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, 2000
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.
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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
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(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(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 such 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 November 30, 2000, there were issued and outstanding 8,077,800
shares of the Registrant's common stock. The aggregate market 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, 2000, was $58,588,800.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
September 30, 2000 (Parts II and IV).
2. Proxy Statement for the Annual Meeting of Stockholders (Part III) to be
held in February, 2001.
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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
principal business is overseeing and directing the business of the Bank and
investing the net stock offering proceeds retained by it. At September 30, 2000,
the Company's assets consist primarily of all outstanding capital stock of the
Bank, and cash and securities of $10.5 million representing a portion of the net
proceeds from the Company's stock offering completed on January 7, 1999. At
September 30, 2000, 3,661,800 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 office is located at 400 Rella Boulevard,
Montebello, New York 10901. Its telephone number is (845) 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. Additional products and services offered include
the sale of mutual funds and annuities, and investment management and trust
services.
The Bank's executive office is located at 400 Rella Boulevard,
Montebello, New York 10901. Its telephone number is (845) 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 54.68% of the outstanding common stock
of the Company as of September 30, 2000. 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 (845) 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",
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"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, 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, 2000, the Bank operated eleven full-service
banking offices in Rockland County, New York and 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,
----------------------------------------------------------------------------
2000 1999 1998
---------------------- ------------------------- ----------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family residential mortgage loans $ 343,871 57.5% $ 344,731 60.2% 290,334 62.0%
Commercial real estate loans 124,988 20.9 110,382 19.3 71,149 15.1
Commercial business loans 27,483 4.6 30,768 5.4 24,372 5.2
Construction loans 29,599 5.0 19,147 3.3 20,049 4.3
--------- ------- --------- -------- --------- --------
Total commercial loans 182,070 30.5 160,297 28.0 115,570 24.6
--------- ------- --------- -------- --------- --------
Home equity lines of credit 28,021 4.7 25,380 4.4 26,462 5.7
Homeowner loans 37,027 6.2 34,852 6.1 27,208 5.8
Other consumer loans 6,486 1.1 7,463 1.3 8,999 1.9
--------- ------- --------- -------- --------- --------
Total consumer loans 71,534 12.0 67,695 11.8 62,669 13.4
--------- ------- --------- -------- --------- --------
Total loans 597,475 100.0% 572,723 100.0% 468,573 100.0%
===== ===== =====
Allowance for loan losses (7,653) (6,202) (4,906)
--------- --------- ---------
Total loans, net $ 589,822 $ 566,521 $ 463,667
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
1997 1996
------------------- ---------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
One- to four-family residential mortgage loans $241,886 59.3% $ 219,827 59.0%
Commercial real estate loans 62,910 15.4 66,145 17.7
Commercial business loans 18,433 4.5 15,268 4.1
Construction loans 23,475 5.7 16,074 4.3
---------- ------- --------- ---------
Total commercial loans 104,818 25.6 97,487 26.1
---------- ------- --------- ---------
Home equity lines of credit 31,671 7.8 31,511 8.5
Homeowner loans 19,160 4.7 13,035 3.5
Other consumer loans 10,741 2.6 10,984 2.9
---------- ------- --------- ---------
Total consumer loans 61,572 15.1 55,530 14.9
---------- ------- --------- ---------
Total loans 408,276 100.0% 372,844 100.0%
===== =====
Allowance for loan losses (3,779) (3,357)
------- ----------
Total loans, net $404,497 $ 369,487
======= ==========
</TABLE>
4
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Loan Maturity Schedule. The following table summarizes the
contractual maturities of the Bank's loan portfolio at September 30, 2000. 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 Commercial Business Construction (2)
---------------------- ----------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- --------- --------- ------- ---------- ------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During the Years Ending September 30,
2001 (1) ................................ $ 195 9.31% $ 8,854 9.31% $ 11,813 9.70% $ 11,662 9.76%
2002 .................................... 475 8.35 2,250 9.33 1,971 9.18 9,667 9.98
2003 .................................... 965 8.40 4,489 9.00 1,356 8.97 5,025 9.32
2004 and 2005 ........................... 1,630 8.61 14,118 8.58 6,744 9.20 291 8.95
2006 to 2010 ............................ 30,775 7.31 54,642 8.09 2,881 8.75 1,590 7.46
2011 to 2025 ............................ 192,307 7.43 40,635 8.27 988 9.13 1,337 9.37
2026 and following ...................... 117,524 7.25 -- -- 1,730 10.62 27 8.45
-------- ----- -------- ------- -------- ------- ------ -------
Total ................................... $343,871 7.37% $124,988 8.35% $ 27,483 9.44% $29,599 9.61%
======== ==== ======== ==== ======== ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Consumer Total
---------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Due During the Years Ending September 30,
2001 (1) ................................ $ 1,208 10.87% $ 33,732 9.66%
2002 .................................... 2,736 10.65 17,099 9.86
2003 .................................... 5,063 9.44 16,898 9.19
2004 and 2005 ........................... 16,106 9.04 38,889 8.88
2006 to 2010 ............................ 33,846 8.76 123,734 8.09
2011 to 2025 ............................ 12,174 8.67 247,441 7.65
2026 and following ...................... 401 15.41 119,682 7.33
-------- ----- ------- ------
Total ................................... $ 71,534 9.00% $597,475 7.98%
======== ==== ======== ====
</TABLE>
------------------------
(1) Includes demand loans, loans having no stated maturity, and overdraft loans.
