10-Q 1 form10q-62274_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 June 30, 2004 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 39,646,462 as of August 6, 2004 1 PROVIDENT BANCORP, INC. QUARTERLY PERIOD ENDED JUNE 30, 2004 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at June 30, 2004 and September 30, 2003 3-4 Consolidated Statements of Income for the Three Months and Nine Months Ended June 30, 2004 and 2003 5 Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2004 6 Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2004 and 2003 7-8 Consolidated Statements of Comprehensive Income/Loss for the Three Months and Nine Months Ended June 30, 2004 and 2003 9 Notes to Consolidated Financial Statements 10-18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19-36 Item 3. Quantitative and Qualitative Disclosures about Market Risk 36-37 Item 4. Controls and Procedures 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings 38 Item 2. Changes in Securities and Use of Proceeds 38 Item 3. Defaults upon Senior Securities 39 Item 4. Submission of Matters to a Vote of Security Holders 39 Item 5. Other Information 39 Item 6. Exhibits and Reports on Form 8-K 40 Signature 41 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PROVIDENT BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except per share data)
Assets June 30, 2004 September 30, 2003 ------------- ------------------ Cash and due from banks $ 33,686 $ 33,500 Securities (Note 7): Available for sale, at fair value (amortized cost of $578,034 at June 30, 2004 and $294,801 at September 30, 2003) 571,962 300,715 Held to maturity, at amortized cost (fair value of $ 70,939 at June 30, 2004 and $75,628 at September 30, 2003) 70,066 73,544 ----------- ----------- Total securities 642,028 374,259 ----------- ----------- Loans held for sale 1,385 2,364 Gross loans (Note 5) 987,881 714,253 Allowance for loan losses (Note 6) (17,331) (11,069) ----------- ----------- Total loans, net 970,550 703,184 ----------- ----------- FHLB stock, at cost 9,755 8,220 Accrued interest receivable, net 6,666 4,851 Premises and equipment, net 16,259 11,647 Goodwill (Notes 2 and 3) 65,823 13,540 Core deposit intangible 6,219 1,063 Bank owned life insurance 13,116 12,483 Other assets 17,183 9,194 ----------- ----------- Total assets $ 1,782,670 $ 1,174,305 =========== ===========
(Continued) 3 PROVIDENT BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED (Unaudited) (Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity June 30, 2004 September 30, 2003 ------------- ------------------ Liabilities: Deposits (Note 8): Non-interest bearing $ 276,864 $ 163,009 Interest bearing 963,963 706,544 ----------- ----------- Total deposits 1,240,827 869,553 Borrowings 169,552 164,757 Mortgage escrow funds 12,365 3,949 Other 17,282 18,189 ----------- ----------- Total liabilities 1,440,026 1,056,448 ----------- ----------- Stockholders' equity: Preferred stock (par value $0.01per share; 10,000,000 shares authorized; none issued or outstanding at June 30, 2004 and par value $0.10 per share; 10,000,000 shares authorized; none issued or outstanding at September 30, 2003) -- -- Common stock (par value $0.01 per share; 75,000,000 shares authorized; 39,638,415 shares issued and outstanding at June 30, 2004; par value $0.10 per share; 20,000,000 shares authorized; 8,280,000 shares issued; 7,946,521 shares outstanding at September 30, 2003) 396 828 Additional paid-in capital 268,438 38,032 Unallocated common stock held by the employee stock ownership plan ("ESOP") (1,456,416 shares at June 30, 2004 and 273,789 shares at September 30, 2003) (11,073) (1,597) Common stock awards under recognition and retention plan ("RRP") (127) (506) Treasury stock, at cost ( 0 shares at June 30, 2004 and 333,479 shares at September 30, 2003) -- (7,780) Retained earnings 88,713 85,398 Accumulated other comprehensive income (3,703) 3,482 ----------- ----------- Total stockholders' equity 342,644 117,857 ----------- ----------- Total liabilities and stockholders' equity $ 1,782,670 $ 1,174,305 =========== =========== Book value at period end $ 8.64 $ 3.28
See accompanying notes to unaudited consolidated financial statements. 4 PROVIDENT BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except share data)
For the Three Months For the Nine Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Interest and dividend income: Loans $ 14,300 $ 10,712 $ 38,651 $ 33,187 Securities 5,646 3,425 14,633 10,236 Other earning assets 38 115 103 292 ----------- ----------- ----------- ----------- Total interest and dividend income 19,984 14,252 53,387 43,715 ----------- ----------- ----------- ----------- Interest expense: Deposits 2,137 1,831 5,682 6,127 Borrowings 1,350 1,144 3,719 3,184 ----------- ----------- ----------- ----------- Total interest expense 3,487 2,975 9,401 9,311 ----------- ----------- ----------- ----------- Net interest income 16,497 11,277 43,986 34,404 Provision for loan losses (Note 6) 225 200 575 800 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 16,272 11,077 43,411 33,604 ----------- ----------- ----------- ----------- Non-interest income: Banking fees and service charges 1,910 1,196 5,082 3,399 Gain on sales of securities available for sale 446 811 1,894 1,895 Gains on sales of loans 61 394 231 836 Other 458 487 1,255 1,128 ----------- ----------- ----------- ----------- Total non-interest income 2,875 2,888 8,462 7,258 ----------- ----------- ----------- ----------- Non-interest expense: Compensation and employee benefits 6,070 4,424 16,523 12,976 Stock-based compensation plans 558 411 2,083 1,419 Occupancy and office operations 1,844 1,321 4,834 3,811 Advertising and promotion 509 378 1,544 1,289 Professional fees 656 426 1,660 1,214 Data and check processing 1,076 783 2,585 2,161 Stationery and office supplies 346 149 785 392 Merger integration costs 56 -- 773 -- Amortization of core deposit intangible 681 103 1,468 345 Establishment of charitable foundation -- -- 5,000 -- Other 1,709 1,181 4,470 3,599 ----------- ----------- ----------- ----------- Total non-interest expense 13,505 9,176 41,725 27,206 ----------- ----------- ----------- ----------- Income before income tax expense 5,642 4,789 10,148 13,656 Income tax expense 1,988 1,683 3,377 4,989 ----------- ----------- ----------- ----------- Net income $ 3,654 $ 3,106 $ 6,771 $ 8,667 =========== =========== =========== =========== Weighted average common shares:(1) Basic 37,806,911 34,149,200 36,450,748 34,193,558 Diluted 38,426,183 34,680,987 37,068,663 34,699,674 Per common share: (Note 9)(1) Basic $ 0.10 $ 0.09 $ 0.19 $ 0.25 Diluted 0.10 0.09 0.18 0.25 Dividends declared 0.04 0.04 0.11 0.09
See accompanying notes to unaudited consolidated financial statements. ---------- (1) Common share information has been adjusted to reflect the stock split of 4.4323 in connection with the second step conversion in January 2004. 5 PROVIDENT BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED JUNE 30, 2004 (Unaudited) (In thousands, except share and per share data)
Common Number of Additional Stock Shares Common Paid-In Unallocated Awards Outstanding(1) Stock Capital ESOP Shares Under RRP -------------- ----- ------- ----------- --------- Balance at September 30, 2003 7,946,521 $ 828 $ 38,032 $ (1,597) $(506) Net Income Other comprehensive income Total comprehensive income Recapitalization (Note 2) 7,700,331 (672) (6,913) Common stock offering 19,573,000 196 192,167 Formation of charitable foundation 400,000 4 3,996 Purchase of ENB Holding Co., Inc. 3,969,676 40 39,657 Establishment of ESOP Plan (998,650 shares) (9,987) Tax benefits: Contribution of 400,000 shares 115 MHC contribution carryforward 512 Stock option transactions 48,887 9 ESOP shares allocated or committed to be released for allocation (125,639 shares) 863 511 Vesting of RRP shares 379 Cash dividends paid ($0.11 per common share) ---------- ----- --------- -------- ----- Balance at June 30, 2004 39,638,415 $ 396 $ 268,438 $(11,073) $(127) ========== ===== ========= ======== ===== 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 6,771 6,771 -------- Other comprehensive income (7,185) (7,185) ------- --------- Total comprehensive income (414) Recapitalization (Note 2) 7,680 95 Common stock offering 192,363 Formation of charitable foundation 4,000 Purchase of ENB Holding Co., Inc. 39,697 Establishment of ESOP Plan (998,650 shares) (9,987) Tax benefits: Contribution of 400,000 shares 115 MHC contribution carryforward 512 Stock option transactions 100 (34) 75 ESOP shares allocated or committed to be released for allocation (125,639 shares) 1,374 Vesting of RRP shares 379 Cash dividends paid ($0.11 per common share) (3,422) (3,422) ------- -------- ------- --------- Balance at June 30, 2004 $ 0 $ 88,713 $(3,703) $ 342,644 ======= ======== ======= =========
