-----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, BmtQhM6CPtK3kV/Ix33SagbqrXKYgNpTLWsBR3UcSbQU8n/n1U2sDsnVNFfAFwKK IUQ8+SumTcMctjA3VLRQDQ== 0000914317-03-000444.txt : 20030213 0000914317-03-000444.hdr.sgml : 20030213 20030213094842 ACCESSION NUMBER: 0000914317-03-000444 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030213 FILED AS OF DATE: 20030213 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: 061537499 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25233 FILM NUMBER: 03556800 BUSINESS ADDRESS: STREET 1: 400 RELLA BLVD CITY: MONTEBELLO STATE: NY ZIP: 10901 BUSINESS PHONE: 8453698040 10-Q 1 form10q49001provident.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 0-25233 PROVIDENT BANCORP, INC. (Exact Name of Registrant as Specified in its Charter) Federal 06-1537499 (State or Other Jurisdiction of (IRS Employer ID No.) Incorporation or Organization) 400 Rella Boulevard, Montebello, New York 10901 (Address of Principal Executive Office) (Zip Code) (845) 369-8040 (Registrant's Telephone Number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes |X| No |_| (2) Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Classes of Common Stock Shares Outstanding ----------------------- ------------------ 7,997,512 $0.10 per share as of January 31, 2003 PROVIDENT BANCORP, INC. FORM 10-Q QUARTERLY PERIOD ENDED DECEMBER 31, 2002 PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at December 31, 2002 and September 30, 2002 3-4 Consolidated Statements of Income for the Three Months Ended December 31, 2002 and 2001 5 Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended December 31, 2002 6 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2002 and 2001 7-8 Notes to Consolidated Financial Statements 9-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 22 Item 3. Defaults upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 25-28 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except per share data)
Assets December 31, 2002 September 30, 2002 - ------ ----------------- ------------------ Cash and due from banks 35,510 35,093 Securities, including $27,851 and $29,624 pledged as collateral for borrowings at December 31, 2002 and September 30, 2002, respectively: Available for sale, at fair value (amortized cost of $199,705 at December 31, 2002 and $196,718 at September 30, 2002) 208,090 206,146 Held to maturity, at amortized cost (fair value of $84,870 at December 31, 2002 and $90,706 at September 30, 2002) 81,281 86,791 ----------- ----------- Total securities 289,371 292,937 ----------- ----------- Loans: One- to four-family residential mortgage loans 386,222 366,111 Commercial real estate, commercial business and construction loans 223,904 221,669 Consumer loans 83,221 83,419 ----------- ----------- Total loans 693,347 671,199 Allowance for loan losses (Note 2) (10,687) (10,383) ----------- ----------- Total loans, net 682,660 660,816 ----------- ----------- Accrued interest receivable, net 4,866 5,491 Federal Home Loan Bank stock, at cost 5,871 5,348 Premises and equipment, net 11,167 11,071 Goodwill (Note 3) 13,540 13,540 Core deposit intangible, net (Note 3) 1,374 1,501 Other assets 13,789 1,904 ----------- ----------- Total assets $ 1,058,148 $ 1,027,701 =========== ===========
(Continued) 3 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, cONTINUED (Unaudited) (Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity December 31, 2002 September 30, 2002 - ------------------------------------ ----------------- ------------------ Liabilities: Deposits: Retail demand and NOW deposits $ 141,829 $ 137,382 Commercial demand deposits 60,194 55,732 Savings and money market deposits 372,029 362,983 Certificates of deposit 247,665 243,529 ----------- ----------- Total deposits 821,717 799,626 ----------- ----------- Borrowings 104,009 102,968 Mortgage escrow funds 9,581 3,747 Other 9,770 10,493 ----------- ----------- Total liabilities 945,077 916,934 ----------- ----------- Stockholders' equity: Preferred stock (par value $0.10 per share; 10,000,000 shares authorized; none issued or outstanding) -- -- Common stock (par value $0.10 per share; 20,000,000 shares authorized; 8,280,000 shares issued; 7,997,512 shares outstanding) 828 828 Additional paid-in capital 36,834 36,696 Unallocated common stock held by the employee stock ownership plan ("ESOP") (1,880) (1,974) Common stock awards under recognition and retention plan ("RRP") (969) (1,108) Treasury stock, at cost (282,488 shares) (5,874) (5,874) Retained earnings 79,178 76,727 Accumulated other comprehensive income, net of taxes (Note 4) 4,954 5,572 ----------- ----------- Total stockholders' equity 113,071 110,867 ----------- ----------- Total liabilities and stockholders' equity $ 1,058,148 $ 1,027,701 =========== ===========
