SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For
the transition period from __________ to
__________
Commission File Number: 0-25233
PROVIDENT BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Federal 06-1537499
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ------------------------------------------- -----
(Address of Principal Executive Office) ( Zip Code)
(914) 369-8040
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
(2) Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
$0.10 per share 8,280,000 as of
June 30, 1999
<PAGE>
PROVIDENT BANCORP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at June 30,
1999 and September 30, 1998 3 - 4
Consolidated Statements of Income for the Three Months and
Nine Months Ended June 30, 1999 and 1998 5
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended June 30, 1999 6
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1999 and 1998 7 - 8
Notes to Consolidated Interim Financial Statements 9 - 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11 - 22
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23 Signatures 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Provident Bancorp, Inc. and subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1999 1998
- ------ ---- ----
<S> <C> <C>
Cash and due from banks $ 10,994 $ 7,572
Investment securities:
Available for sale, at fair value (amortized cost of $90,561 at
June 30, 1999 and $47,163 at September 30, 1998) 89,072 48,071
Held to maturity, at amortized cost (fair value of $3,878 at
June 30, 1999 and $19,262 at September 30, 1998) 3,901 19,176
------------------- -------------------
Total investment securities 92,973 67,247
------------------- -------------------
Mortgage-backed securities:
Available for sale, at fair value (amortized cost of $55,782 at
June 30, 1999 and $49,303 at September 30, 1998) 55,506 49,912
Held to maturity, at amortized cost (fair value of $57,372 at
June 30, 1999 and $80,410 at September 30, 1998) 57,509 79,226
------------------- -------------------
Total mortgage-backed securities 113,015 129,138
------------------- -------------------
Loans:
Residential mortgage loans 339,669 290,334
Commercial mortgage, commercial business and construction loans
161,799 115, 570
Consumer loans 66,155 62,669
Allowance for loan losses (Note 3) (5,495) (4,906)
------------------- -------------------
Total loans, net 562,128 463,667
------------------- -------------------
Accrued interest receivable, net 5,208 4,087
Federal Home Loan Bank stock, at cost 5,703 3,690
Premises and equipment, net 7,567 7,058
Other assets 9,148 8,609
=================== ===================
Total assets $ 806,736 $ 691,068
=================== ===================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Provident Bancorp, Inc. and subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, cONTINUED
(Unaudited)
(In thousands, except share data)
June 30, September 30,
Liabilities and Stockholders' Equity 1999 1998
- ------------------------------------ ---- ----
<S> <C> <C>
Liabilities:
Deposits $ 581,244 $ 573,174
Borrowings and overdrafts 111,845 49,931
Mortgage escrow funds 15,928 5,887
Other liabilities 8,141 6,876
------------------- -------------------
Total liabilities 717,158 635,868
------------------- -------------------
Stockholders' equity (Note 1):
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 March 31, 1999) 828 --
Additional paid-in capital 36,240 --
Unallocated common stock held by employee stock ownership plan ("ESOP")
(3,196) --
Retained earnings 56,764 54,291
Accumulated other comprehensive income (loss), net of taxes of $(706) at June 30,
1999 and $608 at September 30, 1998 (1,058) 909
(Note 4)
------------------- -------------------
Total stockholders' equity 89,578 55,200
=================== ===================
Total liabilities and stockholders' equity $ 806,736 $ 691,068
=================== ===================
See accompanying notes to unaudited consolidated interim financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Three Months Ended For the Nine Months Ended
--------------------------- -------------------------
(In thousands, except per share data) June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Interest and dividend income:
<S> <C> <C> <C> <C>
Loans $ 10,204 $ 8,852 $ 29,407 $ 25,962
Mortgage-backed securities 1,776 2,211 5,520 6,748
Investment securities and other earning assets 1,191 1,069 3,315 3,029
Total interest and dividend income -------------- ----------- ---------- --------
13,171 12,132 38,242 35,739
-------------- ----------- ---------- --------
Interest expense:
Deposits 4,198 4,864 13,126 14,315
Borrowings 1,051 424 2,465 1,294
Total interest expense -------------- ----------- ---------- --------
5,249 5,288 15,591 15,609
-------------- ----------- ---------- --------
