of the charitable foundation will inure to the benefit of, or
be distributable to, its directors, officers or members.
We have selected George Strayton, Donald T. McNelis and Rita Champ to serve
on the initial board of directors of the charitable foundation. As required by
Office of Thrift Supervision regulations, we also will select one additional
person to serve on the initial board of directors who will not be one of our
officers or directors and who will have experience with local charitable
organizations and grant making. While there are no plans to change the size of
the initial board of directors during the year following the completion of the
conversion, following the first anniversary of the conversion, the foundation
may alter the size of and composition of its board of directors. For five years
after the conversion, one seat on the foundation's board of directors will be
reserved for a person from our local community who has experience with local
community charitable organizations and grant making and who is not one of our
officers, directors or employees, and one seat on the foundation's board of
directors will be reserved for one of Provident Bank's directors.
The business experience of Mr. Strayton and Dr. McNelis is described in
"Management of Provident Bancorp." The business experience of Ms. Champ is as
follows:
RITA CHAMP is Provident Bank's Vice President, Director of Marketing, and
has been employed by Provident Bank since August 2001. Prior to joining
Provident Bank, Ms. Champ was Senior Vice-President, General Manager for the
North and South American Financial Services Division of ICL, Ltd, a subsidiary
of Fujitsu Limited.
The board of directors of the Provident Bank Charitable Foundation will be
responsible for establishing its grant and donation policies, consistent with
the purposes for which it was established. As directors of a nonprofit
corporation, directors of the Provident Bank Charitable Foundation will at all
times be bound by their fiduciary duty to advance the charitable foundation's
charitable goals, to protect its assets and to act in a manner consistent with
the charitable purposes for which the charitable foundation is established. The
directors of the Provident Bank Charitable Foundation also will be responsible
for directing the activities of the charitable foundation, including the
management and voting of the shares of common stock of Provident Bank held by
the charitable foundation. However, as required by Office of Thrift Supervision
regulations, all shares of common stock held by the Provident Bank Charitable
Foundation must be voted in the same ratio as all other shares of the common
stock on all proposals considered by stockholders of Provident Bancorp.
The Provident Bank Charitable Foundation's place of business will be
located at our administrative offices. The board of directors of the Provident
Bank Charitable Foundation will appoint such officers and employees as may be
necessary to manage its operations. To the extent applicable, we will comply
with the affiliates restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act and the Office of Thrift Supervision regulations governing
transactions between Provident Bank and the foundation.
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The Provident Bank Charitable Foundation will receive working capital from:
(1) any dividends that may be paid on Provident Bancorp's shares of common
stock in the future;
(2) within the limits of applicable federal and state laws, loans
collateralized by the shares of common stock; or
(3) the proceeds of the sale of any of the shares of common stock in the
open market from time to time.
As a private foundation under Section 501(c)(3) of the Internal Revenue
Code, the Provident Bank Charitable Foundation will be required to distribute
annually in grants or donations a minimum of 5% of the average fair market value
of its net investment assets. Legislation has been introduced that, if enacted,
could have the impact of increasing the charitable foundation's required annual
distribution in grants or donations. One of the conditions imposed on the gift
of common stock is that the amount of common stock that may be sold by the
Provident Bank Charitable Foundation in any one year shall not exceed 5% of the
average market value of the assets held by the Provident Bank Charitable
Foundation, except where the board of directors of the charitable foundation
determines that the failure to sell an amount of common stock greater than such
amount would result in a long-term reduction of the value of its assets and/or
would otherwise jeopardize its capacity to carry out its charitable purposes.
TAX CONSIDERATIONS
Our independent tax advisor, Luse Gorman Pomerenk & Schick, P.C., has
advised us that an organization created for the above purposes should qualify as
a Section 501(c)(3) exempt organization under the Internal Revenue Code and
should be classified as a private foundation. The Provident Bank Charitable
Foundation will submit a timely request to the Internal Revenue Service to be
recognized as an exempt organization. As long as the Provident Bank Charitable
Foundation files its application for tax-exempt status within 15 months from the
date of its organization, and provided the Internal Revenue Service approves the
application, its effective date as a Section 501(c)(3) organization will be the
date of its organization. Our independent tax advisor, however, has not rendered
any advice on whether the Provident Bank Charitable Foundation's tax exempt
status will be affected by the regulatory requirement that all shares of common
stock of Provident Bancorp held by the Provident Bank Charitable Foundation must
be voted in the same ratio as all other outstanding shares of common stock of
Provident Bancorp on all proposals considered by stockholders of Provident
Bancorp.
Provident Bank is authorized by federal law to make charitable
contributions. We believe that the conversion presents a unique opportunity to
establish and fund a charitable foundation given the substantial amount of
additional capital being raised. In making such a determination, we considered
the dilutive impact to our stockholders of the contribution of shares of common
stock to the Provident Bank Charitable Foundation. We believe that the
contribution to the Provident Bank Charitable Foundation in excess of the 10%
annual limitation on charitable deductions described below is justified given
Provident Bank's capital position and its earnings, the substantial additional
capital being raised in the conversion and the potential benefits of the
Provident Bank Charitable Foundation to our community. See "Capitalization,"
"Historical and Pro Forma Regulatory Capital Compliance, and "Comparison of
Valuation and Pro Forma Information With and Without the Foundation." The amount
of the contribution will not adversely affect our financial condition. We
therefore believe that the amount of the charitable contribution is reasonable
given our pro forma capital position, and it does not raise safety and soundness
concerns.
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We have received an opinion from our independent tax advisor that Provident
Bancorp's contribution of its shares of stock to the Provident Bank Charitable
Foundation should not constitute an act of self-dealing and that we should be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution less the nominal amount that the Provident Bank
Charitable Foundation is required to pay Provident Bancorp for such stock. We
are permitted to deduct only an amount equal to 10% of our annual taxable income
in any one year. We are permitted under the Internal Revenue Code to carry the
excess contribution over the five-year period following the contribution to the
Provident Bank Charitable Foundation. We estimate that substantially all of the
contribution should be deductible over the six-year period. However, we do not
have any assurance that the Internal Revenue Service will grant tax-exempt
status to the charitable foundation. Furthermore, even if the contribution is
deductible, we may not have sufficient earnings to be able to use the deduction
in full. We do not expect to make any further contributions to the Provident
Bank Charitable Foundation within the first five years following the initial
contribution, unless such contributions would be deductible under the Internal
Revenue Code. Any such decisions would be based on an assessment of, among other
factors, our financial condition at that time, the interests of our stockholders
and depositors, and the financial condition and operations of the foundation.
Although we have received an opinion from our independent tax advisor that
we should be entitled to a deduction for the charitable contribution, there can
be no assurances that the Internal Revenue Service will recognize the Provident
Bank Charitable Foundation as a Section 501(c)(3) exempt organization or that
the deduction will be permitted. In such event, our contribution to the
Provident Bank Charitable Foundation would be expensed without tax benefit,
resulting in a reduction in earnings in the year in which the Internal Revenue
Service makes such a determination.
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are exempt from federal and state income taxation.
However, investment income, such as interest, dividends and capital gains, is
generally taxed at a rate of 2.0%. Legislation has been introduced that, if
enacted, would reduce this rate to 1.0%. The Provident Bank Charitable
Foundation will be required to file an annual return with the Internal Revenue
Service within four and one-half months after the close of its fiscal year. The
Provident Bank Charitable Foundation will be required to make its annual return
available for public inspection. The annual return for a private foundation
includes, among other things, an itemized list of all grants made or approved,
showing the amount of each grant, the recipient, any relationship between a
grant recipient and the foundation's managers and a concise statement of the
purpose of each grant.
REGULATORY REQUIREMENTS IMPOSED ON THE CHARITABLE FOUNDATION
Office of Thrift Supervision regulations impose the following requirements
on the establishment of the charitable foundation:
o the Office of Thrift Supervision may examine the charitable foundation
at the foundation's expense;
o the charitable foundation must comply with all supervisory directives
imposed by the Office of Thrift Supervision;
o the charitable foundation must provide annually to the Office of
Thrift Supervision a copy of the annual report that the foundation
submits to the Internal Revenue Service;
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o the charitable foundation must operate according to written policies
adopted by its board of directors, including a conflict of interest
policy;
o the charitable foundation may not engage in self-dealing and must
comply with all laws necessary to maintain its tax-exempt status under
the Internal Revenue Code; and
o the charitable foundation must vote its shares in the same ratio as
all of the other shares voted on each proposal considered by the
stockholders of Provident Bancorp.
Within six months of completing the conversion, the Provident Bank
Charitable Foundation must submit to the Office of Thrift Supervision a
three-year operating plan.
Additionally, the establishment and funding of the Provident Bank
Charitable Foundation must be separately approved by:
o at least a majority of the total number of votes eligible to be cast
by members of Provident Bancorp, MHC at the special meeting of
members;
o at least two-thirds of the outstanding shares of common stock of
Provident Bancorp; and
o at least a majority of the outstanding shares of common stock of
Provident Bancorp, excluding those shares held by Provident Bancorp,
MHC.
Consummation of the conversion and the offering of common stock is not
conditioned upon member or stockholder approval of the charitable foundation.
Failure to approve the charitable foundation may, however, materially increase
the pro forma market value of Provident Bancorp. See "Comparison of Valuation
and Pro Forma Information With and Without the Foundation."
RESTRICTIONS ON ACQUISITION OF PROVIDENT BANCORP
Although the Board of Directors of Provident Bancorp is not aware of any
effort that might be made to obtain control of Provident Bancorp after the
conversion, the Board of Directors believes that it is appropriate to include
certain provisions as part of Provident Bancorp's certificate of incorporation
to protect the interests of Provident Bancorp and its stockholders from
takeovers which the Board of Directors of Provident Bancorp might conclude are
not in the best interests of Provident Bank, Provident Bancorp or Provident
Bancorp's stockholders.
The following discussion is a general summary of the material provisions of
Provident Bancorp's certificate of incorporation and bylaws, Provident Bank's
charter and bylaws and certain other regulatory provisions that may be deemed to
have an "anti-takeover" effect. The following description of certain of these
provisions is necessarily general and, with respect to provisions contained in
Provident Bancorp's certificate of incorporation and bylaws and Provident Bank's
stock charter and bylaws, reference should be made in each case to the document
in question, each of which is part of Provident Bancorp, MHC's application for
conversion with the Office of Thrift Supervision and Provident Bancorp's
registration statement filed with the Securities and Exchange Commission. See
"Where You Can Find Additional Information."
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PROVIDENT BANCORP'S CERTIFICATE OF INCORPORATION AND BYLAWS
Provident Bancorp's Delaware certificate of incorporation and bylaws
contain a number of provisions relating to corporate governance and rights of
stockholders that might discourage future takeover attempts. As a result,
stockholders who might desire to participate in such transactions may not have
an opportunity to do so. In addition, these provisions will also render the
removal of the Board of Directors or management of Provident Bancorp more
difficult.
The following description is a summary of the provisions of the certificate
of incorporation and bylaws. See "Where You Can Find Additional Information" as
to how to review a copy of these documents.
DIRECTORS. The Board of Directors will be divided into three classes. The
members of each class will be elected for a term of three years and only one
class of directors will be elected annually. Thus, it would take at least two
annual elections to replace a majority of Provident Bancorp's board of
directors. Further, the bylaws impose notice and information requirements in
connection with the nomination by stockholders of candidates for election to the
Board of Directors or the proposal by stockholders of business to be acted upon
at an annual meeting of stockholders.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The certificate of incorporation
and bylaws provide that special meetings of stockholders can be called only by
the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directorships. Stockholders are not authorized to
call a special meeting of stockholders.
PROHIBITION OF CUMULATIVE VOTING. The certificate of incorporation
prohibits cumulative voting for the election of Directors.
LIMITATION OF VOTING RIGHTS. The certificate of incorporation provides that
in no event will any person who beneficially owns more than 10% of the
then-outstanding shares of common stock, be entitled or permitted to vote any of
the shares of common stock held in excess of the 10% limit.
RESTRICTIONS ON REMOVING DIRECTORS FROM OFFICE. The certificate of
incorporation provides that directors may only be removed for cause, and only by
the affirmative vote of the holders of at least 80% of the voting power of all
of our then-outstanding common stock entitled to vote (after giving effect to
the limitation on voting rights discussed above in "--Limitation of Voting
Rights.")
AUTHORIZED BUT UNISSUED SHARES. After the conversion, Provident Bancorp
will have authorized but unissued shares of common and preferred stock. See
"Description of Capital Stock of Provident Bancorp Following the Conversion."
The certificate of incorporation authorizes 10,000,000 shares of serial
preferred stock. Provident Bancorp is authorized to issue preferred stock from
time to time in one or more series subject to applicable provisions of law, and
the Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
offering rights of such shares (which could be multiple or as a separate class).
In the event of a proposed merger, tender offer or other attempt to gain control
of Provident Bancorp that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
the transaction. An effect of the possible issuance of preferred stock,
therefore may be to deter a future attempt to gain control of Provident Bancorp.
The Board of Directors has no present plan or understanding to issue any
preferred stock.
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AMENDMENTS TO CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
certificate of incorporation must be approved by Provident Bancorp's Board of
Directors and also by a majority of the outstanding shares of Provident
Bancorp's voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required to amend the following
provisions:
(i) The limitation on voting rights of persons who directly or
indirectly beneficially own more than 10% of the outstanding shares
of common stock;
(ii) The inability of stockholders to act by written consent;
(iii) The inability of stockholders to call special meetings of
stockholders;
(iv) The division of the Board of Directors into three staggered classes;
(v) The ability of the Board of Directors to fill vacancies on the
board;
(vi) The inability to deviate from the manner prescribed in the bylaws by
which stockholders nominate directors and bring other business
before meetings of stockholders;
(vii) The requirement that at least 80% of stockholders must vote to
remove directors, and can only remove directors for cause;
(viii) The ability of the Board of Directors to amend and repeal the
bylaws; and
(ix) The ability of the Board of Directors to evaluate a variety of
factors in evaluating offers to purchase or otherwise acquire
Provident Bancorp.
The bylaws may be amended by the affirmative vote of a majority of the
directors of Provident Bancorp or the affirmative vote of at least 80% of the
total votes eligible to be voted at a duly constituted meeting of stockholders.
CONVERSION REGULATIONS
Office of Thrift Supervision regulations prohibit any person from making an
offer, announcing an intent to make an offer or participating in any other
arrangement to purchase stock or acquiring stock or subscription rights in a
converting institution or its holding company from another person prior to
completion of its conversion. Further, without the prior written approval of the
Office of Thrift Supervision, no person may make such an offer or announcement
of an offer to purchase shares or actually acquire shares in the converting
institution or its holding company for a period of three years from the date of
the completion of the conversion if, upon the completion of such offer,
announcement or acquisition, that person would become the beneficial owner of
more than 10% of the outstanding stock of the institution or its holding
company. The Office of Thrift Supervision has defined "person" to include any
individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to a bank or its holding company, or an underwriter or member of a
selling group acting on the converting institution's or its holding company's
behalf for resale to the general public are excepted. The regulation also
provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution or its holding company or who
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controls more than 10% of the outstanding shares or voting rights of a converted
institution or its holding company.
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings bank or its parent holding company unless the Office of
Thrift Supervision has been given 60 days' prior written notice and has not
issued a notice disapproving the proposed acquisition. In addition, Office of
Thrift Supervision regulations provide that no company may acquire control of a
savings bank without the prior approval of the Office of Thrift Supervision. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation by the Office of Thrift
Supervision.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings bank's
directors, or a determination by the Office of Thrift Supervision that the
acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings bank's voting stock, if
the acquiror is also subject to any one of eight "control factors," constitutes
a rebuttable determination of control under the regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the Office of Thrift
Supervision, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings bank's stock who do not intend to
participate in or seek to exercise control over a savings bank's management or
policies may qualify for a safe harbor by filing with the Office of Thrift
Supervision a certification form that states, among other things, that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the Office of Thrift Supervision, as applicable. There are also
rebuttable presumptions in the regulations concerning whether a group "acting in
concert" exists, including presumed action in concert among members of an
"immediate family."