(2) Includes land acquisition loans.
The following table sets forth the dollar amounts of fixed- and adjustable-rate
loans at September 30, 2000 that are contractually due after September 30, 2001.
<TABLE>
<CAPTION>
Due After September 30, 2001
------------------------------------------
Fixed Adjustable Total
------------ ------------ ----------
(In Thousands)
<S> <C> <C> <C>
One- to four-family residential mortgage loans $256,545 $ 87,131 $343,676
-------- -------- --------
Commercial real estate loans ................. 47,816 68,318 116,134
Commercial business loans .................... 7,942 7,728 15,670
Construction loans ........................... 222 17,715 17,937
-------- -------- --------
Total commercial loans ..... 55,980 93,761 149,741
-------- -------- --------
Consumer loans ............................... 42,660 27,666 70,326
-------- -------- --------
Total loans ................ $355,185 $208,558 $563,743
======== ======== ========
</TABLE>
5
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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 $275,000 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, and are 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, 2000, bi-weekly loans totaled $96.7
million or 28.1% of the Bank's residential loan portfolio.
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, 2000, the Bank
sold mortgage loans totaling $808,000 compared with $14.1 million for the year
ended September 30, 1999. As of September 30, 2000 and 1999, the Bank's
portfolio of loans serviced for others totaled $98.5 million and $109.0 million,
respectively.
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 five 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, 2000, the Bank's
ARM portfolio included $12.3 million in loans that re-price every six months,
$28.8 million in one-year ARMs and $45.9 million in loans with an initial
fixed-rate period ranging from three to five 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 that 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
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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 $125.0 million or 20.9% of the Bank's total loan portfolio as of
September 30, 2000, and consisted of 241 loans outstanding with an average loan
balance of approximately $518,600. Substantially all of the Bank's commercial
real estate loans are secured by properties located in its primary market area.
The initial interest rates on a substantial portion of the
Bank's commercial real estate loans adjust after an initial three-to-five year
period to new market rates that generally range between 200 to 350 basis points
over the then-current three-to-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 are also 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, or 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 evaluating a proposed
commercial real estate loan, the Bank emphasizes primarily the ratio of the
property's projected net cash flow to the loan's debt service requirement
(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 land acquisition,
development and construction loans to builders in its market area. This
portfolio totaled $29.6 million, or 5.0% of total loans, at September 30, 2000.
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 60% 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.
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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 amount loaned is generally limited to the cost of the
improvements. Advances are made in accordance with a schedule reflecting the
cost of the 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.
Land acquisition, development and construction lending exposes
the Bank to greater credit risk than permanent mortgage financing. The repayment
of land 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.
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 mix of 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, 2000, the
Bank had 321 commercial business loans outstanding with an aggregate balance of
$27.5 million, or 4.6% of the total loan portfolio. As of September 30, 2000,
the average commercial business loan balance was approximately $85,000.
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.
8
<PAGE>
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,
2000, consumer loans totaled $71.5 million, or 12.0% of the total loan
portfolio.
At September 30, 2000, the largest group of consumer loans
consisted of $65.0 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 90% 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, 2000, homeowner loans totaled $37.0 million or
6.2% of the Bank's total loan portfolio. The disbursed portion of home equity
lines of credit totaled $28.0 million, or 4.7% of the Bank's total loan
portfolio, with $25.6 million remaining undisbursed.
Other consumer loans include personal loans and loans secured
by new or used automobiles. As of September 30, 2000, these loans totaled $6.5
million, or 1.1% 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 consumer
loans, with the Bank listed as loss payee. Personal loans also include secured
and unsecured installment loans for other purposes. 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.
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, mortgage banking
companies and life insurance companies that may 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
9
<PAGE>
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 the purchaser 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.
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,
-----------------------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Unpaid principal balances at beginning of year $ 572,723 $ 468,573 $ 408,276
--------- --------- ---------
Originations by Type
Adjustable-rate:
One- to four-family ................. 16,792 17,563 14,976
Commercial real estate .............. 22,463 17,540 9,025
Commercial business .......................... 17,785 20,616 19,593
Construction ........................ 15,630 16,941 12,529
Consumer ............................ 12,886 12,510 11,587
--------- --------- ---------
Total adjustable-rate .......... 85,556 85,170 67,710
--------- --------- ---------
Fixed-rate:
One- to four-family ................. 16,328 100,873 93,493
Commercial real estate .............. 3,014 22,244 8,161
Commercial business ................. 12,305 4,584 3,209
Construction ........................ 3,675 -- --
Consumer ............................ 14,589 21,213 20,100
--------- --------- ---------
Total fixed-rate ............... 49,911 148,914 124,963
--------- --------- ---------
Total loans originated .............. 135,467 234,084 192,673
Sales ........................................ (722) (13,804) (17,003)
Principal repayments ......................... (109,580) (115,525) (114,166)
Net charge-offs .............................. (259) (294) (610)
Transfers to real estate owned ............... (154) (311) (597)
--------- --------- ---------
Unpaid principal balances at end of year ..... 597,475 572,723 468,573
Allowance for loan losses .................... (7,653) (6,202) (4,906)
--------- --------- ---------
Net loans at end of year ..................... $ 589,822 $ 566,521 $ 463,667
========= ========= =========
</TABLE>
Loan Approval Authority and Underwriting. The Bank has four
levels of lending authority beginning with the Board of Directors. 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 in accordance
with applicable loan policies, of up to the limits established in the Bank's
policy governing loans-to-one-borrower. This policy places limits on the
aggregate dollar amount of credit that may be extended to any one borrower and
related entities. Loans exceeding $3.2 million in the aggregate require approval
of the Board of Directors. The Management Loan Committee may approve loans of up
10
<PAGE>
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 $8.5 million, for the next group of
borrowers is $6.5 million, and for the third group is $3.5 million. Sublimits
apply based on reliance on any single property, and for commercial business
loans.