Net interest income 7,922 6,844 22,651 20,130
Provision for loan losses 420 540 1,140 1,347
Net interest income after provision for loan losses -------------- ----------- ---------- --------
7,502 6,304 21,511 18,783
-------------- ----------- ---------- --------
Non-interest income:
Loan servicing 154 133 402 443
Banking service fees and other income 533 728 1,863 1,855
Total non-interest income -------------- ----------- ---------- --------
687 861 2,265 2,298
-------------- ----------- ---------- --------
Non-interest expense:
Compensation and employee benefits 3,066 2,598 9,026 7,501
Occupancy and office operations 847 812 2,525 2,346
Advertising and promotion 322 275 1,000 825
Federal deposit insurance costs 82 63 229 246
Data processing 327 215 853 612
Amortization of branch purchase premiums 430 430 1,290 1,201
Other 1,443 1,074 4,700 2,910
Total non-interest expense -------------- ----------- -------------- --------
6,517 5,479 19,623 15,641
-------------- ----------- ---------- --------
Income before income tax expense 1,672 1,688 4,153 5,440
Income tax expense 545 569 1,464 1,996
Net income ============== =========== ============== ========
$ 1,127 $ 1,119 $ 2,689 $ 3,444
Basic and diluted earnings per common share, for periods
beginning after date of stock conversion (January 7, 1999)
(Note 5) $ 0.14
==============
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 1999
(Unaudited)
(In thousands, except share data)
Additional Unallocated
Preferred Stock Common Stock Paid-In Capital ESOP Shares Retained Earnings
--------------- ------------ --------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ -- $ -- $ -- $ -- $ 54,291
Net income for the nine-month period
-- -- -- -- 2,689
Issuance of 8,280,000 common shares (Note 1)
-- 828 36,261 -- --
Initial capitalization of Provident
Bancorp, MHC -- -- -- -- (100)
Shares purchased by ESOP
(309,120 shares) -- -- -- (3,760) --
ESOP shares allocated or released for
allocation (38,640 shares) -- -- (21) 564 --
Change in net unrealized gain (loss) on
securities available for sale, net of
taxes of ($1,314) -- -- -- -- --
Cash dividends -- -- -- -- (116)
Balance at June 30, 1999 -------- --------- ----------- ---------- -----------
$ -- $ 828 $ 36,240 $ (3,196) $ 56,764
======== ========= =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Income (Loss) Total
----------------- -----
<S> <C> <C>
Balance at September 30, 1998 $ 909 $ 55,200
Net income for the nine-month
period -- 2,689
Issuance of 8,280,000 common
shares (Note 1) -- 37,089
Initial capitalization of Provident
Bancorp, MHC -- (100)
Shares purchased by ESOP
(309,120 shares) -- (3,760)
ESOP shares allocated or released
for allocation (38,640 shares) -- 543
Change in net unrealized gain
(loss) on securities available for
sale, net of taxes of ($1,314) (1,967) (1,967)
Cash dividends -- (116)
----------- ----------
Balance at June 30, 1999 $ (1,058) $ 89,578
=========== ==========
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Nine Months Ended June
(In thousands) 30,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $2,689 $ 3,444
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises
and equipment 1,111 1,044
ESOP expense 543 ---
Provision for loan losses 1,140 1,347
Amortization of branch purchase premiums 1,290 1,201
Proceeds from sales of loans held for sale 14,081 17,163
Originations of loans held for sale (12,759) (14,619)
Deferred income tax benefit (300) (586)
Net changes in accrued interest receivable
and payable (1,168) (241)
Net increase in other liabilities 1,312 47
Other adjustments, net 132 (267)
-------------- ---------------
Net cash provided by operating activities 8,071 8,533
-------------- ---------------
Cash flows from investing activities:
Purchases of securities:
Investment securities available for sale (62,490) (19,093)
Investment securities held to maturity --- (2,977)
Mortgage-backed securities available for sale (18,355) (13,100)
Mortgage-backed securities held to maturity --- (12,398)
Proceeds from maturities, calls and principal payments:
Investment securities available for sale 19,000 13,000
Investment securities held to maturity 15,291 5,010
Mortgage-backed securities available for sale 11,895 5,442
Mortgage-backed securities held to maturity 21,626 26,979
Proceeds from sales of investment securities available
for sale --- 6,007
Loan originations (188,169) (132,145)
Loan repayments 86,774 91,980
Purchases of Federal Home Loan Bank stock (2,013) (49)
Proceeds from sales of real estate owned 274 451
Purchases of premises and equipment (1,620) (759)
-------------- ---------------
Net cash used in investing activities (117,787) (31,652)
-------------- ---------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Nine Months Ended June
30,
1999 1998
-------------- --------------
Cash flows from financing activities:
<S> <C> <C>
Net increase in deposits $8,070 $33,229
Net increase (decrease) in borrowings and bank overdrafts 61,914 (16,428)
Net increase in mortgage escrow funds 10,041 9,912
Net proceeds from stock offering 37,089 ---
Shares purchased by ESOP (3,760) ---
Initial capitalization of Provident Bancorp, MHC (100) ---
Cash dividends (116) ---
-------------- ---------------
Net cash provided by financing activities 113,138 26,713
-------------- ---------------
Net increase in cash and cash equivalents 3,422 3,594
Cash and cash equivalents at beginning of period 7,572 9,191
============== ===============
Cash and cash equivalents at end of period $10,994 $12,785
============== ===============
Supplemental information:
Interest paid $ 15,638 $ 15,487
Income taxes paid 1,446 3,122
Transfers of loans receivable to real estate owned 311 597
============== ===============
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
8
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. Reorganization and Offering
On January 7, 1999, Provident Bank (the "Bank") completed its
reorganization into a mutual holding company structure. Provident Bancorp, Inc.,
the Bank's holding company (the "Company"), issued a total of 8,280,000 common
shares, consisting of 3,864,000 shares sold to the public and 4,416,000 shares
issued to Provident Bancorp, MHC. The Company raised net proceeds of $37.1
million (gross proceeds of $38.6 million less offering costs of $1.5 million)
from the sale of shares to the public. The Bank's Employee Stock Ownership Plan
("ESOP"), which did not purchase shares in the offering, was authorized to
purchase 8% of the shares issued to the public, or approximately 309,120 shares.
The ESOP completed its purchase of all authorized shares in the open market
during January and February of 1999.
2. Basis of Presentation
The results of operations and financial condition for the periods and
as of dates subsequent to the reorganization are reported on a consolidated
basis for the Company and the Bank (collectively, the "Company").
Earlier financial information pertains to the Bank only.
The financial statements included herein have been prepared by
management without audit. In the opinion of management, the unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position and results of
operations as of the dates and for the periods presented. Certain information
and footnote disclosures normally included in conformity with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Company believes that
the disclosures are adequate to make the information presented not misleading;
however, the results for the interim periods ended June 30, 1999 are not
necessarily indicative of results to be expected for the entire fiscal year
ending September 30, 1999.
The interim unaudited financial statements presented herein should be
read in conjunction with the annual audited financial statements for the fiscal
year ended September 30, 1998, and with the prospectus dated November 12, 1998.
3. 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.
9
<PAGE>
The allowance for loan losses is an amount that management believes
will be adequate to absorb probable losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of the loans.
Management's evaluations, which are subject to periodic review by the Company's
regulators, take into consideration such factors as the Company's past loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and collateral values, and
current economic conditions that may affect the borrowers' ability to pay.
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.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June Nine Months
30, Ended June 30,
--- --------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $5,631 $4,506 $4,906 $3,779
Provision for loan losses 420 540 1,140 1,347
Charge-offs (686) (703) (863) (611)
Recoveries 130 205 312 33
Balance at end of period ----------- -------- --------- ---------
$5,495 $4,548 $5,495 $4,548
=========== ======== ========= =========
</TABLE>
4. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses). In accordance with the provisions of SFAS No. 130,
the Company's total comprehensive income (loss) was $722,000 and $3.5 million
for the nine months ended June 30, 1999 and 1998, respectively, and $(100,000)
and $1.1 million for the three months ended June 30, 1999 and 1998,
respectively. The difference between the Company's net income and total
comprehensive income for these periods equals the change in the after-tax net
unrealized gain or loss on securities available for sale during the applicable
periods. Accumulated other comprehensive income (loss) in the consolidated
statements of financial condition represents the after-tax net unrealized gain
(loss) on securities available for sale as of June 30, 1999 and September 30,
1998.
