EX-13 2 0002.txt ANNUAL REPORT PORTION OF ANNUAL REPORT TO STOCKHOLDERS SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following selected financial condition and operating data are derived from the audited consolidated financial statements of Provident Bancorp, Inc., or, prior to January 7, 1999, Provident Bank. Additional information is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the Consolidated Financial Statements and related notes included elsewhere in this report.
At September 30, -------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (In thousands) Selected Financial Condition Data: Total assets ................ $844,786 $814,518 $691,068 $648,742 $634,250 Loans, net .................. 589,822 566,521 463,667 404,497 369,487 Securities available for sale 162,157 148,387 97,983 84,670 88,795 Securities held to maturity . 48,586 56,782 98,402 126,266 135,001 Deposits .................... 608,976 586,640 573,174 546,846 545,286 Borrowings .................. 127,571 117,753 49,931 41,623 30,157 Equity ...................... 90,986 90,299 55,200 50,399 45,536
Years Ended September 30, ------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (In thousands) Selected Operating Data: Interest and dividend income ............................ $58,899 $52,267 $47,948 $46,555 $42,566 Interest expense ........................................ 26,034 21,589 20,880 20,179 18,585 ------- ------- ------- ------- ------- Net interest income ............................... 32,865 30,678 27,068 26,376 23,981 Provision for loan losses ............................... 1,710 1,590 1,737 1,058 911 ------- ------- ------- ------- ------- Net interest income after provision for loan losses 31,155 29,088 25,331 25,318 23,070 Non-interest income ..................................... 3,391 3,103 3,080 2,711 2,451 Non-interest expense (1) (2) ............................ 25,808 26,303 21,823 20,602 22,734 ------- ------- ------- ------- ------- Income before income tax expense .................. 8,738 5,888 6,588 7,427 2,787 Income tax expense ...................................... 2,866 1,958 2,346 2,829 690 ------- ------- ------- ------- ------- Net income (2) .................................... $ 5,872 $ 3,930 $ 4,242 $ 4,598 $ 2,097 ======= ======= ======= ======= =======
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At or for the Years Ended September 30, ---------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets) ........ 0.70% 0.52% 0.64% 0.72% 0.36% Return on equity (ratio of net income to average equity) .............. 6.58 5.03 7.94 9.51 4.60 Average interest rate spread (3) ...................................... 3.51 3.66 3.79 3.92 3.88 Net interest margin (4) ............................................... 4.12 4.24 4.28 4.36 4.30 Efficiency ratio (5) .................................................. 71.18 77.86 72.39 70.83 73.53 Non-interest expense to average total assets (2) ...................... 3.08 3.47 3.29 3.24 3.91 Average interest-earning assets to average interest-bearing liabilities 118.54 119.28 114.88 113.07 112.60 Per Share and Related Data: Basic and diluted earnings per share (6) .............................. $ 0.76 $ 0.40 -- -- -- Dividends per share (7) ............................................... $ 0.15 $ 0.06 -- -- -- Dividend payout ratio (8) ............................................. 19.74% 15.00% -- -- -- Book value per share (9) .............................................. $ 11.26 $ 10.91 -- -- -- Asset Quality Ratios: Non-performing assets to total assets ................................. 0.50% 0.62% 0.94% 0.75% 1.21% Non-performing loans to total loans ................................... 0.67 0.82 1.32 1.16 1.72 Allowance for loan losses to non-performing loans ..................... 189.85 133.78 80.33 80.80 52.87 Allowance for loan losses to total loans .............................. 1.30 1.09 1.06 0.93 0.91 Capital Ratios: Equity to total assets at end of year ................................. 10.77% 11.09% 7.99% 7.77% 7.18% Average equity to average assets ...................................... 10.67 10.29 8.05 7.59 7.83 Tier 1 leverage ratio (Bank only) ..................................... 9.59 9.56 7.37 6.96 6.15
--------------------------- (1) Non-interest expense for fiscal 1999 includes special charges totaling approximately $1.5 million in connection with the computer system conversion ($1.1 million) and establishment of the employee stock ownership plan ("ESOP") ($371,000). Excluding these special charges after taxes, net income would have been approximately $4.9 million for fiscal 1999. (2) Non-interest expense for fiscal 1996 includes $3.3 million for Provident Bank's share of a special assessment imposed on all financial institutions with deposits insured by the Savings Association Insurance Fund (the "SAIF"). On an after-tax basis, the special assessment reduced net income for fiscal 1996 by approximately $2.0 million. Excluding the special assessment, the ratio of non-interest expense to average total assets was 3.34% for fiscal 1996. (3) 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. (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 (other than the SAIF special assessment in fiscal 1996) divided by the sum of net interest income 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) Dividends per share for fiscal 2000 represents dividends of $0.03 per share declared and paid in the first quarter and $0.04 per share declared and paid in the second through fourth quarters. For fiscal 1999, dividends per share represents dividends of $0.03 per share declared and paid in each of the third and fourth quarters. (8) For fiscal 2000, the payout ratio is based on dividends of $0.15 per share and twelve-month earnings per share of $0.76. For fiscal 1999, the 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%. (9) Book value per share is based on total stockholders' equity and 8,077,800 and 8,280,000 outstanding common shares at September 30, 2000 and 1999, respectively. For this purpose common shares include unallocated ESOP shares but exclude treasury shares. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Provident Bank (the "Bank") is a federally-chartered thrift institution operating as a community bank and conducting business primarily in Rockland and Orange Counties, New York. On January 7, 1999, 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"). 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. Collectively, Provident Bancorp, Inc. and the Bank are referred to herein as "the Company", and financial condition and results of operations are discussed on a consolidated basis. Reference to the Company may signify the Bank, depending on the context of the reference, particularly for periods prior to the Reorganization and Offering. The Company's results of operations depend primarily on its net interest income, which is the difference between the interest income on its earning assets, such as loans and securities, and the interest expense paid on its 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 service fees and income from loan servicing. The Company's non-interest expense consists primarily of salaries and employee benefits, occupancy and office expenses, advertising and promotion expense, data processing expenses and amortization of branch purchase premiums. 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. Forward-Looking Statements In addition to historical information, this document contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believe", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, without limitation, the Company's continued ability to originate quality loans, fluctuations in interest rates, real estate conditions in the Company's lending areas, general and local economic conditions, the Company's continued ability to attract and retain deposits, the Company's ability to control costs, and the effect of new accounting pronouncements and changing regulatory requirements. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 4 Management Strategy Management intends to continue the Bank's growth as an independent community bank offering a broad range of customer-focused services as an alternative to money center banks in its market area, positioning the Bank for sustainable long-term growth. In recent years, management determined that the success of the Bank would be enhanced by operating as a community bank rather than a traditional thrift institution, and as a result, management implemented a business strategy that included: (i) creating an infrastructure for commercial and consumer banking, including an experienced commercial loan department and delivery systems to accommodate the needs of business and individual customers; and (ii) placing a greater emphasis on commercial real estate and business lending, as well as checking and other transaction accounts. Highlights of management's business strategy are as follows: Community banking and customer service: As an independent community bank, a principal objective of the Bank is to respond to the financial services needs of its consumer and commercial customers. Management intends to use new technologies to offer customers new financial products and services as market and regulatory conditions permit, including PC banking, cash management services and sweep accounts, which the Bank introduced in the months subsequent to its September 2000 fiscal year end. The Bank has also begun to offer asset management and trust services, and intends to offer personal financial planning services in the near future. Growing and diversifying the loan portfolio: The Bank also offers a broad range of products to commercial businesses and real estate owners and developers. The Bank has established experienced commercial loan and loan administration departments to assure the continued growth and careful management of the quality of its assets. Expanding the retail banking franchise: Management intends to continue to expand the retail banking franchise and to increase the number of households served in the Bank's market area. Management's 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. In the fall of 1999, the Bank opened its first two branches in Orange County, extending its market area beyond its base of 11 branches in Rockland County. The Bank intends to pursue opportunities to expand its branch network further as market conditions permit and is currently readying three more branch locations, one in Rockland County and two in Orange County, which the Bank expects to open over the next twelve months. Acknowledging the time pressures on the two-income families typical to its market area, the Bank maintains seven-day-a-week banking at six of its branch offices. The Bank also has 16 automated teller machines ("ATMs") including four new, advanced-function ATMs that deliver change to the penny, in addition to the more typical ATM functions. The Bank also participates in networks that permit customers to access their accounts through ATMs worldwide. Management of Market Risk Qualitative Analysis. As with other financial institution holding companies, the Company's most significant form of market risk is interest rate risk. The general objective of the Company's interest rate risk management is to determine the appropriate level of risk, given the Company's business strategy, and then manage that risk in a manner that is consistent with the Company's policy to reduce the exposure of net interest income to changes in market interest rates. The Bank's asset/liability management committee ("ALCO"), which consists of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, the Company's operating environment, and capital and liquidity requirements, and modifies lending, investing and deposit gathering strategies accordingly. A 5 committee of the Board of Directors reviews the ALCO's activities and strategies, the effect of those strategies on the Company's net interest margin, and the effect that changes in market interest rates would have on the value of the Company's loan and securities portfolios. The Company actively evaluates interest rate risk concerns in connection with its lending, investing, and deposit activities. The Company emphasizes the origination of residential monthly and bi-weekly fixed-rate mortgage loans, residential and commercial adjustable-rate mortgage loans, consumer loans and business loans. Depending on market interest rates and the Company's capital and liquidity position, the Company may retain all of its newly originated fixed-rate, fixed-term residential mortgage loans or it may sell all or a portion of such longer-term loans on a servicing-retained basis. The Company also invests in short-term securities. Shortening the maturities of the Company's interest-earning assets by increasing investments in shorter-term loans and securities helps to better match the maturities and interest rates of the Company's assets and liabilities, thereby reducing the exposure of its net interest income to changes in market interest rates. These strategies may adversely impact net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments. The Company has purchased interest rate caps to synthetically extend the duration of its portfolio of short- term certificates of deposits and wholesale borrowings. In March 1998, the Company entered into a five-year interest rate cap agreement in which the counterparty agreed to make interest payments to the Company based on a $20 million notional amount to the extent that the three-month LIBOR rate exceeds 6.50% at each quarterly determination date. In April 2000, the Company entered into a three-year interest rate cap agreement in which the counterparty agreed to make interest payments to the Company based on a $30 million notional amount to the extent that the three-month LIBOR rate exceeds 8.25% at each quarterly determination date. By purchasing shorter-term assets and extending the duration of its liabilities, management believes that the corresponding reduction in interest rate risk will enhance long-term profitability. Quantitative Analysis. 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 the Company'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 periods of interest rate changes. 6 The table below sets forth, as of September 30, 2000, the estimated changes in the Company's NPV and its net interest income that would result from the designated instantaneous changes in the U.S. Treasury yield curve.
