PORTION OF ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected financial condition and operating data are
derived from the audited consolidated financial statements of Provident Bancorp,
Inc., or, prior to January 7, 1999, Provident Bank. Additional information is
provided in "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and the Consolidated Financial Statements and related
notes included elsewhere in this report.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ................ $844,786 $814,518 $691,068 $648,742 $634,250
Loans, net .................. 589,822 566,521 463,667 404,497 369,487
Securities available for sale 162,157 148,387 97,983 84,670 88,795
Securities held to maturity . 48,586 56,782 98,402 126,266 135,001
Deposits .................... 608,976 586,640 573,174 546,846 545,286
Borrowings .................. 127,571 117,753 49,931 41,623 30,157
Equity ...................... 90,986 90,299 55,200 50,399 45,536
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest and dividend income ............................ $58,899 $52,267 $47,948 $46,555 $42,566
Interest expense ........................................ 26,034 21,589 20,880 20,179 18,585
------- ------- ------- ------- -------
Net interest income ............................... 32,865 30,678 27,068 26,376 23,981
Provision for loan losses ............................... 1,710 1,590 1,737 1,058 911
------- ------- ------- ------- -------
Net interest income after provision for loan losses 31,155 29,088 25,331 25,318 23,070
Non-interest income ..................................... 3,391 3,103 3,080 2,711 2,451
Non-interest expense (1) (2) ............................ 25,808 26,303 21,823 20,602 22,734
------- ------- ------- ------- -------
Income before income tax expense .................. 8,738 5,888 6,588 7,427 2,787
Income tax expense ...................................... 2,866 1,958 2,346 2,829 690
------- ------- ------- ------- -------
Net income (2) .................................... $ 5,872 $ 3,930 $ 4,242 $ 4,598 $ 2,097
======= ======= ======= ======= =======
</TABLE>
(Footnotes on next page)
2
<PAGE>
<TABLE>
<CAPTION>
At or for the Years Ended September 30,
----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) ........ 0.70% 0.52% 0.64% 0.72% 0.36%
Return on equity (ratio of net income to average equity) .............. 6.58 5.03 7.94 9.51 4.60
Average interest rate spread (3) ...................................... 3.51 3.66 3.79 3.92 3.88
Net interest margin (4) ............................................... 4.12 4.24 4.28 4.36 4.30
Efficiency ratio (5) .................................................. 71.18 77.86 72.39 70.83 73.53
Non-interest expense to average total assets (2) ...................... 3.08 3.47 3.29 3.24 3.91
Average interest-earning assets to average interest-bearing liabilities 118.54 119.28 114.88 113.07 112.60
Per Share and Related Data:
Basic and diluted earnings per share (6) .............................. $ 0.76 $ 0.40 -- -- --
Dividends per share (7) ............................................... $ 0.15 $ 0.06 -- -- --
Dividend payout ratio (8) ............................................. 19.74% 15.00% -- -- --
Book value per share (9) .............................................. $ 11.26 $ 10.91 -- -- --
Asset Quality Ratios:
Non-performing assets to total assets ................................. 0.50% 0.62% 0.94% 0.75% 1.21%
Non-performing loans to total loans ................................... 0.67 0.82 1.32 1.16 1.72
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 .............................. 1.30 1.09 1.06 0.93 0.91
Capital Ratios:
Equity to total assets at end of year ................................. 10.77% 11.09% 7.99% 7.77% 7.18%
Average equity to average assets ...................................... 10.67 10.29 8.05 7.59 7.83
Tier 1 leverage ratio (Bank only) ..................................... 9.59 9.56 7.37 6.96 6.15
</TABLE>
---------------------------
(1) Non-interest expense for fiscal 1999 includes special charges totaling
approximately $1.5 million in connection with the computer system
conversion ($1.1 million) and establishment of the employee stock
ownership plan ("ESOP") ($371,000). Excluding these special charges after
taxes, net income would have been approximately $4.9 million for fiscal
1999.