See accompanying notes to unaudited consolidated financial statements. 4 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data) For the Three Months Ended December 31, ------------------ 2002 2001 ---- ---- Interest and dividend income: Loans $11,346 $11,220 Securities 3,595 3,463 Other earning assets 83 78 ------- ------- Total interest and dividend income 15,024 14,761 ------- ------- Interest expense: Deposits 2,345 3,303 Borrowings 1,044 1,488 ------- ------- Total interest expense 3,389 4,791 ------- ------- Net interest income 11,635 9,970 Provision for loan losses (Note 2) 300 225 ------- ------- Net interest income after provision for loan losses 11,335 9,745 ------- ------- Non-interest income: Banking fees and service charges 1,089 976 Gain on sales of securities available for sale 657 147 Other 257 161 ------- ------- Total non-interest income 2,003 1,284 ------- ------- Non-interest expense: Compensation and employee benefits 4,695 3,857 Occupancy and office operations 1,236 1,084 Advertising and promotion 416 401 Data processing 573 403 Amortization of intangible assets (Note 3) 127 -- Other 1,426 1,408 ------- ------- Total non-interest expense 8,473 7,153 ------- ------- Income before income tax expense 4,865 3,876 Income tax expense 1,824 1,350 ------- ------- Net income $ 3,041 $ 2,526 ======= ======= Earnings per common share (Note 5): Basic $ 0.39 $ 0.33 ======= ======= Diluted $ 0.39 $ 0.32 ======= ======= See accompanying notes to unaudited consolidated financial statements. 5 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 (Unaudited) (Dollars in thousands, except per share data)
Common Accumulated Additional Unallocated Stock Other Total Common Paid-In ESOP Awards Treasury Retained Comprehensive Stockholders' Stock Capital Shares Under RRP Stock Earnings Income Equity ----- ------- ------ --------- ----- -------- ------ ------ Balance at September 30, 2002 $ 828 $ 36,696 $ (1,974) $ (1,108) $ (5,874) $ 76,727 $ 5,572 $110,867 Net income 3,041 3,041 Other comprehensive income (note 4) (618) (618) -------- Total comprehensive income 2,423 Cash dividends paid ($0.13 per share) (590) (590) ESOP shares allocated or committed to be released for allocation 138 94 232 Vesting of RRP shares 139 139 -------- -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 2002 $ 828 $ 36,834 $ (1,880) $ (969) $ (5,874) $ 79,178 $ 4,954 $113,071 ======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. 6 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) For the Three Months Ended December 31, ------------------ 2002 2001 ---- ---- Cash flows from operating activities: Net income $ 3,041 $ 2,526 Adjustments to reconcile net income to net cash (used in)/provided by operating activities: Provision for loan losses 300 225 Depreciation and amortization of premises and equipment 486 427 Amortization of intangible assets 127 -- Gain on sales of securities available for sale (657) (147) Gain on sales of loans held for sale (4) (6) Net amortization of premiums and discounts 267 47 Amortization of deferred loan fees (155) (121) ESOP and RRP expense 371 345 Originations of loans held for sale (8,718) (1,926) Proceeds from sales of loans held for sale 129 1,774 Deferred income tax benefit (1) (217) Net changes in accrued interest receivable and payable 527 545 Other adjustments (principally net changes in other assets and other liabilities) (68) 2,571 --------- --------- Net cash (used in)/ provided by operating activities (4,355) 6,043 --------- --------- Cash flows from investing activities: Purchases of securities: Available for sale (35,543) (15,316) Held to maturity (4,386) (6,496) Proceeds from maturities, calls and other principal payments on securities: Available for sale 17,377 3,786 Held to maturity 9,819 4,767 Proceeds from sales of securities available for sale 15,678 4,155 Loan originations (100,069) (57,722) Loan principal payments 86,442 52,314 Purchases of Federal Home Loan Bank stock (523) (815) Purchase of bank owned life insurance (12,000) -- Purchases of premises and equipment (582) (585) Other adjustments 168 63 --------- --------- Net cash used in investing activities (23,619) (15,849) --------- --------- 7 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (In thousands) For the Three Months Ended December 31, ------------------ 2002 2001 ---- ---- Cash flows from financing activities: Net increase in deposits 22,106 1,702 Net increase in borrowings 1,041 3,761 Net increase in mortgage escrow funds 5,834 5,146 Stock option transactions -- 42 Cash dividends paid (590) (488) -------- -------- Net cash provided by financing activities 28,391 10,163 -------- -------- Net increase in cash and cash equivalents 417 357 Cash and cash equivalents at beginning of period 35,093 16,447 -------- -------- Cash and cash equivalents at end of period $ 35,510 $ 16,804 ======== ======== Supplemental information: Interest payments $ 3,487 $ 5,036 Income tax payments 66 1,460 Transfer of loans to real estate owned -- 71 ======== ======== See accompanying notes to unaudited consolidated financial statements. 8 PROVIDENT BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation --------------------- The consolidated financial statements include the accounts of Provident Bancorp, Inc., Provident Bank (the "Bank"), and each subsidiary of Provident Bank (Provest Services Corp. I, Provest Services Corp. II, Provident REIT, Inc. and Provident Municipal Bank). Collectively, these entities are referred to herein as "the Company". Provident Bancorp, Inc. is a majority-owned subsidiary of Provident Bancorp, MHC, a mutual holding company. Provest Services Corp. I holds an investment in a low-income housing partnership which provides certain favorable tax consequences. Provest Services Corp. II has engaged a third-party provider to sell annuities and mutual funds to the customers of Provident Bank. Through December 31, 2002, the activities of these two wholly-owned subsidiaries have had a minor impact on the Company's consolidated financial condition and results of operations. Provident REIT, Inc. holds a portion of the Company's real estate loans and is a real estate investment trust for federal income tax purposes. Provident Municipal Bank ("PMB") is a limited purpose New York State-chartered commercial bank, which began operations on April 19, 2002 and is authorized to accept deposits from municipalities