-----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, ABcFcxdI8WOmeoZrTWkSlkIGuG8Z0lL/keBaReYN2A+QgXsOLWBKyJCDyw+7MTEx FYC+h2Xr453wiq8oCV6XHA== 0000914317-04-000736.txt : 20040213 0000914317-04-000736.hdr.sgml : 20040213 20040213153047 ACCESSION NUMBER: 0000914317-04-000736 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040213 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: 800091851 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25233 FILM NUMBER: 04598562 BUSINESS ADDRESS: STREET 1: 400 RELLA BLVD CITY: MONTEBELLO STATE: NY ZIP: 10901 BUSINESS PHONE: 8453698040 10-Q 1 form10q-57478_provident.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, 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) Delaware 80-0091851 (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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 ----------------------- ------------------ $0.01 per share 39,608,586 as of January 31, 2004 1 PROVIDENT BANCORP, INC. QUARTERLY PERIOD ENDED DECEMBER 31, 2003 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at December 31, 2003 and September 30, 2003 3-4 Consolidated Statements of Income for the Three Months Ended December 31, 2003 and 2002 5 Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended December 31, 2003 and 2002 6-7 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2003 and 2002 8-9 Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2003 and 2002 10 Notes to Consolidated Financial Statements 11-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-30 Item 3. Quantitative and Qualitative Disclosures about Market Risk 30 Item 4. Controls and Procedures 31 PART II. OTHER INFORMATION Item 1. Legal Proceedings 31 Item 2. Changes in Securities and Use of Proceeds 31 Item 3. Defaults upon Senior Securities 31 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 5. Other Information 31 Item 6. Exhibits and Reports on Form 8-K 32 Signature 33 Certifications Pursuant to Sarbanes-Oxley Act of 2002 34-38 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, 2003 September 30, 2003 ----------------- ------------------ Cash and due from banks $ 40,331 $ 33,500 Federal funds sold 15,000 -- ----------- ----------- Total cash and cash equivalents 55,331 33,500 Securities (Note 7): Available for sale, at fair value (amortized cost of $413,241 at December 31, 2003 and $294,801 at September 30, 2003) 416,798 300,715 Held to maturity, at amortized cost (fair value of $69,916 at December 31, 2003 and $75,628 at September 30, 2003) 68,003 73,544 ----------- ----------- Total securities 484,801 374,259 ----------- ----------- Loans held for sale 727 2,364 Gross loans (Note 5) 715,912 714,253 Allowance for loan losses (Note 6) (11,249) (11,069) ----------- ----------- Total loans, net 704,663 703,184 ----------- ----------- FHLB stock, at cost 5,665 8,220 Accrued interest receivable, net 5,206 4,851 Premises and equipment, net 11,465 11,647 Goodwill (Note 3) 13,540 13,540 Bank owned life insurance 12,641 12,483 Other assets 11,919 10,257 ----------- ----------- Total assets $ 1,305,958 $ 1,174,305 =========== ===========
(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, 2003 September 30, 2003 ----------------- ------------------ Liabilities: Deposits (Note 8): Non-interest bearing $ 166,518 $ 163,009 Interest bearing 703,651 706,544 ----------- ----------- Total deposits 870,169 869,553 Stock Subscriptions (Note 2) 174,660 -- Borrowings 113,653 164,757 Mortgage escrow funds 9,610 3,949 Other 18,336 18,189 ----------- ----------- Total liabilities 1,186,428 1,056,448 ----------- ----------- 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; 7,947,321 and 7,946,521 shares outstanding at December 31, 2003 and September 30, 2003, respectively) 828 828 Additional paid-in capital 38,290 38,032 Unallocated common stock held by the employee stock ownership plan ("ESOP") (123,898 shares at December 31, 2003 and 131,626 shares at September 30, 2003, respectively) (1,503) (1,597) Common stock awards under recognition and retention plan ("RRP") (379) (506) Treasury stock, at cost (332,679 shares at December 31, 2003 and 333,479 shares at September 30, 2003, respectively) (7,761) (7,780) Retained earnings 87,985 85,398 Accumulated other comprehensive income 2,070 3,482 ----------- ----------- Total stockholders' equity 119,530 117,857 ----------- ----------- Total liabilities and stockholders' equity $ 1,305,958 $ 1,174,305 =========== ===========
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 Ended December 31, ------------------ 2003 2002 ---- ---- Interest and dividend income: Loans $ 10,530 $ 11,346 Securities 3,765 3,595 Other earning assets 23 83 ---------- ---------- Total interest and dividend income 14,318 15,024 ---------- ---------- Interest expense: Deposits 1,557 2,345 Borrowings 1,210 1,044 ---------- ---------- Total interest expense 2,767 3,389 ---------- ---------- Net interest income 11,551 11,635 Provision for loan losses (Note 5) 150 300 ---------- ---------- Net interest income after provision for loan losses 11,401 11,335 ---------- ---------- Non-interest income: Banking fees and service charges 1,384 1,089 Gain on sales of securities available for sale 930 657 Gains on sales of loans 86 39 Other 403 218 ---------- ---------- Total non-interest income 2,803 2,003 ---------- ---------- Non-interest expense: Compensation and employee benefits 4,919 4,216 Occupancy and office operations 1,327 1,132 Advertising and promotion 468 416 Professional fees 417 348 Data and check processing 744 696 Amortization of core deposit intangible 84 127 Other 1,611 1,538 ---------- ---------- Total non-interest expense 9,570 8,473 ---------- ---------- Income before income tax expense 4,634 4,865 Income tax expense 1,589 1,824 ---------- ---------- Net income $ 3,045 $ 3,041 ========== ========== Weighted average common shares: Basic 7,738,931 7,721,560 Diluted 7,883,872 7,858,438 Per common share: (Note 9) Basic $ 0.39 $ 0.39 Diluted 0.39 0.39 Dividends declared 0.15 0.13 Book value at period end $ 15.04 $ 14.83