10
<PAGE>
5. Earnings Per Common Share
The Company completed the reorganization and offering on January 7,
1999. As a result, earnings per share data is presented herein only for periods
beginning after that date. Weighted average common shares of 8,012,209 were used
in calculating basic and diluted earnings per share for the quarter ended June
30, 1999. In computing both basic and diluted earnings per share, outstanding
shares include all shares issued to the mutual holding company but exclude
unallocated ESOP shares that have not been released or committed to be released
to participants.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believe", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Company's continued
ability to originate quality loans, fluctuations in interest rates, real estate
conditions in the Company's lending areas, general and local economic
conditions, 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.
Comparison of Financial Condition at June 30, 1999 and September 30, 1998
Total assets increased to $806.7 million at June 30, 1999 from $691.1
million at September 30, 1998, an increase of $115.7 million, or 16.7 %. The
asset growth was primarily attributable to a $98.5 million increase in loans
receivable, as well as a $9.6 million overall increase in securities.
Net loans receivable increased by $98.5 million in the nine months
ended June 30, 1999 primarily due to an increase of $51.4 million in fixed-rate
residential mortgage loans and an overall increase of $46.4 million in the
commercial loan portfolio. The increase in the commercial loan portfolio was
attributable to increases in commercial mortgage loans of $36.1 million,
multi-family loans of $3.6 million and commercial business loans of $6.7
million. Total consumer loans increased by $3.5 million. Partially offsetting
the above increases was a decrease of $2.0 million
11
<PAGE>
in adjustable-rate residential mortgage loans. The allowance for loan losses
increased by $589,000 to $5.5 million at June 30, 1999 from $4.9 million at
September 30, 1998.
The total securities portfolio increased by $9.6 million to $206.0
million at June 30, 1999 from $196.4 million at September 30, 1998. This net
increase reflects a $25.7 million increase in investment securities and a $16.1
million decrease in mortgage-backed securities.
Total deposits increased by $8.1 million to $581.2 million at June 30,
1999 from $573.2 million at September 30, 1998. Total transaction account
balances increased $16.6 million, or 18.0%, in the nine months ended June 30,
1999, and total savings account balances increased by $8.9 million, or 5.7%.
Total certificates of deposit decreased $22.9 million, or 9.2%, to $226.2
million at June 30, 1999 from $249.2 million at September 30, 1998. Borrowings
(Federal Home Loan Bank advances) and overdrafts, increased $61.9 million during
the nine month period to $111.8 million at June 30, 1999 from $49.9 million at
September 30, 1998. Deposit growth was impacted by the stock offering, since
nearly one third of the stock purchases in January of 1999 were funded from the
Bank's customer deposits.
Total equity increased $34.4 million to $89.6 million at June 30, 1999
from $55.2 million at September 30, 1998, reflecting the infusion of $37.1
million in net proceeds from the stock offering, which closed in January, and
net income of $2.7 million. Partially offsetting these increases was a decrease
of $2.0 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 over the nine month period. The establishment of the ESOP
and subsequent transactions have resulted in a net decrease in total equity of
$3.2 million.
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
June 30, 1998
Net income for the three months ended June 30, 1999 was $1.1 million or
$0.14 per common share, an increase of $8,000 or 0.7% from net income of $1.1
million for the three months ended June 30, 1998. The principal changes in the
current quarter compared to a year ago were an increase in net interest income
and an increase in non-interest expenses.
Interest Income. Interest income increased by $1.0 million or 8.6%, to
$13.2 million for the three months ended June 30, 1999 from $12.1 million for
the three months ended June 30, 1998. The increase was primarily due to a $1.4
million or 15.3 % increase in income from loans, partially offset by a $435,000
or 19.7 % decrease in income from mortgage-backed securities. Interest income
from investment securities and other earning assets saw an increase of $123,000
for the quarter. The increase in income from loans was attributable to a $107.3
million increase in the average loan balance to $542.0 million from $434.7
million, partially offset by a 62 basis point decrease in the average yield to
7.55% from 8.17%. The increase in loans reflects continued growth of the
one-to-four family residential mortgage loan portfolio, together with a $42.0
million or 39.6 % increase in the average commercial loan portfolio. The
$435,000 decrease in income
12
<PAGE>
from mortgage-backed securities was attributable to a $28.1 million decrease in
the average balance to $109.9 million from $138.0 million, net of a 5 basis
point increase in the average yield to 6.48% from 6.43%.