NPV Net Interest Income ------------------------------------------------------------------- --------------------------------------------- Change in Estimated Increase Increase (Decrease) in (Decrease) in NPV Estimated Estimated Net Interest Income Interest Rates Estimated ---------------------------- Net Interest ----------------------------- (basis points) NPV Amount Percent Income Amount Percent -------------- -------------- ------- ---------- --------- ------ ---------- (Dollars in thousands) +300 $ 67,407 $ (31,101) (31.6)% $ 26,560 $ (1,576) (5.6)% +200 77,986 (20,522) (20.8) 27,030 (1,106) (3.9) +100 88,332 (10,176) (10.3) 27,527 (609) (2.2) 0 98,508 --- --- 28,136 --- --- -100 105,833 7,325 7.4 28,628 492 1.7 -200 111,372 12,864 13.1 29,487 1,351 4.8 -300 118,370 19,862 20.2 30,414 2,278 8.1
The table indicates that at September 30, 2000, in the event of an abrupt 200 basis point decrease in interest rates, the Company would be expected to experience a 13.1% increase in NPV. In the event of an abrupt 200 basis point increase in interest rates, the Company would be expected to experience a 20.8% decrease in NPV. Similarly, the table shows a projected 4.8% increase in the first year's net interest income following an abrupt 200 basis point decrease in interest rates. 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. Further, the computations do not reflect any actions management may undertake in response to changes in interest rates. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income require 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 table presented above assumes that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. It 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 table provides an indication of the Company's 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 the Company's 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. The following table sets forth average balance sheets, average yields and costs, and certain other information for the years ended September 30, 2000, 1999 and 1998. Average balances are daily averages. No tax-equivalent yield adjustments were made, as the effect thereof was not material. 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 7 set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.
Years Ended September 30, ------------------------------------------------------------------------------------------- 2000 1999 ------------------------------------------ --------------------------------------------- Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------------- ----------- ---------- ------------ ----------- ---------- - (Dollars in thousands) Interest-earning assets: Loans (1)...................... $ 577,119 $ 45,043 7.80% $ 526,139 $ 40,209 7.64% Mortgage-backed securities (2). 97,533 6,518 6.68 113,458 7,231 6.37 Investment securities (2)...... 114,269 6,750 5.91 78,858 4,410 5.59 Other.......................... 9,119 588 6.45 5,229 417 7.97 ------------- ----------- ----------- ----------- Total interest-earning assets 798,040 58,899 7.38 723,684 52,267 7.22 ---------- ----------- Non-interest-earning assets...... 38,770 35,165 ------------- ----------- Total assets................. $ 836,810 $ 758,849 ============= =========== Interest-bearing liabilities: Savings deposits (3)........... $ 177,077 3,435 1.94 $ 171,585 3,398 1.98 Money market and .....................NOW deposits 129,527 2,499 1.93 125,196 2,516 2.01 Certificates of deposit........ 244,279 12,787 5.23 235,620 11,560 4.91 Borrowings..................... 122,315 7,313 5.98 74,328 4,115 5.53 ------------- ----------- ----------- ----------- Total interest-bearing liabilities.............. 673,198 26,034 3.87 606,729 21,589 3.56 ----------- ----------- Non-interest-bearing liabilities. 74,316 74,064 ------------- ----------- Total liabilities............ 747,514 680,793 Equity........................... 89,296 78,056 ------------- ----------- Total liabilities and equity. $ 836,810 $ 758,849 ============= =========== Net interest income.............. $ 32,865 $ 30,678 =========== =========== Net interest rate spread (4)..... 3.51% 3.66% Net interest-earning assets (5).. $ 124,842 $ 116,955 ============= =========== Net interest margin (6).......... 4.12% 4.24% Ratio of interest-earning assets to interest-bearing liabilities 118.54% 119.28% ------------------------------------
Years Ended September 30, ------------------------- 1998 -------------------------------------- Average Balance Interest Yield/Rate ------------ ---------- ---------- (Dollars in thousands) Interest-earning assets: Loans (1)...................... $ 428,460 $ 35,032 8.18% Mortgage-backed securities (2). 136,011 8,822 6.49 Investment securities (2)...... 64,177 3,791 5.91 Other.......................... 4,345 303 6.97 --------- ----------- Total interest-earning assets 632,993 47,948 7.57 ----------- Non-interest-earning assets...... 30,254 --------- Total assets................. $ 663,247 ========= Interest-bearing liabilities: Savings deposits (3)........... $ 166,529 3,697 2.22 Money market and .....................NOW deposits 114,542 2,687 2.35 Certificates of deposit........ 240,986 12,771 5.30 Borrowings..................... 28,961 1,725 5.96 --------- ----------- Total interest-bearing liabilities.............. 551,018 20,880 3.79 ----------- Non-interest-bearing liabilities. 58,811 --------- Total liabilities............ 609,829 Equity........................... 53,418 --------- Total liabilities and equity. $ 663,247 ========= Net interest income.............. $ 27,068 ============= Net interest rate spread (4)..... 3.78% Net interest-earning assets (5).. $ 81,975 ========= Net interest margin (6).......... 4.28% Ratio of interest-earning assets to interest-bearing liabilities 114.88% ------------------------------------ (1) Balances include the effect of net deferred loan origination fees and costs, and the allowance for loan losses. (2) Average outstanding balances are based on amortized cost. (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. 8 The following table presents the dollar amounts of changes in interest income and interest expense for the major categories of the Company's 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) the change attributable to change in volume (change in average balance multiplied by the prior-period average rate) and (ii) the change attributable to rate (change in average rate multiplied by the prior-period average balance). 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, ------------------------------------------------------------------------------------- 2000 vs. 1999 1999 vs. 1998 --------------------------------------- ----------------------------------------- Increase (Decrease) Increase (Decrease) Total Due to Total Due to Increase ------------------------- Increase ------------------------ Volume Rate (Decrease) Volume Rate ------ ---------- ---------- -------- --------- (In thousands) Interest-earning assets: Loans ................................ $ 3,895 $ 939 $ 4,834 $ 7,581 $(2,404) $ 5,177 Mortgage-backed securities ........... (1,014) 301 (713) (1,440) (151) (1,591) Investment securities ................ 1,979 361 2,340 839 (149) 690 Other ................................ 310 (139) 171 59 (16) 43 ------- ------- ------- ------- ------- ------- Total interest-earning assets .... 5,170 1,462 6,632 7,039 (2,720) 4,319 ------- ------- ------- ------- ------- ------- Interest-bearing liabilities: Savings deposits ..................... 109 (72) 37 109 (408) (299) Money market and NOW deposits ........ 87 (104) (17) 236 (407) (171) Certificates of deposit .............. 425 802 1,227 (279) (931) (1,210) Borrowings ........................... 2,654 544 3,198 2,519 (130) 2,389 ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities 3,275 1,170 4,445 2,585 (1,876) 709 ------- ------- ------- ------- ------- ------- Change in net interest income ........ $ 1,895 $ 292 $ 2,187 $ 4,454 $ (844) $ 3,610 ======= ======= ======= ======= ======= =======
Comparison of Financial Condition at September 30, 2000 and September 30, 1999 Total assets increased to $844.8 million at September 30, 2000 from $814.5 million at September 30, 1999, an increase of $30.3 million, or 3.7%. The asset growth was primarily attributable to a $23.3 million increase in net loans and a $5.6 million increase in total securities. Asset growth was funded principally from a $22.3 million increase in deposits and a $9.8 million increase in borrowings. Net loans increased by $23.3 million in the year ended September 30, 2000 primarily due to an increase of $21.8 million in the commercial loan portfolio. Commercial loans increased to $182.1 million at September 30, 2000, from $160.3 million at September 30, 1999, a growth rate of 13.6%. This increase was attributable to increases in commercial mortgage and multi-family loans of $14.6 million and construction loans of $10.5 million, net of a $3.3 million decrease in commercial business loans. Total consumer loans increased by $3.8 million over the period. The allowance for loan losses increased by $1.5 million to $7.7 million at September 30, 2000 from $6.2 million at September 30, 1999. Securities increased by $5.6 million to $210.7 million at September 30, 2000 from $205.2 million at September 30, 1999. This increase reflects a $13.8 million increase in available-for-sale securities, net of an $8.2 million decrease in securities held to maturity. The increase in the available-for-sale portfolio consisted primarily of an $11.5 million increase in U.S. Government and Agency securities and a $6.9 million increase in corporate debt securities. 9 Deposits increased by $22.3 million to $609.0 million at September 30, 2000 from $586.6 million at September 30, 1999. An increase in the total balance of transaction accounts represented the largest component of deposit growth, increasing $14.3 million, or 13.4%, to $121.3 million at September 30, 2000 from $107.0 million at September 30, 1999. Total savings and money market account balances decreased by $3.5 million, or 1.4%, to $238.3 million at September 30, 2000 from $241.8 million at September 30, 1999. Total certificates of deposit increased $11.6 million, or 4.9%, to $249.4 million at September 30, 2000 from $237.8 million at September 30, 1999. Federal Home Loan Bank ("FHLB") borrowings (advances and securities repurchase agreements) and overdrafts increased by $9.8 million to $127.6 million at September 30, 2000 from $117.8 million at September 30, 1999. Stockholders' equity increased by $687,000 to $91.0 million at September 30, 2000 compared to $90.3 million at September 30, 1999. Equity increased due to fiscal year 2000 net income of $5.9 million, a $903,000 reduction in the after-tax net unrealized loss on the available-for-sale securities portfolio, allocation of employee stock ownership plan ("ESOP") shares of $470,000, and vesting of recognition and retention plan ("RRP") shares of $689,000. These increases were substantially offset by cash dividends of $1.0 million, treasury share purchases of $3.2 million and stock grants of $3.0 million under the Bank's RRP. Comparison of Operating Results for the Years Ended September 30, 2000 and September 30, 1999 Net income for the year ended September 30, 2000 was $5.9 million, an increase of $2.0 million, or 49.4%, from net income of $3.9 million for the year ended September 30, 1999. The increase was due primarily to an increase in net interest income and a decrease in non-interest expense, which, in the prior year, included special charges associated with the conversion to a new computer system and the establishment of the ESOP. Excluding the after-tax impact of these special charges, net income would have been approximately $4.9 million for the year ended September 30, 1999. Interest income increased by $6.6 million, or 12.7%, to $58.9 million for the year ended September 30, 2000 from $52.3 million for the year ended September 30, 1999. The increase was primarily due to increased loan volume, as well as the acquisition over time of higher yielding loans and investment securities and the upward adjustment of rates earned on variable rate loans. For the year ended September 30, 2000, income from loans increased by $4.8 million or 12.0%, and income from securities and other earning assets increased $1.8 million or 14.9%. The increase in income from loans was attributable to a $51.0 million increase in the average balance to $577.1 million from $526.1 million, as well as a 16 basis point increase in the average yield to 7.80% from 7.64%. The continued growth of the commercial loan portfolio was responsible for $26.9 million of the overall increase in average loans. Average commercial loans grew to $167.1 million in 2000, from $140.2 million in 1999, an increase of 