in the Bank's business area. The Company's off-balance sheet activities are limited to (i) loan origination commitments, lines of credit and letters of credit extended to customers in the ordinary course of its lending activities, and (ii) interest rate cap agreements used as part of its interest rate risk management. The Company does not engage in off-balance sheet financing transactions or other activities involving the use of special-purpose entities. The consolidated financial statements have been prepared by management without audit, but, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company's financial position and results of operations as of the dates and for the periods presented. Although certain information and footnote disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three months ended December 31, 2002 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2003. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company's Form 10-K for the fiscal year ended September 30, 2002. 9 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. A material estimate that is particularly susceptible to near-term change is the allowance for loan losses (see Note 2), which is a critical accounting policy. 2. Allowance for Loan Losses and Non-Performing Assets --------------------------------------------------- The allowance for loan losses is established through provisions for losses charged to earnings. Loan losses are charged against the allowance when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized. The allowance for loan losses is the amount that management has determined to be necessary to absorb probable losses on existing loans. Management's evaluations, which are subject to periodic review by the Company's regulators, are made using a consistently-applied methodology that takes into consideration such factors as the Company's past loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and collateral values, and current economic conditions that may affect the borrowers' ability to pay. Changes in the allowance for loan losses may be necessary in the future based on changes in economic and real estate market conditions, new information obtained regarding known problem loans, regulatory examinations, the identification of additional problem loans, and other factors. Activity in the allowance for loan losses is summarized below: Three Months Ended December 31, ------------------ 2002 2001 ---- ---- (Dollars in thousands) Balance at beginning of period $ 10,383 $ 9,123 Provision for loan losses 300 225 Charge-offs (14) (27) Recoveries 18 13 Balance at end of period -- -- $ 10,687 $ 9,334 ======== ======== 10 The following table sets forth the amounts and categories of the Company's non-performing assets at the dates indicated. At both dates, the Company had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates). December 31, September 30, 2002 2002 ---- ---- (Dollars in thousands) Non-accrual loans: One- to four- family residential mortgage loans $2,262 $2,291 Commercial real estate, commercial business and construction loans 2,999 2,492 Consumer loans 95 171 ------ ------ Total non-performing loans 5,356 4,954 Real estate owned: One- to four-family residential 41 41 ------ ------ Total non-performing assets $5,397 $4,995 ====== ====== Non-performing loans as a % of total loans 0.77% 0.74% Non-performing assets as a % of total assets 0.51 0.49 Allowance for loan losses as a % of total non-performing loans 199.5 209.6 Allowance for loan losses as a % of total loans 1.54 1.55 ====== ====== 3. Acquisition of The National Bank of Florida ------------------------------------------- On April 23, 2002, the Company consummated its acquisition of The National Bank of Florida ("NBF"), which was merged with and into Provident Bank, in an all-cash transaction. The Company acquired 100% of the outstanding common stock of NBF for $28.1 million. The acquisition is consistent with the Company's strategic objective of expanding its retail and commercial banking market share in Orange County, New York, where NBF conducted its operations. At the acquisition date, NBF had total assets of approximately $104 million (including securities of $55.2 million, loans of $22.9 million and federal funds sold of $20.9 million), and total deposits of approximately $88.2 million. The acquisition was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". Accordingly, the assets acquired and liabilities assumed were recorded at their fair values at the acquisition date. The total acquisition cost (including direct transaction costs) exceeded the fair value of the net assets acquired by approximately $15.3 million. This amount was recognized as intangible assets, consisting of goodwill of $13.5 million and a core deposit intangible asset of $1.8 million recognized apart from goodwill. Amounts attributable to NBF are included in the Company's consolidated financial statements from the date of acquisition. 11 In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill recorded in the NBF acquisition will not be amortized to expense, but instead will be reviewed for impairment at least annually, with impairment losses charged to expense if and when they occur. The core deposit intangible asset recognized apart from goodwill is being amortized to expense using an accelerated method over its estimated useful life of approximately nine years (with approximately 75% amortized in the first four years), and will be evaluated annually for impairment. Core deposit amortization expense was $127,000 for the three-month period ending December 31, 2002. 