(2) Non-interest expense for fiscal 1996 includes $3.3 million for Provident
Bank's share of a special assessment imposed on all financial institutions
with deposits insured by the Savings Association Insurance Fund (the
"SAIF"). On an after-tax basis, the special assessment reduced net income
for fiscal 1996 by approximately $2.0 million. Excluding the special
assessment, the ratio of non-interest expense to average total assets was
3.34% for fiscal 1996.
(3) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities for the period.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(5) The efficiency ratio represents non-interest expense (other than the SAIF
special assessment in fiscal 1996) divided by the sum of net interest
income and non-interest income.
(6) Basic earnings per share for fiscal 1999 was computed for the nine-month
period following the stock offering based on net income of approximately
$3.2 million for that period and 8,041,018 average common shares.
(7) Dividends per share for fiscal 2000 represents dividends of $0.03 per
share declared and paid in the first quarter and $0.04 per share declared
and paid in the second through fourth quarters. For fiscal 1999, dividends
per share represents dividends of $0.03 per share declared and paid in
each of the third and fourth quarters.
(8) For fiscal 2000, the payout ratio is based on dividends of $0.15 per share
and twelve-month earnings per share of $0.76. For fiscal 1999, the ratio
is based on dividends of $0.06 per share and nine-month earnings of $0.40
per share. Based on six-month earnings of $0.29 per share for the third
and fourth quarters of fiscal 1999, the dividend payout ratio would have
been 20.69%.
(9) Book value per share is based on total stockholders' equity and 8,077,800
and 8,280,000 outstanding common shares at September 30, 2000 and 1999,
respectively. For this purpose common shares include unallocated ESOP
shares but exclude treasury shares.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Provident Bank (the "Bank") is a federally-chartered thrift
institution operating as a community bank and conducting business
primarily in Rockland and Orange Counties, New York. On January
7, 1999, the Bank completed its reorganization into a mutual
holding company structure (the "Reorganization"). As part of the
Reorganization, the Bank converted from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank
(the "Conversion"). The Bank became the wholly-owned subsidiary
of Provident Bancorp, Inc., which became the majority-owned
subsidiary of Provident Bancorp, MHC (the "Mutual Holding
Company"). Provident Bancorp, Inc. issued a total of 8,280,000
common shares on January 7, 1999, consisting of 3,864,000 shares
(or 46.67%) sold to the public (the "Offering") and 4,416,000
shares (or 53.33%) issued to the Mutual Holding Company.
Collectively, Provident Bancorp, Inc. and the Bank are referred
to herein as "the Company", and financial condition and results
of operations are discussed on a consolidated basis. Reference to
the Company may signify the Bank, depending on the context of the
reference, particularly for periods prior to the Reorganization
and Offering.
The Company's results of operations depend primarily on its net
interest income, which is the difference between the interest
income on its earning assets, such as loans and securities, and
the interest expense paid on its deposits and borrowings. Results
of operations are also affected by non-interest income and
expense, the provision for loan losses and income tax expense.
Non-interest income consists primarily of banking service fees
and income from loan servicing. The Company's non-interest
expense consists primarily of salaries and employee benefits,
occupancy and office expenses, advertising and promotion expense,
data processing expenses and amortization of branch purchase
premiums. Results of operations are also significantly affected
by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions
of regulatory authorities.
Forward-Looking Statements
In addition to historical information, this document contains
forward-looking statements. For this purpose, any statements
contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believe", "anticipates", "plans", "expects"
and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could
cause the Company's actual results to differ materially from
those contemplated by such forward-looking statements. These
important factors include, without limitation, the Company's
continued ability to originate quality loans, fluctuations in
interest rates, real estate conditions in the Company's lending
areas, general and local economic conditions, 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.
