SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ____________________
Commission File Number: 0-25233
PROVIDENT BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
Federal 06-1537499
- -------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ------------------------------------------ ----------
(Address of Principal Executive Office) (Zip Code)
(914) 369-8040
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. ______
As of September 30, 1999, there were issued and outstanding 8,280,000
shares of the Registrant's common stock. The aggregate value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the closing
price of the common stock as of November 30, 1999, was $63,273,000.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
September 30, 1999 (Parts II and IV).
2. Proxy Statement for the Annual Meeting of Stockholders (Part III) to be
held in February 2000.
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PART I
ITEM 1. Business
Provident Bancorp, Inc.
Provident Bancorp, Inc. (the "Company") was organized at the direction
of the Board of Directors of Provident Bank (the "Bank") for the purpose of
acting as the stock holding company of the Bank. The Company's assets consist
primarily of all outstanding capital stock of the Bank, and cash and securities
of $12.3 million representing a portion of the net proceeds from the Company's
stock offering completed January 7, 1999. At September 30, 1999, 3,864,000
shares of the Company's common stock, par value $0.10 per share, were held by
the public, and 4,416,000 shares were held by Provident Bancorp, MHC, the
Company's parent mutual holding company (the "Mutual Holding Company"). The
Company's principal business is overseeing and directing the business of the
Bank and investing the net stock offering proceeds retained by it.
The Company's office is located at 400 Rella Boulevard, Montebello, New
York 10901. Its telephone number is (914) 369-8040.
Provident Bank
The Bank was organized in 1888 as a New York-chartered mutual savings
and loan association, adopted a federal mutual charter in 1986 and reorganized
into the stock form of ownership in 1999 as part of its reorganization into the
mutual holding company structure. The Bank's deposits are insured by the Savings
Association Insurance Fund ("SAIF"), as administered by the Federal Deposit
Insurance Corporation ("FDIC"), up to the maximum amount permitted by law. The
Bank is engaged primarily in the business of offering various FDIC-insured
savings and demand deposits to customers through its thirteen full-service
offices, and using those deposits, together with funds generated from operations
and borrowings, to originate one- to four-family residential and commercial real
estate loans, consumer loans, construction loans and commercial business loans.
The Bank also invests in investment securities and mortgage-backed securities.
The Bank's executive office is located at 400 Rella Boulevard,
Montebello, New York 10901. Its telephone number is (914) 369-8040.
Provident Bancorp, MHC
The Mutual Holding Company was formed in January 1999 as part of the
Bank's mutual holding company reorganization. The Mutual Holding Company is
chartered under federal law and owns 53.33% of the outstanding common stock of
the Company. The Mutual Holding Company does not engage in any business
activities other than owning the common stock of the Company, investing in
liquid assets and contributing to local charities.
The Mutual Holding Company's office is located at 400 Rella Boulevard,
Montebello, New York 10901. Its telephone number is (914) 369-8040.
Forward-Looking Statements
In addition to historical information, this annual report contains
forward-looking statements. For this purpose, any statements contained herein
(including documents incorporated herein by reference) that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believe", "anticipates", "plans", "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those contemplated by such forward-looking
statements. These important factors include, without limitation, the Company's
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continued ability to originate quality loans, fluctuations in interest rates,
real estate conditions in the Company's lending areas, general and local
economic conditions, unanticipated Year 2000 issues, the Company's continued
ability to attract and retain deposits, the Company's ability to control costs,
and the effect of new accounting pronouncements and changing regulatory
requirements. The Company undertakes no obligation to publicly release the
results of any revisions to those forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Market Area
The Bank is an independent community bank offering a broad range of
customer-focused services as an alternative to money center banks in its market
area. At September 30, 1999, the Bank operated eleven full-service banking
offices, including one full-service supermarket branch, in Rockland County, New
York. In the weeks before and after September 30, 1999, the Bank also opened and
now operates two full-service supermarket branches in Orange County, New York,
bringing the total number of branch offices to thirteen in the two counties. The
Bank's primary market for deposits is currently concentrated around the areas
where its full-service banking offices are located. The Bank's primary lending
area also has been historically concentrated in Rockland and contiguous
counties.
Rockland County is a suburban market with a broad employment base.
Rockland County also serves as a bedroom community for nearby New York City and
other suburban areas including Westchester County and northern New Jersey.
Neighboring Orange County, where the Bank has opened its two newest branches, is
one of the two fastest growing counties in New York State. The favorable
economic environment in the New York metropolitan area has led to an increase in
residential and commercial construction activity in recent years.
The economy of the Bank's primary market areas is based on a mixture of
service, manufacturing and wholesale/retail trade. Other employment is provided
by a variety of industries and state and local governments. The diversity of the
employment base is evidenced by its many major employers. Additionally, Rockland
and Orange Counties have numerous small employers.
Lending Activities
General. Historically, the principal lending activity of the Bank has
been the origination of fixed-rate and adjustable-rate mortgage ("ARM") loans
collateralized by one- to four-family residential real estate located within its
primary market area. The Bank also originates commercial real estate loans,
commercial business loans and construction loans (collectively referred to as
the "commercial loan portfolio"), as well as consumer loans such as home equity
lines of credit and homeowner loans. The Bank retains most of the loans that it
originates, although from time to time it may sell longer-term one- to
four-family residential real estate loans.
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Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------
1999 1998 1997 1996
------------------ ------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family residential mortgage loans....... $ 344,731 60.2% $ 290,334 62.0% $ 241,886 59.3% $ 219,827 59.0%
--------- ----- --------- ----- --------- ----- --------- -----
Commercial real estate loans......................... 110,382 19.3 71,149 15.1 62,910 15.4 66,145 17.7
Commercial business loans............................ 30,768 5.4 24,372 5.2 18,433 4.5 15,268 4.1
Construction loans................................... 19,147 3.3 20,049 4.3 23,475 5.7 16,074 4.3
--------- ----- --------- ----- --------- ----- --------- -----
Total commercial loans............................. 160,297 28.0 115,570 24.6 104,818 25.6 97,487 26.1
--------- ----- --------- ----- --------- ----- --------- -----
Home equity lines of credit.......................... 25,380 4.4 26,462 5.7 31,671 7.8 31,511 8.5
Homeowner loans...................................... 34,852 6.1 27,208 5.8 19,160 4.7 13,035 3.5
Other consumer loans................................. 7,463 1.3 8,999 1.9 10,741 2.6 10,984 2.9
--------- ----- --------- ----- --------- ----- --------- -----
Total consumer loans............................... 67,695 11.8 62,669 13.4 61,572 15.1 55,530 14.9
--------- ----- --------- ----- --------- ----- --------- -----
Total loans.......................................... 572,723 100.0% 468,573 100.0% 408,276 100.0% 372,844 100.0%
===== ===== ===== =====
Allowance for loan losses............................ (6,202) (4,906) (3,779) (3,357)
--------- --------- ---------- ---------
Total loans, net..................................... $ 566,521 $ 463,667 $ 404,497 $ 369,487
========= ========= ========= =========
<PAGE>
<CAPTION>
September 30,
------------------
1995
------------------
Amount Percent
--------- -------
(Dollars in Thousands)
<S> <C> <C>
One- to four-family residential mortgage loans....... $ 199,017 59.2%
--------- -----
Commercial real estate loans......................... 66,820 20.0
Commercial business loans............................ 11,160 3.3
Construction loans................................... 6,228 1.9
--------- ------
Total commercial loans............................. 84,208 25.2
--------- ------
Home equity lines of credit.......................... 31,771 9.5
Homeowner loans...................................... 10,433 3.1
Other consumer loans................................. 9,990 3.0
--------- ------
Total consumer loans............................... 52,194 15.6
--------- ------
Total loans.......................................... 335,419 100.0%
=====
Allowance for loan losses............................ (3,472)
---------
Total loans, net..................................... $ 331,947
=========
</TABLE>
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Loan Maturity Schedule. The following table summarizes the contractual
maturities of the Bank's loan portfolio at September 30, 1999. Loans with
adjustable or renegotiable interest rates are shown as maturing at the end of
the contractual term of the loan. The table reflects the entire unpaid principal
balance of a loan maturing in the period that includes the final payment date
and, accordingly, does not give effect to periodic principal payments or
possible prepayments.
<TABLE>
<CAPTION>
One- to Four-Family Commercial Real Estate Construction (2) Commercial Business
----------------------- ----------------------- --------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- ------ ----------- ------- ----------- --------- --------- ---------
(Dollars in Thousands)
Due During the Years Ending
September 30,
- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000 (1)..................... $ 142 8.83% $ 5,016 8.44% $ 11,971 8.46% $ 18,566 8.58%
2001......................... 427 8.91 9,571 8.26 1,726 9.01 1,307 8.62
2002......................... 826 8.11 1,257 8.47 1,199 9.86 2,263 8.45
2003 and 2004................ 2,436 7.93 15,553 8.33 373 7.75 5,638 8.38
2005 to 2009................. 34,450 7.29 43,276 8.37 3,602 7.50 2,225 8.72
2010 to 2024................. 195,768 7.15 35,709 8.04 249 9.25 437 9.38
2025 and following........... 110,682 7.20 --- --- 27 8.50 332 9.24
-------- ---- -------- ---- -------- ---- -------- ----
Total ..................... $344,731 7.19% $110,382 8.25% $ 19,147 8.41% $ 30,768 8.56%
======== ==== ======== ==== ======== ==== ======== ====
<PAGE>
<CAPTION>
Consumer Total
-------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- --------- --------- --------
(Dollars in Thousands)
Due During the Years Ending
September 30,
- -----------------------------
<S> <C> <C> <C> <C>
2000 (1)..................... $ 1,874 10.78% $ 37,569 8.60%
2001......................... 2,686 10.70 15,717 8.83
2002......................... 4,005 10.39 9,550 9.33
2003 and 2004................ 16,733 8.54 40,733 8.40
2005 to 2009................. 27,874 8.51 111,427 8.03
2010 to 2024................. 14,218 8.42 246,381 7.36
2025 and following........... 305 11.55 111,346 7.22
-------- ----- -------- ----
Total ..................... $ 67,695 8.77% $572,723 7.72%
======== ===== ======== ====
</TABLE>
- -------------------------------
(1) Includes demand loans, loans having no stated maturity, and overdraft loans.
(2) Includes land loans.
5
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The following table sets forth the dollar amounts of fixed- and
adjustable-rate loans at September 30, 1999 that are contractually due after
September 30, 2000.
<TABLE>
<CAPTION>
Due After September 30, 2000
------------------------------------------
Fixed Adjustable Total
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
One- to four-family residential mortgage loans............ $ 263,479 $ 81,110 $ 344,589
----------- ----------- -----------
Commercial real estate loans.............................. 44,850 60,516 105,366
Commercial business loans................................. 8,009 4,193 12,202
Construction loans........................................ 3,838 3,338 7,176
----------- ----------- -----------
Total commercial loans........................... 56,697 68,047 124,744
----------- ----------- -----------
Consumer loans............................................ 41,260 24,561 65,821
----------- ----------- -----------
Total loans...................................... $ 361,436 $ 173,718 $ 535,154
=========== =========== ===========
</TABLE>
One- to Four-family Real Estate Lending. The Bank's primary lending
activity is the origination of one- to four-family residential mortgage loans
secured by properties located in the Bank's primary market area. The Bank offers
conforming and non-conforming, fixed-rate and adjustable-rate residential
mortgage loans with maturities of up to 30 years and maximum loan amounts
generally of up to $600,000.
The Bank currently offers both fixed- and adjustable-rate conventional
mortgage loans with terms of 10 to 30 years that are fully amortizing with
monthly or bi-weekly loan payments. One- to four-family residential mortgage
loans are generally underwritten according to Fannie Mae and Freddie Mac
guidelines, and loans that conform to such guidelines are referred to as
"conforming loans." The Bank generally originates both fixed-rate and ARM loans
in amounts up to the maximum conforming loan limits as established by Fannie Mae
and Freddie Mac secondary mortgage market standards, which are currently
$240,000 for single-family homes. Private mortgage insurance is generally
required initially for loans with loan-to-value ratios in excess of 80%. Loans
in excess of conforming loan limits, in amounts of up to $600,000, are also
underwritten to both Fannie Mae and Freddie Mac secondary mortgage market
standards. These loans are eligible for sale to various conduit firms that
specialize in the purchase of such non-conforming loans, although most of these
loans are retained in the Bank's loan portfolio.
The Bank's bi-weekly one- to four-family residential mortgage loans
result in significantly shorter repayment schedules than conventional monthly
mortgage loans. The accelerated repayment schedule that accompanies a bi-weekly
mortgage loan results in lower total interest payments and a more rapid increase
in home equity. Bi-weekly mortgage loans are also repaid through an automatic
deduction from the borrower's savings or checking account, which enables the
Bank to avoid the cost of processing payments. As of September 30, 1999,
bi-weekly loans totaled $98.4 million or 28.5% of the Bank's residential loan
portfolio.
Fixed-rate mortgage loans originated by the Bank include due-on-sale
clauses which provide that the loan is immediately due and payable in the event
the borrower transfers ownership of the property. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate residential
loan portfolio, and the Bank generally exercises its rights under these clauses.
The Bank actively monitors its interest rate risk position to determine
the desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and the Bank's capital and liquidity position, the Bank may
retain all of its newly originated longer term fixed-rate, fixed-term
residential mortgage loans or may decide to sell all or a portion of such loans
in the secondary mortgage market to government sponsored enterprises such as
Fannie Mae and Freddie Mac. As a matter of policy, the Bank retains the
servicing rights on all loans sold to generate fee income and reinforce its
commitment to customer service. For the year ended September 30, 1999, the Bank
sold mortgage loans totaling $14.1 million compared with $17.2 million for the
year ended September 30, 1998. As of September 30, 1999 and 1998, the Bank's
portfolio of loans serviced for others totaled $109.0 million and $120.7
million, respectively.
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The Bank currently offers several ARM loan products secured by
residential properties with rates that adjust every six months to one year,
after an initial fixed-rate period ranging from six months to seven years. After
the initial term, the interest rate on these loans is reset based upon a
contractual spread or margin above the average yield on U.S. Treasury
securities, adjusted to a constant maturity of six months to one year (the "U.S.
Treasury Constant Maturity Index"), as published weekly by the Federal Reserve
Board. ARM loans are generally subject to limitations on interest rate increases
of 2% per adjustment period, and an aggregate adjustment of 6% over the life of
the loan. ARM loans require that any payment adjustment resulting from a change
in the interest rate on the ARM loan be sufficient to result in full
amortization of the loan by the end of the loan term, and thus, do not permit
any of the increased payment to be added to the principal amount of the loan,
commonly referred to as negative amortization. At September 30, 1999, the Bank's
ARM portfolio included $14.2 million in loans which re-price every six months,
$29.7 million in one-year ARMs and $37.1 million in loans with an initial
fixed-rate period ranging from three to seven years.
The retention of ARM loans, as opposed to long term, fixed-rate
residential mortgage loans, in the Bank's portfolio helps reduce its exposure to
interest rate risk. However, ARM loans generally pose different credit risks
than fixed-rate loans primarily because the underlying debt service payments of
the borrowers rise as interest rates rise, thereby increasing the potential for
default. In order to minimize this risk, borrowers of one- to four-family one
year ARM loans are qualified at the rate which would be in effect after the
first interest rate adjustment, if that rate is higher than the initial rate.
While one- to four-family residential loans typically are originated
with 15 to 30 year terms, such loans, whether fixed-rate or ARMs, generally
remain outstanding in the Bank's loan portfolio for substantially shorter
periods of time because borrowers must prepay their loans in full upon sale of
the property pledged as security or upon refinancing the loan. Thus, average
loan maturity is a function of, among other factors, the level of purchase and
sale activity in the Bank's primary lending market, prevailing market interest
rates, and the interest rates payable on outstanding loans.
The Bank requires title insurance on all of its one- to four-family
mortgage loans, and also requires that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the lesser of the loan balance or the replacement cost of the
improvements. Loans with initial loan-to-value ratios in excess of 80% must have
private mortgage insurance, although occasional exceptions may be made. Nearly
all residential loans must have a mortgage escrow account from which
disbursements are made for real estate taxes and for hazard and flood insurance.
Commercial Real Estate Lending. The Bank originates real estate loans
secured predominantly by first liens on commercial real estate and apartment
buildings. The commercial real estate properties are predominantly
non-residential properties such as office buildings, shopping centers, retail
strip centers, industrial and warehouse properties and, to a lesser extent, more
specialized properties such as churches, mobile home parks, restaurants,
motel/hotels and auto dealerships. The Bank may, from time to time, purchase
commercial real estate loan participations. Loans secured by commercial real
estate totaled $110.4 million or 19.3% of the Bank's total loan portfolio as of
September 30, 1999, and consisted of 208 loans outstanding with an average loan
balance of approximately $531,000. Substantially all of the Bank's commercial
real estate loans were secured by properties located in its primary market area.
As part of the Bank's ongoing interest rate risk management, the Bank
offers adjustable-rate commercial real estate loans. The initial interest rates
on a substantial portion of these loans adjust after an initial five year period
to new market rates that generally range between 200 to 350 basis points over
the then-current five year U.S. Treasury or FHLB rates. More typically,
commercial real estate loans may have a term of approximately 5 to 10 years,
with an amortization schedule of approximately 20 to 25 years, and may be repaid
subject to certain penalties. Fixed rate loans for a term of 15 to 20 years may
also be made, from time to time.
In the underwriting of commercial real estate loans, the Bank generally
lends up to 70% of the property's appraised value on apartment buildings, up to
70% of the property's appraised value on commercial properties that are not
owner-occupied, and up to 75% of the property's appraised value on commercial
properties that are owner-occupied. Decisions to lend are based on the economic
viability of the property and the creditworthiness of the borrower. In
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evaluating a commercial real estate loan, the Bank emphasizes primarily the
ratio of net cash flow to debt service for the property, generally requiring a
ratio of at least 110%, computed after deduction for a vacancy factor and
property expenses deemed appropriate by the Bank. In addition, a personal
guarantee of the loan is generally required from the principal(s) of the
borrower. On all real estate loans, the Bank requires title insurance insuring
the priority of its lien, fire and extended coverage casualty insurance, and
flood insurance, if appropriate, in order to protect the Bank's security
interest in the underlying property.
Commercial real estate loans generally carry higher interest rates and
have shorter terms than those on one- to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
economy generally.
Construction Loans. The Bank originates acquisition, development and
construction loans to builders in its market area. This portfolio totaled $19.1
million, or 3.3% of total loans, at September 30, 1999.
Acquisition loans are made to help finance the purchase of land
intended for further development, including single-family houses, multi-family
housing, and commercial income property. In some cases, the Bank may make an
acquisition loan before the borrower has received approval to develop the land
as planned. Loans for the acquisition of land are generally limited to the
Bank's most creditworthy customers. In general, the maximum loan-to-value ratio
for a land acquisition loan is 50% of the appraised value of the property. The
Bank also makes development loans to builders in its market area to finance
improvements to real estate, consisting mostly of single-family subdivisions,
typically to finance the cost of utilities, roads and sewers. Builders generally
rely on the sale of single family homes to repay development loans, although in
some cases the improved building lots may be sold to another builder. The
maximum loan-to-value ratio for these loans is generally 60% of the appraised
value of the property. Advances are made in accordance with a schedule
reflecting the cost of improvements.
The Bank also grants construction loans to area builders, often in
conjunction with development loans. These loans finance the cost of completing
homes on the improved property. The loans are generally limited to the lesser of
70% of the appraised value of the property or the actual cost of improvements.
In the case of single-family construction, the Bank limits the number of houses
it will finance that are not under contract for sale. As part of its
underwriting process for construction loans on income producing properties, such
as apartment buildings and commercial rental properties, the Bank considers the
likelihood of leasing the property at the expected rental amount, and the time
to achieve sufficient occupancy levels. The Bank generally requires a percentage
of the building to be leased prior to granting a construction loan on
income-producing property.
Advances on construction loans are made in accordance with a schedule
reflecting the cost of construction. The Bank's policy is to confirm, prior to
each advance, that the construction has been completed properly as evidenced by
an inspection report issued by an appraiser or engineer hired by the Bank. The
Bank also confirms that its lien priority remains in force before advancing
funds. Repayment of construction loans on residential subdivisions is normally
expected from the sale of units to individual purchasers. In the case of income
producing property, repayment is usually expected from permanent financing upon
completion of construction. The Bank commits to provide the permanent mortgage
financing on most of its construction loans on income-producing property.
Acquisition, development and construction lending exposes the Bank to
greater credit risk than permanent mortgage financing. The repayment of
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event the Bank makes an acquisition loan
on property that is not yet approved for the planned development, there is the
risk that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property.
Development and construction loans also expose the Bank to the risk that
improvements will not be completed on time in accordance with specifications and
projected costs. In addition, the ultimate sale or rental of the property may
not occur as anticipated.
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Commercial Business Loans. The Bank currently offers commercial
business loans to customers in its market area, some of which are secured in
part by additional real estate collateral. In an effort to expand its customer
account relationships and develop a broader base of more interest rate sensitive
assets, the Bank makes various types of secured and unsecured commercial loans
for the purpose of financing equipment acquisition, expansion, working capital
and other general business purposes. The terms of these loans generally range
from less than one year to seven years. The loans are either negotiated on a
fixed-rate basis or carry adjustable interest rates indexed to a lending rate
which is determined internally, or a short-term market rate index. The Bank may,
from time to time, purchase commercial business loan participations. At
September 30, 1999, the Bank had 285 commercial business loans outstanding with
an aggregate balance of $30.8 million, or 5.4% of the total loan portfolio. As
of September 30, 1999, the average commercial business loan balance was
approximately $108,000.
Commercial credit decisions are based upon a complete credit assessment
of the loan applicant. A determination is made as to the applicant's ability to
repay in accordance with the proposed terms as well as an overall assessment of
the risks involved. An investigation is made of the applicant to determine
character and capacity to manage. Personal guarantees of the principals are
generally required. In addition to an evaluation of the loan applicant's
financial statements, a determination is made of the probable adequacy of the
primary and secondary sources of repayment to be relied upon in the transaction.
Credit agency reports of the applicant's credit history as well as bank checks
and trade investigations supplement the analysis of the applicant's
creditworthiness. Collateral supporting a secured transaction is also analyzed
to determine its marketability and liquidity. Commercial business loans
generally bear higher interest rates than residential loans, but they also
involve a higher risk of default since their repayment is generally dependent on
the successful operation of the borrower's business.
Consumer Loans. The Bank originates a variety of consumer and other
loans, including homeowner loans, home equity lines of credit, new and used
automobile loans, and personal unsecured loans, including fixed-rate installment
loans and prime rate variable lines-of-credit. As of September 30, 1999,
consumer loans totaled $67.7 million, or 11.8% of the total loan portfolio.
At September 30, 1999, the largest group of consumer loans consisted of
$60.2 million of loans secured by junior liens on residential properties. The
Bank offers fixed-rate, fixed-term second mortgage loans, referred to as
"homeowner loans," and adjustable-rate home equity lines of credit. Homeowner
loans are offered in amounts up to 100% of the appraised value of the property
(including prior liens) with a maximum loan amount of $75,000. Home equity loans
are generally offered in amounts up to 75% of the appraised value of the
property including prior liens, with a maximum loan amount of $200,000. As of
September 30, 1999, homeowner loans totaled $34.9 million or 6.1% of the Bank's
total loan portfolio. The disbursed portion of home equity lines of credit
totaled $25.4 million, or 4.4% of the Bank's total loan portfolio, with $54.8
million remaining undisbursed.