In connection with its residential and commercial real estate
loans, the Bank requires property appraisals to be 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 $674,000 at September 30, 2000.
To the extent that originated loans have been sold with
servicing retained since January 1, 1997, the Bank has capitalized a mortgage
servicing asset at the time of the sale in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." 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 $229,000 are included in other assets at September 30,
2000. 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, 2000, the five largest aggregate amounts loaned to
individual borrowers by the Bank (including any unused lines of credit) were as
follows: $8.8 million, consisting of mortgage-secured and unsecured financing;
$8.0 million, consisting of mortgage-secured and unsecured financing; $7.1
million, consisting of mortgage-secured financing; $6.8 million secured by
marketable securities; and $6.8 million, consisting of mortgage-secured and
unsecured financing. 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.
11
<PAGE>
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 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 September 30, 2000, the Bank had non-accrual loans of $4.0 million. The ratio
of non-performing loans to total loans was 0.67% at September 30, 2000.
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,
2000, the Bank had REO of $154,000, total non-performing assets (non-accrual
loans and REO) of $4.2 million, and a ratio of non-performing assets to total
assets of 0.50%.
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, 2000
One- to four-family .. 14 $1,180 26 $2,496 40 $3,676
Commercial real estate 2 270 5 1,149 7 1,419
Commercial business .. -- -- -- -- -- --
Construction ......... -- -- 1 27 1 27
Consumer ............. 10 187 23 359 33 546
------ ------ ------ ------ ------ ------
Total .............. 26 $1,637 55 $4,031 81 $5,668
====== ====== ====== ====== ====== ======
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
====== ====== ====== ====== ====== ======
</TABLE>
12
<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,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family ................. $2,496 $2,839 $2,965 $2,549 $2,731
Commercial real estate .............. 1,149 1,133 871 1,375 2,087
Commercial business ................. -- 208 368 243 109
Construction ........................ 27 27 1,256 276 920
Consumer ............................ 359 429 647 234 503
------ ------ ------ ------ ------
Total non-performing loans ........ 4,031 4,636 6,107 4,677 6,350
------ ------ ------ ------ ------
Real estate owned:
One- to four-family ................. 154 403 92 186 347
Commercial real estate .............. -- -- 274 -- 960
------ ------ ------ ------ ------
Total real estate owned ........... 154 403 366 186 1,307
------ ------ ------ ------ ------
Total non-performing assets ............ $4,185 $5,039 $6,473 $4,863 $7,657
====== ====== ====== ====== ======
Ratios:
Non-performing loans to total loans . 0.67% 0.82% 1.32% 1.16% 1.72%
Non-performing assets to total assets 0.50 0.62 0.94 0.75 1.21
</TABLE>
For the year ended September 30, 2000, 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 $337,000. Interest
income actually recognized on such loans totaled $77,000.
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, 2000, the Bank had $2.4 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, 2000, classified assets consisted of substandard assets of $4.0
million (loans receivable of $3.9 million and REO of $154,000) and doubtful
assets (loans receivable) of $152,000. There were no assets classified as loss
at September 30, 2000.
13
<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
information 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, 2000, the allowance for loan losses was $7.7
million, which equaled 1.30% of net loans and 189.85% of non-performing loans.