---------- (1) Share information has been adjusted to reflect 4.4323 conversion ratio in connection with the Company's second step conversion in January 2004. See accompanying notes to unaudited consolidated financial statements. 6 PROVIDENT BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended June 30, (In thousands) 2004 2003 ---- ---- Cash flows from operating activities: Net income $ 6,771 $ 8,667 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 575 800 Depreciation and amortization of premises and equipment 1,708 1,456 Amortization of core deposit intangible 1,468 345 Gain on sales of securities available for sale (1,894) (1,895) Gain on sales of loans held for sale (231) (836) Gain on sales of fixed assets sold (50) -- Gain on sale of real estate owned (55) -- Net amortization of premiums and discounts on securities 1,967 796 ESOP and RRP expense 1,753 1,116 Originations of loans held for sale (10,101) (34,997) Proceeds from sales of loans held for sale 11,311 33,279 Deferred income tax (benefit) expense (3,154) 485 Net changes in accrued interest receivable and payable 353 920 Other adjustments (principally net changes in other assets and other liabilities) (2,808) 787 ----------- ----------- Net cash provided by operating activities 7,613 10,923 ----------- ----------- Cash flows from investing activities: Purchases of securities: Available for sale (443,267) (128,102) Held to maturity (9,349) (27,458) Proceeds from maturities, calls and other principal payments on securities: Available for sale 72,389 58,113 Held to maturity 15,804 31,255 Proceeds from sales of securities available for sale 113,536 22,979 Loan originations (251,328) (278,856) Loan principal payments 197,136 256,183 Proceeds from sales of fixed assets 411 -- Proceeds from sales of other real estate owned 135 210 Purchase of FHLB stock (1,535) (471) Purchase of ENB Holding Company, Inc. 60,144 -- Purchase of bank owned life insurance (423) (12,000) Purchases of premises and equipment (2,371) (2001) ----------- ----------- Net cash used in investing activities (248,718) (80,148) ----------- -----------
(continued) 7 PROVIDENT BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (In thousands)
For the Nine Months Ended June 30, -------------- 2004 2003 ---- ---- Cash flows from financing activities: Net increase in transaction and savings deposits $ 50,378 $ 69,140 Net decrease in time deposits (6,049) (11,207) Receipt of stock subscription funds 192,363 -- Net increase in borrowings 4,795 13,764 Net increase in mortgage escrow funds 8,416 9,308 Establishment of ESOP plan (9,987) -- Common stock issued for formation of charitable foundation 4,000 -- Tax benefit: contribution of 400,000 shares to charitable foundation 115 -- Tax benefit: MHC contribution carry-forward 512 -- Recapitalization 95 -- Treasury shares purchased -- (1,898) Exercises of stock options 75 369 Cash dividends paid (3,422) (1,871) --------- --------- Net cash provided by financing activities 241,291 77,605 --------- --------- Net increase in cash and cash equivalents 186 8,380 Cash and cash equivalents at beginning of period 33,500 35,093 --------- --------- Cash and cash equivalents at end of period $ 33,686 $ 43,473 ========= ========= Supplemental information: Interest payments $ 8,952 $ 9,311 Income tax payments 3,135 4,101 Fair value of assets acquired (incl. intangibles) 406,267 -- Fair value of liabilities assumed 329,797 -- Net fair value 76,470 -- Cash portion of ENB Holding Co. purchase transaction 36,773 -- Stock portion of ENB Holding Co. purchase transaction 39,697 -- Total paid for ENB Holding Co. stock 76,470 -- Transfer of loans to real estate owned 112 99 Net change in unrealized gains/ (losses) recorded on securities available for sale (11,988) (2,549) Change in deferred taxes on unrealized (gains)/losses on securities available for sale 4,791 1,014
See accompanying notes to unaudited consolidated financial statements. 8 PROVIDENT BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS (Unaudited) (Dollars in thousands)
Three Months Nine Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income: $ 3,654 $ 3,106 $ 6,771 $ 8,667 Other comprehensive income (loss): Net unrealized gains (losses) on securities available for sale: Net unrealized holding gains (losses) arising during the year, net of taxes of $5,211, $(92), $4,033, $256 (7,817) 137 (6,049) (386) Less reclassification adjustment for net realized (gains) losses included in net income, net of taxes of $178, $323, $758, $758 (268) (488) (1,136) (1,137) Net unrealized gain on derivatives, net of taxes of $(6) -- -- -- 10 --------- --------- --------- --------- Other comprehensive income (loss) (8,085) (351) (7,185) (1,513) --------- --------- --------- --------- Total comprehensive income (loss) $ (4,431) $ 2,755 $ (414) $ 7,154 ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements. 9 PROVIDENT BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) 1. Basis of Presentation The consolidated financial statements and other financial information presented in this document as of June 30, 2004, include the accounts of Provident Bancorp, Inc., a Delaware corporation (the "Company"), Shawangunk Holding Co., Inc. (an inactive subsidiary), Provident Bank (the "Bank"), and each subsidiary of Provident Bank (Provest Services Corp., 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 publicly-held company and the parent of Provident Bank. Provest Services Corp. holds an investment in a low-income housing partnership that provides certain favorable tax consequences. Provest Services Corp. II has engaged a third-party provider to sell annuities to the customers of Provident Bank. Through June 30, 2004, 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 nine months ended June 30, 2004 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. 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 6), which is a critical accounting policy. Certain prior-year amounts have been reclassified to conform to the current-year presentation. 10 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 Nine Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Net income, as reported $ 3,654 $ 3,106 $ 6,771 $ 8,619 Add RRP expense included in reported net income, net of related tax effects 75 83 227 249 Deduct RRP and stock option expense determined under the fair-value-based method, net of related tax effects (165) (98) (388) (297) --------- --------- --------- --------- Pro forma net income $ 3,564 $ 3,091 $ 6,610 $ 8,619 ========= ========= ========= ========= Earnings per share: Basic, as reported $ 0.10 $ 0.09 $ 0.19 $ 0.25 Basic, pro forma 0.09 0.09 0.18 0.25 Diluted, as reported 0.10 0.09 0.18 0.25 Diluted, pro forma 0.09 0.09 0.18 0.25