19.2%. Interest income from commercial loans was $14.6 million for 2000, a $3.0 million or 25.9% increase from income of $11.6 million in 1999. The increase was attributable to both the above-mentioned increase in average balances and a 47 basis point increase in average yields, to 8.72% from 8.25%. The increase in income from investment securities of $2.3 million was attributable to a $35.4 million increase in the average balance to $114.3 million from $78.9 million, as well as a 32 basis point increase in the average yield to 5.91% from 5.59%. The $713,000 decrease in income from mortgage-backed securities was attributable to a $16.0 million decrease in the average balance to $97.5 million from $113.5 million, which offset a 31 basis point increase in the average yield to 6.68% from 6.37%. Interest expense increased by $4.4 million, or 20.6 %, to $26.0 million for the year ended September 30, 2000 from $21.6 million for the year ended September 30, 1999. This increase was due primarily to the continuing rise in market interest rates and higher average balances in wholesale borrowings, which carry higher interest rates than the Bank's core deposits. Average interest-bearing 10 liabilities for the fiscal year ended September 30, 2000 increased $66.5 million, or 10.8%, to $673.2 million, from an average of $606.7 million for the fiscal year ended September 30, 1999. In addition, there was a 31 basis point increase in the average rate paid on such liabilities over the same period. Interest expense on FHLB borrowings increased by $3.2 million due to an increase of $48.0 million in the average balance of such borrowings to $122.3 million from $74.3 million, combined with an increase of 45 basis points in the average rate paid to 5.98% from 5.53%. Interest expense on certificates of deposit increased to $12.8 million in fiscal 2000 from $11.6 million in fiscal 1999. This increase was due to a 32 basis point increase in the average rate paid to 5.23% from 4.91%, as well as an $8.7 million increase in the average balance of certificates of deposit to $244.3 million from $235.6 million. Interest expense on savings deposits, money market and NOW accounts was substantially unchanged compared to fiscal 1999. Net interest income was $32.9 million and $30.7 million for the years ended September 30, 2000 and 1999, respectively. The $2.2 million increase in net interest income was primarily attributable to a $7.8 million increase in net earning assets (interest-earning assets less interest-bearing liabilities), to $124.8 million from $117.0 million, partially offset by a 15 basis point decline in the net interest rate spread to 3.51% from 3.66%. The Company's net interest margin decreased by 12 basis points to 4.12% in the year ended September 30, 2000 from 4.24% in the year ended September 30, 1999. Provision for loan losses is a charge to earnings recorded in order to maintain the allowance for loan losses at a level that is considered appropriate to absorb probable loan losses inherent in the existing portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of real estate collateral, current and anticipated economic conditions, volume and type of lending, and the levels of non-performing and other classified loans. The amount of the allowance for loan losses is based on estimates, and the ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses in order to maintain the adequacy of the allowance. The Company recorded $1.7 million and $1.6 million in loan loss provisions during the years ended September 30, 2000 and 1999, respectively. The provisions reflect continued loan portfolio growth in both fiscal years, including commercial mortgage and business loans. Non-interest income increased to $3.4 million for the year ended September 30, 2000 from $3.1 million for the year ended September 30, 1999 primarily reflecting higher collection of transaction-based service charges, fees on mutual fund sales, and other fee income. ATM transaction fees increased $70,000 to $512,000 for the year ended September 30, 2000 from $442,000 in the prior year. The Company also realized an increase of $44,000 in income from the sale of mutual funds and annuities, to $160,000 from $116,000 in the year ended September 30, 1999. Non-interest expense decreased by $495,000, or 1.9%, to $25.8 million for the fiscal year ended September 30, 2000 from $26.3 million for the fiscal year ended September 30, 1999. During fiscal 1999, expenses of $1.1 million were incurred in connection with the conversion of computer systems, and ESOP expense of $371,000 was recognized for shares allocated to employees for the full plan year ended December 31, 1998. The absence of these costs in fiscal 2000 was partially offset by increased current period expenses associated with operating two new branches and the new Asset Management and Trust Department, and making final preparations for issues relating to the Year 2000 date change. Non-interest expenses for fiscal 2000 were reduced by the reversal of $318,000 in accruals made in fiscal 1999 which were part of the total computer system conversion costs, as discussed above. These accruals were made for conversion-related losses that did not materialize as originally expected. 11 Excluding the impact of the accrual reversal in fiscal 2000 and the one-time conversion and ESOP charges in fiscal 1999, total non-interest expenses increased $1.3 million in fiscal 2000 compared to the prior year. Compensation and employee benefits expense and occupancy and office operations expense increased $1.7 million and $314,000, respectively. Compensation expense in fiscal 2000 includes $689,000 for the vesting of RRP shares, while no shares vested in fiscal 1999. These increases were partially offset by decreases in fiscal 2000 expenses for advertising and promotion, FDIC insurance and consulting fees of $103,000, $132,000 and $279,000, respectively. Income tax expense was $2.9 million for the year ended September 30, 2000 compared to $2.0 million for fiscal 1999, representing effective tax rates of 32.8% and 33.3%, respectively. The tax rate in both fiscal years reflects the investment in tax-exempt securities and the implementation of strategies designed to lower state taxes. Comparison of Operating Results for the Years Ended September 30, 1999 and September 30, 1998 Net income for the year ended September 30, 1999 was $3.9 million, a decrease of $312,000, or 7.4%, compared to net income of $4.2 million for the year ended September 30, 1998. The decrease was due primarily to increases in non-interest expenses (including special charges associated with the conversion to a new computer system and the establishment of the ESOP), partially offset by an increase in net interest income. Excluding the after-tax impact of expenses related to the computer system conversion and the allocation of ESOP shares to participants for the plan year ended December 31, 1998, net income would have been approximately $4.9 million for the year ended September 30, 1999. Interest income increased by $4.3 million, or 9.0%, to $52.3 million for the year ended September 30, 1999 from $48.0 million for the year ended September 30, 1998. The increase was primarily due to a $5.2 million, or 14.8%, increase in income from loans, partially offset by a $901,000, or 7.1%, decrease in income from securities. The increase in income from loans was attributable to a $97.6 million increase in the average balance to $526.1 million from $428.5 million, partially offset by a 54 basis point decrease in the average yield to 7.64% from 8.18%. The continued growth of the one-to-four family residential mortgage loan portfolio was responsible for $64.5 million of the overall increase in average loans, with growth of $35.5 million coming from the average commercial loan portfolio. The decrease in income from securities was attributable to a $22.5 million decrease in the average balance of mortgage-backed securities to $113.5 million from $136.0 million, combined with a 12 basis point decrease in the average yield to 6.37% from 6.49%. Interest expense increased by $709,000, or 3.4 %, to $21.6 million for the year ended September 30, 1999 from $20.9 million for the year ended September 30, 1998. This was the net result of a $55.7 million or 10.1% increase in the average balance of total interest-bearing liabilities in fiscal 1999 compared to fiscal 1998, substantially offset by a 23 basis point decrease in the average rate paid on such liabilities over the same period. Interest expense on borrowings from the FHLB increased by $2.4 million due to an increase of $45.3 million in the average balance of such borrowings to $74.3 million from $29.0 million, offset, in part, by a decrease of 43 basis points in the average rate paid to 5.53% from 5.96%. The higher interest expense on borrowings was partially offset by a decrease of $1.2 million in interest expense on certificates of deposit to $11.6 million from $12.8 million. This decrease was due to a 39 basis point decrease in the average rate paid to 4.91% from 5.30%, as well as a $5.4 million decrease in the average balance of certificates of deposit to $235.6 million from $241.0 million. Also partially offsetting the higher interest expense on borrowings was a decrease of $299,000 in interest expense on savings deposits to $3.4 million from $3.7 million. This decrease was 12 due to a 24 basis point decrease in the average rate paid to 1.98% from 2.22%, offset, in part, by a $5.1 million increase in the average balance to $171.6 million from $166.5 million. Interest expense on money market and NOW accounts declined by $171,000 for the year ended September 30, 1999 due to a reduction in average rate paid to 2.01% from 2.35%, partially offset by a $10.7 million increase in the average balances of such deposits. Net interest income was $30.7 million and $27.1 million for the years ended September 30, 1999 and 1998, respectively. The $3.6 million increase in net interest income was primarily attributable to a $35.0 million increase in net earning assets (interest-earning assets less interest-bearing liabilities), to $117.0 million from $82.0 million, partially offset by a 12 basis point decline in the net interest rate spread to 3.66% from 3.78%. The Company's net interest margin decreased slightly to 4.24% in the year ended September 30, 1999 from 4.28% in the year ended September 30, 1998. Provision for loan losses was $1.6 million and $1.7 million for the years ended September 30, 1999 and 1998, respectively. The provisions reflect continued loan portfolio growth in both fiscal years, including commercial mortgage and commercial business loans. The provision for loan losses in fiscal 1998 also reflects the higher level of net loan charge-offs compared to fiscal 1999. Non-interest income remained relatively unchanged at $3.1 million. Fees from overdrafts increased by $94,000 to $986,000 in the year ended September 30, 1999 from $892,000 in the year ended September 30, 1998. The Company also realized an increase of $55,000 in income from the sale of mutual funds and annuities, to $116,000 in fiscal 1999 from $61,000 in the year ended September 30, 1998. Offsetting these increases were a loss of $79,000 on disposal of fixed assets and a loss of $74,000 on the valuation of loans held for sale. Non-interest expense increased by $4.5 million, or 20.5%, to $26.3 million for the year ended September 30, 1999 from $21.8 million for the year ended September 30, 1998. Expenses associated with the new system conversion amounted to $1.1 million in fiscal 1999, versus pre-conversion spending of $340,000 in fiscal 1998. Excluding these system conversion costs, compensation and employee benefits expense increased by $1.2 million; occupancy and office operations expense increased by $229,000; and data processing expenses, consulting fees, and stationery and printing expenses increased by $335,000, $246,000 and $141,000, respectively. A portion of the higher costs were attributable to branch expansion and new product offerings. The increase in compensation and benefits included ESOP expense of $635,000 in fiscal 1999, consisting of $371,000 attributable to the allocation of 10% of total plan shares to participants for the plan year ended December 31, 1998 and $264,000 attributable to shares committed to be released during the nine months ended September 30, 1999. Income tax expense was $2.0 million for the fiscal year ended September 30, 1999 compared to $2.3 million for fiscal 1998, representing effective tax rates of 33.3% and 35.6%, respectively. The lower effective tax rate in fiscal 1999 reflects the investment in tax-exempt securities and implementation of state tax strategies during the year. 13 Liquidity and Capital Resources The objective of the Company's liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses the Company's ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. The Company's primary sources of funds are deposits, proceeds from principal and interest payments on loans and securities, and to a lesser extent, borrowings and proceeds from the sale of fixed-rate mortgage loans in the secondary mortgage market. Maturities and scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. The Company's primary investing activities are the origination of both residential one- to four-family and commercial real estate loans, and the purchase of investment securities and mortgage-backed securities. During the years ended September 30, 2000, 1999 and 1998, the Company's loan originations totaled $135.5 million, $220.8 million and $172.3 million, respectively; purchases of mortgage-backed securities totaled $9.2 million, $18.3 million and $35.5 million, respectively; and purchases of investment securities totaled $31.3 million, $72.7 million and $23.0 million, respectively. These activities were funded primarily by deposit growth and by principal repayments on loans and securities, as well as by borrowings. Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, and other factors. The net increase in total deposits was $22.3 million, $13.5 million and $26.3 million for the years ended September 30, 2000, 1999 and 1998, respectively. The net increase in transaction, savings and money market accounts was $10.8 million, $24.8 million and $13.3 million for the years ended September 30, 2000, 1999 and 1998, respectively. The Company monitors its liquidity position on a daily basis, and any excess short-term liquidity is usually invested in overnight federal funds sold. The Company generally remains fully invested and meets additional funding requirements through FHLB borrowings, which amounted to $122.0 million at September 30, 2000. In addition to deposits and borrowings, cash flows from financing activities included capital-raising and related transactions in fiscal 2000 and 1999. Net proceeds of $37.1 million from the sale of common stock in the Offering provided an additional source of liquidity during the year ended September 30, 1999, partially offset by a $3.8 million outlay to fund the purchase of common stock for the ESOP. In fiscal 2000, purchases of treasury stock and shares for RRP awards were made at a total cost of $5.0 million. Cash payments for dividends were $1.0 million and $367,000 during the years ended September 30, 2000 and 1999, respectively. At September 30, 2000, the Bank exceeded all of its regulatory capital requirements with a leverage capital level of $80.1 million, or 9.6% of adjusted assets (which is above the required level of $33.4 million, or 4.0%) and a risk-based capital level of $86.5 million, or 16.9% of risk-weighted assets (which is above the required level of $41.0 million, or 8.0%). See Note 11 of the Notes to Consolidated Financial Statements. 14 New Accounting Standards In fiscal 2001, the Company will adopt Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Adoption of these new accounting standards is not expected to have a significant effect on the Company's consolidated financial statements. See Note 19 of the Notes to Consolidated Financial Statements for a further of discussion of these standards. COMMON STOCK AND RELATED MATTERS The Company's common stock is quoted on the Nasdaq National Market under the symbol "PBCP." As of September 30, 2000, the Company had seven registered market makers, 3,475 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 8,077,800 shares outstanding. As of such date, the Mutual Holding Company held 4,416,000 shares of common stock and stockholders other than the Mutual Holding Company held 3,661,800 shares. The following table sets forth market price and dividend information for the common stock since the completion of the Offering on January 7, 1999. Cash Dividends Quarter Ended High Low Declared ------------- ---- --- -------- March 31, 1999 $ 12.25 $ 9.88 $ -- June 30, 1999 11.00 9.94 0.03 September 30, 1999 12.88 11.50 0.03 December 31, 1999 $ 16.23 $ 10.04 0.03 March 31, 2000 15.79 14.93 0.04 June 30, 2000 15.46 14.19 0.04 September 30, 2000 15.92 14.69 0.04 Payment of dividends on the Company's common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitations on the payment of dividends, the results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. The dividend of $0.03 per share paid during the first quarter of fiscal 2000 was increased to $0.04 per share for the second through fourth quarters. In accordance with OTS regulations, the Mutual Holding Company elected to waive its receipt of dividends of approximately $177,000 during the fourth quarter. During the third and fourth quarters of the year ended September 30, 1999, the Company paid dividends of $0.03 per share. In accordance with OTS regulations, the Mutual Holding Company elected to waive its receipt of dividends of approximately $132,000 during the third quarter. 15 STOCKHOLDER INFORMATION Annual Meeting Annual Report on Form 10-K The Annual Meeting of Stockholders A copy of the Company's Form 10-K will be held at the Holiday Inn, 3 for the fiscal year ended September Executive Boulevard, Suffern, New 30, 2000, will be furnished without York on February 21, 2001, at 10:00 charge to stockholders upon written a.m. request to the Manager of Shareholder Relations, Provident Stock Listing Bancorp, Inc., 400 Rella Boulevard, P.O. Box 600, Montebello, New York The Company's common stock is listed 10901, or call (845) 369-8082. on the Nasdaq National Market under the symbol "PBCP." Transfer Agent and Registrar Special Counsel Registrar & Transfer Co. Luse Lehman Gorman Pomerenk & Schick, P.C. 10 Commerce Drive 5335 Wisconsin Avenue, N.W Cranford, New Jersey 07016 Washington, D.C. 20015 Independent Auditors If you have any questions concerning your stockholder account, call our KPMG LLP transfer agent, noted above, at 3001 Summer Street (800) 368-5948 ext. 2531. This is Stamford, Connecticut 06905 the number to call if you require a change of address, records or information about lost certificates, or dividend checks. 16 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP ------------- KPMG LLP Stamford, Connecticut October 27, 2000 17 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition September 30, 2000 and 1999 (Dollars in thousands, except per share data)
2000 1999 --------- ----------- Assets Cash and due from banks $ 12,785 $ 11,838 Securities: Available for sale, at fair value (amortized cost of $163,057 in 2000 and $150,792 in 1999) (note 3) 162,157 148,387 Held to maturity, at amortized cost (fair value of $48,374 in 2000 and $56,479 in 1999) (note 4) 48,586 56,782 --------- --------- Total securities 210,743 205,169 --------- --------- Loans (note 5): One- to four-family residential mortgage loans 343,871 344,731 Commercial real estate, commercial business and construction loans 182,070 160,297 Consumer loans 71,534 67,695 Allowance for loan losses (7,653) (6,202) --------- --------- Total loans, net 589,822 566,521 --------- --------- Accrued interest receivable, net (note 6) 5,495 5,833 Federal Home Loan Bank stock, at cost 7,023 6,176 Premises and equipment, net (note 7) 8,952 8,232 Deferred income taxes (note 10) 6,033 5,510 Other assets (notes 5, 8, 13 and 15) 3,933 5,239 --------- --------- Total assets $ 844,786 $ 814,518 ========= ========= Liabilities and Stockholders' Equity Liabilities: Deposits (note 8) $ 608,976 $ 586,640 Borrowings (note 9) 127,571 117,753 Mortgage escrow funds (note 5) 5,971 10,489 Other 11,282 9,337 --------- --------- Total liabilities 753,800 724,219 --------- --------- Commitments and contingencies (notes 14 and 15) Stockholders' equity (notes 1 and 11): Preferred stock (par value $0.10 per share; 10,000,000 shares authorized; none issued or outstanding) -- -- Common stock (par value $0.10 per share; 10,000,000 shares authorized; 8,280,000 shares issued) 828 828 Additional paid-in capital 36,356 36,262 Unallocated common stock held by employee stock ownership plan ("ESOP") (note 13) (2,726) (3,102) Common stock awards under recognition and retention plan ("RRP") (note 13) (2,306) -- Treasury stock, at cost (202,200 shares) (note 11) (3,203) -- Retained earnings 62,577 57,754 Accumulated other comprehensive loss, net of taxes (note 12) (540) (1,443) --------- --------- Total stockholders' equity 90,986 90,299 --------- --------- Total liabilities and stockholders' equity $ 844,786 $ 814,518 ========= =========
See accompanying notes to consolidated financial statements. 18 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income Years Ended September 30, 2000, 1999 and 1998 (In thousands, except per share data)
2000 1999 1998 ------------ ------------ ------------ Interest and dividend income: Loans $45,043 $40,209 $35,032 Securities 13,268 11,641 12,613 Other earning assets 588 417 303 ------- ------- ------- Total interest and dividend income 58,899 52,267 47,948 ------- ------- ------- Interest expense: Deposits (note 8) 18,721 17,474 19,155 Borrowings 7,313 4,115 1,725 ------- ------- ------- Total interest expense 26,034 21,589 20,880 ------- ------- ------- Net interest income 32,865 30,678 27,068 Provision for loan losses (note 5) 1,710 1,590 1,737 ------- ------- ------- Net interest income after provision for loan losses 31,155 29,088 25,331 ------- ------- ------- Non-interest income: Banking fees and service charges 2,765 2,567 2,427 Loan servicing fees 260 298 342 Other 366 238 311 ------- ------- ------- Total non-interest income 3,391 3,103 3,080 ------- ------- ------- Non-interest expense: Compensation and employee benefits (note 13) 13,509 12,279 10,506 Occupancy and office operations (note 14) 3,805 3,370 3,141 Advertising and promotion 1,096 1,199 1,146 Data processing 1,494 1,301 845 Amortization of branch purchase premiums (note 8) 1,625 1,720 1,630 Other 4,279 6,434 4,555 ------- ------- ------- Total non-interest expense 25,808 26,303 21,823 ------- ------- ------- Income before income tax expense 8,738 5,888 6,588 Income tax expense (note 10) 2,866 1,958 2,346 ------- ------- ------- Net income $ 5,872 $ 3,930 $ 4,242 ======= ======= ======= Basic and diluted earnings per common share, from date of stock offering (January 7, 1999) (note 2) $ 0.76 $ 0.40 ======= =======
See accompanying notes to consolidated financial statements. 19 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Years Ended September 30, 2000, 1999 and 1998 (Dollars in thousands, except per share data)
Additional Unallocated Common Common Paid-in ESOP Stock Awards Treasury Stock Capital Shares Under RRP Stock ---------- ----------- ---------- ----------- ---------- Balance at September 30, 1997 $ -- $ -- $ -- $ -- $ -- Net income -- -- -- -- -- Other comprehensive income (note 12) -- -- -- -- -- Total comprehensive income 4,801 -------- -------- -------- -------- -------- Balance at September 30, 1998 -- -- -- -- -- Net income -- -- -- -- -- Other comprehensive loss (note 12) -- -- -- -- -- Total comprehensive income 1,578 Issuance of 8,280,000 common shares (note 1) 828 36,285 -- -- -- Initial capitalization of Provident Bancorp, MHC -- -- -- -- -- Shares purchased by ESOP (309,120 shares) -- -- (3,760) -- -- ESOP shares allocated or committed to be released for allocation (54,096 shares) -- (23) 658 -- -- Cash dividends paid ($0.06 per common share) -- -- -- -- -- -------- -------- -------- -------- -------- Balance at September 30, 1999 828 36,262 (3,102) -- -- Net income -- -- -- -- -- Other comprehensive income (note 12) -- -- -- -- -- Total comprehensive income 6,775 Purchases of treasury stock (202,200 shares) -- -- -- -- (3,203) ESOP shares allocated or committed to be released for allocation (30,912 shares) -- 94 376 -- -- Awards of RRP shares (193,200 shares) -- -- -- (2,995) -- Vesting of RRP shares -- -- -- 689 -- Cash dividends paid ($0.15 per common share) -- -- -- -- -- -------- -------- -------- -------- -------- Balance at September 30, 2000 $ 828 $ 36,356 $ (2,726) $ (2,306) $ (3,203) ======== ======== ======== ======== ========
Accumulated Other Total Retained Comprehensive Stockholders' Earnings Income (Loss) Equity --------- -------------- ----------- Balance at September 30, 1997 $ 50,049 $ 350 $ 50,399 Net income 4,242 -- 4,242 Other comprehensive income (note 12) -- 559 559 -------- Total comprehensive income -------- -------- -------- Balance at September 30, 1998 54,291 909 55,200 Net income 3,930 -- 3,930 Other comprehensive loss (note 12) -- (2,352) (2,352) -------- Total comprehensive income Issuance of 8,280,000 common shares (note 1) -- -- 37,113 Initial capitalization of Provident Bancorp, MHC (100) -- (100) Shares purchased by ESOP (309,120 shares) -- -- (3,760) ESOP shares allocated or committed to be released for allocation (54,096 shares) -- -- 635 Cash dividends paid ($0.06 per common share) (367) -- (367) -------- -------- -------- Balance at September 30, 1999 57,754 (1,443) 90,299 Net income 5,872 -- 5,872 Other comprehensive income (note 12) -- 903 903 -------- Total comprehensive income Purchases of treasury stock (202,200 shares) -- -- (3,203) ESOP shares allocated or committed to be released for allocation (30,912 shares) -- -- 470 Awards of RRP shares (193,200 shares) -- -- (2,995) Vesting of RRP shares -- -- 689 Cash dividends paid ($0.15 per common share) (1,049) -- (1,049) -------- -------- -------- Balance at September 30, 2000 $ 62,577 $ (540) $ 90,986 ======== ======== ========