Other consumer loans include personal loans and loans secured by new or
used automobiles. As of September 30, 1999, these loans totaled $7.5 million, or
1.3% of the Bank's total loan portfolio. The Bank originates automobile loans
directly to its customers and has no outstanding agreement with automobile
dealerships to generate indirect loans. The maximum term for an automobile loan
is generally 60 months for a new car, and 36 to 48 months for a used car. The
Bank will generally lend up to 100% of the purchase price of a new car, and up
to 90% of the lesser of the purchase price or the National Automobile Dealers'
Association book rate for a used car. The Bank requires all borrowers to
maintain collision insurance on automobiles securing loans in excess of $5,000,
with the Bank listed as loss payee. Personal loans also include secured and
unsecured installment loans. Unsecured installment loans generally have shorter
terms than secured consumer loans, and generally have higher interest rates than
rates charged on secured installment loans with comparable terms.
The Bank's procedures for underwriting consumer loans include an
assessment of an applicant's credit history and the ability to meet existing
obligations and payments on the proposed loan. Although an applicant's
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral security, if any, to the
proposed loan amount.
9
<PAGE>
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as automobiles. In such cases,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, the repayment of consumer loans depends on the borrower's continued
financial stability, as their repayment is more likely than a single family
mortgage loan to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws
(including bankruptcy and insolvency laws) may limit the amount that can be
recovered on such loans.
Loan Originations, Purchases, Sales and Servicing. While the Bank
originates both fixed-rate and adjustable-rate loans, its ability to generate
each type of loan depends upon borrower demand, market interest rates, borrower
preference for fixed- versus adjustable-rate loans, and the interest rates
offered on each type of loan by other lenders in the Bank's market area. This
includes competing banks, savings banks, credit unions, and mortgage banking
companies, as well as life insurance companies, and Wall Street conduits that
also actively compete for local commercial real estate loans. Loan originations
are derived from a number of sources, including branch office personnel,
existing customers, borrowers, builders, attorneys, real estate broker referrals
and walk-in customers.
The Bank's loan origination and sales activity may be adversely
affected by a rising interest rate environment that typically results in
decreased loan demand. Accordingly, the volume of loan originations and the
profitability of this activity can vary from period to period. One- to
four-family residential mortgage loans are generally underwritten to current
Fannie Mae and Freddie Mac seller/servicer guidelines. One- to four-family loans
are also closed on standard Fannie Mae/Freddie Mac documents and sales are
conducted using standard Fannie Mae/Freddie Mac purchase contracts and master
commitments as applicable. One- to four-family mortgage loans may be sold both
to Fannie Mae and Freddie Mac on a non-recourse basis whereby foreclosure losses
are generally the responsibility of either Fannie Mae or Freddie Mac and not the
Bank.
The Bank is a qualified loan servicer for both Fannie Mae and Freddie
Mac. The Bank's policy has been to retain the servicing rights for all loans
sold, and to continue to collect payments on the loans, maintain tax escrows and
applicable fire and flood insurance coverage, and supervise foreclosure
proceedings if necessary. The Bank retains a portion of the interest paid by the
borrower on the loans as consideration for its servicing activities.
10
<PAGE>
The following table sets forth the loan origination, sale and repayment
activities of the Bank for the periods indicated. The Bank has not purchased any
loans in recent years.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Unpaid principal balances at beginning of year....................... $ 468,573 $ 408,276 $ 372,844
--------- --------- ---------
Originations by Type
Adjustable-rate:
One- to four-family............................................. 17,563 14,976 11,299
Commercial real estate.......................................... 17,540 9,025 8,257
Commercial business.................................................. 20,616 19,593 8,140
Construction.................................................... 16,941 12,529 14,240
Consumer........................................................ 12,510 11,587 14,166
--------- --------- ---------
Total adjustable-rate......................................... 85,170 67,710 56,102
--------- --------- ---------
Fixed-rate:
One- to four-family............................................. 100,873 93,493 33,214
Commercial real estate.......................................... 22,244 8,161 710
Commercial business............................................. 4,584 3,209 4,788
Construction.................................................... -- -- 1,002
Consumer........................................................ 21,213 20,100 16,954
--------- --------- ---------
Total fixed-rate.............................................. 148,914 124,963 56,668
--------- --------- ---------
Total loans originated.......................................... 234,084 192,673 112,770
Sales................................................................ (13,804) (17,003) (243)
Principal repayments................................................. (115,525) (114,166) (75,744)
Net charge-offs...................................................... (294) (610) (636)
Transfers to real estate owned....................................... (311) (597) (715)
--------- --------- ---------
Unpaid principal balances at end of year............................. 572,723 468,573 408,276
Allowance for loan losses............................................ (6,202) (4,906) (3,779)
--------- --------- ---------
Net loans at end of year............................................. $ 566,521 $ 463,667 $ 404,497
========= ========= =========
</TABLE>
Loan Approval Authority and Underwriting. The Bank has four levels of
lending authority: the Board of Directors, the Director Loan Committee, the
Management Loan Committee, and individual loan officers. The Board grants
lending authority to the Director Loan Committee, the majority of the members of
which are Directors. The Director Loan Committee in turn may grant authority to
the Management Loan Committee and individual loan officers. In addition,
designated members of management may grant authority to individual loan officers
up to specified limits. The lending activities of the Bank are subject to
written policies established by the Board. These policies are reviewed
periodically.
The Director Loan Committee may approve loans of up to a maximum of
$3.2 million in the aggregate to any one borrower and related entities in
accordance with the Bank's loans-to-one borrower policy. Loans exceeding $3.2
million in the aggregate require approval of the Board of Directors. The
Management Loan Committee may approve loans of up to an aggregate of $650,000 to
any one borrower and related borrowers. Two loan officers with sufficient loan
authority acting together may approve loans up to $350,000. The maximum
individual authority to approve an unsecured loan is $50,000.
The Bank has established a risk rating system for its commercial
business loans, commercial real estate loans, and construction loans to
builders. The risk rating system assesses a variety of factors to rank the risk
of default and risk of loss associated with the loan. These ratings are
performed by commercial credit personnel who do not have responsibility for loan
originations. The Bank determines its maximum loans to one borrower based upon
the rating of the loan. The large majority of loans fall into three categories.
The maximum for the best rated borrowers is $7.5
11
<PAGE>
million, for the next group of borrowers is $5.5 million, and for the third
group is $3.5 million. Sublimits apply based on reliance on any single property,
and for commercial loans.
In connection with its residential and commercial real estate loans,
the Bank requires property appraisals performed by independent appraisers who
are approved by the Board. Appraisals are then reviewed by the appropriate loan
underwriting areas of the Bank. The Bank also requires title insurance, hazard
insurance and, if indicated, flood insurance on property securing its mortgage
loans. For consumer loans under $50,000, such as equity lines of credit and
homeowner loans, title insurance is not required.
Loan Origination Fees and Costs. In addition to interest earned on
loans, the Bank also receives loan origination fees. Such fees vary with the
volume and type of loans and commitments made, and competitive conditions in the
mortgage markets, which in turn respond to the demand and availability of money.
The Bank defers loan origination fees and costs, and amortizes such amounts as
an adjustment to yield over the term of the loan by use of the level-yield
method. Deferred loan origination costs (net of deferred fees) were $838,000 at
September 30, 1999.
To the extent that originated loans are sold on or after January 1,
1997, Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," requires the Bank to capitalize a mortgage servicing asset at the
time of the sale. In the year ended September 30, 1999, the Bank recognized
$139,000 in income upon capitalization of originated mortgage servicing rights
for loans sold on a servicing-retained basis. The capitalized amount is
amortized thereafter (over the period of estimated net servicing income) as a
reduction of servicing fee income. The unamortized amount is fully charged to
income when loans are prepaid. Asset recognition of servicing rights on sales of
originated loans was not permitted under accounting standards in effect prior to
SFAS No. 125, when the Bank sold the majority of the loans it presently services
for others. Originated mortgage servicing rights with an amortized cost of
$255,000 are included in other assets at September 30, 1999. See also Notes 1
and 5 of the Notes to Consolidated Financial Statements.
Loans-to-One Borrower. Savings associations are subject to the same
loans-to-one borrower limits as those applicable to national banks, which under
current regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis, and an additional amount equal to
10% of unimpaired net worth if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
The Bank monitors its credit limits by relationship and by total credit
exposure, including the unused portion of credit made available by the Bank,
such as unadvanced amounts on construction loans and unused lines of credit. At
September 30, 1999, the five largest aggregate amounts loaned to individual
borrowers by the Bank (including any unused lines of credit) were as follows:
$7.2 million, consisting of mortgage-secured financing; $7.0 million consisting
of mortgage secured and unsecured financing; $6.9 million secured by a mortgage;
$5.3 million, consisting of mortgage-secured and unsecured financing; and $5.1
million, secured by marketable securities. All of the loans discussed above are
performing in accordance with their terms.
Delinquent Loans, Other Real Estate Owned and Classified Assets
Collection Procedures. A computer generated late notice is sent by the
17th day of the month requesting the payment due plus the late charge that was
assessed. After the late notices have been mailed, accounts are assigned to a
collector for follow-up to determine reasons for delinquency and to review
payment options. Additional system-generated collection letters are sent to
customers every 10 days. Notwithstanding ongoing collection efforts, all
consumer loans are fully charged-off after 120 days.
Loans Past Due and Non-performing Assets. Loans are reviewed on a
regular basis. Loans are placed on non-accrual status when either principal or
interest is 90 days or more past due. In addition, loans are placed on
non-accrual status when, in the opinion of management, there is sufficient
reason to question the borrower's ability to continue to meet contractual
principal or interest payment obligations. Interest accrued and unpaid at the
time a loan is placed on a non-accrual status is reversed from interest income.
Interest payments received on non-accrual loans are not recognized as income
unless warranted based on the borrower's financial condition and payment record.
At
12
<PAGE>
September 30, 1999, the Bank had non-accrual loans of $4.6 million. The ratio of
non-performing loans to total loans was 0.82% at September 30, 1999.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses. At September 30, 1999, the
Bank had REO of $403,000. The Bank had total non-performing assets (non-accrual
loans and REO) of $5.0 million and a ratio of non-performing assets to total
assets of 0.62% at September 30, 1999.
The following table sets forth certain information with respect to the
Bank's loan portfolio delinquencies at the dates indicated.
<TABLE>
<CAPTION>
Loans Delinquent For
------------------------------------------
60-89 Days 90 Days and Over Total
------------------ ------------------ --------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
At September 30, 1999
One- to four-family............... 15 $ 1,834 37 $ 2,839 52 $ 4,673
Commercial real estate............ 1 45 4 1,133 5 1,178
Commercial business............... --- --- 2 208 2 208
Construction...................... --- --- 1 27 1 27
Consumer.......................... 21 432 23 429 44 861
---- -------- ----- -------- ---- --------
Total............................ 37 $ 2,311 67 $ 4,636 104 $ 6,947
==== ======== ===== ======== ==== ========
At September 30, 1998
One- to four-family............... 9 $ 719 33 $ 2,965 42 $ 3,684
Commercial real estate............ 2 261 2 871 4 1,132
Commercial business............... --- --- 7 368 7 368
Construction...................... --- --- 3 1,256 3 1,256
Consumer.......................... 15 264 14 647 29 911
---- -------- ----- -------- ---- --------
Total............................ 26 $ 1,244 59 $ 6,107 85 $ 7,351
==== ======== ===== ======== ==== ========
At September 30, 1997
One- to four-family............... 11 $ 1,245 28 $ 2,549 39 $ 3,794
Commercial real estate............ 2 204 4 1,375 6 1,579
Commercial business............... 4 98 7 243 11 341
Construction...................... C C 2 276 2 276
Consumer ......................... 5 87 23 234 28 321
---- -------- ----- -------- ---- --------
Total............................ 22 $ 1,634 64 $ 4,677 86 $ 6,311
==== ======== ===== ======== ==== ========
</TABLE>
13
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of the Bank's non-performing assets at the dates indicated. At each
date presented, the Bank had no troubled debt restructurings (loans for which a
portion of interest or principal has been forgiven and loans modified at
interest rates materially less than current market rates).
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family.............................. $ 2,839 $ 2,965 $ 2,549 $ 2,731 $ 1,972
Commercial real estate........................... 1,133 871 1,375 2,087 3,346
Commercial business.............................. 208 368 243 109 654
Construction..................................... 27 1,256 276 920 209
Consumer......................................... 429 647 234 503 421
------- -------- -------- -------- --------
Total non-performing loans...................... 4,636 6,107 4,677 6,350 6,602
------- -------- -------- -------- --------
Real estate owned:
One- to four-family.............................. 403 92 186 347 50
Commercial real estate........................... --- 274 --- 960 160
------- -------- -------- -------- --------
Total real estate owned......................... 403 366 186 1,307 210
------- -------- -------- -------- --------
Total non-performing assets........................ $ 5,039 $ 6,473 $ 4,863 $ 7,657 $ 6,812
======= ======== ======== ======== ========
Ratios:
Non-performing loans to total loans.............. 0.82% 1.32% 1.16% 1.72% 1.99%
Non-performing assets to total assets............ 0.62 0.94 0.75 1.21 1.29
</TABLE>
For the year ended September 30, 1999, gross interest income that would
have been recorded had the non-accrual loans at the end of the period remained
on accrual status throughout the period amounted to $395,000. Interest income
actually recognized on such loans totaled $131,000.
Classification of Assets. The Bank's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
that are considered to be of lesser quality as substandard, doubtful, or loss
assets. An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the savings institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets is not
warranted. Assets that do not expose the Bank to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated as special mention by management. As
of September 30, 1999, the Bank had $4.6 million of assets designated as special
mention.
When the Bank classifies assets as either substandard or doubtful, it
allots for analytical purposes a portion of general valuation allowances or loss
reserves to such assets as deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the inherent
risk associated with lending activities, but which have not been allocated to
particular problem assets. When the Bank classifies problem assets as loss, it
is required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge-off such amount. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional loss allowances. Management regularly
reviews the Bank's asset portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of the Bank's assets at September 30, 1999, classified
assets consisted of substandard assets of $4.2 million (loans receivable of $3.8
million and REO of $403,000) and doubtful assets (loans receivable) of $271,000.
There were no assets classified as loss at September 30, 1999.
14
<PAGE>
Allowance for Loan Losses. The Bank provides for loan losses based on
the allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes provisions for
loan losses in order to maintain the adequacy of the allowance for loan losses.
The allowance for loan losses consists of amounts specifically allocated to
non-performing loans and potential problem loans (if any) as well as allowances
determined for each major loan category. Loan categories such as single-family
residential mortgages and consumer loans are generally evaluated on an aggregate
or "pool" basis by applying loss factors to the current balances of the various
loan categories. The loss factors are determined by management based on an
evaluation of historical loss experience, delinquency trends, volume and type of
lending conducted, and the impact of current economic conditions in the Bank's
market area. While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
At September 30, 1999, the allowance for loan losses was $6.2 million,
which equaled 1.10% of net loans and 133.78% of non-performing loans. For the
years ended September 30, 1999, 1998 and 1997, the Bank recorded net loan
charge-offs of $294,000, $610,000 and $636,000, respectively, as a reduction of
the allowance for loan losses. Provisions for loan losses added to the allowance
were $1.6 million, $1.7 million and $1.1 million during the respective periods.
The following table sets forth activity in the Bank's allowance for
loan losses for the years indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997 1996 1995
------- ------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year........................... $ 4,906 $ 3,779 $ 3,357 $ 3,472 $ 2,837
------- ------- ------- -------- --------
Charge-offs:
One- to four-family.................................. (9) (13) (114) (33) (85)
Commercial real estate............................... --- (87) (301) (840) -
Commercial business.................................. (567) (10) (173) - -
Construction......................................... --- (355) - - -
Consumer............................................. (346) (200) (171) (203) (67)
------- ------- ------- -------- --------
Total charge-offs.................................. (922) (665) (759) (1,076) (152)
------- ------- ------- -------- --------
Recoveries:
One- to four-family.................................. --- --- 42 3 -
Commercial real estate............................... 101 --- --- --- ---
Commercial business.................................. 194 --- - - -
Construction......................................... 286 2 32 14 -
Consumer............................................. 47 53 49 33 27
------- ------- ------- -------- --------
Total recoveries................................... 628 55 123 50 27
------- ------- ------- -------- --------
Net charge-offs........................................ (294) (610) (636) (1,026) (125)
Provision for loan losses.............................. 1,590 1,737 1,058 911 760
------- ------- ------- -------- --------
Balance at end of year................................. 6,202 4,906 $ 3,779 $ 3,357 $ 3,472
======= ======= ======= ======== ========
Ratios:
Net charge-offs to average loans outstanding......... 0.06% 0.14% 0.17% 0.29% 0.04%
Allowance for loan losses to non-performing loans.... 133.78 80.33 80.80 52.87 52.59
Allowance for loan losses to total loans, net ....... 1.10 1.06 0.93 0.91 1.05
</TABLE>
15
<PAGE>
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category, and the percent of loans in each category to total loans
at the dates indicated. The allowance for loan losses allocated to each category
is not necessarily indicative of future losses in any particular category and
does not restrict the use of the allowance to absorb losses in other categories.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Balances Category Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ...... $ 2,091 $344,731 60.2% $ 1,320 $290,334 62.0% $ 734 $241,886 59.3%
Commercial real estate ... 2,416 110,382 19.3 1,976 71,149 15.1 1,431 62,910 15.4
Commercial business ...... 254 30,768 5.4 376 24,372 5.2 443 18,433 4.5
Construction ............. 614 19,147 3.3 301 20,049 4.3 389 23,475 5.7
Consumer ................. 827 67,695 11.8 933 62,669 13.4 782 61,572 15.1
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total.................. $ 6,202 $572,723 100.0% $ 4,906 $468,573 100.0% $ 3,779 $408,276 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
<CAPTION>
September 30,
--------------------------------------------------------------------
1996 1995
------------------------------ -------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ...... $ 756 $219,827 59.0% $ 696 $199,017 59.3%
Commercial real estate ... 1,247 66,145 17.7 1,377 66,820 19.9
Commercial business ...... 536 15,268 4.1 536 11,160 3.3
Construction ............. 389 16,074 4.3 389 6,228 1.9
Consumer ................. 429 55,530 14.9 474 52,194 15.6
-------- -------- ----- -------- -------- -----
Total.................. $ 3,357 $372,844 100.0% $ 3,472 $335,419 100.0%
======== ======== ===== ======== ======== =====
</TABLE>
16
<PAGE>
Securities Activities
The Company's securities investment policy is established by the Board
of Directors. This policy dictates that investment decisions will be made based
on the safety of the investment, liquidity requirements, potential returns, cash
flow targets, and consistency with the Company's interest rate risk management
strategy. The Board's asset/liability committee oversees the Company's
investment program and evaluates on an ongoing basis the Company's investment
policy and objectives. The chief financial officer, or the chief financial
officer acting with the chief executive officer, is responsible for making
securities portfolio decisions in accordance with established policies. The
Company's chief financial officer and chief executive officer have the authority
to purchase and sell securities within specific guidelines established by the
investment policy. In addition, all transactions are reviewed by the Board's
asset/liability committee at least quarterly.
The Company's current policies generally limit securities investments
to U.S. Government and U.S. Agency securities, municipal bonds, and corporate
debt obligations, as well as investments in preferred and common stock of
government agencies such as Fannie Mae, Freddie Mac and the FHLB (federal agency
securities). Securities in these categories are classified as "investment
securities" for financial reporting purposes. The policy also permits
investments in mortgage-backed securities, including pass-through securities
issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as
collateralized mortgage obligations ("CMOs") issued or backed by securities
issued by these government agencies. Also permitted are investments in
securities issued or backed by the Small Business Administration and
asset-backed securities collateralized by auto loans, credit card receivables,
and home equity and home improvement loans. The Company's current investment
strategy uses a risk management approach of diversified investing in fixed-rate
securities with short- to intermediate-term maturities, as well as
adjustable-rate securities, which may have a longer term to maturity. The
emphasis of this approach is to increase overall investment securities yields
while managing interest rate risk. To accomplish these objectives, the Company
focuses on investments in mortgage-backed securities and CMOs. In addition, U.S.
Government and other non-amortizing securities are used for call protection and
liquidity.
SFAS No. 115 requires the Company to designate its securities as held
to maturity, available for sale, or trading, depending on the Company's ability
and intent. Available for sale securities are carried at fair value, while held
to maturity securities are carried at amortized cost. The Company does not have
a trading portfolio.
As of September 30, 1999, the Company's overall securities portfolio
had a carrying value of $205.2 million. In accordance with SFAS No. 115,
securities with a fair value of $148.4 million, or 18.2% of total assets, were
classified as available for sale, while securities with an amortized cost of $
56.8 million, or 6.9% of total assets, were classified as held to maturity. The
estimated fair value of these held to maturity securities at September 30, 1999
was $56.5 million, which was $303,000 less than their amortized cost.
Government Securities. At September 30, 1999, the Company held $61.9
million, or 7.6% of total assets, in government securities, consisting primarily
of U.S. Treasury and agency obligations with short- to medium-term maturities
(one to five years), of which $58.9 million was classified as available for sale
and $3.0 million was classified as held to maturity. While these securities
generally provide lower yields than other investments such as mortgage-backed
securities, the Company's current investment strategy is to maintain investments
in such instruments to the extent appropriate for liquidity purposes, as
collateral for borrowings, and for prepayment protection.
Corporate Bonds and Other Debt Securities. At September 30, 1999, the
Company held $23.7 million in corporate debt securities, all of which was
classified as available for sale. Although corporate bonds may offer a higher
yield than that of a U.S. Treasury or agency security of comparable duration,
corporate bonds also may have a higher risk of default due to adverse changes in
the creditworthiness of the issuer. In recognition of this potential risk, the
Company's policy limits investments in corporate bonds to securities with ten
years or less and rated "A" or better by at least one nationally recognized
rating agency, and to a total investment of no more than $2.0 million per issuer
and a total portfolio limit of $40.0 million. At September 30, 1999, the Company
held $11.2 million in bonds issued by
17
<PAGE>
states and political subdivisions, of which $10.8 million was classified as
available for sale and $415,000 was classified as held to maturity. The bonds
are not rated.
Equity Securities. At September 30, 1999, the Company's equity
securities portfolio totaled $3.2 million, all of which was classified as
available for sale, and consisted of preferred stock issued by Freddie Mac and
Fannie Mae, and certain other equity investments. The Company benefits from its
investment in common and preferred stock due to a tax deduction the Company
receives with regard to dividends paid by domestic corporate issuers on equity
securities held by other corporate entities, such as the Company. The Company
also held $6.2 million of common stock in the FHLB of New York that must be held
as a condition of membership in the Federal Home Loan Bank System.
Mortgage-Backed Securities. The Company purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower credit risk as a result of the guarantees
provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase
liquidity. The Company invests primarily in mortgage-backed securities issued or
sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae. The Company also invests
to a lesser extent in securities backed by the Small Business Administration, or
agencies of the U.S. Government.