2. Mutual Holding Company Conversion and Acquisition of E.N.B. Holding Company, Inc. On January 14, 2004 the Company completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC. As a result of the conversion, the Company became the stock holding company of the Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in Provident Bancorp., Inc., a federal corporation ("Provident Federal") were sold to investors. In addition, the Company simultaneously completed its acquisition of E.N.B. Holding Company, Inc., ("ENB") located in Ellenville, New York. The Company sold 19,573,000 shares of common stock at $10.00 per share to depositors of the 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 Provident Federal as of January 14, 2004 has been converted into 4.4323 new shares of the Company's common stock. 11 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 had 39,608,586 issued and outstanding shares at January 14, 2004. Financial statements as of June 30, 2004, reflect the effect of the conversion of existing common shares, the stock offering and the acquisition of ENB. Goodwill recorded in the ENB acquisition ($52.3million) 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 ($5.4 million at June 30, 2004), is recognized apart from goodwill and amortized to expense over its estimated useful life and evaluated for impairment. 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 the 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 statements 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, ($829,000 and $1.1 million at June 30, 2004 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 the Company 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 is unlikely 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 12 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 30, 2003. 5. Loans Major classifications of loans, excluding loans held for sale, are summarized below:
June 30, 2004 September 30, 2003 ------------- ------------------ Real estate - residential mortgage $ 383,012 $ 380,776 Real estate - commercial mortgage 334,626 188,360 Real estate - construction 43,645 10,323 Commercial and industrial 101,418 54,174 Consumer loans 125,180 80,620 ----------- ----------- Total $ 987,881 $ 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 Nine Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Balance at beginning of period $ 17,093 $ 10,901 $ 11,069 $ 10,383 Allowance acquired through acquisition -- -- 5,750 -- Provision for loan losses 225 200 575 800 Charge-offs (101) (100) (249) (232) Recoveries 114 54 186 104 -------- -------- -------- -------- Balance at end of period $ 17,331 $ 11,055 $ 17,331 $ 11,055 ======== ======== ======== ========
13 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).
June 30, 2004 September 30, 2003 ------------- ------------------ Non-accrual loans: One- to four-family residential mortgage loans $1,129 $ 951 Commercial real estate, commercial business and construction loans 4,146 3,632 Consumer loans 202 114 ------ ------ Total non-performing loans 5,477 4,697 Real estate owned: One- to four-family residential -- -- ------ ------ Total non-performing assets $5,477 $4,697 ====== ====== Ratios: Non-performing loans to total loans, net 0.55% 0.66% Non-performing assets to total assets 0.31% 0.40% Allowance for loan losses to total non-performing loans 316.43% 235.66% Allowance for loan losses to total loans 1.75% 1.55%
14 7. Securities The following is a summary of securities available for sale at June 30, 2004 and September 30, 2003:
Available for Sale Portfolio June 30, 2004 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================== Mortgage-backed and SBA Securities Mortgage-backed securities $341,560 $ 1,282 $ (4,754) $338,088 Collateralized mortgage obligations 10,942 1 (164) 10,779 SBAs and other 181 1 -- 182 -------- -------- -------- -------- Total mortgage-backed and SBA securities 352,683 1,284 (4,918) 349,049 -------- -------- -------- -------- Investment Securities U.S. Government and federal agency securities 203,056 488 (2,636) 200,908 State and municipal securities 21,290 60 (553) 20,797 Equity securities 1,005 327 (124) 1,208 -------- -------- -------- -------- Total investment securities 225,351 875 (3,313) 222,913 -------- -------- -------- -------- Total available for sale $578,034 $ 2,159 $ (8,231) $571,962 ======== ======== ======== ======== 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 ======== ======== ======== ========
15 The following is a summary of securities held to maturity at June 30, 2004 and September 30, 2003:
Held to Maturity Portfolio June 30, 2004 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value =================================================== Mortgage-backed securities Mortgage-backed securities $38,873 $ 806 $ (474) $39,205 Collateralized mortgage obligations 3,135 66 -- 3,201 ------- ------- ------- ------- Total mortgage-backed securities 42,008 872 (474) 42,406 ------- ------- ------- ------- Investment securities State and municipal securities 27,749 837 (319) 28,267 Other investments 309 -- (43) 266 ------- ------- ------- ------- Total investment securities $28,058 $ 837 $ (362) $28,533 ------- ------- ------- ------- Total held to maturity $70,066 $ 1,709 $ (836) $70,939 ======= ======= ======= ======= Held to Maturity Portfolio September 30, 2003 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value =================================================== 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 ======= ======= ======= =======
16 At June 30, 2004 and September 30, 2003, the unrealized net gain/ (loss) on securities available for sale [net of tax of ($2,369) and $2,432, respectively] that was included in accumulated other comprehensive income, a separate component of stockholders' equity, was ($3,703) and $3,482 respectively. Gross realized gains were $ 446 and $811 respectively, for the three months ended June 30, 2004 and 2003, $1,894 and $1,895, respectively, for the nine months ended September 30, 2004 and 2003. Securities with a carrying amount of $127,650 and $69,452 were pledged as collateral for municipal deposits, borrowings and other purposes at June 30, 2004 and September 30, 2003, respectively. 8. Deposits Major classifications of deposits are summarized below: June 30, 2004 September 30, 2003 ------------- ------------------ Demand deposits: Retail $ 131,162 $ 90,471 Commercial and municipal 145,702 72,538 NOW 87,851 62,367 ---------- ---------- Total transaction accounts 364,715 225,376 Money market 159,808 128,222 Savings 370,475 279,717 Time under $100,000 249,390 187,623 Time over $100,000 96,439 48,615 ---------- ---------- Total $1,240,827 $ 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 for all periods through January 14, 2004, 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 stock 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. Prior period share information has been adjusted to reflect the 4.4323 exchange ratio in connection with the second-step conversion completed January 14, 2004. 17 Basic earnings per common share is computed as follows (dollars in thousands, except per share data):
For the Three Months For the Nine Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Weighted average common shares outstanding (basic) 37,806,911 34,149,200 36,450,748 34,193,558 ----------- ----------- ----------- ----------- Net income $ 3,654 $ 3,106 $ 6,771 $ 8,667 Basic earnings per common share $ 0.10 $ 0.09 $ 0.19 $ 0.25
Diluted earnings per common share is computed as follows (dollars in thousands, except per share data):
For the Three Months For the Nine Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Weighted average common shares outstanding 37,806,911 34,149,200 36,450,748 34,193,558 Effect of common stock equivalents 619,272 531,787 617,915 506,116 ----------- ----------- ----------- ----------- Total diluted shares 38,426,183 34,680,987 37,068,663 34,699,674 Net income $ 3,654 $ 3,106 $ 6,771 $ 8,667 Diluted earnings per common share $ 0.10 $ 0.09 $ 0.18 $ 0.25
