10-Q 1 forrm10-q52215provident.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 March 31, 2003 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) United States of America 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. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Classes of Common Stock Shares Outstanding ----------------------- ------------------ $0.10 per share 7,969,302 as of May 7, 2003 1 PROVIDENT BANCORP, INC. QUARTERLY PERIOD ENDED MARCH 31, 2003 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at March 31, 2003 and September 30, 2002 3-4 Consolidated Statements of Income for the Three Months and Six Months Ended March 31, 2003 and 2002 5 Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended March 31, 2003 and 2002 6-7 Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2003 and 2002 8-9 Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended March 31, 2003 and 2002 10 Notes to Consolidated Financial Statements 11-18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19-32 Item 3. Quantitative and Qualitative Disclosures about Market Risk 32 Item 4. Controls and Procedures 32 PART II. OTHER INFORMATION Item 1. Legal Proceedings 33 Item 2. Changes in Securities and Use of Proceeds 33 Item 3. Defaults upon Senior Securities 33 Item 4. Submission of Matters to a Vote of Security Holders 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 35 Signature 36 Exhibit 99.1 37 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 38-41 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)
At At Assets March 31, 2003 September 30, 2002 ------ -------------- ------------------ Cash and due from banks $ 31,861 $ 35,093 Securities (Note 7): Available for sale, at fair value (amortized cost of $227,437 at March 31, 2003 and $196,718 at September 30, 2002) 234,906 206,146 Held to maturity, at amortized cost (fair value of $96,805 at March 31, 2003 and $90,706 at September 30, 2002) 93,289 86,791 Regulatory Securities, at cost 5,970 5,348 ----------- ----------- Total securities 334,165 298,285 ----------- ----------- Loans (Notes 5) 690,593 671,199 Allowance for loan losses (Note 3) (10,901) (10,383) ----------- ----------- Total loans, net 679,692 660,816 ----------- ----------- Accrued interest receivable, net 5,168 5,491 Premises and equipment, net 11,344 11,071 Goodwill (Note 4) 13,540 13,540 Bank owned life insurance 12,161 -- Other assets 3,322 3,405 ----------- ----------- Total assets $ 1,091,253 $ 1,027,701 =========== ===========
(Continued) 3 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED (Unaudited) (Dollars in thousands, except per share data)
At At Liabilities and Stockholders' Equity March 31, 2003 September 30, 2002 ------------------------------------ -------------- ------------------ Liabilities: Deposits (Note 6): Non interest bearing $ 122,817 $ 110,131 Interest bearing 717,784 689,495 ----------- ----------- Total deposits 840,601 799,626 Borrowings 119,388 102,968 Mortgage escrow funds 7,645 3,747 Other 10,074 10,493 ----------- ----------- Total liabilities 977,708 916,834 ----------- ----------- 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; 7,972,102 and 7,997,512 shares outstanding at March 31, 2003 and September 30, 2002, respectively) 828 828 Additional paid-in capital 36,979 36,696 Unallocated common stock held by the employee stock ownership plan ("ESOP") (147,082 shares at March 31, 2003 and 162,538 shares at September 30, 2002, respectively) (1,785) (1,974) Common stock awards under recognition and retention plan ("RRP") (852) (1,108) Treasury stock, at cost (307,898 shares at March 31, 2003 and 282,488 shares at September 30, 2002, respectively) (6,854) (5,874) Retained earnings 80,819 76,727 Accumulated other comprehensive income 4,410 5,572 ----------- ----------- Total stockholders' equity 113,545 110,867 ----------- ----------- Total liabilities and stockholders' equity $ 1,091,253 $ 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 share data)
For the Three Months For the Six Months Ended March 31, Ended March 31, --------------- --------------- 2003 2002 2003 2002 ---- ---- ---- ---- Interest and dividend income: Loans $ 11,129 $ 11,002 $ 22,475 $ 22,222 Securities 3,296 3,532 6,968 7,067 Other earning assets 14 24 20 30 ---------- ---------- ---------- ---------- Total interest and dividend income 14,439 14,558 29,463 29,319 ---------- ---------- ---------- ---------- Interest expense: Deposits 1,965 2,698 4,310 6,001 Borrowings 982 1,494 2,026 2,982 ---------- ---------- ---------- ---------- Total interest expense 2,947 4,192 6,336 8,983 ---------- ---------- ---------- ---------- Net interest income 11,492 10,366 23,127 20,336 Provision for loan losses (Note 3) 300 175 600 400 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 11,192 10,191 22,527 19,936 ---------- ---------- ---------- ---------- Non-interest income: Banking fees and service charges 1,114 935 2,203 1,911 Gain on sales of securities available for sale 427 90 1,084 237 Gains on sales of loans 403 34 442 40 Other 423 171 641 326 ---------- ---------- ---------- ---------- Total non-interest income 2,367 1,230 4,370 2,514 ---------- ---------- ---------- ---------- Non-interest expense: Compensation and employee benefits 5,304 3,976 9,999 7,833 Occupancy and office operations 1,254 1,182 2,490 2,266 Advertising and promotion 495 304 911 705 Consulting fees 210 72 423 198 Data processing 528 440 1,101 843 Amortization of core deposit intangible 115 -- 242 -- Other 1,651 1,296 2,864 2,578 ---------- ---------- ---------- ---------- Total non-interest expense 9,557 7,270 18,030 14,423 ---------- ---------- ---------- ---------- Income before income tax expense 4,002 4,151 8,867 8,027 Income tax expense 1,482 1,550 3,306 2,900 ---------- ---------- ---------- ---------- Net income $ 2,520 $ 2,601 $ 5,561 $ 5,127 ========== ========== ========== ========== Weighted average common shares: Basic 7,717,668 7,703,009 7,719,635 7,694,528 Diluted 7,835,432 7,847,100 7,834,907 7,825,278 Per common share: (Note 8) Basic $ 0.33 $ 0.34 $ 0.72 $ 0.67 Diluted 0.32 0.33 0.71 0.66 Dividends declared 0.14 0.10 0.27 0.18 Book value at period end $ 14.24 $ 13.15