Mortgage-backed securities are created by pooling mortgages and issuing
a security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of the Company's
mortgage-backed securities investments are collateralized by single-family
mortgages. The issuers of such securities (generally U.S. Government agencies
and government sponsored enterprises, including Fannie Mae, Freddie Mac and
Ginnie Mae) pool and resell the participation interests in the form of
securities to investors, such as the Company, and guarantee the payment of
principal and interest to these investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees, credit enhancements and servicing fees. However,
mortgage-backed securities are usually more liquid than individual mortgage
loans and may be used to collateralize certain liabilities and obligations of
the Company. Investments in mortgage-backed securities involve a risk that
actual prepayments will be greater than the estimated life of the security,
which may require adjustments to the amortization of any premium or accretion of
any discount relating to such instruments, thereby reducing the net yield on
such securities. There is also reinvestment risk associated with cash flows from
and redemptions of such securities. In addition, the market value of such
securities may be adversely affected by changes in interest rates. The Company
reviews prepayment estimates for its mortgage-backed securities at purchase to
ensure that prepayment assumptions are reasonable considering the underlying
collateral for the securities at issue and current interest rates, and to
determine the yield and estimated maturity of the mortgage-backed securities
portfolio.
At September 30, 1999, the Company's mortgage-backed pass-through
securities portfolio totaled $74.2 million, of which $26.5 million was available
for sale and $47.7 million was held to maturity. Although the average
contractual maturity of the aggregate mortgage-backed securities portfolio was
approximately 15 years, the actual maturity of a mortgage-backed security may be
less than its stated contractual maturity due to prepayments of the underlying
mortgages. Prepayments that are faster than anticipated may shorten the life of
the security and may result in a loss of any premiums paid and thereby reduce
the net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Company may be subject to reinvestment risk
because, to the extent that the mortgage-backed securities prepay faster than
anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate of return. Conversely, in a
rising interest rate environment prepayments may decline, thereby extending the
estimated life of the security and depriving the Company of the ability to
reinvest cash flows at the increased rates of interest.
CMOs and REMICs. In addition to mortgage-backed pass-through
securities, the Company invests in CMOs or collateralized mortgage obligations,
including REMICs. This portfolio is limited to CMOs and REMICs backed by Fannie
Mae and Freddie Mac. CMOs are a type of debt security issued by a
special-purpose entity that aggregates pools
18
<PAGE>
of mortgages and mortgage-backed securities and creates different classes of CMO
securities with varying maturities and amortization schedules, as well as a
residual interest, with each class possessing different risk characteristics.
The cash flows from the underlying collateral are generally divided into
"tranches" or classes whereby tranches have descending priorities with respect
to the distribution of principal and interest repayment of the underlying
mortgages and mortgage-backed securities, as opposed to pass-through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. In contrast to mortgage-backed securities from which cash flow
is received (and hence, prepayment risk is shared) pro rata by all securities
holders, the cash flow from the mortgages or mortgage-backed securities
underlying CMOs is paid in accordance with a predetermined priority to investors
holding various tranches of such securities or obligations. A particular tranche
of CMOs may, therefore, carry prepayment risk that differs from that of both the
underlying collateral and other tranches. Investments in CMOs involve a risk
that actual prepayments will differ from those estimated in pricing the
security, which may result in adjustments to the net yield on such securities.
Additionally, the market value of such securities may be adversely affected by
changes in market interest rates. Management believes these securities may
represent attractive alternatives relative to other investments due to the wide
variety of maturity, repayment and interest rate options available.
The Company's practice is to limit fixed-rate CMO investments primarily
in the early to intermediate tranches, which have the greatest cash flow
stability. Floating rate CMOs are purchased with emphasis on the relative
trade-offs between life rate caps, prepayment risk, and interest rates. The
Company's current policy with respect to CMOs limits investments to non-high
risk securities unless approval is given by the Board of Directors and an
analysis is provided on how a high-risk CMO will improve the overall interest
rate risk of the Company. High-risk CMOs are defined as those securities
exhibiting significantly greater volatility of estimated average life and price
relative to interest rates compared to 30-year, fixed-rate securities.
Available for Sale Portfolio
As of September 30, 1999, securities with a fair value of $148.4
million, or 18.2% of total assets, were classified as available for sale.
Investment securities, consisting of U.S. Government and agency securities,
municipal bonds, and corporate debt obligations as well as investments in
preferred and common stock, made up $96.6 million of this total, or 11.8 % of
total assets, with mortgage-backed securities totaling $51.8 million, or 6.4% of
total assets.
19
<PAGE>
The following table sets forth the composition of the Company's
available for sale portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------- ------- ------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government securities.............. $31,657 $31,507 $26,119 $ 26,547 $ 27,273 $ 27,387
Federal agency obligations.............. 27,966 27,407 17,028 17,278 15,993 15,948
Corporate debt securities .............. 24,201 23,667 1,999 1,997 3,007 3,005
State and municipal securities.......... 11,700 10,808 --- --- --- ---
Equity securities....................... 3,175 3,236 2,017 2,249 2,017 2,177
------- ------- ------- -------- -------- --------
Total investment securities available
for sale ............................. 98,699 96,625 47,163 48,071 48,290 48,517
------- ------- ------- -------- -------- --------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae.......................... 16,053 15,930 10,726 10,907 13,172 13,335
Freddie Mac ........................ 3,252 3,306 5,052 5,210 7,364 7,571
Other .............................. 7,163 7,252 3,167 3,185 4,584 4,567
CMOs and REMICs...................... 25,625 25,274 30,358 30,610 10,665 10,680
------- ------- ------- -------- -------- --------
Total mortgage-backed securities
available for sale ................... 52,093 51,762 49,303 49,912 35,785 36,153
------- ------- ------- -------- -------- --------
Total available for sale securities..... $150,792 $148,387 $96,466 $ 97,983 $ 84,075 $ 84,670
======== ======== ======= ======== ======== ========
</TABLE>
At September 30, 1999, the Company's available for sale U. S. Treasury
securities portfolio totaled $31.5 million, or 3.9% of total assets. These
securities had maturities of less than five years, with a weighted average yield
of 4.86%. At September 30, 1999, the federal agency securities in the Company's
available for sale portfolio totaled $27.4 million, or 3.4% of total assets, and
had maturities of less than five years, with a weighted average yield of 6.07%.
The agency securities portfolio includes both non-callable and callable
debentures. The agency debentures are callable on a quarterly basis following an
initial holding period of from twelve to twenty-four months. At September 30,
1999, the state and municipal securities in the Company's available for sale
portfolio totaled $10.8 million, or 1.3% of total assets, and had weighted
average maturity of approximately 10 years, with a weighted average tax-free
yield of 4.35%. Available for sale corporate debt securities totaled $23.7
million at September 30, 1999, while equity securities available for sale
totaled $3.2 million.
At September 30, 1999, $26.5 million of the Company's available for
sale mortgage-backed securities consisted of pass-through securities, which
totaled 3.3% of total assets. At the same date, the Company's available for sale
CMO portfolio totaled $25.3 million, or 3.1% of total assets, and consisted of
CMOs issued by government sponsored agencies such as Fannie Mae and Freddie Mac
with a weighted average yield of 5.99%. The Company owns both fixed-rate and
floating-rate CMOs. The Company's CMO portfolio at September 30, 1999 included
securities of $24.0 million (principally available for sale securities) for
which the underlying mortgage collateral had contractual maturities of over ten
years. However, as with mortgage-backed pass-through securities, the actual
maturity of a CMO may be less than its stated contractual maturity due to
prepayments of the underlying mortgages.
20
<PAGE>
Held to Maturity Portfolio
As of September 30, 1999, securities with an amortized cost of $56.8
million, or 7.0% of total assets, were classified as held to maturity.
Investment securities, consisting of U.S. Government and agency securities,
municipal bonds, and corporate debt obligations made up $3.4 million of this
total, or 0.4% of total assets. Mortgage-backed securities totaling $53.4
million, or 6.6% of total assets, made up the remainder of this portfolio.
The following table sets forth the composition of the Company's held to
maturity portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------- ------- ------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government securities................ $ --- $ --- $ 8,988 $ 9,011 $ 8,952 $ 8,913
Federal agency obligations................ 2,987 2,953 9,481 9,544 12,521 12,457
State and municipal and other securities.. 415 415 707 707 722 721
------- ------- ------- -------- -------- --------
Total investment securities held to
maturity ............................. 3,402 3,368 19,176 19,262 22,195 22,091
------- ------- ------- -------- -------- --------
Mortgage-Backed Securities:
Pass-through securities:
Ginnie Mae.............................. 5,106 5,140 6,526 6,616 7,971 8,114
Fannie Mae.............................. 18,116 17,786 26,117 26,349 29,674 29,565
Freddie Mac............................. 22,014 21,900 33,014 33,639 49,158 49,497
Other................................... 2,453 2,499 2,171 2,264 2,222 2,282
CMOs and REMICs........................... 5,691 5,786 11,398 11,542 15,046 15,166
------- ------- ------- -------- -------- --------
Total mortgage-backed securities held
to maturity .......................... 53,380 53,111 79,226 80,410 104,071 104,624
------- ------- ------- -------- -------- --------
Total held to maturity securities........... $56,782 $56,479 $98,402 $99,672 $126,266 $126,715
======= ======= ======= ======= ======== ========
</TABLE>
At September 30, 1999, the federal agency securities in the Company's
held to maturity portfolio totaled $3.0 million, or 0.4% of total assets, and
had maturities of less than five years, with a weighted average yield of 6.05%.
The agency securities portfolio includes both non-callable and callable
debentures. The agency debentures are callable on a quarterly basis following an
initial holding period of from twelve to twenty-four months.
At September 30, 1999, the Company's held to maturity mortgage-backed
pass-through securities portfolio totaled $47.7 million, of which $2.0 million
had a weighted average yield of 5.53% and contractual maturities within one
year; $7.4 million had a weighted average yield of 5.99% and contractual
maturities within five years; $14.8 million had a weighted average yield of
6.69% and contractual maturities of five to ten years; and $21.0 million had a
weighted average yield of 7.10% and contractual maturities of over ten years.
At September 30, 1999, $5.7 million of the CMO portfolio, or 0.7% of
total assets, was classified as held-to-maturity. The estimated fair value of
the Company's held-to-maturity CMO portfolio at September 30, 1999 was $5.8
million, or $95,000 more than the amortized cost.
21
<PAGE>
The composition and maturities of the investment securities portfolio
(debt securities) and the mortgage-backed securities portfolio at September 30,
1999 are summarized in the following table. Maturities are based on the final
contractual payment dates, and do not reflect the impact of prepayments or
redemptions that may occur.
<TABLE>
<CAPTION>
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years More than Ten Years
------------------- ------------------- ------------------- ---------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
-------- -------- -------- -------- -------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
Mortgage-Backed Securities
Freddie Mac ................ $ --- ---% $ 749 7.32% $ 69 8.79% $ 2,434 6.78%
Fannie Mae.................. 521 6.43 592 6.59 5,265 6.20 9,675 6.55
CMOs and REMICs............. --- --- --- --- 6,964 6.13 18,661 5.93
Other....................... --- --- --- --- 4,732 6.32 2,431 5.97
------- ------- ------- ------- ------- -------- -------- --------
Total .................... 521 6.43 1,341 7.00 17,030 6.21 33,201 6.18
------- ------- ------- ------- ------- -------- -------- --------
Investment Securities
U.S. Gov't and agency
securities ............... 10,124 6.37 49,499 5.24 --- --- --- ---
State and municipal
securities ............... --- --- --- --- 4,711 3.99 6,989 4.60
Corporate debt securities... 2,006 5.03 10,062 6.09 12,133 6.75 --- ---
------- ------- ------- ------- ------- -------- -------- --------
Total .................... 12,130 6.14 59,561 5.38 16,844 5.98 6,989 4.60
------- ------- ------- ------- ------- -------- -------- --------
Total available for sale...... $12,651 6.16% $60,902 5.42% $33,874 6.10% $ 40,190 5.90%
======= ======= ======= ======= ======= ======== ======== ========
Held to Maturity:
Mortgage-Backed Securities
Freddie Mac ................ $ --- ---% $ 1,333 6.21% $ 8,983 6.66% $ 11,698 7.04%
Fannie Mae.................. 1,999 5.53 6,096 5.94 4,730 6.41 5,291 6.67
Ginnie Mae.................. --- --- 6 7.31 1,052 8.30 4,048 7.85
CMOs and REMICs............. --- --- --- --- --- --- 5,691 6.32
Other....................... --- --- --- --- 28 11.50 2,425 7.35
------- ------- ------- ------- ------- -------- -------- --------
Total .................... 1,999 5.53 7,435 5.99 14,793 6.70 29,153 6.97
------- ------- ------- ------- ------- -------- -------- --------
Investment Securities
U.S. Gov't and agency
securities ............... --- --- 2,987 6.05 --- --- --- ---
State and municipal
securities ............... --- --- 25 7.75 --- --- 390 6.75
------- ------- ------- ------- ------- -------- -------- --------
Total .................... --- --- 3,012 6.06 --- --- 390 6.75
------- ------- ------- ------- ------- -------- -------- --------
Total held to maturity........ $ 1,999 5.53% $10,447 6.01% $14,793 6.70% $ 29,543 6.97%
======= ======= ======= ======= ======= ======== ======== ========
<PAGE>
<CAPTION>
Total Securities
-------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Available for Sale:
Mortgage-Backed Securities
Freddie Mac ................ $ 3,252 $ 3,307 6.95%
Fannie Mae.................. 16,053 15,930 6.43
CMOs and REMICs............. 25,629 25,273 5.99
Other....................... 7,163 7,252 6.20
-------- -------- --------
Total .................... 52,093 51,762 6.21
-------- -------- --------
Investment Securities
U.S. Gov't and agency
securities ............... 59,623 58,914 5.43
State and municipal
securities ............... 11,700 10,808 4.35
Corporate debt securities... 24,201 23,667 6.33
-------- -------- --------
Total .................... 95,524 93,389 5.23
-------- -------- --------
Total available for sale...... $147,617 $145,151 5.77%
======== ======== ========
Held to Maturity:
Mortgage-Backed Securities
Freddie Mac ................ $ 22,014 $ 21,900 6.83%
Fannie Mae.................. 18,116 17,786 6.23
Ginnie Mae.................. 5,106 5,140 7.94
CMOs and REMICs............. 5,691 5,786 6.32
Other....................... 2,453 2,499 7.39
-------- -------- --------
Total .................... 53,380 53,111 6.71
-------- -------- --------
Investment Securities
U.S. Gov't and agency
securities ............... 2,987 2,953 6.05
State and municipal
securities ............... 415 415 6.81
-------- -------- --------
Total .................... 3,402 3,368 6.14
-------- -------- --------
Total held to maturity........ $ 56,782 $ 56,479 6.67%
======== ======== ========
</TABLE>
22
<PAGE>
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, proceeds from maturing securities
and cash flows from operations, are the primary sources of the Bank's funds for
use in lending, investing and for other general purposes. To a lesser extent,
the Bank uses borrowed funds (primarily FHLB advances) to fund its operations.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. Its deposit accounts consist of savings accounts, NOW
accounts, checking accounts, money market accounts, club accounts and
certificates of deposit. It offers certificates of deposit with balances in
excess of $100,000, as well as IRAs and other qualified plan accounts. The Bank
provides commercial checking accounts for small to moderately-sized businesses,
as well as low-cost checking account services for low-income customers.
At September 30, 1999, the Bank's deposits totaled $586.6 million.
Interest-bearing deposits totaled $526.8 million, and non-interest bearing
demand deposits totaled $59.8 million. NOW, savings and money market deposits
totaled $289.0 million at September 30, 1999. Also at that date, the Bank had a
total of $237.8 million in certificates of deposit, of which $197.4 million had
maturities of one year or less. Although the Bank has a significant portion of
its deposits in shorter-term certificates of deposit, management monitors
activity on these accounts and, based on historical experience and the Bank's
current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. It relies primarily on competitive pricing
of its deposit products, customer service and long-standing relationships with
customers to attract and retain these deposits; however, market interest rates
and rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain deposits. The Bank uses traditional means
of advertising its deposit products, including radio and print media, and
generally does not solicit deposits from outside its market area. While
certificates of deposit in excess of $100,000 are accepted by the Bank, and may
be subject to preferential rates, it does not actively solicit such deposits as
they are more difficult to retain than core deposits. Historically, the Bank has
not used brokers to obtain deposits.
The following table sets forth the distribution of the Bank's deposit
accounts, by account type, at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
-------- ------ ----- -------- ------ ----- -------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits
Retail ............... $ 35,701 6.1% ---% $ 31,045 5.4% ---% $ 32,104 5.9% ---%
Commercial ........... 24,147 4.1 --- 19,285 3.4 --- 17,117 3.1 ---
-------- ------ ----- -------- ------ ----- -------- ------ -----
Total demand deposits 59,848 10.2 --- 50,330 8.8 --- 49,221 9.0 ---
NOW deposits.......... 47,129 8.0 1.01 41,738 7.3 1.22 32,985 6.0 1.25
Savings deposits...... 161,809 27.6 2.02 155,934 27.2 1.99 153,171 28.0 2.25
Money market deposits. 80,033 13.6 2.75 76,010 13.3 2.65 75,339 13.8 2.96
-------- ------ ----- -------- ------ ----- -------- ------ -----
348,819 59.4 1.70 324,012 56.6 1.74 310,716 56.8 1.96
Certificates of deposit 237,821 40.6 4.82 249,162 43.4 5.15 236,130 43.2 5.31
-------- ------ ----- -------- ------ ----- -------- ------ -----
Total deposits....... $586,640 100.0% 2.97% $573,174 100.0% 3.22% $546,846 100.0% 3.40%
======== ====== ===== ======== ====== ===== ======== ====== =====
</TABLE>
23
<PAGE>
The following table sets forth, by interest rate ranges, information
concerning the Bank's certificates of deposit at the dates indicated.
<TABLE>
<CAPTION>
At September 30, 1999
----------------------------------------------------------------------------- Total at
Period to Maturity September 30,
----------------------------------------------------------------------------- ---------------------
Less than One to Two to More than Percent
Interest Rate Range One Year Two Years Three Years Three Years Total of Total 1998 1997
------------------- -------- ----------- ----------- ----------- ---------- ----------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4.00% and below.......... $ 11,195 $ 79 $ --- $ 2,745 $ 14,019 5.9% $ 1,003 $ 716
4.01% to 5.00%........... 120,081 12,151 1,272 1,876 135,380 56.9 103,713 68,707
5.01% to 6.00%........... 56,155 16,207 3,944 1,583 77,889 32.8 123,044 151,729
6.01% to 7.00%........... 6,627 122 248 29 7,026 2.9 17,943 9,557
7.01% and above.......... 3,315 77 115 --- 3,507 1.5 3,459 5,421
-------- ------- ------- ------- -------- ------ -------- --------
Total................. $197,373 $28,636 $ 5,579 $ 6,233 $237,821 100.0% $249,162 $236,130
======== ======= ======= ======= ======== ====== ======== ========
</TABLE>
The following table sets forth the amount of the Bank's certificates of
deposit by time remaining until maturity as of September 30, 1999.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000............. $59,309 $46,954 $68,755 $35,523 $210,541
Certificates of deposit of $100,000 or more (1)........ 8,331 5,968 8,056 4,925 27,280
------- ------- ------- ------- --------
Total of certificates of deposit.................... $67,640 $52,922 $76,811 $40,448 $237,821
======= ======= ======= ======= ========
</TABLE>
- -----------------------
(1) The weighted average interest rates for these accounts, by maturity period,
are 4.40% for 3 months or less; 4.77% for 3 to 6 months; 5.31% for 6 to 12
months; and 4.90% for over 12 months. The overall weighted average interest
rate for accounts of $100,000 or more was 4.84%.
Borrowings. At September 30, 1999, the Bank had $117.8 million of
borrowings, of which $115.5 million consisted of FHLB advances. FHLB advances
were $38.6 million as of September 30, 1998 and $24.0 million as of September
30, 1997. At September 30, 1999, the Bank had access to additional FHLB
borrowings of up to $128.9 million.
The following table sets forth information concerning balances and
interest rates on the Bank's FHLB advances at the dates and for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1999 1998 1997
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at end of year............................................ $115,515 $38,646 $24,000
Average balance during year....................................... 74,319 28,817 23,730
Maximum outstanding at any month end.............................. 118,526 38,646 38,000
Weighted average interest rate at end of year..................... 5.60% 5.97% 6.69%
Average interest rate during year................................. 5.53% 5.96% 6.27%
</TABLE>
24
<PAGE>
Subsidiary Activities
Provest Services Corp. I is a wholly-owned subsidiary of the Bank
holding an investment in a limited partnership which operates an assisted-living
facility. A percentage of the units in the facility are for low-income
individuals. Provest Services Corp. II is a wholly-owned subsidiary of the Bank
which has engaged a third-party provider to sell annuities and mutual funds to
the Bank's customers. Through September 30, 1999, the activities of these
subsidiaries have had an insignificant effect on the Bank's consolidated
financial condition and results of operations. During fiscal 1999, the Bank
established Provident REIT, Inc., a wholly-owned subsidiary in the form of a
real estate investment trust ("REIT"). The REIT holds both residential and
commercial real estate loans.
Competition
The Bank faces significant competition in both originating loans and
attracting deposits. The New York metropolitan area has a high concentration of
financial institutions, most of whom are significantly larger institutions that
have greater financial resources than the Bank, and all of which are competitors
of the Bank to varying degrees. The Bank's competition for loans comes
principally from commercial banks, savings banks, mortgage banking companies,
credit unions and insurance companies and other financial service companies. Its
most direct competition for deposits has historically come from commercial
banks, savings banks and credit unions. The Bank faces additional competition
for deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Further competition may
arise as restrictions on the interstate operations of financial institutions are
removed.
Employees
As of September 30, 1999, the Bank had 211 full-time employees and 38
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
REGULATION
General
As a federally chartered, SAIF-insured savings bank, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The Bank also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors. The FDIC also has examination
authority over the Bank in its role as the administrator of the SAIF. The Bank's
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, or Congress,
could have a material adverse impact on the Company and the Bank and their
operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
25
<PAGE>
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus, and an additional 10% of unimpaired capital and surplus if
such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. The OTS by regulation has
amended the loans to one borrower rule to permit savings associations meeting
certain requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.
Qualified Thrift Lender Requirement. The HOLA requires savings
institutions to be qualified thrift lenders ("QTL"). To be a QTL, the Bank can
either satisfy the QTL test, or the Domestic Building and Loan Association
("DBLA") Test of the Internal Revenue Code of 1986, as amended (the "Code").
Under the QTL test, a savings bank is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments,"
primarily residential mortgages and related investments, including certain
mortgage-backed and related securities on a monthly basis in 9 out of every 12
months. Under the DBLA test, an institution must meet a "business operations
test" and a "60% of assets test." The business operations test requires the
business of a DBLA to consist primarily of acquiring the savings of the public
and investing in loans. An institution meets the public savings requirements
when it meets one of two conditions: (i) the institution acquires its savings in
conformity with OTS rules and regulations; or (ii) the general public holds more
than 75% of its deposits, withdrawable shares, and other obligations. The
general public may not include family or related business groups or persons who
are officers or directors of the institution.
The 60% of assets test requires that at least 60% of a DBLA's assets
must consist of assets that thrifts normally hold, except for consumer loans
that are not educational loans. The DBLA test does not include, as the QTL test
does to a limited or optional extent, mortgage loans originated and sold into
the secondary market and subsidiary investments. A savings bank that fails to be
a QTL must either convert to a bank charter or operate under certain
restrictions. As of September 30, 1999, the Bank met the QTL test.
Limitations on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. A "well capitalized" institution can, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year in an amount up to 100 percent of its net income during the
calendar year, plus its retained net income for the preceding two years. As of
September 30, 1999, the Bank was a "well-capitalized" institution.
In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. It is
the OTS' recent practice to review dividend waiver notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association
(and the savings association's capital ratios adjusted accordingly) in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
at September 30, 1999 exceeded the then applicable requirements.