4. 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 net of any gain (loss) on securities sold during the period. The Company's total comprehensive income was $2.4 million and $1.7 million for the three months ended December 31, 2002 and 2001, respectively. Accumulated other comprehensive income in the consolidated statements of financial condition at December 31, 2002 and September 30, 2002 substantially represented the after-tax net unrealized gain on securities available for sale. 5. Earnings Per Common Share ------------------------- The number of shares used in the computation of both basic and diluted earnings per share includes all shares issued to the mutual holding company, but excludes unallocated ESOP shares that have not been released or committed to be released to participants. RRP shares are not included in outstanding shares until they become vested. Weighted average common shares used in calculating basic earnings per share for the three months ended December 31, 2002 and 2001 were 7,721,560 and 7,686,230, respectively. Diluted earnings per share was computed based on 7,858,438 shares for the three months ended December 31, 2002 (including 136,878 common-equivalent shares) and 7,807,529 shares for the three months ended December 31, 2001 (including 121,299 common-equivalent shares). The common equivalent shares are 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 periods. 12 6. Guarantor's Obligations under Guarantees ---------------------------------------- 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. As of December 31, 2002, the Company had $8.1 million in outstanding letters of credit commitments, of which $1.6 million were secured by cash collateral. Management does not expect that the provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (see "Recent Accounting Standards") will impact the Company's results of operations or financial condition. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believe", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, without limitation, the Company's continued ability to originate quality loans, fluctuations in interest rates, real estate conditions in the Company's lending areas, general and local economic conditions, the Company's continued ability to attract and retain deposits, the Company's ability to control costs, the effect of new accounting pronouncements and changing regulatory requirements, and the ability to realize cost savings and integrate operations following the recent acquisition of NBF. 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. The Company's significant accounting policies are summarized in Note 3 to the consolidated financial statements included in its September 30, 2002 Annual Report on Form 10-K. An accounting policy considered particularly critical to the Company's financial results is the allowance for loan losses. The methodology for assessing the appropriateness of the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgement involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment that could result in changes in the necessary allowance. 13 As discussed in Note 3 to the consolidated financial statements included in Item 1 of this report, the Company completed its acquisition of NBF in April 2002. The acquisition was accounted for as a purchase and, accordingly, amounts attributable to NBF have been included in the Company's consolidated financial statements from the date of acquisition. In April 2002, the Company announced the formation of PMB to serve the banking needs of municipalities throughout Rockland and Orange Counties. The formation of PMB eliminated the regulatory barriers previously preventing Provident Bank from accepting the deposit of public funds. Comparison of Financial Condition at December 31, 2002 and September 30, 2002 Total assets at December 31, 2002 were $1.1 billion, an increase of $30.4 million, or 3.0%, over assets of $1.0 billion at September 30, 2002. Average total assets for the three months ended December 31, 2002 were $1.0 billion, an increase of $144.3 million, or 16.1%, over average total assets of $895.5 million in the three months ended December 31, 2001. Net loans at December 31, 2002 were $682.7 million, an increase of $21.9 million, or 3.3%, over net loan balances of $660.8 million at September 30, 2002. Over the first three months of its new fiscal year, the Bank experienced growth of $20.1 million in the residential loan portfolio, reflecting continued refinancing activity. The allowance for loan losses was increased by $300,000 to $10.7 million at December 31, 2002 from $10.4 million at September 30, 2002. The total securities portfolio decreased to $289.4 million at December 31, 2002 from $292.9 million at September 30, 2002, a decrease of $3.5 million, or 1.2%. The portfolio is invested primarily in US government agency issued mortgage-backed securities and agency notes, as well as smaller positions in short-term corporate notes and state, county and municipal securities. The decrease in the investment securities balance is due primarily to the sale of securities to fund bank owned life insurance ("BOLI"), the cash value of which is included in "other assets". In addition, accelerated paydowns of certain of the Company's mortgage-backed securities, related to nation-wide refinancing activity, caused the balance held in those securities to decline. Total deposits were $821.7 million at December 31, 2002, up $22.1 million, or 2.8%, from $799.6 million at September 30, 2002. The Company generally sees a seasonal increase in deposits in the months of November and December, followed by a similar outflow in January, as local depositors prepare to pay real estate taxes in January. Also, the growing municipal deposit business brought in balances in checking, savings, and certificates of deposit during the quarter. 