Interest Expense. Interest expense decreased marginally, by $39,000 or
0.7 %, to $5.2 million for the three months ended June 30, 1999 from $5.3
million for the three months ended June 30, 1998. This decrease was the result
of a 34 basis point decrease in the average rate paid on total interest-bearing
liabilities in the 1999 period compared to the 1998 period, more than offsetting
a $49.8 million or 8.9% increase in the average balance of interest-bearing
liabilities over the same period. The decrease in total interest expense
resulted primarily from a $484,000 decrease in interest expense on certificates
of deposit to $2.7 million from $3.2 million, due in part to a 54 basis point
decrease in the average rate paid to 4.75% from 5.29%. In addition, interest
expense on savings deposits decreased by $89,000 to $857,000 from $946,000 due
to a 25 basis point decrease in the average rate paid on such deposits to 1.98%
from 2.23%, offset, in part, by a $3.6 million increase in the average balance
to $173.5 million from $169.9 million. Interest expense on money market, demand
and NOW accounts declined by $94,000 for the quarter ended June 30, 1999 due to
a reduction in average rate paid to 1.95% from 2.38%, net of a $6.9 million
increase in average balances of such deposits. These expense reductions were
partially offset by higher interest expense on borrowings from the Federal Home
Loan Bank ("FHLB"). The average balance of such borrowings increased by $52.4
million to $80.0 million for the 1999 period, from $27.6 million in 1998,
offset, in part, by a decrease of 90 basis points in the average rate paid to
5.27% from 6.17 %.
Net Interest Income. For the three months ended June 30, 1999 and 1998,
net interest income was $7.9 million and $6.8 million, respectively. The $1.1
million increase in net interest income was primarily attributable to a $34.9
million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), complimented by a 3 basis point increase in the
net interest rate spread to 3.79% from 3.76%. The Company's net interest margin
increased to 4.36% in the three months ended June 30, 1999 from 4.26% in the
three months ended June 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 $420,000 and $540,000 in loan loss provisions during the three months
ended June 30, 1999 and 1998, respectively.
13
<PAGE>
The table below sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated. At both dates, the Company had no
troubled debt restructurings (loans for which a portion of interest or principal
has been forgiven and loans modified at interest rates materially less than
current market rates).
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---- ----
(Dollars in thousands)
Non-performing loans:
First mortgage loans:
<S> <C> <C>
One-to-four family $ 3,144 $ 2,965
Commercial mortgage 1,668 871
Construction and land 1,021 1,256
---------------- --------------------
Total first mortgage loans 5,833 5,092
Consumer loans 966 647
Commercial business loans 415 368
---------------- --------------------
Total non-performing loans 7,214 6,107
---------------- --------------------
Real estate owned:
One-to-four family 382 92
Commercial real estate 21 274
---------------- --------------------
Total real estate owned 403 366
---------------- --------------------
Total non-performing assets $ 7,617 $ 6,473
================ ====================
Ratios:
Non-performing loans to total loans 1.28% 1.32%
Non-performing assets to total assets 0.94 0.94
Allowance for loan losses to total non-performing loans 76.17 80.33
Allowance for loan losses to total loans 0.98 1.06
================ ====================
</TABLE>
Non-Interest Income. Non-interest income is composed primarily of fee
income for bank services, and also includes gains and losses from the sale of
loans and securities. Total non-interest income for the three months ended June
30, 1999 declined by $174,000 or 20.2%, to $687,000 for the three months ended
June 30, 1999 from $861,000 for the three months ended June 30, 1998. The
primary reason for the decline was a decrease in the gain on sale of loans of
$168,000 for the three months ended June 30, 1999 compared with the three months
ended June 30, 1998 due primarily to lower volume.
14
<PAGE>
Non-Interest Expenses. Non-interest expenses increased by $1.0 million
or 18.9%, to $6.5 million for the three months ended June 30, 1999 from $5.5
million for the three months ended June 30, 1998. Some of the factors
contributing to the increase in the period ended June 30, 1999 were costs
associated with the Bank's planned expansion of branch locations and product
offerings.
Total compensation and employee benefits expense increased $468,000 or
18.0% over the prior-year quarter due, in part, to higher salary expense of
$317,000. The higher expense reflects new branch and product expansion, as well
as higher overtime and temporary help expense of $32,000.
Other non-interest expenses increased $369,000 to $1.4 million for the
three months ended June 30, 1999 from $1.1 million for the three months ended
June 30, 1998. This increase includes higher consulting expenses totaling
$189,000.