The Office of Thrift Supervision may prohibit an acquisition of control if
it finds, among other things, that:
(1) the acquisition would result in a monopoly or substantially lessen
competition;
(2) the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
165
DESCRIPTION OF CAPITAL STOCK OF PROVIDENT BANCORP
FOLLOWING THE CONVERSION
GENERAL
At the effective date, Provident Bancorp will be authorized to issue
75,000,000 shares of common stock, par value of $0.01 per share, and 10,000,000
shares of preferred stock, par value $0.01 per share. Provident Bancorp
currently expects to issue in the offering up to 17,020,000 shares of common
stock, subject to adjustment, 400,000 shares to the Provident Bank Charitable
Foundation, and up to 13,632,477 shares, subject to adjustment, in exchange for
the publicly held shares of Provident Bancorp. Provident Bancorp will not issue
shares of preferred stock in the conversion. Each share of Provident Bancorp
common stock will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. Upon payment of the
subscription price for the common stock, in accordance with the plan of
conversion and reorganization, all of the shares of common stock will be duly
authorized, fully paid and nonassessable.
The common stock of Provident Bancorp will represent nonwithdrawable
capital, will not be an account of an insurable type, and will not be insured by
the Federal Deposit Insurance Corporation or any other government agency.
COMMON STOCK
DIVIDENDS. Provident Bancorp may pay dividends out of statutory surplus or
from net earnings if, as and when declared by its Board of Directors. The
payment of dividends by Provident Bancorp is subject to limitations that are
imposed by law and applicable regulation. The holders of common stock of
Provident Bancorp will be entitled to receive and share equally in dividends as
may be declared by the Board of Directors of Provident Bancorp out of funds
legally available therefor. If Provident Bancorp issues shares of preferred
stock, the holders thereof may have a priority over the holders of the common
stock with respect to dividends.
VOTING RIGHTS. Upon consummation of the conversion, the holders of common
stock of Provident Bancorp will have exclusive voting rights in Provident
Bancorp. They will elect Provident Bancorp's Board of Directors and act on other
matters as are required to be presented to them under Delaware law or as are
otherwise presented to them by the Board of Directors. Generally, each holder of
common stock will be entitled to one vote per share and will not have any right
to cumulate votes in the election of directors. Any person who beneficially owns
more than 10% of the then-outstanding shares of Provident Bancorp's common
stock, however, will not be entitled or permitted to vote any shares of common
stock held in excess of the 10% limit. If Provident Bancorp issues shares of
preferred stock, holders of the preferred stock may also possess voting rights.
Certain matters require an 80% stockholder vote.
As a federal stock savings association, corporate powers and control of
Provident Bank are vested in its Board of Directors, who elect the officers of
Provident Bank and who fill any vacancies on the Board of Directors. Voting
rights of Provident Bank are vested exclusively in the owners of the shares of
capital stock of Provident Bank, which will be Provident Bancorp, and voted at
the direction of Provident Bancorp's Board of Directors. Consequently, the
holders of the common stock of Provident Bancorp will not have direct control of
Provident Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
Provident Bank, Provident Bancorp, as the holder of 100% of Provident Bank's
capital stock, would be entitled to receive, after payment or provision for
payment of all debts and liabilities of Provident Bank, including all deposit
166
accounts and accrued interest thereon, and after distribution of the balance in
the liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of Provident Bank available for distribution. In the
event of liquidation, dissolution or winding up of Provident Bancorp, the
holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of
Provident Bancorp available for distribution. If preferred stock is issued, the
holders thereof may have a priority over the holders of the common stock in the
event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the common stock of Provident Bancorp will
not be entitled to preemptive rights with respect to any shares that may be
issued. The common stock is not subject to redemption.
PREFERRED STOCK
None of the shares of Provident Bancorp's authorized preferred stock will
be issued as part of the conversion. Preferred stock may be issued with
preferences and designations as our Board of Directors may from time to time
determine. Our Board of Directors may, without stockholder approval, issue
shares of preferred stock with voting, dividend, liquidation and conversion
rights that could dilute the voting strength of the holders of the common stock
and may assist management in impeding an unfriendly takeover or attempted change
in control.
TRANSFER AGENT
The transfer agent and registrar for Provident Bancorp's common stock is
Registrar and Transfer Company, Cranford, New Jersey.
EXPERTS
The consolidated financial statements of Provident Bancorp, Inc. as of
September 30, 2002 and 2001, and for each of the years in the three-year period
ended September 30, 2002, appearing elsewhere in this prospectus have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, which is included herein and
upon the authority of said firm as experts in accounting and auditing.
RP Financial, LC. has consented to the publication herein of the summary of
its report to Provident Bancorp setting forth its opinion as to the estimated
pro forma market value of the common stock upon completion of the conversion and
offering and its letter with respect to subscription rights.
LEGAL MATTERS
The legality of the common stock has been opined upon for Provident Bancorp
by Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to Provident
Bancorp. Certain legal matters will be passed upon for Ryan Beck & Co. by
Pitney, Hardin, Kipp & Szuch, LLP, Morristown, New Jersey.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Provident Bancorp has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 with respect to the
shares of common stock offered hereby. As permitted by the rules and regulations
of the Securities and Exchange Commission, this prospectus does not contain all
the information set forth in the registration statement. Such information,
including the
167
appraisal report which is an exhibit to the registration statement, can be
examined without charge at the public reference facilities of the Securities and
Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
The Securities and Exchange Commission telephone number is 1-800-SEC-0330. In
addition, the Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission, including Provident Bancorp. The statements
contained in this prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions of the material terms of, and should be read in conjunction
with, such contract or document.
Provident Bancorp, MHC has filed with the Office of Thrift Supervision an
Application on Form AC with respect to the conversion. This prospectus omits
certain information contained in the application. The application may be
examined at the principal office of the Office of Thrift Supervision, 1700 G
Street, N.W., Washington, D.C. 20552, and at the Northeast Regional Office of
the Office of Thrift Supervision, 10 Exchange Place, 18th Floor, Jersey City,
New Jersey 07302.
IN CONNECTION WITH THE OFFERING, PROVIDENT BANCORP WILL REGISTER ITS COMMON
STOCK UNDER SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 AND, UPON SUCH
REGISTRATION, PROVIDENT BANCORP AND THE HOLDERS OF ITS COMMON STOCK WILL BECOME
SUBJECT TO THE PROXY SOLICITATION RULES, REPORTING REQUIREMENTS AND RESTRICTIONS
ON COMMON STOCK PURCHASES AND SALES BY DIRECTORS, OFFICERS AND GREATER THAN 10%
STOCKHOLDERS, THE ANNUAL AND PERIODIC REPORTING AND CERTAIN OTHER REQUIREMENTS
OF THE SECURITIES EXCHANGE ACT OF 1934. UNDER THE PLAN OF CONVERSION AND
REORGANIZATION, PROVIDENT BANCORP HAS UNDERTAKEN THAT IT WILL NOT TERMINATE SUCH
REGISTRATION FOR A PERIOD OF AT LEAST THREE YEARS FOLLOWING THE STOCK OFFERING.
168
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Index of Consolidated Financial Statements
Page
Independent Auditors' Report F - 2
Consolidated Balance Sheets at September 30, 2002 and 2001 (audited) and at
June 30, 2003 (unaudited) F - 3
Consolidated Statements of Income for the years ended September 30, 2002,
2001, and 2000 (audited) and for the nine-month periods ended June 30, 2003
and 2002 (unaudited) F - 4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
September 30, 2002, 2001, and 2000 (audited) and for the nine-month period
ended June 30, 2003 (unaudited) F - 5
Consolidated Statements of Cash Flows for the years ended September 30, 2002,
2001, and 2000 (audited) and for the nine-month periods ended June 30, 2003
and 2002 (unaudited) F - 6
Notes to Consolidated Financial Statements F - 7
All schedules are omitted because the required information is not applicable or
is included in the consolidated financial statements and related notes.
F - 1
Independent Auditors' Report
The Board of Directors and Stockholders
Provident Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Provident Bancorp, Inc. and subsidiary (the Company) as of September 30, 2002
and 2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Provident Bancorp,
Inc. and subsidiary as of September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Stamford, Connecticut
October 25, 2002
F - 2
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
At September 30,
At June 30, -------------------------
2003 2002 2001
----------- ----------- ----------
(Unaudited)
Assets
Cash and due from banks $ 32,473 $ 35,093 $ 16,447
Federal funds sold 11,000 -- --
----------- ----------- ----------
Total cash and cash equivalents 43,473 35,093 16,447
Securities (including $40,317, $29,624 and $41,690 pledged as collateral for
borrowings at the respective dates):
Available for sale, at fair value (note 4) 251,913 206,146 163,928
Held to maturity, at amortized cost (fair value of $85,576,
$90,706 and $73,660 at the respective dates) (note 5) 82,787 86,791 71,355
----------- ----------- ----------
Total securities 334,700 292,937 235,283
----------- ----------- ----------
Loans held for sale 2,554 -- --
Loans (note 6):
One-to four-family residential mortgage loans 379,794 366,111 358,198
Commercial real estate, commercial business, and construction loans 232,563 221,669 180,179
Consumer loans 81,253 83,419 76,892
Allowance for loan losses (11,055) (10,383) (9,123)
----------- ----------- ----------
Total loans, net 682,555 660,816 606,146
----------- ----------- ----------
Accrued interest receivable, net (note 7) 4,427 5,491 5,597
Federal Home Loan Bank (FHLB) stock, at cost 5,819 5,348 5,521
Premises and equipment, net (note 8) 11,616 11,071 8,917
Goodwill (note 2) 13,540 13,540 --
Core deposit intangible, net (note 2) 1,156 1,501 --
Other assets (notes 6, 11, and 12) 14,858 1,904 3,349
----------- ----------- ----------
Total assets $ 1,114,698 $ 1,027,701 $ 881,260
=========== =========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $ 857,534 $ 799,626 $ 653,100
FHLB borrowings (note 10) 116,732 102,968 110,427
Mortgage escrow funds (note 6) 13,055 3,747 6,197
Other (note 11) 11,640 10,493 8,916
----------- ----------- ----------
Total liabilities 998,961 916,834 778,640
----------- ----------- ----------
Commitments and contingencies (notes 16 and 17)
Stockholders' equity (notes 1 and 15):
Preferred stock (par value $0.10 per share; 10,000,000 shares
authorized; None issued or outstanding) -- -- --
Common stock (par value $0.10 per share; 20,000,000 shares authorized;
8,280,000 shares issued; 7,953,075 shares, 7,997,512 shares,
and 8,024,166 shares outstanding at the respective dates) 828 828 828
Additional paid-in capital 37,252 36,696 36,535
Unallocated common stock held by employee stock ownership Plan
("ESOP") (note 12) (1,691) (1,974) (2,350)
Common stock awards under recognition and retention plan
("RRP") (note 12) (618) (1,108) (1,729)
Treasury stock, at cost (326,925 shares at June 30, 2003, 282,488
shares at September 30, 2002, and 255,834 shares at September 30,
2001) (note 15) (7,469) (5,874) (4,298)
Retained earnings 83,376 76,727 69,252
Accumulated other comprehensive income, net of taxes (note 13) 4,059 5,572 4,382
----------- ----------- ----------
Total stockholders' equity 115,737 110,867 102,620
----------- ----------- ----------
Total liabilities and stockholders' equity $ 1,114,698 $ 1,027,701 $ 881,260
=========== =========== ==========
See accompanying notes to consolidated financial statements.
F - 3
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Nine months ended
June 30, Years ended September 30,
----------------------- ------------------------------------
2003 2002 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(Unaudited)
Interest and dividend income:
Loans $ 33,199 $ 33,434 $ 44,967 $ 46,434 $ 45,043
Securities 10,224 10,546 14,496 13,916 13,268
Other earning assets 292 349 488 628 588
---------- ---------- ---------- ---------- ----------
Total interest and dividend income 43,715 44,329 59,951 60,978 58,899
---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits (note 9) 6,147 8,881 11,701 19,423 18,721
Borrowings 3,164 4,319 5,500 6,821 7,313
---------- ---------- ---------- ---------- ----------
Total interest expense 9,311 13,200 17,201 26,244 26,034
---------- ---------- ---------- ---------- ----------
Net interest income 34,404 31,129 42,750 34,734 32,865
Provision for loan losses (note 6) 800 600 900 1,440 1,710
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 33,604 30,529 41,850 33,294 31,155
---------- ---------- ---------- ---------- ----------
Non-interest income:
Banking fees and service charges 3,399 2,932 4,201 3,555 3,025
Net gain on sales of securities available for sale (note 4) 1,895 288 461 531 9
Net gain on sales of loans 836 92 146 -- 28
Other 1,058 540 593 620 329
---------- ---------- ---------- ---------- ----------
Total non-interest income 7,188 3,852 5,401 4,706 3,391
---------- ---------- ---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits (note 12) 15,109 12,227 17,246 14,129 13,509
Occupancy and office operations (note 17) 3,811 3,495 4,808 4,261 3,805
Advertising and promotion 1,289 1,030 1,470 1,507 1,096
Data processing 1,700 1,316 1,890 1,561 1,494
Consulting fees 628 256 415 320 376
Merger integration costs (note 2) -- 354 531 -- --
Amortization of intangible assets (notes 2 and 3) 345 150 286 359 1,625
Other 4,254 4,074 5,515 294 3,903
---------- ---------- ---------- ---------- ----------
Total non-interest expense 27,136 22,902 32,161 22,431 25,808
---------- ---------- ---------- ---------- ----------
Income before income tax expense 13,656 11,479 15,090 15,569 8,738
Income tax expense (note 11) 4,989 4,209 5,563 4,087 2,866
---------- ---------- ---------- ---------- ----------
Net income $ 8,667 $ 7,270 $ 9,527 $ 11,482 $ 5,872
========== ========== ========== ========== ==========
Earnings per common share (note 14):
Basic $ 1.12 $ 0.94 $ 1.24 $ 0.98 $ 0.76
Diluted 1.11 0.93 1.22 0.97 0.76
========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F - 4
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands, except per share data)
Additional Unallocated Common
Common paid-in ESOP stock awards
stock capital shares under RRP
---------- ---------- ----------- ------------
Balance at September 30, 1999 $ 828 $ 36,262 $ (3,102) $ --
Net income -- -- -- --
Other comprehensive income (note 13) -- -- -- --
Total comprehensive income
Cash dividends paid ($0.15 per common share) -- -- -- --
Purchases of treasury stock (202,200 shares) -- -- -- --
ESOP shares allocated or committed to be released for allocation -- 94 376 --
Awards of RRP shares -- -- -- (2,995)
Vesting of RRP shares -- -- -- 689
---------- ---------- ----------- ------------
Balance at September 30, 2000 828 36,356 (2,726) (2,306)
Net income -- -- -- --
Other comprehensive income (note 13) -- -- -- --
Total comprehensive income
Cash dividends paid ($0.22 per common share) -- -- -- --
Purchases of treasury stock (59,034 shares) -- -- -- --
ESOP shares allocated or committed to be released for allocation -- 179 376 --
Vesting of RRP shares -- -- -- 577
Stock option transactions -- -- -- --
---------- ---------- ----------- ------------
Balance at September 30, 2001 828 36,535 (2,350) (1,729)
Net income -- -- -- --
Other comprehensive income (note 13) -- -- -- --
Total comprehensive income
Cash dividends paid ($0.41 per common share) -- -- -- --
Purchases of treasury stock (69,317 shares) -- -- -- --
ESOP shares allocated or committed to be released for allocation -- 459 376 --
Vesting of RRP shares -- -- -- 621
Stock option and other equity transactions -- (298) -- --
---------- ---------- ----------- ------------
Balance at September 30, 2002 828 36,696 (1,974) (1,108)
Net income (unaudited) -- -- -- --
Other comprehensive loss (note 13) (unaudited) -- -- -- --
Total comprehensive income (unaudited)
Cash dividends paid ($0.42 per common share) (unaudited) -- -- -- --
Purchases of treasury stock (60,700 shares) (unaudited) -- -- -- --
ESOP shares allocated or committed to be released for
allocation (unaudited) -- 439 283 --
Vesting (forfeiture) of RRP shares (unaudited) -- -- -- 490
Stock option and other equity transactions (unaudited) -- 117 -- --
---------- ---------- ----------- ------------
Balance at June 30, 2003 (unaudited) $ 828 $ 37,252 $ (1,691) $ (618)
========== ========== =========== ============
Accumulated
other Total
Treasury Retained comprehensive stockholders'
stock earnings income (loss) equity
---------- ---------- ------------- -------------
Balance at September 30, 1999 $ -- $ 57,754 $ (1,443) $ 90,299
Net income -- 5,872 -- 5,872
Other comprehensive income (note 13) -- -- 903 903
-------------
Total comprehensive income 6,775
Cash dividends paid ($0.15 per common share) -- (1,049) -- (1,049)
Purchases of treasury stock (202,200 shares) (3,203) -- -- (3,203)
ESOP shares allocated or committed to be released for allocation -- -- -- 470
Awards of RRP shares -- -- -- (2,995)
Vesting of RRP shares -- -- -- 689
---------- ---------- ------------- -------------
Balance at September 30, 2000 (3,203) 62,577 (540) 90,986
Net income -- 7,482 -- 7,482
Other comprehensive income (note 13) -- -- 4,922 4,922
-------------
Total comprehensive income 12,404
Cash dividends paid ($0.22 per common share) -- (807) -- (807)
Purchases of treasury stock (59,034 shares) (1,155) -- -- (1,155)
ESOP shares allocated or committed to be released for allocation -- -- -- 555
Vesting of RRP shares -- -- -- 577
Stock option transactions 60 -- -- 60
---------- ---------- ------------- -------------
Balance at September 30, 2001 (4,298) 69,252 4,382 102,620
Net income -- 9,527 -- 9,527
Other comprehensive income (note 13) -- -- 1,190 1,190
-------------
Total comprehensive income 10,717
Cash dividends paid ($0.41 per common share) -- (1,935) -- (1,935)
Purchases of treasury stock (69,317 shares) (1,971) -- -- (1,971)
ESOP shares allocated or committed to be released for allocation -- -- -- 835
Vesting of RRP shares -- -- -- 621
Stock option and other equity transactions 395 (117) -- (20)
---------- ---------- ------------- -------------
Balance at September 30, 2002 (5,874) 76,727 5,572 110,867
Net income (unaudited) -- 8,667 -- 8,667
Other comprehensive loss (note 13) (unaudited) -- -- (1,513) (1,513)
-------------
Total comprehensive income (unaudited) 7,154
Cash dividends paid ($0.42 per common share) (unaudited) -- (1,871) -- (1,871)
Purchases of treasury stock (60,700 shares) (unaudited) (1,898) -- -- (1,898)
ESOP shares allocated or committed to be released for
allocation (unaudited) -- -- -- 722
Vesting (forfeiture) of RRP shares (unaudited) (96) -- -- 394
Stock option and other equity transactions (unaudited) 399 (147) -- 369
---------- ---------- ------------- -------------
Balance at June 30, 2003 (unaudited) $ (7,469) $ 83,376 $ 4,059 $ 115,737
========== ========== ============= =============
See accompanying notes to consolidated financial statements.