For the years ended September 30, 2000, 1999 and 1998, the Bank recorded net
loan charge-offs of $259,000, $294,000 and $610,000, respectively, as a
reduction of the allowance for loan losses. Provisions for loan losses added to
the allowance were $1.7 million, $1.6 million and $1.7 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,
---------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ....................... $ 6,202 $ 4,906 $ 3,779 $ 3,357 $ 3,472
------- ------- ------- ------- -------
Charge'offs:
One- to four-family ............................. (168) (9) (13) (114) (33)
Commercial real estate .......................... (1) -- (87) (301) (840)
Commercial business ............................. (6) (567) (10) (173) --
Construction .................................... -- -- (355) -- --
Consumer ........................................ (195) (346) (200) (171) (203)
------- ------- ------- ------- -------
Total charge'offs ........................... (370) (922) (665) (759) (1,076)
------- ------- ------- ------- -------
Recoveries:
One- to four-family ............................. 24 -- -- 42 3
Commercial real estate .......................... -- 101 -- -- --
Commercial business ............................. 24 194 -- -- --
Construction .................................... -- 286 2 32 14
Consumer ........................................ 63 47 53 49 33
------- ------- ------- ------- -------
Total recoveries ............................ 111 628 55 123 50
------- ------- ------- ------- -------
Net charge'offs .................................... (259) (294) (610) (636) (1,026)
Provision for loan losses .......................... 1,710 1,590 1,737 1,058 911
------- ------- ------- ------- -------
Balance at end of year ............................. $ 7,653 $ 6,202 $ 4,906 $ 3,779 $ 3,357
======= ======= ======= ======= =======
Ratios:
Net charge-offs to average loans outstanding .... 0.04% 0.06% 0.14% 0.17% 0.29%
Allowance for loan losses to non-performing loans 189.85 133.78 80.33 80.80 52.87
Allowance for loan losses to total loans, net ... 1.30 1.09 1.06 0.93 0.91
</TABLE>
14
<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,
---------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------ ----------------------------------- --------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Balances Catagory Balances Catagory Balances Catagory
Loan By to Total Loan Loss by to Total Loan Loss by to Total
Allowance Catagory Loans Allowance Catogory Loans Allownaces Catogory Loans
---------- --------- --------- --------- --------- ------- ----------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family .. $ 2,423 $343,871 57.5% $ 2,091 $344,731 60.2% $ 1,320 $290,334 62.0%
Commercial real estate 3,210 124,988 20.9 2,416 110,382 19.3 1,976 71,149 15.1
Commercial business .. 481 27,483 4.6 254 30,768 5.4 376 24,372 5.2
Construction ......... 733 29,599 5.0 614 19,147 3.3 301 20,049 4.3
Consumer ............. 806 71,534 12.0 827 67,695 11.8 933 62,669 13.4
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total ........... $ 7,653 $597,475 100.0% $ 6,202 $572,723 100.0% $ 4,906 $468,573 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Balances Catagory Balances Catagory
Loan By to Total Loan Loss by to Total
Allowance Catagory Loans Allowance Catogory Loans
---------- --------- --------- --------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family .. $ 734 $241,886 59.3% $ 756 $219,827 59.0%
Commercial real estate 1,431 62,910 15.4 1,247 66,145 17.7
Commercial business .. 443 18,433 4.5 536 15,268 4.1
Construction ......... 389 23,475 5.7 389 16,074 4.3
Consumer ............. 782 61,572 15.1 429 55,530 14.9
-------- -------- ----- -------- -------- -----
Total ........... $ 3,779 $408,276 100.0% $ 3,357 $372,844 100.0%
======== ======== ===== ======== ======== =====
</TABLE>
Securities Activities
The Company's securities investment policy is established by
the Board of Directors. This policy dictates that investment decisions 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 permit securities
investments in 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
15
<PAGE>
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.
SFAS No. 115 requires that at the time of purchase the Company
designate a security as held to maturity, available for sale, or trading,
depending on the Company's ability and intent. Available for sale securities are
reported at fair value, while held to maturity securities are reported at
amortized cost. The Company does not have a trading portfolio.
As of September 30, 2000, the Company's overall securities
portfolio had a carrying value of $210.7 million. In accordance with SFAS No.
115, securities with a fair value of $162.2 million, or 19.2% of total assets,
were classified as available for sale, while securities with an amortized cost
of $48.6 million, or 5.8% of total assets, were classified as held to maturity.
The estimated fair value of the held to maturity securities at September 30,
2000 was $48.4 million, which was $212,000 less than their amortized cost.
Government Securities. At September 30, 2000, the Company held
$73.9 million, or 8.7% of total assets, in government securities at amortized
cost, consisting primarily of U.S. Treasury and agency obligations with short-
to medium-term maturities (one to five years), of which $70.9 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,
2000, the Company held $31.0 million in corporate debt securities, at amortized
cost, all of which were 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 maturities of 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.
The policy limits investments in municipal bonds to securities with maturities
of 20 years or less and rated AA or better by at least one nationally recognized
rating agency and favors issues that are insured. In addition, the policy
imposes limitations of a total investment of no more than $2.0 million per
municipal issuer and a total portfolio limit of 10% of assets. At September 30,
2000, the Company held $12.1 million at amortized cost in bonds issued by states
and political subdivisions, of which $11.7 million was classified as available
for sale and $397,000 was classified as held to maturity.
Equity Securities. At September 30, 2000, the Company's equity
securities portfolio at amortized cost totaled $3.2 million, all of which was
classified as available for sale, and consisted of preferred and common 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 $7.0 million of common stock in the FHLB of
New York, a portion of which must be held as a condition of membership in the
Federal Home Loan Bank System, with the remainder held as a condition to borrow
under the FHLB advance program.
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.
16
<PAGE>
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 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, 2000, the Company's mortgage-backed
pass-through securities portfolio totaled $91.4 million at amortized cost, of
which $46.2 million was available for sale and $45.2 million was held to
maturity. Of this total, the CMO portfolio totaled $24.5 million, of which $19.6
million was available for sale and $4.9 million was held to maturity. Although
the average contractual maturity of the aggregate mortgage-backed securities
portfolio was approximately 15 years at September 30, 2000, 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. A portion of the Company's mortgage-backed
securities portfolio is invested in CMOs or collateralized mortgage obligations,
including REMICs. This portfolio is limited to CMOs and REMICs backed by Fannie
Mae and Freddie Mac. CMOs and REMICs are types of debt securities issued by a
special-purpose entity that aggregates pools of mortgages and mortgage-backed
securities and creates different classes of 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 that have descending
priorities with respect to the distribution of principal and interest cash
flows, while cash flows on pass-through mortgage-backed securities where cash
flows are distributed pro rata to all security holders. 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 to the early-to-intermediate tranches, which have the greatest cash
flow stability. Floating rate CMOs are purchased with emphasis on the relative
17
<PAGE>
trade-offs between lifetime 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 performed on how a high-risk CMO will impact the overall interest
rate risk of the Company. High-risk CMOs are defined as those securities
exhibiting significantly greater volatility in estimated average life and price
relative to interest rates compared to 30-year, fixed-rate, pass-through
securities.