See accompanying notes to unaudited consolidated financial statements. 5 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2003 (Unaudited) (In thousands, except 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 5,561 5,561 Cash dividends paid ($0.27 per share) (1,335) (1,335) Purchases of treasury stock (37,500 shares) (1,157) (1,157) Stock options exercised (12,090 shares) 177 (134) 43 ESOP shares allocated or committed to be released for allocation (15,456 shares) 283 189 472 Vesting of RRP shares 256 256 Decrease in net unrealized gain on securities available for sale, net of taxes of $787 (1,172) (1,172) Decrease in net unrealized loss on cash flow hedges, net of taxes of $(6) 10 10 ------- -------- ------- ------- ------- ------- ------ -------- Balance at March 31, 2003 $ 828 $ 36,979 $(1,785) $ (852) $(6,854) $80,819 $4,410 $113,545 ======= ======== ======= ======= ======= ======= ====== ========
See accompanying notes to unaudited consolidated financial statements. 6 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2002 (Unaudited) (In thousands, except 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, 2001 $828 $ 36,535 $(2,350) $(1,729) $(4,298) $69,252 $ 4,382 $102,620 Net income 5,127 5,127 Cash dividends paid ($0.18 per share) (851) (851) Purchases of treasury stock (8,000 shares) (219) (219) Stock option exercises (27,333 shares) 288 (99) 189 ESOP shares allocated or committed to be released for allocation (15,456 shares) 213 188 401 Vesting of RRP shares 310 310 Decrease in net unrealized gain on securities available for sale, net of taxes of $1,190 (1,786) (1,786) Decrease in net unrealized loss on cash flow hedges, net of taxes of $(12) 19 19 ---- -------- ------- ------- ------- ------- ------- -------- Balance at March 31, 2002 $828 $ 36,748 $(2,162) $(1,419) $(4,229) $73,429 $ 2,615 $105,810 ==== ======== ======= ======= ======= ======= ======= ========
See accompanying notes to unaudited consolidated financial statements. 7 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the Six Months Ended March 31, --------------- 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 5,561 $ 5,127 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 600 400 Depreciation and amortization of premises and equipment 961 872 Amortization of core deposit intangible 242 -- Gain on sales of securities available for sale (1,084) (238) Gain on sales of loans held for sale (442) 40 Net amortization of premiums and discounts on securities 487 102 ESOP and RRP expense 728 711 Originations of loans held for sale (13,501) (8,659) Proceeds from sales of loans held for sale 13,775 8,009 Deferred income tax (benefit) expense 570 (3,209) Net changes in accrued interest receivable and payable 204 (14) Other adjustments (principally net changes in other assets and other liabilities) (632) 3,238 --------- --------- Net cash provided by operating activities 7,469 6,379 --------- --------- Cash flows from investing activities: Purchases of securities: Available for sale (81,392) (27,913) Held to maturity (24,809) (6,332) Proceeds from maturities, calls and other principal payments on securities: Available for sale 35,279 7,461 Held to maturity 18,188 11,414 Proceeds from sales of securities available for sale 16,113 12,060 Loan originations (188,865) (113,797) Loan principal payments 169,556 96,955 Purchases of regulatory securities (622) (1,108) Purchase of bank owned life insurance (12,000) -- Purchases of premises and equipment (1,234) (1,064) Other adjustments 218 -- --------- --------- Net cash used in investing activities (69,568) (22,324) --------- ---------
(continued) 8 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (In thousands)
For the Six Months Ended March 31, --------------- 2003 2002 ---- ---- Cash flows from financing activities: Net increase in transaction and savings deposits $ 41,992 $ 44,906 Net decrease in time deposits (994) (20,124) Borrowings 40,000 17,884 Repayments of borrowings (23,580) (11,028) Net increase in mortgage escrow funds 3,898 1,839 Treasury shares purchased (1,157) (219) Exercises of stock options 43 189 Cash dividends paid (1,335) (851) -------- -------- Net cash provided by financing activities 58,867 32,596 -------- -------- Net (decrease) increase in cash and cash equivalents (3,232) 16,651 Cash and cash equivalents at beginning of period 35,093 16,447 -------- -------- Cash and cash equivalents at end of period $ 31,861 $ 33,098 ======== ======== Supplemental information: Interest payments $ 6,455 $ 9,145 Income tax payments 3,231 4,422 Transfer of loans to real estate owned 99 162 Net change in unrealized gains recorded on securities available for sale $ (1,959) $ (2,980) Change in deferred taxes on unrealized gains on securities available for sale 783 1,178
See accompanying notes to unaudited consolidated financial statements. 9 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Six Months Ended March 31, Ended March 31, --------------- --------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income: $ 2,520 $ 2,601 $ 5,561 $ 5,127 Other comprehensive income (loss): Net unrealized losses on securities available for sale: Net unrealized holding losses arising during the year, net of taxes of $197, $585, $349 and $1,095 (292) (877) (522) (1,643) Less reclassification adjustment for net realized gains included in net income, net of taxes of $171, $36, $434, and $95 (256) (54) (650) (143) Net unrealized gain on derivatives, net of taxes of ($2), ($5), ($6) and ($12) 4 8 10 19 ------- ------- ------- ------- Other comprehensive loss (544) (923) (1,162) (1,767) ------- ------- ------- ------- Comprehensive income $ 1,976 $ 1,678 $ 4,399 $ 3,360 ======= ======= ======= =======
10 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 March 31, 2003, 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 ($30 million notional amount, expired 4/7/03). 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 and six months ended March 31, 2003 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. 11 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. Certain prior-year amounts have been reclassified to conform to the current-year presentation. Stock-Based Compensation The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock option plan. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding awards in each period. In April 2003 the FASB decided to require all companies to expense the value of employee stock options but has not decided how to measure the fair value of the options. As such, the financial statement impact of stock option expensing is not known at this time.