Community Reinvestment Act and Fair Lending Laws. Savings associations
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws
26
<PAGE>
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received an
outstanding CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Affiliates. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any nonsavings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. If an institution fails to meet these standards, the appropriate federal
banking agency may require the institution to submit a compliance plan.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 4% tier 1 core capital ratio, a
4% tier 1 risk-based ratio, and an 8% total risk-based ratio. Tier 1 core
capital is defined as common stockholders' equity less investments in and
advances to "nonincludable" subsidiaries, goodwill and other intangible assets,
nonqualifying equity instruments and disallowed servicing assets, and other
disallowed assets; plus accumulated losses (gains) on certain available-for-sale
securities and cash flow hedges (net of taxes), qualifying intangible assets,
minority interest in includable consolidated subsidiaries, and mutual
institutions' nonwithdrawable deposit accounts. Adjusted total assets is defined
as total assets less assets of "nonincludable" subsidiaries, goodwill and other
intangible assets and disallowed servicing assets and other disallowed assets;
plus accumulated losses (gains) on certain available-for sale securities and
cash flow hedges, and qualifying intangible assets. Total risk-based capital is
defined as tier 1 (core) capital plus 45% of net unrealized gains on
available-for-sale equity securities, qualifying
27
<PAGE>
subordinated debt and redeemable preferred stock, capital certificates,
nonwithdrawable deposit accounts not included in core capital, other equity
instruments and allowances for loan and lease losses; less equity investments
and other assets required to be deducted, low-level recourse deduction and
capital reduction for interest-rate risk exposure.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset.
At September 30, 1999, the Bank exceeded each of the OTS capital
requirements as summarized below:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ---------------------- ---------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio(1)
------ --------- ------ --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.................. $ 76,894 9.6% $ 12,069 1.5% $ --- ---%
Tier I core capital............... 76,894 9.6 32,184 4.0 40,230 5.0
Tier I risk-based capital......... 76,894 15.9 --- --- 28,986 6.0
Total risk-based capital.......... 82,935 17.2 38,648 8.0 48,310 10.0
</TABLE>
- --------------------
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective
Action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has total risk-based capital of less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that
is less than 3.0% is considered to be "significantly undercapitalized," and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
At September 30, 1999, the Bank was categorized as "well capitalized,"
meaning that the Bank's total risk-based capital ratio exceeded 10.0%, Tier I
risk-based capital ratio exceeded 6.0%, leverage capital ratio exceeded 5.0%,
and the Bank was not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure.
28
<PAGE>
Insurance of Deposit Accounts. The FDIC has adopted a risk-based
deposit insurance assessment system. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. The FDIC is
authorized to raise the assessment rates in certain circumstances. The FDIC has
exercised this authority several times in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank, as a federal association, is required to be a member of the
FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central
credit facility primarily for member institutions. The Bank, as a member of the
FHLB of New York, is required to acquire and hold shares of capital stock in
that FHLB in an amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. As of September 30, 1999, the Bank was in compliance with this
requirement. The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). At September 30, 1999, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.
Financial Modernization Legislation
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley
Act, which will be effective on March 11, 2000, and will expand the permissible
activities of bank holding companies like Financial. Upon the effective date of
the legislation, the Company will be permitted to own and control depository
institutions and to engage in activities that are financial in nature or
incidental to financial activities, or activities that are complementary to a
financial activity and do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The
legislation identifies certain activities that are deemed to be financial in
nature, including nonbanking activities currently permissible for bank holding
companies to engage in both within and outside the United States, as well as
insurance and securities underwriting and merchant banking activities.
In order to take advantage of this new authority, a savings and loan
holding company's depositary institution subsidiaries must be well capitalized
and well managed and have at least a satisfactory record of performance under
the Community Reinvestment Act. The Bank currently meets these requirements. No
prior regulatory notice would be required to acquire a company engaging in these
activities or to commence these activities directly or indirectly through a
subsidiary.
Holding Company Regulation
General. The Mutual Holding Company and the Company are nondiversified
mutual savings and loan holding companies within the meaning of the HOLA. As
such, the Mutual Holding Company and the Company are registered with the OTS and
are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Holding Company and the Company and any nonsavings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, the Company and the Mutual Holding Company
are generally not subject to state business organizations law.
Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a Mutual Holding Company and a federally chartered
mid-tier holding company such as the Company may engage in the following
activities: (I) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary
29
<PAGE>
of such company; (vii) holding or managing properties used or occupied by a
savings association subsidiary of such company properties used or occupied by a
savings association subsidiary of such company; (viii) acting as trustee under
deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by
regulation, has determined to be permissible for bank holding companies under
Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by
regulation, prohibits or limits any such activity for savings and loan holding
companies; or (B) in which multiple savings and loan holding companies were
authorized (by regulation) to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the Director. If a Mutual Holding Company
acquires or merges with another holding company, the holding company acquired or
the holding company resulting from such merger or acquisition may only invest in
assets and engage in activities listed in (I) through (x) above, and has a
period of two years to cease any nonconforming activities and divest of any
nonconforming investments.
The HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (I) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Waivers of Dividends by the Mutual Holding Company. OTS regulations
require the Mutual Holding Company to notify the OTS of any proposed waiver of
its right to receive dividends. The OTS reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (I)
the Mutual Holding Company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the Mutual Holding Company's
members; (ii) for as long as the savings association subsidiary is controlled by
the Mutual Holding Company, the dollar amount of dividends waived by the Mutual
Holding Company are considered as a restriction to the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the Mutual Holding
Company is available for declaration as a dividend solely to the Mutual Holding
Company, and, in accordance with SFAS No. 5, where the savings association
determines that the payment of such dividend to the Mutual Holding Company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the Mutual Holding Company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the Mutual Holding Company.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to undertake a conversion from mutual to stock
form ("Conversion Transaction"). In a Conversion Transaction a new holding
company would be formed as the successor to the Company (the "New Holding
Company"), the Mutual Holding Company's corporate existence would end, and
certain customers of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock ("Common Stock") held by stockholders of the Company other
than the Mutual Holding Company ("Minority Stockholders") would be automatically
converted into a number of shares of common stock of the New
30
<PAGE>
Holding Company determined pursuant an exchange ratio that ensures that after
the Conversion Transaction, subject to the dividend waiver adjustment described
below and any adjustment to reflect the receipt of cash in lieu of fractional
shares, the percentage of the to-be outstanding shares of the New Holding
Company issued to Minority Stockholders in exchange for their Common Stock would
be equal to the percentage of the outstanding shares of Common Stock held by
Minority Stockholders immediately prior to the Conversion Transaction. The total
number of shares held by Minority Stockholders after the Conversion Transaction
would also be affected by any purchases by such persons in the offering that
would be conducted as part of the Conversion Transaction.
The dividend waiver adjustment would decrease the percentage of the
to-be outstanding shares of common stock of the New Holding Company issued to
Minority Stockholders in exchange for their shares of Common Stock to reflect
(I) the aggregate amount of dividends waived by the Mutual Holding Company and
(ii) assets other than Common Stock held by the Mutual Holding Company. Pursuant
to the dividend waiver adjustment, the percentage of the to-be outstanding
shares of the New Holding Company issued to Minority Stockholders in exchange
for their shares of Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders multiplied by a
dividend waiver fraction. The dividend waiver fraction is equal to the product
of (a) a fraction, of which the numerator is equal to the Company's
stockholders' equity at the time of the Conversion Transaction less the
aggregate amount of dividends waived by the Mutual Holding Company and the
denominator is equal to the Company's stockholders' equity at the time of the
Conversion Transaction, and (b) a fraction, of which the numerator is equal to
the appraised pro forma market value of the New Holding Company minus the value
of the Mutual Holding Company's assets other than Common Stock and the
denominator is equal to the pro forma market value of the New Holding Company.
Federal Securities Law
The common stock of the Company is registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act. Common stock of the Company held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Company may
not be resold without registration or unless sold in accordance with certain
resale restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
ITEM 2. Properties
- -------------------
Properties
In the weeks before and after September 30, 1999, Provident opened its
first two branches in Orange County, extending its market area from its base of
11 conveniently located branches in Rockland County. Currently the Bank leases
eight premises, including its headquarters location, from third parties under
terms and conditions considered by the management to be favorable to the Bank.
In addition, the Bank owns six premises.
Following is a list of Bank locations:
Corporate Office and Commercial Lending Group
400 Rella Boulevard 38-40 New Main Street
Montebello, NY 10901 Haverstraw, NY 10927
(914) 369-8040 (914) 942-3880
Rockland County:
44 W. Route 59 375 Rt. 303 at Kings Highway
Nanuet, NY 10954 Orangeburg, NY 10962
(914) 627-6180 (914) 398-4810
31
<PAGE>
148 Rt. 9W 196 Rt. 59
Stony Point, NY 10980 Suffern, NY 10901
(914) 942-3890 (914) 369-8360
179 South Main Street 1633 Rt. 202
New City, NY 10956 Pomona, NY 10970
(914) 639-7750 (914) 364-5690
72 West Eckerson Rd. Orange County:
Spring Valley, NY 10977
(914) 426-7230 125 Dolson Avenue
(In the ShopRite Supermarket)*
1 Lake Road West Middletown, NY 10940
Congers, NY 19020 (914)-342-5777
(914) 267-2180
153 Rt. 94
71 Lafayette Avenue (In the ShopRite Supermarket)
Suffern, NY 10901 Warwick, NY 10990
(914) 369-8350 (914) 986-9540
26 North Middletown Rd. * Opened in October, 1999
(In the ShopRite Supermarket)
Pearl River, NY 10965
(914) 627-6170
ITEM 3. Legal Proceedings
- -------------------------
The Bank is a defendant in a lawsuit, Patrick Gawrysiak a/k/a Patrick
Gray v. Provident Bank, brought by a prospective purchaser of REO property,
alleging breach of contract, negligence, consumer fraud and civil conspiracy.
The plaintiff brought the lawsuit in the Superior Court of New Jersey, Bergen
County Law Division, and is seeking compensatory damages of $500,000, exemplary
damages of $1.0 million, "nominal" damages of $1.0 million and punitive damages
of $1.0 million. The Bank retained counsel and vigorously contested the claim.
On September 24, 1999, the Bank's motion for summary judgment was granted
dismissing the lawsuit for lack of personal jurisdiction over the Bank.
Plaintiff has filed a notice of appeal of that decision. Management continues to
believe the underlying claim is baseless and intends to vigorously contest the
plaintiff's appeal.
The Company is not involved in any other pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business which, in the aggregate, involved amounts which are believed by
management to be immaterial to the financial condition and operations of the
Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. Market for Company's Common Stock and Related Security Holder Matters
The "Common Stock and Related Matters" section of the Company's Annual
Report to Stockholders is incorporated herein by reference.
32
<PAGE>
ITEM 6. Selected Financial Data
- -------------------------------
The "Selected Consolidated Financial and Other Data" section for the
year ended September 30, 1999 is filed as part of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements contained in the Company's Annual Report to
Stockholders are incorporated herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
None
PART III
ITEM 10. Directors and Executive Officers of the Company
- --------------------------------------------------------
The "Proposal 1-Election of Directors" section of the Company's Proxy
Statement for the Company's Annual Meeting of Stockholders to be held in
February 2000 (the "Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
- -------------------------------
The "Proposal I-Election of Directors" section of the Proxy Statement
is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The "Proposal I-Election of Directors" section of the Proxy Statement
is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The "Transactions with Certain Related Persons" section of the Proxy
Statement is incorporated herein by reference.
33
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(A) Independent Auditors' Report
(B) Consolidated Statements of Condition
(C) Consolidated Statements of Income
(D) Consolidated Statements of Changes in Stockholders'
Equity
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Stock Holding Company Charter of Provident Bancorp, Inc.
(incorporated herein by reference to the Company's
Registration Statement on Form S-1, file No. 333-63593 (the
"S-1"))
3.2 Bylaws of Provident Bancorp, Inc. (incorporated herein by
reference to the S-1)
4 Form of Stock Certificate of Provident Bancorp, Inc.
(incorporated herein by reference to the S-1)
10.1 Form of Employee Stock Ownership Plan (incorporated herein by
reference to the S-1)
10.2 Employment Agreement with George Strayton, as amended
(incorporated herein by reference to the S-1)
10.3 Form of Employment Agreement (incorporated herein by reference
to the S-1)
10.4 Deferred Compensation Agreement (incorporated herein by
reference to the S-1)
10.5 Supplemental Executive Retirement Plan, as amended
(incorporated herein by reference to the S-1)
10.6 Management Incentive Program (incorporated herein by reference
to the S-1)
34
<PAGE>
10.7 1996 Long-Term Incentive Plan for Officers and Directors, as
amended (incorporated herein by reference to the S-1)
13 Annual Report to Stockholders
21 Subsidiaries of the Company
27 EDGAR Financial Data Schedule
35
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Provident Bancorp, Inc.
Date: December 23, 1999 By: \s\ George Strayton
--------------------
George Strayton
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By: \s\ George Strayton By: \s\ Katherine Dering
---------------------------------- ----------------------------------
George Strayton Katherine Dering
President, Chief Executive Officer and Chief Financial Officer and Senior
Director Vice President
Date: December 23, 1999 Date: December 23, 1999
By: \s\ William F. Helmer By: \s\ Dennis L. Coyle
---------------------------------- ----------------------------------
William F. Helmer Dennis L. Coyle, Vice Chairman
Chairman of the Board
Date: December 23, 1999 Date: December 23, 1999
By: \s\ Murray L. Korn By: \s\ Donald T. McNelis
---------------------------------- ----------------------------------
Murray L. Korn, Director Donald T. McNelis, Director
Date: December 23, 1999 Date: December 23, 1999
By: \s\ Richard A. Nozell By: \s\ William R. Sichol, Jr.
---------------------------------- ----------------------------------
Richard A. Nozell, Director William R. Sichol, Jr., Director
Date: December 23, 1999 Date: December 23, 1999
By: By: \s\ F. Gary Zeh
---------------------------------- ----------------------------------
Wilbur C. Ward, Director F. Gary Zeh, Director
Date: December 23, 1999
</TABLE>
36
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following financial condition data and operating data are derived
from the audited consolidated financial statements of Provident Bancorp, Inc.
(the "Company"), or prior to January 7, 1999, Provident Bank (the "Bank").
Additional information is provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and related notes included elsewhere in this report.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ..................... $814,518 $691,068 $648,742 $634,250 $526,593
Loans, net ....................... 566,521 463,667 404,497 369,487 331,947
Securities available for sale:
Mortgage-backed securities ..... 51,762 49,912 36,153 41,482 30,329
Investment securities ............ 96,625 48,071 48,517 47,313 21,456
Securities held to maturity:
Mortgage-backed securities ..... 53,380 79,226 104,071 112,863` 80,735
Investment securities ............ 3,402 19,176 22,195 22,138 37,920
Deposits ......................... 586,640 573,174 546,846 545,286 443,667
Borrowings ....................... 117,753 49,931 41,623 30,157 29,087
Equity ........................... 90,299 55,200 50,399 45,536 43,828
<CAPTION>
Years Ended September 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest and dividend income .......................... $52,267 $47,948 $46,555 $42,566 $37,030
Interest expense ...................................... 21,589 20,880 20,179 18,585 15,064
------- ------- ------- ------- -------
Net interest income ................................... 30,678 27,068 26,376 23,981 21,966
Provision for loan losses ............................. 1,590 1,737 1,058 911 760
------- ------- ------- ------- -------
Net interest income after provision for loan losses ... 29,088 25,331 25,318 23,070 21,206
Non-interest income ................................... 3,103 3,080 2,711 2,451 2,100
Non-interest expense (excluding special assessment) (1) 26,303 21,823 20,602 19,436 15,264
SAIF special assessment (2) ........................... -- -- C 3,298 C
------- ------- ------- ------- -------
Income before income tax expense .................. 5,888 6,588 7,427 2,787 8,042
Income tax expense .................................... 1,958 2,346 2,829 690 3,239
------- ------- ------- ------- -------
Net income (1) (2) ............................... $ 3,930 $ 4,242 $ 4,598 $ 2,097 $ 4,803
======= ======= ======= ======= =======
</TABLE>
(Footnotes on next page)
1
<PAGE>
<TABLE>
<CAPTION>
At or for the Years Ended September 30,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) ........ 0.52% 0.64% 0.72% 0.36% 0.96%
Return on equity (ratio of net income to average equity) .............. 5.03 7.94 9.51 4.60 11.77
Average interest rate spread (3) ...................................... 3.66 3.79 3.92 3.88 4.15
Net interest margin (4) ............................................... 4.24 4.28 4.36 4.30 4.53
Efficiency ratio (5) .................................................. 77.86 72.39 70.83 73.53 63.43
Non-interest expense to average total assets .......................... 3.47 3.29 3.24 3.91 3.06
Average interest-earning assets to average interest-bearing liabilities 119.28 114.88 113.07 112.60 112.38
Per Share and Related Data:
Basic earnings per share (6) ........................................ $ 0.40 -- -- -- --
Dividends per share (7) ............................................. $ 0.06 -- -- -- --
Dividend payout ratio (8) ........................................... 15.00% -- -- -- --
Book value per share (9) ............................................ $ 10.91 -- -- -- --
Asset Quality Ratios:
Non-performing assets to total assets ................................. 0.62% 0.94% 0.75% 1.21%
1.29%
Non-performing loans to total loans ................................... 0.82 1.32 1.16 1.72 1.99
Allowance for loan losses to non-performing loans ..................... 133.78 80.33 80.80 52.87 52.59
Allowance for loan losses to total loans .............................. 1.09 1.06 0.93 0.91 1.05
Capital Ratios:
Equity to total assets at end of year ................................. 11.09% 7.99% 7.77% 7.18% 8.32%
Average equity to average assets ...................................... 10.29 8.05 7.59 7.83 8.17
Tier 1 leverage ratio (Bank only) ..................................... 9.56 7.37 6.96 6.15 8.24
</TABLE>
- -------------------------------
(1) Non interest expense for the year ended September 30, 1999 includes special
charges totaling approximately $1.5 million in connection with the computer
system conversion ($1.1 million) and establishment of the Bank's Employee
Stock Ownership Plan ("ESOP") ($371,000). Excluding these special charges
after taxes, net income would have been approximately $4.9 million for the
year ended September 30, 1999.
(2) The SAIF special assessment represents the Bank's share of an assessment
imposed on all financial institutions with deposits insured by the Savings
Association Insurance Fund (the "SAIF"). On an after-tax basis, the special
assessment reduced net income for fiscal 1996 by approximately $2.0
million.
(3) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities for the period.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(5) The efficiency ratio represents non-interest expense (other than the SAIF
special assessment in fiscal 1996) divided by the sum of net interest
income and non-interest income.
<PAGE>
(6) Basic earnings per share was computed for the nine-month period following
the stock offering based on net income of approximately $3.2 million for
that period and 8,041,018 average common shares.
(7) Represents dividends of $0.03 per share declared and paid in each of the
third and fourth quarters of fiscal 1999.
(8) Ratio is based on dividends of $0.06 per share and nine-month earnings of
$0.40 per share. Based on six-month earnings of $0.29 per share for the
third and fourth fiscal quarters, the dividend pay out ratio would be
20.69%.
(9) Based on total stockholders' equity and all 8,280,000 outstanding common
shares, including unallocated ESOP shares.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this annual report contains
forward-looking statements. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believe", "anticipates",
"plans", "expects" and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the Company's actual results to differ materially from those contemplated
by such forward-looking statements. These important factors include, without
limitation, the Company's continued ability to originate quality loans,
fluctuations in interest rates, real estate conditions in the Company's lending
areas, general and local economic conditions, unanticipated Year 2000 issues,
the Company's continued ability to attract and retain deposits, the Company's
ability to control costs, and the effect of new accounting pronouncements and
changing regulatory requirements. The Company undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
General
Provident Bank (the "Bank") is a federally chartered thrift institution
operating as a community bank and conducting business primarily in Rockland
County, New York. On January 7, 1999, the Bank completed its reorganization into
a mutual holding company structure, and Provident Bancorp, Inc., (the "Company")
the Bank's stock holding company, sold 3,864,000 shares or 46.67% of its common
stock to the public and issued 4,416,000 shares or 53.33% to Provident Bancorp,
MHC. As a result of the stock offering, the Company raised net proceeds of
approximately $37.1 million, prior to the purchase of stock by the Employee
Stock Ownership Plan (the "ESOP"). The ESOP, which did not purchase shares in
the offering, purchased 8% of the shares issued to the public, or 309,120
shares, in the open market during January and February 1999. The financial
condition and results of operations of the Company are being discussed on a
consolidated basis with the Bank. Reference to the Company may signify the Bank,
depending on the context of the reference.
The Company's results of operations depend primarily on its net
interest income, which is the difference between the interest income on its
earning assets, such as loans and securities, and the interest expense paid on
its deposits and borrowings. Results of operations are also affected by
non-interest income and expense, the provision for loan losses and income tax
expense. Non-interest income consists primarily of banking service fees and
income from loan servicing. The Company's non-interest expense consists
primarily of salaries and employee benefits, occupancy and office expenses,
advertising and promotion expense, data processing expenses, and amortization of
branch purchase premiums. Results of operations are also significantly affected
by general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.
3
<PAGE>
Management Strategy
Management intends to continue focusing on the Bank's growth as an
independent community bank offering a broad range of customer-focused services
as an alternative to money center banks in its market area, positioning the Bank
for sustainable long-term growth. In recent years, management determined that
the success of the Bank would be enhanced by operating as a community bank
rather than a traditional thrift institution, and as a result, management
implemented a business strategy that included: (i) creating an infrastructure
for commercial and consumer banking, including an experienced commercial loan
department and delivery systems to accommodate the needs of business and
individual customers; and (ii) placing a greater emphasis on commercial real
estate and business lending, as well as checking and other transaction accounts.
Highlights of management's business strategy are as follows:
Community banking and customer service: As an independent community
bank, a principal objective of the Bank is to respond to the financial services
needs of its consumer and commercial customers. Management intends to use new
technologies to offer customers new financial products and services as market
and regulatory conditions permit, including PC banking, cash management services
and sweep accounts, although the Bank does not currently offer these products or
services. Management also expects that the Bank will offer asset management,
trust, and personal financial planning services in the near future.
Growing and diversifying the loan portfolio: The Bank also offers a
broad range of products to commercial businesses and real estate owners and
developers. Commercial and real estate loans improve the yield of the overall
portfolio and shorten its average maturity. The Bank has established experienced
commercial loan and loan administration departments to assure the continued
growth and careful management of the quality of its assets.
Expanding the retail banking franchise: Management intends to further
expand the retail banking franchise and to increase the number of households
served in the Bank's market area. Management's strategy is to deliver
exceptional customer service, which depends on up-to-date technology and
convenient access, as well as courteous personal contact from a trained and
motivated workforce. To this end, the Bank fosters a sales culture in its branch
offices that emphasizes transaction accounts, the account most customers
identify with "their" bank. In the weeks before and after September 30, 1999,
the Bank opened its first two branches in Orange County, extending its market
area from its base of 11 conveniently located branches in Rockland County. The
Bank intends to pursue opportunities to expand its branch network further as
market conditions permit. In addition, acknowledging the time pressures on the
two-income families typical to its market area, six of the Bank's branch offices
are now open seven days a week. The Bank also has 17 automated teller machines
("ATM") including seven new, advanced-function ATMs that deliver change to the
penny, in addition to the more typical ATM functions. Its ATMs also participate
in networks that permit customers to access their accounts through ATMs
worldwide.