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 June 30, 2004, the Company had $10.8 million in outstanding letters of credit, of which $2.2 million were secured by cash collateral. 18 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 and non-performing loans is considered a critical accounting policy by management 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 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 the Bank, to serve the banking needs of municipalities throughout our service area, and primarily Rockland and Orange Counties. The Bank is a federally chartered savings association and municipalities in New York State may only deposit funds with commercial banks. The formation of PMB provides a vehicle for the deposit of funds that may not be deposited with the Bank. 19 As of January 14, 2004, the Company completed its stock offering and acquisition of ENB in connection with Provident Bancorp, MHC's mutual-to-stock conversion. The acquisition was accounted for as a purchase and, accordingly, amounts attributable to ENB have been included in the Company's consolidated financial statements from the date of acquisition. See Note 2 to the accompanying consolidated financial statements included in Item 1 of this quarterly report. Comparison of Financial Condition at June 30, 2004 and September 30, 2003 Total assets as of June 30, 2004 were $1.8 billion, an increase of $608.4 million, or 51.8%, over assets of $1.2 billion at September 30, 2003, and an increase of $668.0 million, or 59.9%, over assets of $1.1 billion at June 30, 2003. The increase over both periods is due primarily to (i) the January 2004 acquisition of ENB, whose assets totaled $349.7 million on the merger date (ii) proceeds from the offering in the second-step conversion of $192.2 million, net of related costs and (iii) internal growth of the company. Net loans (excluding loans held for sale) as of June 30, 2004 were $970.6 million, an increase of $267.4 million, or 38.0%, over net loan balances of $703.2 million at September 30, 2003, and an increase of $288.0 million, or 42.2%, over balances at June 30, 2003. Loans acquired from ENB totaled $219.2 million, while allowances for loan losses transferred in connection with ENB were $5.7 million, or 2.6% of ENB's outstanding loan balances. Inclusive of ENB loans acquired, commercial loans increased by $226.8 million, or 89.7%, over balances at September 30, 2003. Consumer loans increased by $44.6 million, or 55.3%, during the nine-month period, while residential loans increased by $2.2 million, or 0.6%. Asset quality continues to be strong. At $5.5 million, or 0.31% of total assets, non-performing assets are up slightly from $4.7 million at September 30, 2003 and $5.4 million at June 30, 2003. Total securities increased by $267.7 million, or 71.5%, to $642.0 million at June 30, 2004 from $374.3 million at September 30, 2003 as the Company invested the majority of the stock subscription funds received ($192.4 million) in securities. Investments were made primarily in mortgage-backed securities, which increased by $179.1 million, or 84.5%, and in U.S. Government and Federal Agency Securities, which increased by $67.5 million, or 50.6%. Total deposits as of June 30, 2004 were $1.2 billion, up $371.3 million, or 42.7%, from September 30, 2003, and $383.3 million, or 44.7%, from June 30, 2003. Deposits acquired from ENB totaled $326.8 million. As of June 30, 2004 retail and commercial transaction accounts were 29.4% of deposits compared to 25.9% at September 30, 2003 and 25.5% at June 30, 2003. Borrowings from the Federal Home Loan Bank of New York (the "FHLB") increased by $4.8 million during the nine-month period to $169.6 million at June 30, 2004 from $164.8 million at September 30, 2003. 20 Stockholders' equity increased by $224.7 million to $342.6 million at June 30, 2004 compared to $117.9 million at September 30, 2003. The Company completed its second-step stock conversion in January 2004, raising $192.2 million in new capital, net of related costs. In addition, $39.7 million and $4.0 million, respectively, in new capital was issued for the purchase of ENB and for the funding of the charitable foundation. Net income of $6.8 million for the nine-month period also increased capital. Partially offsetting the increases were the payments of cash dividends totaling $3.4 million, the purchase of additional ESOP shares totaling $10.0 million and net declines in accumulated comprehensive income of $7.2 million. During the first nine 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 June 30, 2004. At June 30, 2004, there were no shares of common stock held by the Company in treasury as the treasury shares were cancelled in connection with the second step stock conversion. Pursuant to applicable Office of Thrift Supervision regulations that restrict stock repurchases for one year following the completion of a mutual stock conversion, the authorization to repurchase shares of the Company's common stock expired in connection with its second-step conversion on January 14, 2004. Supplemental Reporting of Non-GAAP Results of Operations. The Company is providing supplemental reporting of its results on a "net operating cash" or "tangible" basis, from which the Company excludes the after- tax charge for establishing the charitable foundation, the after-tax effect of amortization of core deposit intangible assets and expenses associated with merging acquired operations into the Company. Although "net operating cash income" as defined by the Company is not a GAAP measure, management believes that this information helps investors understand the effect of acquisition activity and the establishment of the charitable foundation in reported results. The after-tax effect of the establishment of the charitable foundation was $3.0 million ($0.08 per share). Merger integration expenses were $34,000 after tax for the three months ended June 30, 2004, and $464,000 after tax for the nine months ended June 30, 2004. The after-tax effect of the amortization of core deposit intangible assets was $409,000 ($0.01 per diluted share) in the recent quarter, compared with $62,000 (less than $0.01 per diluted share) in the year-earlier quarter. Similar amortization charges for the nine months ended June 30, 2004 and 2003 were $881,000, after tax ($0.02 per diluted share) and $207,000 after tax ($0.01 per diluted share), respectively. Diluted net operating cash earnings per share, which excludes amortization of core deposit intangible assets and merger-related expenses, were $0.11 for the quarter ended June 30, 2004, compared with $0.09 in the second quarter of 2003. Net operating cash income for the recent quarter was $4.1 million, an increase of 28.1% from $3.2 million in the year-earlier quarter. Expressed as an annualized rate of return on average assets and average stockholders' equity, net operating income was 0.92% and 4.75% respectively, in the quarter ended June 30, 2004, compared with 1.15% and 11.10% in the quarter ended June 30, 2003. 21 Reconciliation of GAAP and Non-GAAP results of operations: A reconciliation of diluted earnings per share and net income with diluted net operating cash earnings per share and net operating income follows (in thousands, except per share amounts):
Three months ended June 30, Nine months ended June 30, --------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Diluted cash earnings per share $ 0.10 $ 0.09 $ 0.18 $ 0.25 Charge for establishment of charitable foundation(1) -- -- 0.08 -- Merger integration expenses(1) -- -- 0.01 -- Amortization of core deposit intangibles(1) 0.01 0.00 0.02 0.01 ---------- ---------- ---------- ---------- Diluted net cash operating earnings $ 0.11 $ 0.09 $ 0.29 $ 0.26 ========== ========== ========== ========== Net Income $ 3,654 $ 3,106 $ 6,771 $ 8,667 Charge for establishment of charitable foundation(1) 3,000 Merger integration expenses(1) 34 -- 464 -- Amortization of core deposit intangibles(1) 409 62 881 207 ---------- ---------- ---------- ---------- Net operating cash income $ 4,097 $ 3,168 $ 11,116 $ 8,874 ========== ========== ========== ==========