Three-months Six-months Ended Ended March 31, March 31, ----------------------------------------------------------------------------------------------------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Net income, as reported $ 2,520 $ 2,601 $ 5,561 $ 5,127 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net ofrelated tax effects (77) (76) (153) (161) Pro forma net income $ 2,443 $ 2,525 $ 5,408 $ 4,966 Earnings per share Basic - as reported $ 0.33 $ 0.34 $ 0.72 $ 0.67 Basic - pro forma 0.32 0.33 0.70 0.65 Diluted - as reported 0.32 0.33 0.71 0.66 Diluted - pro forma 0.31 $ 0.32 0.69 $ 0.63
2. Critical Accounting Policies The accounting and reporting policies of Provident Bancorp, Inc. are prepared in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for credit losses are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by management could result in material changes in the Company's financial position or results of operations. Footnote 3 (Summary of Significant Accounting Policies) of the 2002 Annual Report on Form 10-K, provide detail with regard to the Corporation's accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since September 2002. 3. 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 loan losses inherent in the existing portfolio. 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. 12 Activity in the allowance for loan losses for the periods indicated is summarized below:
Three Months Six Months Ended March 31, Ended March 31, --------------- --------------- 2003 2002 2003 2002 ---- ---- ---- ---- (In thousands) Balance at beginning of period $ 10,687 $ 9,334 $ 10,383 $ 9,123 Provision for loan losses 300 175 600 400 Charge-offs (117) (75) (131) (102) Recoveries 31 69 49 82 ======== ======= ======== ======= Balance at end of period $ 10,901 $ 9,503 $ 10,901 $ 9,503 ======== ======= ======== =======
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).
March 31, 2003 September 30, 2002 -------------- ------------------ (Dollars in thousands) Non-accrual loans: One- to four- family residential mortgage loans $1,798 $2,291 Commercial real estate, commercial business and construction loans 3,717 2,492 Consumer loans 119 171 ------ ------ Total non-performing loans 5,634 4,954 Real estate owned: One- to four-family residential 140 41 ------ ------ Total non-performing assets $5,774 $4,995 ====== ====== Ratios: Non-performing loans to total loans 0.82% 0.74% Non-performing assets to total assets 0.53 0.49 Allowance for loan losses to total non-performing loans 193.48 209.59 Allowance for loan losses to total loans 1.58 1.55
4. Acquisition of The National Bank of Florida On April 23, 2002, the Company consummated its acquisition, for cash, of The National Bank of Florida ("NBF"), which was merged with and into Provident Bank. The transaction was valued at approximately $28.1 million. At the acquisition date, NBF had total assets of approximately $104 million and total deposits of approximately $88 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 13 acquisition date. The excess of the total acquisition cost over the fair value of the net assets acquired was recorded as intangible assets (consisting of both goodwill and a core deposit intangible asset recognized apart from goodwill) and is accounted for in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Amounts attributable to NBF are included in the Company's consolidated financial statement from the date of acquisition. In accordance with SFAS No. 142, goodwill recorded in the NBF acquisition ($13.5 million) is not amortized to expense, but instead is reviewed for impairment at least annually, with impairment losses charged to expense, if and when they occur. The core deposit intangible asset, ($1.3 million and $1.5 million at March 31, 2003 and September 30, 2002, respectively), is recognized apart from goodwill and amortized to expense over its estimated useful life and evaluated for impairment. 5. Loans Major classifications of loans are summarized below (in thousands): March 31, 2003 September 30, 2002 -------------- ------------------ Real estate - residential mortgage $386,629 $366,111 Real estate - commercial mortgage 172,214 163,329 Real estate - construction 8,564 17,020 Commercial and industrial 41,749 41,320 Consumer 6,024 6,812 Other loans 75,413 76,607 -------- -------- Total $690,593 $671,199 ======== ======== 6. Deposits Major classifications of deposits are summarized below (in thousands): March 31, 2003 September 30, 2002 -------------- ------------------ Demand deposits: Retail $ 61,078 $ 54,399 Commercial and municipal 61,739 55,732 NOW 84,751 82,983 -------- -------- Total transaction accounts 207,568 193,114 Money market 130,664 115,065 Savings 259,857 247,918 Time under $100,000 196,532 204,967 Time over $100,000 45,980 38,562 -------- -------- Total $840,601 $799,626 ======== ======== 14 7. Securities The following is a summary of securities available for sale (AFS) at March 31, 2003 and September 30, 2002 (in thousands):
Available for Sale Portfolio March 31, 2003 ============================================================== Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ============================================================== Mortgage-backed and SBA Securities Mortgage-backed securities $ 50,899 $1,513 $(124) $ 52,288 Collateralized mortgage obligations 33,204 153 (3) 33,354 SBAs and other 1,065 7 -- 1,072 ---------------------------------------------------------------------------------------------------------------------- Total mortgage-backed and SBA securities 85,168 1,673 (127) 86,714 ---------------------------------------------------------------------------------------------------------------------- Investment Securities U.S. Government and federal agency securities 123,138 3,887 -- 127,025 Corporate debt securities 18,025 1,435 -- 19,460 Equity securities 1,106 701 (100) 1,707 ---------------------------------------------------------------------------------------------------------------------- Total investment securities 142,269 6,023 (100) 148,192 ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- Total available for sale $227,437 $7,696 $(227) $234,906 ====================================================================================================================== Available for Sale Portfolio September 30, 2002 ============================================================== Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ============================================================== Mortgage-backed and SBA Securities Mortgage-backed Securities $ 35,097 $2,048 $ -- $ 37,145 Collateralized mortgage obligations 21,352 161 (10) 21,503 SBAs and other 1,105 5 -- 1,110 ---------------------------------------------------------------------------------------------------------------------- Total mortgage-backed and SBA securities 57,554 2,214 (10) 59,758 ---------------------------------------------------------------------------------------------------------------------- Investment Securities U.S. Government and federal agency securities 107,972 4,201 -- 112,173 Corporate debt securities 30,079 2,065 -- 32,144 Equity securities 1,113 1,060 (102) 2,071 ---------------------------------------------------------------------------------------------------------------------- Total investment securities 139,164 7,326 (102) 146,388 ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- Total available for sale $196,718 $9,540 $(112) $206,146 ======================================================================================================================