Management of Market Risk
Qualitative Analysis. As with other financial institution holding
companies, one of the Company's most significant forms of market risk is
interest rate risk. The general objective of the Company's interest rate risk
management is to determine the appropriate level of risk given the Company's
business strategy, and then manage that risk in a manner that is consistent with
the Company's policy to reduce the exposure of the Company's net interest income
to changes in market interest rates. The Bank's asset/liability management
committee ("ALCO"), which consists of senior management, evaluates the interest
rate risk
4
<PAGE>
inherent in certain assets and liabilities, the Company's operating environment,
and capital and liquidity requirements, and modifies lending, investing and
deposit gathering strategies accordingly. A committee of the Board of Directors
reviews the ALCO's activities and strategies, the effect of those strategies on
the Company's net interest margin, and the effect that changes in market
interest rates would have on the value of the Company's loan and securities
portfolios.
The Company actively evaluates interest rate risk concerns in
connection with its lending, investing, and deposit activities. The Company
emphasizes the origination of residential monthly and bi-weekly fixed-rate
mortgage loans, residential and commercial adjustable-rate mortgage loans,
consumer and business loans. Depending on market interest rates and the
Company's capital and liquidity position, the Company may retain all of its
newly originated fixed-rate, fixed-term residential mortgage loans or may sell
all or a portion of such longer-term loans on a servicing-retained basis. The
Company also invests in short-term securities, which generally have lower yields
compared to longer-term investments. Shortening the maturities of the Company's
interest-earning assets by increasing investments in shorter-term loans and
securities helps to better match the maturities and interest rates of the
Company's assets and liabilities, thereby reducing the exposure of the Company's
net interest income to changes in market interest rates. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer term, fixed-rate loans and investments. The
Company has also purchased an interest rate cap to synthetically extend the
duration of its portfolio of short-term certificates of deposit. The counter
party in the transaction has agreed to make interest payments to the Company,
based on a $20 million notional amount, to the extent that the three-month LIBOR
rate exceeds 6.5% over the term of the cap agreement, which has a five-year term
ending in March 2003. See Note 15 of the Notes to Consolidated Financial
Statements. By purchasing shorter term assets and extending the duration of its
liabilities, management believes that the corresponding reduction in interest
rate risk will enhance long-term profitability.
Quantitative Analysis. Management monitors interest rate sensitivity
primarily through the use of a model that simulates net interest income under
varying interest rate assumptions. Management also evaluates this sensitivity
using a model that estimates the change in the Bank's net portfolio value
("NPV") over a range of interest rate scenarios. NPV is the present value of
expected cash flows from assets, liabilities and off-balance sheet contracts.
Both models assume estimated loan prepayment rates, reinvestment rates and
deposit decay rates which seem most likely based on historical experience during
prior interest rate changes.
<PAGE>
The table below sets forth, as of September 30, 1999, the estimated
changes in the Company's NPV and its net interest income that would result from
the designated instantaneous changes in the U.S. Treasury yield curve.
<TABLE>
<CAPTION>
NPV Net Interest Income
------------------------------------------------------- ---------------------------------------------
Change in Estimated Increase Estimated Increase (Decrease) in
Interest Rates Estimated (Decrease) in NPV Net Interest Estimated Net Interest Income
(basis points) NPV Amount Percent Income Amount Percent
-------------- --------- --------- ------ ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
+300 $ 68,767 $ (32,167) (31.9)% $ 27,332 $ (417) (1.5)%
+200 80,092 (20,842) (20.6) 27,564 (185) (0.7)
+100 91,137 (9,797) (9.7) 27,728 (21) (0.1)
0 100,934 --- --- 27,749 --- ---
-100 109,626 8,692 8.6 28,118 369 1.3
-200 117,346 16,412 16.3 28,810 1,061 3.8
-300 122,971 22,037 21.8 29,230 1,481 5.3
</TABLE>
5
<PAGE>
The table set forth above indicates that at September 30, 1999, in the
event of an abrupt 200 basis point decrease in interest rates, the Company would
be expected to experience a 16.3% increase in NPV, and a 3.8% increase in net
interest income. In the event of an abrupt 200 basis point increase in interest
rates, the Company would be expected to experience a 20.6% decrease in NPV, and
a 0.7% decline in net interest income. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions including
relative levels of market interest rates, loan prepayments and deposit decay,
and should not be relied upon as indicative of actual results. Further, the
computations do not reflect any actions management may undertake in response to
changes in interest rates.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV and net interest income
requires making certain assumptions that may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. The
NPV and net interest income table presented above assumes that the composition
of the Company's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured. It also
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or the repricing
characteristics of specific assets and liabilities. Accordingly, although the
NPV and net interest income table provides an indication of the Company's
sensitivity to interest rate changes at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and will differ from actual results.
Analysis of Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them,
respectively.
6
<PAGE>
The following table sets forth average balance sheets, average yields
and costs, and certain other information for the years ended September 30, 1999,
1998 and 1997. No tax-equivalent yield adjustments were made, as the effect
thereof was not material. All average balances are monthly average balances
which, in the opinion of management, are not materially different from daily
average balances. Non-accrual loans were included in the computation of average
balances, but have been reflected in the table as loans carrying a zero yield.
The yields set forth below include the effect of deferred fees, discounts and
premiums which are included in interest income.
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- ------------------------------
Average Average Average
Outstanding Yield/ Outstanding Yield/ Outstanding Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)................ $ 526,139 $40,209 7.64% $ 428,460 $35,032 8.18% $ 385,355 $32,544 8.45%
Mortgage-backed securities (2) 113,458 7,231 6.37 136,011 8,822 6.49 144,252 9,398 6.52
Investment securities (2). 78,858 4,481 5.68 64,177 3,791 5.91 71,826 4,385 6.11
Other..................... 5,229 346 6.62 4,345 303 6.97 3,526 228 6.47
--------- ------- --------- ------- --------- -------
Total interest-earning assets 723,684 52,267 7.22 632,993 47,948 7.57 604,959 46,555 7.70
------- ------ ------
Non-interest-earning assets 35,165 30,254 31,861
---------- ---------- ----------
Total assets.............. $ 758,849 $ 663,247 $ 636,820
========== ========= =========
Interest-bearing liabilities:
Savings deposits (3)...... $ 171,585 3,398 1.98 $ 166,529 3,697 2.22 $ 164,726 3,670 2.23
Money market and
NOW deposits.......... 125,196 2,516 2.01 114,542 2,687 2.35 109,289 2,675 2.45
Certificates of deposit... 235,620 11,560 4.91 240,986 12,771 5.30 237,262 12,347 5.20
Borrowings................ 74,328 4,115 5.53 28,961 1,725 5.96 23,730 1,487 6.27
---------- ------- --------- ------- --------- -------
Total interest-bearing
liabilities............... 606,729 21,589 3.56 551,018 20,880 3.79 535,007 20,179 3.78
------- ------- -------
Non-interest-bearing liabilities 74,064 58,811 53,489
------- ---------- ----------
Total liabilities............ 680,793 609,829 588,496
Equity....................... 78,056 53,418 48,324
--------- --------- ---------
Total liabilities and equity $ 758,849 $ 663,247 $ 636,820
========== ========= =========
Net interest income.......... $30,678 $27,068 $26,376
======= ======= =======
Net interest rate spread (4). 3.66% 3.78% 3.92%
Net interest-earning assets (5) $ 116,955 $81,975 $69,952
========== ======= =======
Net interest margin (6)...... 4.24% 4.28% 4.36%
Ratio of interest-earning assets
to interest-bearing liabilities 119.28% 114.88% 113.07%
</TABLE>
- --------------------
<PAGE>
(1) Balances include the effect of net deferred loan origination fees and
costs, and the allowance for loan losses.
(2) Average outstanding balances are based on amortized cost.
(3) Includes club accounts and interest-bearing mortgage escrow balances.
(4) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average total
interest-earning assets.
7
<PAGE>
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of the Company's
interest-earning assets and interest-bearing liabilities. Information is
provided for each category of interest-earning assets and interest-bearing
liabilities with respect to (i) changes attributable to changes in volume (i.e.,
changes in average balances multiplied by the prior-period average rate) and
(ii) changes attributable to rate (i.e., changes in average rate multiplied by
prior-period average balances). For purposes of this table, changes attributable
to both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------------- ----------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ............................. $ 7,581 $ (2,404) $ 5,177 $ 3,550 $(1,062) $ 2,488
Mortgage-backed securities......... (1,440) (151) (1,591) (535) (41) (576)
Investment securities.............. 839 (149) 690 (456) (138) (594)
Other................................ 59 (16) 43 56 19 75
-------- --------- ---------- ------- ------- ----------
Total interest-earning assets..... 7,039 (2,720) 4,319 2,615 (1,222) 1,393
-------- --------- ---------- ------- -------- ----------
Interest-bearing liabilities:
Savings deposits................... 109 (408) (299) 40 (13) 27
Money market and NOW
deposits ........................ 236 (407) (171) 126 (114) 12
Certificates of deposit............ (279) (931) (1,210) 195 229 424
Borrowings........................... 2,519 (130) 2,389 315 (77) 238
-------- --------- ---------- ------- -------- ----------
Total interest-bearing liabilities 2,585 (1,876) 709 676 25 701
-------- --------- ---------- ------- ------- ----------
Change in net interest income........ $ 4,454 $ (844) $ 3,610 $ 1,939 $(1,247) $ 692
======== ========= ========== ======= ======== ==========
</TABLE>
Comparison of Financial Condition at September 30, 1999 and September 30, 1998
Total assets increased to $814.5 million at September 30, 1999 from
$691.0 million at September 30, 1998, an increase of $123.5 million, or 17.9 %.
The asset growth was primarily attributable to overall increases of $102.9
million in net loans and $8.8 million in securities.
<PAGE>
Net loans increased by $102.9 million, or 22.2%, in the year ended
September 30, 1999, primarily due to increases of $54.4 million in residential
mortgage loans and $44.7 million in the commercial loan portfolio. Residential
mortgage loans increased to $344.7 million at September 30, 1999, from $290.3
million at September 30, 1998, a growth rate of 18.7%. The commercial loan
portfolio (which includes commercial mortgage, construction and commercial
business loans) increased to $160.3 million at September 30, 1999, from $115.6
million at September 30, 1998, a growth rate of 38.7%. The commercial portfolio
growth was primarily attributable to increases in commercial mortgage loans of
$39.2 million and commercial business loans of $6.4 million. Total consumer
loans increased by $5.0 million. The allowance
8
<PAGE>
for loan losses increased by $1.3 million to $6.2 million at September 30, 1999
from $4.9 million at September 30, 1998.
The total securities portfolio increased by $8.8 million to $205.2
million at September 30, 1999 from $196.4 million at September 30, 1998. This
net increase reflects a $32.8 million increase in investment securities and a
$24.0 million decrease in mortgage-backed securities, as the Company
de-emphasized mortgage-backed securities in light of the increase in its
residential mortgage loan portfolio.
Total deposits increased by $13.5 million to $586.6 million at
September 30, 1999 from $573.2 million at September 30, 1998. Deposit growth was
impacted by the stock offering, since nearly one-third of the stock purchases in
January 1999 were funded from the Bank's customer deposits. Total transaction
account balances increased by $14.9 million, or 16.2%, in the year ended
September 30, 1999, to $107.0 million from $92.1 million at September 30, 1998.
Total savings account balances increased by $5.9 million, or 3.8%, to $161.8
million at September 30, 1999 from $155.9 million at September 30, 1998. Total
certificates of deposit decreased by $11.3 million, or 4.6 %, to $237.8 million
at September 30, 1999 from $249.2 million at September 30, 1998. Borrowings
increased by $67.8 million to $117.8 million at September 30, 1999 from $49.9
million at September 30, 1998.
Stockholders' equity increased by $35.1 million to $90.3 million at
September 30, 1999 from $55.2 million at September 30, 1998, primarily
reflecting the $37.1 million in net proceeds from the stock offering, as well as
net income of $3.9 million. Partially offsetting these increases was a decrease
of $2.4 million in accumulated other comprehensive income (after-tax net
unrealized gains or losses on available-for-sale securities) following the rapid
rise in interest rates during the last half of fiscal 1999. Open-market
purchases of ESOP shares and subsequent transactions resulted in a net decrease
in stockholders' equity of $3.1 million.
Comparison of Operating Results for the Years Ended September 30, 1999 and
September 30, 1998
Net income for the year ended September 30, 1999 was $3.9 million, a
decrease of $312,000, or 7.4%, compared to net income of $4.2 million for the
year ended September 30, 1998. The decrease was due primarily to increases in
non-interest expenses (including expenses associated with the conversion to a
new computer system and the establishment of the ESOP), partially offset by an
increase in net interest income. Excluding the after-tax impact of expenses
related to the computer system conversion and the expenses attributable to the
allocation of ESOP shares to participants for the plan year ended December 31,
1998, net income would have been approximately $4.9 million for the year ended
September 30, 1999.
Interest Income. Interest income increased by $4.3 million, or 9.0%, to
$52.3 million for the year ended September 30, 1999 from $48.0 million for the
year ended September 30, 1998. The increase was primarily due to a $5.2 million,
or 14.8%, increase in income from loans, partially offset by a $901,000, or
7.1%, decrease in income from securities. The increase in income from loans was
attributable to a $97.6 million increase in the average balance to $526.1
million from $428.5 million, partially offset by a 54 basis point decrease in
the average yield to 7.64% from 8.18%. The continued growth of the one-to-four
family residential mortgage loan portfolio was responsible for $64.5 million of
the overall increase in average loans, with growth of $35.5 million coming from
the average commercial loan portfolio. The decrease in income from
mortgage-backed securities was attributable to a $22.5 million decrease in the
average balance to $113.5 million from $136.0 million, combined with a 12 basis
point decrease in the average yield to 6.37% from 6.49%.
9
<PAGE>
Interest Expense. Interest expense increased by $709,000, or 3.4 %, to
$21.6 million for the year ended September 30, 1999 from $20.9 million for the
year ended September 30, 1998. This was the net result of a $55.7 million or
10.1 % increase in the average balance of total interest-bearing liabilities in
fiscal 1999 compared to fiscal 1998, substantially offset by a 23 basis point
decrease in the average rate paid on such liabilities over the same period.
Interest expense on borrowings from the Federal Home Loan Bank of New York (the
"FHLB") increased by $2.4 million due to an increase of $45.3 million in the
average balance to $74.3 million from $29.0 million, offset, in part, by a
decrease of 43 basis points in the average rate paid to 5. 53% from 5.96%. The
higher interest expense on borrowings was partially offset by a decrease of $1.2
million in interest expense on certificates of deposit to $11.6 million from
$12.8 million. This decrease was due to a 39 basis point decrease in the average
rate paid to 4.91% from 5.30 %, as well as a $5.4 million decrease in the
average balance of certificates of deposit to $235.6 million from $241.0
million. Also partially offsetting the higher interest expense on borrowings was
a decrease of $299,000 in interest expense on savings deposits to $3.4 million
from $3.7 million. This decrease was due to a 24 basis point decrease in the
average rate paid to 1.98% from 2.22%, offset, in part, by a $5.1 million
increase in the average balance to $171.6 million from $166.5 million. Interest
expense on money market and NOW accounts declined by $171,000 for the year ended
September 30, 1999 due to a reduction in average rate paid to 2.01% from 2.35%,
partially offset by a $10.7 million increase in the average balances of such
deposits.
Net Interest Income. For the years ended September 30, 1999 and 1998,
net interest income was $30.7 million and $27.1 million, respectively. The $3.6
million increase in net interest income was primarily attributable to a $35.0
million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), to $117.0 million from $82.0 million, partially
offset by a 12 basis point decline in the net interest rate spread to 3.66 %
from 3.78 %. The Company's net interest margin decreased slightly to 4.24 % in
the year ended September 30, 1999 from 4.28% in the year ended September 30,
1998.
Provision for Loan Losses. The Company records provisions for loan
losses, which are charged to earnings, in order to maintain the allowance for
loan losses at a level which is considered appropriate to absorb probable loan
losses inherent in the existing portfolio. In determining the appropriate level
of the allowance for loan losses, management considers past and anticipated loss
experience, evaluations of real estate collateral, current and anticipated
economic conditions, volume and type of lending, and the levels of
non-performing and other classified loans. The amount of the allowance is based
on estimates, and the ultimate losses may vary from such estimates. Management
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses in order to maintain the adequacy of the allowance. The Company
recorded $1.6 million and $ 1.7 million in loan loss provisions during the years
ended September 30, 1999 and 1998, respectively. The provisions reflect
continued loan portfolio growth in both fiscal years, including commercial
mortgage and commercial business loans. The provision for loan losses in fiscal
1998 also reflects the higher level of net loan charge-offs compared to fiscal
1999.
Non-Interest Income. Non-interest income remained relatively unchanged
at $3.1 million. Fees from overdrafts increased by $94,000 to $986,000 in the
year ended September 30, 1999 from $892,000 in the year ended September 30,
<PAGE>
1998. The Company also realized an increase of $55,000 in income from the sale
of mutual funds and annuities, to $116,000 in fiscal 1999 compared to $61,000 in
the year ended September 30, 1998. Offsetting these increases were a loss of
$79,000 on disposal of fixed assets and a loss of $74,000 on the valuation of
loans held for sale.
Non-Interest Expense. Non-interest expenses increased by $4.5 million,
or 20.5%, to $26.3 million for the year ended September 30, 1999 from $21.8
million for fiscal year ended September 30, 1998. Expenses associated with the
new system conversion amounted to $1.1 million in fiscal 1999, versus
10
<PAGE>
pre-conversion spending of $340,000 in fiscal 1998. Excluding these system
conversion costs, compensation and employee benefits increased by $1.2 million;
occupancy and office operations expense increased by $229,000; and data
processing expenses, consulting fees, and stationery and printing expenses
increased by $335,000, $246,000 and $141,000, respectively. A portion of the
higher costs were attributable to branch expansion and new product offerings.
The increase in compensation and benefits includes ESOP expense of $635,000 in
fiscal 1999, consisting of $371,000 attributable to the allocation of 10% of
total plan shares to participants for the plan year ended December 31, 1998 and
$264,000 attributable to shares committed to be released during the nine months
ended September 30, 1999.
Income Taxes. Income tax expense was $2.0 million for the fiscal year
ended September 30, 1999 compared to $2.3 million for fiscal 1998, representing
effective tax rates of 33.3% and 35.6%, respectively. The lower effective tax
rate in fiscal 1999 primarily reflects the investment in tax-exempt securities
and implementation of state tax strategies during the year.
Comparison of Operating Results for the Years Ended September 30, 1998 and
September 30, 1997
Net income was $4.2 million for the year ended September 30, 1998
compared to $4.6 million for the year ended September 30, 1997. The decrease was
due primarily to increases in the provision for loan losses and non-interest
expense, partially offset by an increase in net interest income and a decrease
in income tax expense.
Interest Income. Interest income increased by $1.4 million, or 3.0%, to
$48.0 million for the year ended September 30, 1998 from $46.6 million for the
year ended September 30, 1997. The increase was due primarily to an increase in
average interest-earning assets. The impact of declining yields and spreads was
partially offset by a change in asset mix. Loan balances increased while
investment and mortgage-backed securities declined. Income from loans increased
$2.5 million, partially offset by a $1.2 million decrease in income from
securities. The increase in income from loans was attributable to a $43.1
million increase in the average balance of loans to $428.5 million from $385.4
million, partially offset by a 27 basis point decrease in the average yield on
loans to 8.18% from 8.45%. The increase in average loans resulted primarily from
the origination of one- to four-family mortgage loans. The decrease in the
average yield on loans reflects declining market interest rates, as the Company
originated new residential loans with yields lower than the average yield on the
existing loan portfolio. The decrease in income from securities reflects
decreases in average balances of $8.3 million for mortgage-backed securities and
$7.6 million for investment securities, combined with a 20 basis point decrease
in the average yield on investment securities to 5.91% from 6.11%.
<PAGE>
Interest Expense. Interest expense increased by $701,000, or 3.5%, to
$20.9 million for the year ended September 30, 1998 from $20.2 million for the
year ended September 30, 1997. This increase was due primarily to a $16.0
million increase in the average balance of interest-bearing liabilities in
fiscal 1998 compared to fiscal 1997. The increase in overall interest expense
resulted primarily from a $424,000 increase in interest expense on certificates
of deposit and a $238,000 increase in interest expense on borrowings. The
increase attributable to certificates of deposit resulted from a $3.7 million
increase in the average balance of certificates of deposit to $241.0 million in
the year ended September 30, 1998 from $237.3 million in fiscal 1997, combined
with a 10 basis point increase in the average cost of certificates of deposit to
5.30% from 5.20%. The increase attributable to borrowings resulted from a $5.3
million increase in the average balance of borrowings to $29.0 million for the
year ended September 30, 1998 from $23.7 million for the year ended September
30, 1997, which was partially offset by a 31 basis point decrease in the average
cost of borrowings to 5.96% from 6.27%.
11
<PAGE>
Net Interest Income. For the years ended September 30, 1998 and 1997,
net interest income was $27.1 million and $26.4 million, respectively. The
$692,000 increase in net interest income was primarily attributable to a $12.0
million increase in net interest-earning assets (interest-earning assets less
interest-bearing liabilities), partially offset by a 14 basis point decline in
the net interest rate spread to 3.78% from 3.92%. The Company's net interest
margin decreased to 4.28% in the year ended September 30, 1998 from 4.36% in the
year ended September 30, 1997.
Provision for Loan Losses. The Company's provision for loan losses
increased by $679,000 to $1.7 million for the year ended September 30, 1998 from
$1.1 million for the year ended September 30, 1997. The increased provision
reflects continued loan portfolio growth, including commercial real estate and
commercial business loans, as well as an increase in non-performing loans to
$6.1 million at September 30, 1998 from $4.7 million at September 30, 1997.
Non-Interest Income. Non-interest income increased by $369,000, or
13.6%, to $3.1 million for the year ended September 30, 1998 from $2.7 million
for the year ended September 30, 1997. This reflects a $164,000 increase in the
gain on sale of loans to $170,000 in fiscal 1998 from $6,000 in fiscal 1997,
primarily from a higher volume of loan sales, as the Company sold newly
originated, longer term fixed-rate mortgage loans as part of its interest rate
risk management. In addition, deposit-related fees and charges increased
$137,000, or 6.7%, to $2.2 million for the year ended September 30, 1998 from
$2.0 million for the year ended September 30, 1997.
Non-Interest Expense. Non-interest expense increased by $1.2 million,
or 5.9%, to $21.8 million for the year ended September 30, 1998 from $20.6
million for the fiscal year ended September 30, 1997. Compensation and employee
benefits increased by $591,000 to $10.5 million from $9.9 million primarily due
to a $335,000, or 4.9%, increase in salaries for Company officers and staff, and
a $90,000 increase in medical and disability insurance. In addition, there was a
charge of approximately $190,000 in fiscal 1998 related to the early termination
of a long-term incentive plan for senior officers and directors. The increase in
non-interest expense in fiscal 1998 also reflects $340,000 in conversion-related
expenses associated with the new core processing system and an increase of
$160,000 in legal expenses.
Income Taxes. Income tax expense was $2.3 million for the year ended
September 30, 1998 compared to $2.8 million for fiscal 1997, representing
effective tax rates of 35.6% and 38.1%, respectively.
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and to a lesser extent,
borrowings and proceeds from the sale of fixed-rate mortgage loans in the
secondary mortgage market. Maturities and scheduled amortization of loans and
securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows, mortgage
prepayments and mortgage loan sales are greatly influenced by market interest
rates, economic conditions and competition.