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, 2003 (Unaudited) (In thousands, except share and per share data)
Common Additional Unallocated Stock Common Paid-In ESOP Awards Stock Capital Shares Under RRP ----- ------- ------ --------- Balance at September 30, 2003 $ 828 $ 38,032 $ (1,597) $ (506) Net income Cash dividends paid ($0.15 per share) Stock option transactions ESOP shares allocated or committed to be released for allocation (7,728 shares) 258 94 Vesting of RRP shares 127 Decrease in net unrealized gain on securities available for sale, net of taxes of $943 -------- -------- -------- -------- Balance at December 31, 2003 $ 828 $ 38,290 $ (1,503) $ (379) ======== ======== ======== ======== Accumulated Other Total Treasury Retained Comprehensive Stockholders' Stock Earnings Income Equity ----- -------- ------ ------ Balance at September 30, 2003 $ (7,780) $ 85,398 $ 3,482 $117,857 Net income 3,045 3,045 Cash dividends paid ($0.15 per share) (452) (452) Stock option transactions 19 (6) 13 ESOP shares allocated or committed to be released for allocation (7,728 shares) 352 Vesting of RRP shares 127 Decrease in net unrealized gain on securities available for sale, net of taxes of $943 (1,412) (1,412) -------- -------- -------- -------- Balance at December 31, 2003 $ (7,761) $ 87,985 $ 2,070 $119,530 ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. 6 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 (Unaudited) (In thousands, except share and per share data)
Common Additional Unallocated Stock Common Paid-In ESOP Awards Stock Capital Shares Under RRP ----- ------- ------ --------- Balance at September 30, 2002 $ 828 $ 36,696 $ (1,974) $ (1,108) Net income Cash dividends paid ($0.13 per share) ESOP shares allocated or committed to be released for allocation 138 94 (7,728 shares) Vesting of RRP shares 139 Decrease in net unrealized gain on securities available for sale net of taxes of $415 Decrease in net unrealized loss on cash flow hedges, net of taxes of $(4) -------- -------- -------- -------- Balance at December 31, 2002 $ 828 $ 36,834 $ (1,880) $ (969) ======== ======== ======== ======== Accumulated Other Total Treasury Retained Comprehensive Stockholders' Stock Earnings Income Equity ----- -------- ------ ------ Balance at September 30, 2002 $ (5,874) $ 76,727 $ 5,572 $110,867 Net income 3,041 3,041 Cash dividends paid ($0.13 per share) (590) (590) ESOP shares allocated or committed to be released for allocation 232 (7,728 shares) Vesting of RRP shares 139 Decrease in net unrealized gain on securities available for sale net of taxes of $415 (624) (624) Decrease in net unrealized loss on cash flow hedges, net of taxes of $(4) 6 6 -------- -------- -------- -------- Balance at December 31, 2002 $ (5,874) $ 79,178 $ 4,954 $113,071 ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. 7 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the Three Months Ended December 31, 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 3,045 $ 3,041 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses 150 300 Depreciation and amortization of premises and equipment 473 486 Amortization of core deposit intangible 84 127 Gain on sales of securities available for sale (930) (657) Gain on sales of loans held for sale (86) (4) Gain on sales of fixed assets sold (46) -- Net amortization of premiums and discounts on securities 380 267 ESOP and RRP expense 479 371 Originations of loans held for sale (2,502) (8,718) Proceeds from sales of loans held for sale 4,225 129 Proceeds from sales of fixed assets 358 Deferred income tax expense (benefit) (4,080) (1) Net changes in accrued interest receivable and payable (353) 527 Other adjustments (principally net changes in other assets and other liabilities) 3,318 (40) --------- --------- Net cash provided by (used in) operating activities 4,157 (4,172) --------- --------- Cash flows from investing activities: Purchases of securities: Available for sale (182,930) (35,543) Held to maturity (1,886) (4,386) Proceeds from maturities, calls and other principal payments on securities: Available for sale 35,960 17,377 Held to maturity 7,380 9,819 Proceeds from sales of securities available for sale 29,127 15,678 Proceeds from sales of fixed assets 358 -- Loan originations (66,829) (100,069) Loan principal payments 65,148 86,442 Sale (purchase) of FHLB stock 2,555 (523) Purchase of bank owned life insurance -- (12,000) Purchases of premises and equipment (603) (582) --------- --------- Net cash used in investing activities (111,720) (23,787) --------- ---------
(continued) 8 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (In thousands)
For the Three Months Ended December 31, ------------------ 2003 2002 ---- ---- Cash flows from financing activities: Net increase in transaction and savings deposits $ 19,022 $ 17,955 Net (decrease)/increase in time deposits (18,406) 4,136 Receipt of stock subscription funds 174,660 -- Net (decrease)/increase in borrowings (51,104) 1,041 Net increase in mortgage escrow funds 5,661 5,834 Exercises of stock options 13 -- Cash dividends paid (452) (590) --------- --------- Net cash provided by financing activities 129,394 28,376 --------- --------- Net increase in cash and cash equivalents 21,831 417 Cash and cash equivalents at beginning of period 33,500 35,093 --------- --------- Cash and cash equivalents at end of period $ 55,331 $ 35,510 ========= ========= Supplemental information: Interest payments $ 2,765 $ 3,487 Income tax payments 9 66 Net change in unrealized gains recorded on securities available for sale (2,355) (1,039) Change in deferred taxes on unrealized gains on securities available for sale 943 415