15 The following is a summary of securities held to maturity (HTM) at March 31, 2003 and September 30, 2002 (in thousands):
Held to Maturity Portfolio March 31, 2003 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value =========================================================== Mortgage-backed Securities Mortgage-backed securities $69,725 $2,624 $ -- $72,349 Collateralized mortgage obligations 4,303 67 -- 4,370 ------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 74,028 2,691 -- 76,719 ------------------------------------------------------------------------------------------------------------- Investment Securities State and municipal securities 19,261 825 -- 20,086 ------------------------------------------------------------------------------------------------------------- Total investment securities 19,261 825 -- 20,086 ------------------------------------------------------------------------------------------------------------- Total held to maturity $93,289 $3,516 -- $96,805 ============================================================================================================= Held to Maturity Portfolio September 30, 2002 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value =========================================================== Mortgage-backed Securities Mortgage-backed securities $66,078 $2,896 $(21) $68,953 Collateralized mortgage obligations 4,304 124 -- 4,428 ------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 70,382 3,020 (21) 73,381 ------------------------------------------------------------------------------------------------------------- Investment Securities State and municipal securities 16,409 916 -- 17,325 ------------------------------------------------------------------------------------------------------------- Total investment securities 16,409 916 -- 17,325 ------------------------------------------------------------------------------------------------------------- Total held to maturity $86,791 $3,936 $(21) $90,706 =============================================================================================================
16 At March 31, 2003 and September 30, 2002, the unrealized net gain on securities available for sale (net of tax of $3,059 and $3,856, respectively) that was included in accumulated other comprehensive income, a separate component of stockholders' equity, was $4,410 and $5,572, respectively. Gross realized gains were $427 and $90, respectively, for the three months ended March 31, 2003 and 2002, and $1,084 and $237, respectively, for the six months ended March 31, 2003 and 2002. Securities with a carrying amount of $72,596 and $45,280 were pledged as collateral for municipal deposits, borrowings and other purposes at March 31, 2003 and September 30, 2002, respectively. 8. Earnings Per Common Share The number of shares used in the computation of both basic and diluted earnings per share includes all shares issued to Provident Bancorp, MHC, but excludes unallocated ESOP shares that have not been released or committed to be released to participants. Unvested RRP shares are excluded from basic earnings per share calculations only. The common equivalent shares are incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options and unvested RRP shares were exercised or became vested during the periods. Basic earnings per common share is computed as follows ($ in thousands, except share data):
For the Three Months For the Six Months Ended March 31, Ended March 31, 2003 2002 2003 2002 ---- ---- ---- ---- Weighted average common shares outstanding 7,717,668 7,703,009 7,719,635 7,694,528 Total basic shares 7,717,668 7,703,009 7,719,635 7,694,528 Net income $2,520 $2,601 $5,561 $5,127 Basic earnings per common share $0.33 $0.34 $0.72 $0.67
Diluted earnings per common share is computed as follows ( $in thousands, except share data):
For the Three Months For the Six Months Ended March 31, Ended March 31, --------------- --------------- 2003 2002 2003 2002 ---- ---- ---- ---- Weighted average common shares outstanding 7,717,668 7,703,009 7,719,635 7,694,528 Effect of common stock equivalents 117,764 144,091 115,272 130,750 Total diluted shares 7,835,432 7,847,100 7,834,907 7,825,278 Net income $2,520 $2,601 $5,561 $5,127 Diluted earnings per common share $0.32 $0.33 $0.71 $0.66
17 9. 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. 18 As of March 31, 2003, the Company had $6.2 million in outstanding letters of credit, of which $1.5 million were secured by cash collateral. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The Company has made, and may continue to make, various forward-looking statements with respect to earnings, credit quality and other financial and business matters for 2003 and, in certain instances, subsequent periods. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and that statements for subsequent periods are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements. In addition to those factors previously disclosed by the Company and those factors identified elsewhere herein, the following factors could cause actual results to differ materially from such forward-looking statements; pricing pressures on loan and deposit products; changes in local and national economic conditions; the extent and timing of actions of the Company's regulators; customer deposit disintermediation; changes in customers' acceptance of the Company's products and services; general actions of competitors, other normal business risks such as credit losses, litigation, increases in the levels of non-performing assets, revenues following acquisitions if such revenues are lower than expected, and costs or difficulties related to the integration of acquired and existing businesses are greater than expected. The Company's forward-looking statements speak only as of the date on which such statements are made. The Company assumes no duty to update forward-looking statements to reflect new, changing or unanticipated events or circumstances. 