12
<PAGE>
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial real estate loans, and the
purchase of investment securities and mortgage-backed securities. During the
years ended September 30, 1999, 1998 and 1997, the Company's loan originations
totaled $220.8 million, $172.3 million and $112.6 million, respectively.
Purchases of mortgage-backed securities totaled $18.3 million, $35.5 million and
$12.1 million for the years ended September 30, 1999, 1998 and 1997,
respectively. Purchases of investment securities totaled $72.7 million, $23.0
million and $13.2 million for the years ended September 30, 1999, 1998 and 1997,
respectively. These investing activities were funded primarily by deposit growth
and by principal repayments on loans and securities. Net proceeds of $37.1
million from the stock offering provided an additional source of liquidity
during the year ended September 30, 1999. Loan origination commitments totaled
$18.7 million at September 30, 1999, comprised of $10.3 million at adjustable or
variable rates and $8.4 million at fixed rates. The Company anticipates that it
will have sufficient funds available to meet current loan commitments.
Deposit flows are generally affected by the level of interest rates,
the interest rates and products offered by local competitors, and other factors.
The net increase in total deposits was $13.5 million, $26.3 million and $1.6
million for the years ended September 30, 1999, 1998 and 1997, respectively.
Certificates of deposit that are scheduled to mature in one year or less from
September 30, 1999 totaled $197.4 million. Based upon prior experience and
current pricing strategy, management believes that a significant portion of such
deposits will remain with the Bank.
The Company monitors its liquidity position on a daily basis, and any
excess short-term liquidity is usually invested in overnight federal funds sold.
The Company generally remains fully invested and meets additional funding
requirements through FHLB advances, which amounted to $115.5 million at
September 30, 1999.
At September 30, 1999, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $76.9 million, or 9.6% of adjusted
assets (which is above the required level of $32.2 million, or 4.0%) and a
risk-based capital level of $82.9 million, or 17.2% of risk-weighted assets
(which is above the required level of $38.6 million, or 8.0%). These capital
requirements, which are applicable to the Bank only, do not consider additional
capital retained by the Company. See Note 11 of the Notes to Consolidated
Financial Statements for additional information concerning the Bank's capital
requirements.
Year 2000 Considerations
The following information constitutes a "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness Act.
The Company, like all companies that utilize computer technology, has
faced the significant challenge over the past year of ensuring that its computer
systems will be able to process time-sensitive data accurately beyond the Year
1999 (referred to as the "Year 2000 issue"). The Year 2000 issue arose since
many existing computer programs use two digits rather than four in date fields
that define the year. Such computer programs may recognize a date field using 00
as the Year 1900 rather than the Year 2000. Software, hardware and equipment
both within and outside the Company's direct control (and with which the Company
interfaces either electronically or operationally), are likely to be affected by
the Year 2000 issue.
<PAGE>
The Company conducted a comprehensive review of its computer systems to
identify systems that could be affected by the Year 2000 issue, and developed an
implementation plan (including establishing
13
<PAGE>
priorities for mission-critical applications) to modify or replace the affected
systems and test them for Year 2000 readiness. The Company's plan includes
actions to identify Year 2000 issues attributable to its own systems as well as
those of third parties who supply products and services to the Company, or who
have material business relationships with the Company.
The Company realized that the Year 2000 issue extends beyond the
computer systems associated with its operations. The Company identified and
began a process of quantifying certain external risks posed by the Year 2000
problem and prepared a plan to deal with those risks. The Company's Year 2000
plan addresses each identified external risk and, in cases where risks may be
high, the Company took action to protect its interests, including establishing
contingency plans to be activated in the event of system failures. In addition
to its internal efforts, the Company employed the services of an outside
consulting firm to help it with this planning effort. Although no guaranty can
be given that all internal systems and/or third parties will be prepared for the
Year 2000 issue, the actions being taken by the Company in response to Year 2000
issues are consistent with the guidelines set forth in policy statements issued
by the bank regulatory agencies.
The Company identified six mission-critical systems including its core
data processing system for loans, deposits and the general ledger. In November
1998, the Company converted to a new core system, which it believes enhanced the
quality of its information technology and will result in improved customer
service. Similar to the operation of the Company's prior core system, computer
operations are performed by a third-party vendor. The Company has completed its
own testing of the core system. A detailed report of testing results has been
produced, and the results where validated for accuracy by internal staff.
The Company obtained assurances from certain third parties with whom it
does business, either as to their current Year 2000 compliance or assurance that
they are in the process of addressing the Year 2000 issue. For example, the
Company exchanges data with a number of other entities, such as credit bureaus,
the Federal Reserve Bank, and government-sponsored enterprises. The failure of
these entities to adequately address the Year 2000 issue could adversely affect
the Company's ability to conduct its business. The risk also exists that some of
the Company's commercial borrowers may not have prepared for Year 2000 issues
and may suffer financial harm as a result. This, in turn, represents risk to the
Company regarding the repayment of loans from those commercial customers. The
Company has surveyed its existing commercial customers with aggregate
outstanding loan balances of $250,000 or more regarding their Year 2000
preparedness, and has conducted follow-up interviews with its larger commercial
borrowers to determine their readiness. While the Company does not have specific
financial data regarding the potential effect of the Year 2000 issues on its
commercial customers, the Company recognizes this as a risk and will continue to
seek evidence of preparedness from its major borrowers. The Company also has
been assessing Year 2000 readiness as a component of its risk evaluation for new
commercial borrowers.
Contingency plans were developed for all mission-critical applications
in anticipation of the possibility of unplanned system difficulties. These plans
provide for some type of manual record keeping and reporting procedures, and
were incorporated as part of the Company's overall contingency planning process.
In preparing its contingency plan, the Company categorized potential events as
<PAGE>
uncontrollable and controllable. Uncontrollable events, such as loss of electric
power and telephone service failures, will affect all companies, government and
customers. These uncontrollable events cannot be remedied by anyone other than
the appropriate responsible party, but require a workaround action plan as
outlined in the business resumption contingency plan.
The Company documented pre-determined actions to help it resume normal
operations in the event of failure of any mission-critical service and product,
as specified in the Company's Year 2000 inventory
14
<PAGE>
list. For example, the Company reviewed the availability of cash to meet
potential depositor demand due to concerns about the availability of funds after
December 31, 1999. As part of its contingency planning process, the Company
conducted a business impact analysis to identify potentially disruptive events
and the effect such disruption could have on business operations should a
service provider or software vendor be unable to restore systems and/or business
operations. The Company has established a recovery program that identifies
participants, processes and equipment that might be necessary for the Company to
function adequately in case of some unforeseen event. The basic priorities for
restoring service are based on the essential application processing required to
ensure that the Company can continue to serve its customers. The Company also
instituted a resumption tracking system for critical operations to ensure that
appropriate pre-determined actions are identified. The tracking system
identifies any required resources (equipment, personnel etc.) needed to restore
operations.
Monitoring and managing the Year 2000 issue resulted, and may result,
in additional direct and indirect costs for the Company. Direct costs include
potential charges by third-party software vendors for product enhancements,
costs involved in testing software products for Year 2000 compliance, and any
resulting costs for developing and implementing contingency plans for critical
software products which are not enhanced. Indirect costs principally consist of
the time devoted by existing employees in monitoring software vendor progress,
testing enhanced software products, and implementing any necessary contingency
plans. The Company's direct and indirect costs of addressing the Year 2000 issue
are charged to expense as incurred, except for costs incurred in the purchase of
new software or hardware, which are capitalized. To date, costs incurred
primarily relate to the dedication of internal resources employed in the
assessment and development of the Company's Year 2000 plan, as well as the
testing of hardware and software owned or licensed for its personal computers.
Based on knowledge as of the preparation date of this report, total direct and
indirect Year 2000 costs are not expected to exceed $250,000, of which $140,000
was incurred through September 30, 1999.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133 which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial condition at fair value. If certain
conditions are met, a derivative may be specifically designated as a fair value
hedge, a cash flow hedge, or a foreign currency hedge. A specific accounting
treatment applies to each type of hedge. Entities may reclassify securities from
the held-to-maturity category to the available-for-sale category at the time of
adopting SFAS No. 133. As amended, SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, although earlier
adoption is permitted. The Company has not yet selected an adoption date or
decided whether it will reclassify securities between categories. The Company
has engaged in limited derivatives and hedging activities covered by the new
standard, and does not expect to significantly increase such activities in the
near term. Accordingly, SFAS No. 133 is not expected to have a material impact
on the Company's consolidated financial statements.
<PAGE>
COMMON STOCK AND RELATED MATTERS
The common stock of the Company is quoted on the Nasdaq National Market
under the symbol "PBCP." As of September 30, 1999, the Company had six
registered market makers, 3,912 stockholders of record (excluding the number of
persons or entities holding stock in street name through various brokerage
firms), and 8,280,000 shares outstanding. As of such date, Provident Bancorp,
MHC (the "Mutual Holding
15
<PAGE>
Company"), held 4,416,000 shares of common stock and stockholders other than the
Mutual Holding Company held 3,864,000 shares.
The following table sets forth market price and dividend information
for the common stock since the completion of the initial public offering on
January 7, 1999.
Cash Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
March 31, 1999 $ 12.25 $ 9.88 $ --
June 30, 1999 11.00 9.94 0.03
September 30, 1999 12.88 11.50 0.03
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and depends on a number
of factors, including capital requirements, regulatory limitations on the
payment of dividends, the results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends will continue.
During the third and fourth quarters of the year ended September 30,
1999, the Company paid dividends of $0.03 per share. In accordance with
regulations, the Mutual Holding Company obtained OTS approval to waive its
receipt of dividends, and waived receipt of $132,472 of dividends paid during
the third quarter. Subsequent to that date, however, the Company has paid
dividends to the Mutual Holding Company as well as to its minority shareholders.
16
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
September 30, 1999 and 1998
(Dollars in thousands, except per share data)
1999 1998
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 11,838 $ 7,572
Securities:
Available for sale, at fair value (amortized cost of $150,792 in 1999 and
$96,466 in 1998) (note 3) 148,387 97,983
Held to maturity, at amortized cost (fair value of $56,479 in 1999 and
$99,672 in 1998) (note 4) 56,782 98,402
--------- ---------
Total securities 205,169 196,385
--------- ---------
Loans (note 5):
One- to four-family residential mortgage loans 344,731 290,334
Commercial real estate, commercial business and construction loans 160,297 115,570
Consumer loans 67,695 62,669
Allowance for loan losses (6,202) (4,906)
--------- ---------
Total loans, net 566,521 463,667
--------- ---------
Accrued interest receivable, net (note 6) 5,656 4,087
Federal Home Loan Bank stock, at cost 6,176 3,690
Premises and equipment, net (note 7) 8,232 7,058
Deferred income taxes (note 10) 5,510 2,477
Other assets (notes 5 and 8) 5,416 6,132
--------- ---------
Total assets $ 814,518 $ 691,068
========= =========
<PAGE>
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 8) $ 586,640 $ 573,174
Borrowings (note 9) 117,753 49,931
Mortgage escrow funds (note 5) 10,489 5,887
Other 9,337 6,876
--------- ---------
Total liabilities 724,219 635,868
--------- ---------
Commitments and contingencies (notes 14 and 15)
Stockholders' equity (notes 1 and 11):
Preferred stock (par value $0.10 per share; 10,000,000 shares authorized;
none issued or outstanding) -- --
Common stock (par value $0.10 per share; 10,000,000 shares authorized;
8,280,000 shares issued and outstanding at September 30, 1999) 828 --
Additional paid-in capital 36,262 --
Unallocated common stock held by employee stock ownership plan ("ESOP")
(note 13) (3,102) --
Retained earnings 57,754 54,291
Accumulated other comprehensive (loss) income, net of taxes (note 12) (1,443) 909
--------- ---------
Total stockholders' equity 90,299 55,200
--------- ---------
Total liabilities and stockholders' equity $ 814,518 $ 691,068
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended September 30, 1999, 1998 and 1997
(In thousands, except per share data)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest and dividend income:
Loans $40,209 $35,032 $32,544
Securities 11,712 12,613 13,783
Other earning assets 346 303 228
------- ------- -------
Total interest and dividend income 52,267 47,948 46,555
------- ------- -------
Interest expense:
Deposits (note 8) 17,474 19,155 18,692
Borrowings 4,115 1,725 1,487
------- ------- -------
Total interest expense 21,589 20,880 20,179
------- ------- -------
Net interest income 30,678 27,068 26,376
Provision for loan losses (note 5) 1,590 1,737 1,058
------- ------- -------
Net interest income after provision for loan losses 29,088 25,331 25,318
------- ------- -------
Non-interest income:
Loan servicing 559 579 583
Banking service fees and other income 2,544 2,501 2,128
------- ------- -------
Total non-interest income 3,103 3,080 2,711
------- ------- -------
Non-interest expense:
Compensation and employee benefits (note 13) 12,279 10,506 9,915
Occupancy and office operations (note 14) 3,370 3,141 3,167
Advertising and promotion 1,199 1,146 1,038
Data processing 1,301 845 580
Amortization of branch purchase premiums (note 8) 1,720 1,630 1,506
Other 6,434 4,555 4,396
------- ------- -------
Total non-interest expense 26,303 21,823 20,602
------- ------- -------
Income before income tax expense 5,888 6,588 7,427
Income tax expense (note 10) 1,958 2,346 2,829
------- ------- -------
Net income $ 3,930 $ 4,242 $ 4,598
======= ======= =======
Basic earnings per common share, from date of stock
offering (January 7, 1999) (note 2) $ 0.40
=======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
Accumulated
Other Total
Additional Unallocated Comprehensive Stock-
Preferred Common Paid-in ESOP Retained (Loss) holders'
Stock Stock Capital Shares Earnings Income Equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $ -- $ -- $ -- $ -- $ 45,451 $ 85 $ 45,536
-------- -------- -------- -------- -------- -------- --------
Net income -- -- -- -- 4,598 -- 4,598
Other comprehensive income (note 12) -- -- -- -- -- 265 265
--------
Total comprehensive income 4,863
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1997 -- -- -- -- 50,049 350 50,399
Net income -- -- -- -- 4,242 -- 4,242
Other comprehensive income (note 12) -- -- -- -- -- 559 559
--------
Total comprehensive income 4,801
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1998 -- -- -- -- 54,291 909 55,200
Net income -- -- -- -- 3,930 -- 3,930
Other comprehensive loss (note 12) -- -- -- -- -- (2,352) (2,352)
--------
Total comprehensive income 1,578
Issuance of 8,280,000 common shares (note 1) -- 828 36,285 -- -- -- 37,113
Initial capitalization of Provident Bancorp, MHC -- -- -- -- (100) -- (100)
Shares purchased by ESOP (309,120 shares) -- -- -- (3,760) -- -- (3,760)
ESOP shares allocated or committed to be
released for allocation (54,096 shares) -- -- (23) 658 -- -- 635
Cash dividends paid ($0.06 per common share) -- -- -- -- (367) -- (367)
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1999 $ -- $ 828 $ 36,262 $ (3,102) $ 57,754 $ (1,443) $ 90,299
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,930 $ 4,242 $ 4,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,590 1,737 1,058
Depreciation and amortization of premises and
equipment 1,497 1,390 1,462
Amortization of branch purchase premiums 1,720 1,630 1,506
Net amortization of premiums and discounts
on securities 239 250 177
Originations of loans held for sale (13,271) (20,402) (197)
Proceeds from sales of loans held for sale 14,089 17,163 197
Deferred income tax (benefit) expense (1,488) (1,057) 496
Net changes in accrued interest receivable
and payable (1,293) 675 (245)
Net increase (decrease) in other liabilities 2,187 1,061 (2,881)
Other adjustments, net (607) (402) (175)
--------- --------- ---------
Net cash provided by operating activities 8,593 6,287 5,996
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of securities:
Available for sale (91,029) (43,120) (10,204)
Held to maturity -- (15,375) (15,070)
Proceeds from maturities, calls and principal
payments on securities:
Available for sale 36,586 24,645 14,730
Held to maturity 41,510 43,077 23,679
Proceeds from sales of securities available for sale -- 6,007 --
Loan originations (220,813) (172,271) (112,573)
Loan principal repayments 115,525 114,166 75,744
Purchases of Federal Home Loan Bank stock (2,486) (49) (430)
Proceeds from sales of real estate owned 274 451 2,029
Purchases of premises and equipment (2,670) (1,565) (1,260)
Proceeds from sales of premises and equipment -- 164 292
--------- --------- ---------
Net cash used in investing activities (123,103) (43,870) (23,063)
--------- --------- ---------
(Continued)
5
<PAGE>
<CAPTION>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net increase in deposits $ 13,466 $ 26,328 $ 1,560
Net increase in borrowings 67,822 8,308 11,466
Net increase (decrease) in mortgage escrow funds 4,602 1,328 (437)
Net proceeds from stock offering 37,113 -- --
Shares purchased by ESOP (3,760) -- --
Initial capitalization of Provident Bancorp, MHC (100) -- --
Cash dividends paid (367) -- --
--------- --------- ---------
Net cash provided by financing activities 118,776 35,964 12,589
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 4,266 (1,619) (4,478)
Cash and cash equivalents at beginning of year 7,572 9,191 13,669
--------- --------- ---------
Cash and cash equivalents at end of year $ 11,838 $ 7,572 $ 9,191
========= ========= =========
Supplemental Information:
Interest paid $ 21,313 $ 20,380 $ 20,100
Income taxes paid 1,446 3,539 1,808
Loans transferred to real estate owned 311 597 715
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(1) Reorganization and Stock Offering
On January 7, 1999, Provident Bank (the "Bank") completed its
reorganization into a mutual holding company structure (the
"Reorganization"). As part of the Reorganization, the Bank converted from
a federally-chartered mutual savings bank to a federally-chartered stock
savings bank (the "Conversion"). The Bank became the wholly-owned
subsidiary of Provident Bancorp, Inc., which became the majority-owned
subsidiary of Provident Bancorp, MHC (the "Mutual Holding Company").
Collectively, Provident Bancorp, Inc. and the Bank are referred to herein
as "the Company".
Provident Bancorp, Inc. issued a total of 8,280,000 common shares on
January 7, 1999, consisting of 3,864,000 shares (or 46.67%) sold to the
public (the "Offering") and 4,416,000 shares (or 53.33%) issued to the
Mutual Holding Company. The net proceeds from the sale of shares to the
public amounted to $37,113, representing gross proceeds of $38,640 less
offering costs of $1,527. Provident Bancorp, Inc. utilized net proceeds
of $24,000 to make a capital contribution to the Bank.
The Company's Employee Stock Ownership Plan ("ESOP"), which did not
purchase shares in the Offering, was authorized to purchase up to 8% of
the shares sold in the Offering, or 309,120 shares. The ESOP completed
its purchase of all such authorized shares in the open market during
January and February 1999, at a total cost of $3,760.
(2) Summary of Significant Accounting Policies
The Bank is a community bank that offers financial services to
individuals and businesses primarily in Rockland County, New York and its
contiguous communities. The Bank's principal business is accepting
deposits and, together with funds generated from operations and
borrowings, investing in various types of loans and securities. The Bank
is a federally-chartered savings bank and its deposits are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation ("FDIC"). The Office of Thrift
Supervision ("OTS") is the primary regulator for the Bank, Provident
Bancorp, Inc. and the Mutual Holding Company.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Provident
Bancorp, Inc., the Bank, and the Bank's wholly-owned subsidiaries. These
subsidiaries are (i) Provident REIT, Inc. which was formed in fiscal 1999
as a real estate investment trust and holds a portion of the Company's
real estate loans, (ii) Provest Services Corp. I which became active in
fiscal 1996 and has invested in a low- income housing partnership, and
(iii) Provest Services Corp. II which became active in fiscal 1997 and
has engaged a third-party provider to sell mutual funds and annuities to
the Bank's customers. Prior to the Reorganization and Offering, Provident
Bancorp, Inc. had no operations other than those of an organizational
nature. Intercompany transactions and balances are eliminated in
consolidation.
7
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. 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, which is discussed below.
For purposes of reporting cash flows, cash equivalents (if any) include
highly liquid short-term investments such as overnight federal funds.
Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," requires entities
to classify securities among three categories -- held to maturity,
trading, and available for sale. Management determines the appropriate
classification of the Company's securities at the time of purchase.
Held-to-maturity securities are limited to debt securities for which
management has the intent and the Company has the ability to hold to
maturity. These securities are reported at amortized cost.
Trading securities are debt and equity securities bought and held
principally for the purpose of selling them in the near term. These
securities are reported at fair value, with unrealized gains and losses
included in earnings. The Company does not engage in security trading
activities.
All other debt and equity securities are classified as available for
sale. These securities are reported at fair value, with unrealized gains
and losses (net of the related deferred income tax effect) excluded from
earnings and reported in a separate component of stockholders' equity
(accumulated other comprehensive income or loss). Available-for-sale
securities include securities that management intends to hold for an
indefinite period of time, such as securities to be used as part of the
Company's asset/liability management strategy or securities that may be
sold in response to changes in interest rates, changes in prepayment
risks, the need to increase capital, or similar factors.
Premiums and discounts on debt securities are recognized in interest
income on a level-yield basis over the period to maturity. The cost of
securities sold is determined using the specific identification method.
Unrealized losses are charged to earnings when the decline in fair value
of a security is judged to be other than temporary.
Loans
Loans, other than those classified as held for sale, are carried at
amortized cost less the allowance for loan losses. Mortgage loans
originated and held for sale in the secondary market are carried at the
8
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
lower of aggregate cost or estimated market value. Market value is
estimated based on outstanding investor commitments or, in the absence of
such commitments, based on current investor yield requirements. Net
unrealized losses, if any, are recognized in a valuation allowance by a
charge to earnings.
A loan is placed on non-accrual status when management has determined
that the borrower may be unable to meet contractual principal or interest
obligations, or when interest and principal is 90 days or more past due.
Accrual of interest ceases and, in general, uncollected past due interest
(including interest applicable to prior years, if any) is reversed and
charged against current income. Interest payments received on non-accrual
loans, including impaired loans under SFAS No. 114, are not recognized as
income unless warranted based on the borrower's financial condition and
payment record. Interest on loans that have been restructured is accrued
in accordance with the renegotiated terms.
The Company defers non-refundable loan origination and commitment fees,
and certain direct loan origination costs, and amortizes the net amount
as an adjustment of the yield over the contractual term of the loan. If a
loan is prepaid or sold, the net deferred amount is recognized in income
at that time.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
losses charged to earnings. 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 an amount that management believes will
be adequate to absorb probable losses on existing loans that may become
uncollectable, based on evaluations of the collectability of the loans.
Management's evaluations, which are subject to periodic review by the
Company's regulators, take into consideration factors such as the
Company's past loan loss experience, changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific problem
loans and collateral values, and current economic conditions that may
affect the borrowers' ability to pay. Future adjustments to the allowance
for loan losses may be necessary based on changes in economic and real
estate market conditions, further information obtained regarding known
problem loans, regulatory examinations, the identification of additional
problem loans, and other factors.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Company considers a loan to be impaired when, based on
current information and events, it is probable that it will be unable to
collect all principal and interest due according to the contractual terms
of the loan. SFAS No. 114 applies to loans that are individually
evaluated for collectability in accordance with the Company's ongoing
loan review procedures (principally commercial real estate, commercial
business and construction loans). The standard does not generally apply
to smaller-balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and consumer loans. Under
SFAS No. 114, creditors are permitted to measure and report impaired
loans based on one of
9
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
three approaches -- the present value of expected future cash flows
discounted at the loan's effective interest rate; the loan's observable
market price; or the fair value of the collateral if the loan is
collateral dependent. If the approach used results in a measurement that
is less than the recorded investment in an impaired loan, an impairment
loss is recognized as part of the allowance for loan losses.