Available for Sale Portfolio
As of September 30, 2000, securities with a fair value of
$162.2 million, or 19.2% 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 $116.4 million of this total, or13.8% of
total assets, with mortgage-backed securities totaling $45.8 million, or 5.4% of
total assets.
The following table sets forth the composition of the
Company's available for sale portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ----------------------
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 ........................ $ 33,004 $ 32,851 $ 31,657 $ 31,507 $ 26,119 $ 26,547
Federal agency obligations ........................ 37,934 37,546 27,966 27,407 17,028 17,278
Corporate debt securities ......................... 30,975 30,588 24,201 23,667 1,999 1,997
State and municipal securities .................... 11,697 10,981 11,700 10,808 -- --
Equity securities ................................. 3,201 4,383 3,175 3,236 2,017 2,249
-------- -------- -------- -------- -------- --------
Total investment securities available for sale .... 116,811 116,349 98,699 96,625 47,163 48,071
-------- -------- -------- -------- -------- --------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae ..................................... 17,767 17,723 16,053 15,930 10,726 10,907
Freddie Mac .................................... 2,344 2,383 3,252 3,306 5,052 5,210
Other ........................................... 6,582 6,494 7,163 7,252 3,167 3,185
CMOs and REMICs .................................. 19,553 19,208 25,625 25,274 30,358 30,610
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale 46,246 45,808 52,093 51,762 49,303 49,912
-------- -------- -------- -------- -------- --------
Total securities available for sale ............... $163,057 $162,157 $150,792 $148,387 $ 96,466 $ 97,983
======== ======== ======== ======== ======== ========
</TABLE>
At September 30, 2000, the Company's available for sale U. S.
Treasury securities portfolio totaled $32.9 million, or 3.9% of total assets.
These securities had maturities of less than five years, with a weighted average
yield of 5.68%. At September 30, 2000, the federal agency securities in the
Company's available for sale portfolio totaled $37.5 million, or 4.4% of total
assets, and had maturities of less than five years, with a weighted average
yield of 5.84%. 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, 2000, the state and municipal securities in
the Company's available for sale portfolio totaled $11.0 million, or 1.3% of
total assets, and had a weighted average maturity of approximately 10 years,
with a weighted average tax-free yield of 4.13%. Available for sale corporate
debt securities totaled $30.6 million at September 30, 2000, while equity
securities available for sale totaled $4.4 million.
At September 30, 2000, $26.6 million of the Company's
available for sale mortgage-backed securities consisted of pass-through
securities, which totaled 3.1% of total assets. At the same date, the fair value
of the Company's available for sale CMO portfolio totaled $19.2 million, or 2.3%
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 6.14%. The
Company owns both fixed-rate and floating-rate CMOs. The Company's portfolio of
CMO's available for sale at September 30, 2000 included securities of $16.5
18
<PAGE>
million 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 and the terms of the CMO tranche owned.
Held to Maturity Portfolio
As of September 30, 2000, securities with an amortized cost of
$48.6 million, or 5.8% 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 $45.2
million, or 5.4% 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,
-------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government securities .......................... $ -- $ -- $ -- $ -- $ 8,988 $ 9,011
Federal agency obligations .......................... 2,991 2,957 2,987 2,953 9,481 9,544
Municipal and other securities ...................... 397 397 415 415 707 707
------- ------- ------- ------- ------- -------
Total investment securities held to maturity .... 3,388 3,354 3,402 3,368 19,176 19,262
------- ------- ------- ------- ------- -------
Mortgage-Backed Securities:
Pass-through securities:
Ginnie Mae ...................................... 4,279 4,275 5,106 5,140 6,526 6,616
Fannie Mae ...................................... 16,578 16,440 18,116 17,786 26,117 26,349
Freddie Mac ..................................... 17,105 16,902 22,014 21,900 33,014 33,639
Other ............................................. 2,283 2,343 2,453 2,499 2,171 2,264
CMOs and REMICs ..................................... 4,953 5,060 5,691 5,786 11,398 11,542
------- ------- ------- ------- ------- -------
Total mortgage-backed securities held to maturity 45,198 45,020 53,380 53,111 79,226 80,410
------- ------- ------- ------- ------- -------
Total securities held to maturity ...................... $48,586 $48,374 $56,782 $56,479 $98,402 $99,672
======= ======= ======= ======= ======= =======
</TABLE>
At September 30, 2000, 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 6.04%. 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, 2000, the Company's held to maturity
mortgage-backed pass-through securities portfolio totaled $40.2 million, of
which $1.1 million had a weighted average yield of 4.60% and contractual
maturities within one year; $4.1 million had a weighted average yield of 6.03%
and contractual maturities within five years; $14.0 million had a weighted
average yield of 6.67% and contractual maturities of five to ten years; and
$21.0 million had a weighted average yield of 7.38% and contractual maturities
of over ten years.
At September 30, 2000, $5.0 million of the CMO portfolio, or
0.6% 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, 2000 was
$5.1 million, or $107,000 more than the amortized cost. While the contractual
maturity of the CMO's underlying collateral is greater than ten years, the
actual period to maturity of the CMO's may be shorter due to prepayments on the
underlying mortgages and the terms of the CMO tranche owned.