See accompanying notes to unaudited consolidated financial statements. 9 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended December 31, ------------------ 2003 2002 ---- ---- Net income: $ 3,045 $ 3,041 Other comprehensive (loss): Net unrealized gains (losses) on securities available for sale: Net unrealized holding gains (losses) arising during the year, net of taxes of $569 and $153 (854) (230) Less reclassification adjustment for net realized gains included in net income, net of taxes of $372 and $263 (558) (394) Net unrealized gain on derivatives, net of taxes of $0 and $(4) -- 6 ------- ------- Other comprehensive (loss) (1,412) (618) ------- ------- Total comprehensive income $ 1,633 $ 2,423 ======= ======= See accompanying notes to unaudited consolidated financial statements. 10 PROVIDENT BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) 1. Basis of Presentation As described in note 2, Mutual Holding Company Conversion and Acquisition of E.N.B. Holding Company, Inc., Provident Bancorp., Inc., a Delaware corporation, was not an operating company as of December 31, 2003. Accordingly, the consolidated financial statements and other financial information presented in this document as of December 31, 2003, include the accounts of Provident Bancorp, Inc., a federal corporation (the "Company"), 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, 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 loan origination commitments, lines of credit and letters of credit extended to customers in the ordinary course of its lending activities. 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, 2003 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2004. 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, 2003. 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 5), 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 commencing in 2005, 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 Ended December 31, 2003 2002 ---- ---- Net income, as reported $3,045 $3,041 Add RRP expense included in reported net income, net of related tax effects 84 87 Deduct RRP and stock option expense determined under the fair-value-based method, net of related tax effects (84) (87) Pro forma net income $3,045 $3,041 Earnings per share: Basic, as reported $ 0.39 $ 0.39 Basic, pro forma 0.39 0.39 Diluted, as reported 0.39 0.39 Diluted, pro forma 0.39 0.39 12 2. Mutual Holding Company Conversion and Acquisition of E.N.B. Holding Company, Inc. On January 14, 2004 Provident Delaware completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC. As a result of the conversion, Provident Delaware became the stock holding company of Provident Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in the Company were sold to investors. In addition, Provident Delaware simultaneously completed its acquisition of E.N.B. Holding Company, Inc., (ENB) located in Ellenville, New York. Provident Delaware sold 19,573,000 shares of common stock at $10.00 per share to depositors of Provident Bank as of June 30, 2002 and September 30, 2003. The new holding company also issued 400,000 shares of common stock and contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In addition, each outstanding share of common stock of the Company as of January 14, 2004 has been converted into 4.4323 new shares of the Corporation's common stock. Shareholders of ENB as of the close of business on January 14, 2004 received total merger consideration of approximately $76.47 million, consisting of 3,969,676 shares of common stock of the Company and approximately $36.77 million in cash. As a result of the above transactions, the Company will have 39,608,586 issued and outstanding shares. Financial statements as of December 31, 2003, do not reflect the effect of the conversion of existing common shares, the stock offering or the acquisition of ENB. ENB operated nine offices and had total assets of $361 million and deposits of $325 million as of December 31, 2003. 13 3. 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 $88.2 million. Amounts attributable to NBF are included in the Company's consolidated financial statement from the date of acquisition. 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, ($979,000 and $1.1 million at December 31, 2003 and September 30, 2003, respectively), is recognized apart from goodwill and amortized to expense over its estimated useful life and evaluated for impairment. 4. 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 policies considered critical to the Company's financial results include the allowance for loan losses, accounting for goodwill and the recognition of interest income. The methodology for determining the allowance for loan losses is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. Accounting for goodwill is considered to be a critical policy because goodwill must be tested for impairment at least annually using a "two-step" approach that involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions utilized. Interest income on loans, securities and other interest-earning assets is accrued monthly unless management considers the collection of interest to be doubtful. Loans are placed on nonaccrual status when payments are contractually past due 90 days or more, or when management has determined that the borrower may be unable to meet contractual principal or interest obligations. At such time, unpaid interest is reversed by charging interest income. Interest payments received on nonaccrual loans (including impaired loans) are recognized as income unless future collections are doubtful. Loans are returned to accrual status when collectibility is no longer considered doubtful (generally, when all payments have been brought current). 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 2003 Annual Report on Form 10-K, provides detail with regard to the Company's accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since September 2003. 