---------- (1) After related tax effect at 40% marginal rate Comparison of Operating Results for the Three Months Ended June 30, 2004 and June 30, 2003 Net Income. For the three months ended June 30, 2004 net income was $3.7 million, an increase of $548,000, or 17.6%, compared to $3.1 million for the same period in fiscal 2003. Net interest income after provision for loan losses for the three months ended June 30, 2004 increased by $5.2 million, or 46.8%, compared to the same period in the prior year. Non-interest income remained the same at $2.9 million for the three months ended June 30, 2004 and June 30, 2003. Non-interest expenses increased $4.3 million, or 46.7%, to $13.5 million for the three months ended June 30, 2004 compared to $9.2 million for the same prior-year period. The relevant performance measures follow: Three Months Ended June 30, 2004 2003 ---- ---- Per common share: Basic earnings $ 0.10 $ 0.09 Diluted earnings 0.10 0.09 Dividends declared 0.04 0.04 Return on average (annualized): Assets 0.82% 1.13% Equity 4.24% 10.89% 22 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 June 30, --------------------------- 2004 2003 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- Interest earning assets: Commercial and commercial mortgage loans(1) $ 447,784 $ 7,324 6.58% $ 222,737 $ 3,660 6.59% Consumer loans(1) 119,603 1,386 4.66 79,797 967 4.86 Residential mortgage loans(1) 378,454 5,590 5.94 379,847 6,085 6.43 ---------- ---------- ---------- ---------- Total loans 945,841 14,300 6.08 682,381 10,712 6.30 ---------- ---------- ---------- ---------- Securities-taxable 557,661 5,233 3.77 301,512 3,261 4.34 Securities-tax exempt(2) 44,562 636 5.74 17,025 252 5.94 Other earning assets 10,473 38 1.46 17,075 115 2.70 ---------- ---------- ---------- ---------- Total securities and other earning assets 612,696 5,907 3.88 335,612 3,628 4.34 ---------- ---------- ---------- ---------- Total interest-earning assets 1,558,537 20,207 5.21 1,017,993 14,340 5.65 Non-interest-earning assets: 236,410 82,858 ---------- ---------- Total assets $1,794,947 $1,100,851 ========== ========== Interest bearing liabilities: Savings, clubs and escrow $ 377,845 $ 409 0.44% $ 283,360 $ 322 0.46% Money market accounts 176,544 225 0.51 124,046 245 0.79 NOW checking 98,611 53 0.22 84,095 52 0.25 Certificate accounts 349,126 1,450 1.67 236,363 1,212 2.06 ---------- ---------- ---------- ---------- Total interest-bearing deposits 1,002,126 2,137 0.86 727,864 1,831 1.01 Borrowings 180,154 1,350 3.01 117,954 1,144 3.89 ---------- ---------- ---------- ---------- Total interest-bearing liabilities 1,182,280 3,487 1.19 845,818 2,975 1.41 ---------- ---------- Non-interest-bearing liabilities: 265,904 140,608 ---------- ---------- Total liabilities 1,448,184 986,426 Stockholders' Equity 346,763 114,425 ---------- ---------- Total liabilities and equity 1,794,947 1,100,851 ========== ========== Net interest margin $ 16,720 4.31% $ 11,365 4.48% ========== ==== ========== ==== Net interest rate spread 4.02% 4.24% ==== ==== Net earning assets $ 376,257 $ 172,175 ========== ========== Tax equivalent adjustment(2) (223) (88) Net interest income $ 16,497 $ 11,277 ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities 131.82% 120.36% ========== ==========
---------- (1) Includes non-accrual loans. (2) Tax equivalent adjustment for tax exempt income is based on a 35% federal rate. 23 The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (in thousands): Three Months Ended June 30, 2004 vs. 2003 Increase/(Decrease) Due to -------------------------- Volume(1) Rate(1) Total --------- ------- ----- Interest-earning assets Commercial and commercial mortgage loans $ 3,670 $ (6) $ 3,664 Consumer loans 461 (42) 419 Residential mortgage loans (22) (473) (495) Securities-taxable 2,453 (481) 1,972 Securities-tax exempt(2) 393 (9) 384 Other earning assets (35) (42) (77) ------- ------- ------- Total interest income 6,920 (1,053) 5,867 ------- ------- ------- Interest-bearing liabilities Savings 102 (15) 87 Money market 84 (104) (20) NOW checking 8 (7) 1 Certificates of deposit 500 (261) 239 Borrowings 506 (301) 205 ------- ------- ------- Total interest expense 1,200 (688) 512 ------- ------- ------- Net interest margin $ 5,720 $ (365) $ 5,355 ======= ======= ======= Less tax equivalent adjustment(2) (226) 91 (135) ------- ------- ------- Net interest income $ 5,494 $ (274) $ 5,220 ======= ======= ======= ---------- (1) Changes due to increases in both rate and volume have been allocated proportionately to rate and volume. (2) Tax equivalent adjustment for tax exempt income is based on a 35% federal rate. 24 Net Interest Income. Net interest income after provision for loan losses for the three months ended June 30, 2004 was $16.3 million, compared to $11.1 million for the three months ended June 30, 2003, an increase of $5.2 million or 46.9%. The increase in net interest income was largely due to a $540.5 million increase in average interest earning assets to $1.6 billion during the quarter ended June 30, 2004, as compared to $1.0 billion for the same quarter in the prior year, due primarily to the Ellenville National Bank acquisition, net proceeds from the second-step offering and continued internal growth. The increase in average interest earning assets was partially offset by a decline in average yield of 44 basis points from 5.65% to 5.21%. Despite a decrease in the average cost of interest-bearing liabilities of 22 basis points interest expense increased $512,000 for the quarter compared to the same quarter in 2003, as average interest-bearing liabilities increased by $336.5 million. On a fully taxable equivalent basis, net interest margin declined by 17 basis points to 4.31%, while net interest spread declined by 22 basis points to 4.02%. 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 $225,000 and $200,000 in loan loss provisions during the three months ended June 30, 2004 and 2003, respectively. The increase in the provision reflects the overall growth in the commercial lending portfolio for the quarter. Non-Interest Income was $2.9 million for both the three months ended June 30, 2004 and June 30, 2003. Gains on the sale of securities were $446,000 for the current three-month period, compared to $811,000 for the same period last year. During the three-month period ended June 30, 2004, the Company recorded gains on sales of loans totaling $61,000, compared to $394,000 for the same period last year. Excluding the effects of gains on sales of securities and loans, the increase in non-interest income was $685,000, or 40.7%. Banking fees and service charges increased by $714,000, or 59.7%, of which $449,000 was generated from the acquired Ellenville National Bank ("Ellenville")branches and $265,000 was due primarily to volume-driven increases in overdraft, non-sufficient funds, and ATM and debit card fees. Other non-interest income decreased by $29,000, or 6.0%, due primarily to lower earnings on the Company's bank owned life insurance ("BOLI") investments. Non-Interest Expense for the three months ended June 30, 2004 increased by $4.3 million, or 46.7%, to $13.5 million, compared to $9.2 million for the three months ended June 30,2003. The acquisition of ENB in January 2004 played a major role in the increases in most categories. Compensation and employee benefits increased by $1.6 million, or 36.4%, to $6.1 million for the period ended June 30, 2004. Of that amount, $700,000 was attributable to the ENB acquisition and the remainder was due to staff additions for future growth and expansion, as well as normal merit increases. An increase in stock-based compensation plans of $147,000, or 35.8%, occurred during the current three-month period primarily due to vesting and allocations of benefit plans at an average price per share of common stock of $10.91 per share for the three months ended June 30, 2004 compared to $7.30 per share for the three months ended June 30, 2003. Occupancy and office operations increased by $523,000, or 39.6%, for the three months ended June 30, 2004, almost all of which was attributable to the acquired Ellenville properties. Professional fees increased by $230,000, or 54.0%, due primarily to fees associated with the Company's compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002, related to internal controls, and fees paid to consultants engaged to run day-to-day operations, as the Company's permanent employees focused on the integration of Ellenville National Bank and the pending acquisition of Warwick Community Bancorp. Amortization of core deposit intangible increased by $578,000 as a result of the Ellenville deposits acquired. Stationery and office supplies increased by $197,000, or 132.2%, as the new Ellenville branches were stocked. Other expenses increased by 25 $528,000, or 44.7%, due primarily