The composition and maturities of the investment securities
portfolio (debt securities) and the mortgage-backed securities portfolio at
September 30, 2000 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.
19
<PAGE>
<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
Fannie Mae ..................... $ 53 6.20% $ -- --% $ 4,951 6.21% $12,763 7.09%
Freddie Mac .................... -- -- 472 7.28 -- -- 1,872 7.73
CMOs and REMICs ................ -- -- -- -- 3,027 6.17 16,526 6.14
Other .......................... -- -- -- -- 4,528 6.32 2,054 7.46
------- ---- ------- ---- ------- ----- ------- ----
Total ..................... 53 6.20 472 7.28 12,506 6.24 33,215 6.67
------- ---- ------- ---- ------- ----- ------- ----
Investment Securities
U.S. Gov't and agency securities 18,554 5.41 47,383 5.77 5,001 7.00 -- --
State and municipal securities . -- -- -- -- 5,315 4.01 6,382 4.24
Corporate debt securities ...... -- -- 23,872 6.71 7,103 6.77 -- --
------- ---- ------- ---- ------- ----- -------
Total ..................... 18,554 5.41 71,255 6.09 17,419 5.99 6,382 4.24
------- ---- ------- ---- ------- ----- ------- ----
Total available for sale ........... $18,607 5.42% $71,727 6.10% $29,925 6.09% $39,597 6.28%
======= ==== ======= ==== ======= ===== ======= ====
Held to Maturity:
Mortgage-Backed Securities
Ginnie Mae ..................... $ 1 6.95% $ 6 9.00 $ 826 8.30% $ 3,446 7.92%
Fannie Mae ..................... 1,090 4.60 3,164 5.98 3,698 6.40 8,626 6.98
Freddie Mac .................... -- -- 886 6.21% 9,474 6.63 6,745 7.63
CMOs and REMICs ................ -- -- -- -- -- -- 4,953 7.63
Other .......................... -- -- -- -- 24 11.13 2,259 7.35
------- ---- ------- ---- ------- ----- ------- ----
Total ..................... 1,091 4.60 4,056 6.03 14,022 6.67 26,029 7.43
------- ---- ------- ---- ------- ----- ------- ----
Investment Securities
U.S. Gov't and agency securities -- -- 2,991 6.04 -- -- -- --
State and municipal securities . 25 8.00 -- -- -- -- 372 6.75
------- ---- ------- ---- ------- ----- ------- ----
Total ..................... 25 8.00 2,991 6.04 -- -- 372 6.75
------- ---- ------- ---- ------- ----- -------
Total held to maturity ............. $ 1,116 4.68% $ 7,047 6.04% $14,022 6.67% $26,401 7.42%
======= ==== ======= ==== ======= ===== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Available for Sale:
Mortgage-Backed Securities
Fannie Mae ..................... $ 17,767 $ 17,723 6.84%
Freddie Mac .................... 2,344 2,383 7.65
CMOs and REMICs ................ 19,553 19,208 6.14
Other .......................... 6,582 6,494 6.67
-------- -------- ----
Total ..................... 46,246 45,808 6.56
-------- -------- ----
Investment Securities
U.S. Gov't and agency securities 70,938 70,397 5.77
State and municipal securities . 11,697 10,981 4.13
Corporate debt securities ...... 30,975 30,588 6.72
-------- -------- ----
Total ..................... 113,610 111,966 5.86
-------- -------- ----
Total available for sale ........... $159,856 $157,774 6.06%
======== ======== ====
Held to Maturity:
Mortgage-Backed Securities
Ginnie Mae ..................... $ 4,279 $ 4,275 7.99%
Fannie Mae ..................... 16,578 16,440 6.50
Freddie Mac .................... 17,105 16,902 7.01
CMOs and REMICs ................ 4,953 5,060 7.63
Other .......................... 2,283 2,343 7.39
-------- -------- ----
Total ..................... 45,198 45,020 7.00
-------- -------- ----
Investment Securities
U.S. Gov't and agency securities 2,991 2,957 6.04
State and municipal securities . 397 397 6.83
-------- -------- ----
Total ..................... 3,388 3,354 6.13
-------- -------- ----
Total held to maturity ............. $ 48,586 $ 48,374 6.94%
======== ======== ====
</TABLE>
20
<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, 2000, the Bank's deposits totaled $609.0
million. Interest-bearing deposits totaled $542.5 million, and non-interest
bearing demand deposits totaled $66.5 million. NOW, savings and money market
deposits totaled $293.1 million at September 30, 2000. Also at that date, the
Bank had a total of $249.4 million in certificates of deposit, of which $176.8
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,
-------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ -------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------ ------- ---- ------ ------- ---- ------ ------- ----
(Dollars in Thousands)
Demand deposits
<S> <C> <C> <C> <C> <C> <C> <C>
Retail .............. $ 38,145 6.3% --% $ 35,701 6.1% --% $ 31,045 5.4% --%
Commercial .......... 28,324 4.7 -- 24,147 4.1 -- 19,285 3.4 --
-------- ------ ---- -------- ------ ----- -------- ------- ----
Total demand deposits 66,469 11.0 -- 59,848 10.2 -- 50,330 8.8
-------- ------ ---- -------- ------ ----- -------- ------- ----
NOW deposits .......... 54,800 9.0 1.01 47,129 8.0 1.01 41,738 7.3 1.22
Savings deposits ...... 161,987 26.6 2.02 161,809 27.6 2.02 155,934 27.2 1.99
Money market deposits . 76,332 12.5 2.55 80,033 13.6 2.75 76,010 13.3 2.65
-------- ------ ---- -------- ------ ----- -------- ------- ----
359,588 59.1 1.61 348,819 59.4 1.70 324,012 56.6 1.74
Certificates of deposit 249,388 40.9 5.83 237,821 40.6 4.82 249,162 43.4 5.15
-------- ------ ---- -------- ------ ----- -------- ------- ----
Total deposits ........ $608,976 100.0% 3.34% $586,640 100.0% 2.97% $573,174 100.0% 3.22%
======== ====== ==== ======== ====== ===== ======== ======= ====
</TABLE>
21
<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, 2000
--------------------------------------------------------------------------- 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 1999 1998
------------------- -------- --------- ----------- ---------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4.00% and below $ 2,318 $ 1 $ 31 $ -- $ 2,350 0.9% $ 14,019 $ 1,003