F - 5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine months ended
June 30,
------------------------
2003 2002
---------- ----------
(Unaudited)
Cash flows from operating activities:
Net income $ 8,667 $ 7,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 800 600
Depreciation and amortization of premises and equipment 1,456 1,345
Amortization of intangible assets 345 150
Net amortization of premiums and discounts on securities 796 274
ESOP and RRP expense 1,116 1,080
Originations of loans held for sale (34,997) (12,722)
Proceeds from sales of loans 33,279 12,004
Net gain on sales of securities available for sale (1,895) (288)
Net gain on sales of loans (836) (92)
Deferred income tax expense (benefit) 485 (928)
Net changes in accrued interest receivable and payable 920 100
Other adjustments (principally net changes in other
assets and other liabilities) 787 1,456
---------- ----------
Net cash provided by operating activities 10,923 10,249
---------- ----------
Cash flows from investing activities:
Purchases of securities:
Available for sale (128,102) (67,576)
Held to maturity (27,458) (34,480)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale 58,113 15,137
Held to maturity 31,255 16,120
Proceeds from sales of securities available for sale 22,979 52,961
Loan originations (278,856) (150,372)
Loan principal payments 256,183 129,906
Purchase of The National Bank of Florida, net of cash and cash equivalents
acquired -- (6,000)
Redemption (purchase) of FHLB stock (471) (866)
Purchase of bank owned life insurance (12,000) --
Purchases of premises and equipment (2,001) (2,012)
Proceeds from sales of other real estate owned 210 --
Other investing activities -- --
---------- ----------
Net cash used in investing activities (80,148) (47,182)
---------- ----------
Cash flows from financing activities:
Net deposits 57,933 55,780
Net increase (decrease) in borrowings 13,764 2,700
Net increase (decrease) in mortgage escrow funds 9,308 6,496
Treasury shares purchased (1,898) (775)
Stock option transactions 369 234
Shares purchased for RRP awards -- --
Cash dividends paid (1,871) (1,500)
---------- ----------
Net cash provided by financing activities 77,605 62,935
---------- ----------
Net increase in cash and cash equivalents 8,380 26,002
Cash and cash equivalents at beginning of year 35,093 16,447
---------- ----------
Cash and cash equivalents at end of year $ 43,473 $ 42,449
========== ==========
Supplemental information:
Interest payments $ 9,457 $ 13,395
Income tax payments 4,101 6,469
Securities transferred from available for sale to held to maturity -- --
Loans transferred to real estate owned 99 132
========== ==========
Acquisition of The National Bank of Florida, accounted for using the
purchase method:
Fair value of assets acquired $ -- $ 121,186
Fair value of liabilities assumed -- 93,086
---------- ----------
Cash paid for common stock $ -- $ 28,100
========== ==========
Years ended September 30,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 9,527 $ 7,482 $ 5,872
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900 1,440 1,710
Depreciation and amortization of premises and equipment 1,876 1,741 1,625
Amortization of intangible assets 286 359 1,625
Net amortization of premiums and discounts on securities 383 109 85
ESOP and RRP expense 1,456 1,132 1,159
Originations of loans held for sale (11,912) -- (361)
Proceeds from sales of loans 12,058 -- 808
Net gain on sales of securities available for sale (461) (531) (9)
Net gain on sales of loans (146) -- (28)
Deferred income tax expense (benefit) (1,172) 1,897 (642)
Net changes in accrued interest receivable and payable (428) (786) 992
Other adjustments (principally net changes in other
assets and other liabilities) 2,302 133 (612)
---------- ---------- ----------
Net cash provided by operating activities 14,669 12,976 12,224
---------- ---------- ----------
Cash flows from investing activities:
Purchases of securities:
Available for sale (73,491) (51,368) (35,746)
Held to maturity (34,411) (30,366) (4,710)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale 29,907 29,743 17,439
Held to maturity 22,083 19,396 12,869
Proceeds from sales of securities available for sale 56,049 17,291 6,010
Loan originations (202,483) (139,297) (135,467)
Loan principal payments 169,652 121,129 109,580
Purchase of The National Bank of Florida, net of cash and cash equivalents
acquired (6,000) -- --
Redemption (purchase) of FHLB stock 173 1,502 (847)
Purchase of bank owned life insurance -- -- --
Purchases of premises and equipment (2,382) (1,706) (2,345)
Proceeds from sales of other real estate owned -- -- --
Other investing activities -- 259 350
---------- ---------- ----------
Net cash used in investing activities (40,903) (33,417) (32,867)
---------- ---------- ----------
Cash flows from financing activities:
Net deposits 58,417 44,124 22,336
Net increase (decrease) in borrowings (7,459) (17,144) 9,818
Net increase (decrease) in mortgage escrow funds (2,450) 226 (4,518)
Treasury shares purchased (1,971) (1,155) (3,203)
Stock option transactions 278 60 --
Shares purchased for RRP awards -- (1,201) (1,794)
Cash dividends paid (1,935) (807) (1,049)
---------- ---------- ----------
Net cash provided by financing activities 44,880 24,103 21,590
---------- ---------- ----------
Net increase in cash and cash equivalents 18,646 3,662 947
Cash and cash equivalents at beginning of year 16,447 12,785 11,838
---------- ---------- ----------
Cash and cash equivalents at end of year $ 35,093 $ 16,447 $ 12,785
========== ========== ==========
Supplemental information:
Interest payments $ 17,735 $ 26,928 $ 25,382
Income tax payments 7,752 3,110 4,183
Securities transferred from available for sale to held to maturity -- 11,865 --
Loans transferred to real estate owned 132 218 154
========== ========== ==========
Acquisition of The National Bank of Florida, accounted for using the
purchase method:
Fair value of assets acquired $ 121,186 $ -- $ --
Fair value of liabilities assumed 93,086 -- --
---------- ---------- ----------
Cash paid for common stock $ 28,100 $ -- $ --
========== ========== ==========
See accompanying notes to consolidated financial statements.
F - 6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(1) Reorganization and Stock Offering
Initial Public Offering
On January 7, 1999, Provident Bank (the Bank) completed its
reorganization into a mutual holding company structure (the
Reorganization). As part of the Reorganization, the Bank converted from
a federally-chartered mutual savings bank to a federally-chartered stock
savings bank (the Conversion). The Bank became the wholly owned
subsidiary of Provident Bancorp, Inc., which became the majority-owned
subsidiary of Provident Bancorp, MHC (the Mutual Holding Company).
Collectively, Provident Bancorp, Inc. and the Bank are referred to
herein as "the Company".
Provident Bancorp, Inc. issued a total of 8,280,000 common shares on
January 7, 1999, consisting of 3,864,000 shares (or 46.67%) sold to the
public (the Offering) and 4,416,000 shares (or 53.33%) issued to the
Mutual Holding Company. The net proceeds from the sale of shares to the
public amounted to $37,113. Provident Bancorp, Inc. utilized net
proceeds of $24,000 to make a capital contribution to the Bank. The
Company's employee stock ownership plan (ESOP) purchased 309,120 shares
(or 8% of the number of shares sold in the Offering) in open market
transactions, during January and February 1999, at a total cost of
$3,760.
At September 30, 2002 and June 30, 2003, the Mutual Holding Company
owned 4,416,000 (or 55.22% and 55.53%) of the outstanding common shares
of Provident Bancorp, Inc. and the remaining 3,581,512 and 3,537,075
shares (or 44.78% and 44.47%), respectively, were owned by other
shareholders.
Second Step Conversion and Acquisition of E.N.B Holding Company, Inc.
On July 1, 2003, the respective Boards of Directors of Provident
Bancorp, Inc. and the Mutual Holding Company adopted a plan to convert
from the mutual holding company form of organization to a fully public
holding company structure. The Mutual Holding Company will merge into
the Bank, and will no longer exist. Provident Bancorp, Inc. will be
succeeded by a new Delaware corporation with the same name. Shares of
common stock of Provident Bancorp, Inc. representing the ownership
interest of the Mutual Holding Company will be offered for sale in a
subscription offering and a community offering, the net proceeds of
which will result in additional capital for Provident Bancorp, Inc.
Shares of common stock of Provident Bancorp, Inc. owned by public
shareholders (shareholders other than the Mutual Holding Company) will
be converted into the right to receive new shares of Provident Bancorp,
Inc. common stock determined pursuant to an exchange ratio. In
connection with the second step conversion, Provident Bancorp, Inc.
intends to establish a charitable foundation and contribute 4% of the
offering up to $5,000 to the foundation. A maximum of $1,000 will be
paid to the foundation with the remainder of the contribution being
contributed in shares. The charitable foundation is subject to the
approval of the majority of the members of the Mutual Holding Company
and two-thirds of the shareholders of Provident Bancorp, Inc. Except for
the effect of the issuance of shares to the charitable foundation, the
exchange ratio will ensure that immediately after the conversion and
exchange of existing shares of Provident Bancorp, Inc. for new shares,
the public shareholders will own the same aggregate percentage of new
Provident Bancorp, Inc. common stock that they owned immediately prior
to the conversion, excluding any shares purchased in the offering.
F - 7 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The plan of conversion provides for the establishment, upon the
completion of the conversion, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account
Holders (as those terms are defined in the plan of conversion) in an
amount equal to the greater of (i) the Mutual Holding Company's
ownership interest in the retained earnings of Provident Bancorp, Inc.
as of the date of its latest balance sheet contained in this prospectus,
or (ii) the retained earnings of the Bank at the time that the Bank
reorganized into the Mutual Holding Company in 1999. Each Eligible
Account Holder and Supplemental Eligible Account Holder that continues
to maintain his or her deposit account at the Bank would be entitled, in
the event of a complete liquidation of the Bank after the conversion, to
a pro rata interest in the liquidation account prior to any payment to
the stockholders of Provident Bancorp, Inc. The liquidation account will
be reduced annually on December 31 to the extent that Eligible Account
Holders and Supplemental Eligible Account Holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases
will not restore such account holder's interest in the liquidation
account. Subsequent to the conversion, the Bank may not pay cash
dividends or make other capital distributions if the effect thereof
would be to reduce its stockholder's equity below the amount of the
liquidation account.
The conversion and related transactions will be accounted for at
historical cost, with no resulting change in the historical carrying
amounts of assets and liabilities. Costs related to the offering will be
netted against the gross proceeds from the sale of common stock; if the
offering is not completed, the costs would be charged to expense. No
such costs had been incurred as of June 30, 2003.
At the time of the adoption of the plan of conversion and
reorganization, the Company entered into an agreement to acquire all of
the outstanding shares of common stock of E.N.B. Holding Company, Inc.
E.N.B. Holding Company, Inc. is a New York corporation that owns all of
the outstanding common stock of Ellenville National Bank. Stockholders
of E.N.B. Holding Company, Inc. will receive $4,830 for each share of
E.N.B. Holding Company common stock in the form of (i) cash; (ii) shares
of common stock of Provident Bancorp, Inc. a Delaware corporation
(valued at $10.00 per share); or (iii) a combination of cash and shares
of common stock, provided that the aggregate merger consideration to be
paid to all stockholders of E.N.B. Holding Company will consist of 50%
cash and 50% shares of Provident Bancorp common stock.
The conversion, stock offering and acquisition are expected to be
completed simultaneously in January 2004.
(2) Acquisition of The National Bank of Florida
On April 23, 2002, the Company consummated its acquisition of The
National Bank of Florida (NBF), which was merged with and into the Bank,
in an all-cash transaction. The Company acquired 100% of the outstanding
common stock of NBF for $28,100, pursuant to an Agreement and Plan of
Merger entered into during November 2001. The acquisition was made to
further the Company's strategic objective of expanding its retail and
commercial banking market share in Orange County, New York, where NBF
conducted its operations.
F - 8 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The NBF acquisition was accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations. Accordingly, the assets
acquired and liabilities assumed were recorded by the Company at their
fair values at the acquisition date. The total acquisition cost
(including direct transaction costs) exceeded the fair value of the net
assets acquired by $15,327. This amount was recognized as intangible
assets, consisting of goodwill of $13,540 (none of which is tax
deductible) and a core deposit intangible of $1,787.
The core deposit intangible represents the estimated value of acquired
depositor relationships, principally attributable to the relatively
low-cost funding provided by such deposits. Amortization expense for the
core deposit intangible was $286 for the period from the acquisition
date through September 30, 2002, representing the accumulated
amortization at that date and amortization expense was $345 for the nine
months ended June 30, 2003 and accumulated amortization at June 30, 2003
was $631. Scheduled core deposit amortization expense is $301 for fiscal
2004, $220 for fiscal 2005, $164 for fiscal 2006, $123 for fiscal 2007
and $255 for later years.
Costs incurred by the Company to integrate the operations of NBF into
the Bank amounted to $531 and are included in non-interest expense for
the year ended September 30, 2002.
The following is a summary of the fair values of the assets acquired and
liabilities assumed at the acquisition date (in thousands):
Assets acquired:
Cash and cash equivalents $ 24,286
Securities 55,809
Loans, net 23,112
Goodwill 13,540
Core deposit intangible 1,787
Other 2,652
----------
121,186
Liabilities assumed:
Deposits 88,182
Other 4,904
----------
93,086
----------
Cash paid for NBF common Stock $ 28,100
==========
Amounts attributable to NBF are included in the Company's consolidated
financial statements from the date of acquisition. Pro forma combined
operating results for the fiscal years ended September 30, 2002 and
2001, as if NBF had been acquired at the beginning of those periods,
have not been presented since the NBF acquisition would not materially
affect such results.