14 5. Loans Major classifications of loans, excluding loans held for sale, are summarized below (in thousands): December 31, 2003 September 30, 2003 ----------------- ------------------ Real estate - residential mortgage $369,677 $380,776 Real estate - commercial mortgage 203,880 188,360 Real estate - construction 14,003 10,323 Commercial and industrial 47,159 54,174 Consumer loans 81,193 80,620 -------- -------- Total $715,912 $714,253 ======== ======== 6. 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. Activity in the allowance for loan losses for the periods indicated is summarized below: Three Months Ended December 31, ------------------ 2003 2002 ---- ---- (In thousands) Balance at beginning of period $ 11,069 $ 10,383 Provision for loan losses 150 300 Charge-offs (12) (14) Recoveries 42 18 -------- -------- Balance at end of period $ 11,249 $ 10,687 ======== ======== 15 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, 2003 September 30, 2003 ----------------- ------------------ (Dollars in thousands) Non-accrual loans: One- to four-family residential mortgage loans $1,194 $ 951 Commercial real estate, commercial business and construction loans 3,625 3,632 Consumer loans 169 114 ------ ------ Total non-performing loans 4,988 4,697 Real estate owned: One- to four-family residential -- -- ------ ------ Total non-performing assets $4,988 $4,697 ====== ====== Ratios: Non-performing loans to total loans 0.70% 0.66% Non-performing assets to total assets 0.38 0.40 Allowance for loan losses to total non-performing loans 225.52 235.66 Allowance for loan losses to total loans 1.57 1.55
16 7. Securities The following is a summary of securities available for sale at December 31, 2003 and September 30, 2003 (in thousands):
Available for Sale Portfolio December 31, 2003 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ====================================================== Mortgage-backed and SBA Securities Mortgage-backed securities $228,074 $ 2,418 $ (1,103) $229,389 Collateralized mortgage obligations 16,680 28 (140) 16,568 SBAs and other 187 1 -- 188 -------- -------- -------- -------- Total mortgage-backed and SBA securities 244,941 2,447 (1,243) 246,145 -------- -------- -------- -------- Investment Securities U.S. Government and federal agency Securities 164,752 2,339 (152) 166,939 State and municipal securities 2,542 27 (28) 2,541 Equity securities 1,006 297 (130) 1,173 -------- -------- -------- -------- Total investment securities 168,300 2,663 (310) 170,653 -------- -------- -------- -------- Total available for sale $413,241 $ 5,110 $ (1,553) $416,798 ======== ======== ======== ======== Available for Sale Portfolio September 30, 2003 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ====================================================== Mortgage-backed and SBA Securities Mortgage-backed Securities $135,049 $ 2,541 $ (648) $136,942 Collateralized mortgage obligations 19,733 -- (55) 19,678 SBAs and other 206 -- -- 206 -------- -------- -------- -------- Total mortgage-backed and SBA securities 154,988 2,541 (703) 156,826 -------- -------- -------- -------- Investment Securities U.S. Government and federal agency securities 130,186 3,278 (60) 133,404 State and municipal securities 2,545 26 (35) 2,536 Corporate debt securities 6,030 593 -- 6,623 Equity securities 1,052 359 (85) 1,326 -------- -------- -------- -------- Total investment securities 139,813 4,256 (180) 143,889 -------- -------- -------- -------- Total available for sale $294,801 $ 6,797 $ (883) $300,715 ======== ======== ======== ========
17 The following is a summary of securities held to maturity at December 31, 2003 and September 30, 2003 (in thousands):
Held to Maturity Portfolio December 31, 2003 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value =================================================== Mortgage-backed Securities Mortgage-backed securities $45,229 $ 1,150 $ (268) $46,111 Collateralized mortgage obligations 4,009 62 -- 4,071 ------- ------- ------- ------- Total mortgage-backed securities 49,238 1,212 (268) 50,182 ------- ------- ------- ------- Investment Securities State and municipal securities 18,765 970 (1) 19,734 ------- ------- ------- ------- Total held to maturity $68,003 $ 2,182 $ (269) $69,916 ======= ======= ======= ======= Held to Maturity Portfolio September 30, 2003 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value =================================================== Mortgage-backed Securities Mortgage-backed securities $50,863 $ 1,271 $ (255) $51,879 Collateralized mortgage obligations 4,297 66 -- 4,363 ------- ------- ------- ------- Total mortgage-backed securities 55,160 1,337 (255) 56,242 ------- ------- ------- ------- Investment Securities State and municipal securities 18,384 1,003 (1) 19,386 ------- ------- ------- ------- Total held to maturity $73,544 $ 2,340 $ (256) $75,628 ======= ======= ======= =======
18 At December 31, 2003 and September 30, 2003, the unrealized net gain on securities available for sale (net of tax of $1,373 and $3,305, respectively) that was included in accumulated other comprehensive income, a separate component of stockholders' equity, was $2,070 and $3,482 respectively. Gross realized gains were $930 and $657 respectively, for the three months ended December 31, 2003 and 2002. Securities with a carrying amount of $69,397 and $69,452 were pledged as collateral for municipal deposits, borrowings and other purposes at December 31, 2003 and September 30, 2003, respectively. 8. Deposits Major classifications of deposits are summarized below (in thousands):
December 31, 2003 September 30, 2003 ----------------- ------------------ Demand deposits: Retail $ 98,798 $ 90,471 Commercial and municipal 67,720 72,538 NOW 62,305 62,367 -------- -------- Total transaction accounts 228,823 225,376 Money market 132,609 128,222 Savings 290,905 279,717 Time under $100,000 181,559 187,623 Time over $100,000 36,273 48,615 -------- -------- Total $870,169 $869,553 ======== ========