14 Borrowings from the Federal Home Loan Bank of New York (the "FHLB") increased by $1.0 million during the three-month period to $104.0 million at December 31, 2002 from $103.0 million at September 30, 2002, supplementing deposit growth to fund the $21.9 million increase in net loans over the three-month period. Stockholders' equity increased by $2.2 million to $113.1 million at December 31, 2002, compared to $110.9 million at September 30, 2002. In addition to net income of $3.0 million for the three months ended December 31, 2002, equity increased by $371,000 due to activity related to the Company's ESOP and management retention plans. Offsetting these increases were cash dividends of $590,000 and a $618,000 decrease in after-tax net unrealized gains on securities available for sale, related primarily to the sale of securities to fund the acquisition of bank owned life insurance ("BOLI"). The Company has repurchased a total of 330,551 shares of its common stock under its two previously announced repurchase programs, which authorized total repurchases of up to 376,740 shares. Net of stock option-related reissuances, a total of 282,488 treasury shares were held by the Company at December 31, 2002. Comparison of Operating Results for the Three Months Ended December 31, 2002 and December 31, 2001 Net Income. Net income for the three months ended December 31, 2002 was $3.0 million, an increase of $515,000 over net income of $2.5 million for the three months ended December 31, 2001, due primarily to the Bank's strong net interest margin, net of higher operating costs related to its branch expansion. Basic and diluted earnings per share were both $0.39 for the three months ended December 31, 2002, compared to $0.33 and $0.32, respectively, for the same period last year. Interest Income. Total interest income for the three months ended December 31, 2002 increased to $15.0 million, an increase of $263,000, or 1.8%, compared to the $14.8 million earned in the prior-year period. The increase was primarily due to higher average balances of interest-earning assets, largely offset by lower average yields on loans and securities, due to lower market interest rates, as well as a shift in asset mix more heavily toward securities than loans. This shift was due, in part, to the addition of NBF assets, the majority of which were securities and other earning assets. Average total interest-earning assets for the three months ended December 31, 2002 were $978.2 million, an increase of $123.8 million, or 14.5%, over average total interest-earning assets for the three months ended December 31, 2001 of $854.4 million. The $63.2 million, or 10.4%, increase in average loans to $671.4 million from $608.2 million was attributable to increased balances in all loan types, but especially commercial loans, which grew to an average balance of $213.0 million compared to $175.7 million for the prior-year quarter, an increase of 21.2%. Average residential mortgage loan balances also grew, reaching an average balance of $374.4 million compared to $356.0 million for the prior-year quarter, benefiting from increased activity due to the low market rates. Average yields on the higher loan balances declined to 6.70% from 7.32%. The largest decline in yields was in the consumer loan 15 category, which is made up almost equally of fixed-rate loans with short average maturities and home equity lines of credit, which bear interest rates that float with the prime rate, and that fell significantly compared to a year ago. Average rates paid on consumer loans for the three-month period fell to 5.34% from 6.55%. Interest income on securities and other earning assets for the three months ended December 31, 2002 was $3.7 million, an increase of $137,000, or 3.9%, from securities income of $3.5 million for the prior year period. This increase is the net result of a decrease of 95 basis points in the average yield to 4.76% from 5.71%, which was more than offset by a $60.6 million, or 24.6%, increase in the average balances of securities and other earning assets to $306.8 million for the quarter ended December 31, 2002 compared to $246.2 million for the quarter ended December 31, 2001. The decline in yields in securities was due to lower market interest rates as well as to heavy prepayments on mortgage-backed securities, which resulted in faster-than-anticipated amortization of premiums on those securities. Interest Expense. Total interest expense for the three months ended December 31, 2002 fell by $1.4 million to $3.4 million, a decrease of 29.3% compared to interest expense of $4.8 million for the same period last year. The decrease was primarily due to lower rates paid on interest-bearing deposits and borrowings, as well as to slow growth in certificate of deposit accounts and a higher concentration of non-interest-bearing and low interest-bearing savings, money market and NOW checking deposits among total deposits for the period. Average rates paid on interest-bearing liabilities for the three months ended December 31, 2002 declined by 101 basis points to 1.67% from 2.68% for the same period last year. The lower average rates and change in mix more than offset the increase in average total interest-bearing liabilities, which increased by $96.7 million, or 13.7%, to $805.0 million for the period