Transfers and Servicing of Financial Assets
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," establishes financial reporting
standards for a broad range of transactions including sales of loans with
servicing retained, loan securitizations, loan participations, repurchase
agreements, securities lending and in-substance defeasances of debt. SFAS
No. 125 is generally effective for transactions entered into on or after
January 1, 1997 and superseded SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which became effective for the Company on October 1,
1996.
Among other things, the standard requires recognition of servicing rights
as an asset when loans are sold with servicing retained. The Company
recognizes mortgage servicing assets by allocating the cost of an
originated mortgage loan between the loan and the servicing right based
on estimated relative fair values. The cost allocated to the servicing
right is capitalized as a separate asset which is amortized thereafter in
proportion to, and over the period of, estimated net servicing income.
Capitalized mortgage servicing rights are assessed for impairment based
on the fair value of those rights, and any impairment loss is recognized
in a valuation allowance by charges to income.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank ("FHLB") of New York, the Bank
is required to hold a certain amount of FHLB stock. This stock is
considered to be a non-marketable equity security under SFAS No. 115 and,
accordingly, is carried at cost.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets ranging from 3 to
40 years. Leasehold improvements are amortized on a straight-line basis
over the terms of the respective leases or the estimated useful lives of
the improvements, whichever is shorter. Routine holding costs are charged
to expense as incurred, while significant improvements are capitalized.
10
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Branch Purchase Premiums
Premiums attributable to the acquisition of core deposits in branch
purchase transactions are amortized using the straight-line method over
periods not exceeding the estimated average remaining life of the
acquired customer base (initial five-year periods for the Bank's 1996
branch purchases). The unamortized premiums are reviewed for impairment
if events or changes in circumstances indicate that the carrying amount
may not be fully recoverable.
Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded
initially at estimated fair value less expected sales costs, with any
resulting writedown charged against the allowance for loan losses.
Subsequent valuations are performed by management, and the carrying value
of a real estate owned property is adjusted by a charge to expense to
reflect any subsequent declines in estimated fair value. Fair value
estimates are based on recent appraisals and other available information.
Routine holding costs are charged to expense as incurred, while
significant improvements are capitalized. Gains and losses on sales of
real estate owned are recognized upon disposition.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred taxes are recognized for the estimated future tax
effects attributable to "temporary differences" between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which the temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax laws
or rates is recognized in income tax expense in the period that includes
the enactment date of the change.
A deferred tax liability is recognized for all temporary differences that
will result in future taxable income. A deferred tax asset is recognized
for all temporary differences that will result in future tax deductions,
subject to reduction of the asset by a valuation allowance in certain
circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more
likely than not that some portion or all of the deferred tax asset will
not be realized. The valuation allowance is subject to ongoing adjustment
based on changes in circumstances that affect management's judgment about
the realizability of the deferred tax asset. Adjustments to increase or
decrease the valuation allowance are charged or credited, respectively,
to income tax expense.
Interest Rate Cap Agreements
The Company uses the accrual method of accounting for interest rate cap
agreements entered into for interest rate risk management purposes.
Interest payments (if any) due from the counterparties are
11
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
recognized in the consolidated statements of income as an adjustment to
interest income or expense on the assets or liabilities designated in the
Company's interest rate risk management strategy. Premiums paid by the
Company at inception of the agreements are included in other assets and
amortized on a straight-line basis as an adjustment to interest income or
expense over the term of the agreements.
Employee Stock Ownership Plan
Compensation expense recognized for the Company's ESOP equals the fair
value of shares that have been allocated or committed to be released for
allocation to participants. Any difference between the fair value of the
shares at that time and the ESOP's original acquisition cost is charged
or credited to stockholders' equity (additional paid-in capital). The
cost of ESOP shares that have not yet been allocated or committed to be
released is deducted from stockholders' equity.
Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic earnings per
share excludes dilution and is computed by dividing net income applicable
to common stock by the weighted average number of common shares
outstanding for the period. Basic earnings per share presented in the
fiscal 1999 consolidated statement of income is for the nine-month period
following the Offering, based on net income of $3,202 for that period and
8,041,018 average outstanding common shares. For purposes of computing
earnings per share, outstanding common shares include all shares issued
to the Mutual Holding Company but exclude ESOP shares that have not been
allocated or committed to be released for allocation to participants. At
September 30, 1999, the Company had no outstanding stock options or other
contracts that could result in the issuance of additional common shares
and, accordingly, diluted earnings per share is not applicable.
Segment Information
During fiscal 1999, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 requires
public companies to report certain financial information about
significant revenue-producing segments of the business for which such
information is available and utilized by the chief operating decision
maker. Specific information to be reported for individual operating
segments includes a measure of profit and loss, certain revenue and
expense items, and total assets. As a community-oriented financial
institution, substantially all of the Company's operations involve the
delivery of loan and deposit products to customers. Management makes
operating decisions and assesses performance based on an ongoing review
of these community banking operations, which constitute the Company's
only operating segment for financial reporting purposes under SFAS No.
131.
12
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(3) Securities Available for Sale
The following are summaries of securities available for sale at September
30, 1999 and 1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
September 30, 1999
Mortgage-Backed Securities
Freddie Mac $ 20,926 $ 54 $ (232) $ 20,748
Fannie Mae 24,004 102 (344) 23,762
Other 7,163 89 -- 7,252
-------- -------- -------- --------
52,093 245 (576) 51,762
-------- -------- -------- --------
Investment Securities
U.S. Government and Agency securities 59,623 -- (709) 58,914
State and municipal securities 11,700 -- (892) 10,808
Corporate debt securities 24,201 -- (534) 23,667
Equity securities 3,175 144 (83) 3,236
-------- -------- -------- --------
98,699 144 (2,218) 96,625
-------- -------- -------- --------
Total available for sale $150,792 $ 389 $ (2,794) $148,387
======== ======== ======== ========
September 30, 1998
Mortgage-Backed Securities
Freddie Mac $ 19,792 $ 341 $ (30) $ 20,103
Fannie Mae 26,344 280 -- 26,624
Other 3,167 18 -- 3,185
-------- -------- -------- --------
49,303 639 (30) 49,912
-------- -------- -------- --------
Investment Securities
U.S. Government and Agency securities 43,147 678 -- 43,825
Corporate debt securities 1,999 -- (2) 1,997
Equity securities 2,017 242 (10) 2,249
-------- -------- -------- --------
47,163 920 (12) 48,071
-------- -------- -------- --------
Total available for sale $ 96,466 $ 1,559 $ (42) $ 97,983
======== ======== ======== ========
</TABLE>
13
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Equity securities at both September 30, 1999 and 1998 consist of Freddie
Mac and Fannie Mae preferred stock.
The following is a summary of the amortized cost and fair value of debt
securities available for sale (other than mortgage-backed securities) at
September 30, 1999, by remaining period to contractual maturity. Actual
maturities may differ because certain issuers have the right to call or
prepay their obligations.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------- -------
<S> <C> <C>
Remaining period to contractual maturity:
Less than one year $12,129 $12,139
One to five years 59,563 58,542
Five to ten years 16,843 16,338
Greater than ten years 6,989 6,370
------- -------
Total $95,524 $93,389
======= =======
</TABLE>
The following is an analysis, by type of interest rate, of the amortized
cost and weighted average yield of securities available for sale:
<TABLE>
<CAPTION>
Fixed Adjustable
Rate Rate Total
----------- ---------- -----------
<S> <C> <C> <C>
September 30, 1999
Amortized cost $ 134,015 $ 13,602 $ 147,617
Weighted average yield 6.03% 6.43% 6.07%
September 30, 1998
Amortized cost $ 72,272 $ 22,177 $ 94,449
Weighted average yield 6.05% 6.50% 6.16%
</TABLE>
Proceeds from sales of securities available for sale were $6,007 for the
year ended September 30, 1998, resulting in gross realized gains of $10
which are included in other non-interest income. There were no sales of
securities available for sale during the years ended September 30, 1999
and 1997.
U.S. Government securities with a carrying value of $3,577 and $2,240
were pledged as collateral for public deposits and other purposes at
September 30, 1999 and 1998, respectively.
14
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(4) Securities Held to Maturity
The following are summaries of securities held to maturity at September
30, 1999 and 1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
September 30, 1999
Mortgage-Backed Securities
Freddie Mac $ 22,014 $ 69 $ (183) $ 21,900
Fannie Mae 23,807 94 (329) 23,572
Ginnie Mae 5,106 34 -- 5,140
Other 2,453 46 -- 2,499
-------- -------- -------- --------
53,380 243 (512) 53,111
-------- -------- -------- --------
Investment Securities
U.S. Government and Agency securities 2,987 -- (34) 2,953
Other 415 -- -- 415
-------- -------- -------- --------
3,402 -- (34) 3,368
-------- -------- -------- --------
Total held to maturity $ 56,782 $ 243 $ (546) $ 56,479
======== ======== ======== ========
September 30, 1998
Mortgage-Backed Securities
Freddie Mac $ 36,048 $ 724 $ -- $ 36,772
Fannie Mae 34,496 304 (27) 34,773
Ginnie Mae 6,511 90 -- 6,601
Other 2,171 93 -- 2,264
-------- -------- -------- --------
79,226 1,211 (27) 80,410
-------- -------- -------- --------
Investment Securities
U.S. Government and Agency securities 18,469 86 -- 18,555
Other 707 -- -- 707
-------- -------- -------- --------
19,176 86 -- 19,262
-------- -------- -------- --------
Total held to maturity $ 98,402 $ 1,297 $ (27) $ 99,672
======== ======== ======== ========
</TABLE>
15
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The following is a summary of the amortized cost and fair value of
securities held to maturity (other than mortgage-backed securities) at
September 30, 1999, by remaining period to contractual maturity. Actual
maturities may differ because certain issuers have the right to call or
repay their obligations.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------ ------
<S> <C> <C>
Remaining period to contractual maturity:
One to five years $3,012 $2,978
Greater than ten years 390 390
------ ------
Total $3,402 $3,368
====== ======
</TABLE>
The following is an analysis, by type of interest rate, of the amortized
cost and weighted average yield of securities held to maturity:
<TABLE>
<CAPTION>
Fixed Adjustable
Rate Rate Total
------- ------- -------
<S> <C> <C> <C>
September 30, 1999
Amortized cost $45,175 $11,607 $56,782
Weighted average yield 6.69% 6.66% 6.68%
September 30, 1998
Amortized cost $77,877 $20,525 $98,402
Weighted average yield 6.40% 6.33% 6.39%
</TABLE>
There were no sales of securities held to maturity during the years ended
September 30, 1999, 1998 and 1997.
16
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(5) Loans
The components of the loan portfolio were as follows at September 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
One- to four-family residential mortgage loans:
Fixed rate $ 263,577 $ 207,887
Adjustable rate 81,154 82,447
--------- ---------
344,731 290,334
--------- ---------
Commercial real estate loans 110,382 71,149
Commercial business loans 30,768 24,372
Construction loans 19,147 20,049
--------- ---------
160,297 115,570
--------- ---------
Home equity lines of credit 25,380 26,462
Homeowner loans 34,852 27,208
Other consumer loans 7,463 8,999
--------- ---------
67,695 62,669
--------- ---------
Total loans 572,723 468,573
Allowance for loan losses (6,202) (4,906)
--------- ---------
Total loans, net $ 566,521 $ 463,667
========= =========
</TABLE>
Total loans include net deferred loan origination costs of $838 and $841
at September 30, 1999 and 1998, respectively.
A substantial portion of the Company's loan portfolio is secured by
residential and commercial real estate located in Rockland County, New
York and its contiguous communities. The ability of the Company's
borrowers to make principal and interest payments is dependent upon,
among other things, the level of overall economic activity and the real
estate market conditions prevailing within the Company's concentrated
lending area. Commercial real estate and construction loans are
considered by management to be of somewhat greater credit risk than loans
to fund the purchase of a primary residence due to the generally larger
loan amounts and dependency on income production or sale of the real
estate. Substantially all of these loans are collateralized by real
estate located in the Company's primary market area.
17
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The principal balances of non-accrual loans were as follows at September
30:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
One- to four-family residential mortgage loans $2,839 $2,965
Commercial real estate loans 1,133 871
Commercial business loans 208 368
Construction loans 27 1,256
Consumer loans 429 647
------ ------
Total non-accrual loans $4,636 $6,107
====== ======
</TABLE>
The allowance for uncollected interest, representing the amount of
interest on non-accrual loans that has not been recognized in interest
income, was $456 and $531 at September 30, 1999 and 1998, respectively.
Gross interest income that would have been recorded if the non-accrual
loans at September 30 had remained on accrual status throughout the year,
amounted to $395 in fiscal 1999, $698 in fiscal 1998 and $411 in fiscal
1997. Interest income actually recognized on such loans totaled $131,
$310 and $147 for the years ended September 30, 1999, 1998 and 1997,
respectively.
The Company's recorded investment in impaired loans, as defined by SFAS
No. 114, totaled $1,368 and $2,495 at September 30, 1999 and 1998,
respectively. Substantially of all of these loans were
collateral-dependent loans measured based on the fair value of the
collateral in accordance with SFAS No. 114. The Company determines the
need for an allowance for loan impairment under SFAS No. 114 on a
loan-by-loan basis. An impairment allowance was not required at September
30, 1999 and 1998. The Company's recorded investment in impaired loans
averaged $2,577, $2,909 and $2,210 for the years ended September 30,
1999, 1998 and 1997, respectively.
Activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 4,906 $ 3,779 $ 3,357
Provision for losses 1,590 1,737 1,058
Charge-offs (922) (665) (759)
Recoveries 628 55 123
======= ======= =======
Balance at end of year $ 6,202 $ 4,906 $ 3,779
======= ======= =======
</TABLE>
18
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Other assets include real estate owned properties with a net carrying
value of $403 at September 30, 1999 and $366 at September 30, 1998.
Provisions for losses and other activity in the allowance for losses on
real estate owned were insignificant during the years ended September 30,
1999, 1998 and 1997.
Certain residential mortgage loans originated by the Company are sold in
the secondary market. Other non-interest income includes net gains of
$162 in fiscal 1999 and $170 in fiscal 1998 on sales of residential
mortgage loans held for sale (net gains in fiscal 1997 were
insignificant). Fixed-rate residential mortgage loans include loans held
for sale with a net carrying value of $1,198 at September 30, 1999 and
$3,885 at September 30, 1998. An allowance for losses of $70 was
established at September 30, 1999, by a charge to non-interest income, to
reduce the carrying value of loans held for sale to market value. Other
assets include capitalized mortgage servicing rights with an amortized
cost of $255 at September 30, 1999 and $157 at September 30, 1998, which
approximated fair value.
The Company generally retains the servicing rights on mortgage loans
sold. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors and, if necessary, processing foreclosures. Mortgage loans
serviced for others totaled approximately $109,000, $120,700 and $127,600
at September 30, 1999, 1998 and 1997, respectively. These amounts include
loans sold with recourse (approximately $1,900 at September 30, 1999) for
which management does not expect the Company to incur any significant
losses. Loan servicing income includes servicing fees from investors and
certain charges collected from borrowers, such as late payment fees.
Mortgage escrow funds include balances of $2,047 at September 30, 1999
and $2,017 at September 30, 1998 related to loans serviced for others.
(6) Accrued Interest Receivable
The components of accrued interest receivable were as follows at
September 30:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Loans, net of allowance for uncollected interest
of $456 in 1999 and $531 in 1998 $3,638 $2,492
Securities 2,018 1,595
------ ------
Total accrued interest receivable, net $5,656 $4,087
====== ======
</TABLE>
19
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(7) Premises and Equipment
Premises and equipment are summarized as follows at September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land and land improvements $ 1,088 $ 1,088
Buildings 4,522 3,504
Leasehold improvements 2,809 2,809
Furniture, fixtures and equipment 7,258 6,733
-------- --------
15,677 14,134
Accumulated depreciation and amortization (7,445) (7,076)
-------- --------
Total premises and equipment, net $ 8,232 $ 7,058
======== ========
</TABLE>
(8) Deposits
Deposit accounts and weighted average interest rates are summarized as
follows at September 30:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
Amount Rate Amount Rate
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Demand deposits:
Retail $ 35,701 --% $ 31,045 --%
Commercial 24,147 -- 19,285 --
NOW deposits 47,129 1.01 41,738 1.22
Savings deposits 161,809 2.02 155,934 1.99
Money market deposits 80,033 2.75 76,010 2.65
Certificates of deposit 237,821 4.82 249,162 5.15
-------- --------
Total deposits $586,640 2.97% $573,174 3.22%
======== ========
</TABLE>
Certificates of deposit at September 30 had remaining periods to
contractual maturity as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Remaining period to contractual maturity:
Less than one year $197,373 $200,037
One to two years 28,636 37,675
Two to three years 5,579 6,438
Greater than three years 6,233 5,012
-------- --------
Total certificates of deposit $237,821 $249,162
======== ========
</TABLE>
20
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Certificate of deposit accounts with a denomination of $100 or more
totaled $27,280 and $27,430 at September 30, 1999 and 1998, respectively.
The FDIC generally insures depositor accounts up to $100, as defined in
the applicable regulations.
The Company purchased two branch offices in separate transactions
consummated in fiscal 1996. In these transactions, the Bank assumed
deposit liabilities of $104,477 and recorded a core deposit purchase
premium of $7,532. Premium amortization charged to expense amounted to
$1,720, $1,630 and $1,506 for the years ended September 30, 1999, 1998
and 1997, respectively. Unamortized premiums of $1,960 and $3,665 are
included in other assets at September 30, 1999 and 1998, respectively.
Interest expense on deposits is summarized as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Savings deposits $ 3,398 $ 3,697 $ 3,670
Money market and NOW deposits 2,516 2,687 2,675
Certificates of deposit 11,560 12,771 12,347
======= ======= =======
Total interest expense $17,474 $19,155 $18,692
======= ======= =======
</TABLE>
(9) Borrowings
The Company's borrowings and weighted average interest rates are
summarized as follows at September 30:
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
Amount Rate Amount Rate
----------- --------- ------------ ---------
<S> <C> <C> <C> <C>
FHLB advances by remaining period to maturity:
Less than one year $ 40,000 5.83% $ 8,000 6.00%
-------- --------
One to two years 5,000 6.35 10,000 6.20
Two to three years 27,535 5.56 5,000 6.35
Three to four years 7,980 5.84 4,750 5.20
Four to five years 25,000 5.20 10,896 5.91
Greater than five years 10,000 5.19 -- --
-------- --------
115,515 5.60 38,646 5.97
Bank overdraft 2,238 11,285
-------- --------
Total borrowings $117,753 $ 49,931
======== ========
</TABLE>
21
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
As a member of the FHLB of New York, the Bank may have outstanding FHLB
borrowings of up to 30% of its total assets, or approximately $244,400 at
September 30, 1999, in a combination of term advances and overnight
funds. The unused FHLB borrowing capacity was approximately $128,900 at
September 30, 1999.
FHLB borrowings are secured by the investment in FHLB stock and by a
blanket security agreement. This agreement requires the Company to
maintain as collateral certain qualifying assets (principally securities
and residential mortgage loans) not otherwise pledged. The Bank satisfied
this collateral requirement at September 30, 1999 and 1998.
(10) Income Taxes
Income tax expense consists of the following components for the years
ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current tax expense:
Federal $ 2,832 $ 2,765 $ 1,898
State 614 638 435
------- ------- -------
3,446 3,403 2,333
------- ------- -------
Deferred tax (benefit) expense:
Federal (1,097) (787) 356
State (391) (270) 140
------- ------- -------
(1,488) (1,057) 496
------- ------- -------
Total income tax expense $ 1,958 $ 2,346 $ 2,829
======= ======= =======
</TABLE>
Actual income tax expense amounts for the years ended September 30 differ
from the amounts determined by applying the statutory Federal income tax
rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
--------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tax at Federal statutory
rate $ 2,002 34.0% $ 2,240 34.0% $ 2,525 34.0%
State income taxes, net
of Federal tax effect 147 2.5 243 3.7 380 5.1
Tax-exempt interest (102) (1.7) -- -- -- --
Low-income housing tax
credits (72) (1.2) (71) (1.1) (63) (0.8)
Other, net (17) (0.3) (66) (1.0) (13) (0.2)
------- ---- ------- ---- ------- ----
Actual income tax expense $ 1,958 33.3% $ 2,346 35.6% $ 2,829 38.1%
======= ==== ======= ==== ======= ====
</TABLE>
22
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Deferred tax assets and liabilities are recognized for temporary
differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. The sources of these temporary
differences and their deferred tax effects are as follows at September
30:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $2,540 $2,019
Deposit premium amortization 1,546 1,052
Deferred compensation 996 869
Net unrealized loss on securities available for sale 962 --
Depreciation of premises and equipment 149 134
Other 385 81
------ ------
Total deferred tax assets 6,578 4,155
------ ------
Deferred Tax Liabilities:
Federal tax bad debt reserve 370 444
Prepaid pension costs 393 357
Deferred loan origination costs, net 305 269
Net unrealized gain on securities available for sale -- 608
------ ------
Total deferred tax liabilities 1,068 1,678
------ ------
Net deferred tax asset $5,510 $2,477
====== ======
</TABLE>
In assessing the realizability of the Company's total deferred tax
assets, management considers whether it is more likely than not that some
portion or all of those assets will not be realized. Based upon
management's consideration of historical and anticipated future pre-tax
income, as well as the reversal period for the items giving rise to the
deferred tax assets and liabilities, a valuation allowance for deferred
tax assets was not considered necessary at September 30, 1999 and 1998.
As a savings institution, the Bank is subject to special provisions in
the Federal and New York State tax laws regarding its allowable tax bad
debt deductions and related tax bad debt reserves. These deductions
historically were determined using methods based on loss experience or a
percentage of taxable income. Tax bad debt reserves represent the excess
of allowable deductions over actual bad debt losses, and include a
defined "base-year" amount. SFAS No. 109 requires recognition of deferred
tax liabilities with respect to reserves in excess of the base-year
amount, as well as any portion of the base-year amount which is expected
to become taxable (or "recaptured") in the foreseeable future.
23
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
For Federal tax purposes, the bad debt deduction based on a percentage of
taxable income is no longer available and the bad debt reserves in excess
of the base-year amount must be recaptured into taxable income over a
six-year period. The Company previously established, and has continued to
maintain, a deferred tax liability with respect to the Federal reserves
subject to recapture. For New York tax purposes, the
percentage-of-taxable-income method continues to be available and all
State bad debt reserves are considered base-year reserves.
The Bank's Federal and State base-year reserves at September 30, 1999
were approximately $4,600 and $25,300, respectively. In accordance with
SFAS No. 109, deferred tax liabilities have not been recognized with
respect to these reserves, since the Company does not expect that these
amounts will become taxable in the foreseeable future. Under the tax
laws, events that would result in taxation of certain of these reserves
include (i) redemptions of the Bank's stock or certain excess
distributions by the Bank to Provident Bancorp, Inc. and (ii) failure of
the Bank to maintain a specified qualifying-assets ratio or meet other
thrift definition tests for New York State tax purposes. The unrecognized
deferred tax liabilities with respect to the Bank's base-year reserves
totaled approximately $3,300 at September 30, 1999.