4
<PAGE>
Management Strategy
Management intends to continue the Bank's growth as an
independent community bank offering a broad range of
customer-focused services as an alternative to money center banks
in its market area, positioning the Bank for sustainable
long-term growth. In recent years, management determined that the
success of the Bank would be enhanced by operating as a community
bank rather than a traditional thrift institution, and as a
result, management implemented a business strategy that included:
(i) creating an infrastructure for commercial and consumer
banking, including an experienced commercial loan department and
delivery systems to accommodate the needs of business and
individual customers; and (ii) placing a greater emphasis on
commercial real estate and business lending, as well as checking
and other transaction accounts. Highlights of management's
business strategy are as follows:
Community banking and customer service: As an independent
community bank, a principal objective of the Bank is to respond
to the financial services needs of its consumer and commercial
customers. Management intends to use new technologies to offer
customers new financial products and services as market and
regulatory conditions permit, including PC banking, cash
management services and sweep accounts, which the Bank introduced
in the months subsequent to its September 2000 fiscal year end.
The Bank has also begun to offer asset management and trust
services, and intends to offer personal financial planning
services in the near future.
Growing and diversifying the loan portfolio: The Bank also offers
a broad range of products to commercial businesses and real
estate owners and developers. The Bank has established
experienced commercial loan and loan administration departments
to assure the continued growth and careful management of the
quality of its assets.
Expanding the retail banking franchise: Management intends to
continue to expand the retail banking franchise and to increase
the number of households served in the Bank's market area.
Management's strategy is to deliver exceptional customer service,
which depends on up-to-date technology and convenient access, as
well as courteous personal contact from a trained and motivated
workforce. In the fall of 1999, the Bank opened its first two
branches in Orange County, extending its market area beyond its
base of 11 branches in Rockland County. The Bank intends to
pursue opportunities to expand its branch network further as
market conditions permit and is currently readying three more
branch locations, one in Rockland County and two in Orange
County, which the Bank expects to open over the next twelve
months. Acknowledging the time pressures on the two-income
families typical to its market area, the Bank maintains
seven-day-a-week banking at six of its branch offices. The Bank
also has 16 automated teller machines ("ATMs") including four
new, advanced-function ATMs that deliver change to the penny, in
addition to the more typical ATM functions. The Bank also
participates in networks that permit customers to access their
accounts through ATMs worldwide.
Management of Market Risk
Qualitative Analysis. As with other financial institution holding
companies, the Company's most significant form of market risk is
interest rate risk. The general objective of the Company's
interest rate risk management is to determine the appropriate
level of risk, given the Company's business strategy, and then
manage that risk in a manner that is consistent with the
Company's policy to reduce the exposure of net interest income to
changes in market interest rates. The Bank's asset/liability
management committee ("ALCO"), which consists of senior
management, evaluates the interest rate risk inherent in certain
assets and liabilities, the Company's operating environment, and
capital and liquidity requirements, and modifies lending,
investing and deposit gathering strategies accordingly. A
5
<PAGE>
committee of the Board of Directors reviews the ALCO's activities
and strategies, the effect of those strategies on the Company's
net interest margin, and the effect that changes in market
interest rates would have on the value of the Company's loan and
securities portfolios.
The Company actively evaluates interest rate risk concerns in
connection with its lending, investing, and deposit activities.
The Company emphasizes the origination of residential monthly and
bi-weekly fixed-rate mortgage loans, residential and commercial
adjustable-rate mortgage loans, consumer loans and business
loans. Depending on market interest rates and the Company's
capital and liquidity position, the Company may retain all of its
newly originated fixed-rate, fixed-term residential mortgage
loans or it may sell all or a portion of such longer-term loans
on a servicing-retained basis. The Company also invests in
short-term securities. Shortening the maturities of the Company's
interest-earning assets by increasing investments in shorter-term
loans and securities helps to better match the maturities and
interest rates of the Company's assets and liabilities, thereby
reducing the exposure of its net interest income to changes in
market interest rates. These strategies may adversely impact net
interest income due to lower initial yields on these investments
in comparison to longer-term, fixed-rate loans and investments.