ended December 31, 2002, compared to an average of $708.3 million for the prior year period. For the three months ended December 31, 2002, interest expense on deposits fell by $958,000, or 29.0%, to $2.3 million from $3.3 million in the prior year period. Interest expense on savings accounts increased by $26,000, or 5.4%, to $509,000 from $483,000, due to a 36.7% increase in average balances to $258.4 million from $189.0 million, offsetting the 23 basis points decline in average rates paid to 0.78% from 1.01%. Average balances of money market and NOW checking increased by $20.1 million, or 20.8%, and $8.4 million, or 11.7%, respectively, while their average yields fell by 48 and 9 basis points, respectively, compared to the three months ended December 31, 2001. Interest expense on certificates of deposit fell by $910,000, or 38.1%, to $1.5 million for the three months ended December 31, 2002, from $2.4 million for the same three-month period last year. The average interest rate paid on certificates of deposit fell by 166 basis points to 2.38% for the three months ended December 31, 2002, from 4.04% for the prior-year period. Average balances of certificates of deposit increased by $11.9 million, or 5.1%, to $246.3 million for the current quarter versus $234.4 million for the same quarter last year, partly due to the above-mentioned increased municipal deposit activity. 16 For the three months ended December 31, 2002, interest expense on borrowings fell by $444,000, or 29.8%, to $1.0 million from $1.5 million in the prior year period. The average rate paid on total borrowings for the three-month period ended December 31, 2002 decreased 106 basis points to 4.02% from 5.08% for the same period last year. The average amount borrowed declined by $13.1 million, or 11.3%, to $103.1 million for the current quarter, compared to $116.2 million for the same period last year. Net Interest Income. Net interest income for the three months ended December 31, 2002 was $11.6 million, compared to $10.0 million for the three months ended December 31, 2001, an increase of $1.6 million or 16.0%. The increase in net interest income was largely due to a $27.2 million increase in average net earning assets to $173.2 million, from $146.0 million, as well as to a 25 basis point increase in net interest rate spread, to 4.42% from 4.17% in the prior year period. Net interest margin increased to 4.72% for the three months ended December 31, 2002, up from 4.63% in the prior year period. Average non interest-earning assets for the three months ended December 31, 2002 increased by $20.4 million compared to the prior year period, while average non interest-bearing liabilities increased by $40.0 million for the same periods. As noted in the above discussion, the increase in the Company's net interest income is due, in large part, to the relative changes in the yield and cost of the Company's assets and liabilities as a result of decreasing market interest rates in calendar 2001 and early 2002. This decrease in market interest rates has reduced the cost of interest-bearing liabilities faster, and to a greater extent, than the rates on interest-earning assets such as loans and securities. Also, customers have allowed more of their deposits to linger in checking and savings accounts, as rates in certificate of deposit accounts have appeared unattractive to them. Should market interest rates increase with the expected economic recovery, the cost of the interest-bearing liabilities will increase faster than the rates on interest-earning assets. In addition, the impact of rising rates could be compounded if deposit customers move funds from savings accounts back to higher-rate certificate of deposit accounts. Such movements may cause a decrease in interest rate spread and net interest margin. Should market interest rates continue to fall, the rates on interest-earning assets could fall to a greater extent than rates on interest-bearing liabilities, as certain of the latter rates may have already reached market minimums. Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain an allowance for loan losses to absorb probable loan losses inherent in the existing portfolio. In determining the allowance for loan losses, management considers past loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, and the levels of non-performing and other classified loans. The amount of the allowance for loan losses is determined based on various 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 using a consistently-applied methodology. The Company recorded $300,000 and $225,000 in loan loss provisions during the three months ended December 31, 2002 and 2001, respectively. 17 Non-Interest Income. Non-interest income is composed primarily of fee income for bank services, and also includes loan servicing fees and gains and losses from the sale of loans and securities. Non-interest income for the three months ended December 31, 2002 was $2.0 million compared to $1.3 million for the three months ended December 31, 2001, an increase of $719,000, or 56.0%. This increase was primarily attributable to net securities gains which were $657,000 for the current three-month period, compared to gains of $147,000 recorded in the same period a year ago. Also contributing to this increase was an increase of $113,000, or 11.6%, in banking fees and service charges, as increases in transaction account volumes generated higher fee income. Other non-interest income increased to $257,000, up from $161,000 in the prior year, due primarily to volume-related increases in loan fee income ($75,000) and net debit card fees ($39,000). Non-Interest Expense. Non-interest expenses for the three months ended December 31, 2002 were $8.5 million, a $1.3 million or 18.5% increase over expenses of $7.2 million for the three months ended December 31, 2001. The increase was primarily attributable to increases in compensation and occupancy expenses of $838,000, or 21.7%, and $152,000, or 14.0%, respectively, due to annual salary and benefit increases, the opening of a new branch, and the addition of NBF branches and staff. Of the $838,000 increase in compensation expenses, $156,000 or 18.6% of the total increase, was attributable to increased costs for the Company's stock-based compensation plans based on an increase in the average market value of its common stock to $29.96 per share for the three months ended December 31, 2002 from $24.34 per share for the same period last year. Data processing expense also increased by $170,000, or 42.2%, related to higher deposit and loan volumes. Additionally, the Company incurred $127,000 in costs related to the amortization of the NBF core deposit intangible during the current three-month period, while there were no similar expenses in the prior year. Income Taxes. Income tax expense was $1.8 million for the three months ended December 31, 2002 compared to $1.3 million for the same period in 2001, as tax strategies implemented in the past had a smaller relative impact due to growth in the Company's pre-tax income. On December 30, 2002 the Company contributed $12.0 million to fund a Bank Owned Life Insurance ("BOLI") program. The BOLI will generate a federal tax benefit in subsequent reporting periods. The effective tax rates in the 2002 and 2001 first quarters were 37.5% and 34.8%, respectively. 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. 18 The Company's primary sources of funds are deposits, proceeds from principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturities of securities and short-term investments, and proceeds from sales of loans originated for sale and securities available for sale. 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 and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition. Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, and other factors. The Company's primary investing activities are the origination of both residential one- to four-family and commercial mortgage loans, and the purchase of investment securities and mortgage-backed securities. During the three months ended December 31, 2002, originations of loans for portfolio totaled $100.1 million, originations of loans held for sale totaled $8.7 million and purchases of securities totaled $39.9 million. During the three months ended December 31, 2001, loan originations (including loans held for sale) totaled $59.6 million and purchases of securities totaled $21.8 million. For the three-month period ended December 31, 2002, these investing activities were funded primarily by principal repayments on loans ($86.4 million), by proceeds from sales and maturities of securities ($43.5 million), and by deposit growth ($22.1 million). Loan origination commitments totaled $71.9 million at December 31, 2002. The Company anticipates that it will have sufficient funds available to meet current loan commitments. The Company monitors its liquidity position on a daily basis. Excess short-term liquidity, if any, is usually invested in overnight federal funds sold. At December 31, 2002, the Company held no federal funds sold. The Company generally remains fully invested and utilizes additional sources of funds through FHLB borrowings, which amounted to $104.0 million at December 31, 2002. At December 31, 2002, the Bank exceeded all of its regulatory capital requirements with a leverage capital level of $87.5 million, or 8.5% of adjusted assets (which is above the required level of $41.2 million, or 4.0%) and a total risk-based capital level of $95.1 million, or 15.6% of risk-weighted assets (which is above the required level of $48.7 million, or 8.0%). In order to be classified as well capitalized, the regulatory requirements call for leverage and total risk-based capital ratios of 5.0% and 10.0%, respectively. At December 31, 2002, the Bank exceeded all capital requirements for well-capitalized classification. These capital requirements, which are applicable to the Bank only, do not consider additional capital retained at the holding company level. 19 The following table sets forth the Bank's regulatory capital position at December 31, 2002 and September 30, 2002, compared to OTS requirements.
OTS Requirements ----------------------------------------- Minimum Capital For Classification Bank Actual Adequacy as Well Capitalized ----------------- ----------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) December 31, 2002 Tangible capital $87,485 8.5% $15,460 1.5% $ -- --% Tier 1 (core) capital 87,485 8.5 41,227 4.0 51,534 5.0 Risk-based capital: Tier 1 87,485 14.4 -- -- 36,548 6.0 Total 95,137 15.6 48,730 8.0 60,913 10.0 September 30, 2002 Tangible capital $84,307 8.5% $14,963 1.5% $ -- --% Tier 1 (core) capital 84,307 8.5 39,901 4.0 49,875 5.0 Risk-based capital: Tier 1 84,307 14.2 -- -- 35,552 6.0 Total 91,747 15.5 47,403 8.0 59,254 10.0