4.01% to 5.00% 11,803 1,143 162 1,328 14,436 5.8 135,380 103,713
5.01% to 6.00% 141,238 10,857 2,122 1,282 155,499 62.4 77,889 123,044
6.01% to 7.00% 21,314 45,684 2,283 655 69,936 28.0 7,026 17,943
7.01% and above 83 1,894 5,190 -- 7,167 2.9 3,507 3,459
-------- -------- -------- -------- -------- ----- -------- --------
Total .... $176,756 $ 59,579 $ 9,788 $ 3,265 $249,388 100.0% $237,821 $249,162
======== ======== ======== ======== ======== ===== ======== ========
</TABLE>
The following table sets forth the amount of the Bank's
certificates of deposit by time remaining until maturity as of September 30,
2000.
<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> <C>
Certificates of deposit less than $100,000 .... $ 55,726 $ 49,696 $ 47,255 $ 65,708 $218,385
Certificates of deposit of $100,000 or more (1) 9,341 8,136 6,602 6,924 31,003
-------- -------- -------- -------- --------
Total of certificates of deposit ........ $ 65,067 $ 57,832 $ 53,857 $ 72,632 $249,388
======== ======== ======== ======== ========
</TABLE>
--------------------
(1) The weighted average interest rates for these accounts, by maturity period,
are 5.07% for 3 months or less; 5.53% for 3 to 6 months; 5.36% for 6 to 12
months; and 6.30% for over 12 months. The overall weighted average interest
rate for accounts of $100,000 or more was 5.53%.
Borrowings. At September 30, 2000, the Bank had $127.6 million
of borrowings, of which $122.0 million consisted of FHLB advances and repurchase
agreements. FHLB borrowings were $115.5 million as of September 30, 1999 and
$38.6 million as of September 30, 1998. At September 30, 2000, the Bank had
access to additional FHLB borrowings of up to $163.1 million.
The following table sets forth information concerning balances
and interest rates on the Bank's FHLB advances and repurchase agreements at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at end of year ...................... $121,975 $115,515 $ 38,646
Average balance during year ................. 122,315 74,319 28,817
Maximum outstanding at any month end ........ 131,458 118,526 38,646
Weighted average interest rate at end of year 6.36% 5.60% 5.97%
Average interest rate during year ........... 5.98% 5.53% 5.96%
</TABLE>
22
<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, 2000, 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 which are significantly larger
institutions with 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, 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, 2000, the Bank had 199 full-time employees
and 36 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.
23
<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, 2000, 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, 2000, 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 and (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.
24
<PAGE>
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, 2000 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 comply with the Fair
Lending Laws 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.
25
<PAGE>
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, disallowed servicing assets, and other
disallowed assets; plus (minus) accumulated losses (gains) on certain
available-for-sale securities and cash flow hedges (net of taxes); plus
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, disallowed servicing assets,
and other disallowed assets; plus (minus) accumulated losses (gains) on certain
available-for sale securities and cash flow hedges; plus 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
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, 2000, 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)
------ --------- ------ --------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital ........ $80,097 9.6% $12,526 1.5% $ -- --%
Tier I core capital ..... 80,097 9.6 33,402 4.0 41,752 5.0
Tier I risk-based capital 80,097 15.6 -- -- 30,738 6.0
Total risk-based capital 86,497 16.9 40,985 8.0 51,231 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.
26
<PAGE>
At September 30, 2000, 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.
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, 2000, 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, 2000,
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 expanded the permissible activities of savings and
loan holding companies like the Company. The Company is now 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 non-banking 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 depository 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 is required to acquire a company
engaging in these activities or to commence these activities directly or
indirectly through a subsidiary.
27
<PAGE>
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 of such company; (vii)
holding or managing 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.
The OTS has proposed new rules which would require savings and
loan holding companies to notify the OTS prior to engaging in transactions which
(i) when combined with other debt transactions engaged in during a 12-month
period, would increase the holding company's consolidated debt by 5% or
more;(ii) when combined with other asset acquisitions engaged in during a
12-month period, would result in asset acquisitions of greater than 15% of the
28
<PAGE>
holding company's consolidated assets; or (iii) when combined with any other
transactions engaged in during a 12-month period, would reduce the holding
company's ratio of consolidated tangible capital to consolidated tangible assets
by 10% or more during the 12-month period. The OTS has proposed to exempt from
this rule holding companies whose consolidated tangible capital exceeds 10%
following the transactions.
