-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IL+Cb9ZlHfRLUT8iivXvz+0t86eXhWyWBoTijU8ShiDnI8DGgKWDhaV4FhO5Pd5I j7P/G6e+hy34vFT4/FSoQA== 0000914317-00-000856.txt : 20010101 0000914317-00-000856.hdr.sgml : 20010101 ACCESSION NUMBER: 0000914317-00-000856 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENT BANCORP INC/NY/ CENTRAL INDEX KEY: 0001070154 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 000000000 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25233 FILM NUMBER: 798645 BUSINESS ADDRESS: STREET 1: 400 RELLA BLVD CITY: MONTEBELLO STATE: NY ZIP: 10901 BUSINESS PHONE: 9143698040 10-K 1 0001.txt 10-K FOR PROVIDENT BANCORP SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ____________________ Commission File Number: 0-25233 PROVIDENT BANCORP, INC. ---------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Federal 06-1537499 - -------------------------------- --------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 400 Rella Boulevard, Montebello, New York 10901 - ------------------------------------------ ---------- (Address of Principal Executive Office) (Zip Code) (845) 369-8040 --------------------------------------------------- (Registrant's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: None ---- Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per share --------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES [ X ] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ______ As of November 30, 2000, there were issued and outstanding 8,077,800 shares of the Registrant's common stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of November 30, 2000, was $58,588,800. DOCUMENTS INCORPORATED BY REFERENCE 1. Sections of Annual Report to Stockholders for the fiscal year ended September 30, 2000 (Parts II and IV). 2. Proxy Statement for the Annual Meeting of Stockholders (Part III) to be held in February, 2001. 1 PART I ITEM 1. Business Provident Bancorp, Inc. Provident Bancorp, Inc. (the "Company") was organized at the direction of the Board of Directors of Provident Bank (the "Bank") for the purpose of acting as the stock holding company of the Bank. The Company's principal business is overseeing and directing the business of the Bank and investing the net stock offering proceeds retained by it. At September 30, 2000, the Company's assets consist primarily of all outstanding capital stock of the Bank, and cash and securities of $10.5 million representing a portion of the net proceeds from the Company's stock offering completed on January 7, 1999. At September 30, 2000, 3,661,800 shares of the Company's common stock, par value $0.10 per share, were held by the public, and 4,416,000 shares were held by Provident Bancorp, MHC, the Company's parent mutual holding company (the "Mutual Holding Company"). The Company's office is located at 400 Rella Boulevard, Montebello, New York 10901. Its telephone number is (845) 369-8040. Provident Bank The Bank was organized in 1888 as a New York-chartered mutual savings and loan association, adopted a federal mutual charter in 1986 and reorganized into the stock form of ownership in 1999 as part of its reorganization into the mutual holding company structure. The Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF"), as administered by the Federal Deposit Insurance Corporation ("FDIC"), up to the maximum amount permitted by law. The Bank is engaged primarily in the business of offering various FDIC-insured savings and demand deposits to customers through its thirteen full-service offices, and using those deposits, together with funds generated from operations and borrowings, to originate one- to four-family residential and commercial real estate loans, consumer loans, construction loans and commercial business loans. The Bank also invests in investment securities and mortgage-backed securities. Additional products and services offered include the sale of mutual funds and annuities, and investment management and trust services. The Bank's executive office is located at 400 Rella Boulevard, Montebello, New York 10901. Its telephone number is (845) 369-8040. Provident Bancorp, MHC The Mutual Holding Company was formed in January 1999 as part of the Bank's mutual holding company reorganization. The Mutual Holding Company is chartered under federal law and owns 54.68% of the outstanding common stock of the Company as of September 30, 2000. The Mutual Holding Company does not engage in any business activities other than owning the common stock of the Company, investing in liquid assets and contributing to local charities. The Mutual Holding Company's office is located at 400 Rella Boulevard, Montebello, New York 10901. Its telephone number is (845) 369-8040. Forward-Looking Statements In addition to historical information, this annual report contains forward-looking statements. For this purpose, any statements contained herein (including documents incorporated herein by reference) that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believe", "anticipates", "plans", 2 "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. Market Area The Bank is an independent community bank offering a broad range of customer-focused services as an alternative to money center banks in its market area. At September 30, 2000, the Bank operated eleven full-service banking offices in Rockland County, New York and two full-service supermarket branches in Orange County, New York, bringing the total number of branch offices to thirteen in the two counties. The Bank's primary market for deposits is currently concentrated around the areas where its full-service banking offices are located. The Bank's primary lending area also has been historically concentrated in Rockland and contiguous counties. Rockland County is a suburban market with a broad employment base. Rockland County also serves as a bedroom community for nearby New York City and other suburban areas including Westchester County and northern New Jersey. Neighboring Orange County, where the Bank has opened its two newest branches, is one of the two fastest growing counties in New York State. The favorable economic environment in the New York metropolitan area has led to an increase in residential and commercial construction activity in recent years. The economy of the Bank's primary market areas is based on a mixture of service, manufacturing and wholesale/retail trade. Other employment is provided by a variety of industries and state and local governments. The diversity of the employment base is evidenced by its many major employers. Additionally, Rockland and Orange Counties have numerous small employers. Lending Activities General. Historically, the principal lending activity of the Bank has been the origination of fixed-rate and adjustable-rate mortgage ("ARM") loans collateralized by one-to four-family residential real estate located within its primary market area. The Bank also originates commercial real estate loans, commercial business loans and construction loans (collectively referred to as the "commercial loan portfolio"), as well as consumer loans such as home equity lines of credit and homeowner loans. The Bank retains most of the loans that it originates, although from time to time it may sell longer-term one- to four-family residential real estate loans. 3 Loan Portfolio Composition. The following table sets forth the composition of the Bank's loan portfolio by type of loan at the dates indicated.
September 30, ---------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ------------------------- ---------------------- Amount Percent Amount Percent Amount Percent (Dollars in Thousands) One- to four-family residential mortgage loans $ 343,871 57.5% $ 344,731 60.2% 290,334 62.0% Commercial real estate loans 124,988 20.9 110,382 19.3 71,149 15.1 Commercial business loans 27,483 4.6 30,768 5.4 24,372 5.2 Construction loans 29,599 5.0 19,147 3.3 20,049 4.3 --------- ------- --------- -------- --------- -------- Total commercial loans 182,070 30.5 160,297 28.0 115,570 24.6 --------- ------- --------- -------- --------- -------- Home equity lines of credit 28,021 4.7 25,380 4.4 26,462 5.7 Homeowner loans 37,027 6.2 34,852 6.1 27,208 5.8 Other consumer loans 6,486 1.1 7,463 1.3 8,999 1.9 --------- ------- --------- -------- --------- -------- Total consumer loans 71,534 12.0 67,695 11.8 62,669 13.4 --------- ------- --------- -------- --------- -------- Total loans 597,475 100.0% 572,723 100.0% 468,573 100.0% ===== ===== ===== Allowance for loan losses (7,653) (6,202) (4,906) --------- --------- --------- Total loans, net $ 589,822 $ 566,521 $ 463,667 ========= ========= =========
September 30, ---------------------------------------------- 1997 1996 ------------------- --------------------- Amount Percent Amount Percent One- to four-family residential mortgage loans $241,886 59.3% $ 219,827 59.0% Commercial real estate loans 62,910 15.4 66,145 17.7 Commercial business loans 18,433 4.5 15,268 4.1 Construction loans 23,475 5.7 16,074 4.3 ---------- ------- --------- --------- Total commercial loans 104,818 25.6 97,487 26.1 ---------- ------- --------- --------- Home equity lines of credit 31,671 7.8 31,511 8.5 Homeowner loans 19,160 4.7 13,035 3.5 Other consumer loans 10,741 2.6 10,984 2.9 ---------- ------- --------- --------- Total consumer loans 61,572 15.1 55,530 14.9 ---------- ------- --------- --------- Total loans 408,276 100.0% 372,844 100.0% ===== ===== Allowance for loan losses (3,779) (3,357) ------- ---------- Total loans, net $404,497 $ 369,487 ======= ==========
4 Loan Maturity Schedule. The following table summarizes the contractual maturities of the Bank's loan portfolio at September 30, 2000. Loans with adjustable or renegotiable interest rates are shown as maturing at the end of the contractual term of the loan. The table reflects the entire unpaid principal balance of a loan maturing in the period that includes the final payment date and, accordingly, does not give effect to periodic principal payments or possible prepayments.
One- to Four-Family Commercial Real Estate Commercial Business Construction (2) ---------------------- ----------------------- ------------------- ------------------ Weighted Weighted Weighted Weighted Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate -------- --------- --------- ------- ---------- ------ -------- ------- (Dollars in Thousands) Due During the Years Ending September 30, 2001 (1) ................................ $ 195 9.31% $ 8,854 9.31% $ 11,813 9.70% $ 11,662 9.76% 2002 .................................... 475 8.35 2,250 9.33 1,971 9.18 9,667 9.98 2003 .................................... 965 8.40 4,489 9.00 1,356 8.97 5,025 9.32 2004 and 2005 ........................... 1,630 8.61 14,118 8.58 6,744 9.20 291 8.95 2006 to 2010 ............................ 30,775 7.31 54,642 8.09 2,881 8.75 1,590 7.46 2011 to 2025 ............................ 192,307 7.43 40,635 8.27 988 9.13 1,337 9.37 2026 and following ...................... 117,524 7.25 -- -- 1,730 10.62 27 8.45 -------- ----- -------- ------- -------- ------- ------ ------- Total ................................... $343,871 7.37% $124,988 8.35% $ 27,483 9.44% $29,599 9.61% ======== ==== ======== ==== ======== ==== ======= ====
Consumer Total ---------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate -------- -------- --------- ------ (Dollars in Thousands) Due During the Years Ending September 30, 2001 (1) ................................ $ 1,208 10.87% $ 33,732 9.66% 2002 .................................... 2,736 10.65 17,099 9.86 2003 .................................... 5,063 9.44 16,898 9.19 2004 and 2005 ........................... 16,106 9.04 38,889 8.88 2006 to 2010 ............................ 33,846 8.76 123,734 8.09 2011 to 2025 ............................ 12,174 8.67 247,441 7.65 2026 and following ...................... 401 15.41 119,682 7.33 -------- ----- ------- ------ Total ................................... $ 71,534 9.00% $597,475 7.98% ======== ==== ======== ====
- ------------------------ (1) Includes demand loans, loans having no stated maturity, and overdraft loans. (2) Includes land acquisition loans. The following table sets forth the dollar amounts of fixed- and adjustable-rate loans at September 30, 2000 that are contractually due after September 30, 2001.