9. 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. 19 Basic earnings per common share is computed as follows (dollars in thousands, except share data): For the Three Months Ended December 31, ------------------ 2003 2002 ---- ---- Weighted average common shares outstanding 7,738,931 7,721,560 ---------- ---------- Total basic shares 7,738,931 7,721,560 Net income $ 3,045 $ 3,041 Basic earnings per common share $ 0.39 $ 0.39 Diluted earnings per common share is computed as follows (dollars in thousands, except share data): For the Three Months Ended December 31, ------------------ 2003 2002 ---- ---- Weighted average common shares outstanding 7,738,931 7,721,560 Effect of common stock equivalents 144,941 136,878 ---------- ---------- Total diluted shares 7,883,872 7,858,438 Net income $ 3,045 $ 3,041 Diluted earnings per common share $ 0.39 $ 0.39 10. Guarantor's Obligations Under Guarantees Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary's compliance with the terms of the letter of credit. 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, 2003, the Company had $9.5 million in outstanding letters of credit, of which $2.8 million were secured by cash collateral. 20 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 2004 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 that 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, 2003 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 3 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 our service area, primarily Rockland and Orange Counties. Provident Bank is a federally chartered savings association and municipalities in New York State 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. 21 As of January 14, 2004 Provident Delaware completed its stock offering and acquisition of E.N.B. Holding Company in connection with Provident Bancorp, MHC's mutual-to-stock conversion. See Note 2 to the accompanying financial statements. Comparison of Financial Condition at December 31, 2003 and September 30, 2003 Total assets as of December 31, 2003 were $1.3 billion, an increase of $127.6 million, or 10.9% over assets of $1.2 billion at September 30, 2003. Net loans as of December 31, 2003 were $704.7 million, an increase of $1.5 million, or 0.2%, over net loan balances of $703.2 million at September 30, 2003. Residential loans declined during the three-month period by $11.1 million, or 2.9%, compared to balances at September 30, 2003, primarily in fixed rate mortgages. Commercial mortgage loans increased by $15.5 million, or 8.2%, as originations of $23.9 million surpassed repayments of $8.4 million. Commercial and industrial loans decreased by $7.0 million, or 12.9%, as customers paid down lines of credit in a greater amount than drawn on new advances under lines of credit. Asset quality continues to be strong. At $5.0 million, or 0.38% of total assets, non-performing assets were up slightly from $4.7 million, or 0.40% of total assets at September 30, 2003. Total securities increased by $110.5 million, or 29.5%, to $484.8 million at December 31, 2003 as the Company invested the majority of the stock subscription funds received in securities. Investments were made primarily in mortgage-backed securities, which increased by $83.4 million, or 39.3%, and in U.S. Government and Federal Agency Securities, which increased by $33.5 million, or 25.1%. Total deposits at December 31, 2003 were virtually unchanged compared to balances at September 30, 2003. Deposit growth has occurred in transaction account, savings and money market account products, while certificates of deposit declined slightly. The largest deposit growth has occurred in savings and money market accounts, which increased to $423.5 million at December 31, 2003 from $407.9 million at September 30, 2003, an increase of $15.6 million, or 3.8%. Transaction accounts posted an increase of $3.4 million, or 1.5%, to $228.8 million. During the same time period, total certificates of deposit declined by $18.4 million as municipal certificates declined by $15.9 million, while all other certificates decreased by $2.5 million. Total municipal deposits amounted to $15.1 million at December 31, 2003 compared to $31.0 million at September 30, 2003. The Company began accepting municipal deposits in April 2002 after the formation of PMB. Borrowings from the Federal Home Loan Bank of New York (the "FHLB") decreased by $51.1 million during the three-month period to $113.7 million at December 31, 2003 from $164.8 million at September 30, 2003, as the Company used uninvested stock subscription funds to pay down overnight borrowings. 22 Stockholders' equity increased by $1.6 million to $119.5 million at December 31, 2003 compared to $117.9 million at September 30, 2003. In addition to net income of $3.0 million for the three-month period, equity increased by $492,000 due to activity related to the Company's ESOP, stock option and management retention plans. Partially offsetting these increases were cash dividends, which reduced stockholders' equity by $452,000 and the change in after-tax unrealized gains on securities available for sale, which decreased equity by $1.4 million. During the first three months of fiscal 2004, the Company did not repurchase shares of its common stock. The total shares repurchased under its previously announced repurchase programs, which authorized the repurchase of up to 553,990 shares including the March 2003 authorization of 177,250 shares, was 399,555 shares through December 31, 2003. Net of option-related reissuances, treasury shares held by the Company at December 31, 2003 were 332,679 shares. The authorization to repurchase shares of the Company's common stock expired in connection with its second-step conversion on January 14, 2004. Comparison of Operating Results for the Three Months Ended December 31, 2003 and December 31, 2002 Net Income. For the three months ended December 31, 2003 net interest income after provision for loan losses was $11.4 million, up $66,000, or 0.6%, compared to $11.3 million for the same period of 2002. Non-interest income was $2.8 million for the three months ended December 31, 2003 compared to $2.0 million for the same period last year, an increase of $800,000, or 39. 