The OTS has also proposed new rules which would codify the
manner in which the OTS reviews the capital adequacy of savings and loan holding
companies and determines when a holding company must maintain additional
capital. The OTS is not currently proposing to establish uniform capital
adequacy guidelines for all savings and loan holding companies.
The Company and the Bank are unable to predict whether or when
these proposed regulations will be adopted, and what effect, if any, the
adoption of these regulations would have on their business.
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 and (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.
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 Holding Company
determined pursuant an exchange ratio that ensures that after the Conversion
Transaction 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 be affected by any purchases by such persons in the offering that would be
conducted as part of the Conversion Transaction.
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.
29
<PAGE>
ITEM 2. Properties
Properties
As of September 30, 2000, the Bank leases eight premises,
including its headquarters location, from third parties under terms and
conditions considered by management to be favorable to the Bank. In addition,
the Bank owns six premises. Following is a list of Bank locations:
Corporate Office, Commercial Lending Group and
Investment Management and Trust Department
400 Rella Boulevard 1 Lake Road West
Montebello, NY 10901 Congers, NY 19020
(914) 369-8040 (914) 267-2180
Rockland County: 71 Lafayette Avenue
Suffern, NY 10901
44 W. Route 59 (914) 369-8350
Nanuet, NY 10954
(914) 627-6180 26 North Middletown Rd.
(In the ShopRite Supermarket)
38-40 New Main Street Pearl River, NY 10965
Haverstraw, NY 10927 (914) 627-6170
(914) 942-3880
196 Rt. 59
375 Rt. 303 at Kings Highway Suffern, NY 10901
Orangeburg, NY 10962 (914) 369-8360
(914) 398-4810
1633 Rt. 202
Pomona, NY 10970
148 Rt. 9W (914) 364-5690
Stony Point, NY 10980
(914) 942-3890 Orange County:
179 South Main Street 125 Dolson Avenue
New City, NY 10956 (In the ShopRite Supermarket)
(914) 639-7750 Middletown, NY 10940
(914)-342-5777
72 West Eckerson Rd.
Spring Valley, NY 10977 153 Rt. 94
(914) 426-7230 (In the ShopRite Supermarket)
Warwick, NY 10990
(914) 986-9540
30
<PAGE>
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 an appeal, which has been fully briefed and
is pending before the Appellate Division. Management continues to believe the
underlying claim is baseless and is vigorously contesting 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
quarter ended September 30, 2000.
PART II
ITEM 5. Market for Company's Common Stock and Related Stockholder Matters
The "Common Stock and Related Matters" section of the
Company"s Annual Report to Stockholders is incorporated herein by reference.
ITEM 6. Selected Financial Data
The "Selected Consolidated Financial and Other Data" section
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 of Market Risk" which is part of the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of the Company's Annual Report to Stockholders, and 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.
31
<PAGE>
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 Annual Meeting of Stockholders to be held in
February 2001 (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.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements filed as a part of this Form 10-K are as
follows:
(A) Independent Auditors" Report
(B) Consolidated Statements of Financial 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.
32
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 2000.
(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)
10.7 1996 Long-Term Incentive Plan for Officers and
Directors, as amended (incorporated herein by
reference to the S-1)
10.8 Provident Bank Stock Option Plan (incorporated herein
by reference to the Company's Proxy Statement for the
2000 Annual Meeting of Stockholders, filed with the
SEC on January 18, 2000.)
10.9 Provident Bank Recognition Retention Plan
(incorporated herein by reference to the Company's
Proxy Statement for the 2000 Annual Meeting of
Stockholders, filed with the SEC on January 18, 2000.)
13 Annual Report to Stockholders
21 Subsidiaries of the Company (incorporated herein by
reference to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999, file no.
0-25233.)
23.1 Consent of KPMG LLP
27 EDGAR Financial Data Schedule
33
<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 26, 2000 By: \s\ George Strayton
---------------------------------------
George Strayton
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act 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>
<CAPTION>
<S> <C> <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 26, 2000 Date: December 26, 2000
By: \s\ William F. Helmer By: \s\ Dennis L. Coyle
------------------------------------------- ------------------------------------
William F. Helmer Dennis L. Coyle, Vice Chairman
Chairman of the Board
Date: December 26, 2000 Date: December 26, 2000
By: \s\ Judith Hershaft By: \s\ Thomas F. Jauntig, Jr.
------------------------------------------- ------------------------------------
Judith Hershaft, Director Thomas F. Jauntig, Jr., Director
Date: December 26, 2000 Date: December 26, 2000
By: \s\ Donald T. McNelis By: \s\ Richard A. Nozell
------------------------------------------- ------------------------------------
Donald T. McNelis, Director Richard A. Nozell, Director
Date: December 26, 2000 Date: December 26, 2000
By: \s\ William R. Sichol, Jr. By: \s\ Burt Steinberg
------------------------------------------- ------------------------------------
William R. Sichol, Jr., Director Burt Steinberg, Director
Date: December 26, 2000 Date: December 26, 2000
By: \s\ Wilbur C. Ward By: \s\ F. Gary Zeh
------------------------------------------- ------------------------------------
Wilbur C. Ward, Director F. Gary Zeh, Director
Date: December 26, 2000 Date: December 26, 2000
</TABLE>
34