F - 9 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(3) Summary of Significant Accounting Policies
The Bank is a community bank offering financial services to individuals
and businesses primarily in Rockland County, New York and contiguous
areas such as Orange County, New York. The Bank's principal business is
accepting deposits and, together with funds generated from operations
and borrowings, investing in various types of loans and securities. The
Bank is a federally-chartered savings bank and its deposits are insured
up to applicable limits by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation (FDIC). The Office of Thrift
Supervision (OTS) is the primary regulator for the Bank, Provident
Bancorp, Inc. and the Mutual Holding Company.
(a) Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of
Provident Bancorp, Inc., the Bank, and the Bank's wholly owned
subsidiaries. These subsidiaries are (i) Provident Municipal
Bank (PMB) which is a limited-purpose, New York State-chartered
commercial bank formed to accept deposits from municipalities in
the Company's market area, (ii) Provident REIT, Inc. which is a
real estate investment trust that holds a portion of the
Company's real estate loans, (iii) Provest Services Corp. I
which has invested in a low-income housing partnership, and (iv)
Provest Services Corp. II which has engaged a third-party
provider to sell mutual funds and annuities to the Bank's
customers. Intercompany transactions and balances are eliminated
in consolidation. The accounts of the Mutual Holding Company are
not included in the consolidated financial statements.
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America. In preparing the consolidated
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ
significantly from these estimates. An estimate that is
particularly susceptible to significant near-term change is the
allowance for loan losses, which is discussed below.
Certain prior-year amounts have been reclassified to conform to
the current-year presentation. For purposes of reporting cash
flows, cash equivalents (if any) include highly-liquid,
short-term investments such as overnight federal funds.
(b) Securities
SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, requires entities to classify securities
among three categories - held to maturity, trading, and
available for sale. Management determines the appropriate
classification of the Company's securities at the time of
purchase.
Held-to-maturity securities are limited to debt securities for
which management has the intent and the Company has the ability
to hold to maturity. These securities are reported at amortized
cost.
F - 10 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
Trading securities are debt and equity securities held
principally for the purpose of selling them in the near term.
These securities are reported at fair value, with unrealized
gains and losses included in earnings. The Company does not
engage in security trading activities.
All other debt and marketable equity securities are classified
as available for sale. These securities are reported at fair
value, with unrealized gains and losses (net of the related
deferred income tax effect) excluded from earnings and reported
in a separate component of stockholders' equity (accumulated
other comprehensive income or loss). Available-for-sale
securities include securities that management intends to hold
for an indefinite period of time, such as securities to be used
as part of the Company's asset/liability management strategy or
securities that may be sold in response to changes in interest
rates, changes in prepayment risks, the need to increase
capital, or similar factors.
Premiums and discounts on debt securities are recognized in
interest income on a level-yield basis over the period to
maturity. The cost of securities sold is determined using the
specific identification method. Unrealized losses are charged to
earnings when management determines that the decline in fair
value of a security is other than temporary.
c) Loans
Loans (other than loans held for sale) are reported at amortized
cost less the allowance for loan losses. Mortgage loans
originated and held for sale in the secondary market (if any)
are reported at the lower of aggregate cost or estimated market
value. Market value is estimated based on outstanding investor
commitments or, in the absence of such commitments, based on
current investor yield requirements. Net unrealized losses, if
any, are recognized in a valuation allowance by a charge to
earnings.
A loan is placed on nonaccrual status when management has
determined that the borrower may be unable to meet contractual
principal or interest obligations, or when payments are 90 days
or more past due. Accrual of interest ceases and, in general,
uncollected past due interest (including interest applicable to
prior years, if any) is reversed and charged against current
interest income. Interest payments received on nonaccrual loans,
including impaired loans under SFAS No. 114, are not recognized
as income unless warranted based on the borrower's financial
condition and payment record.
The Company defers nonrefundable loan origination and commitment
fees, and certain direct loan origination costs, and amortizes
the net amount as an adjustment of the yield over the
contractual term of the loan. If a loan is prepaid or sold, the
net deferred amount is recognized in the statement of income at
that time.
(d) Allowance for Loan Losses
The allowance for loan losses is established through provisions
for losses charged to earnings. Losses on loans (including
impaired loans) are charged to the allowance for loan losses
when management believes that the collection of principal is
unlikely. Recoveries of loans previously charged-off are
credited to the allowance when realized.
F - 11 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The allowance for loan losses is an amount that management
believes is necessary to absorb probable losses on existing
loans that may become uncollectable, based on evaluations of the
collectability of the loans. Management's evaluations, which are
subject to periodic review by the OTS, take into consideration
factors such 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, results of regulatory
examinations, the identification of additional problem loans,
and other factors.
In accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, the Company considers a loan to be
impaired when, based on current information and events, it is
probable that it will be unable to collect all principal and
interest contractually due. SFAS No. 114 applies to loans that
are individually evaluated for collectability in accordance with
the Company's ongoing loan review procedures (principally
commercial real estate, commercial business and construction
loans). The standard does not generally apply to smaller-balance
homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and consumer
loans. Under SFAS No. 114, creditors are permitted to report
impaired loans based on one of three measures - the present
value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or
the fair value of the collateral if the loan is collateral
dependent. If the measure of an impaired loan is less than its
recorded investment, an impairment loss is recognized as part of
the allowance for loan losses.
(e) Mortgage Servicing Assets
The cost of an originated mortgage loan that is sold with
servicing retained is allocated between the loan and the
servicing right. The cost allocated to the retained servicing
right is capitalized as a separate asset and amortized
thereafter in proportion to, and over the period of, estimated
net servicing income. Capitalized mortgage servicing rights are
assessed for impairment based on the fair value of those rights,
and impairment losses are recognized in a valuation allowance by
charges to income.
(f) Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) of New York,
the Bank is required to hold a certain amount of FHLB stock.
This stock is a nonmarketable equity security under SFAS No. 115
and, accordingly, is reported at cost.
(g) Premises and Equipment
Premises and equipment are reported at cost, less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
related assets which range from 3 to 40 years. Leasehold
improvements are amortized on a straight-line basis over the
terms of the respective leases or the estimated useful lives of
the improvements,
F - 12 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
whichever is shorter. Routine holding costs are charged to
expense as incurred, while significant improvements are
capitalized.
(h) Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill recorded in the NBF acquisition is not
amortized to expense, but instead is evaluated for impairment at
least annually. The core deposit intangible recorded in the NBF
acquisition is amortized to expense using an accelerated method
over its estimated life of approximately nine years, and is
evaluated for impairment at least annually. Impairment losses on
intangible assets are charged to expense if and when they occur.
Core deposit intangibles recorded in the Company's 1996 branch
acquisitions became fully amortized during fiscal 2001, prior to
the effective date of SFAS No. 142. Amortization expense for
these intangible assets was $359 in fiscal 2001 and $1,625 in
fiscal 2000.
(i) Real Estate Owned
Real estate properties acquired through loan foreclosures are
recorded initially at estimated fair value less expected sales
costs, with any resulting writedown charged to the allowance for
loan losses. Subsequent valuations are performed by management,
and the carrying amount of a property is adjusted by a charge to
expense to reflect any subsequent declines in estimated fair
value. Fair value estimates are based on recent appraisals and
other available information. Routine holding costs are charged
to expense as incurred, while significant improvements are
capitalized. Gains and losses on sales of real estate owned are
recognized upon disposition.
(j) Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers
securities to a counterparty under an agreement to repurchase
the identical securities at a fixed price on a future date.
These agreements are accounted for as secured financing
transactions since the Company maintains effective control over
the transferred securities and the transfer meets other
specified criteria. Accordingly, the transaction proceeds are
recorded as borrowings and the underlying securities continue to
be carried in the Company's securities portfolio. Disclosure of
the pledged securities is made in the consolidated statements of
financial condition if the counterparty has the right by
contract to sell or repledge such collateral.
(k) Income Taxes
Deferred taxes are recognized for the estimated future tax
effects attributable to "temporary differences" between the
financial statement carrying amounts and the tax bases of
existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax laws
or rates is recognized in income tax expense in the period that
includes the enactment date of the change.
F - 13 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
A deferred tax liability is recognized for all temporary
differences that will result in future taxable income. A
deferred tax asset is recognized for all temporary differences
that will result in future tax deductions, subject to reduction
of the asset by a valuation allowance in certain circumstances.
This valuation allowance is recognized if, based on an analysis
of available evidence, management determines that it is more
likely than not that some portion or all of the deferred tax
asset will not be realized. The valuation allowance is subject
to ongoing adjustment based on changes in circumstances that
affect management's judgment about the realizability of the
deferred tax asset. Adjustments to increase or decrease the
valuation allowance are charged or credited, respectively, to
income tax expense.
(l) Interest Rate Cap Agreements
Interest rate cap agreements are accounted for in accordance
with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which the Company adopted as of October 1,
2000. These agreements are cash flow hedges since they are used
to reduce the variability of cash flows from potentially higher
interest payments associated with upward interest rate
repricings on a portion of the Company's certificate of deposit
accounts and borrowings. In accordance with SFAS No. 133, the
interest rate cap agreements are reported at fair value. Changes
in fair value attributable to time value are reported in
interest expense, while changes attributable to intrinsic value
are reported in accumulated other comprehensive income until
earnings are affected by the variability in cash flows of the
hedged liabilities. In fiscal 2000, prior to the adoption of
SFAS No. 133, payments (if any) due from the counterparties to
the agreements were recognized as a reduction of interest
expense and premiums paid by the Company were amortized on a
straight-line basis to interest expense.
(m) Stock-based Compensation Plans
Compensation expense is recognized for the ESOP equal to the
fair value of shares that have been allocated or committed to be
released for allocation to participants. Any difference between
the fair value at that time and the ESOP's original acquisition
cost is charged or credited to stockholders' equity (additional
paid-in capital). The cost of ESOP shares that have not yet been
allocated or committed to be released for allocation is deducted
from stockholders' equity.
The Company accounts for the Stock Option Plan in accordance
with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, compensation expense is recognized
only if the exercise price of an option is less than fair value
of the underlying stock on the date of the grant. The fair value
of shares awarded under the recognition and retention plan
(RRP), measured at the grant date, is recognized as unearned
compensation (a deduction from stockholders' equity) and
amortized to compensation expense as the shares become vested.
Tax benefits attributable to any tax deductions that are greater
than the amount of compensation expense recognized for financial
statement purposes are credited to additional paid-in capital.
SFAS No. 123, Accounting for Stock-Based Compensation,
encourages the use of a fair-value-based method of accounting
for employee stock compensation plans, but permits the continued
use of the intrinsic-value-based method of accounting prescribed
by APB Opinion No. 25. Under
F - 14 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
SFAS No. 123, the grant-date fair value of options is recognized
as compensation expense over the vesting period. The Company has
elected to continue to apply APB Opinion No. 25 and disclose the
pro forma information required by SFAS No. 123. Had stock-based
compensation expense been recognized in accordance with SFAS No.
123, the Company's net income and earnings per common share
would have been adjusted to the following pro forma amounts:
Nine months ended
June 30, Years ended September 30,
----------------------- ------------------------------------
2003 2002 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Net income, as reported $ 8,667 7,270 9,527 7,482 5,872
Add RRP expense included in
reported net income, net
of related tax effects 250 294 392 373 463
Deduct RRP and stock option
expense determined under
the fair-value-based method,
net of related tax effects (627) (663) (886) (812) (1,046)
---------- ---------- ---------- ---------- ----------
Pro forma net income $ 8,290 6,901 9,033 7,043 5,289
========== ========== ========== ========== ==========
Earnigs per share:
Basic, as reported $ 1.12 0.94 1.24 0.98 0.76
========== ========== ========== ========== ==========
Basic, pro forma 1.07 0.90 1.17 0.93 0.68
========== ========== ========== ========== ==========
Diluted, as reported 1.11 0.93 1.22 0.97 0.76
========== ========== ========== ========== ==========
Diluted, pro forma 1.06 0.88 1.15 0.92 0.68
========== ========== ========== ========== ==========
The estimated per-share fair value of stock options granted for
the nine months ended June 30, 2003 and 2002, and in fiscal
2002, 2001 and 2000 was $4.99, $7.11, $7.06, $5.80, and $5.90,
respectively, using the Black-Scholes option-pricing model with
assumptions as follows: dividend yields of 1.8%, 1.4%, 1.4%,
1.3% and 1.0%; expected volatility rates of 14.7%, 22.4%, 22.4%,
22.7%, and 22.0%; risk-free interest rates of 3.3%, 4.3%, 4.2%,
3.9%, and 6.6%; and expected option lives of approximately 5
years, 6 years, 6 years, 6 years and 8 years.
(n) Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net
income applicable to common stock by the weighted average number
of common shares outstanding during the period. Diluted EPS is
computed in a similar manner, except that the weighted average
number of common shares is increased to include incremental
shares (computed using the treasury stock method) that would
have been outstanding if all potentially dilutive stock options
and unvested RRP shares were exercised or became vested during
the period. For purposes of computing both basic and diluted
EPS, outstanding shares include all shares issued to the Mutual
Holding Company, but exclude unallocated ESOP shares.
F - 15 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(o) Segment Information
Public companies are required to report certain financial
information about significant revenue-producing segments of the
business for which such information is available and utilized by
the chief operating decision maker. As a community-oriented
financial institution, substantially all of the Company's
operations involve the delivery of loan and deposit products to
customers. Management makes operating decisions and assesses
performance based on an ongoing review of these community
banking operations, which constitute the Company's only
operating segment for financial reporting purposes.
F - 16 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(4) Securities Available for Sale
The following is a summary of securities available for sale:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
June 30, 2003
Mortgage-backed securities
Fannie Mae $ 69,903 $ 1,036 $ (103) $ 70,836
Freddie Mac 17,923 559 -- 18,482
Other 21,464 671 (60) 22,075
---------- ---------- ---------- ----------
109,290 2,266 (163) 111,393
---------- ---------- ---------- ----------
Investment securities
U.S. Government and
Agency securities 121,379 3,710 (3) 125,086
Corporate debt securities 12,020 835 -- 12,855
State and municipal securities 1,293 -- (19) 1,274
Equity securities 1,051 339 (85) 1,305
---------- ---------- ---------- ----------
135,743 4,884 (107) 140,520
---------- ---------- ---------- ----------
Total available for sale $ 245,033 $ 7,150 $ (270) $ 251,913
========== ========== ========== ==========
September 30, 2002
Mortgage-backed securities
Fannie Mae $ 29,643 $ 1,046 $ (5) $ 30,684
Freddie Mac 18,135 483 (5) 18,613
Other 8,671 680 -- 9,351
---------- ---------- ---------- ----------
56,449 2,209 (10) 58,648
---------- ---------- ---------- ----------
Investment securities
U.S. Government and
Agency securities 109,077 4,206 -- 113,283
Corporate debt securities 30,079 2,065 -- 32,144
Equity securities 1,113 1,060 (102) 2,071
---------- ---------- ---------- ----------
140,269 7,331 (102) 147,498
---------- ---------- ---------- ----------
Total available for sale $ 196,718 $ 9,540 $ (112) $ 206,146
========== ========== ========== ==========
September 30, 2001
Mortgage-backed securities
Fannie Mae $ 21,525 $ 613 $ -- $ 22,138
Freddie Mac 26,875 883 (9) 27,749
Other 9,478 162 -- 9,640
---------- ---------- ---------- ----------
57,878 1,658 (9) 59,527
---------- ---------- ---------- ----------
Investment securities
U.S. Government and
Agency securities 48,869 2,288 -- 51,157
Corporate debt securities 48,367 2,505 -- 50,872
Equity securities 1,290 1,143 (61) 2,372
---------- ---------- ---------- ----------
98,526 5,936 (61) 104,401
---------- ---------- ---------- ----------
Total available for sale $ 156,404 $ 7,594 $ (70) $ 163,928
========== ========== ========== ==========
Equity securities principally consist of Freddie Mac and Fannie Mae
common and preferred stock.