Due After September 30, 2001 ------------------------------------------ Fixed Adjustable Total ------------ ------------ ---------- (In Thousands) One- to four-family residential mortgage loans $256,545 $ 87,131 $343,676 -------- -------- -------- Commercial real estate loans ................. 47,816 68,318 116,134 Commercial business loans .................... 7,942 7,728 15,670 Construction loans ........................... 222 17,715 17,937 -------- -------- -------- Total commercial loans ..... 55,980 93,761 149,741 -------- -------- -------- Consumer loans ............................... 42,660 27,666 70,326 -------- -------- -------- Total loans ................ $355,185 $208,558 $563,743 ======== ======== ========
5 One- to Four-family Real Estate Lending. The Bank's primary lending activity is the origination of one- to four-family residential mortgage loans secured by properties located in the Bank's primary market area. The Bank offers conforming and non-conforming, fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $600,000. The Bank currently offers both fixed- and adjustable-rate conventional mortgage loans with terms of 10 to 30 years that are fully amortizing with monthly or bi-weekly loan payments. One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and loans that conform to such guidelines are referred to as "conforming loans." The Bank generally originates both fixed-rate and ARM loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac secondary mortgage market standards, which are currently $275,000 for single-family homes. Private mortgage insurance is generally required initially for loans with loan-to-value ratios in excess of 80%. Loans in excess of conforming loan limits, in amounts of up to $600,000, are also underwritten to both Fannie Mae and Freddie Mac secondary mortgage market standards. These loans are eligible for sale to various conduit firms that specialize in the purchase of such non-conforming loans, although most of these loans are retained in the Bank's loan portfolio. The Bank's bi-weekly one- to four-family residential mortgage loans result in significantly shorter repayment schedules than conventional monthly mortgage loans, and are repaid through an automatic deduction from the borrower's savings or checking account, which enables the Bank to avoid the cost of processing payments. As of September 30, 2000, bi-weekly loans totaled $96.7 million or 28.1% of the Bank's residential loan portfolio. The Bank actively monitors its interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Depending on market interest rates and the Bank's capital and liquidity position, the Bank may retain all of its newly originated longer term fixed-rate, fixed-term residential mortgage loans or may decide to sell all or a portion of such loans in the secondary mortgage market to government sponsored enterprises such as Fannie Mae and Freddie Mac. As a matter of policy, the Bank retains the servicing rights on all loans sold to generate fee income and reinforce its commitment to customer service. For the year ended September 30, 2000, the Bank sold mortgage loans totaling $808,000 compared with $14.1 million for the year ended September 30, 1999. As of September 30, 2000 and 1999, the Bank's portfolio of loans serviced for others totaled $98.5 million and $109.0 million, respectively. The Bank currently offers several ARM loan products secured by residential properties with rates that adjust every six months to one year, after an initial fixed-rate period ranging from six months to five years. After the initial term, the interest rate on these loans is reset based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of six months to one year (the "U.S. Treasury Constant Maturity Index"), as published weekly by the Federal Reserve Board. ARM loans are generally subject to limitations on interest rate increases of 2% per adjustment period, and an aggregate adjustment of 6% over the life of the loan. ARM loans require that any payment adjustment resulting from a change in the interest rate on the ARM loan be sufficient to result in full amortization of the loan by the end of the loan term, and thus, do not permit any of the increased payment to be added to the principal amount of the loan, commonly referred to as negative amortization. At September 30, 2000, the Bank's ARM portfolio included $12.3 million in loans that re-price every six months, $28.8 million in one-year ARMs and $45.9 million in loans with an initial fixed-rate period ranging from three to five years. The retention of ARM loans, as opposed to long term, fixed-rate residential mortgage loans, in the Bank's portfolio helps reduce its exposure to interest rate risk. However, ARM loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default. In order to minimize this risk, borrowers of one- to four-family one year ARM loans are qualified at the rate that would be in effect after the first interest rate adjustment, if that rate is higher than the initial rate. While one- to four-family residential loans typically are originated with 15 to 30 year terms, such loans, whether fixed-rate or ARMs, generally remain outstanding in the Bank's loan portfolio for substantially shorter periods of time because borrowers must prepay their loans in full upon sale of the property pledged as security or upon refinancing the loan. Thus, average loan maturity is a function of, among other factors, the level of 6 purchase and sale activity in the Bank's primary lending market, prevailing market interest rates, and the interest rates payable on outstanding loans. The Bank requires title insurance on all of its one- to four-family mortgage loans, and also requires that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. Loans with initial loan-to-value ratios in excess of 80% must have private mortgage insurance, although occasional exceptions may be made. Nearly all residential loans must have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance. Commercial Real Estate Lending. The Bank originates real estate loans secured predominantly by first liens on commercial real estate and apartment buildings. The commercial real estate properties are predominantly non-residential properties such as office buildings, shopping centers, retail strip centers, industrial and warehouse properties and, to a lesser extent, more specialized properties such as churches, mobile home parks, restaurants, motel/hotels and auto dealerships. The Bank may, from time to time, purchase commercial real estate loan participations. Loans secured by commercial real estate totaled $125.0 million or 20.9% of the Bank's total loan portfolio as of September 30, 2000, and consisted of 241 loans outstanding with an average loan balance of approximately $518,600. Substantially all of the Bank's commercial real estate loans are secured by properties located in its primary market area. The initial interest rates on a substantial portion of the Bank's commercial real estate loans adjust after an initial three-to-five year period to new market rates that generally range between 200 to 350 basis points over the then-current three-to-five year U.S. Treasury or FHLB rates. More typically, commercial real estate loans may have a term of approximately 5 to 10 years, with an amortization schedule of approximately 20 to 25 years, and may be repaid subject to certain penalties. Fixed rate loans for a term of 15 to 20 years are also made, from time to time. In the underwriting of commercial real estate loans, the Bank generally lends up to 70% of the property's appraised value on apartment buildings, or commercial properties that are not owner-occupied, and up to 75% of the property's appraised value on commercial properties that are owner-occupied. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, the Bank emphasizes primarily the ratio of the property's projected net cash flow to the loan's debt service requirement (generally requiring a ratio of at least 110%), computed after deduction for a vacancy factor and property expenses deemed appropriate by the Bank. In addition, a personal guarantee of the loan is generally required from the principal(s) of the borrower. On all real estate loans, the Bank requires title insurance insuring the priority of its lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect the Bank's security interest in the underlying property. Commercial real estate loans generally carry higher interest rates and have shorter terms than those on one- to four-family residential mortgage loans. Commercial real estate loans, however, entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the economy generally. Construction Loans. The Bank originates land acquisition, development and construction loans to builders in its market area. This portfolio totaled $29.6 million, or 5.0% of total loans, at September 30, 2000. Acquisition loans are made to help finance the purchase of land intended for further development, including single-family houses, multi-family housing, and commercial income property. In some cases, the Bank may make an acquisition loan before the borrower has received approval to develop the land as planned. Loans for the acquisition of land are generally limited to the Bank's most creditworthy customers. In general, the maximum loan-to-value ratio for a land acquisition loan is 60% of the appraised value of the property. The Bank also makes development loans to builders in its market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance the cost of utilities, roads and sewers. 7 Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum amount loaned is generally limited to the cost of the improvements. Advances are made in accordance with a schedule reflecting the cost of the improvements. The Bank also grants construction loans to area builders, often in conjunction with development loans. These loans finance the cost of completing homes on the improved property. The loans are generally limited to the lesser of 70% of the appraised value of the property or the actual cost of improvements. In the case of single-family construction, the Bank limits the number of houses it will finance that are not under contract for sale. As part of its underwriting process for construction loans on income-producing properties, such as apartment buildings and commercial rental properties, the Bank considers the likelihood of leasing the property at the expected rental amount, and the time to achieve sufficient occupancy levels. The Bank generally requires a percentage of the building to be leased prior to granting a construction loan on income-producing property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. The Bank's policy is to confirm, prior to each advance, that the construction has been completed properly as evidenced by an inspection report issued by an appraiser or engineer hired by the Bank. The Bank also confirms that its lien priority remains in force before advancing funds. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. The Bank commits to provide the permanent mortgage financing on most of its construction loans on income-producing property. Land acquisition, development and construction lending exposes the Bank to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event the Bank makes an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and construction loans also expose the Bank to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. Commercial Business Loans. The Bank currently offers commercial business loans to customers in its market area, some of which are secured in part by additional real estate collateral. In an effort to expand its customer account relationships and develop a broader mix of assets, the Bank makes various types of secured and unsecured commercial loans for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to seven years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate which is determined internally, or a short-term market rate index. The Bank may, from time to time, purchase commercial business loan participations. At September 30, 2000, the Bank had 321 commercial business loans outstanding with an aggregate balance of $27.5 million, or 4.6% of the total loan portfolio. As of September 30, 2000, the average commercial business loan balance was approximately $85,000. Commercial credit decisions are based upon a complete credit assessment of the loan applicant. A determination is made as to the applicant's ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. An investigation is made of the applicant to determine character and capacity to manage. Personal guarantees of the principals are generally required. In addition to an evaluation of the loan applicant's financial statements, a determination is made of the probable adequacy of the primary and secondary sources of repayment to be relied upon in the transaction. Credit agency reports of the applicant's credit history as well as bank checks and trade investigations supplement the analysis of the applicant's creditworthiness. Collateral supporting a secured transaction is also analyzed to determine its marketability and liquidity. Commercial business loans generally bear higher interest rates than residential loans, but they also involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower's business. 8 Consumer Loans. The Bank originates a variety of consumer and other loans, including homeowner loans, home equity lines of credit, new and used automobile loans, and personal unsecured loans, including fixed-rate installment loans and prime rate variable lines-of-credit. As of September 30, 2000, consumer loans totaled $71.5 million, or 12.0% of the total loan portfolio. At September 30, 2000, the largest group of consumer loans consisted of $65.0 million of loans secured by junior liens on residential properties. The Bank offers fixed-rate, fixed-term second mortgage loans, referred to as "homeowner loans," and adjustable-rate home equity lines of credit. Homeowner loans are offered in amounts up to 90% of the appraised value of the property (including prior liens) with a maximum loan amount of $75,000. Home equity loans are generally offered in amounts up to 75% of the appraised value of the property including prior liens, with a maximum loan amount of $200,000. As of September 30, 2000, homeowner loans totaled $37.0 million or 6.2% of the Bank's total loan portfolio. The disbursed portion of home equity lines of credit totaled $28.0 million, or 4.7% of the Bank's total loan portfolio, with $25.6 million remaining undisbursed. Other consumer loans include personal loans and loans secured by new or used automobiles. As of September 30, 2000, these loans totaled $6.5 million, or 1.1% of the Bank's total loan portfolio. The Bank originates automobile loans directly to its customers and has no outstanding agreement with automobile dealerships to generate indirect loans. The maximum term for an automobile loan is generally 60 months for a new car, and 36 to 48 months for a used car. The Bank will generally lend up to 100% of the purchase price of a new car, and up to 90% of the lesser of the purchase price or the National Automobile Dealers' Association book rate for a used car. The Bank requires all borrowers to maintain collision insurance on automobiles securing consumer loans, with the Bank listed as loss payee. Personal loans also include secured and unsecured installment loans for other purposes. Unsecured installment loans generally have shorter terms than secured consumer loans, and generally have higher interest rates than rates charged on secured installment loans with comparable terms. The Bank's procedures for underwriting consumer loans include an assessment of an applicant's credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral security, if any, to the proposed loan amount. Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that tend to depreciate rapidly, such as automobiles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, the repayment of consumer loans depends on the borrower's continued financial stability, as their repayment is more likely than a single family mortgage loan to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws (including bankruptcy and insolvency laws) may limit the amount that can be recovered on such loans. Loan Originations, Purchases, Sales and Servicing. While the Bank originates both fixed-rate and adjustable-rate loans, its ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed- versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders in the Bank's market area. This includes competing banks, savings banks, credit unions, mortgage banking companies and life insurance companies that may also actively compete for local commercial real estate loans. Loan originations are derived from a number of sources, including branch office personnel, existing customers, borrowers, builders, attorneys, real estate broker referrals and walk-in customers. The Bank's loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. Accordingly, the volume of loan originations and the profitability of this activity can vary from period to period. One- to four-family residential mortgage loans are generally underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines. One- to four-family loans are also closed on standard Fannie Mae/Freddie Mac documents and sales are 9 conducted using standard Fannie Mae/Freddie Mac purchase contracts and master commitments as applicable. One- to four-family mortgage loans may be sold both to Fannie Mae and Freddie Mac on a non-recourse basis whereby foreclosure losses are generally the responsibility of the purchaser and not the Bank. The Bank is a qualified loan servicer for both Fannie Mae and Freddie Mac. The Bank's policy has been to retain the servicing rights for all loans sold, and to continue to collect payments on the loans, maintain tax escrows and applicable fire and flood insurance coverage, and supervise foreclosure proceedings if necessary. The Bank retains a portion of the interest paid by the borrower on the loans as consideration for its servicing activities. The following table sets forth the loan origination, sale and repayment activities of the Bank for the periods indicated. The Bank has not purchased any loans in recent years.