to increases of $136,000, $56,000, $42,000 and $68,000 in SEC and shareholder-related expenses, courier expenses, correspondent bank expense and postage, respectively. Further, merger integration expenses related to the acquisition of ENB were $56,000. Income Taxes. Income tax expense was $2.0 million for the three months ended June 30, 2004, compared to $1.7 million expense for the same period in 2003. The effective tax rates were 35.2% and 35.1%, respectively. Comparison of Operating Results for the Nine Months Ended June 30, 2004 and June 30, 2003 Net Income. For the nine months ended June 30, 2004 net income was $6.8 million, down $1.9 million, or 28%, compared to $8.7 million for the same period of 2003. Net interest income after provision for loan losses increased to $43.4 million for the nine months ended June 30, 2004, an increase of $9.8 million, or 29.2%, compared to $33.6 million for the nine months ended June 30, 2003. Non-interest income was $8.5 million for the nine months ended June 30, 2004 compared to $7.3 million for the same period last year, an increase of $1.2 million, or 16.4%. Non-interest expenses increased $14.5 million, or 53.4% (including the $5.0 million contribution to the charitable foundation), to $41.7 million for the nine months ended June 30, 2004 compared to $27.2 million for the same prior-year period. The relevant performance measures follow: Nine Months Ended June 30, 2004 2003 ---- ---- Per common share: Basic earnings $0.19 $ 0.25 Diluted earnings 0.18 0.25 Dividends declared 0.11 0.09 Return on average (annualized): Assets 0.59% 1.09% Equity 3.51% 10.27% 26 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).
Nine Months Ended June 30, -------------------------- 2004 2003 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- Interest earning assets: Commercial and commercial mortgage loans(1) $ 358,255 $ 17,427 6.50% $ 213,152 $ 11,306 7.09% Consumer loans(1) 101,027 3,720 4.92 81,550 3,136 5.14 Residential mortgage loans(1) 393,407 17,504 5.94 384,510 18,745 6.52 ---------- ---------- ---------- ---------- Total loans 852,689 38,651 6.05 679,212 33,187 6.53 ---------- ---------- ---------- ---------- Securities-taxable 494,032 13,693 3.70 282,002 9,719 4.61 Securities-tax exempt(2) 35,143 1,447 5.50 18,388 796 5.79 Other earning assets 11,192 103 1.23 11,173 292 3.49 ---------- ---------- ---------- ---------- Total securities and other earning assets 540,367 15,243 3.77 311,563 10,807 4.64 ---------- ---------- ---------- ---------- Total interest-earning assets 1,393,056 53,894 5.17 990,775 43,994 5.94 Non-interest-earning assets: 147,247 74,639 ---------- ---------- Total assets $1,540,303 $1,065,414 ========== ========== Interest bearing liabilities: Savings, clubs and escrow $ 346,499 1,141 0.44% $ 269,528 1,187 0.59% Money market accounts 144,264 601 0.56 119,100 786 0.88 NOW checking 82,548 134 0.22 82,189 169 0.27 Certificate accounts 302,918 3,805 1.68 241,683 3,985 2.20 ---------- ---------- ---------- ---------- Total interest-bearing deposits 876,229 5,681 0.87 712,500 6,127 1.15 Borrowings 157,207 3,719 3.16 108,688 3,184 3.92 ---------- ---------- ---------- ---------- Total interest-bearing liabilities 1,033,436 9,401 1.22 821,188 9,311 1.52 Non-interest-bearing liabilities: 248,963 131,425 ---------- ---------- Total liabilities 1,282,399 952,613 Stockholders' Equity 257,904 112,801 ---------- ---------- Total liabilities and equity $1,540,303 $1,065,414 ========== ========== Net interest margin $ 44,493 4.27% $ 34.683 4.68% ========== ==== ========== ==== Net interest rate spread 3.95% 4.42% ==== ==== Net earning assets $ 359,620 $ 169,587 ========== ========== Tax equivalent adjustment(2) (507) (279) ========== ========== Net interest income $ 43,986 $ 34,404 ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities 134.81% 120.65% ========== ==========
---------- (1) Includes non-accrual loans. (2) Tax equivalent adjustment for tax exempt income is based on a 35% federal rate. 27 The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (in thousands): Nine Months Ended June 30, 2004 vs. 2003 Increase/(Decrease) Due to -------------------------- Volume(1) Rate(1) Total --------- ------- ----- Interest-earning assets Commercial and commercial mortgage loans $ 7,135 $ (1,014) $ 6,121 Consumer loans 724 (140) 584 Residential mortgage loans 434 (1,675) (1,241) Securities-taxable 6,197 (2,223) 3,974 Securities-tax exempt(2) 693 (42) 651 Other earning assets 0 (189) (189) -------- -------- -------- Total interest income 15,183 (5,283) 9,900 -------- -------- -------- Interest-bearing liabilities Savings 298 (343) (45) Money market 142 (327) (185) NOW checking 1 (36) (35) Certificates of deposit 882 (1,062) (180) Borrowings 1,237 (702) 535 -------- -------- -------- Total interest expense 2,560 (2,470) 90 -------- -------- -------- Net interest margin $ 12,623 $ (2,813) $ 9,810 ======== ======== ======== Less tax equivalent adjustment(2) (244) 16 (228) -------- -------- -------- Net interest income $ 12,379 $ (2,797) $ 9,582 ======== ======== ======== (1) Changes due to increases in both rate and volume have been allocated proportionately to rate and volume. (2) Tax equivalent adjustment for tax exempt income is based on a 35% federal rate. 28 Net Interest Income after provision for loan losses increased by $9.8 million, or 29.2%, to $43.4 million for the nine-months ended June 30, 2004 from $33.6 million for the same period in 2003. The increase in interest income reflects an increase in average earning assets of $402.3 million to $1.4 billion, offset by a decline in yield of 78 basis points to 5.12%. The cost of interest bearing liabilities increased by $90,000 as the average balances increased by $212.2 million to $1.0 billion, even though the average rate paid on average interest bearing funds decreased 30 basis points to 1.22%. On a fully taxable equivalent basis, net interest margin decreased from 4.68% to 4.27% and net interest spread declined from 4.42% to 3.95%. Provision for Loan Losses. The Company records provisions for loan losses, which are charged in 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 $575,000 and $800,000 in loan loss provisions during the nine months ended June 30, 2004 and 2003, 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 for the nine-month period ended June 30, 2004 increased to $8.5 million, an increase of $1.2 million, or 16.4%, compared to $7.3 million for the same nine-month period last year. Gains on sales of securities and loans were $1.9 million and $231,000, respectively, for the current period, generating a combined decrease of $606,000 from the securities and loan sales gains of $1.9 million and $836,000, respectively, for the same period last year. Banking fees and service charges increased to $5.1 million for the current nine-month period, an increase of $1.7 million, or 49.5%, over the same period last year. The increase is primarily attributable to increases in service fees of $867,000 resulting from the acquired branches, coupled with volume-related increases in service fees on new and existing accounts at the original Provident branches. Other income increased by $127,000, or 11.3%, to $1.3 million for the nine-month period ended June 30, 2004, from $1.1 million for the same period last year. The increase is primarily due to $422,000 in income from the BOLI for the current nine-month period compared to $324,000 for the same period last year, as the BOLI program was only established for six months of fiscal 2003. Non-Interest Expense excluding the Charitable Foundation contribution of $5.0 million, was $36.7 million for the nine-month period ended June 30, 2004, an increase of $9.5 million, or 35.1%, compared to $27.1 million for the same nine-month period last year. Increases in compensation and benefits directly attributable to the acquisition of ENB were $1.2 million and in occupancy and office operations were $564,000. Compensation and benefits increased by an additional $2.3 million, due to annual salary increases and staff additions. Stock-based compensation expense increased by $664,000, or 46.8%, as the company's per share value increased from an average of $7.01 per share for the nine months ended June 30, 2003 to an average of $10.87 per share for the nine months ended June 30, 2004. Also, the Company allocated additional shares related to the $10.0 million ESOP purchase. Professional fees were $1.7 million for the nine-month period ended June 30, 2004, an increase of $446,000, or 36.7%, over the comparable period in the prior year. The increase is primarily due to the additional fees associated with Section 404 of the Sarbanes-Oxley Act of 2002, related to internal controls compliance, and the fees for contracted consultants engaged during the integration period of Ellenville National Bank and the planning period for the integration of Warwick. Additional increases in non-interest expense categories for the current year-to-date period are advertising costs of $255,000, or 19.8%, and a volume-related increase of $424,000, or 19.6%, in data and check processing costs. Amortization of intangible assets increased by $1.1 million due to the addition of the ENB core deposit intangible. Other non-interest expense increased by $871,000, or 24.2%, primarily due to increases in Securities and Exchange 29 Commission and shareholder relations expenses ($160,000), regulatory assessments ($84,000), postage ($150,000) and correspondent bank expense ($123,000). Income Taxes. Income tax expense was $3.4million for the nine months ended June 30, 2004 compared to $5.0 million for the same period in 2003. Excluding the impact of the charitable foundation contribution, the effective tax rates were 35.5% and 36.5%, respectively. Including the impact of the charitable foundation, the effective tax rate for the nine months ended June 30, 2004 was 33.3%. 30 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 nine-months ended June 30, 2004 and June 30, 2003, loan originations, excluding loans originated for sale, totaled $251.3 million and $278.9 million, respectively, and purchases of securities totaled $452.6 million and $155.6 million, respectively. For the nine-month periods ended June 30, 2004 and 2003, 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 $63.6 million at June 30, 2004. 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 $3.6 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. Excluding the acquisition of ENB, the net increase in total deposits for the nine months ended June 30, 2004 was $44.3 million, compared to $57.9 million for the nine months ended June 30, 2003. On January 14, 2004 the Company completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC. As a result of the conversion, the Company became the stock holding company of the Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in Provident Federal were sold to investors. In addition, the Company simultaneously completed its acquisition of E.N.B. Holding Company, Inc., located in Ellenville, New York. The Company sold 19,573,000 shares of common stock at $10.00 per share to depositors of the Bank as of June 30, 2002 and September 30, 2003. The 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 Company's common stock. 31 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. We generally remain fully invested and utilize additional sources of funds through Federal Home Loan Bank of New York overnight and term advances, of which $169.3 were outstanding at June 30, 2004. The Company has the ability to borrow an additional $300.6 million under its credit facilities with the Federal Home Loan Bank of New York. At June 30, 2004, the Bank exceeded all of its regulatory capital requirements with a Tier 1 capital (leverage) level of $199.0 million, or 11.9% of adjusted assets (which is above the required level of $67.1 million, or 4.0%) and a total risk-based capital level of $213.1 million, or 17.7% of risk-weighted assets (which is above the required level of $90.0 million, or 8.0. Regulations require leverage and total risk-based capital ratios of 5.0% and 10.0%, respectively, in order to be classified as well-capitalized. In performing this calculation, the intangible assets recorded in the April 2002 NBF acquisition and the January 2004 ENB acquisition are deducted from capital and from total adjusted assets for purposes of regulatory capital measures. At June 30, 2004, 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 following table sets forth the Bank's regulatory capital position at June 30, 2004 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) June 30, 2004 Tangible capital $199,022 11.9% $ 25,166 1.5% $ -- -- Tier 1 (core) capital 199,022 11.9 67,107 4.0 83,884 5.0 Risk-based capital: Tier 1 199,022 17.7 67,552 6.0 Total 213,136 18.9 90,070 8.0 112,587 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
32 Asset/Liability Management The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities and capital resources. The Company's Asset and Liability Committee ("ALCO") of the Board monitors, and the Bank, through its Management ALCO, controls the rate sensitivity of the balance sheet while seeking to maintain an appropriate level of net interest income contribution to the operations of the Company. The Company's net interest income is affected by fluctuations in market interest rates as a result of timing differences in the repricing of its assets and liabilities. These repricing differences are quantified in specific time intervals and are referred to as interest rate sensitivity gaps. The Company manages the interest rate risk of current and future earnings to a level that it considers consistent with its mix of business and seeks to limit such risk exposure to appropriate percentages of both earnings and the imputed value of stockholders' equity. The objective in managing interest rate risk is to support the achievement of business strategies, while controlling earnings variability and seeking to provide appropriate liquidity. Further, the historical level of transaction accounts (greater than 15% of total assets) serves to mitigate the effects of increases in interest rates and reduce the average cost of total liabilities. The following chart (dollars in thousands) provides a quantification of the Company's interest rate sensitivity gap as of June 30, 2004, based upon the known repricing dates of certain assets, at amortized cost, and liabilities and the assumed repricing dates of others. As shown in the following chart, at June 30, 2004, assuming no management action, the Company's principal interest rate risk is to a falling rate environment, and particularly within a one-year time frame. That is, net interest revenue would be expected to be adversely affected by a decrease in interest rates below the rates embedded in the current yield curve, principally due to the higher level of assets ($666 million) that would reprice relative to similarly categorized liabilities ($652 million) in that time frame. 33
Three Four months months to Total within One to Over Five Maturity Repricing Date(1) or less One Year One Year Five Years Years TOTAL -------------------------- ------- -------- -------- ---------- ----- ----- Securities $ 45 $ 59 $ 104 $ 452 $ 86 $ 642 Fixed Rate Loans(3) 117 175 292 226 94 612 Variable Rate Loans (2,3) 225 45 270 87 5 362 ------ ------ ------ ------ ------ ------ Total Interest Earnings Assets(1) $ 387 $ 279 $ 666 $ 765 $ 185 $1,616 ====== ====== ====== ====== ====== ====== Total Deposits(4,5) $ 212 $ 380 $ 592 $ 387 $ 263 $1,242 Borrowing(6) 43 5 48 118 4 170 Other 12 -- 12 -- -- 12 ------ ------ ------ ------ ------ ------ Total Repricable Liabilities $ 267 $ 385 $ 652 $ 505 $ 267 $1,424 ====== ====== ====== ====== ====== ====== Period Gap 120 (106) 14 260 (82) 192 Percent of Total Assets 6.73% (5.97%) 0.74% 14.58% (4.60)% Cumulative Gap 120 14 14 274 192 Percent of Total Assets (cumulative) 6.73% 0.79% .79% 15.37% 10.77%