F - 17 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of
investment securities available for sale (other than equity securities),
by remaining period to contractual maturity. Actual maturities may
differ because certain issuers have the right to call or prepay their
obligations.
June 30, 2003 September 30, 2002
----------------------- -----------------------
Amortized Amortized
cost Fair value cost Fair value
---------- ---------- ---------- ----------
Remaining period to contractual
maturity:
Less than one year $ 29,028 $ 29,522 $ 27,207 $ 27,802
One to five years 104,528 108,574 110,844 116,515
Five to ten years 785 774 -- --
Greater than ten years 351 344 1,105 1,110
---------- ---------- ---------- ----------
Total $ 134,692 $ 139,214 $ 139,156 $ 145,427
========== ========== ========== ==========
Proceeds from sales of securities available for sale during the nine
months ended June 30, 2003 and the years ended September 30, 2002, 2001
and 2000 totaled $22,979, $56,049, $17,291 and $6,010, respectively.
These sales resulted in gross realized gains of $1,895 and $744 and
gross realized losses of $0 and $283 for the nine months ended June 30,
2003 and the year ended September 30, 2002, respectively, and gross
realized gains of $531 and $9 in fiscal 2001 and fiscal 2000,
respectively.
The Company transferred securities with a fair value of $11,865 from its
available-for-sale portfolio to its held-to-maturity portfolio during
the year ended September 30, 2001, based on management's evaluation of
the respective portfolios and the Company's investment policy and
strategies. The securities were assigned a new cost basis in the
held-to-maturity portfolio equal to their fair value at the transfer
date. The net unrealized loss of $146 at the transfer date and the
related discounts are being amortized as offsetting yield adjustments
over the terms of the securities.
Securities with carrying amounts of $40,317, $29,624 and $41,690 were
pledged as collateral for borrowings under securities repurchase
agreements at June 30, 2003, September 30, 2002 and September 30, 2001,
respectively. U.S. Government securities with carrying amounts of
$35,655, $15,656 and $4,772 were pledged as collateral for municipal
deposits and other purposes at June 30, 2003, September 30, 2002 and
September 30, 2001, respectively.
F - 18 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(5) Securities Held to Maturity
The following is a summary of securities held to maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
June 30, 2003
Mortgage-backed securities
Fannie Mae $ 31,622 $ 915 $ (22) $ 32,515
Freddie Mac 31,362 712 (12) 32,062
Other 1,259 75 -- 1,334
---------- ---------- ---------- ----------
64,243 1,702 (34) 65,911
Investment securities
State and municipal securities 18,544 1,121 -- 19,665
---------- ---------- ---------- ----------
Total held to maturity $ 82,787 $ 2,823 $ (34) $ 85,576
========== ========== ========== ==========
September 30, 2002
Mortgage-backed securities
Fannie Mae $ 32,904 $ 1,700 $ -- $ 34,604
Freddie Mac 34,693 1,116 (21) 35,788
Other 2,785 204 -- 2,989
---------- ---------- ---------- ----------
70,382 3,020 (21) 73,381
Investment securities
State and municipal securities 16,409 916 -- 17,325
---------- ---------- ---------- ----------
Total held to maturity $ 86,791 $ 3,936 $ (21) $ 90,706
========== ========== ========== ==========
September 30, 2001
Mortgage-backed securities
Fannie Mae $ 27,971 $ 983 $ (1) $ 28,953
Freddie Mac 26,477 917 -- 27,394
Other 5,001 152 -- 5,153
---------- ---------- ---------- ----------
59,449 2,052 (1) 61,500
Investment securities
State and municipal securities 11,906 254 -- 12,160
---------- ---------- ---------- ----------
Total held to maturity $ 71,355 $ 2,306 $ (1) $ 73,660
========== ========== ========== ==========
F - 19 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of
investment securities held to maturity, by remaining period to
contractual maturity. Actual maturities may differ because certain
issuers have the right to call or repay their obligations.
June 30, 2003 September 30, 2002
----------------------- -----------------------
Amortized Amortized
cost Fair value cost Fair value
---------- ---------- ---------- ----------
Remaining period to contractual maturity:
Less than one year $ 270 $ 270 $ 1,750 $ 1,750
One to five years 7,937 8,346 3,097 3,287
Five to ten years 10,015 10,727 9,963 10,600
Greater than ten years 322 322 1,599 1,688
---------- ---------- ---------- ----------
Total $ 18,544 $ 19,665 $ 16,409 $ 17,325
========== ========== ========== ==========
There were no sales of securities held to maturity during the nine
months ended June 30, 2003 and the years ended September 30, 2002, 2001
and 2000.
F - 20 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(6) Loans
The components of the loan portfolio, excluding loans held for sale,
were as follows:
September 30,
June 30, ------------------------
2003 2002 2001
---------- ---------- ----------
One- to four-family residential
mortgage loans:
Fixed rate $ 323,084 $ 299,851 $ 278,668
Adjustable rate 56,710 66,260 79,530
---------- ---------- ----------
379,794 366,111 358,198
---------- ---------- ----------
Commercial real estate loans 179,945 163,329 129,295
Commercial business loans 45,306 41,320 31,394
Construction loans 7,312 17,020 19,490
---------- ---------- ----------
232,563 221,669 180,179
---------- ---------- ----------
Consumer loans:
Home equity lines of credit 48,026 39,727 31,125
Homeowner loans 27,771 36,880 39,501
Other consumer loans 5,456 6,812 6,266
---------- ---------- ----------
81,253 83,419 76,892
---------- ---------- ----------
Total loans 693,610 671,199 615,269
Allowance for loan losses (11,055) (10,383) (9,123)
---------- ---------- ----------
Total loans, net $ 682,555 $ 660,816 $ 606,146
========== ========== ==========
Total loans include net deferred loan origination costs of $1,013,
$1,048 and $914 at June 30, 2003, September 30, 2002 and September 30,
2001, respectively.
A substantial portion of the Company's loan portfolio is secured by
residential and commercial real estate located in Rockland County, New
York and contiguous areas such as Orange County, New York. The ability
of the Company's borrowers to make principal and interest payments is
dependent upon, among other things, the level of overall economic
activity and the real estate market conditions prevailing within the
Company's concentrated lending area. Commercial real estate and
construction loans are considered by management to be of somewhat
greater credit risk than loans to fund the purchase of a primary
residence due to the generally larger loan amounts and dependency on
income production or sale of the real estate. Substantially all of these
loans are collateralized by real estate located in the Company's primary
market area.
F - 21 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The principal balances of nonaccrual loans were as follows:
September 30,
June 30, -----------------------
2003 2002 2001
---------- ---------- ----------
One- to four-family residential
mortgage loans $ 1,727 $ 2,291 $ 1,684
Commercial real estate loans 3,488 2,492 418
Construction loans -- -- --
Commercial loans 39 -- --
Consumer loans 116 171 175
---------- ---------- ----------
Total nonaccrual loans $ 5,370 $ 4,954 $ 2,277
========== ========== ==========
Gross interest income that would have been recorded if the foregoing
nonaccrual loans had remained current in accordance with their
contractual terms totaled $294 for the nine months ended June 30, 2003,
and $371, $165 and $337 for the years ended September 30, 2002, 2001 and
2000, respectively, compared to interest income actually recognized
(including income recognized on a cash basis) of $153, $83, $13, and
$77, respectively.
The Company's total recorded investment in impaired loans, as defined by
SFAS No. 114, was $622, $588 and $358 at June 30, 2003, September 30,
2002 and September 30, 2001, respectively. Substantially all of these
loans were collateral-dependent loans measured based on the fair value
of the collateral. The Company determines the need for an allowance for
loan impairment under SFAS No. 114 on a loan-by-loan basis. An
impairment allowance was not required at June 30, 2003 or September 30,
2002 and September 30, 2001 due to the adequacy of collateral values.
The Company's average recorded investment in impaired loans was $605 for
the nine months ended June 30, 2003 and $473, $768, and $1,196 during
the years ended September 30, 2002, 2001, and 2000, respectively.
Activity in the allowance for loan losses is summarized as follows:
Nine months ended June 30, Year ended September 30,
-------------------------- --------------------------------------
2003 2002 2002 2001 2000
----------- ----------- ---------- ---------- ----------
Balance at beginning of year $ 10,383 $ 9,123 $ 9,123 $ 7,653 $ 6,202
Provision for loan losses 800 600 900 1,440 1,710
Charge-offs (232) (137) (324) (159) (370)
Recoveries 104 99 147 189 111
Allowance recorded in NBF
acquisition -- 537 537 -- --
----------- ----------- ---------- ---------- ----------
Balance at end of year $ 11,055 $ 10,222 $ 10,383 $ 9,123 $ 7,653
=========== =========== ========== ========== ==========
Real estate owned properties are included in other assets at net
carrying amounts of $41 and $109 at September 30, 2002 and September 30,
2001, respectively (none at June 30, 2003). Provisions for losses
F - 22 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
and other activity in the allowance for losses on real estate owned were
insignificant during the nine months ended June 30, 2003 and the years
ended September 30, 2002, 2001 and 2000.
Certain residential mortgage loans originated by the Company are sold in
the secondary market. Other non-interest income includes net gains on
such sales of $836 and $92 for the nine months ended June 30, 2003 and
2002, respectively, $146 in fiscal 2002, none in fiscal 2001 and $28 in
fiscal 2000. At June 30, 2003 there was $2,554 in loans held for sale.
There were no loans held for sale at September 30, 2002 and September
30, 2001. Other assets at June 30, 2003, September 30, 2002 and
September 30, 2001 include capitalized mortgage servicing rights with an
amortized cost of $557, $193 and $201, respectively, which approximated
fair value.
The Company generally retains the servicing rights on mortgage loans
sold. Servicing loans for others involves collecting payments,
maintaining escrow accounts, making remittances to investors and, if
necessary, processing foreclosures. Mortgage loans serviced for others
totaled approximately $79,659, $73,600, $86,700 and $98,500 at June 30,
2003, September 30, 2002, 2001 and 2000, respectively. These amounts
include loans sold with recourse (approximately $541 and $838 at June
30, 2003 and September 30, 2002, respectively) for which management does
not expect the Company to incur any significant losses. Mortgage escrow
funds include balances of $2,558, $879 and $1,416 at June 30, 2003,
September 30, 2002 and September 30, 2001, respectively, related to
loans serviced for others.
(7) Accrued Interest Receivable
The components of accrued interest receivable were as follows:
September 30,
June 30, -----------------------
2003 2002 2001
---------- ---------- ----------
Loans $ 2,180 $ 2,561 $ 2,971
Securities 2,247 2,930 2,626
---------- ---------- ----------
Total accrued interest
receivable $ 4,427 $ 5,491 $ 5,597
========== ========== ==========
F - 23 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(8) Premises and Equipment, Net
Premises and equipment are summarized as follows:
September 30,
June 30, ------------------------
2003 2002 2001
---------- ---------- ----------
Land and land improvements $ 1,407 $ 1,368 $ 1,090
Buildings 6,614 6,802 4,775
Leasehold improvements 6,076 4,600 4,163
Furniture, fixtures, and equipment 11,569 10,895 9,607
---------- ---------- ----------
25,666 23,665 19,635
Accumulated depreciation and amortization (14,050) (12,594) (10,718)
---------- ---------- ----------
Total premises and equipment, net $ 11,616 $ 11,071 $ 8,917
========== ========== ==========
(9) Deposits
Deposit balances and weighted average interest rates are summarized as
follows:
September 30,
-------------------------------------------------
June 30, 2003 2002 2001
----------------------- ----------------------- -----------------------
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- ----------
Demand deposits:
Retail $ 83,165 0.00% $ 54,399 0.00% $ 41,280 0.00%
Commercial 64,508 -- 55,732 -- 33,081 --
NOW deposits 70,963 0.20 82,983 0.40 63,509 0.49
Savings deposits 279,016 0.40 247,918 0.99 160,777 1.05
Money market deposits 127,560 0.55 115,065 1.23 109,126 1.81
Certificates of deposit 232,322 2.03 243,529 2.64 245,327 4.63
---------- ---------- ----------
Total deposits $ 857,534 0.78% $ 799,626 1.33% $ 653,100 2.31%
========== ========== ==========
Municipal deposits held by PMB totaled $19,813 and $8,800 at June 30,
2003 and September 30, 2002, respectively.
F - 24 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
Certificates of deposit had remaining periods to contractual maturity as
follows:
September 30,
June 30, -----------------------
2003 2002 2001
---------- ---------- ----------
Remaining period to contractual maturity:
Less than one year $ 168,768 $ 186,160 $ 218,850
One to two years 44,923 36,168 20,433
Two to three years 7,287 13,485 2,499
Greater than three years 11,344 7,716 3,545
---------- ---------- ----------
Total certificates of deposit $ 232,322 $ 243,529 $ 245,327
========== ========== ==========
Certificate of deposit accounts with a denomination of $100 or more
totaled $39,744, $38,562 and $32,660 at June 30, 2003, September 30,
2002 and September 30, 2001, respectively. The FDIC generally insures
depositor accounts up to $100 as defined in the applicable regulations.
Interest expense on deposits is summarized as follows:
Nine months Years ended
ended June 30, September 30,
----------------------- ------------------------------------
2003 2002 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Savings deposits $ 1,207 $ 1,610 $ 2,289 $ 2,898 $ 3,435
Money market and NOW deposits 955 1,304 1,750 2,610 2,499
Certificates of deposit 3,985 5,967 7,662 13,915 12,787
---------- ---------- ---------- ---------- ----------
Total interest expense $ 6,147 $ 8,881 $ 11,701 $ 19,423 $ 18,721
========== ========== ========== ========== ==========
F - 25 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(10) FHLB Borrowings
The Company's FHLB borrowings and weighted average interest rates are
summarized as follows:
September 30,
-------------------------------------------------
June 30, 2003 2002 2001
----------------------- ----------------------- -----------------------
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- ----------
By type of borrowing:
Advances $ 76,374 3.40% $ 72,968 3.63% $ 70,677 5.39%
Repurchase agreements 40,358 4.52 30,000 5.17 39,750 5.18
---------- ---------- ----------
Total borrowings $ 116,732 3.79% $ 102,968 4.08% $ 110,427 5.32%
---------- ---------- ----------
By remaining period to maturity:
Less than one year $ 11,238 4.30% $ 30,319 3.24% $ 39,950 6.20%
One to two years 15,000 5.31 20,000 5.02 20,477 4.73
Two to three years 38,000 2.67 15,000 2.69 15,000 5.43
Three to four years 19,285 4.77 8,000 4.72 10,000 3.74
Four to five years 29,219 3.46 9,649 4.69 -- --
Greater than five years 3,990 4.89 20,000 4.88 25,000 4.96
---------- ---------- ----------
Total borrowings $ 116,732 3.79% $ 102,968 4.08% $ 110,427 5.32%
========== ========== ==========
As a member of the FHLB of New York, the Bank may borrow in the form of
term and overnight FHLB advances up to 30% of its total assets, or
approximately $334,000 and $308,000 at June 30, 2003 and September 30,
2002. The Bank's unused FHLB borrowing capacity was approximately
$202,700 and $235,000, respectively, at those dates. FHLB advances are
secured by the Bank's investment in FHLB stock and by a blanket security
agreement. This agreement requires the Bank to maintain as collateral
certain qualifying assets (such as securities and residential mortgage
loans) not otherwise pledged. The Bank satisfied this collateral
requirement at June 30, 2003, September 30, 2002 and September 30, 2001.
Securities repurchase agreements had weighted average remaining terms to
maturity of approximately 3.1 years, 4.3 years and 5.3 years at June 30,
2003, September 30, 2002 and September 30, 2001, respectively. Average
borrowings under securities repurchase agreements were $33,643 for the
nine months ended June 30, 2003 and $34,479, $36,417, and $40,515 during
the years ended September 30, 2002, 2001 and 2000, respectively, and the
maximum outstanding month-end balance was $40,358, $39,750, $39,750 and
$44,750, respectively.
FHLB borrowings of $35,000 and $35,000 at June 30, 2003 and September
30, 2002 are callable quarterly, at the discretion of the FHLB. These
borrowings have a weighted average remaining term to the contractual
maturity dates of approximately 3 years and 4 years, respectively and
weighted average interest rates of 5.11% and 5.11% at June 30, 2003 and
September 30, 2002, respectively.