9 %, including increases in securities gains and gains on sales of loans of $273,000 and $47,000, respectively. Non-interest expenses increased $1.1 million, or 12.9%, to $9.6 million for the three months ended December 31, 2003 compared to $8.5 million for the same prior-year period. Net income after taxes was unchanged at $3.0 million for the three months ended December 31, 2003 and December 31, 2002. The relevant performance measures follow: Three Months Ended December 31, 2003 2002 ---- ---- Per common share: Basic earnings $ 0.39 $ 0.39 Diluted earnings 0.39 0.39 Dividends declared 0.15 0.13 Return on average (annualized): Assets 1.02% 1.16% Equity 10.30% 10.81% 23 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).
Three Months Ended December 31, ------------------------------- 2003 2002 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- Interest earning assets: Commercial and comm. mtg. loans (1) $ 254,295 $ 4,104 6.42% $ 215,295 $ 3,839 7.07% Consumer loans (1) 79,225 878 4.41 83,919 1,130 5.34 Residential mortgage loans (1) 369,814 5,548 5.97 372,169 6,377 6.80 ---------- ------- ---------- ------- Total loans 703,334 10,530 5.96 671,383 11,346 6.70 AFS Investments & MBS 308,232 3,000 3.87 213,307 2,524 4.69 HTM Investments & MBS 69,241 765 4.40 84,085 1,071 5.05 Other earning assets 12,146 23 0.75 6,289 83 5.24 ---------- ------- ---------- ------- Total securities & other earning assets 389,619 3,788 3.87 303,681 3,678 4.81 ---------- ------- ---------- ------- Total interest-earning assets 1,092,953 14,318 5.21 975,064 15,024 6.11 ---------- ------- ---------- ------- Non-interest-earning assets: Cash & due from banks 41,892 28,197 Premises & equipment 11,576 11,070 Other assets 35,442 25,481 ---------- ---------- Total assets $1,181,863 $1,039,812 ========== ========== Interest bearing liabilities: Savings, clubs & escrow $ 291,402 $ 314 0.43% $ 258,382 $ 509 0.78% Money market accounts 133,437 177 0.53 117,028 298 1.01 NOW checking 62,797 32 0.20 80,187 62 0.31 Certificate accounts 225,304 1,034 1.83 246,318 1,476 2.38 ---------- ------- ---------- ------- Total interest-bearing deposits 712,940 1,557 0.87 701,915 2,345 1.33 Borrowings 147,571 1,210 3.26 103,092 1,044 4.02 ---------- ------- ---------- ------- Total interest-bearing liabilities 860,511 2,767 1.28 805,007 3,389 1.67 ------- ------- ---- Non-interest-bearing liabilities: Demand deposits 159,766 113,705 Other 43,94 9,519 Total liabilities 1,064,231 928,231 Equity 117,632 111,581 ---------- ---------- Total liabilities and equity $1,181,863 $1,039,812 ========== ========== Net interest income $11,551 $11,635 ======= ======= Net interest rate spread 3.93% 4.44% ==== ==== Net earning assets $ 232,442 $ 170,057 ========== ========== Net interest margin 4.20% 4.73% ==== ==== Average interest-earning assets 127.01% 121.12% ====== ======= Total average interest-bearing liabilities
(1) Includes non-accrual loans. 24 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 December 31, 2003 vs. 2002 Increase/(Decrease) Due to -------------------------- Volume (1) Rate (1) Total ---------- -------- ----- Interest-earning assets Consumer loans $ (62) $ (190) $(252) Commercial and comm. mtg. loans 640 (375) 265 Residential mortgage loans (41) (788) (829) Available for sale securities 969 (493) 476 Held to maturity securities (177) (129) (306) Other earning assets 43 (103) (60) ------- ------- ----- Total interest income 1,372 (2,078) (706) Interest-bearing liabilities Savings 57 (252) (195) Money market 36 (157) (121) NOW Checking (11) (19) (30) Certificates of deposit (119) (323) (442) Borrowings 388 (222) 166 ------- ------- ----- Total interest expense 351 (973) (622) ------- ------- ----- Net interest income $ 1,021 $(1,105) $ (84) ======= ======= =====
(1) Changes in rate/volume have been allocated to rate and volume. 25 Net Interest Income. For the three months ended December 31, 2003, net interest income before provision for loan losses decreased by $84,000, or 0.7% to $11.5 million from $11.6 million for the same period in 2002. Interest income decreased by $706,000, or 4.7%, as an increase in average earning assets of $117.9 million to $1.1 billion, was offset by a decline in yield of 90 basis points to 5.21%. The cost of interest-bearing liabilities declined by $622,000 as the average rate paid on interest-bearing liabilities dropped 39 basis points to 1.28%, which partially offset an increase in average balances of $55.5 million to $860.5 million. Net interest margin decreased from 4.73% to 4.20% and net interest spread decreased from 4.44% to 3.93%. 