Year Ended September 30, ----------------------------------------------- 2000 1999 1998 --------- --------- --------- (In Thousands) Unpaid principal balances at beginning of year $ 572,723 $ 468,573 $ 408,276 --------- --------- --------- Originations by Type Adjustable-rate: One- to four-family ................. 16,792 17,563 14,976 Commercial real estate .............. 22,463 17,540 9,025 Commercial business .......................... 17,785 20,616 19,593 Construction ........................ 15,630 16,941 12,529 Consumer ............................ 12,886 12,510 11,587 --------- --------- --------- Total adjustable-rate .......... 85,556 85,170 67,710 --------- --------- --------- Fixed-rate: One- to four-family ................. 16,328 100,873 93,493 Commercial real estate .............. 3,014 22,244 8,161 Commercial business ................. 12,305 4,584 3,209 Construction ........................ 3,675 -- -- Consumer ............................ 14,589 21,213 20,100 --------- --------- --------- Total fixed-rate ............... 49,911 148,914 124,963 --------- --------- --------- Total loans originated .............. 135,467 234,084 192,673 Sales ........................................ (722) (13,804) (17,003) Principal repayments ......................... (109,580) (115,525) (114,166) Net charge-offs .............................. (259) (294) (610) Transfers to real estate owned ............... (154) (311) (597) --------- --------- --------- Unpaid principal balances at end of year ..... 597,475 572,723 468,573 Allowance for loan losses .................... (7,653) (6,202) (4,906) --------- --------- --------- Net loans at end of year ..................... $ 589,822 $ 566,521 $ 463,667 ========= ========= =========
Loan Approval Authority and Underwriting. The Bank has four levels of lending authority beginning with the Board of Directors. The Board grants lending authority to the Director Loan Committee, the majority of the members of which are Directors. The Director Loan Committee, in turn, may grant authority to the Management Loan Committee and individual loan officers. In addition, designated members of management may grant authority to individual loan officers up to specified limits. The lending activities of the Bank are subject to written policies established by the Board. These policies are reviewed periodically. The Director Loan Committee may approve loans in accordance with applicable loan policies, of up to the limits established in the Bank's policy governing loans-to-one-borrower. This policy places limits on the aggregate dollar amount of credit that may be extended to any one borrower and related entities. Loans exceeding $3.2 million in the aggregate require approval of the Board of Directors. The Management Loan Committee may approve loans of up 10 to an aggregate of $650,000 to any one borrower and related borrowers. Two loan officers with sufficient loan authority acting together may approve loans up to $350,000. The maximum individual authority to approve an unsecured loan is $50,000. The Bank has established a risk rating system for its commercial business loans, commercial real estate loans, and construction loans to builders. The risk rating system assesses a variety of factors to rank the risk of default and risk of loss associated with the loan. These ratings are performed by commercial credit personnel who do not have responsibility for loan originations. The Bank determines its maximum loans to one borrower based upon the rating of the loan. The large majority of loans fall into three categories. The maximum for the best rated borrowers is $8.5 million, for the next group of borrowers is $6.5 million, and for the third group is $3.5 million. Sublimits apply based on reliance on any single property, and for commercial business loans. In connection with its residential and commercial real estate loans, the Bank requires property appraisals to be performed by independent appraisers who are approved by the Board. Appraisals are then reviewed by the appropriate loan underwriting areas of the Bank. The Bank also requires title insurance, hazard insurance and, if indicated, flood insurance on property securing its mortgage loans. For consumer loans under $50,000, such as equity lines of credit and homeowner loans, title insurance is not required. Loan Origination Fees and Costs. In addition to interest earned on loans, the Bank also receives loan origination fees. Such fees vary with the volume and type of loans and commitments made, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. The Bank defers loan origination fees and costs, and amortizes such amounts as an adjustment to yield over the term of the loan by use of the level-yield method. Deferred loan origination costs (net of deferred fees) were $674,000 at September 30, 2000. To the extent that originated loans have been sold with servicing retained since January 1, 1997, the Bank has capitalized a mortgage servicing asset at the time of the sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The capitalized amount is amortized thereafter (over the period of estimated net servicing income) as a reduction of servicing fee income. The unamortized amount is fully charged to income when loans are prepaid. Asset recognition of servicing rights on sales of originated loans was not permitted under accounting standards in effect prior to SFAS No. 125, when the Bank sold the majority of the loans it presently services for others. Originated mortgage servicing rights with an amortized cost of $229,000 are included in other assets at September 30, 2000. See also Notes 1 and 5 of the Notes to Consolidated Financial Statements. Loans-to-One Borrower. Savings associations are subject to the same loans-to-one borrower limits as those applicable to national banks, which under current regulations restrict loans to one borrower to an amount equal to 15% of unimpaired net worth on an unsecured basis, and an additional amount equal to 10% of unimpaired net worth if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate). The Bank monitors its credit limits by relationship and by total credit exposure, including the unused portion of credit made available by the Bank, such as unadvanced amounts on construction loans and unused lines of credit. At September 30, 2000, the five largest aggregate amounts loaned to individual borrowers by the Bank (including any unused lines of credit) were as follows: $8.8 million, consisting of mortgage-secured and unsecured financing; $8.0 million, consisting of mortgage-secured and unsecured financing; $7.1 million, consisting of mortgage-secured financing; $6.8 million secured by marketable securities; and $6.8 million, consisting of mortgage-secured and unsecured financing. All of the loans discussed above are performing in accordance with their terms. Delinquent Loans, Other Real Estate Owned and Classified Assets Collection Procedures. A computer-generated late notice is sent by the 17th day of the month requesting the payment due plus the late charge that was assessed. After the late notices have been mailed, accounts are assigned to a collector for follow-up to determine reasons for delinquency and to review payment options. Additional system-generated collection letters are sent to customers every 10 days. Notwithstanding ongoing collection efforts, all consumer loans are fully charged-off after 120 days. 11 Loans Past Due and Non-performing Assets. Loans are reviewed on a regular basis. Loans are placed on non-accrual status when either principal or interest is 90 days or more past due. In addition, loans are placed on non-accrual status when, in the opinion of management, there is sufficient reason to question the borrower's ability to continue to meet contractual principal or interest payment obligations. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income. Interest payments received on non-accrual loans are not recognized as income unless warranted based on the borrower's financial condition and payment record. At September 30, 2000, the Bank had non-accrual loans of $4.0 million. The ratio of non-performing loans to total loans was 0.67% at September 30, 2000. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned ("REO") until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less estimated costs of disposal. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses. At September 30, 2000, the Bank had REO of $154,000, total non-performing assets (non-accrual loans and REO) of $4.2 million, and a ratio of non-performing assets to total assets of 0.50%. The following table sets forth certain information with respect to the Bank's loan portfolio delinquencies at the dates indicated.