F - 26 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(11) Income Taxes
Income tax expense consists of the following:
Nine months ended June 30, Years ended September 30,
-------------------------- --------------------------------------
2003 2002 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Current tax expense:
Federal $ 3,911 $ 5,754 $ 5,872 $ 1,839 $ 3,214
State 593 793 863 351 294
---------- ---------- ---------- ---------- ----------
4,504 6,547 6,735 2,190 3,508
---------- ---------- ---------- ---------- ----------
Deferred tax (benefit) expense:
Federal 490 (1,966) (918) 1,800 (472)
State (5) (372) (254) 97 (170)
---------- ---------- ---------- ---------- ----------
485 (2,338) (1,172) 1,897 (642)
---------- ---------- ---------- ---------- ----------
Total income tax
expense $ 4,989 $ 4,209 $ 5,563 $ 4,087 $ 2,866
========== ========== ========== ========== ==========
Actual income tax expense differs from the tax computed based on pre-tax
income and the applicable statutory Federal tax rate, for the following
reasons:
Nine months ended June 30, Years ended September 30,
-------------------------- ----------------------------------------
2003 2002 2002 2001 2000
---------- ----------- ---------- ---------- ----------
Tax at Federal statutory rate $ 4,779 $ 4,018 $ 5,282 $ 3,933 $ 2,971
State income taxes, net of
Federal tax benefit 382 270 396 296 82
Tax-exempt interest (170) (130) (193) (148) (139)
Nondeductible portion of ESOP
expense 153 117 161 61 32
Low-income housing tax credits (54) (54) (72) (72) (72)
BOLI Income (113) --
Other, net 12 (12) (11) 17 (8)
---------- ----------- ---------- ---------- ----------
Actual income tax expense $ 4,989 $ 4,209 $ 5,563 $ 4,087 $ 2,866
========== =========== ========== ========== ==========
Effective income tax rate 36.5% 36.7% 36.9% 35.3% 32.8%
========== =========== ========== ========== ==========
F - 27 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized below. The net amount is reported
in other assets or other liabilities in the consolidated statements of
financial condition.
September 30,
June 30, ------------------------
2003 2002 2001
---------- ---------- ----------
Deferred tax assets:
Allowance for loan losses $ 4,518 $ 4,226 $ 3,516
Deferred compensation 2,090 1,924 1,389
Core deposit intangibles 1,124 1,132 1,904
Depreciation of premises and equipment 245 540 448
Other 178 150 164
---------- ---------- ----------
Total deferred tax assets 8,155 7,972 7,421
---------- ---------- ----------
Deferred tax liabilities:
Net unrealized gain on securities
available for sale (2,705) (3,720) (2,954)
Undistributed earnings of subsidiary not
consolidated for tax return purposes
(Provident REIT, Inc.) (3,974) (3,067) (3,193)
Purchase accounting fair value
adjustments (694) (578) --
Prepaid pension costs (178) (484) (394)
Other (555) (604) (509)
---------- ---------- ----------
Total deferred tax liabilities (8,106) (8,453) (7,050)
---------- ---------- ----------
Net deferred tax asset (liability) $ 49 $ (481) $ 371
========== ========== ==========
Based on management's consideration of historical and anticipated future
pre-tax income, as well as the reversal period for the items giving rise
to the deferred tax assets and liabilities, a valuation allowance for
deferred tax assets was not considered necessary at June 30, 2003,
September 30, 2002 and September 30, 2001.
The Bank is subject to special provisions in the Federal and New York
State tax laws regarding its allowable tax bad debt deductions and
related tax bad debt reserves. Tax bad debt reserves consist of a
defined "base-year" amount, plus additional amounts accumulated after
the base year. Deferred tax liabilities are recognized with respect to
reserves accumulated after the base year, as well as any portion of the
base-year amount that is expected to become taxable (or recaptured) in
the foreseeable future. The Bank's base-year tax bad debt reserves were
$4,600 for Federal tax purposes and $34,700 and $32,100 for New York
State tax purposes at June 30, 2003 and September 30, 2002,
respectively. Associated deferred tax liabilities of $3,600 and $3,500
have not been recognized at those dates since the Company does not
expect that the base-year reserves will become taxable in the
foreseeable future. Under the tax laws, events that would result in
taxation of certain of these reserves include (i) redemptions of the
Bank's stock or
F - 28 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
certain excess distributions by the Bank to Provident Bancorp, Inc. and
(ii) failure of the Bank to maintain a specified qualifying-assets ratio
or meet other thrift definition tests for New York State tax purposes.
(12) Employee Benefit Plans and Stock-Based Compensation Plans
(a) Pension Plan
The Company has a noncontributory defined benefit pension plan
covering substantially all of its employees. Employees who are
twenty-one years of age or older and have worked for the Company
for one year are eligible to participate in the plan. The
Company's funding policy is to contribute annually an amount
sufficient to meet statutory minimum funding requirements, but
not in excess of the maximum amount deductible for Federal
income tax purposes. Contributions are intended to provide not
only for benefits attributed to service to date, but also for
benefits expected to be earned in the future.
The following is a summary of changes in the projected benefit
obligation and fair value of plan assets, together with a
reconciliation of the funded status to the amount of prepaid
pension costs reported in other assets in the consolidated
statements of financial condition:
September 30,
------------------------
2002 2001
---------- ----------
Changes in projected benefit obligation:
Beginning of year $ 6,889 $ 5,421
Service cost 430 465
Interest cost 490 427
Actuarial (gain) loss (427) 640
Acquisition of NBF 1,875 --
Benefits paid (125) (64)
---------- ----------
End of year 9,132 6,889
---------- ----------
Changes in fair value of plan assets:
Beginning of year 6,385 7,459
Actual loss on plan assets (895) (1,150)
Employer contributions 600 140
Acquisition of NBF 1,922 --
Benefits paid (125) (64)
---------- ----------
End of year 7,887 6,385
---------- ----------
Funded status at end of year (1,245) (504)
Unrecognized net actuarial loss 2,555 1,500
Unrecognized prior service cost (70) (82)
Unrecognized net transition obligation 62 86
---------- ----------
Prepaid pension costs $ 1,302 $ 1,000
========== ==========
F - 29 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
A discount rate of 6.75% and a rate of increase in future compensation
levels of 5.0% were used in determining the actuarial present value of
the projected benefit obligation at September 30, 2002 (7.25% and 5.5%,
respectively, at September 30, 2001). The long-term rate of return on
plan assets was 8.0% for fiscal 2002 and 2001.
The components of the net periodic pension expense were as follows:
Years ended September 30,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Service cost $ 430 $ 465 $ 515
Interest cost 490 427 409
Expected return on plan assets (598) (600) (539)
Amortization of prior service cost (14) (14) (14)
Amortization of net transition obligation 26 26 26
Recognized net actuarial loss (gain) 12 (2) --
---------- ---------- ----------
Net periodic pension expense $ 346 $ 302 $ 397
========== ========== ==========
Net periodic pension expense was $554 and $293 for the nine
months ended June 30, 2003 and 2002, respectively.
The Company has also established a nonqualified Supplemental
Executive Retirement Plan to provide certain executives with
supplemental retirement benefits in addition to the benefits
provided by the pension plan. The periodic pension expense for
the supplemental plan amounted to $77 and $33 for the nine
months ended June 30, 2003 and 2002, respectively, and $90, $59
and $54 for the years ended September 30, 2002, 2001 and 2000,
respectively. The actuarial present value of the projected
benefit obligation was $555 and $426 at September 30, 2002 and
2001, respectively, all of which is unfunded.
(b) Other Postretirement Benefits Plan
The Company's postretirement health care plan, which is
unfunded, provides optional medical, dental and life insurance
benefits to retirees. In accordance with SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than
Pensions, the cost of postretirement benefits is accrued over
the years in which employees provide services to the date of
their full eligibility for such benefits. As permitted by SFAS
No. 106, the Company has elected to amortize the transition
obligation for accumulated benefits as an expense over a 20-year
period. The periodic expense recognized for this plan was $38
and $32 for the nine months ended June 30, 2003 and 2002,
respectively, and $32, $37 and $39 for the years ended September
30, 2002, 2001 and 2000, respectively.
F - 30 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(c) Employee Savings Plans
The Company also sponsors a defined contribution plan
established under Section 401(k) of the Internal Revenue Code.
Eligible employees may elect to contribute up to 10% of their
compensation to the plan. The Company currently makes matching
contributions equal to 50% of a participant's contributions up
to a maximum matching contribution of 3% of compensation.
Voluntary and matching contributions are invested, in accordance
with the participant's direction, in one or a number of
investment options. Savings plan expense was $184 and $148 for
the nine months ended June 30, 2003 and 2002, respectively, and
$206, $184 and $180 for the years ended September 30, 2002, 2001
and 2000, respectively. A supplemental savings plan has also
been established for certain senior officers. Expense recognized
for this plan was $50 and $51 for the nine months ended June 30,
2003 and 2002, respectively, and $68, $62 and $53 for the years
ended September 30, 2002, 2001 and 2000, respectively.
(d) Employee Stock Ownership Plan
In connection with the Reorganization and Offering, the Company
established an ESOP for eligible employees who meet certain age
and service requirements. The ESOP borrowed $3,760 from
Provident Bancorp, Inc. and used the funds to purchase 309,120
shares of common stock in the open market subsequent to the
Offering. The Bank makes periodic contributions to the ESOP
sufficient to satisfy the debt service requirements of the loan
which has a ten-year term and bears interest at the prime rate.
The ESOP uses these contributions, and any dividends received by
the ESOP on unallocated shares, to make principal and interest
payments on the loan.
ESOP shares are held by the plan trustee in a suspense account
until allocated to participant accounts. Shares released from
the suspense account are allocated to participants on the basis
of their relative compensation in the year of allocation.
Participants become vested in the allocated shares over a period
not to exceed five years. Any forfeited shares are allocated to
other participants in the same proportion as contributions.
ESOP expense was $721 and $615 for the nine months ended June
30, 2003 and 2002, respectively, and $835, $555 and $470 for the
years ended September 30, 2002, 2001 and 2000, respectively.
Through June 30, 2003 and September 30, 2002, a cumulative total
of 169,766 shares and 146,582 shares have been allocated to
participants or committed to be released for allocation,
respectively. The cost of ESOP shares that have not yet been
allocated to participants or committed to be released for
allocation is deducted from stockholders' equity (139,354 shares
with a cost of $1,691 and a fair value of approximately $4,473
at June 30, 2003 and 162,538 shares with a cost of $1,974 and a
fair value of approximately $4,600 at September 30, 2002,
respectively).
(e) Recognition and Retention Plan
In February 2000, the Company's stockholders approved the
Provident Bank 2000 Recognition and Retention Plan (the RRP).
The principal purpose of the RRP is to provide executive
officers and directors a proprietary interest in the Company in
a manner designed to encourage their continued performance and
service. A total of 193,200 shares were awarded under the RRP in
February 2000,
F - 31 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
and the grant-date fair value of these shares $(2,995) was
charged to stockholders' equity. The awards vest at a rate of
20% on each of five annual vesting dates, the first of which was
September 30, 2000. RRP expense was $394 and $464 for the nine
months ended June 30, 2003 and 2002, respectively, and $621,
$577 and $689 for the years ended September 30, 2002, 2001 and
2000, respectively.
(f) Stock Option Plan
The stockholders also approved the Provident Bank 2000 Stock
Option Plan (the Stock Option Plan) in February 2000. A total of
386,400 shares of authorized but unissued common stock has been
reserved for issuance under the Stock Option Plan, although the
Company may also fund option exercises using treasury shares.
Options have a ten-year term and may be either nonqualified
stock options or incentive stock options. Reload options may be
granted and provide for the automatic grant of a new option at
the then-current market price in exchange for each previously
owned share tendered by an employee in a stock-for-stock
exercise. Each option entitles the holder to purchase one share
of common stock at an exercise price equal to the fair market
value of the stock on the grant date.
The following is a summary of activity in the Stock Option Plan:
Weighted
Shares subject average
to option exercise price
-------------- --------------
Granted in February 2000 366,650 $ 15.50
Forfeited (11,250) 15.50
-------------- --------------
Outstanding at September 30, 2000 355,400 15.50
Granted 5,451 21.15
Exercised (10,851) 15.50
Forfeited (1,200) 15.50
-------------- --------------
Outstanding at September 30, 2001 348,800 15.59
Granted 44,331 25.97
Exercised (86,994) 16.43
Forfeited (3,100) 15.50
-------------- --------------
Outstanding at September 30, 2002 303,037 16.87
Granted 10,620 31.36
Exercised (33,068) 24.99
Forfeited (5,050) 15.50
-------------- --------------
Outstanding at June 30, 2003 275,539 $ 17.26
============== ==============
F - 32 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
Options exercisable at June 30, 2003 and September 30, 2002,
2001 and 2000 totaled 209,586, 157,463, 137,815 and 71,080,
respectively, with a weighted average exercise price of
approximately $17.71, $16.70, $15.50, and $15.50 per share,
respectively. These options had weighted average remaining terms
of 6.7 years, 7.4 years, 8.4 years, and 9.4 years at the
respective dates. There were 35,300 shares available for future
option grants at June 30, 2003 and September 30, 2002,
respectively.
(13) Comprehensive Income
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net
unrealized gain or loss on securities available for sale. The Company
has reported its comprehensive income in the consolidated statements of
changes in stockholders' equity.
F - 33 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The components of other comprehensive income (loss) are summarized as
follows:
Nine months ended June 30, Year ended September 30,
-------------------------- --------------------------------------
2003 2002 2002 2001 2000
----------- ------------ ---------- ---------- ----------
Net unrealized holding gain
(loss) arising during the year on securities available for sale, net of
related income taxes of $256, $304, $950, $3,526 and
$606, respectively $ (386) $ (473) $ 1,429 $ 5,289 $ 908
Reclassification adjustment for net realized gains included in net
income, net of related income taxes of $758 and $115 for the nine
months ended June 30, 2003 and 2002, respectively, and $184, $212 and
$4 for the years ended September 30, 2002, 2001 and 2000,
respectively (1,137) (173) (277) (319) (5)
----------- ------------ ---------- ---------- ----------
(1,523) (646) 1,152 4,970 903
Net unrealized gain (loss) on derivatives, net of related income taxes
of $6 and $19 for the nine months ended June 30, 2003 and 2002,
respectively, and $26 and $32 for the years ended September 30, 2002
and
2001, respectively (note 16) 10 28 38 (48) --
----------- ------------ ---------- ---------- ----------
Other comprehensive
income (loss) $ (1,513) $ (618) $ 1,190 $ 4,922 $ 903
=========== ============ ========== ========== ==========
The Company's accumulated other comprehensive income included in
stockholders' equity at June 30, 2003, September 30, 2002 and September
30, 2001 consists of (i) the after-tax net unrealized gain of $4,059,
$5,582 and $4,430, respectively, on securities available for sale, and
(ii) the after-tax net unrealized loss of $0, $10 and $48, respectively,
on derivatives accounted for as cash flow hedges.
F - 34 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(14) Earnings Per Common Share
The following is a summary of the calculation of earnings per share
(EPS):
Nine months ended June 30, Years ended September 30,
-------------------------- ------------------------------------
2003 2002 2002 2001 2000
----------- ------------ ---------- ---------- ----------
(In thousands, except per share data)
Net income $ 8,667 $ 7,270 $ 9,527 $ 7,482 $ 5,872
=========== ============ ========== ========== ==========
Weighted average common shares
outstanding for computation of
basic EPS //(1)// 7,715 7,701 7,702 7,661 7,773
Common-equivalent shares due to
the dilutive effect of stock
options and RRP awards //(2)// 114 128 118 50 --
----------- ------------ ---------- ---------- ----------
Weighted average common shares
for computation of diluted EPS $ 7,829 $ 7,829 $ 7,820 $ 7,711 $ 7,773
=========== ============ ========== ========== ==========
Earnings per common share:
Basic $ 1.12 $ 0.94 $ 1.24 $ 0.98 $ 0.76
Diluted 1.11 0.93 1.22 0.97 0.76
=========== ============ ========== ========== ==========
(1) Includes all shares issued to the Mutual Holding Company, but
excludes unallocated ESOP shares.