---------- (1) Interest rate sensitivity gaps are defined as the fixed rate positions (assets less liabilities) for a given time period. The gaps measure the time weighted dollar equivalent volume of positions fixed for a particular period. The gap positions reflect a repricing date at which date funds are assumed to "mature" and reprice to a current market rate for the asset or liability. The table does not include loans on nonaccrual status as of June 30, 2004. (2) Prime-priced loans are considered as zero - three month assets. (3) Variable rate balances are reported on their repricing formulas. Fixed rate balances are reported based on their scheduled contractual maturity dates, except for certain investment securities and loans secured by 1-4 family residential properties that are based on anticipated cash flow. (4) Noninterest bearing deposit liabilities were approximately $277 million at June 30, 2004. (5) Time deposits totaling $346 million are classified by contractual maturity or repricing frequency as of June 30, 2004. (6) Borrowings of $170 million as of June 30, 2004 are classified by contractual maturity or repricing frequency. 34 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. 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. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and requires that an issuer classify financial instruments that are considered a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 had no impact on the Company's consolidated statement of financial condition or results of operations upon implementation during the third quarter of 2003. In November 2003, the FASB also issued a staff position that indefinitely deferred the effective date of SFAS No. 150 for certain mandatorily redeemable non-controlling interests. The Company currently believes that the deferral of the effective date of SFAS No. 150 for certain mandatorily redeemable non-controlling interests will not have any impact on its consolidated statement of financial condition or results of operations when implemented. The issuance of SFAS No. 150 and FIN 46 has also resulted in the Federal Reserve Board announcing potential future reconsideration of trust preferred securities as elements of regulatory capital. The Company currently has no issuances of trust preferred securities. In March 2004, the FASB published an Exposure Draft, "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." The Exposure Draft proposes changes in accounting that would 35 replace existing requirements under SFAS 123 and APB Opinion NO 25, "Accounting for Stock Issued to Employees." Under the proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 (SAB 105), "Application of Accounting Principles to Loan Commitments." This staff bulletin is effective for interest rate locks entered into or substantially modified on or after April 1, 2004. This bulletin and subsequent interpretations did not have a material impact on the Company's results of operations. 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. The Bank's interest rate profile has changed since September 30, 2003 as a result of the $192.4 million in new capital and the acquisition of ENB. As a result of these events, the Bank has become more asset sensitive, which indicates that more of the Bank's assets will now reprice quicker than its liabilities and that net interest income should increase if rates increase gradually. However, if rates increase rapidly as a result of an improving economy, the Bank may have to increase the rates paid on deposits and borrowed funds quicker than loans and investments reprice, resulting in a negative impact on interest spreads and net interest income. 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 level the Company's net interest margin could also be negatively affected, as competitive pressures could keep the Bank from lowering rates on its deposits, and prepayments and curtailments on assets may continue. Such movements may cause a decrease in the 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, the Company completed its stock offering and acquisition of ENB. The Company received $192.4 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. Quantitative and qualitative disclosure about market risk is presented at September 30, 2003 in Item 7A in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 29, 2003. The following is an update of the discussion provided therein. General: The Company's largest component of market risk continues to be interest rate risk. The Company is not subject to foreign currency exchange or commodity price risk. At June 30, 2004, neither the Company nor the Bank owned any trading assets, nor did they utilize hedging transactions such as interest rate swaps and caps. GAP Analysis: The one-year and five-year cumulative interest sensitivity gap as a percentage of total assets have changed from (17%) and 10% at September 30, 2003, respectively, to 0.74% and 15.32% at June 30, 2004, respectively. Investments, loans and fixed rate time deposits utilized contractual 36 repricing dates in this analysis. Non-maturity deposits (demand, money market and savings) have been decayed utilizing national norms. Interest Rate Risk Compliance: The Bank continues to monitor the impact of interest rate volatility upon net interest income and net portfolio value in the same manner as at September 30, 2003. There have been no changes in the board approved limits of acceptable variance in net interest income and net portfolio value change at June 30, 2004 compared to September 30, 2003, and the impact of possible changes within the Company's models continue to fall within all board approved limits for potential interest rate volatility. 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. 37 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, Use of Proceeds and Issuer Purchases of Equity Securities (a) - (d) Not applicable (e) Issuer Purchases of Equity Securities
Maximum Number (or Total Number of Shares Approximate Dollar (or Units) Purchased Value) of Shares (or Total Number of Average Price as Part of Publicly Units) that may yet be Shares (or Units) Paid per Share Announced Plans or Purchased Under the Period Purchased(1) (or Unit) Programs(2) Plans or Programs April 1 - April 30, 2004 -- -- -- -- May 1 - May 31, 2004 -- -- -- -- June 1 - June 30, 2004 9,417 $10.61 0 0 ----- ------ ----- ----- Total 9,417 $10.61 0 0 ===== ====== ===== =====
---------- (1) The total number of shares purchased during the periods indicated includes shares purchased as part of publicly announced programs and shares deemed to have been received from employees who exercised stock options by attesting to previously acquired common shares in satisfaction of the exercise price, as is permitted under Provident's stock option plans. (2) OTS regulations prohibit the repurchase of common shares for a period of one year following a second step stock conversion. 38 Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On April 22, 2004, 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, 2004. The number of votes cast at the meeting as to each matter acted upon was as follows:
VOTES FOR VOTES WITHHELD 1. Election of Directors: William Helmer 32,320,906 204,003 Donald T. McNelis 32,321,506 203,403 William R. Sichol, Jr. 32,270,838 254,071 F. Gary Zeh 32,321,335 203,574 ------------------------------------------------------------------------------------------- VOTES FOR VOTES AGAINST VOTES ABSTAINING ------------------------------------------------------------------------------------------- 2. Ratification of the Appointment of KPMG LLP as the Company's 32,195,272 242,918 86,719 Independent Auditors -------------------------------------------------------------------------------------------
Item 5. Other Information None 39 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Description -------------- ----------- 10.10 Employment agreement of Senior Vice President and Chief Financial Officer, Paul A. Maisch. 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 June 30, 2004: 1) On April 22, 2004, the Company filed a Form 8-K announcing that it issued a press release regarding its earnings for the fiscal quarter ended March 31, 2004. 40 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: August 6, 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: August 6, 2004 41