See accompanying notes to consolidated financial statements. 20 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended September 30, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------------- -------------- --------------- Cash Flows from Operating Activities: Net income $ 5,872 $ 3,930 $ 4,242 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,710 1,590 1,737 Depreciation and amortization of premises and equipment 1,625 1,497 1,390 Amortization of branch purchase premiums 1,625 1,720 1,630 Net amortization of premiums and discounts on securities 85 239 250 ESOP and RRP expense 1,159 635 -- Originations of loans held for sale (361) (13,271) (20,402) Proceeds from sales of loans held for sale 808 14,089 17,163 Deferred income tax benefit (1,124) (1,488) (1,057) Net changes in accrued interest receivable and payable 992 (1,293) 675 Other adjustments, net (158) 945 659 --------- --------- --------- Net cash provided by operating activities 12,233 8,593 6,287 --------- --------- --------- Cash Flows from Investing Activities: Purchases of securities: Available for sale (35,746) (91,029) (43,120) Held to maturity (4,710) -- (15,375) Proceeds from maturities, calls and principal payments on securities: Available for sale 17,439 36,586 24,645 Held to maturity 12,869 41,510 43,077 Proceeds from sales of securities available for sale 6,001 -- 6,007 Loan originations (135,467) (220,813) (172,271) Loan principal payments 109,580 115,525 114,166 Purchases of Federal Home Loan Bank stock (847) (2,486) (49) Purchases of premises and equipment (2,345) (2,670) (1,565) Other investing activities 350 274 615 --------- --------- --------- Net cash used in investing activities (32,876) (123,103) (43,870) --------- --------- ---------
(Continued) 21 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows, Continued Years Ended September 30, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 ----------- ---------- ---------- Cash Flows from Financing Activities: Net increase in deposits $ 22,336 $ 13,466 $ 26,328 Net increase in borrowings 9,818 67,822 8,308 Net (decrease) increase in mortgage escrow funds (4,518) 4,602 1,328 Treasury shares purchased (3,203) -- -- Shares purchased for RRP awards (1,794) -- -- Shares purchased by ESOP -- (3,760) -- Net proceeds from stock offering -- 37,113 -- Cash dividends paid (1,049) (367) -- Initial capitalization of Provident Bancorp, MHC -- (100) -- --------- --------- --------- Net cash provided by financing activities 21,590 118,776 35,964 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 947 4,266 (1,619) Cash and cash equivalents at beginning of year 11,838 7,572 9,191 --------- --------- --------- Cash and cash equivalents at end of year $ 12,785 $ 11,838 $ 7,572 ========= ========= ========= Supplemental Information: Interest paid $ 25,382 $ 21,313 $ 20,380 Income taxes paid 4,185 1,446 3,539 Loans transferred to real estate owned 154 311 597 ========= ========= =========
See accompanying notes to consolidated financial statements. 22 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) (1) Reorganization and Stock 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, representing gross proceeds of $38,640 less offering costs of $1,527. Provident Bancorp, Inc. utilized net proceeds of $24,000 to make a capital contribution to the Bank. Prior to the Reorganization and Offering, Provident Bancorp, Inc. had no operations other than those of an organizational nature. The Company's employee stock ownership plan ("ESOP"), which did not purchase shares in the Offering, was authorized to purchase up to 8% of the shares sold in the Offering, or 309,120 shares. The ESOP completed its purchase of all such authorized shares in the open market during January and February 1999, at a total cost of $3,760. (2) 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 its contiguous communities. 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 ("SAIF") 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. 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 REIT, Inc. which was formed in fiscal 1999 as a real estate investment trust and holds a portion of the Company's real estate loans, (ii) Provest Services Corp. I which became active in fiscal 1996 and has invested in a low- income housing partnership, and (iii) Provest Services Corp. II which became active in fiscal 1997 and 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. 23 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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. Securities Statement of Financial Accounting Standards ("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. Trading securities are debt and equity securities bought and 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 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. Loans Loans, other than those classified as 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 are reported at the 24 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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 non-accrual 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 non-accrual 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. Interest on loans that have been restructured is accrued in accordance with the renegotiated terms. The Company defers non-refundable 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 income at that time. 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. The allowance for loan losses is an amount that management believes will be adequate 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 Company's regulators, 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, 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 and consumer loans. Under SFAS No. 114, 25 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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. Mortgage Servicing Assets Mortgage servicing rights are recognized as assets when loans are sold with servicing retained. The cost of an originated mortgage loan that is sold is allocated between the loan and the servicing right based on estimated relative fair values. The cost allocated to the 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. 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 considered to be a non-marketable equity security under SFAS No. 115 and, accordingly, is reported at cost. 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 ranging 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, whichever is shorter. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized. Branch Purchase Premiums Premiums attributable to the acquisition of core deposits in branch purchase transactions are amortized using the straight-line method over periods not exceeding the estimated average remaining life of the acquired customer base. The unamortized premiums are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be fully recoverable. 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 26 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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. 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. 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. 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. Interest Rate Cap Agreements The Company uses the accrual method of accounting for interest rate cap agreements entered into for interest rate risk management purposes. Interest payments (if any) due from the counterparties are recognized in the consolidated statements of income as an adjustment to interest income or expense on the assets or liabilities designated in the Company's interest rate risk management strategy. Premiums paid by the Company at inception of the agreements are included in other assets and amortized on a straight-line basis as an adjustment to interest income or expense over the term of the agreements. These policies were revised upon adoption of SFAS No. 133, effective October 1, 2000, as discussed in note 19. 27 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) Stock-Based Compensation Plans Compensation expense is recognized for the Company's 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 of the shares 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 is deducted from stockholders' equity. The Company accounts for its stock option plan in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation expense is recognized only if the exercise price of an option is less than the fair value of the underlying stock at the grant date. SFAS No. 123, Accounting for Stock-Based Compensation, encourages entities to recognize the fair value of all stock-based awards (measured on the grant date) as compensation expense over the vesting period. Alternatively, SFAS No. 123 allows entities to apply the provisions of APB Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide these pro forma disclosures. The recognition and retention plan ("RRP") is also accounted for in accordance with APB Opinion No. 25. The fair value of the shares awarded, 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. 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 that have not been committed to be released to participants. RRP shares are not included in outstanding shares until they become vested. Both basic and diluted EPS were based on 7,772,724 and 8,041,018 common shares for the years ended September 30, 2000 and 1999, respectively. The Company's stock options and unvested RRP shares did not have a dilutive effect on EPS in fiscal 2000 and, accordingly, were not included in the calculation of diluted EPS. There were no stock options or unvested RRP shares in fiscal 1999. Earnings per share presented in the fiscal 1999 consolidated statement of income is for the nine-month period following the Offering, based on net income of $3,202 for that period. 28 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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. Specific information to be reported for individual operating segments includes a measure of profit and loss, certain revenue and expense items, and total assets. 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. (3) Securities Available for Sale The following are summaries of securities available for sale at September 30, 2000 and 1999:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- ------------ September 30, 2000 Mortgage-Backed Securities Fannie Mae $ 22,193 $ 135 $ (309) $ 22,019 Freddie Mac 17,471 39 (214) 17,296 Other 6,582 16 (105) 6,493 ------------- ------------- ------------- ------------ 46,246 190 (628) 45,808 ------------- ------------- ------------- ------------ Investment Securities U.S. Government and Agency securities 70,938 -- (541) 70,397 Corporate debt securities 30,975 -- (387) 30,588 State and municipal securities 11,697 -- (716) 10,981 Equity securities 3,201 1,211 (29) 4,383 ------------- ------------- ------------- ------------ 116,811 1,211 (1,673) 116,349 ------------- ------------- ------------- ------------ Total available for sale $ 163,057 $ 1,401 $ (2,301) $ 162,157 ============= ============= ============= ============ September 30, 1999 Mortgage-Backed Securities Fannie Mae $ 24,004 $ 102 $ (344) $ 23,762 Freddie Mac 20,926 54 (232) 20,748 Other 7,163 89 -- 7,252 ------------- ------------- ------------- ------------ 52,093 245 (576) 51,762 ------------- ------------- ------------- ------------ Investment Securities U.S. Government and Agency securities 59,623 -- (709) 58,914 Corporate debt securities 24,201 -- (534) 23,667 State and municipal securities 11,700 -- (892) 10,808 Equity securities 3,175 144 (83) 3,236 ------------- ------------- ------------- ------------ 98,699 144 (2,218) 96,625 ------------- ------------- ------------- ------------ Total available for sale $ 150,792 $ 389 $ (2,794) $ 148,387 ============= ============= ============= ============