Loans Delinquent For ------------------------------------------------------- 60-89 Days 90 Days and Over Total ----------------------- ---------------------------- ------------------------ Number Amount Number Amount Number Amount ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) At September 30, 2000 One- to four-family .. 14 $1,180 26 $2,496 40 $3,676 Commercial real estate 2 270 5 1,149 7 1,419 Commercial business .. -- -- -- -- -- -- Construction ......... -- -- 1 27 1 27 Consumer ............. 10 187 23 359 33 546 ------ ------ ------ ------ ------ ------ Total .............. 26 $1,637 55 $4,031 81 $5,668 ====== ====== ====== ====== ====== ====== At September 30, 1999 One- to four-family .. 15 $1,834 37 $2,839 52 $4,673 Commercial real estate 1 45 4 1,133 5 1,178 Commercial business .. -- -- 2 208 2 208 Construction ......... -- -- 1 27 1 27 Consumer ............. 21 432 23 429 44 861 ------ ------ ------ ------ ------ ------ Total .............. 37 $2,311 67 $4,636 104 $6,947 ====== ====== ====== ====== ====== ====== At September 30, 1998 One- to four-family .. 9 $ 719 33 $2,965 42 $3,684 Commercial real estate 2 261 2 871 4 1,132 Commercial business .. -- -- 7 368 7 368 Construction ......... -- -- 3 1,256 3 1,256 Consumer ............. 15 264 14 647 29 911 ------ ------ ------ ------ ------ ------ Total .............. 26 $1,244 59 $6,107 85 $7,351 ====== ====== ====== ====== ====== ======
12 Non-Performing Assets. The table below sets forth the amounts and categories of the Bank's non-performing assets at the dates indicated. At each date presented, the Bank had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates).
September 30, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------ ------- ------ (Dollars in Thousands) Non-accrual loans: One- to four-family ................. $2,496 $2,839 $2,965 $2,549 $2,731 Commercial real estate .............. 1,149 1,133 871 1,375 2,087 Commercial business ................. -- 208 368 243 109 Construction ........................ 27 27 1,256 276 920 Consumer ............................ 359 429 647 234 503 ------ ------ ------ ------ ------ Total non-performing loans ........ 4,031 4,636 6,107 4,677 6,350 ------ ------ ------ ------ ------ Real estate owned: One- to four-family ................. 154 403 92 186 347 Commercial real estate .............. -- -- 274 -- 960 ------ ------ ------ ------ ------ Total real estate owned ........... 154 403 366 186 1,307 ------ ------ ------ ------ ------ Total non-performing assets ............ $4,185 $5,039 $6,473 $4,863 $7,657 ====== ====== ====== ====== ====== Ratios: Non-performing loans to total loans . 0.67% 0.82% 1.32% 1.16% 1.72% Non-performing assets to total assets 0.50 0.62 0.94 0.75 1.21
For the year ended September 30, 2000, gross interest income that would have been recorded had the non-accrual loans at the end of the period remained on accrual status throughout the period amounted to $337,000. Interest income actually recognized on such loans totaled $77,000. Classification of Assets. The Bank's policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the savings institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated as special mention by management. As of September 30, 2000, the Bank had $2.4 million of assets designated as special mention. When the Bank classifies assets as either substandard or doubtful, it allots for analytical purposes a portion of general valuation allowances or loss reserves to such assets as deemed prudent by management. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which have not been allocated to particular problem assets. When the Bank classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or to charge-off such amount. The Bank's determination as to the classification of its assets and the amount of its valuation allowance is subject to review by its regulatory agencies, which can order the establishment of additional loss allowances. Management regularly reviews the Bank's asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management's review of the Bank's assets at September 30, 2000, classified assets consisted of substandard assets of $4.0 million (loans receivable of $3.9 million and REO of $154,000) and doubtful assets (loans receivable) of $152,000. There were no assets classified as loss at September 30, 2000. 13 Allowance for Loan Losses. The Bank provides for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in management's judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the adequacy of the allowance for loan losses. The allowance for loan losses consists of amounts specifically allocated to non-performing loans and potential problem loans (if any) as well as allowances determined for each major loan category. Loan categories such as single-family residential mortgages and consumer loans are generally evaluated on an aggregate or "pool" basis by applying loss factors to the current balances of the various loan categories. The loss factors are determined by management based on an evaluation of historical loss experience, delinquency trends, volume and type of lending conducted, and the impact of current economic conditions in the Bank's market area. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. At September 30, 2000, the allowance for loan losses was $7.7 million, which equaled 1.30% of net loans and 189.85% of non-performing loans. For the years ended September 30, 2000, 1999 and 1998, the Bank recorded net loan charge-offs of $259,000, $294,000 and $610,000, respectively, as a reduction of the allowance for loan losses. Provisions for loan losses added to the allowance were $1.7 million, $1.6 million and $1.7 million during the respective periods. The following table sets forth activity in the Bank's allowance for loan losses for the years indicated.
Years Ended September 30, --------------------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- (Dollars in Thousands) Balance at beginning of year ....................... $ 6,202 $ 4,906 $ 3,779 $ 3,357 $ 3,472 ------- ------- ------- ------- ------- Charge'offs: One- to four-family ............................. (168) (9) (13) (114) (33) Commercial real estate .......................... (1) -- (87) (301) (840) Commercial business ............................. (6) (567) (10) (173) -- Construction .................................... -- -- (355) -- -- Consumer ........................................ (195) (346) (200) (171) (203) ------- ------- ------- ------- ------- Total charge'offs ........................... (370) (922) (665) (759) (1,076) ------- ------- ------- ------- ------- Recoveries: One- to four-family ............................. 24 -- -- 42 3 Commercial real estate .......................... -- 101 -- -- -- Commercial business ............................. 24 194 -- -- -- Construction .................................... -- 286 2 32 14 Consumer ........................................ 63 47 53 49 33 ------- ------- ------- ------- ------- Total recoveries ............................ 111 628 55 123 50 ------- ------- ------- ------- ------- Net charge'offs .................................... (259) (294) (610) (636) (1,026) Provision for loan losses .......................... 1,710 1,590 1,737 1,058 911 ------- ------- ------- ------- ------- Balance at end of year ............................. $ 7,653 $ 6,202 $ 4,906 $ 3,779 $ 3,357 ======= ======= ======= ======= ======= Ratios: Net charge-offs to average loans outstanding .... 0.04% 0.06% 0.14% 0.17% 0.29% 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, net ... 1.30 1.09 1.06 0.93 0.91
14 Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
September 30, --------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------ ----------------------------------- -------------------------------- Percent Percent Percent of Loans of Loans of Loans Loan in Each Loan in Each Loan in Each Balances Catagory Balances Catagory Balances Catagory Loan By to Total Loan Loss by to Total Loan Loss by to Total Allowance Catagory Loans Allowance Catogory Loans Allownaces Catogory Loans ---------- --------- --------- --------- --------- ------- ----------- --------- ------- (Dollars in Thousands) One- to four-family .. $ 2,423 $343,871 57.5% $ 2,091 $344,731 60.2% $ 1,320 $290,334 62.0% Commercial real estate 3,210 124,988 20.9 2,416 110,382 19.3 1,976 71,149 15.1 Commercial business .. 481 27,483 4.6 254 30,768 5.4 376 24,372 5.2 Construction ......... 733 29,599 5.0 614 19,147 3.3 301 20,049 4.3 Consumer ............. 806 71,534 12.0 827 67,695 11.8 933 62,669 13.4 -------- -------- ----- -------- -------- ----- -------- -------- ----- Total ........... $ 7,653 $597,475 100.0% $ 6,202 $572,723 100.0% $ 4,906 $468,573 100.0% ======== ======== ===== ======== ======== ===== ======== ======== =====
September 30, ------------------------------------------------------------------------- 1997 1996 ------------------------------------ ------------------------------------ Percent Percent of Loans of Loans Loan in Each Loan in Each Balances Catagory Balances Catagory Loan By to Total Loan Loss by to Total Allowance Catagory Loans Allowance Catogory Loans ---------- --------- --------- --------- --------- ------- (Dollars in Thousands) One- to four-family .. $ 734 $241,886 59.3% $ 756 $219,827 59.0% Commercial real estate 1,431 62,910 15.4 1,247 66,145 17.7 Commercial business .. 443 18,433 4.5 536 15,268 4.1 Construction ......... 389 23,475 5.7 389 16,074 4.3 Consumer ............. 782 61,572 15.1 429 55,530 14.9 -------- -------- ----- -------- -------- ----- Total ........... $ 3,779 $408,276 100.0% $ 3,357 $372,844 100.0% ======== ======== ===== ======== ======== =====
Securities Activities The Company's securities investment policy is established by the Board of Directors. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with the Company's interest rate risk management strategy. The Board's asset/liability committee oversees the Company's investment program and evaluates on an ongoing basis the Company's investment policy and objectives. The chief financial officer, or the chief financial officer acting with the chief executive officer, is responsible for making securities portfolio decisions in accordance with established policies. The Company's chief financial officer and chief executive officer have the authority to purchase and sell securities within specific guidelines established by the investment policy. In addition, all transactions are reviewed by the Board's asset/liability committee at least quarterly. The Company's current policies generally permit securities investments in U.S. Government and U.S. Agency securities, municipal bonds, and corporate debt obligations, as well as investments in preferred and common stock of government agencies such as Fannie Mae, Freddie Mac and the FHLB (federal agency securities). Securities in these categories are classified as "investment securities" for financial reporting purposes. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations ("CMOs") issued or backed by securities issued by these government agencies. Also permitted are investments in securities issued or backed by the Small Business Administration and 15 asset-backed securities collateralized by auto loans, credit card receivables, and home equity and home improvement loans. The Company's current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities, as well as adjustable-rate securities, which may have a longer term to maturity. The emphasis of this approach is to increase overall investment securities yields while managing interest rate risk. SFAS No. 115 requires that at the time of purchase the Company designate a security as held to maturity, available for sale, or trading, depending on the Company's ability and intent. Available for sale securities are reported at fair value, while held to maturity securities are reported at amortized cost. The Company does not have a trading portfolio. As of September 30, 2000, the Company's overall securities portfolio had a carrying value of $210.7 million. In accordance with SFAS No. 115, securities with a fair value of $162.2 million, or 19.2% of total assets, were classified as available for sale, while securities with an amortized cost of $48.6 million, or 5.8% of total assets, were classified as held to maturity. The estimated fair value of the held to maturity securities at September 30, 2000 was $48.4 million, which was $212,000 less than their amortized cost. Government Securities. At September 30, 2000, the Company held $73.9 million, or 8.7% of total assets, in government securities at amortized cost, consisting primarily of U.S. Treasury and agency obligations with short- to medium-term maturities (one to five years), of which $70.9 million was classified as available for sale and $3.0 million was classified as held to maturity. While these securities generally provide lower yields than other investments such as mortgage-backed securities, the Company's current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity purposes, as collateral for borrowings, and for prepayment protection. Corporate Bonds and Other Debt Securities. At September 30, 2000, the Company held $31.0 million in corporate debt securities, at amortized cost, all of which were classified as available for sale. Although corporate bonds may offer a higher yield than that of a U.S. Treasury or agency security of comparable duration, corporate bonds also may have a higher risk of default due to adverse changes in the creditworthiness of the issuer. In recognition of this potential risk, the Company's policy limits investments in corporate bonds to securities with maturities of ten years or less and rated "A" or better by at least one nationally recognized rating agency, and to a total investment of no more than $2.0 million per issuer and a total portfolio limit of $40.0 million. The policy limits investments in municipal bonds to securities with maturities of 20 years or less and rated AA or better by at least one nationally recognized rating agency and favors issues that are insured. In addition, the policy imposes limitations of a total investment of no more than $2.0 million per municipal issuer and a total portfolio limit of 10% of assets. At September 30, 2000, the Company held $12.1 million at amortized cost in bonds issued by states and political subdivisions, of which $11.7 million was classified as available for sale and $397,000 was classified as held to maturity. Equity Securities. At September 30, 2000, the Company's equity securities portfolio at amortized cost totaled $3.2 million, all of which was classified as available for sale, and consisted of preferred and common stock issued by Freddie Mac and Fannie Mae, and certain other equity investments. The Company benefits from its investment in common and preferred stock due to a tax deduction the Company receives with regard to dividends paid by domestic corporate issuers on equity securities held by other corporate entities, such as the Company. The Company also held $7.0 million of common stock in the FHLB of New York, a portion of which must be held as a condition of membership in the Federal Home Loan Bank System, with the remainder held as a condition to borrow under the FHLB advance program. Mortgage-Backed Securities. The Company purchases mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) lower credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase liquidity. The Company invests primarily in mortgage-backed securities issued or sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae. The Company also invests to a lesser extent in securities backed by the Small Business Administration, or agencies of the U.S. Government. 16 Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of the Company's mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as the Company, and guarantee the payment of principal and interest to these investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees, credit enhancements and servicing fees. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize certain liabilities and obligations of the Company. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than the estimated life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby reducing the net yield on such securities. There is also reinvestment risk associated with cash flows from and redemptions of such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. The Company reviews prepayment estimates for its mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio. At September 30, 2000, the Company's mortgage-backed pass-through securities portfolio totaled $91.4 million at amortized cost, of which $46.2 million was available for sale and $45.2 million was held to maturity. Of this total, the CMO portfolio totaled $24.5 million, of which $19.6 million was available for sale and $4.9 million was held to maturity. Although the average contractual maturity of the aggregate mortgage-backed securities portfolio was approximately 15 years at September 30, 2000, the actual maturity of a mortgage-backed security may be less than its stated contractual maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and may result in a loss of any premiums paid and thereby reduce the net yield on such securities. Although prepayments of underlying mortgages depend on many factors, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Company may be subject to reinvestment risk because, to the extent that the mortgage-backed securities prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate of return. Conversely, in a rising interest rate environment prepayments may decline, thereby extending the estimated life of the security and depriving the Company of the ability to reinvest cash flows at the increased rates of interest. CMOs and REMICs. A portion of the Company's mortgage-backed securities portfolio is invested in CMOs or collateralized mortgage obligations, including REMICs. This portfolio is limited to CMOs and REMICs backed by Fannie Mae and Freddie Mac. CMOs and REMICs are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into "tranches" or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities where cash flows are distributed pro rata to all security holders. A particular tranche of CMOs may, therefore, carry prepayment risk that differs from that of both the underlying collateral and other tranches. Investments in CMOs involve a risk that actual prepayments will differ from those estimated in pricing the security, which may result in adjustments to the net yield on such securities. Additionally, the market value of such securities may be adversely affected by changes in market interest rates. Management believes these securities may represent attractive alternatives relative to other investments due to the wide variety of maturity, repayment and interest rate options available. The Company's practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with emphasis on the relative 17 trade-offs between lifetime rate caps, prepayment risk, and interest rates. The Company's current policy with respect to CMOs limits investments to non-high risk securities unless approval is given by the Board of Directors and an analysis is performed on how a high-risk CMO will impact the overall interest rate risk of the Company. High-risk CMOs are defined as those securities exhibiting significantly greater volatility in estimated average life and price relative to interest rates compared to 30-year, fixed-rate, pass-through securities. Available for Sale Portfolio As of September 30, 2000, securities with a fair value of $162.2 million, or 19.2% of total assets, were classified as available for sale. Investment securities, consisting of U.S. Government and agency securities, municipal bonds, and corporate debt obligations as well as investments in preferred and common stock, made up $116.4 million of this total, or13.8% of total assets, with mortgage-backed securities totaling $45.8 million, or 5.4% of total assets. The following table sets forth the composition of the Company's available for sale portfolio at the dates indicated.
September 30, ---------------------------------------------------------------------- 2000 1999 1998 --------------------- --------------------- ---------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ---------- -------- --------- -------- ---------- -------- (Dollars in Thousands) Investment Securities: U.S. Government securities ........................ $ 33,004 $ 32,851 $ 31,657 $ 31,507 $ 26,119 $ 26,547 Federal agency obligations ........................ 37,934 37,546 27,966 27,407 17,028 17,278 Corporate debt securities ......................... 30,975 30,588 24,201 23,667 1,999 1,997 State and municipal securities .................... 11,697 10,981 11,700 10,808 -- -- Equity securities ................................. 3,201 4,383 3,175 3,236 2,017 2,249 -------- -------- -------- -------- -------- -------- Total investment securities available for sale .... 116,811 116,349 98,699 96,625 47,163 48,071 -------- -------- -------- -------- -------- -------- Mortgage-Backed Securities: Pass-through securities: Fannie Mae ..................................... 17,767 17,723 16,053 15,930 10,726 10,907 Freddie Mac .................................... 2,344 2,383 3,252 3,306 5,052 5,210 Other ........................................... 6,582 6,494 7,163 7,252 3,167 3,185 CMOs and REMICs .................................. 19,553 19,208 25,625 25,274 30,358 30,610 -------- -------- -------- -------- -------- -------- Total mortgage-backed securities available for sale 46,246 45,808 52,093 51,762 49,303 49,912 -------- -------- -------- -------- -------- -------- Total securities available for sale ............... $163,057 $162,157 $150,792 $148,387 $ 96,466 $ 97,983 ======== ======== ======== ======== ======== ========
At September 30, 2000, the Company's available for sale U. S. Treasury securities portfolio totaled $32.9 million, or 3.9% of total assets. These securities had maturities of less than five years, with a weighted average yield of 5.68%. At September 30, 2000, the federal agency securities in the Company's available for sale portfolio totaled $37.5 million, or 4.4% of total assets, and had maturities of less than five years, with a weighted average yield of 5.84%. The agency securities portfolio includes both non-callable and callable debentures. The agency debentures are callable on a quarterly basis following an initial holding period of from twelve to twenty-four months. At September 30, 2000, the state and municipal securities in the Company's available for sale portfolio totaled $11.0 million, or 1.3% of total assets, and had a weighted average maturity of approximately 10 years, with a weighted average tax-free yield of 4.13%. Available for sale corporate debt securities totaled $30.6 million at September 30, 2000, while equity securities available for sale totaled $4.4 million. At September 30, 2000, $26.6 million of the Company's available for sale mortgage-backed securities consisted of pass-through securities, which totaled 3.1% of total assets. At the same date, the fair value of the Company's available for sale CMO portfolio totaled $19.2 million, or 2.3% of total assets, and consisted of CMOs issued by government sponsored agencies such as Fannie Mae and Freddie Mac with a weighted average yield of 6.14%. The Company owns both fixed-rate and floating-rate CMOs. The Company's portfolio of CMO's available for sale at September 30, 2000 included securities of $16.5 18 million for which the underlying mortgage collateral had contractual maturities of over ten years. However, as with mortgage-backed pass-through securities, the actual maturity of a CMO may be less than its stated contractual maturity due to prepayments of the underlying mortgages and the terms of the CMO tranche owned. Held to Maturity Portfolio As of September 30, 2000, securities with an amortized cost of $48.6 million, or 5.8% of total assets, were classified as held to maturity. Investment securities, consisting of U.S. Government and agency securities, municipal bonds, and corporate debt obligations made up $3.4 million of this total, or 0.4% of total assets. Mortgage-backed securities totaling $45.2 million, or 5.4% of total assets, made up the remainder of this portfolio. The following table sets forth the composition of the Company's held to maturity portfolio at the dates indicated.