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. As discussed in Note 4 to the consolidated financial statements included in Item 1 of this quarterly 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, a commercial bank subsidiary of Provident Bank, to serve the banking needs of municipalities throughout Rockland and Orange Counties. Provident Bank is a federally chartered savings association and municipalities in New York may only deposit funds in commercial banks. The formation of PMB provides a vehicle for the deposits that may not be deposited with Provident Bank. 19 Comparison of Financial Condition at March 31, 2003 and September 30, 2002 Total assets as of March 31, 2003 were $1,091.3 million, an increase of $63.6 million, or 6.2% over assets of $1,027.7 million at September 30, 2002. Net loans as of March 31, 2003 were $679.7 million, an increase of $18.9 million, or 2.9%, over net loan balances of $660.8 million at September 30, 2002. Residential loans continued to grow during the six-month period, posting an increase of $20.5 million, or 5.6%, over balances at September 30, 2002, primarily in bi-weekly mortgages. Commercial and consumer loans remained relatively unchanged as prepayments and maturities of existing loans virtually offset originations of $89.9 million. Asset quality continues to be strong. At $5.8 million, or 0.53% of total assets, non-performing assets were up slightly from $5.0 million, or 0.49% of total assets at September 30, 2002. Total securities increased to $334.2 million at March 31, 2003 from $298.3 million at September 30, 2002, as the Company continued to purchase additional securities funded by growth in deposits and advances from the Federal Home Loan Bank. Total deposits increased by $41.0 million to $840.6 million, an increase of 5.1% over balances of $799.6 million at September 30, 2002. Deposit growth has occurred in transaction account, savings and money market account products, while certificates of deposit were virtually unchanged. The largest deposit growth has occurred in savings and money market accounts, which increased to $390.5 million at March 31, 2003 from $363.0 million at September 30, 2002, an increase of $27.5 million, or 7.6%. Transaction accounts posted an increase of $14.5 million, or 7.5%, to $207.6 million. During the same time period, total certificates of deposit declined by $1.0 million as municipal certificates of deposit grew to $15.5 million, while all other certificates decreased to $227.0 million. The overall deposit increase is primarily due to improved marketing efforts, coupled with new product offerings. Total municipal deposits equaled $26.7 million at March 31, 2003 compared to $8.8 million at September 30, 2002. Provident began taking in municipal deposits in April 2002 after the formation of PMB. Borrowings from the Federal Home Loan Bank of New York (the "FHLB") increased by $16.4 million during the six-month period to $119.4 million at March 31, 2003 from $103.0 million at September 30, 2002, primarily to fund loans and investments as noted above. Stockholders' equity increased by $2.6 million to $113.5 million at March 31, 2003 compared to $110.9 million at September 30, 2002. In addition to net income of $5.6 million for the six-month period, equity increased by $0.8 million due to activity related to the Company's ESOP, stock option and management retention plans. Partially offsetting these increases were cash dividends and treasury share purchases, which reduced stockholders' equity by $1.3 million and $1.1 million, respectively, and the change in after-tax unrealized gains on securities available for sale, which decreased equity by $1.2 million. During the first six months of fiscal 2003, the Company repurchased 37,500 shares of common stock, bringing the total shares repurchased to 368,051 shares under its previously announced repurchase programs, which authorized the repurchase of up to 376,740 shares. Net of option-related reissuances, treasury shares held by the Company at March 31, 2003 were 307,898 20 shares. In March 2003 the Company announced that the Board of Directors authorized the additional repurchase of 177,250 shares of its common stock, which represents 5% of its shares. Comparison of Operating Results for the Three Months Ended March 31, 2003 and March 31, 2002 Net Income. Interest income for the three months ended March 31, 2002 declined by $119,000, or less than 1% compared to the same period of 2002. Interest expense decreased by $1.2 million or 29.7%. This resulted in an increase in net interest income of $1.1 million or 10.6%. The provision for loan losses increased by $125,000 to $300,000 for the quarter ended March 31, 2003. Total non-interest income, which includes an increase in securities gains of $337,000 and gains on sales of loans of $369,000, increased $1.2 million or 100%. Non interest expense, which includes a one-time compensation charge of $324,000, increased by $2.3 million or 31.5%. Net income (after taxes) decreased $81,000 to $2,520,000. The relevant performance measures follow:
Three Months Ended March 31, 2003 March 31, 2002 -------------- -------------- Per common share: Basic earnings $ 0.33 $ 0.34 Diluted earnings 0.32 0.33 Dividends declared 0.14 0.10 Return on average (annualized): Assets 0.97% 1.16% Equity 9.09% 9.88% Tangible equity 10.50% 9.90%
The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands). 21
Three Months Ended March 31, ---------------------------- 2003 2002 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- Interest earning assets: Commercial loans (1) $ 216,172 $ 3,788 7.11% $182,227 $ 3,322 7.39% Consumer loans (1) 80,896 1,038 5.20 73,395 1,140 6.30 Other loans (1) 386,727 6,303 6.61 362,597 6,540 7.31 ------------------------ --------------------- Total loans 683,795 11,129 6.60 618,219 11,002 7.22 ------------------------ --------------------- AFS Investments & MBS 208,780 2,127 4.13 176,627 2,354 5.41 HTM Investments & MBS 77,094 1,169 6.15 72,396 1,172 6.60 Other earning assets 3,932 14 1.44 2,378 30 4.09 ------------------------ --------------------- Total securities & other earning assets 289,806 3,310 4.63 251,401 3,556 5.74 ------------------------ --------------------- Total interest-earning assets 973,601 14,439 6.01 869,620 14,558 6.79 Non-interest-earning assets: Cash & Due from Banks 29,302 18,911 Premises & Equipment 11,425 9,003 Other assets 41,426 9,500 ---------- -------- Total assets $1,055,754 $907,034 ========== ======== Interest bearing liabilities: Savings, clubs & escrow $ 266,936 369 0.56% $194,946 475 0.99% Money market accounts 116,217 243 0.85 102,070 343 1.36 NOW checking 86,381 55 0.26 68,410 76 0.45 Certificate accounts 242,324 1,298 2.17 224,687 1,804 3.26 ------------------------ --------------------- Total interest-bearing deposits 711,858 1,965 1.12 590,113 2,698 1.85 Borrowings 105,039 982 3.79 122,813 1,494 4.93 ------------------------ --------------------- Total interest-bearing liabilities 816,897 2,947 1.46 712,926 4,192 2.38 Non-interest-bearing liabilities: Demand deposits 114,519 78,451 Other 11,932 8,914 ------------------------ --------------------- Total liabilities 943,348 2,947 1.27 800,291 4,192 2.12 Equity 112,406 106,743 ---------- -------- Total liabilities and equity $1,055,754 $907,034 ========== ======== Net interest income $ 11,492 $10,366 ======== ======= Net interest rate spread 4.55% 4.41% ==== ==== Net earning assets $ 156,704 $156,694 ========== ======== Net interest margin 4.79% 4.83% ==== ==== Average interest-earning assets 119.18% 121.98% to average interest-bearing liabilities ====== ======