Income Taxes. Income tax expense was $545,000 for the three months
ended June 30, 1999 compared to $569,000 for the same period in 1998. The
effective tax rates were 32.6% and 33.7%, respectively.
Comparison of Operating Results for the Nine Months Ended June 30, 1999 and June
30, 1998
Net income for the nine months ended June 30, 1999 was $2.7 million, a
decrease of $755,000 or 21.9%, from net income of $3.4 million for the nine
months ended June 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 impact of costs of $1.5 million
related to the conversion to a new computer system and the establishment of the
ESOP, net income would have been approximately $3.6 million for the nine-month
period ended June 30, 1999.
Interest Income. Interest income increased by $2.5 million or 7.0%, to
$38.2 million for the nine months ended June 30, 1999 from $35.7 million for the
nine months ended June 30, 1998. The increase was primarily due to a $3.4
million or 13.3% increase in income from loans, partially offset by a $1.2
million or 18.2% decrease in income from mortgage-backed securities. The
increase in income from loans was attributable to a $91.6 million increase in
the average balance to $512.2 million from $420.7 million, partially offset by a
58 basis point decrease in the average yield to 8.25% from 7.68%. The continued
growth of the one-to-four family residential mortgage loan portfolio was
responsible for the majority of the loan increase, together with a $31.1 million
or 30.2 % increase in the average commercial loan portfolio. The decrease in
income from mortgage-backed securities was attributable to a $22.7 million
decrease in the average balance to $115.6 million from $138.3 million, combined
with a 14 basis point decrease in the average yield to 6.38 % from 6.52 %.
15
<PAGE>
Interest Expense. Interest expense was $15.6 million for both the nine
months ended June 30, 1999 and 1998. This stable expense was the net result of a
$45.3 million or 8.3% increase in the average balance of total interest-bearing
liabilities in the 1999 period compared to the 1998 period, substantially offset
by a 30 basis point decrease in the average rate paid on such liabilities over
the same period. Interest expense on borrowings from the FHLB increased by $1.2
million due to an increase of $31.3 million in the average balance of such
borrowings to $60.4 million from $29.2 million, offset, in part, by a decrease
of 48 basis points in the average rate paid to 5.45 % from 5.93 %. The higher
interest expense on borrowings was partially offset by a decrease of $766,000 in
interest expense on certificates of deposit to $8.8 million from $9.6 million.
This decrease was due to a 40 basis point decrease in the average rate paid to
4.93% from 5.33 %, as well as a $1.7 million decrease in the average balance of
certificates of deposit to $238.5 million from $240.2 million. Also partially
offsetting the higher interest expense on borrowings was a decrease of $236,000
in interest expense on savings deposits to $2.5 million from $2.7 million. This
decrease was due to a 24 basis point decrease in the average rate paid to 1.99%
from 2.23 % offset, in part, by a $4.6 million increase in the average balance
to $168.0 million from $163.4 million. Interest expense on money market, demand
and NOW accounts declined by $187,000 for the nine months ended June 30, 1999
due to a reduction in average rate paid to 1.98% from 2.40%, net of an $11.1
million increase in average balances of such deposits compared to same period in
1998.
Net Interest Income. For the nine months ended June 30, 1999 and 1998,
net interest income was $22.7 million and $20.1 million, respectively. The $2.5
million increase in net interest income was primarily attributable to a $31.5
million increase in net earning assets (interest-earning assets less
interest-bearing liabilities), to $112.8 million from $81.3 million, partially
offset by a 6 basis point decline in the net interest rate spread to 3.74 % from
3.80 %. The Company's net interest margin increased slightly to 4.31 % in the
nine months ended June 30, 1999 from 4.30 % in the nine months ended June 30,
1998.
Provision for Loan Losses. The Company recorded $1.1 million and $1.3
million in loan loss provisions during the nine months ended June 30, 1999 and
1998, respectively. The provisions reflect continued loan portfolio growth in
both nine-month periods and a $250,000 provision in the prior year period for a
commercial real estate loan.
Non-Interest Income. Total non-interest income was approximately $2.3
million for both the nine months ended June 30, 1999 and 1998. Total service
fees on loans sold decreased $27,000 or 10.5%, to $231,000 for the nine months
ended June 30, 1999 from $258,000 for the nine months ended June 30, 1998. In
addition, deposit related fees were approximately $1.9 million each period.