September 30, ------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ------- --------- ------- --------- ------- (In Thousands) Investment Securities: U.S. Government securities .......................... $ -- $ -- $ -- $ -- $ 8,988 $ 9,011 Federal agency obligations .......................... 2,991 2,957 2,987 2,953 9,481 9,544 Municipal and other securities ...................... 397 397 415 415 707 707 ------- ------- ------- ------- ------- ------- Total investment securities held to maturity .... 3,388 3,354 3,402 3,368 19,176 19,262 ------- ------- ------- ------- ------- ------- Mortgage-Backed Securities: Pass-through securities: Ginnie Mae ...................................... 4,279 4,275 5,106 5,140 6,526 6,616 Fannie Mae ...................................... 16,578 16,440 18,116 17,786 26,117 26,349 Freddie Mac ..................................... 17,105 16,902 22,014 21,900 33,014 33,639 Other ............................................. 2,283 2,343 2,453 2,499 2,171 2,264 CMOs and REMICs ..................................... 4,953 5,060 5,691 5,786 11,398 11,542 ------- ------- ------- ------- ------- ------- Total mortgage-backed securities held to maturity 45,198 45,020 53,380 53,111 79,226 80,410 ------- ------- ------- ------- ------- ------- Total securities held to maturity ...................... $48,586 $48,374 $56,782 $56,479 $98,402 $99,672 ======= ======= ======= ======= ======= =======
At September 30, 2000, the federal agency securities in the Company's held to maturity portfolio totaled $3.0 million, or 0.4% of total assets, and had maturities of less than five years, with a weighted average yield of 6.04%. The agency securities portfolio includes both non-callable and callable debentures. The agency debentures are callable on a quarterly basis following an initial holding period of from twelve to twenty-four months. At September 30, 2000, the Company's held to maturity mortgage-backed pass-through securities portfolio totaled $40.2 million, of which $1.1 million had a weighted average yield of 4.60% and contractual maturities within one year; $4.1 million had a weighted average yield of 6.03% and contractual maturities within five years; $14.0 million had a weighted average yield of 6.67% and contractual maturities of five to ten years; and $21.0 million had a weighted average yield of 7.38% and contractual maturities of over ten years. At September 30, 2000, $5.0 million of the CMO portfolio, or 0.6% of total assets, was classified as held-to-maturity. The estimated fair value of the Company's held-to-maturity CMO portfolio at September 30, 2000 was $5.1 million, or $107,000 more than the amortized cost. While the contractual maturity of the CMO's underlying collateral is greater than ten years, the actual period to maturity of the CMO's may be shorter due to prepayments on the underlying mortgages and the terms of the CMO tranche owned. The composition and maturities of the investment securities portfolio (debt securities) and the mortgage-backed securities portfolio at September 30, 2000 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur. 19
More than One Year More than Five Years One Year or Less through Five Years through Ten Years More than Ten Years -------------------- ------------------- ---------------------- ------------------- Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- -------- ------- -------- --------- ------- --------- ------- (Dollars in Thousands) Available for Sale: Mortgage-Backed Securities Fannie Mae ..................... $ 53 6.20% $ -- --% $ 4,951 6.21% $12,763 7.09% Freddie Mac .................... -- -- 472 7.28 -- -- 1,872 7.73 CMOs and REMICs ................ -- -- -- -- 3,027 6.17 16,526 6.14 Other .......................... -- -- -- -- 4,528 6.32 2,054 7.46 ------- ---- ------- ---- ------- ----- ------- ---- Total ..................... 53 6.20 472 7.28 12,506 6.24 33,215 6.67 ------- ---- ------- ---- ------- ----- ------- ---- Investment Securities U.S. Gov't and agency securities 18,554 5.41 47,383 5.77 5,001 7.00 -- -- State and municipal securities . -- -- -- -- 5,315 4.01 6,382 4.24 Corporate debt securities ...... -- -- 23,872 6.71 7,103 6.77 -- -- ------- ---- ------- ---- ------- ----- ------- Total ..................... 18,554 5.41 71,255 6.09 17,419 5.99 6,382 4.24 ------- ---- ------- ---- ------- ----- ------- ---- Total available for sale ........... $18,607 5.42% $71,727 6.10% $29,925 6.09% $39,597 6.28% ======= ==== ======= ==== ======= ===== ======= ==== Held to Maturity: Mortgage-Backed Securities Ginnie Mae ..................... $ 1 6.95% $ 6 9.00 $ 826 8.30% $ 3,446 7.92% Fannie Mae ..................... 1,090 4.60 3,164 5.98 3,698 6.40 8,626 6.98 Freddie Mac .................... -- -- 886 6.21% 9,474 6.63 6,745 7.63 CMOs and REMICs ................ -- -- -- -- -- -- 4,953 7.63 Other .......................... -- -- -- -- 24 11.13 2,259 7.35 ------- ---- ------- ---- ------- ----- ------- ---- Total ..................... 1,091 4.60 4,056 6.03 14,022 6.67 26,029 7.43 ------- ---- ------- ---- ------- ----- ------- ---- Investment Securities U.S. Gov't and agency securities -- -- 2,991 6.04 -- -- -- -- State and municipal securities . 25 8.00 -- -- -- -- 372 6.75 ------- ---- ------- ---- ------- ----- ------- ---- Total ..................... 25 8.00 2,991 6.04 -- -- 372 6.75 ------- ---- ------- ---- ------- ----- ------- Total held to maturity ............. $ 1,116 4.68% $ 7,047 6.04% $14,022 6.67% $26,401 7.42% ======= ==== ======= ==== ======= ===== ======= ====
Weighted Amortized Fair Average Cost Value Yield ---- ----- ----- (Dollars in Thousands) Available for Sale: Mortgage-Backed Securities Fannie Mae ..................... $ 17,767 $ 17,723 6.84% Freddie Mac .................... 2,344 2,383 7.65 CMOs and REMICs ................ 19,553 19,208 6.14 Other .......................... 6,582 6,494 6.67 -------- -------- ---- Total ..................... 46,246 45,808 6.56 -------- -------- ---- Investment Securities U.S. Gov't and agency securities 70,938 70,397 5.77 State and municipal securities . 11,697 10,981 4.13 Corporate debt securities ...... 30,975 30,588 6.72 -------- -------- ---- Total ..................... 113,610 111,966 5.86 -------- -------- ---- Total available for sale ........... $159,856 $157,774 6.06% ======== ======== ==== Held to Maturity: Mortgage-Backed Securities Ginnie Mae ..................... $ 4,279 $ 4,275 7.99% Fannie Mae ..................... 16,578 16,440 6.50 Freddie Mac .................... 17,105 16,902 7.01 CMOs and REMICs ................ 4,953 5,060 7.63 Other .......................... 2,283 2,343 7.39 -------- -------- ---- Total ..................... 45,198 45,020 7.00 -------- -------- ---- Investment Securities U.S. Gov't and agency securities 2,991 2,957 6.04 State and municipal securities . 397 397 6.83 -------- -------- ---- Total ..................... 3,388 3,354 6.13 -------- -------- ---- Total held to maturity ............. $ 48,586 $ 48,374 6.94% ======== ======== ====
20 Sources of Funds General. Deposits, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations, are the primary sources of the Bank's funds for use in lending, investing and for other general purposes. To a lesser extent, the Bank uses borrowed funds (primarily FHLB advances) to fund its operations. Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. Its deposit accounts consist of savings accounts, NOW accounts, checking accounts, money market accounts, club accounts and certificates of deposit. It offers certificates of deposit with balances in excess of $100,000, as well as IRAs and other qualified plan accounts. The Bank provides commercial checking accounts for small to moderately-sized businesses, as well as low-cost checking account services for low-income customers. At September 30, 2000, the Bank's deposits totaled $609.0 million. Interest-bearing deposits totaled $542.5 million, and non-interest bearing demand deposits totaled $66.5 million. NOW, savings and money market deposits totaled $293.1 million at September 30, 2000. Also at that date, the Bank had a total of $249.4 million in certificates of deposit, of which $176.8 million had maturities of one year or less. Although the Bank has a significant portion of its deposits in shorter-term certificates of deposit, management monitors activity on these accounts and, based on historical experience and the Bank's current pricing strategy, believes it will retain a large portion of such accounts upon maturity. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank's deposits are obtained predominantly from the areas in which its branch offices are located. It relies primarily on competitive pricing of its deposit products, customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Bank's ability to attract and retain deposits. The Bank uses traditional means of advertising its deposit products, including radio and print media, and generally does not solicit deposits from outside its market area. While certificates of deposit in excess of $100,000 are accepted by the Bank, and may be subject to preferential rates, it does not actively solicit such deposits as they are more difficult to retain than core deposits. Historically, the Bank has not used brokers to obtain deposits. The following table sets forth the distribution of the Bank's deposit accounts, by account type, at the dates indicated.
September 30, ------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------ -------------------------------- ------------------------------ Weighted Weighted Weighted Average Average Average Amount Percent Rate Amount Percent Rate Amount Percent Rate ------ ------- ---- ------ ------- ---- ------ ------- ---- (Dollars in Thousands) Demand deposits Retail .............. $ 38,145 6.3% --% $ 35,701 6.1% --% $ 31,045 5.4% --% Commercial .......... 28,324 4.7 -- 24,147 4.1 -- 19,285 3.4 -- -------- ------ ---- -------- ------ ----- -------- ------- ---- Total demand deposits 66,469 11.0 -- 59,848 10.2 -- 50,330 8.8 -------- ------ ---- -------- ------ ----- -------- ------- ---- NOW deposits .......... 54,800 9.0 1.01 47,129 8.0 1.01 41,738 7.3 1.22 Savings deposits ...... 161,987 26.6 2.02 161,809 27.6 2.02 155,934 27.2 1.99 Money market deposits . 76,332 12.5 2.55 80,033 13.6 2.75 76,010 13.3 2.65 -------- ------ ---- -------- ------ ----- -------- ------- ---- 359,588 59.1 1.61 348,819 59.4 1.70 324,012 56.6 1.74 Certificates of deposit 249,388 40.9 5.83 237,821 40.6 4.82 249,162 43.4 5.15 -------- ------ ---- -------- ------ ----- -------- ------- ---- Total deposits ........ $608,976 100.0% 3.34% $586,640 100.0% 2.97% $573,174 100.0% 3.22% ======== ====== ==== ======== ====== ===== ======== ======= ====
21 The following table sets forth, by interest rate ranges, information concerning the Bank's certificates of deposit at the dates indicated.
At September 30, 2000 --------------------------------------------------------------------------- Total at Period to Maturity September 30, --------------------------------------------------------------------------- ---------------------- Less than One to Two to More than Percent Interest Rate Range One Year Two Years Three Years Three Years Total of Total 1999 1998 - ------------------- -------- --------- ----------- ---------- -------- -------- --------- --------- (Dollars in Thousands) 4.00% and below $ 2,318 $ 1 $ 31 $ -- $ 2,350 0.9% $ 14,019 $ 1,003 4.01% to 5.00% 11,803 1,143 162 1,328 14,436 5.8 135,380 103,713 5.01% to 6.00% 141,238 10,857 2,122 1,282 155,499 62.4 77,889 123,044 6.01% to 7.00% 21,314 45,684 2,283 655 69,936 28.0 7,026 17,943 7.01% and above 83 1,894 5,190 -- 7,167 2.9 3,507 3,459 -------- -------- -------- -------- -------- ----- -------- -------- Total .... $176,756 $ 59,579 $ 9,788 $ 3,265 $249,388 100.0% $237,821 $249,162 ======== ======== ======== ======== ======== ===== ======== ========
The following table sets forth the amount of the Bank's certificates of deposit by time remaining until maturity as of September 30, 2000.
Maturity -------------------------------------------------------- 3 Months Over 3 to 6 Over 6 to 12 Over 12 or Less Months Months Months Total ------- ------ ------ ------ ----- (In Thousands) Certificates of deposit less than $100,000 .... $ 55,726 $ 49,696 $ 47,255 $ 65,708 $218,385 Certificates of deposit of $100,000 or more (1) 9,341 8,136 6,602 6,924 31,003 -------- -------- -------- -------- -------- Total of certificates of deposit ........ $ 65,067 $ 57,832 $ 53,857 $ 72,632 $249,388 ======== ======== ======== ======== ========
- -------------------- (1) The weighted average interest rates for these accounts, by maturity period, are 5.07% for 3 months or less; 5.53% for 3 to 6 months; 5.36% for 6 to 12 months; and 6.30% for over 12 months. The overall weighted average interest rate for accounts of $100,000 or more was 5.53%. Borrowings. At September 30, 2000, the Bank had $127.6 million of borrowings, of which $122.0 million consisted of FHLB advances and repurchase agreements. FHLB borrowings were $115.5 million as of September 30, 1999 and $38.6 million as of September 30, 1998. At September 30, 2000, the Bank had access to additional FHLB borrowings of up to $163.1 million. The following table sets forth information concerning balances and interest rates on the Bank's FHLB advances and repurchase agreements at the dates and for the periods indicated.