(2) Represents incremental shares computed using the treasury stock
method.
(15) Stockholders' Equity
(a) Regulatory Capital Requirements
OTS regulations require savings institutions to maintain a
minimum ratio of tangible capital to total adjusted assets of
1.5%, a minimum ratio of Tier 1 (core) capital to total adjusted
assets of 4.0%, and a minimum ratio of total (core and
supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is
required to take certain supervisory actions (and may take
additional discretionary actions) with respect to an
undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The
regulations establish a framework for the classification of
savings institutions into five categories - well capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a Tier 1
(core) capital ratio of at least 5.0%, a Tier 1 risk-based
capital ratio of at least 6.0%, and a total risk-based capital
ratio of at least 10.0%.
F - 35 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors. These
capital requirements apply only to the Bank, and do not consider
additional capital retained by Provident Bancorp, Inc.
Management believes that, as of June 30, 2003, September 30, 2002 and
September 30, 2001, the Bank met all capital adequacy requirements to be
classified as a well-capitalized institution.
The following is a summary of the Bank's actual regulatory capital
amounts and ratios at June 30, 2003, September 30, 2002 and September
30, 2001, compared to the OTS requirements for minimum capital adequacy
and for classification as a well-capitalized institution. PMB is also
subject to certain regulatory capital requirements which it satisfied as
of June 30, 2003 and September 30, 2002.
OTS requirements
-------------------------------------------------
Minimum capital Classification as well
Bank actual adequacy capitalized
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
June 30, 2003:
Tangible capital $ 91,149 8.4% $ 16,372 1.5% $ -- 0.0%
Tier 1 (core) capital 91,149 8.4 43,658 4.0 54,573 5.0
Risk-based capital:
Tier 1 91,149 13.9 -- 0.0 39,440 6.0
Total 98,976 15.1 52,587 8.0 65,734 10.0
========== ========== ==========
September 30, 2002:
Tangible capital $ 84,307 8.5% $ 14,963 1.5% $ -- 0.0%
Tier 1 (core) capital 84,307 8.5 39,901 4.0 49,875 5.0
Risk-based capital:
Tier 1 84,307 14.2 -- 0.0 35,552 6.0
Total 91,747 15.5 47,403 8.0 59,254 10.0
========== ========== ==========
September 30, 2001:
Tangible capital $ 88,526 10.2% $ 13,015 1.5% $ -- 0.0%
Tier 1 (core) capital 88,526 10.2 34,706 4.0 43,383 5.0
Risk-based capital:
Tier 1 88,526 16.9 -- 0.0 31,404 6.0
Total 95,100 18.2 41,873 8.0 52,341 10.0
========== ========== ==========
Tangible and Tier 1 capital amounts represent the stockholder's equity
of the Bank, less intangible assets and after-tax net unrealized gains
on securities available for sale. Total capital represents Tier 1
capital plus the allowance for loan losses up to a maximum amount equal
to 1.25% of risk-weighted assets.
F - 36 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The following is a reconciliation of the Bank's total stockholder's
equity under accounting principles generally accepted in the United
States of America ("GAAP") and its regulatory capital:
September 30,
June 30, ------------------------
2003 2002 2001
---------- ---------- ----------
Total GAAP stockholder's equity $ 109,251 $ 104,779 $ 92,769
Goodwill and intangible assets (14,150) (15,041) --
Unrealized gain on securities available
for sale (3,952) (5,431) (4,243)
---------- ---------- ----------
Tangible, tier 1 core and
Tier 1 risk-based capital 91,149 84,307 88,526
Allowance for loan losses 7,827 7,440 6,574
---------- ---------- ----------
Total risk-based capital $ 98,976 $ 91,747 $ 95,100
========== ========== ==========
(b) Dividend Payments
Under OTS regulations, savings associations such as the Bank
generally may declare annual cash dividends up to an amount
equal to the sum of net income for the current year and net
income retained for the two preceding years. Dividend payments
in excess of this amount require OTS approval. The Bank paid
cash dividends of $3,500 and $2,000 to Provident Bancorp, Inc.
during the nine months ended June 30, 2003 and the year ended
September 30, 2000, respectively (none during the years ended
September 30, 2002 and 2001).
Unlike the Bank, Provident Bancorp, Inc. is not subject to OTS
regulatory limitations on the payment of dividends to its
shareholders. The Mutual Holding Company waived the receipt of
cash dividends with respect to its shares of Provident Bancorp,
Inc. amounting to $1,402 for the nine months ended June 30,
2003, $1,310 in fiscal 2002, $972 in fiscal 2001 and $177 in
fiscal 2000, for a cumulative total of $3,993 through June 30,
2003.
(c) Stock Repurchase Programs
The Company completed a stock repurchase program during the year
ended September 30, 2000, purchasing 193,200 common shares for
the treasury at a total cost of $3,061. In July 2000, the
Company announced a second repurchase program to acquire up to
5%, or approximately 185,000, of its publicly-traded shares as
market conditions warrant. This program was completed in May
2003. A third repurchase program was announced in March 2003 to
acquire up to 5% or approximately $177,250. A total of 14,511
shares have been purchased for the treasury under the third
program through June 30, 2003 at a total cost of $456.
F - 37 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(d) Liquidation Rights
All depositors who had liquidation rights with respect to the
Bank as of the effective date of the Reorganization continue to
have such rights solely with respect to the Mutual Holding
Company, as long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors of the
Bank subsequent to the Reorganization will have liquidation
rights with respect to the Mutual Holding Company.
(16) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to
off-balance-sheet financial instruments that involve, to varying
degrees, elements of credit risk and interest rate risk in addition to
the amounts recognized in the consolidated financial statements. The
contractual or notional amounts of these instruments, which reflect the
extent of the Company's involvement in particular classes of
off-balance-sheet financial instruments, are summarized as follows:
September 30,
June 30, -----------------------
2003 2002 2001
---------- ---------- ----------
Lending-related instruments:
Loan origination commitments:
Fixed-rate loans $ 58,245 $ 36,285 $ 9,983
Adjustable-rate loans 46,325 26,048 2,282
Unused lines of credit 71,189 63,091 37,748
Standby letters of credit 8,120 6,862 6,716
Interest rate risk management:
Interest rate cap agreements -- 50,000 50,000
========== ========== ==========
(a) Lending-Related Instruments
The contractual amounts of loan origination commitments, unused
lines of credit and standby letters of credit represent the
Company's maximum potential exposure to credit loss, assuming
(i) the instruments are fully funded at a later date, (ii) the
borrowers do not meet the contractual payment obligations, and
(iii) any collateral or other security proves to be worthless.
The contractual amounts of these instruments do not necessarily
represent future cash requirements since certain of these
instruments may expire without being funded and others may not
be fully drawn upon. Substantially all of these lending-related
instruments have been entered into with customers located in the
Company's primary market area described in note 6.
Loan origination commitments are legally-binding agreements to
lend to a customer as long as there is no violation of any
condition established in the contract. Commitments have fixed
expiration dates (generally ranging up to 60 days) or other
termination clauses, and may require payment of a fee by the
customer. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral, if
any, obtained by the Company upon extension of credit, is based
on management's credit evaluation of the borrower. Collateral
varies but may include mortgages on
F - 38 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
residential and commercial real estate, deposit accounts with
the Company, and other property. The Company's fixed-rate loan
origination commitments at June 30, 2003 provide for interest
rates ranging principally from 4.50% to 7.88%.
Unused lines of credit are legally-binding agreements to lend to
a customer as long as there is no violation of any condition
established in the contract. Lines of credit generally have
fixed expiration dates or other termination clauses. The amount
of collateral obtained, if deemed necessary by the Company, is
based on management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by
the Company to assure the performance of financial obligations
of a customer to a third party. These commitments are primarily
issued in favor of local municipalities to support the obligor's
completion of real estate development projects. The credit risk
involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
(b) Interest Rate Cap Agreements
At September 30, 2002 and 2001, the Company was a party to two
interest rate cap agreements with a total notional amount of
$50,000 and maturity dates in March and April 2003. These
agreements were entered into to reduce the variability of cash
flows from potentially higher interest payments associated with
upward interest rate repricings on a portion of the Company's
certificate of deposit accounts and borrowings. The
counterparties to the agreements are obligated to make payments
to the Company, based on the notional amounts, to the extent
that the three-month LIBOR rate exceeds specified levels during
the term of the agreements. These specified rate levels are
8.25% and 6.50% for interest rate cap agreements with notional
amounts of $30,000 and $20,000, respectively.
The Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as of October 1, 2000, and
recorded an after-tax transition adjustment of $41 to recognize
the interest rate cap agreements at fair value. The Company's
interest rate cap agreements are accounted for as cash flow
hedges under SFAS No. 133 and are reported at fair value, which
was insignificant at both September 30, 2002 and 2001. Interest
expense for the nine months ended June 30, 2003 and 2002 and the
years ended September 30, 2002 and 2001 includes charges of $16,
$51, $68 and $157, respectively, for the effect of the interest
rate cap agreements. The remaining amount reported in
accumulated other comprehensive income with respect to these
agreements at September 30, 2002 will be reclassified into
earnings during fiscal 2003.
(17) Commitments and Contingencies
Certain premises and equipment are leased under operating leases with
terms expiring through 2025. The Company has the option to renew certain
of these leases for terms of up to five years. Future minimum rental
payments due under noncancelable operating leases with initial or
remaining terms of more than one year at September 30, 2002 are $2,005
for fiscal 2003, $2,070 for fiscal 2004, $1,870 for fiscal 2005, $1,329
for fiscal 2006, $1,279 for fiscal 2007 and a total of $3,382 for later
years. Occupancy and office operations expense includes net rent expense
of $900 and $853 for the nine months ended
F - 39 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
June 30, 2003 and 2002, respectively, and $1,137, $1,076 and $1,008 for
the years ended September 30, 2002, 2001 and 2000, respectively.
The Company is a defendant in certain claims and legal actions arising
in the ordinary course of business. Management, after consultation with
legal counsel, does not anticipate losses on any of these claims or
actions that would have a material adverse effect on the consolidated
financial statements.
(18) Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information for those financial
instruments for which it is practicable to estimate fair value, whether
or not such financial instruments are recognized in the consolidated
statements of financial condition. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
Quoted market prices are used to estimate fair values when those prices
are available, although active markets do not exist for many types of
financial instruments. Fair values for these instruments must be
estimated by management using techniques such as discounted cash flow
analysis and comparison to similar instruments. These estimates are
highly subjective and require judgments regarding significant matters,
such as the amount and timing of future cash flows and the selection of
discount rates that appropriately reflect market and credit risks.
Changes in these judgments often have a material effect on the fair
value estimates. Since these estimates are made as of a specific point
in time, they are susceptible to material near-term changes. Fair values
disclosed in accordance with SFAS No. 107 do not reflect any premium or
discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect possible tax
ramifications or estimated transaction costs.
The following is a summary of the carrying amounts and estimated fair
values of financial assets and liabilities (none of which were held for
trading purposes):
September 30,
June 30, -------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
Carrying Estimated Carrying Estimated Carrying Estimated
amount fair value amount fair value amount fair value
---------- ---------- ---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 43,473 $ 43,473 $ 35,093 $ 35,093 $ 16,447 $ 16,447
Securities available for sale 251,913 251,913 206,146 206,146 163,928 163,928
Securities held to maturity 82,787 85,576 86,791 90,706 71,355 73,660
Loans 682,555 713,430 660,816 678,927 606,146 624,020
Accrued interest receivable 4,427 4,427 5,491 5,491 5,597 5,597
FHLB stock 5,819 5,819 5,348 5,348 5,521 5,521
Financial liabilities:
Deposits 857,534 860,218 799,626 802,040 653,100 655,675
FHLB borrowings 116,732 120,529 102,968 106,308 110,427 113,970
Mortgage escrow funds 13,055 13,055 3,747 3,747 6,197 6,197
========== ========== ========== ========== ========== ==========
F - 40 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The following paragraphs summarize the principal methods and assumptions
used by management to estimate the fair value of the Company's financial
instruments.
(a) Securities
The estimated fair values of securities were based on quoted
market prices.
(b) Loans
Fair values were estimated for portfolios of loans with similar
financial characteristics. For valuation purposes, the total
loan portfolio was segregated into adjustable-rate and
fixed-rate categories. Fixed-rate loans were further segmented
by type, such as residential mortgage, commercial mortgage,
commercial business and consumer loans. Loans were also
segmented by maturity dates.
Fair values were estimated by discounting scheduled future cash
flows through estimated maturity using a discount rate
equivalent to the current market rate on loans that are similar
with regard to collateral, maturity and the type of borrower.
The discounted value of the cash flows was reduced by a credit
risk adjustment based on loan categories. Based on the current
composition of the Company's loan portfolio, as well as past
experience and current economic conditions and trends, the
future cash flows were adjusted by prepayment assumptions that
shortened the estimated remaining time to maturity and therefore
affected the fair value estimates.
(c) Deposits
In accordance with SFAS No. 107, deposits with no stated
maturity (such as savings, demand and money market deposits)
were assigned fair values equal to the carrying amounts payable
on demand. Certificates of deposit were segregated by account
type and original term, and fair values were estimated by
discounting the contractual cash flows. The discount rate for
each account grouping was equivalent to the current market rates
for deposits of similar type and maturity.
These fair values do not include the value of core deposit
relationships that comprise a significant portion of the
Company's deposit base. Management believes that the Company's
core deposit relationships provide a relatively stable, low-cost
funding source that has a substantial value separate from the
deposit balances.
(d) FHLB Borrowings
Fair values of FHLB borrowings were estimated by discounting the
contractual cash flows. A discount rate was utilized for each
outstanding borrowing equivalent to the then-current rate
offered by the FHLB on borrowings of similar type and maturity.
(e) Other Financial Instruments
The other financial assets and liabilities listed in the
preceding table have estimated fair values that approximate the
respective carrying amounts because the instruments are payable
on demand or have short-term maturities and present relatively
low credit risk and interest rate risk.
F - 41 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
The fair values of the Company's off-balance-sheet financial
instruments described in note 16 were estimated based on current
market terms (including interest rates and fees), considering
the remaining terms of the agreements and the credit worthiness
of the counterparties. At June 30, 2003, September 30, 2002 and
2001, the estimated fair values of these instruments
approximated the related carrying amounts, which were
insignificant.
(19) Recent Accounting Standards and Interpretations
In October 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 147, Acquisitions of Certain Financial Institutions - an
Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No.
9. This statement removes acquisitions of financial institutions from
the scope of both SFAS No. 72 and FASB Interpretation No. 9 and requires
that those transactions be accounted for in accordance with SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. As a result, the requirement in paragraph 5 of
Statement 72 to recognize (and subsequently amortize) any excess of the
fair value of liabilities assumed over the fair value of intangible
assets acquired as an unidentifiable intangible asset (SFAS No. 72
goodwill) no longer applies to acquisitions within the scope of the
statement. The Company does not currently have any SFAS No. 72 goodwill
and, as a result, the adoption of this statement is not expected to have
a material impact on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123. This statement provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effects of the method used on reported results. The
provisions of this standard are not expected to have a material impact
on the consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This statement amends
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, for certain decisions made by the Board as part of the
Derivative Implementation Group process. This statement is effective for
contracts entered into or modified after June 30, 2003 and hedging
relationships designated after June 30, 2003. Management does not expect
that the provisions of SFAS No. 149 will have a material impact on the
results of operations or financial condition.
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity was issued in May 2003.
Under this statement, certain freestanding financial instruments that
embody obligations for the issuer and that are now classified in equity,
must be classified as liabilities (or as assets in some circumstances).
Generally, SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003.
Adoption of this standard is not expected to have a material impact on
the consolidated financial statements.
F - 42 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, was issued in November 2002. This interpretation
elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. The disclosure requirements in this
interpretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. The interpretation also
requires a guarantor to recognize, at fair value, a liability for the
obligation at inception of the guarantee (effective for guarantees
issued or modified after December 31, 2002). The provisions of FIN No.