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 to absorb probable loan losses inherent in the existing portfolio. The Company recorded $150,000 and $300,000 in loan loss provisions during the three months ended December 31, 2003 and 2002, respectively. The decrease in the provision reflects the strong coverage ratios provided by the allowance, as well as the Company's historical charge-off ratios. Non-Interest Income. Non-interest income for the three month period ended December 31, 2003 increased to $2.8 million, an increase of $800,000 million, or 39.9%, compared to $2.0 million for the same three-month period last year. Realized gains on securities available for sale and sales of loans were $930,000 and $86,000, respectively, for the current period, generating a combined increase of $320,000 over the securities and loan sales gains of $696,000 for the same period last year. Banking fees and services charges increased to $1.4 million for the current three-month period, an increase of $295,000, or 27.1%, over the same period last year. The increase is primarily attributable to increases in overdraft and uncollected fees of $187,000. Other income increased by $185,000, or 84.9%, for the three month period ended December 31, 2003, from $218,000 for the same period last year. The increase is primarily due to $157,000 in income from the new BOLI program and an increase of $19,000 in loan fees. In addition, the Company realized $46,000 on the sale of fixed assets in the current three-month period. Non-Interest Expense. Non-interest expense increased by $1.1 million, or 12.9%, to $9.6 million for the three-month period ended December 31, 2003, compared to $8.5 million for the same three-month period last year. In February, 2003 the Company opened a de novo branch in our Northern region, generating modest increases in compensation and benefits and in occupancy and office operations during the current quarter. Compensation and benefits increased by $703,000, or 16.7%, of which $108,000 was attributable to the increased cost of stock-based compensation plans, $67,000 was due to additional retirement plan and other deferred compensation expense, $81,000 was related to higher life and health insurance premiums and the remaining increase was due to annual salary increases of approximately 4% and additional administration staff. Additional increases in non-interest expense categories for the current year to date period are additional advertising costs of $52,000, or 12.5%, related to the new branch and new products, and a volume-related increase of $48,000, or 6.9%, in data and check processing costs. Professional fees increased by $69,000 primarily related to expenses recorded in connection with compliance for Section 404 of the Sarbanes Oxley Act of 2002. Other expenses increased by $73,000, or 4.7%, due primarily to an increase of $35,000, or 120.7%, in charitable contributions. 26 Amortization of the core deposit intangible decreased by $43,000 as the premium associated with the acquisition of NBF in third quarter 2002 is amortized on an accelerated basis declining each year. Income Taxes. Income tax expense was $1.6 million for the three months ended December 31, 2003 compared to $1.8 million for the same period in 2002. The effective tax rates were 34.3 % and 37.5%, respectively, as a greater portion of the Company's pre-tax income was derived from investments in tax advantaged vehicles, such as bank owned life insurance. 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 three months ended December 31, 2003 and December 31, 2002, loan originations, excluding loans originated for sale, totaled $66.8 million and $100.1 million, respectively, and purchases of securities totaled $184.8 million and $39.9 million, respectively. For the three month periods ended December 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 stock subscriptions received in the Company's stock offering completed in January 2004. Loan origination commitments totaled $69.7 million at December 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 BOLI contracts. Such investments are illiquid and are therefore classified as other assets. As the Company's quarterly earnings exceeded $3.0 million, it is expected that the funds will be replaced by retained earnings in approximately 1.25 years, thereby not having a significant impact on capital and liquidity. Earnings from BOLI are derived from the net increase in cash surrender value. 27 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 three months ended December 31, 2003 was $616,000, compared to $22.1 million for the three months ended December 31, 2002. On January 14, 2004 Provident Delaware completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC. As a result of the conversion, Provident Delaware became the stock holding company of Provident Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in the Company were sold to investors. In addition, Provident Delaware has completed its acquisition of E.N.B. Holding Company, Inc., (ENB) located in Ellenville, New York. Provident Delaware sold 19,573,000 shares of common stock at $10.00 per share to depositors of Provident Bank as of June 30, 2002 and September 30, 2003. The new holding company also issued 400,000 shares of common stock and contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In addition, each outstanding share of common stock of the Company as of January 14, 2004 has been converted into 4.4323 new shares of the Corporation's common stock. Shareholders of ENB as of the close of business on January 14, 2004 received total merger consideration of approximately $76.47 million, consisting of 3,969,676 shares of common stock of the Company and approximately $36.77 million in cash. The Company monitors its liquidity position on a daily basis. Although the Company sold $15.0 million in federal funds at period end, it generally remains fully invested and utilizes additional sources of funds through FHLB overnight advances, of which none were outstanding at December 31, 2003. The Company has the ability to borrow an additional $258.2 million under its credit facilities with the Federal Home Loan Bank of New York. At December 31, 2003, the Bank exceeded all of its regulatory capital requirements with a Tier 1 capital (leverage) level of $97.4 million, or 7.6% of adjusted assets (which is above the required level of $51.3 million, or 4.0%) and a total risk-based capital level of $106.3 million, or 15% of risk-weighted assets (which is above the required level of $56.6 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. In performing this calculation, the intangible assets recorded in the April 2002 NBF acquisition are deducted from capital for purposes of regulatory capital measures. At December 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. 28 The following table sets forth the Bank's regulatory capital position at December 31, 2003 and September 30, 2003, 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, 2003 Tangible capital $ 98,384 7.7% $19,301 1.5% $ -- --% Tier 1 (core) capital 98,384 7.7 51,468 4.0 64,336 5.0 Risk-based capital: Tier 1 98,384 13.8 -- -- 42,682 6.0 Total 107,256 15.1 56,909 8.0 71,137 10.0 September 30, 2003 Tangible capital $ 93,497 8.1% $17,231 1.5% $ -- --% Tier 1 (core) capital 93,497 8.1 45,950 4.0 57,437 5.0 Risk-based capital: Tier 1 93,497 13.7 -- -- 40,835 6.0 Total 102,041 15.0 54,447 8.0 68,058 10.0