29 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) Equity securities at both September 30, 2000 and 1999 consist of Freddie Mac and Fannie Mae preferred stock. The following is a summary of the amortized cost and fair value of debt securities available for sale (other than mortgage-backed securities) at September 30, 2000, by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or prepay their obligations. Amortized Fair Cost Value Remaining period to contractual maturity: Less than one year $ 18,554 $ 18,489 One to five years 71,255 70,539 Five to ten years 17,420 17,010 Greater than ten years 6,381 5,928 -------- -------- Total $113,610 $111,966 ======== ======== The following is an analysis, by type of interest rate, of the amortized cost and weighted average yield of debt securities available for sale: Fixed Adjustable Rate Rate Total ------------ -------------- ---------- September 30, 2000 Amortized cost $ 148,464 $ 11,392 $ 159,856 Weighted average yield 5.95% 7.52% 6.06% September 30, 1999 Amortized cost $ 134,015 $ 13,602 $ 147,617 Weighted average yield 6.03% 6.43% 6.07% Proceeds from sales of securities available for sale during the years ended September 30, 2000 and 1998 totaled $6,001 and $6,007, respectively, resulting in gross realized gains of $9 and $10, respectively, which are included in other non-interest income. There were no sales of securities available for sale during the year ended September 30, 1999. At September 30, 2000 and 1999, respectively, U.S. Government securities with carrying amounts of $5,166 and $3,577 were pledged as collateral for purposes other than the borrowings described in note 9. 30 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) (4) Securities Held to Maturity The following are summaries of securities held to maturity at September 30, 2000 and 1999:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ---------- --------- September 30, 2000 Mortgage-Backed Securities Fannie Mae $ 21,531 $ 107 $ (138) $ 21,500 Freddie Mac 17,105 19 (222) 16,902 Ginnie Mae 4,279 -- (4) 4,275 Other 2,283 60 -- 2,343 -------- -------- -------- -------- 45,198 186 (364) 45,020 -------- -------- -------- -------- Investment Securities U.S. Government and Agency securities 2,991 -- (34) 2,957 Other 397 -- -- 397 -------- -------- -------- -------- 3,388 -- (34) 3,354 -------- -------- -------- -------- Total held to maturity $ 48,586 $ 186 $ (398) $ 48,374 ======== ======== ======== ======== September 30, 1999 Mortgage-Backed Securities Fannie Mae $ 23,807 $ 94 $ (329) $ 23,572 Freddie Mac 22,014 69 (183) 21,900 Ginnie Mae 5,106 34 -- 5,140 Other 2,453 46 -- 2,499 -------- -------- -------- -------- 53,380 243 (512) 53,111 -------- -------- -------- -------- Investment Securities U.S. Government and Agency securities 2,987 -- (34) 2,953 Other 415 -- -- 415 -------- -------- -------- -------- 3,402 -- (34) 3,368 -------- -------- -------- -------- Total held to maturity $ 56,782 $ 243 $ (546) $ 56,479 ======== ======== ======== ========
31 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) The following is a summary of the amortized cost and fair value of securities held to maturity (other than mortgage-backed securities) at September 30, 2000, by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or repay their obligations. Amortized Fair Cost Value --------- ------- Remaining period to contractual maturity: Less than one year $ 25 $ 25 One to five years 2,991 2,957 Greater than five years 372 372 ------ -------- Total $ 3,388 $ 3,354 ====== ======== The following is an analysis, by type of interest rate, of the amortized cost and weighted average yield of securities held to maturity: Fixed Adjustable Rate Rate Total ------- --------- ---------- September 30, 2000 Amortized cost $ 39,829 $ 8,757 $ 48,586 Weighted average yield 6.77% 7.72% 6.94% September 30, 1999 Amortized cost $ 45,175 $ 11,607 $ 56,782 Weighted average yield 6.69% 6.66% 6.68% There were no sales of securities held to maturity during the years ended September 30, 2000, 1999 and 1998. 32 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) (5) Loans The components of the loan portfolio were as follows at September 30:
2000 1999 ---------- --------- One- to four-family residential mortgage loans: Fixed rate $ 257,138 $ 263,577 Adjustable rate 86,733 81,154 --------- --------- 343,871 344,731 --------- --------- Commercial real estate loans 124,988 110,382 Commercial business loans 27,483 30,768 Construction loans 29,599 19,147 --------- --------- 182,070 160,297 --------- --------- Home equity lines of credit 28,021 25,380 Homeowner loans 37,027 34,852 Other consumer loans 6,486 7,463 --------- --------- 71,534 67,695 --------- --------- Total loans 597,475 572,723 Allowance for loan losses (7,653) (6,202) --------- --------- Total loans, net $ 589,822 $ 566,521 ========= =========
Total loans include net deferred loan origination costs of $674 and $838 at September 30, 2000 and 1999, 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 its contiguous communities. 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. 33 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) The principal balances of non-accrual loans were as follows at September 30: 2000 1999 ------- ------- One- to four-family residential mortgage loans $ 2,496 $ 2,839 Commercial real estate loans 1,149 1,133 Commercial business loans -- 208 Construction loans 27 27 Consumer loans 359 429 ------- ------ Total non-accrual loans $ 4,031 $ 4,636 ======= ====== The allowance for uncollected interest, representing the amount of interest on non-accrual loans that has not been recognized in interest income, was $485 and $456 at September 30, 2000 and 1999, respectively. Gross interest income that would have been recorded if the non-accrual loans at September 30 had remained on accrual status throughout the year, amounted to $337 in fiscal 2000, $395 in fiscal 1999 and $698 in fiscal 1998. Interest income actually recognized on such loans (including income recognized on a cash basis) totaled $77, $131 and $310 for the years ended September 30, 2000, 1999 and 1998, respectively. The Company's total recorded investment in impaired loans, as defined by SFAS No. 114, was $1,176 and $1,368 at September 30, 2000 and 1999, 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 September 30, 2000 and 1999 due to the adequacy of collateral values. The Company's average recorded investment in impaired loans was $1,196, $2,577 and $2,909 during the years ended September 30, 2000, 1999 and 1998, respectively. Activity in the allowance for loan losses is summarized as follows for the years ended September 30: 2000 1999 1998 ------- ------- ------- Balance at beginning of year $ 6,202 $ 4,906 $ 3,779 Provision for losses 1,710 1,590 1,737 Charge-offs (370) (922) (665) Recoveries 111 628 55 ------- ------- ------- Balance at end of year $ 7,653 $ 6,202 $ 4,906 ======= ======= ======= 34 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) Real estate owned properties are included in other assets at net carrying amounts of $154 and $403 at September 30, 2000 and 1999, respectively. Provisions for losses and other activity in the allowance for losses on real estate owned were insignificant during the years ended September 30, 2000, 1999 and 1998. Certain residential mortgage loans originated by the Company are sold in the secondary market. Net gains on sales of residential mortgage loans held for sale are included in other non-interest income and amounted to $28, $162 and $170 for the years ended September 30, 2000, 1999 and 1998, respectively. Fixed-rate residential mortgage loans include loans held for sale at a carrying amount of $1,198 at September 30, 1999 (none at September 30, 2000). This amount is net of an allowance for losses of $70 that was established to reduce the loans to market value. Other assets at September 30, 2000 and 1999, respectively, include capitalized mortgage servicing rights with an amortized cost of $229 and $255, which approximated fair value. The Company generally retains the servicing rights on mortgage loans sold. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and, if necessary, processing foreclosures. Mortgage loans serviced for others totaled approximately $98,500, $109,000 and $120,700 at September 30, 2000, 1999 and 1998, respectively. These amounts include loans sold with recourse (approximately $1,600 at September 30, 2000) for which management does not expect the Company to incur any significant losses. Mortgage escrow funds include balances of $1,680 at September 30, 2000 and $2,047 at September 30, 1999 related to loans serviced for others. (6) Accrued Interest Receivable The components of accrued interest receivable were as follows at September 30: 2000 1999 ------- ------- Loans, net of allowance for uncollected interest $ 2,917 $ 3,638 Securities 2,578 2,195 ------- ------- Total accrued interest receivable, net $ 5,495 $ 5,833 ======= ======= 35 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) (7) Premises and Equipment Premises and equipment are summarized as follows at September 30: 2000 1999 --------- --------- Land and land improvements $ 1,090 $ 1,088 Buildings 4,807 4,522 Leasehold improvements 3,304 2,809 Furniture, fixtures and equipment 8,712 7,258 -------- -------- 17,913 15,677 Accumulated depreciation and amortization (8,961) (7,445) -------- -------- Total premises and equipment, net $ 8,952 $ 8,232 ======== ======== (8) Deposits Deposit balances and weighted average interest rates are summarized as follows at September 30:
2000 1999 --------------- ------------------ Amount Rate Amount Rate ------ ---- ------ ---- Demand deposits: Retail $ 38,145 --% 35,701 --% Commercial 28,324 -- 24,147 -- NOW deposits 54,800 1.01 47,129 1.01 Savings deposits 161,987 2.02 161,809 2.02 Money market deposits 76,332 2.55 80,033 2.75 Certificates of deposit 249,388 5.83 237,821 4.82 -------- -------- Total deposits $608,976 3.34% $586,640 2.97% ======== ===== ======== =====
Certificates of deposit at September 30 had remaining periods to contractual maturity as follows: 2000 1999 --------- -------- Remaining period to contractual maturity: Less than one year $176,756 $197,373 One to two years 59,579 28,636 Two to three years 9,788 5,579 Greater than three years 3,265 6,233 -------- -------- Total certificates of deposit $249,388 $237,821 ======== ======== 36 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) Certificate of deposit accounts with a denomination of $100 or more totaled $31,003 and $27,280 at September 30, 2000 and 1999, respectively. The FDIC generally insures depositor accounts up to $100 as defined in the applicable regulations. The Company purchased two branch offices in separate transactions consummated in fiscal 1996 and recorded a core deposit purchase premium of $7,532. Unamortized premiums of $350 and $1,960 are included in other assets at September 30, 2000 and 1999, respectively. Interest expense on deposits is summarized as follows for the years ended September 30: 2000 1999 1998 ------- ------- ------- Savings deposits $ 3,435 $ 3,398 $ 3,697 Money market and NOW deposits 2,499 2,516 2,687 Certificates of deposit 12,787 11,560 12,771 ------- ------- ------- Total interest expense $18,721 $17,474 $19,155 ======= ======= ======= (9) Borrowings The Company's borrowings and weighted average interest rates are summarized as follows at September 30:
2000 1999 ------------------------- ------------------------- Amount Rate Amount Rate ----------- --------- ----------- --------- FHLB borrowings by remaining period to maturity: Less than one year $ 42,600 6.70% $ 40,000 5.83% One to two years 33,750 6.74 5,000 6.35 Two to three years 10,625 5.90 27,535 5.56 Three to four years 15,000 5.43 7,980 5.84 Four to five years 10,000 6.68 25,000 5.20 Greater than five years 10,000 5.19 10,000 5.19 ----------- ----------- 121,975 6.36 115,515 5.60 Bank overdraft 5,596 2,238 ----------- ----------- Total borrowings $ 127,571 $ 117,753 =========== ===========