(1) Includes nonaccrual loans. 22 The table below details the changes in interest income and interest expense for the period indicated due to both changes in average outstanding balances and changes in average interest rates (in thousands): Three Months Ended March 31, 2003 vs. 2002 Increase/(Decrease) Due to -------------------------- Volume (1) Rate (1) Total ---------- -------- ----- Interest-earning assets Consumer loans $ 111 ($213) ($102) Commercial loans 600 (134) 466 Residential loans 423 (660) (237) Available for sale securities 393 (620) (227) Held to maturity securities 75 (84) (9) Other earning assets 11 (21) (10) ------- ------ ------- Total interest income 1,613 (1,732) (119) Interest-bearing liabilities Savings 144 (250) (106) Money market 43 (143) (100) NOW Checking 17 (38) (21) Certificates of deposit 137 (643) (506) Borrowings (199) (313) (512) ------- ------ ------- Total interest expense 142 (1,387) (1,245) ------- ------ ------- Net interest income $ 1,471 ($345) $ 1,126 ======= ====== ======= (1) Changes in rate/volume have been allocated to rate and volume 23 Net Interest Income. Net interest income after provision for loan losses for the three months ended March 31, 2003 was $11.2 million, compared to $10.2 million for the three months ended March 31, 2002, an increase of $1.0 million, or 9.8%. The increase in net interest income was largely due to a $104.0 million increase in average earning assets to $973.6 million during the quarter ended March 31, 2003, as compared to $869.6 million for the same quarter in the prior year, due primarily to the NBF acquisition. The increase in average earning assets was partially offset by a decline in average yield of 78 basis points from 6.79% to 6.01%. A decrease in the average cost of interest bearing liabilities of 92 basis points led to a $1.2 million drop in interest expense for the quarter compared to the same quarter in 2002, even as interest-bearing liabilities increased by $104.0 million. Net interest margin declined by 4 basis points to 4.79%, while net interest rate spread improved by 14 basis points to 4.55%. This 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 since 2001. This decrease in market interest rates has reduced the cost of interest-bearing liabilities faster and to a greater extent than the rates on interest-earning assets such as loans and securities. However, if recently low interest rate levels persist for an extended period of time, the prepayment of assets could continue at a rate exceeding scheduled repayment. Such funds received would most likely be reinvested at lower yields than that of its previously held assets. Also, as the reduction in liability costs have already exceeded the pace at which assets repriced downward, net interest margin may be further compressed. Conversely, if the geopolitical factors and an economic recovery become more apparent, market interest rates could rise. Competitive pressures could cause a rise in the Company's funding costs and lead to pressures on net interest margin. Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level which is considered appropriate to absorb probable loan losses inherent in the existing portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of real estate collateral, current and anticipated economic conditions, volume and type of lending, and the levels of non-performing and other classified loans. The amount of the allowance 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 $300,000 and $175,000 in loan loss provisions during the three months ended March 31, 2003 and 2002, respectively. Non-Interest Income. Non-interest income for the three months ended March 31, 2003 was $2.4 million compared to $1.2 million for the three months ended March 31, 2002, an increase of $1.2 million, or 100%. Realized gains on securities available for sale were $427,000 for the current three-month period, compared to $90,000 for the same period in the prior year. The Company also recorded gains on sale of loans totaling $403,000, while there was only $34,000 of such gains for the same period last year. Excluding the effects of gains on sales of securities and loans, the increase in non-interest income was $431,000, or 39.0%. Banking fees and services charges increased by $179,000, or 19.1%, due primarily to volume-driven increases in overdraft, NSF, and debit card fees. Loan fees and charges increased by $62,000, or 33.3%, primarily as the result of a $100,000 24 prepayment fee received. In addition, the formation of a Bank Owned Life Insurance ("BOLI") program in December 2002, generated $161,000 in other income during the current three-month period. Non-Interest Expense. Non-interest expenses for the three months ended March 31, 2003 increased by $2.3 million, or 31.5%, to $9.6 million, compared to $7.3 million for the three months ended March 31, 2002. The acquisition of NBF in April, 2002, played a major role in the increases in most categories, as did the opening of a new branch in February, 2003. The Company experienced related increases in compensation and employee benefits of $264,000 and in occupancy and office operations costs of $119,000. Also, amortization of intangible assets of $115,000 in the current three-month period is related to the deposit premiums recorded as a result of the acquisition. Excluding the new branch-related salaries, the increase in compensation and benefits was $1.1 million, or 27.5%. The $1.1 million increase is primarily due to a $324,000 payout of an employment agreement, retirement plan and deferred compensation cost increases of $193,000, net health insurance premium increases of $71,000 and salary increases due to annual increases and additional administration staff. Consulting fees increased by $138,000, or 191.7%, incurred primarily to improve the Company's technological infrastructure. Other expenses increased by $706,000, or 21.9%, due primarily to the start-up costs mentioned above, and an increase in advertising of $191,000 related to the new branches. Income Taxes. Income tax expense was $1,482,000 for the three months ended March 31, 2003 compared to $1,550,000 for the same period in 2002, as a result of changes in pre-tax income and the effects of the BOLI program implemented in late December 2002. The effective tax rates were 37.0% and 37.3%, respectively. Comparison of Operating Results for the Six Months Ended March 31, 2003 and March 31, 2002 Net Income. For the six months ended March 31, 2003 net interest income after provision for loan losses was $22.5 million, up $2.6 million or 13.1% compared to $19.9 million for the same period of 2002. Other income was $4.4 million, which included $1.1 million in securities gains and $442,000 in gains on sales of loans, (up $846,000 and $402,000, respectively), or an increase of $1.9 million, or 76% over the six months ended March 31, 2002. Other expenses increased $3.6 million, or 25% to $18.0 million for the six months ended March 31, 2003 compared to $14.4 million for the same prior year period. Net income after taxes improved to $5,561,000 compared to $5,127,000, an increase of $434,000, or 8.5%. 25 The relevant performance measures follow:
Six Months Ended March 31, 2003 March 31, 2002 -------------- -------------- Per common share: Basic earnings $ 0.72 $ 0.67 Diluted earnings 0.71 0.66 Dividends declared 0.27 0.18 Return on average (annualized): Assets 1.06% 1.15% Equity 9.96% 9.76% Tangible equity 11.52% 9.78%
The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands). 26
Six Months Ended March 31, -------------------------- 2003 2002 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- Interest earning assets: Commercial loans (1) $ 214,590 $ 7,627 7.13% $178,949 $ 6,734 7.55% Consumer loans (1) 82,424 2,168 5.28 74,949 2,403 6.43 Other loans (1) 380,507 12,680 6.68 359,245 13,085 7.31 ----------------------- --------------------- Total loans 677,521 22,475 6.65 613,143 22,222 7.27 ----------------------- --------------------- AFS Investments & MBS 210,310 4,651 4.44 169,830 4,714 5.57 HTM Investments & MBS 86,039 2,317 5.40 77,565 2,353 6.08 Other earning assets 2,356 20 1.70 1,371 30 4.39 ----------------------- --------------------- Total securities & other earning assets 298,705 6,988 4.69 248,766 7,097 5.72 ----------------------- --------------------- Total interest-earning assets 976,226 29,463 6.05 861,909 29,319 6.82 Non-interest-earning assets: Cash & Due from Banks 29,871 17,874 Premises & Equipment 11,245 9,013 Other assets 30,353 8,156 ---------- -------- Total assets $1,047,695 $896,952 ========== ======== Interest bearing liabilities: Savings, clubs & escrow $ 262,612 878 0.67% $191,952 958 1.00% Money market accounts 116,627 541 0.93 99,453 706 1.42 NOW checking 83,250 117 0.28 65,845 147 0.45 Certificate accounts 244,343 2,774 2.28 229,608 4,190 3.66 ----------------------- --------------------- Total interest-bearing deposits 706,832 4,310 1.22 586,858 6,001 2.05 Borrowings 104,055 2,026 3.90 119,474 2,982 5.01 ----------------------- --------------------- Total interest-bearing liabilities 810,887 6,336 1.57 706,332 8,983 2.55 Non-interest-bearing liabilities: Demand deposits 113,627 75,926 Other 11,192 9,351 ----------------------- --------------------- Total liabilities 935,706 6,336 1.36 791,609 8,983 2.28 Equity 111,989 105,343 ---------- -------- Total liabilities and equity $1,047,695 $896,952 ========== ======== Net interest income $23,127 $20,336 ======= ======= Net interest rate spread 4.48% 4.27% ==== ==== Net earning assets $ 165,339 $155,577 ========== ======== Net interest margin 4.75% 4.73% ==== ==== Average interest-earning assets 120.39% 122.03% to average interest-bearing liabilities ====== ======
(1) Includes nonaccrual loans. 27 The table below details the changes in interest income and interest expense for the period indicated due to both changes in average outstanding balances and changes in average interest rates (in thousands): Six Months Ended March 31, 2003 vs. 2002 Increase/(Decrease) Due to -------------------------- Volume (1) Rate (1) Total ---------- -------- ----- Interest-earning assets Consumer loans $ 224 ($459) ($235) Commercial loans 1,285 (392) 893 Residential loans 755 (1,160) (405) Available for sale securities 1,002 (1,064) (63) Held to maturity securities 243 (280) (36) Other earning assets 14 (24) (10) ------- ----- ------- Total interest income 3,523 (3,379) 144 Interest-bearing liabilities Savings 292 (372) (80) Money market 108 (273) (165) NOW Checking 34 (64) (30) Certificates of deposit 254 (1,670) (1,416) Borrowings (353) (603) (956) ------- ----- ------- Total interest expense 335 (2,982) (2,647) ------- ----- ------- Net interest income $ 3,188 ($397) $ 2,791 ======= ===== ======= (1) Changes in rate/volume have been allocated to rate and volume. 28 Net Interest Income. For the six months ended March 31, 2003, net interest income increased by $2.8 million, or 13.8% to $23.1 million from the same period in 2002. The increase in interest income reflects an increase in average earning assets of $114.3 million to $976.2 million, offset by a decline in yield of 77 basis points to 6.05%. The cost of interest bearing liabilities declined by $2.6 million as the average rate paid on interest bearing liabilities dropped 98 basis points to 1.57%, which offset an increase in average balances of $104.6 million to $810.9 million. Net interest margin increased from 4.73% to 4.75% and net interest spread improved from 4.27% to 4.48%. Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level which is considered appropriate to absorb probable loan losses inherent in the existing portfolio. The Company recorded $600,000 and $400,000 in loan loss provisions during the six months ended March 31, 2003 and 2002, respectively. Non-Interest Income. Non-interest income for the six-month period ended March 31, 2003 increased to $4.4 million, an increase of $1.9 million, or 76%, compared to $2.5 million for the same six-month period last year. Realized gains on securities available for sale and sales of loans were $1.1 million and $442,000, respectively, for the current period, generating a combined increase of $1.2 million over the securities and loan sales gains of $277,000 for the same period last year. Banking fees and services charges increased to $2.2 million for the current six-month period, an increase of $292,000, or 15.8%, over the same period last year. The increase is primarily attributable to volume-related increases in transaction account fees of $270,000 resulting from the new and acquired branches. Other income increased by $315,000, or 96.6%, to $641,000 for the six-month period ended March 31, 2003, from $326,000 for the same period last year. The increase is primarily due to $161,000 in income from the BOLI and the previously mentioned prepayment fee received, as well as a one-time fee of $86,000 from the Company's check-printing vendor. Non-Interest Expense. Non-interest expense increased by $3.6 million, or 25%, to $18.0 million for the six-month period ended March 31, 2003, compared to $14.4 million for the same six-month period last year. Increases in compensation and benefits and in occupancy and office operations directly attributable to the new branches were $522,000 and $283,000, respectively. Compensation and benefits increased by an additional $1.7 million, of which $324,000 represented the pay-out of an employment agreement, $212,000 was attributable to the increased cost of stock-based compensation plans, $234,000 was due to additional retirement plan and other deferred compensation expense, $118,000 was related to higher health insurance premiums and the remaining increase was due to annual salary increases of approximately 4.5% and additional administration staff. The Company amortized $242,000 of intangible assets, during the current fiscal year-to-date period as a result of the NBF acquisition. Consulting fees increased by $225,000, or 113.6%, incurred primarily for technological development. Other expenses increased by $974,000, or 15.2%, for the current fiscal year-to-date period primarily due to: additional advertising costs of $206,000, or 29.2%, related to new branches and products and a volume-related increase of $258,000, or 30.6%, in data processing costs. 