The intangible assets recorded in the April 2002 NBF acquisition are deducted from capital for purposes of calculating regulatory capital measures. However, the Bank continues to be classified as a well-capitalized institution. Recent Accounting Standards In November 2002, the Financial Accounting Standards Board ("the FASB") issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 is an interpretation of FASB Statements No. 5, 57 and 107 and rescinds FIN No. 35. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the provisions of FIN No. 45 in this Form 10-Q (see Note 6). 20 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. This statement is effective for fiscal years ending after December 15, 2002. Management does not expect that the provisions of SFAS No. 148 will impact our results of operations or financial condition. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities," which is an interpretation of ARB No. 51. This Interpretation addresses consolidation by business enterprises of variable interest entities. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period in which an enterprise holds a variable interest that it acquired before February 1, 2003. Management does not expect that the provisions of FIN No. 46 will impact our results of operations or financial condition. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's most significant form of market risk is interest rate risk, as the majority of its assets and liabilities are sensitive to changes in interest rates. There have been no material changes in the Company's interest rate risk position since September 30, 2002, although the dramatic increase in net interest spread in the past nine months could be adversely impacted by a rise in short term interest rates. As noted in Item 2, Management's Discussion and Analysis, the increase in the Company's net interest income is due, in large part, to the relative changes in the yield and cost of the Company's assets and liabilities as a result of decreasing market interest rates in calendar 2001 and early 2002. This decrease in market interest rates has reduced the cost of interest-bearing liabilities faster, and to a greater extent, than the rates on interest-earning assets such as loans and securities. Should market interest rates increase with the expected economic recovery, the cost of the interest-bearing liabilities will increase faster than the rates on interest-earning assets. In addition, the impact of rising rates could be compounded if deposit customers move funds from savings accounts back to higher-rate certificate of deposit accounts. Conversely, should market interest rates fall significantly below current levels, the Company's net interest margin might also be negatively affected, as competitive pressures could keep the Company from reducing rates much lower on its deposits. Such movements may cause a decrease in interest rate spread and net interest margin. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. 21 Item 4. Controls and Procedures The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to any material information relating to the Company and its subsidiaries required to be included in the Company's Exchange Act filings. There were no significant changes made in the Company's internal controls or in other factors that that could significantly affect these disclosure controls and procedures subsequent to the date of the evaluation performed by the Company's Chief Executive Officer and Chief Financial Officer. Part II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involved amounts which are believed to be immaterial to the consolidated financial condition and operations of the Company. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 22 Item 6. Exhibits and Reports on Form 8-K Exhibit 99.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 --------------------------------------------------------- George Strayton, Chief Executive Officer and Katherine A. Dering, Chief Financial Officer of Provident Bancorp, Inc. (the "Company") each certify in his or her capacity as an officer of the Company that he or she has reviewed the quarterly report on Form 10-Q for the quarter ended December 31, 2002 and that to the best of his or her knowledge: (1) the report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations. ---------------------------- Date: February , 2003 George Strayton Chief Executive Officer ---------------------------- Date: February , 2003 Katherine A. Dering Chief Financial Officer 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Provident Bancorp, Inc. (Registrant) By: \s\ George Strayton -------------------------------------------- George Strayton President and Chief Executive Officer (Duly Authorized Representative) Date: February 12, 2003 By: \s\ Katherine A. Dering -------------------------------------------- Katherine A. Dering Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: February 12, 2003 24 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 --------------------------------------------------------- I, George Strayton, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Provident Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 25 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. February 12, 2003 \s\ George Strayton ----------------- ------------------------------------- Date George Strayton President and Chief Executive Officer 26 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 --------------------------------------------------------- I, Katherine A. Dering, Senior Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Provident Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 27 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. February 12, 2003 \s\ Katherine A. Dering ----------------- ------------------------------------- Date Katherine A. Dering Senior Vice President and Chief Financial Officer 28 -----END PRIVACY-ENHANCED MESSAGE-----