37 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) FHLB borrowings include securities repurchase agreements of $34,750 at September 30, 2000 and $44,750 at September 30, 1999, with weighted average interest rates of 5.70% and 5.32% and weighted average remaining terms to maturity of approximately 45 months and 61 months at the respective dates. Securities with carrying amounts of $37,619 and $47,366 were pledged as collateral for these borrowings at September 30, 2000 and 1999, respectively. Average borrowings under securities repurchase agreements were $40,515 and $18,330 during the years ended September 30, 2000 and 1999, respectively, and the maximum outstanding month-end balance was $44,750 during both periods. The remaining FHLB borrowings were advances of $87,225 and $70,765 at September 30, 2000 and 1999, respectively. As a member of the FHLB of New York, the Bank may have outstanding advances of up to 30% of its total assets, or approximately $250,300 at September 30, 2000, in a combination of term and overnight advances. The unused FHLB borrowing capacity was approximately $163,075 at September 30, 2000. FHLB advances are secured by the investment in FHLB stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (principally securities and residential mortgage loans) not otherwise pledged. The Bank satisfied this collateral requirement at September 30, 2000 and 1999. FHLB borrowings of $25,000 at September 30, 2000 are callable at the discretion of the FHLB beginning on various dates during fiscal 2001 and 2002. These borrowings have weighted average remaining terms to the initial call dates and the contractual maturity dates of approximately 10 and 67 months, respectively. The weighted average interest rate on callable borrowings was 5.33% at September 30, 2000. (10) Income Taxes Income tax expense consists of the following components for the years ended September 30: 2000 1999 1998 ------- ------- ------- Current tax expense: Federal $ 3,596 $ 2,832 $ 2,765 State 394 614 638 ------- ------- ------- 3,990 3,446 3,403 ------- ------- ------- Deferred tax benefit: Federal (854) (1,097) (787) State (270) (391) (270) ------- ------- ------- (1,124) (1,488) (1,057) ------- ------- ------- Total income tax expense $ 2,866 $ 1,958 $ 2,346 ======= ======= ======= 38 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) Actual income tax expense amounts for the years ended September 30 differ from the amounts computed by applying the statutory Federal tax rate of 34% to income before income taxes, for the following reasons:
2000 1999 1998 ------- ------- ------- Tax at Federal statutory rate $ 2,971 $ 2,002 $ 2,240 State income taxes, net of Federal tax effect 82 147 243 Tax-exempt interest (139) (102) -- Low-income housing tax credits (72) (72) (71) Other, net 24 (17) (66) ------- ------- ------- Actual income tax expense $ 2,866 $ 1,958 $ 2,346 ======= ======= ======= Effective income tax rate 32.8% 33.3% 35.6% ======= ======= =======
The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30 are as follows:
2000 1999 -------- -------- Deferred tax assets: Allowance for loan losses $ 3,134 $ 2,540 Branch purchase premium amortization 2,002 1,546 Deferred compensation 1,093 996 Net unrealized loss on securities available for sale 360 962 Depreciation of premises and equipment 145 149 Other 321 385 --------- --------- Total deferred tax assets 7,055 6,578 --------- --------- Deferred tax liabilities: Prepaid pension costs 475 393 Federal tax bad debt reserve 296 370 Deferred loan origination costs, net 251 305 --------- --------- Total deferred tax liabilities 1,022 1,068 --------- --------- Net deferred tax asset $ 6,033 $ 5,510 ========= =========
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 September 30, 2000 and 1999. 39 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) As a savings institution, 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 ("excess reserves") accumulated after the base year. Deferred tax liabilities are recognized with respect to such excess reserves, as well as any portion of the base-year amount that is expected to become taxable (or "recaptured") in the foreseeable future. Federal tax laws include a requirement to recapture into taxable income (over a six-year period) the Federal bad debt reserves in excess of the base-year amounts. The Bank has established a deferred tax liability with respect to such excess Federal reserves. New York State tax laws designate all State bad debt reserves as the base-year amount. The Bank's base-year tax bad debt reserves were $4,600 for Federal tax purposes and $26,500 for New York State tax purposes at September 30, 2000. Associated deferred tax liabilities of $3,400 have not been recognized 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 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. (11) Regulatory Matters 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%. 40 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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 September 30, 2000 and 1999, the Bank met all capital adequacy requirements to which it was subject. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. The following is a summary of the Bank's actual regulatory capital amounts and ratios at September 30, 2000 and 1999, compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution:
OTS Requirements -------------------------------------------- Minimum Capital Classification as Bank Actual Adequacy Well Capitalized --------------------- --------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ---------- --------- ---------- --------- ---------- --------- September 30, 2000 Tangible capital $ 80,097 9.6% $ 12,526 1.5% $ -- --% Tier 1 (core) capital 80,097 9.6 33,402 4.0 41,752 5.0 Risk-based capital: Tier 1 80,097 15.6 -- -- 30,738 6.0 Total 86,497 16.9 40,985 8.0 51,231 10.0 ========== ========= ========== ========= ========== ========= September 30, 1999 Tangible capital $ 76,894 9.6% $ 12,069 1.5% $ -- --% Tier 1 (core) capital 76,894 9.6 32,184 4.0 40,230 5.0 Risk-based capital: Tier 1 76,894 15.9 -- -- 28,986 6.0 Total 82,935 17.2 38,648 8.0 48,310 10.0 ========== ========= ========== ========= ========== =========
Dividend Payments Under current 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. Dividends in excess of this amount require OTS approval. The Bank paid cash dividends of $2,000 to Provident Bancorp, Inc. during the year ended September 30, 2000 (none during the year ended September 30, 1999). 41 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) Unlike the Bank, Provident Bancorp, Inc. is not subject to OTS regulatory limitations on the payment of dividends to its shareholders. Through September 30, 2000, the Mutual Holding Company has waived receipt of $309 in cash dividends with respect to its shares of Provident Bancorp, Inc. common stock. 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. A total of 9,000 shares were purchased for the treasury under the second program through September 30, 2000 at a total cost of $142. 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. (12) 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. The Company's other comprehensive income (loss), which is attributable to gains and losses on securities available for sale, is summarized as follows for the years ended September 30:
2000 1999 1998 -------- -------- -------- Net unrealized holding gain (loss) arising during the year, net of related income taxes of ($606), $1,570 and ($367), respectively $ 908 $(2,352) $ 565 Reclassification adjustment for net realized gains included in net income, net of related income taxes of $4 in both 2000 and 1998 (5) -- (6) -------- --------- -------- Other comprehensive income (loss) $ 903 $(2,352) $ 559 ======== ========= ========
42 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) The Company's accumulated other comprehensive loss, which is included in stockholders' equity, represents the net unrealized loss on securities available for sale of $900 and $2,405 at September 30, 2000 and 1999, respectively, less related deferred income taxes of $360 and $962, respectively. (13) Employee Benefit and Stock-Based Compensation Plans Pension Plans The Company has a non-contributory 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 obligations and fair value of plan assets, together with a reconciliation of the plan's funded status and the prepaid pension costs recognized in the consolidated statements of financial condition: 2000 1999 ------- -------- Changes in projected benefit obligations: Beginning of year $ 5,543 $ 5,471 Service cost 515 475 Interest cost 409 402 Actuarial gain (315) (651) Benefits paid (731) (154) ------- ------- End of year 5,421 5,543 ------- ------- Changes in fair value of plan assets: Beginning of year 6,464 5,312 Actual return on plan assets 1,126 733 Employer contributions 600 573 Benefits paid (731) (154) ------- ------- End of year 7,459 6,464 ------- ------- Funded status at end of year 2,038 921 Unrecognized net actuarial (gain) loss (893) 9 Unrecognized prior service cost (96) (110) Unrecognized net transition obligation 112 138 ------- ------- Prepaid pension costs (included in other assets) $ 1,161 $ 958 ======= ======= 43 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) A discount rate of 7.75% and a rate of increase in future compensation levels of 5.5% were used in determining the actuarial present value of the projected benefit obligation at September 30, 2000 (7.5% and 5.5%, respectively, at September 30, 1999). The expected long-term rate of return on plan assets was 8.0% for 2000 and 1999. The components of the net periodic pension expense were as follows for the years ended September 30: 2000 1999 1998 ------ ------ ------ Service cost $ 515 $ 475 $ 427 Interest cost 409 402 367 Expected return on plan assets (539) (425) (411) Amortization of prior service cost (14) (14) (14) Amortization of net transition obligation 26 26 26 Recognized net actuarial loss -- 23 -- ------ ------- ------- Net periodic pension expense $ 397 $ 487 $ 395 ====== ===== ===== The Company has also established a non-qualified 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 $54, $53 and $46 for the years ended September 30, 2000, 1999 and 1998, respectively. The actuarial present value of the projected benefit obligation was approximately $226 and $128 at September 30, 2000 and 1999, respectively, all of which is unfunded. The obligations at September 30, 2000 and 1999 were determined using discount rates of 7.75% and 7.5%, respectively, and a rate of increase in future compensation of 4.5%. 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 (which amounted to $237 at the adoption date) as an expense over a 20-year period. The periodic expense recognized for this plan was $39, $44 and $38 for the years ended September 30, 2000, 1999 and 1998, respectively. 401(k) Savings Plan 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 44 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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 $180, $212 and $315 for the years ended September 30, 2000, 1999 and 1998, respectively. 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 $470 and $635 for the years ended September 30, 2000 and 1999, respectively. The fiscal 1999 expense consisted of (i) $264 attributable to the allocation of 30,912 shares to participants with respect to the initial plan year ended December 31, 1998, and (ii) $264 attributable to 23,184 shares committed to be released to participants during the nine months ended September 30, 1999. Through September 30, 2000, a cumulative total of 85,008 shares have been allocated to participants or committed to be released for allocation. 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 (224,112 shares with a cost of $2,726 at September 30, 2000). The fair value of these shares was approximately $3,500 at that date. 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, 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 $689 for the year ended September 30, 2000. 45 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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 non-qualified stock options or incentive stock options. 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. In February 2000, initial option grants were made for 366,650 shares at an exercise price of $15.50 per share. Options on 11,250 shares were subsequently forfeited. A total of 355,400 options were outstanding at September 30, 2000 and 71,080 options were exercisable at that date. A total of 31,000 shares are available for future option grants. In accordance with the provisions of APB Opinion No. 25 related to fixed stock options, compensation expense is not recognized with respect to the Company's options since the exercise price equals the fair value of the common stock at the grant date. Under the alternative fair-value-based method defined in SFAS No. 123, the grant-date fair value of fixed stock options is recognized as expense over the vesting period. The estimated per share fair value of options granted in February 2000 was $5.90, estimated using the Black-Scholes option-pricing model with assumptions as follows: dividend yield of 1%; expected volatility rate of 22%; risk-free interest rate of 6.6%; and expected option life of 8 years. Had the fair-value-based method of SFAS No. 123 been applied to the options granted, net income would have been approximately $5,300 and both basic and diluted earnings per share would have been $0.68 for the year ended September 30, 2000. (14) 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 non-cancelable operating leases with initial or remaining terms of more than one year at September 30, 2000 are $1,022 for fiscal 2001; $1,047 for fiscal 2002; $1,055 for fiscal 2003; $1,049 for fiscal 2004; $1,032 for fiscal 2005; and a total of $5,849 for later years. Occupancy and office operations expense includes net rent expense of $1,124, $1,020 and $931 for the years ended September 30, 2000, 1999 and 1998, 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. 