Years Ended September 30, --------------------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) Balance at end of year ...................... $121,975 $115,515 $ 38,646 Average balance during year ................. 122,315 74,319 28,817 Maximum outstanding at any month end ........ 131,458 118,526 38,646 Weighted average interest rate at end of year 6.36% 5.60% 5.97% Average interest rate during year ........... 5.98% 5.53% 5.96%
22 Subsidiary Activities Provest Services Corp. I is a wholly-owned subsidiary of the Bank holding an investment in a limited partnership which operates an assisted-living facility. A percentage of the units in the facility are for low-income individuals. Provest Services Corp. II is a wholly-owned subsidiary of the Bank which has engaged a third-party provider to sell annuities and mutual funds to the Bank's customers. Through September 30, 2000, the activities of these subsidiaries have had an insignificant effect on the Bank's consolidated financial condition and results of operations. During fiscal 1999, the Bank established Provident REIT, Inc., a wholly-owned subsidiary in the form of a real estate investment trust ("REIT"). The REIT holds both residential and commercial real estate loans. Competition The Bank faces significant competition in both originating loans and attracting deposits. The New York metropolitan area has a high concentration of financial institutions, most of which are significantly larger institutions with greater financial resources than the Bank, and all of which are competitors of the Bank to varying degrees. The Bank's competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, insurance companies and other financial service companies. Its most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. The Bank faces additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. Further competition may arise as restrictions on the interstate operations of financial institutions are removed. Employees As of September 30, 2000, the Bank had 199 full-time employees and 36 part-time employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good. REGULATION General As a federally chartered, SAIF-insured savings bank, the Bank is subject to examination, supervision and extensive regulation by the OTS and the FDIC. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The Bank also is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") governing reserves to be maintained against deposits and certain other matters. The OTS examines the Bank and prepares reports for the consideration of the Bank's Board of Directors. The FDIC also has examination authority over the Bank in its role as the administrator of the SAIF. The Bank's relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. Any change in such regulation, whether by the FDIC, OTS, or Congress, could have a material adverse impact on the Company and the Bank and their operations. Federal Regulation of Savings Institutions Business Activities. The activities of savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations issued by the agencies to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which savings association may engage. The description of statutory provisions and regulations applicable to savings associations set forth herein does not purport to be a complete description of such statutes and regulations and their effect on the Bank. 23 Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limits on loans to a single or related group of borrowers. Generally, this limit is 15% of the Bank's unimpaired capital and surplus, and an additional 10% of unimpaired capital and surplus if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. The OTS by regulation has amended the loans to one borrower rule to permit savings associations meeting certain requirements to extend loans to one borrower in additional amounts under circumstances limited essentially to loans to develop or complete residential housing units. Qualified Thrift Lender Requirement. The HOLA requires savings institutions to be qualified thrift lenders ("QTL"). To be a QTL, the Bank can either satisfy the QTL test, or the Domestic Building and Loan Association ("DBLA") Test of the Internal Revenue Code of 1986, as amended (the "Code"). Under the QTL test, a savings bank is required to maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments," primarily residential mortgages and related investments, including certain mortgage-backed and related securities on a monthly basis in 9 out of every 12 months. Under the DBLA test, an institution must meet a "business operations test" and a "60% of assets test." The business operations test requires the business of a DBLA to consist primarily of acquiring the savings of the public and investing in loans. An institution meets the public savings requirements when it meets one of two conditions: (i) the institution acquires its savings in conformity with OTS rules and regulations; or (ii) the general public holds more than 75% of its deposits, withdrawable shares, and other obligations. The general public may not include family or related business groups or persons who are officers or directors of the institution. The 60% of assets test requires that at least 60% of a DBLA's assets must consist of assets that thrifts normally hold, except for consumer loans that are not educational loans. The DBLA test does not include, as the QTL test does to a limited or optional extent, mortgage loans originated and sold into the secondary market and subsidiary investments. A savings bank that fails to be a QTL must either convert to a bank charter or operate under certain restrictions. As of September 30, 2000, the Bank met the QTL test. Limitations on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. A "well capitalized" institution can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year in an amount up to 100 percent of its net income during the calendar year, plus its retained net income for the preceding two years. As of September 30, 2000, the Bank was a "well-capitalized" institution. In addition, OTS regulations require the Mutual Holding Company to notify the OTS of any proposed waiver of its right to receive dividends. It is the OTS' recent practice to review dividend waiver notices on a case-by-case basis, and, in general, not object to any such waiver if: (i) the mutual holding company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (ii) for as long as the savings association subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company are considered as a restriction on the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with SFAS No. 5, where the savings association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability and (iv) the amount of any waived dividend is considered as having been paid by the savings association (and the savings association's capital ratios adjusted accordingly) in evaluating any proposed dividend under OTS capital distribution regulations. 24 Liquidity. The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage (currently 4%) of its net withdrawable deposit accounts plus borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity ratio at September 30, 2000 exceeded the then applicable requirements. Community Reinvestment Act and Fair Lending Laws. Savings associations share a responsibility under the Community Reinvestment Act ("CRA") and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution"s failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The Bank received an outstanding CRA rating under the current CRA regulations in its most recent federal examination by the OTS. Transactions with Affiliates. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Company and any nonsavings institution subsidiaries) or to make loans to certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with nonaffiliated companies. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties," including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institutions, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. The FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement the safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit systems; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. 25 Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 4% tier 1 core capital ratio, a 4% tier 1 risk-based ratio, and an 8% total risk-based ratio. Tier 1 core capital is defined as common stockholders' equity less investments in and advances to "nonincludable" subsidiaries, goodwill and other intangible assets, nonqualifying equity instruments, disallowed servicing assets, and other disallowed assets; plus (minus) accumulated losses (gains) on certain available-for-sale securities and cash flow hedges (net of taxes); plus qualifying intangible assets, minority interest in includable consolidated subsidiaries, and mutual institutions' nonwithdrawable deposit accounts. Adjusted total assets is defined as total assets less assets of "nonincludable" subsidiaries, goodwill and other intangible assets, disallowed servicing assets, and other disallowed assets; plus (minus) accumulated losses (gains) on certain available-for sale securities and cash flow hedges; plus qualifying intangible assets. Total risk-based capital is defined as tier 1 (core) capital plus 45% of net unrealized gains on available-for-sale equity securities, qualifying subordinated debt and redeemable preferred stock, capital certificates, nonwithdrawable deposit accounts not included in core capital, other equity instruments and allowances for loan and lease losses; less equity investments and other assets required to be deducted, low-level recourse deduction and capital reduction for interest-rate risk exposure. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. At September 30, 2000, the Bank exceeded each of the OTS capital requirements as summarized below:
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------- ---------------------- ----------------------- Amount Ratio (1) Amount Ratio (1) Amount Ratio(1) ------ --------- ------ --------- ------ -------- (Dollars in Thousands) Tangible capital ........ $80,097 9.6% $12,526 1.5% $ -- --% Tier I core capital ..... 80,097 9.6 33,402 4.0 41,752 5.0 Tier I risk-based capital 80,097 15.6 -- -- 30,738 6.0 Total risk-based capital 86,497 16.9 40,985 8.0 51,231 10.0
(1) Core capital is calculated on the basis of a percentage of total adjusted assets; risk-based capital levels are calculated on the basis of a percentage of risk-weighted assets. Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective Action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has total risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized," and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS may also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. 26 At September 30, 2000, the Bank was categorized as "well capitalized," meaning that the Bank's total risk-based capital ratio exceeded 10.0%, Tier I risk-based capital ratio exceeded 6.0%, leverage capital ratio exceeded 5.0%, and the Bank was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. Insurance of Deposit Accounts. The FDIC has adopted a risk-based deposit insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC is authorized to raise the assessment rates in certain circumstances. The FDIC has exercised this authority several times in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank. Federal Home Loan Bank System The Bank, as a federal association, is required to be a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. As of September 30, 2000, the Bank was in compliance with this requirement. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). At September 30, 2000, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. Financial Modernization Legislation On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act, which expanded the permissible activities of savings and loan holding companies like the Company. The Company is now permitted to own and control depository institutions and to engage in activities that are financial in nature or incidental to financial activities, or activities that are complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The legislation identifies certain activities that are deemed to be financial in nature, including non-banking activities currently permissible for bank holding companies to engage in both within and outside the United States, as well as insurance and securities underwriting and merchant banking activities. In order to take advantage of this new authority, a savings and loan holding company's depository institution subsidiaries must be well capitalized and well managed and have at least a satisfactory record of performance under the Community Reinvestment Act. The Bank currently meets these requirements. No prior regulatory notice is required to acquire a company engaging in these activities or to commence these activities directly or indirectly through a subsidiary. 27 Holding Company Regulation General. The Mutual Holding Company and the Company are nondiversified mutual savings and loan holding companies within the meaning of the HOLA. As such, the Mutual Holding Company and the Company are registered with the OTS and are subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Mutual Holding Company and the Company and any nonsavings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. As federal corporations, the Company and the Mutual Holding Company are generally not subject to state business organizations law. Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS regulations and policy, a Mutual Holding Company and a federally chartered mid-tier holding company such as the Company may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director. If a Mutual Holding Company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (x) above, and has a period of two years to cease any nonconforming activities and divest of any nonconforming investments. The HOLA prohibits a savings and loan holding company, including the Company and the Mutual Holding Company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. The OTS has proposed new rules which would require savings and loan holding companies to notify the OTS prior to engaging in transactions which (i) when combined with other debt transactions engaged in during a 12-month period, would increase the holding company's consolidated debt by 5% or more;(ii) when combined with other asset acquisitions engaged in during a 12-month period, would result in asset acquisitions of greater than 15% of the 28 holding company's consolidated assets; or (iii) when combined with any other transactions engaged in during a 12-month period, would reduce the holding company's ratio of consolidated tangible capital to consolidated tangible assets by 10% or more during the 12-month period. The OTS has proposed to exempt from this rule holding companies whose consolidated tangible capital exceeds 10% following the transactions. The OTS has also proposed new rules which would codify the manner in which the OTS reviews the capital adequacy of savings and loan holding companies and determines when a holding company must maintain additional capital. The OTS is not currently proposing to establish uniform capital adequacy guidelines for all savings and loan holding companies. The Company and the Bank are unable to predict whether or when these proposed regulations will be adopted, and what effect, if any, the adoption of these regulations would have on their business. Waivers of Dividends by the Mutual Holding Company. OTS regulations require the Mutual Holding Company to notify the OTS of any proposed waiver of its right to receive dividends. The OTS reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the Mutual Holding Company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the Mutual Holding Company's members; (ii) for as long as the savings association subsidiary is controlled by the Mutual Holding Company, the dollar amount of dividends waived by the Mutual Holding Company are considered as a restriction to the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the Mutual Holding Company is available for declaration as a dividend solely to the Mutual Holding Company, and, in accordance with SFAS No. 5, where the savings association determines that the payment of such dividend to the Mutual Holding Company is probable, an appropriate dollar amount is recorded as a liability and (iv) the amount of any waived dividend is considered as having been paid by the savings association in evaluating any proposed dividend under OTS capital distribution regulations. Conversion of the Mutual Holding Company to Stock Form. OTS regulations permit the Mutual Holding Company to undertake a conversion from mutual to stock form ("Conversion Transaction"). In a Conversion Transaction a new holding company would be formed as the successor to the Company (the "New Holding Company"), the Mutual Holding Company"s corporate existence would end, and certain customers of the Bank would receive the right to subscribe for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock ("Common Stock") held by stockholders of the Company other than the Mutual Holding Company ("Minority Stockholders") would be automatically converted into a number of shares of common stock of the New Holding Company determined pursuant an exchange ratio that ensures that after the Conversion Transaction the percentage of the to-be outstanding shares of the New Holding Company issued to Minority Stockholders in exchange for their Common Stock would be equal to the percentage of the outstanding shares of Common Stock held by Minority Stockholders immediately prior to the Conversion Transaction. The total number of shares held by Minority Stockholders after the Conversion Transaction would be affected by any purchases by such persons in the offering that would be conducted as part of the Conversion Transaction. Federal Securities Law The common stock of the Company is registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Common stock of the Company held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. 29 ITEM 2. Properties Properties As of September 30, 2000, the Bank leases eight premises, including its headquarters location, from third parties under terms and conditions considered by management to be favorable to the Bank. In addition, the Bank owns six premises. Following is a list of Bank locations: Corporate Office, Commercial Lending Group and Investment Management and Trust Department 400 Rella Boulevard 1 Lake Road West Montebello, NY 10901 Congers, NY 19020 (914) 369-8040 (914) 267-2180 Rockland County: 71 Lafayette Avenue Suffern, NY 10901 44 W. Route 59 (914) 369-8350 Nanuet, NY 10954 (914) 627-6180 26 North Middletown Rd. (In the ShopRite Supermarket) 38-40 New Main Street Pearl River, NY 10965 Haverstraw, NY 10927 (914) 627-6170 (914) 942-3880 196 Rt. 59 375 Rt. 303 at Kings Highway Suffern, NY 10901 Orangeburg, NY 10962 (914) 369-8360 (914) 398-4810 1633 Rt. 202 Pomona, NY 10970 148 Rt. 9W (914) 364-5690 Stony Point, NY 10980 (914) 942-3890 Orange County: 179 South Main Street 125 Dolson Avenue New City, NY 10956 (In the ShopRite Supermarket) (914) 639-7750 Middletown, NY 10940 (914)-342-5777 72 West Eckerson Rd. Spring Valley, NY 10977 153 Rt. 94 (914) 426-7230 (In the ShopRite Supermarket) Warwick, NY 10990 (914) 986-9540 30 ITEM 3.Legal Proceedings The Bank is a defendant in a lawsuit, Patrick Gawrysiak a/k/a Patrick Gray v. Provident Bank, brought by a prospective purchaser of REO property, alleging breach of contract, negligence, consumer fraud and civil conspiracy. The plaintiff brought the lawsuit in the Superior Court of New Jersey, Bergen County Law Division, and is seeking compensatory damages of $500,000, exemplary damages of $1.0 million, "nominal" damages of $1.0 million and punitive damages of $1.0 million. The Bank retained counsel and vigorously contested the claim. On September 24, 1999, the Bank's motion for summary judgment was granted dismissing the lawsuit for lack of personal jurisdiction over the Bank. Plaintiff has filed an appeal, which has been fully briefed and is pending before the Appellate Division. Management continues to believe the underlying claim is baseless and is vigorously contesting the plaintiff's appeal. The Company is not involved in any other pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involved amounts which are believed by management to be immaterial to the financial condition and operations of the Company. ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of stockholders during the quarter ended September 30, 2000. PART II ITEM 5. Market for Company's Common Stock and Related Stockholder Matters The "Common Stock and Related Matters" section of the Company"s Annual Report to Stockholders is incorporated herein by reference. ITEM 6. Selected Financial Data The "Selected Consolidated Financial and Other Data" section of the Company's Annual Report to Stockholders is incorporated herein by reference. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company"s Annual Report to Stockholders is incorporated herein by reference. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk The information required by this item is set forth under the caption "Management of Market Risk" which is part of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's Annual Report to Stockholders, and is incorporated herein by reference. ITEM 8. Financial Statements and Supplementary Data The financial statements contained in the Company's Annual Report to Stockholders are incorporated herein by reference. 31 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III ITEM 10. Directors and Executive Officers of the Company The "Proposal 1 "Election of Directors" section of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held in February 2001 (the "Proxy Statement") is incorporated herein by reference. ITEM 11. Executive Compensation The "Proposal I"Election of Directors" section of the Proxy Statement is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The "Proposal I "Election of Directors" section of the Proxy Statement is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions The "Transactions with Certain Related Persons" section of the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements The financial statements filed as a part of this Form 10-K are as follows: (A) Independent Auditors" Report (B) Consolidated Statements of Financial Condition (C) Consolidated Statements of Income (D) Consolidated Statements of Changes in Stockholders' Equity (E) Consolidated Statements of Cash Flows (F) Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedules All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements. 32 (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2000. (c) Exhibits 3.1 Stock Holding Company Charter of Provident Bancorp, Inc. (incorporated herein by reference to the Company's Registration Statement on Form S-1, file No. 333-63593 (the "S-1")) 3.2 Bylaws of Provident Bancorp, Inc. (incorporated herein by reference to the S-1) 4 Form of Stock Certificate of Provident Bancorp, Inc. (incorporated herein by reference to the S-1) 10.1 Form of Employee Stock Ownership Plan (incorporated herein by reference to the S-1) 10.2 Employment Agreement with George Strayton, as amended (incorporated herein by reference to the S-1) 10.3 Form of Employment Agreement (incorporated herein by reference to the S-1) 10.4 Deferred Compensation Agreement (incorporated herein by reference to the S-1) 10.5 Supplemental Executive Retirement Plan, as amended (incorporated herein by reference to the S-1) 10.6 Management Incentive Program (incorporated herein by reference to the S-1) 10.7 1996 Long-Term Incentive Plan for Officers and Directors, as amended (incorporated herein by reference to the S-1) 10.8 Provident Bank Stock Option Plan (incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders, filed with the SEC on January 18, 2000.) 10.9 Provident Bank Recognition Retention Plan (incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders, filed with the SEC on January 18, 2000.) 13 Annual Report to Stockholders 21 Subsidiaries of the Company (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999, file no. 0-25233.) 23.1 Consent of KPMG LLP 27 EDGAR Financial Data Schedule 33 Signatures Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Provident Bancorp, Inc. Date: December 26, 2000 By: \s\ George Strayton --------------------------------------- George Strayton President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: \s\ George Strayton By: \s\ Katherine Dering ------------------------------------------- ------------------------------------- George Strayton Katherine Dering President, Chief Executive Officer and Chief Financial Officer and Senior Director Vice President Date: December 26, 2000 Date: December 26, 2000 By: \s\ William F. Helmer By: \s\ Dennis L. Coyle ------------------------------------------- ------------------------------------ William F. Helmer Dennis L. Coyle, Vice Chairman Chairman of the Board Date: December 26, 2000 Date: December 26, 2000 By: \s\ Judith Hershaft By: \s\ Thomas F. Jauntig, Jr. ------------------------------------------- ------------------------------------ Judith Hershaft, Director Thomas F. Jauntig, Jr., Director Date: December 26, 2000 Date: December 26, 2000 By: \s\ Donald T. McNelis By: \s\ Richard A. Nozell ------------------------------------------- ------------------------------------ Donald T. McNelis, Director Richard A. Nozell, Director Date: December 26, 2000 Date: December 26, 2000 By: \s\ William R. Sichol, Jr. By: \s\ Burt Steinberg ------------------------------------------- ------------------------------------ William R. Sichol, Jr., Director Burt Steinberg, Director Date: December 26, 2000 Date: December 26, 2000 By: \s\ Wilbur C. Ward By: \s\ F. Gary Zeh ------------------------------------------- ------------------------------------ Wilbur C. Ward, Director F. Gary Zeh, Director Date: December 26, 2000 Date: December 26, 2000
34 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 ======= ======= ======= ======= =======
(Footnotes on next page) 2
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 EX-23.1 3 0003.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 [KPMG LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Provident Bancorp, Inc,: We consent to incorporation by reference in the Registration Statement (No. 33-49344) on Form S-8 of Provident Bancorp, Inc. or our report dated October 27, 2000, relating to the consolidated statements of financial condition of Provident Bancorp, Inc., and subsidiary as of September 30, 2000 and 1999, and the related cosolidated statements of income, changes in stockholders; equity, and cash flows for each of the years in the three-year period ended September 30, 2000, which report appears in the September 30, 2000 Annual Report on Form 10-K of Provident Bancorp, Inc. /s/ KPMG LLP - ------------ KPMB LLP Stamford, Connecticut December 27, 2000 EX-27 4 0004.txt FDS FOR PROVIDENT
9 YEAR SEP-30-2000 SEP-30-2000 12,785 0 0 0 162,157 48,586 48,374 589,822 7,653 844,786 608,976 127,571 11,282 0 0 0 828 90,158 844,786 45,043 13,268 588 58,899 18,721 26,034 32,865 1,710 0 25,808 8,738 8,738 0 0 5,782 0.76 0.76 0 4,031 0 0 0 6,202 370 111 7,653 7,653 0 0
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