16
<PAGE>
Non-Interest Expenses. Non-interest expenses increased by $4.0 million
or 25.5%, to $19.6 million for the nine months ended June 30, 1999 from $15.6
million for the nine months ended June 30, 1998. The increase was due, in part,
to $1.1 million in incremental costs associated with the recent conversion to a
new computer system .
The increase in total non-interest expenses for the first nine months of
the current year also reflects ESOP costs of $543,000 in the compensation and
employee benefits category. The ESOP was established during 1998. A total of
30,912 ESOP shares (or 10% of total ESOP shares) was allocated to participants
for the plan year ended December 31, 1998 and, accordingly, the entire amount of
compensation expense related to this allocation ($371,000) was recognized. ESOP
expense of $87,000 and $85,000 was recognized in the quarter ended March 31,
1999 and June 30, 1999, respectively, for the shares committed to be released to
participants during those quarters with respect to the calendar 1999 plan year.
Total occupancy and office operations expenses increased $179,000 or
7.6%, to $2.5 million for the nine months ended June 30, 1999 from $2.3 million
for the nine months ended June 30, 1998. Total amortization of branch purchase
premiums increased $89,000 or 7.4%, to $1.3 million in the current nine month
period from $1.2 for the nine months ended June 30, 1998. Other non-interest
expenses increased $1.8 million to $4.7 million for the nine months ended June
30, 1999 from $2.9 million for the nine months ended June 30, 1998. This
increase includes $920,000 of the total conversion costs for the new data
processing system referred to above, $58,000 in interest on stock subscription
proceeds and $79,000 for higher recruitment expenses.
Income Taxes. Income tax expense was $1.5 million for the nine months
ended June 30, 1999 compared to $2.0 million for the same period in 1998. The
effective tax rates were 35.2% and 36.7%, respectively.
17
<PAGE>
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 maturities of securities and short-term investments
and the sale of fixed-rate loans in the secondary mortgage market. While
maturities and scheduled amortization of loans and securities, and proceeds from
borrowings, are predictable sources of funds, other funding sources such as
deposit inflows, mortgage prepayments and mortgage loan sales are greatly
influenced by market interest rates, economic conditions and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the nine months
ended June 30, 1999 and 1998, loan originations totaled $188.2 million and
$132.1 million, respectively; purchases of mortgage-backed securities totaled
$18.4 million and $25.5 million, respectively; and purchases of investment
securities totaled $62.5 million and $22.1 million, respectively. These
investing activities were funded primarily by deposit growth and wholesale
borrowings as well as by principal repayments on loans and securities. Also,
although not routinely a source of funds, net proceeds from the stock offering
of $37.1 million were received in the nine months ended June 30, 1999, including
stock purchases funded from Bank savings accounts and certificates of deposit.
Loan sales totaling $14.1 million provided an additional source of liquidity
during the nine months ended June 30, 1999. There were $1.5 million in
commitments to sell fixed-rate residential loans at June 30, 1999. Loan
origination commitments totaled $15.9 million at June 30, 1999. 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 for the nine months ended June 30, 1999 was
$8.1 million, compared to $33.2 million for the nine months ended June 30, 1998.
The Company monitors its liquidity position on a daily basis. Excess
short-term liquidity, if any, is usually invested in overnight federal funds
sold. The Company generally remains fully invested and utilizes additional
sources of funds through FHLB advances, which amounted to $109.1 million at June
30, 1999.
18
<PAGE>
At June 30, 1999, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $75.2 million, or 9.4% of
adjusted assets (which is above the required level of $32.0 million, or 4.0%)
and a risk-based capital level of $80.7 million, or 16.9% of risk-weighted
assets (which is above the required level of $38.3 million, or 8.0%). These
capital requirements, which are applicable to the Bank only, do not consider
additional capital retained at the holding company level.
The following table sets forth the Bank's regulatory capital position
at June 30, 1999 and September 30, 1998, compared to OTS requirements. The
increase in the Bank's capital level during the nine months ended June 30, 1999
primarily reflects the Bank's issuance of its common stock to the holding
company for $24.0 million, representing a portion of the net proceeds raised in
the stock offering. The remainder has been retained and invested by the holding
company, after funding the ESOP shares.