45 is not expected to have a material impact on the consolidated
financial statements.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, to provide guidance on the identification of entities
controlled through means other than voting rights. FIN No. 46 specifies
how a business enterprise should evaluate its interests in a variable
interest entity to determine whether to consolidate that entity. A
variable interest entity must be consolidated by its primary beneficiary
if the entity does not effectively disperse risks among the parties
involved. A public company with a variable interest in an entity created
before February 1, 2003 must apply FIN No. 46 in the first interim or
annual period beginning after June 15, 2003. The adoption of FIN No. 46
is not expected to have a significant effect on the consolidated
financial statements.
(20) Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition of
Provident Bancorp, Inc. and the related condensed statements of income
and cash flows:
September 30,
Condensed Statements of June 30, -----------------------
Financial Condition 2003 2002 2001
---------- ---------- ----------
Assets:
Cash $ 5,053 $ 641 $ 2,847
Securities available for sale 2,316 6,466 6,510
Loan receivable from ESOP 1,880 2,256 2,632
Investment in Provident Bank 107,559 102,805 90,419
Other assets 93 195 305
---------- ---------- ----------
Total assets $ 116,901 $ 112,363 $ 102,713
========== ========== ==========
Liabilities $ 1,164 $ 1,496 $ 93
Stockholders' equity 115,737 110,867 102,620
---------- ---------- ----------
Total liabilities and
stockholders' equity $ 116,901 $ 112,363 $ 102,713
========== ========== ==========
F - 43 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
Nine months ended June 30, Year ended September 30,
-------------------------- --------------------------------------
2003 2002 2002 2001 2000
---------- ------------ ---------- ---------- ----------
Condensed statements of income
Interest income $ 210 $ 342 $ 450 $ 626 $ 902
Dividends from Provident Bank 3,500 -- -- -- 2,000
Gain on sale of securities available
for sale 92 123 123 431 --
Non-interest expense (129) (182) (226) (180) (180)
Income tax expense (72) (109) (134) (338) (279)
---------- ------------ ---------- ---------- ----------
Income before equity in undistributed
earnings of Provident Bank 3,601 174 213 539 2,443
Equity in undistributed earnings of
Provident Bank 5,066 7,096 9,314 6,943 3,429
---------- ------------ ---------- ---------- ----------
Net income $ 8,667 $ 7,270 $ 9,527 $ 7,482 $ 5,872
========== ============ ========== ========== ==========
Condensed statements of cash flows Cash flows from operating activities:
Net income $ 8,667 $ 7,270 $ 9,527 $ 7,482 $ 5,872
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings of
Provident Bank (5,066) (7,096) (9,314) (6,943) (3,429)
Other adjustments, net (407) (851) 755 (674) (781)
---------- ------------ ---------- ---------- ----------
Net cash provided by (used in)
operating activities 3,194 (677) 968 (135) 1,662
Cash flows from investing activities:
Purchases of securities available for sale -- (2,261) (2,296) (2,431) (1,008)
Proceeds from maturities of securities
available for sale 2,100 -- -- -- --
Proceeds from sales of securities available
for sale 2,142 2,324 2,374 6,810 984
ESOP loan principal repayments 376 376 376 376 376
---------- ------------ ---------- ---------- ----------
Net cash provided by investing
activities 4,618 439 454 4,755 352
---------- ------------ ---------- ---------- ----------
Cash flows from financing activities:
Treasury shares purchased (1,898) (775) (1,971) (1,155) (3,203)
Cash dividends paid (1,871) (1,500) (1,935) (807) (1,049)
Stock option transactions 369 234 278 60 --
---------- ------------ ---------- ---------- ----------
Net cash used in financing activities (3,400) (2,041) (3,628) (1,902) (4,252)
---------- ------------ ---------- ---------- ----------
Net increase (decrease) in cash 4,412 (2,279) (2,206) 2,718 (2,238)
Cash at beginning of year 641 2,847 2,847 129 2,367
---------- ------------ ---------- ---------- ----------
Cash at end of year $ 5,053 $ 568 $ 641 $ 2,847 $ 129
========== ============ ========== ========== ==========
F - 44 (Continued)
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information with respect to June 30, 2003 and the nine-month periods
ended June 30, 2003 and 2002 is unaudited)
(Dollars in thousands, except per share data)
(21) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations
for the years ended September 30, 2002 and 2001:
First Second Third Fourth
quarter quarter quarter quarter
---------- ---------- ---------- ----------
Year ended September 30, 2002
Interest and dividend income $ 14,761 $ 14,558 $ 15,010 $ 15,622
Interest expense 4,791 4,192 4,217 4,001
---------- ---------- ---------- ----------
Net interest income 9,970 10,366 10,793 11,621
Provision for loan losses 225 175 200 300
Non-interest income 1,284 1,230 1,338 1,549
Non-interest expense 7,153 7,270 8,479 9,259
---------- ---------- ---------- ----------
Income before income
tax expense 3,876 4,151 3,452 3,611
Income tax expense 1,350 1,550 1,309 1,354
---------- ---------- ---------- ----------
Net income $ 2,526 $ 2,601 $ 2,143 $ 2,257
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.32 $ 0.34 $ 0.28 $ 0.29
Diluted 0.32 0.33 0.27 0.29
========== ========== ========== ==========
Year ended September 30, 2001
Interest and dividend income $ 15,369 $ 15,361 $ 15,155 $ 15,093
Interest expense 7,061 6,921 6,412 5,850
---------- ---------- ---------- ----------
Net interest income 8,308 8,440 8,743 9,243
Provision for loan losses 360 360 360 360
Non-interest income 1,051 1,023 1,477 1,155
Non-interest expense 6,125 6,739 6,664 6,903
---------- ---------- ---------- ----------
Income before income
tax expense 2,874 2,364 3,196 3,135
Income tax expense 999 799 1,092 1,197
---------- ---------- ---------- ----------
Net income $ 1,875 $ 1,565 $ 2,104 $ 1,938
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.24 $ 0.20 $ 0.27 $ 0.25
Diluted 0.24 0.20 0.27 0.25
---------- ---------- ---------- ----------
F - 45
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus and, if given or made,
such other information or representation must not be relied upon as having been
authorized by Provident Bancorp, Inc. or Provident Bank. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this prospectus nor any sale hereunder shall under any circumstances create any
implication that there has been no change in the affairs of Provident Bancorp,
Inc. or Provident Bank since any of the dates as of which information is
furnished herein or since the date hereof.
Up to 19,573,000 Shares
(Anticipated Maximum)
Provident Bancorp, Inc.
(Holding Company for
Provident Bank)
COMMON STOCK
par value $0.01 per share
------------------
PROSPECTUS
------------------
Ryan Beck & Co.
November ___, 2003
------------------
These securities are not deposits or accounts and are not federally
insured or guaranteed.
------------------
Until December ___, 2003 or 25 days after commencement of the syndicated
community offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments of subscriptions.
- --------------------------------------------------------------------------------
F:\clients\1109\second step\Prospectus 08.doc
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount(1)
---------
* Registrant's Legal Fees and Expenses........................... $ 600,000
* E.N.B. Holding Company's Legal Fees and Expenses............... 550,000
* Registrant's Accounting Fees and Expenses...................... 175,000
* E.N.B. Holding Company's Accounting Fees and Expenses.......... 290,000
* E.N.B. Holding Company's Financial Advisory Fees and Expenses.. 2,574,124
* Conversion Agent and Data Processing Fees...................... 75,000
* Marketing Agent Fees and Expenses (2).......................... 1,309,040
* Appraisal and Business Plan Fees and Expenses.................. 187,500
* Registrant's Financial Advisory Fees and Expenses.............. 157,500
* Printing, Postage and Mailing.................................. 325,000
* Filing Fees (OTS, NASD, Nasdaq and SEC)........................ 97,660
* Other.......................................................... 159,176
--------------
* Total ......................................................... $ 6,500,000
==============
- --------------
* Estimated
(1) Includes expenses related to the acquisition of E.N.B. Holding Company,
Inc.
(2) Provident Bancorp, Inc. has retained Ryan, Beck & Co., Inc. to assist in
the sale of common stock on a best efforts basis in the offerings. Fees are
estimated at the midpoint of the offering range.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Articles TENTH and ELEVENTH of the Certificate of Incorporation of
Provident Bancorp, Inc. (the "Corporation") sets forth circumstances under which
directors, officers, employees and agents of the Corporation may be insured or
indemnified against liability which they incur in their capacities as such:
TENTH:
------
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director of Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee,
to repay all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter a
"final adjudication") that such indemnitee is not entitled to be indemnified for
such expenses under this Section or otherwise. The rights to indemnification and
to the advancement of expenses conferred in Sections A and B of this Article
TENTH shall be contract rights and such rights shall continue as to an
indemnitee who has ceased to be a Director, Officer, employee or agent and shall
inure to the benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraphs by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits and financial statement schedules filed as part of
this registration statement are as follows:
(A) LIST OF EXHIBITS
1.1 Engagement Letter between Provident Bancorp, Inc. and Ryan, Beck &
Co., Inc. *
1.2 Form of Agency Agreement between Provident Bancorp, Inc. and Ryan,
Beck & Co., Inc. *
2.1 Plan of Conversion and Reorganization, as amended*
2.2 Agreement and Plan of Reorganization by and between Provident Bancorp,
MHC, Provident Bancorp, Inc., a Federal corporation, Provident Bancorp,
Inc., a Delaware corporation, Provident Bank and E.N.B. Holding
Company, Inc. and Ellenville National Bank*****
3.1 Certificate of Incorporation of Provident Bancorp, Inc.*
3.2 Bylaws of Provident Bancorp, Inc.*
4 Form of Common Stock Certificate of Provident Bancorp, Inc.*
5 Opinion of Luse Gorman Pomerenk & Schick regarding legality of
securities being registered*
8 Federal Tax Opinion of Luse Gorman Pomerenk & Schick*
10.1 Employee Stock Ownership Plan**
10.2 Employment Agreement with George Strayton, as amended**
10.3 Form of Employment Agreement**
10.4 Deferred Compensation Agreement, as amended and restated*
10.5 Supplemental Executive Retirement Plan, as amended**
10.6 Management Incentive Program**
10.7 1996 Long-Term Incentive Plan for Officers and Directors, as amended**
10.8 Provident Bank 2000 Stock Option Plan***
10.9 Provident Bank 2000 Recognition and Retention Plan***
21 Subsidiaries of Registrant*
23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions
included as Exhibits 5 and 8)
23.2 Consent of KPMG LLP
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement between Provident Bancorp, Inc. and RP Financial,
LC.*
99.2 Business Plan Agreement between the Registrant and RP Financial, LC. *
99.3 Appraisal Report of RP Financial, LC.****
99.4 Letter of RP Financial, LC. with respect to Subscription Rights*
99.5 Marketing Materials*
99.6 Order and Acknowledgment Form*
99.7 Prospectus Supplement for participants in the Provident Bank 401(k)
Plan*
99.8 Conversion Appraisal Update Report****
- --------------------------
* Previously filed.
** Incorporated by reference to the Registration Statement on Form S-1
(File No. 333-63593), originally filed with the Commission on September
17, 1998 and amended on November 6, 1998 and November 12, 1998.
*** Incorporated by reference from Provident Bancorp, Inc.'s Proxy Statement
for the 2000 Annual Meeting of Stockholders filed with the Commission on
January 18, 2000.
**** Supporting financial schedules filed pursuant to Rule 202 of Regulation
S-T.
***** Incorporated by Reference to Exhibit 2.1 to the Current Report on Form
8-K of Provident Bancorp, Inc., a Federal corporation, filed with the
Commission on July 3, 2003 (File No. 0-25223).
(B) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required information is
not applicable or is included in the consolidated financial statements or
related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any duration from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the Village of Montebello, State of
New York on November 7, 2003.
PROVIDENT BANCORP, INC.
By: /s/ GEORGE STRAYTON
------------------------------------
George Strayton
President, Chief Executive Officer
and Director
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Provident Bancorp, Inc. (the
"Company") hereby severally constitute and appoint George Strayton as our true
and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said George Strayton may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-1 relating
to the offering of the Company's common stock, including specifically, but not
limited to, power and authority to sign for us in our names in the capacities
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm
all that said George Strayton shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ George Strayton President, Chief Executive November 7, 2003
- ------------------------------- Officer and Director (Principal
George Strayton Executive Officer)
/s/ Paul A. Maisch Senior Vice President and Chief November 7, 2003
- ------------------------------- Financial Officer (Principal
Paul A. Maisch Financial and Accounting Officer)
/s/ William F. Helmer Chairman of the Board November 7, 2003
- -------------------------------
William F. Helmer
/s/ Dennis L. Coyle Vice Chairman of the Board November 7, 2003
- -------------------------------
Dennis L. Coyle
/s/ Judith Hershaft Director November 7, 2003
- -------------------------------
Judith Hershaft
/s/ Thomas F. Jauntig, Jr. Director November 7, 2003
- -------------------------------
Thomas F. Jauntig, Jr.
/s/ Donald T. McNelis Director November 7, 2003
- -------------------------------
Donald T. McNelis
/s/ Richard A. Nozell Director November 7, 2003
- -------------------------------
Richard A. Nozell
/s/ William R. Sichol, Jr. Director November 7, 2003
- -------------------------------
William R. Sichol, Jr.
/s/ Burt Steinberg Director November 7, 2003
- -------------------------------
Burt Steinberg
/s/ Gary Zeh Director November 7, 2003
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F. Gary Zeh
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 2003
REGISTRATION NO. 333-108795
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT
ON
FORM S-1
PROVIDENT BANCORP, INC.
MONTEBELLO, NEW YORK
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EXHIBIT INDEX
1.1 Engagement Letter between Provident Bancorp, Inc. and Ryan, Beck &
Co., Inc. *
1.2 Form of Agency Agreement between Provident Bancorp, Inc. and Ryan,
Beck & Co., Inc. *
2.1 Plan of Conversion and Reorganization, as amended*
2.2 Agreement and Plan of Reorganization by and between Provident Bancorp,
MHC, Provident Bancorp, Inc., a Federal corporation, Provident Bancorp,
Inc., a Delaware corporation, Provident Bank and E.N.B. Holding
Company, Inc. and Ellenville National Bank*****
3.1 Certificate of Incorporation of Provident Bancorp, Inc.*
3.2 Bylaws of Provident Bancorp, Inc.*
4 Form of Common Stock Certificate of Provident Bancorp, Inc.*
5 Opinion of Luse Gorman Pomerenk & Schick regarding legality of
securities being registered*
8 Federal Tax Opinion of Luse Gorman Pomerenk & Schick*
10.1 Employee Stock Ownership Plan**
10.2 Employment Agreement with George Strayton, as amended**
10.3 Form of Employment Agreement**
10.4 Deferred Compensation Agreement, as amended and restated*
10.5 Supplemental Executive Retirement Plan, as amended**
10.6 Management Incentive Program**
10.7 1996 Long-Term Incentive Plan for Officers and Directors, as amended**
10.8 Provident Bank 2000 Stock Option Plan***
10.9 Provident Bank 2000 Recognition and Retention Plan***
21 Subsidiaries of Registrant*
23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions
included as Exhibits 5 and 8)
23.2 Consent of KPMG LLP
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement between Provident Bancorp, Inc. and RP Financial,
LC.*
99.2 Business Plan Agreement between the Registrant and RP Financial, LC. *
99.3 Appraisal Report of RP Financial, LC.****
99.4 Letter of RP Financial, LC. with respect to Subscription Rights*
99.5 Marketing Materials*
99.6 Order and Acknowledgment Form*
99.7 Prospectus Supplement for participants in the Provident Bank 401(k)
Plan*
99.8 Conversion Appraisal Update Report****
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* Previously filed.
** Incorporated by reference to the Registration Statement on Form S-1
(File No. 333-63593), originally filed with the Commission on September
17, 1998 and amended on November 6, 1998 and November 12, 1998.
*** Incorporated by reference from Provident Bancorp, Inc.'s Proxy Statement
for the 2000 Annual Meeting of Stockholders filed with the Commission on
January 18, 2000.
**** Supporting financial schedules filed pursuant to Rule 202 of Regulation
S-T.
***** Incorporated by Reference to Exhibit 2.1 to the Current Report on Form
8-K of Provident Bancorp, Inc., a Federal corporation, filed with the
Commission on July 3, 2003 (File No. 0-25223).