46 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) (15) 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 at September 30: 2000 1999 -------- -------- Lending-Related Instruments: Loan origination commitments: Fixed-rate loans $ 9,412 $ 8,433 Adjustable-rate loans 1,993 10,257 Unused lines of credit 35,529 30,443 Standby letters of credit 7,548 6,597 Interest Rate Risk Management: Interest rate cap agreements 50,000 20,000 ======== ======== 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 5. 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 residential and commercial real estate, deposit accounts with the Company, and other property. The Company's fixed-rate loan origination commitments at September 30, 2000 provide for interest rates ranging from 5.50% to 11.78%. 47 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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. In order to limit the interest rate and market risk associated with loans held for sale and commitments to originate loans held for sale, the Company may enter into mandatory forward commitments to sell loans in the secondary mortgage market. There were no such forward commitments outstanding at September 30, 2000 and 1999. Risks associated with forward commitments to sell mortgage loans include the possible inability of the counterparties to meet the contract terms, or of the Company to originate loans to fulfill the contracts. If the Company is unable to fulfill a contract, it could purchase securities in the open market to deliver against the contract. The Company controls its counterparty risk by entering into these agreements only with highly-rated counterparties. Interest Rate Cap Agreements The Company had outstanding interest rate cap agreements with notional amounts of $50,000 and $20,000 at September 30, 2000 and 1999, respectively. The agreements at September 30, 2000 have terms ending in March 2003 and April 2003. These agreements were entered into to reduce the Company's exposure to potential increases in interest rates on a portion of its certificate of deposit accounts and borrowings. The counterparties in the transactions have agreed to make interest 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 were 8.25% and 6.50% for agreements with notional amounts of $30,000 and $20,000, respectively, at September 30, 2000. The carrying amounts of the agreements at September 30, 2000 and 1999 represented unamortized premiums of $258 and $209, respectively, which are included in other assets. The estimated fair values of the agreements at September 30, 2000 and 1999 were approximately $190 and $310, respectively, representing the estimated net amounts the Company would have received had it terminated the contracts at those dates. Premium amortization of $79, $61 and $36 is included in interest expense for the years ended September 30, 2000, 1999 and 1998, respectively. Counterparty payments of $19 were received and recorded as a reduction of interest expense for the year ended September 30, 2000. (16) 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, 48 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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 at September 30 (none of which were held for trading purposes):
2000 1999 --------------------------- ---------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------ ------------- ----------- -------------- Financial Assets: Cash and due from banks 12,785 $ 12,785 $ 11,838 $ 11,838 Securities available for sale 162,157 162,157 148,387 148,387 Securities held to maturity 48,586 48,374 56,782 56,479 Loans 589,822 576,568 566,521 564,275 Accrued interest receivable 5,495 5,495 5,833 5,833 FHLB stock 7,023 7,023 6,176 6,176 Financial Liabilities: Deposits 608,976 608,450 586,640 585,402 Borrowings 127,571 127,015 117,753 117,077 Mortgage escrow funds 5,971 5,971 10,489 10,489 ============ ============= =========== ==============
The following methods and assumptions were used by management to estimate the fair value of the Company's financial instruments: Securities The estimated fair values of securities were based on quoted market prices. 49 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) Loans Fair values were estimated for portfolios of loans with similar financial characteristics. For valuation purposes, the total loan portfolio was segregated into performing and non-performing categories. Performing loans were segregated by adjustable-rate and fixed-rate loans; fixed-rate loans were further segmented by type, such as residential mortgage, commercial mortgage, commercial business and consumer loans. Residential loans were also segmented by maturity. 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. Estimated fair values of loans held for sale were based on contractual sale prices for loans covered by forward sale commitments. Any remaining loans held for sale were valued based on current secondary market prices and yields. 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 unrecognized value separate from the deposit balances. 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. The bank overdraft included in total borrowings has an estimated fair value equal to the carrying amount. 50 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) 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. The carrying amounts and estimated fair values of the Company's interest rate cap agreements at September 30, 2000 and 1999 are set forth in note 15. The fair values of the Company's lending-related off-balance-sheet financial instruments described in note 15 were estimated based on the interest rates and fees currently charged to enter into similar agreements, considering the remaining terms of the agreements and the present credit worthiness of the counterparties. At September 30, 2000 and 1999, the estimated fair values of these instruments approximated the related carrying amounts which were not significant. (17) Condensed Parent Company Financial Statements Set forth below are the condensed statements of financial condition of Provident Bancorp, Inc. at September 30, 2000 and 1999, together with the related condensed statements of income and cash flows for the year ended September 30, 2000 and the period from January 7, 1999 through September 30, 1999.
September 30, -------------------------- 2000 1999 ---------- --------- Condensed Statements of Financial Condition Assets Cash and cash equivalents $ 129 $ 2,367 Securities available for sale 10,396 9,906 Loan receivable from ESOP 3,008 3,384 Investment in Provident Bank 77,084 74,496 Other assets 434 320 ------- ------- Total assets $91,051 $90,473 ======= ======= Liabilities $ 65 $ 174 Stockholders' Equity 90,986 90,299 ------- ------- Total liabilities and stockholders' equity $91,051 $90,473 ======= =======
51 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands)
Year Ended Period Ended September 30, September 30, 2000 1999 -------- -------- Condensed Statements of Income Interest income $ 902 $ 425 Dividends from Provident Bank 2,000 -- Non-interest expense (180) -- Income tax expense (279) (174) -------- -------- Income before equity in undistributed earnings of Provident Bank 2,443 251 Equity in undistributed earnings of Provident Bank 3,429 2,951 -------- -------- Net income $ 5,872 $ 3,202 ======== ======== Condensed Statements of Cash Flows Cash Flows from Operating Activities: Net income $ 5,872 $ 3,202 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of Provident Bank (3,429) (2,951) Other adjustments, net (405) (312) -------- -------- Net cash provided by (used in) operating activities 2,038 (61) -------- -------- Cash Flows from Investing Activities: Purchases of securities available for sale (1,008) (10,218) Proceeds from sales of securities available for sale 984 -- Capital contribution to Provident Bank -- (24,000) -------- -------- Net cash used in investing activities (24) (34,218) -------- -------- Cash Flows from Financing Activities: Treasury shares purchased (3,203) -- Cash dividends paid (1,049) (367) Net proceeds from stock offering -- 37,113 Initial capitalization of Provident Bancorp, MHC -- (100) -------- -------- Net cash (used in) provided by financing activities (4,252) 36,646 -------- -------- Net (decrease) increase in cash and cash equivalents (2,238) 2,367 Cash and cash equivalents at beginning of period 2,367 -- -------- -------- Cash and cash equivalents at end of period $ 129 $ 2,367 ======== ========
52 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (18) Quarterly Results of Operations (Unaudited) The following is a condensed summary of quarterly results of operations for the years ended September 30, 2000 and 1999:
First Second Third Fourth Year Ended September 30, 2000 Quarter Quarter Quarter Quarter ------------ ------------- ------------- -------------- Interest and dividend income $ 14,298 $ 14,522 $ 14,811 $ 15,268 Interest expense 6,194 6,324 6,642 6,874 ------------ ------------- ------------- -------------- Net interest income 8,104 8,198 8,169 8,394 Provision for loan losses 450 450 450 360 Non-interest income 847 794 843 907 Non-interest expense 6,385 6,623 6,365 6,435 ------------ ------------- ------------- -------------- Income before income tax expense 2,116 1,919 2,197 2,506 Income tax expense 716 691 681 778 ------------ ------------- ------------- -------------- Net income $ 1,400 $ 1,228 $ 1,516 $ 1,728 ============ ============= ============= ============== Basic and diluted earnings per common share $ 0.17 $ 0.16 $ 0.20 $ 0.23 ============ ============= ============= ============== Year Ended September 30, 1999 Interest and dividend income $ 12,506 $ 12,563 $ 13,171 $ 14,027 Interest expense 5,333 5,009 5,249 5,998 ------------ ------------- ------------- -------------- Net interest income 7,173 7,554 7,922 8,029 Provision for loan losses 360 360 420 450 Non-interest income 812 766 687 838 Non-interest expense 6,472 6,632 6,517 6,682 ------------ ------------- ------------- -------------- Income before income tax expense 1,153 1,328 1,672 1,735 Income tax expense 425 491 544 498 ------------ ------------- ------------- -------------- Net income $ 728 $ 837 $ 1,128 $ 1,237 ============ ============= ============= ============== Basic and diluted earnings per common share $ 0.10 $ 0.14 $ 0.15 ============= ============= ==============
(19) Accounting Standards In fiscal 2001, the Company will adopt SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 133 requires that all derivative instruments be measured at fair value and recognized in the statement of financial condition as either assets or liabilities. Changes in the fair value of derivative instruments are reported either in current earnings or comprehensive income, depending on the use of the derivative and whether it qualifies for hedge accounting. Special hedge accounting treatment is 53 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) permitted only if specific criteria are met, including a requirement that the hedging relationship be highly effective both at inception and on an ongoing basis. Accounting for hedges varies based on the type of hedge. For instance, the effective portion of a cash flow hedge is recognized in other comprehensive income, while the ineffective portion is recognized in current earnings. SFAS No. 133 was effective October 1, 2000 for the Company. Because the Company's derivatives were limited to the interest rate cap agreements described in note 15, the effect of adoption of SFAS No. 133 was not significant. However, there may be increased volatility in net income and stockholders' equity on an ongoing basis as a result of SFAS No. 133 depending on factors such as the Company's future use of derivatives and further ongoing interpretation of SFAS No. 133 by the Financial Accounting Standards Board. SFAS No. 140 replaces SFAS No. 125 which the Company adopted in fiscal 1997. Although SFAS No. 140 revises certain aspects of accounting for securitizations and collateral, and requires certain new disclosures, it carries over most provisions of SFAS No. 125 without revision. SFAS No. 140 is effective for transactions occurring after March 31, 2001, and its provisions related to collateral and disclosures are effective for fiscal years ending after December 15, 2000. The Company's present accounting practices for mortgage loan sales, the related servicing rights, and securities repurchase agreements are not expected to change significantly under SFAS No. 140. Accordingly, adoption of the standard in fiscal 2001 is not expected to have a significant effect on the Company's consolidated financial statements. 54