(11) Regulatory Matters
Capital Requirements
OTS regulations require savings institutions to maintain a minimum ratio
of tangible capital to total adjusted assets of 1.5%; a minimum ratio of
Tier 1 (core) capital to total adjusted assets of 4.0% (effective April
1, 1999); and a minimum ratio of total (core and supplementary) capital
to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories -- well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a Tier 1 (core) capital ratio of at least
5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors. These
capital requirements apply only to the Bank, and do not consider
additional capital retained by Provident Bancorp, Inc.
24
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Management believes that, as of September 30, 1999 and 1998, the Bank met
all capital adequacy requirements to which it was subject. Further, the
most recent OTS notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations. There have
been no conditions or events since that notification that management
believes have changed the Bank's capital classification.
The following table sets forth the Bank's regulatory capital position at
September 30, 1999 and 1998, compared to OTS requirements for minimum
capital adequacy and for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
OTS Requirements
-----------------------------------------------------
Minimum Capital Classification as Well
Bank Actual Adequacy Capitalized
------------------------- ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999
Tangible capital $ 76,894 9.6% $ 12,069 1.5% $ -- --%
Tier 1 (core) capital 76,894 9.6 32,184 4.0 40,230 5.0
Risk-based capital:
Tier 1 76,894 15.9 -- -- 28,986 6.0
Total 82,935 17.2 38,648 8.0 48,310 10.0
============ ========= ============ ========= ============ ========
September 30, 1998
Tangible capital $ 50,626 7.4% $ 10,301 1.5% $ -- --%
Tier 1 (core) capital 50,626 7.4 20,601 3.0 34,335 5.0
Risk-based capital:
Tier 1 50,626 12.9 -- -- 23,472 6.0
Total 55,532 14.2 31,296 8.0 39,120 10.0
============ ========= ============ ========= ============ ========
</TABLE>
Dividend Limitations
Under OTS regulations that became effective April 1, 1999, savings
associations such as the Bank generally may declare annual cash dividends
up to an amount equal to net income for the current year plus net income
retained for the two preceding years. Dividends in excess of such amount
require OTS approval. The Bank has not paid any dividends to Provident
Bancorp, Inc. through September 30, 1999. Unlike the Bank, Provident
Bancorp, Inc. is not subject to OTS regulatory limitations on the payment
of dividends to its shareholders. In fiscal 1999, the Mutual Holding
Company accepted dividend payments of $132 and waived receipt of $132 in
dividends with respect to its shares of Provident Bancorp, Inc. common
stock.
25
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Liquidation Rights
All depositors who had liquidation rights with respect to the Bank as of
the effective date of the Reorganization continue to have such rights
solely with respect to the Mutual Holding Company, as long as they
continue to hold deposit accounts with the Bank. In addition, all persons
who become depositors of the Bank subsequent to the Reorganization will
have liquidation rights with respect to the Mutual Holding Company.
(12) Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for the reporting and display of
comprehensive income (and its components) in financial statements.
Comprehensive income represents the sum of net income and items of "other
comprehensive income" that are reported directly in stockholders' equity,
such as the change during the period in the after-tax net unrealized gain
or loss on securities available for sale. In accordance with SFAS No.
130, the Company has reported its comprehensive income for fiscal 1999,
1998 and 1997 in the consolidated statements of changes in stockholders'
equity.
The Company's other comprehensive income or loss, which is attributable
to gains and losses on securities available for sale, is summarized as
follows for the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net unrealized holding (loss) gain arising during the year,
net of related income taxes of $1,570, ($367)
and ($186), respectively $(2,352) $ 565 $ 265
Reclassification adjustment for net realized gain included
in net income, net of related income taxes of $4 -- (6) --
------- ------- -------
Other comprehensive (loss) income $(2,352) $ 559 $ 265
======= ======= =======
</TABLE>
26
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The Company's accumulated other comprehensive (loss) income, which is
included in stockholders' equity, represents the net unrealized (loss)
gain on securities available for sale of ($2,405) and $1,517 at September
30, 1999 and 1998, respectively, less related deferred income taxes of
$962 and ($608), respectively.
(13) Employee Benefits
Pension Plans
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. Employees who are twenty-one years of
age or older and have worked for the Company for one year are eligible to
participate in the plan. The Company's funding policy is to contribute
annually an amount sufficient to meet statutory minimum funding
requirements, but not in excess of the maximum amount deductible for
Federal income tax purposes. Contributions are intended to provide not
only for benefits attributed to service to date, but also for those
expected to be earned in the future.
27
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The following is a summary of changes in the plan's projected benefit
obligations and fair value of assets, together with a reconciliation of
the plan's funded status and the prepaid pension costs recognized in the
consolidated statements of financial condition:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Changes in projected benefit obligations:
Beginning of year $ 5,471 $ 4,411
Service cost 475 427
Interest cost 402 367
Actuarial (loss) gain (651) 557
Benefits paid (154) (291)
------- -------
End of year 5,543 5,471
------- -------
Changes in fair value of plan assets:
Beginning of year 5,312 5,152
Actual return on plan assets 733 49
Employer contributions 573 402
Benefits paid (154) (291)
------- -------
End of year 6,464 5,312
------- -------
Funded status at end of year 921 (159)
Unrecognized net actuarial loss 9 992
Unrecognized prior service cost (110) (124)
Unrecognized net transition obligation 138 164
------- -------
Prepaid pension costs $ 958 $ 873
======= =======
</TABLE>
A discount rate of 7.5% and a rate of increase in future compensation
levels of 5.5% were used in determining the actuarial present value of
the projected benefit obligations at September 30, 1999 (7.0% and 5.5%,
respectively, at September 30, 1998). The expected long-term rate of
return on plan assets was 8.0% for 1999 and 1998.
28
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The components of the net periodic pension expense were as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Service cost $ 475 $ 427 $ 348
Interest cost 402 367 329
Expected return on plan assets (425) (411) (306)
Recognized net actuarial loss 23 -- 21
Amortization of prior service cost (14) (14) (14)
Amortization of net transition obligation 26 26 26
----- ----- -----
Net periodic pension expense $ 487 $ 395 $ 404
===== ===== =====
</TABLE>
The Company has also established a non-qualified Supplemental Executive
Retirement Plan to provide certain executives with supplemental
retirement benefits in addition to the benefits provided by the pension
plan. The periodic pension expense related to the supplemental plan
amounted to $53, $46 and $40 for the years ended September 30, 1999, 1998
and 1997, respectively. The actuarial present value of the accumulated
benefit obligation was approximately $128 and $98 at September 30, 1999
and 1998, respectively, all of which is unfunded. The amounts at
September 30, 1999 and 1998 were determined using discount rates of 7.5%
and 7.0%, respectively, and a rate of increase in future compensation of
4.5%.
Other Postretirement Benefits
The Company's postretirement health care plan, which is unfunded,
provides optional medical, dental and life insurance benefits to
retirees. In accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," the cost of postretirement
benefits is accrued over the years in which employees provide services to
the date of their full eligibility for such benefits. As permitted by
SFAS No. 106, the Company elected to amortize the transition obligation
for accumulated benefits (which amounted to $237 at the adoption date) as
an expense over a 20-year period. The total periodic expense recognized
under SFAS No. 106 was $44, $38 and $37 for the years ended September 30,
1999, 1998 and 1997, respectively.
401(k) Savings Plan
The Company also sponsors a defined contribution plan established under
Section 401(k) of the Internal Revenue Code, pursuant to which eligible
employees may elect to contribute up to 10% of their compensation. The
Company may make matching contributions up to a maximum of 6% of a
participant's compensation. Matching contributions currently are 50% of
participant contributions and, prior to January 1, 1999, were 100% of
such contributions. Voluntary and matching contributions
29
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
are invested, in accordance with the participant's direction, in one or a
number of investment options. Savings plan expense was $212, $315 and
$276 for the years ended September 30, 1999, 1998 and 1997, respectively.
Employee Stock Ownership Plan
In connection with the Reorganization and Offering, the Company
established an ESOP for eligible employees who meet certain age and
service requirements. The ESOP borrowed $3,760 from Provident Bancorp,
Inc. and used the funds to purchase 309,120 shares of common stock in the
open market subsequent to the Offering. The Bank makes periodic
contributions to the ESOP sufficient to satisfy the debt service
requirements of the loan which has a ten-year term and bears interest at
the prime rate. The ESOP uses these contributions, and any dividends
received by the ESOP on unallocated shares, to make principal and
interest payments on the loan.
Shares purchased by the ESOP are held in a suspense account by the plan
trustee until allocated to participant accounts. Shares released from the
suspense account are allocated to participants on the basis of their
relative compensation in the year of allocation. Participants become
vested in the allocated shares over a period not to exceed five years.
Any forfeited shares are allocated to other participants in the same
proportion as contributions.
Total ESOP expense of $635 was recognized in fiscal 1999, consisting of
(i) $371 attributable to the allocation of 30,912 shares to participants
with respect to the initial plan year ended December 31, 1998, and (ii)
$264 attributable to 23,184 shares committed to be released to
participants during the nine months ended September 30, 1999 with respect
to the plan year ending December 31, 1999. The cost of the 255,024 ESOP
shares that have not yet been allocated or committed to be released to
participants is deducted from stockholders' equity ($3,102 at September
30, 1999). The fair value of these shares was approximately $3,283 at
that date.
(14) Commitments and Contingencies
Certain premises and equipment are leased under operating leases with
terms expiring through 2025. The Company has the option to renew certain
of these leases for terms of up to five years. Future minimum rental
payments due under non-cancelable operating leases with initial or
remaining terms of more than one year at September 30, 1999 are $1,678
for fiscal 2000; $1,647 for fiscal 2001; $1,678 for fiscal 2002; $1,698
for fiscal 2003; $1,675 for fiscal 2004; and a total of $6,144 for later
years. Net rent expense was $1,020, $931 and $951 for the years ended
September 30, 1999, 1998 and 1997, respectively.
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. Management, after consultation with
legal counsel, does not anticipate losses on any of these claims or
actions that would have a material adverse effect on the consolidated
financial statements.
30
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(15) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to
off-balance-sheet financial instruments that involve, to varying degrees,
elements of credit risk and interest rate risk in addition to the amounts
recognized in the consolidated financial statements. The contractual or
notional amounts of these instruments, which reflect the extent of the
Company's involvement in particular classes of off-balance-sheet
financial instruments, are summarized as follows at September 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Lending-Related Instruments:
Loan origination commitments:
Fixed-rate loans $ 8,433 $38,895
Adjustable-rate loans 10,257 11,584
Unused lines of credit 30,443 27,373
Standby letters of credit 6,597 4,952
Forward commitments to sell loans -- 6,500
Interest Rate Risk Management:
Interest rate cap agreement 20,000 20,000
======= =======
</TABLE>
Lending-Related Instruments
The contractual amounts of loan origination commitments, unused lines of
credit and standby letters of credit represent the Company's maximum
potential exposure to credit loss, assuming (i) the instruments are fully
funded at a later date, (ii) the borrowers do not meet the contractual
payment obligations, and (iii) any collateral or other security proves to
be worthless. The contractual amounts of these instruments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully
drawn upon. Substantially all of these lending-related instruments have
been entered into with customers located in the Company's primary market
area described in note 5.
Loan origination commitments are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments have fixed expiration dates (generally ranging
up to 60 days) or other termination clauses, and may require payment of a
fee by the customer. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral, if any,
obtained by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies
but may include mortgages on residential and commercial real estate,
deposit accounts with the Company, and other property. The Company's
fixed-rate loan origination commitments at September 30, 1999 provide for
interest rates ranging from 5.13% to 8.80%.
Unused lines of credit are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Lines of credit generally have fixed expiration
31
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
dates or other termination clauses. The amount of collateral obtained, if
deemed necessary by the Company, is based on management's credit
evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Company to assure the performance of financial obligations of a customer
to a third party. These commitments are primarily issued in favor of
local municipalities to support the obligor's completion of real estate
development projects. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers.
In order to limit the interest rate and market risk associated with loans
held for sale and commitments to originate loans held for sale, the
Company may enter into mandatory forward commitments to sell loans in the
secondary mortgage market. Risks associated with forward commitments to
sell mortgage loans include the possible inability of the counterparties
to meet the contract terms, or of the Company to originate loans to
fulfill the contracts. If the Company is unable to fulfill a contract, it
could purchase securities in the open market to deliver against the
contract. The Company controls its counterparty risk by entering into
these agreements only with highly-rated counterparties.
Interest Rate Cap Agreement
At September 30, 1999 and 1998, the Company was a party to an interest
rate cap agreement with a notional amount of $20,000 and a five-year term
ending in March 2003. This agreement was entered into to reduce the
Company's exposure to potential increases in interest rates on a portion
of its certificate of deposit accounts. The counterparty in the
transaction has agreed to make interest payments to the Company, based on
the notional amount, to the extent that the three-month LIBOR rate
exceeds 6.50% during the term of the cap agreement. No payments were due
from the counterparty through September 30, 1999. The carrying amount of
the cap agreement at September 30, 1999 and 1998 represented the
unamortized premium of $209 and $270, respectively, which is included in
other assets. Premium amortization of $61 and $36 is included in deposit
interest expense for the years ended September 30, 1999 and 1998,
respectively. The estimated fair value of the interest rate cap agreement
at September 30, 1999 and 1998 was approximately $310 and $180,
respectively, representing the estimated amounts the Company would have
received had it terminated the contract at those dates.
(16) Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information for those financial
instruments for which it is practicable to estimate fair value, whether
or not such financial instruments are recognized in the consolidated
statements of financial condition. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
32
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Quoted market prices are used to estimate fair values when those prices
are available. However, active markets do not exist for many types of
financial instruments. Consequently, fair values for these instruments
must be estimated by management using techniques such as discounted cash
flow analysis and comparison to similar instruments. These estimates are
highly subjective and require judgments regarding significant matters,
such as the amount and timing of future cash flows and the selection of
discount rates that appropriately reflect market and credit risks.
Changes in these judgments often have a material effect on the fair value
estimates. Since these estimates are made as of a specific point in time,
they are susceptible to material near-term changes. Fair values disclosed
in accordance with SFAS No. 107 do not reflect any premium or discount
that could result from the sale of a large volume of a particular
financial instrument, nor do they reflect possible tax ramifications or
estimated transaction costs.
The following is a summary of the carrying amounts and estimated fair
values of financial assets and liabilities at September 30 (none of which
were held for trading purposes):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------- ----------- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 11,838 $ 11,838 $ 7,572 $ 7,572
Securities available for sale 148,387 148,387 97,983 97,983
Securities held to maturity 56,782 56,479 98,402 99,672
Loans 566,521 564,275 463,667 466,020
Accrued interest receivable 5,656 5,656 4,087 4,087
Federal Home Loan Bank stock 6,176 6,176 3,690 3,690
Financial Liabilities:
Deposits 586,640 585,402 573,174 575,822
Borrowings 117,753 117,077 49,931 50,849
Mortgage escrow funds 10,489 10,489 5,887 5,887
============ ============= =========== ==============
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Securities
The estimated fair values of securities were based on quoted market
prices.
Loans
Fair values were estimated for portfolios of loans with similar financial
characteristics. For valuation purposes, the total loan portfolio was
segregated into performing and non-performing categories.
33
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Performing loans were segregated by adjustable-rate and fixed-rate loans;
fixed-rate loans were further segmented by type, such as residential
mortgage, commercial mortgage, commercial business and consumer loans.
Residential loans were also segmented by maturity.
Fair values were estimated by discounting scheduled future cash flows
through estimated maturity using a discount rate equivalent to the rate
at which the Company would currently make loans which are similar with
regard to collateral, maturity and the type of borrower. The discounted
value of the cash flows was reduced by a credit risk adjustment based on
loan categories. Based on the current composition of the Company's loan
portfolio, as well as both past experience and current economic
conditions and trends, the future cash flows were adjusted by prepayment
assumptions that shortened the estimated remaining time to maturity and
therefore affected the fair value estimates.
Estimated fair values of loans held for sale were based on contractual
sale prices for loans covered by forward sale commitments. Any remaining
loans held for sale were valued based on current secondary market prices
and yields.
Deposits
In accordance with SFAS No. 107, deposits with no stated maturity (such
as savings, demand and money market deposits) were assigned fair values
equal to the carrying amounts payable on demand. Certificates of deposit
were segregated by account type and original term, and fair values were
estimated based on the discounted value of contractual cash flows. The
discount rate for each account grouping was equivalent to the
then-current rate offered by the Company for deposits of similar type and
maturity.
These fair values do not include the value of core deposit relationships
that comprise a significant portion of the Company's deposit base.
Management believes that the Company's core deposit relationships provide
a relatively stable, low-cost funding source that has a substantial
unrecognized value separate from the deposit balances.
Borrowings
Estimated fair values of FHLB advances were based on the discounted value
of contractual cash flows. A discount rate was utilized for each
outstanding advance equivalent to the then-current rate offered by the
FHLB on borrowings of similar type and maturity. The bank overdraft
included in total borrowings has an estimated fair value equal to the
carrying amount.
Other Financial Instruments
The other financial assets and liabilities listed in the preceding table
have estimated fair values that approximate the respective carrying
amounts because the instruments are payable on demand or have short-term
maturities and present relatively low credit risk and interest rate risk.
34
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The carrying amount and estimated fair value of the Company's interest
rate cap agreement at September 30, 1999 and 1998 are set forth in note
15. The fair values of the Company's lending-related off-balance-sheet
financial instruments described in note 15 were estimated based on the
interest rates and fees currently charged to enter into similar
agreements, considering the remaining terms of the agreements and the
present credit worthiness of the counterparties. At September 30, 1999
and 1998, the estimated fair values of these instruments approximated the
related carrying amounts which were not significant.
(17) Condensed Parent Company Financial Statements
Set forth below is the condensed statement of financial condition of
Provident Bancorp, Inc. at September 30, 1999, together with the related
condensed statements of income and cash flows for the period from January
7, 1999 through September 30, 1999.
<TABLE>
<CAPTION>
Condensed Statement of Financial Condition
<S> <C>
Assets
Cash and cash equivalents $ 2,367
Securities available for sale 9,906
Loan receivable from ESOP 3,384
Investment in Provident Bank 74,496
Other assets 320
-------
Total assets $90,473
=======
Liabilities $ 174
Stockholders' Equity 90,299
-------
Total liabilities and stockholders' equity $90,473
=======
Condensed Statement of Income
Interest income $ 425
Income tax expense 174
-------
Income before equity in undistributed earnings of Provident Bank 251
Equity in undistributed earnings of Provident Bank 2,951
-------
Net income $ 3,202
=======
</TABLE>
35
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
<S> <C>
Cash Flows from Operating Activities:
Net income $ 3,202
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed earnings of Provident Bank (2,951)
Other adjustments, net (312)
--------
Net cash used in operating activities (61)
--------
Cash Flows from Investing Activities:
Capital contribution to Provident Bank (24,000)
Purchase of securities available for sale (10,218)
--------
Net cash used in investing activities (34,218)
--------
Cash Flows from Financing Activities:
Net proceeds from stock offering 37,113
Initial capitalization of Provident Bancorp, MHC (100)
Cash dividends paid (367)
--------
Net cash provided by financing activities 36,646
--------
Net increase in cash and cash equivalents 2,367
Cash and cash equivalents at beginning of period --
--------
Cash and cash equivalents at end of period $ 2,367
========
</TABLE>
36
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(18) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations
for the years ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended September 30, 1999
Interest and dividend income $12,506 $12,563 $13,171 $14,027
Interest expense 5,333 5,009 5,249 5,998
------- ------- ------- -------
Net interest income 7,173 7,554 7,922 8,029
Provision for loan losses 360 360 420 450
Non-interest income 812 766 687 838
Non-interest expense 6,472 6,632 6,517 6,682
------- ------- ------- -------
Income before income tax expense 1,153 1,328 1,672 1,735
Income tax expense 425 491 544 498
------- ------- ------- -------
Net income $ 728 $ 837 $ 1,128 $ 1,237
======= ======= ======= =======
Basic earnings per common share $ 0.10 $ 0.14 $ 0.15
======= ======= =======
Year Ended September 30, 1998
Interest and dividend income $11,816 $11,789 $12,132 $12,211
Interest expense 5,152 5,168 5,288 5,272
------- ------- ------- -------
Net interest income 6,664 6,621 6,844 6,939
Provision for loan losses 270 537 540 390
Non-interest income 792 644 863 781
Non-interest expense 4,944 5,216 5,479 6,184
------- ------- ------- -------
Income before income tax expense 2,242 1,512 1,688 1,146
Income tax expense 876 551 569 350
------- ------- ------- -------
Net income $ 1,366 $ 961 $ 1,119 $ 796
======= ======= ======= =======
</TABLE>
37
<PAGE>
[Letterhead of KPMG LLP]
Independent Auditors' Report
The Board of Directors and Stockholders
Provident Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Provident Bancorp, Inc. and subsidiary (the "Company") as of September 30,
1999 and 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Provident Bancorp,
Inc. and subsidiary as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1999 in conformity with generally accepted accounting
principles.
/s/KPMG LLP
Stamford, Connecticut
October 28, 1999
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at the Holiday Inn, 3 Executive
Boulevard, Suffern, New York on February 22, 2000, at 10:00 a.m.
Stock Listing
The Company's common stock is listed on the Nasdaq National Market under the
symbol "PBCP."
Special Counsel
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Washington, D.C. 20015
Independent Auditors
KPMG LLP
3001 Summer Street
Stamford, Connecticut 06905
Annual Report on Form 10-K
A copy of the Company's Form 10-K for the fiscal year ended September 30, 1999,
will be furnished without charge to stockholders. Make requests in writing to
the Manager of Shareholder Relations, Provident Bancorp, Inc., 400 Rella
Boulevard, P. O. Box 600, Montebello, New York 10901, or call (914) 369-8040.
Transfer Agent and Registrar
Registrar & Transfer Co.
10 Commerce Drive
Cranford, New Jersey 07016
If you have questions concerning your stockholder account, call our transfer
agent, noted above, at (800) 368-5948 ext. 2531. This is the number to call if
you require a change of address, records or information about lost certificates,
or dividend checks.
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the subsidiaries of Provident Bancorp, Inc.:
Name State of Incorporation
- ---- ----------------------
Provident Bank Federal
|
Provest Services Corp. I New York
Provest Services Corp. II New York
Provident REIT, Inc. New York
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,838
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,387
<INVESTMENTS-CARRYING> 56,782
<INVESTMENTS-MARKET> 56,479
<LOANS> 572,723
<ALLOWANCE> 6,202
<TOTAL-ASSETS> 814,518
<DEPOSITS> 586,640
<SHORT-TERM> 117,753
<LIABILITIES-OTHER> 19,826
<LONG-TERM> 0
0
0
<COMMON> 828
<OTHER-SE> 89,471
<TOTAL-LIABILITIES-AND-EQUITY> 814,518
<INTEREST-LOAN> 40,209
<INTEREST-INVEST> 11,712
<INTEREST-OTHER> 346
<INTEREST-TOTAL> 52,267
<INTEREST-DEPOSIT> 17,474
<INTEREST-EXPENSE> 21,589
<INTEREST-INCOME-NET> 30,678
<LOAN-LOSSES> 1,590
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 26,303
<INCOME-PRETAX> 5,888
<INCOME-PRE-EXTRAORDINARY> 5,888
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,930
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 7.22
<LOANS-NON> 4,636
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,906
<CHARGE-OFFS> 922
<RECOVERIES> 628
<ALLOWANCE-CLOSE> 6,202
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,202
</TABLE>