Recent Accounting Standards In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 (revised), Consolidation of Variable Interest Entities ("FIN 46R"), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the variable interest entity ("VIE"). FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. As a public company that is not a small business issuer (as defined in applicable SEC regulations), the Company is required to apply FIN 46R to variable interests generally as of March 31, 2004 and to special-purpose entities as of December 31, 2003. For any VIE's that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts and any difference between the net amount added to the balance sheet and any previously recognized interest would be recorded as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of FIN 46R did not and is not expected to have a significant effect on the Company's consolidated financial statements. 29 In December 2003, the FASB also issued Statement of Financial Accounting Standards No. 132 (revised), Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS No. 132R"). This standard prescribes employers' disclosures about pension plans and other postretirement benefit plans, but does not change the measurement or recognition of those plans. SFAS No. 132R retains and revises the disclosure requirements contained in the original standard. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. As a public company, the Company will be required to provide substantially all of the revised disclosures beginning with its September 30, 2004 consolidated financial statements. 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, 2003, 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. As discussed in Note 2, as of January 14, 2004, Provident Delaware completed its stock offering and acquisition of E.N.B. Holding Company. Provident Delaware received $174.7 million in new funds for stock subscriptions; pending utilization of funds for its general business needs, the proceeds were invested in securities (primarily mortgage backed securities), securities of US government sponsored agencies and US Treasuries with an average life of approximately three years. 30 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as of the end of the period covered by this report. Based upon that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time frames specified in the SEC's rules and forms. There were no significant changes made in the Company's internal controls over financial reporting or in other factors that could significantly affect the Company's internal control over financial reporting during the period covered by this report. 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 31 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Description -------------- ----------- 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: The Company filed the following reports on Form 8-K during the three months ended December 31, 2003: 1) On October 28, 2003, the Company filed a Form 8-K announcing that it issued a press release regarding its earnings for the fiscal year ended September 30, 2003. 2) On December 11, 2003, the Company filed a Form 8-K announcing that it made a slide presentation at an investor conference. The Company also distributed a paper copy of the presentation to conference attendees. The presentation discussed the Company's current and historical performance and strategies. 32 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: \s\ George Strayton ------------------- George Strayton President and Chief Executive Officer (Duly Authorized Representative) Date: February 12, 2004 By: \s\ Paul A. Maisch ------------------ Paul A. Maisch Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) Date: February 12, 2004 33 EX-31.1 3 ex31-1.txt Exhibit 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 34 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 12 , 2004 \s\ George Strayton ------------------- George Strayton President and Chief Executive Officer 35 EX-31.2 4 ex31-2.txt Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Paul A. Maisch, 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 36 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 12, 2004 \s\ Paul A. Maisch ------------------ Paul A. Maisch Senior Vice President and Chief Financial Officer 37 EX-32.1 5 ex32-1.txt Exhibit 32.1 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 Paul A. Maisch, Chief Financial Officer of Provident Bancorp, Inc. (the "Company") each certify in his capacity as an officer of the Company that he has reviewed the quarterly report on Form 10-Q for the quarter ended December 31, 2003 and that to the best of his 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 of the Company. A signed original of this written statement required by Section 906 has been provided to Provident Bancorp, Inc. and will be retained by Provident Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. \s\ George Strayton ------------------- Date: February 12 , 2004 George Strayton Chief Executive Officer \s\ Paul A. Maisch ------------------- Date: February 12 , 2004 Paul A. Maisch Chief Financial Officer 38 -----END PRIVACY-ENHANCED MESSAGE-----