29 Income Taxes. Income tax expense was $3.3 million for the six months ended March 31, 2003 compared to $2.9 million for the same period in 2002. The effective tax rates were 37.3% and 36.1%, respectively, as a greater portion of the Company's increase in pre-tax income was subject to the marginal tax rates. 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, 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. The Company's primary investing activities are the origination of both residential one- to four-family and commercial mortgage loans, and the purchase of investment securities and mortgage-backed securities. During the six months ended March 31, 2003 and March 31, 2002, loan originations (including loans held for sale) totaled $202.4 million and $122.4 million, respectively, and purchases of securities totaled $106.2 million and $34.2 million, respectively. For the six-month periods ended March 31, 2003 and 2002, these investing activities were funded primarily by principal repayments on loans, by proceeds from sales and maturities of securities, by deposit growth and additional borrowings. Loan origination commitments totaled $78.0 million at March 31, 2003. The Company anticipates that it will have sufficient funds available to meet current loan commitments. In December 2002 the Company invested $12 million in Bank Owned Life Insurance (BOLI) contracts. Such investments are illiquid and are therefore classified as other assets. As the Company's quarterly earnings exceeded $2.5 million, it is expected that the funds will be replaced by retained earnings in approximately 1.5 years, thereby not having a significant impact on capital and liquidity. Earnings from BOLI are derived from the net increase in cash surrender value. Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, the appeal of non-deposit investments, and other factors. The net increase in total deposits for the six months ended March 31, 2003 was $41.0 million, compared to $24.8 million for the six months ended March 31, 2002. The Company monitors its liquidity position on a daily basis. The Company generally remains fully invested and utilizes additional sources of funds through FHLB overnight advances, which amounted to $4.0 million at March 31, 2003. 30 At March 31, 2003, the Bank exceeded all of its regulatory capital requirements with a Tier 1 capital (leverage) level of $90.8 million, or 8.5% of adjusted assets (which is above the required level of $42.6 million, or 4.0%) and a total risk-based capital level of $98.5 million, or 16.0% of risk-weighted assets (which is above the required level of $49.4 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 March 31, 2003, 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. 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. The following table sets forth the Bank's regulatory capital position at March 31, 2003 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) March 31, 2003 Tangible capital $90,789 8.5% $15,993 1.5% $ -- --% Tier 1 (core) capital 90,789 8.5 42,647 4.0 53,309 5.0 Risk-based capital: Tier 1 90,789 14.7 -- -- 37,030 6.0 Total 98,543 16.0 49,373 8.0 61,716 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
31 Recent Accounting Standards In April 2003, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," for certain decisions made by the Board as part of the Derivative Implementation Group process. This Statement is effective for contracts entered into or modified after June 30, 2003 and hedging relationships designated after June 30, 2003. Management does not expect that the provisions of SFAS No. 149 will have a material impact on the Company's 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 six 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 beginning in 2001. This decrease in market interest rates has reduced the cost of interest-bearing liabilities faster, and to a greater extent, than the rates on interest-earning assets such as loans and securities. Should market interest rates increase with the expected economic recovery, the cost of the interest-bearing liabilities could 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 continue to fall below today's levels, the Company's net interest margin could also be negatively affected, as competitive pressures could keep the Company from reducing rates much lower on its deposits and prepayments and curtailments on assets may continue. 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. 32 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 33 Item 4. Submission of Matters to a Vote of Security Holders On February 19, 2003, the Company held its annual meeting of stockholders for the purpose of the election of four Directors to three year terms and the ratification of the appointment of KPMG LLP as the Company's independent auditors for the fiscal year ending September 30, 2003. The number of votes cast at the meeting as to each matter acted upon was as follows: VOTES VOTES FOR WITHHELD --------- -------- 1. Election of Directors: Judith Hershaft 7,159,125 9,284 Thomas F. Jauntig, Jr. 7,159,125 9,284 Donald T. McNelis 7,159,325 9,084 Richard A. Nozell 7,158,925 9,484 VOTES VOTES VOTES FOR AGAINST ABSTAINING -------- ------- ---------- 2. Ratification of the Appointment of KPMG LLP as the Company's Independent Auditors 7,136,190 13,388 18,831 Item 5. Other Information None 34 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Description -------------- ----------- 99.1 Certification pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: The Company filed the following report on Form 8-K during the three months ended March 31, 2003: Filed March 26, 2003 - News releases announcing the resignation of Katherine Dering, chief financial officer, and announcing the appointment of Paul Maisch as chief financial officer. 35 SIGNATURE 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: ___________________________________________ George Strayton President and Chief Executive Officer (Duly Authorized Representative) Date: May 13, 2003 By: ___________________________________________ Paul A. Maisch Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) Date: May 13, 2003 36