<TABLE>
<CAPTION>
OTS Requirements
-------------------------------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
-------------------- ------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ -------- ------- --------- --------
(Dollars in thousands)
June 30, 1999
- ----------------------------
<S> <C> <C> <C> <C> <C>
Tangible capital $75,205 9.4% $11,988 1.5 % $ - - %
Tier 1 (core) capital 75,205 9.4 31,968 4.0 39,960 5.0
Risk-based capital:
Tier 1 75,205 15.7 - - 28,727 6.0
Total 80,701 16.9 38,302 8.0 47,878 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>
19
<PAGE>
Year 2000 Considerations
(The following information constitutes "Year 2000 Readiness Disclosure" under
the Year 2000 Information and Readiness Disclosure Act.)
The Company, like all companies that utilize computer technology, is
facing the significant challenge 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 has arisen 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.
The Company has conducted a comprehensive review of its computer
systems to identify systems that could be affected by the Year 2000 issue, and
has developed an implementation plan (including establishing 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 realizes that the Year 2000 issue extends beyond the
computer systems associated with its operations. The Company has identified and
begun a process of quantifying certain external risks posed by the Year 2000
problem. The Company's Year 2000 plan addresses each identified external risk
and, in cases where risks may be high, the Company has begun to take 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 has 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 has 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
will enhance the quality of its information technology and 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 have been validated for accuracy by
internal staff.
The Company has 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 governmental sponsored
20
<PAGE>
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 be
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. During
the past 6 months, the Company also has been assessing Year 2000 readiness as a
component of its risk evaluation for new commercial borrowers.
While the Company expects to complete its Year 2000 plan on a timely
basis, there can be no assurance that required remediation, if any, of its own
systems or the systems of other companies will be identified or completed in a
timely fashion. Contingency plans have been 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 have been incorporated as part of the Company's
overall contingency planning process. In preparing its contingency plan, the
Company has categorized potential events as 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 has 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 list. For example,
the Company has 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 has 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 will 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
21
<PAGE>
any resulting costs for developing and implementing contingency plans for
critical software products which are not enhanced. Indirect costs will
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 date hereof,
total direct and indirect Year 2000 costs are not expected to exceed $500,000,
of which less than $200,000 was incurred through June 30, 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate
risk, as the majority of the assets and liabilities are sensitive to changes in
interest rates. There have been no material changes in the Company's interest
rate risk position since September 30, 1998. Other types of market risk, such as
foreign exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities.
Part II. OTHER INFORMATION
Item 1. 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 a real estate
owned 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. Although there can be no certainty as to
the outcome of this matter, management believes the claim is baseless and has
retained counsel to vigorously contest the claim.
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 consolidated financial condition and
operations.
22
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27-Financial Data Schedule
(submitted only with filing in electronic format)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Bancorp, Inc.
(Registrant)
Date: August 12, 1999 By: /s/ Katherine A. Dering
__________________ ___________________
Katherine A. Dering
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer and duly
authorized representative)
23
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001070154
<NAME> Provident Bancorp Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,994
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 144,578
<INVESTMENTS-CARRYING> 61,410
<INVESTMENTS-MARKET> 61,250
<LOANS> 567,623
<ALLOWANCE> 5,495
<TOTAL-ASSETS> 806,736
<DEPOSITS> 581,244
<SHORT-TERM> 111,845
<LIABILITIES-OTHER> 24,069
<LONG-TERM> 0
0
0
<COMMON> 828
<OTHER-SE> 88,750
<TOTAL-LIABILITIES-AND-EQUITY> 806,736
<INTEREST-LOAN> 29,407
<INTEREST-INVEST> 8,835
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 38,242
<INTEREST-DEPOSIT> 13,126
<INTEREST-EXPENSE> 15,591
<INTEREST-INCOME-NET> 22,651
<LOAN-LOSSES> 1,140
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 19,623
<INCOME-PRETAX> 4,153
<INCOME-PRE-EXTRAORDINARY> 4,153
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,689
<EPS-BASIC> .14
<EPS-DILUTED> .14
<YIELD-ACTUAL> 0
<LOANS-NON> 7,214
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,906
<CHARGE-OFFS> 863
<RECOVERIES> 312
<ALLOWANCE-CLOSE> 5,495
<ALLOWANCE-DOMESTIC> 5,495
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