The Company has purchased interest rate caps to synthetically
extend the duration of its portfolio of short- term certificates
of deposits and wholesale borrowings. In March 1998, the Company
entered into a five-year interest rate cap agreement in which the
counterparty agreed to make interest payments to the Company
based on a $20 million notional amount to the extent that the
three-month LIBOR rate exceeds 6.50% at each quarterly
determination date. In April 2000, the Company entered into a
three-year interest rate cap agreement in which the counterparty
agreed to make interest payments to the Company based on a $30
million notional amount to the extent that the three-month LIBOR
rate exceeds 8.25% at each quarterly determination date.
By purchasing shorter-term assets and extending the duration of
its liabilities, management believes that the corresponding
reduction in interest rate risk will enhance long-term
profitability.
Quantitative Analysis. Management monitors interest rate
sensitivity primarily through the use of a model that simulates
net interest income under varying interest rate assumptions.
Management also evaluates this sensitivity using a model that
estimates the change in the Company's net portfolio value ("NPV")
over a range of interest rate scenarios. NPV is the present value
of expected cash flows from assets, liabilities and off-balance
sheet contracts. Both models assume estimated loan prepayment
rates, reinvestment rates and deposit decay rates that seem most
likely based on historical experience during prior periods of
interest rate changes.
6
<PAGE>
The table below sets forth, as of September 30, 2000, the
estimated changes in the Company's NPV and its net interest
income that would result from the designated instantaneous
changes in the U.S. Treasury yield curve.
<TABLE>
<CAPTION>
NPV Net Interest Income
------------------------------------------------------------------- ---------------------------------------------
Change in Estimated Increase Increase (Decrease) in
(Decrease) in NPV Estimated Estimated Net Interest Income
Interest Rates Estimated ---------------------------- Net Interest -----------------------------
(basis points) NPV Amount Percent Income Amount Percent
-------------- -------------- ------- ---------- --------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
+300 $ 67,407 $ (31,101) (31.6)% $ 26,560 $ (1,576) (5.6)%
+200 77,986 (20,522) (20.8) 27,030 (1,106) (3.9)
+100 88,332 (10,176) (10.3) 27,527 (609) (2.2)
0 98,508 --- --- 28,136 --- ---
-100 105,833 7,325 7.4 28,628 492 1.7
-200 111,372 12,864 13.1 29,487 1,351 4.8
-300 118,370 19,862 20.2 30,414 2,278 8.1
</TABLE>
The table indicates that at September 30, 2000, in the event of
an abrupt 200 basis point decrease in interest rates, the Company
would be expected to experience a 13.1% increase in NPV. In the
event of an abrupt 200 basis point increase in interest rates,
the Company would be expected to experience a 20.8% decrease in
NPV. Similarly, the table shows a projected 4.8% increase in the
first year's net interest income following an abrupt 200 basis
point decrease in interest rates. Computations of prospective
effects of hypothetical interest rate changes are based on
numerous assumptions including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be
relied upon as indicative of actual results. Further, the
computations do not reflect any actions management may undertake
in response to changes in interest rates.
Certain shortcomings are inherent in the methodology used in the
above interest rate risk measurements. Modeling changes in NPV
and net interest income require making certain assumptions that
may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. The table
presented above assumes that the composition of the Company's
interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being
measured. It also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of
the duration to maturity or the repricing characteristics of
specific assets and liabilities. Accordingly, although the table
provides an indication of the Company's sensitivity to interest
rate changes at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net
interest income and will differ from actual results.
Analysis of Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing
liabilities. Net interest income depends on the relative amounts
of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on them, respectively.
The following table sets forth average balance sheets, average
yields and costs, and certain other information for the years
ended September 30, 2000, 1999 and 1998. Average balances are
daily averages. No tax-equivalent yield adjustments were made, as
the effect thereof was not material. Non-accrual loans were
included in the computation of average balances, but have been
reflected in the table as loans carrying a zero yield. The yields
7
<PAGE>
set forth below include the effect of deferred fees, discounts
and premiums that are amortized or accreted to interest income.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------------------------
2000 1999
------------------------------------------ ---------------------------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------- ----------- ---------- ------------ ----------- ---------- -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)...................... $ 577,119 $ 45,043 7.80% $ 526,139 $ 40,209 7.64%
Mortgage-backed securities (2). 97,533 6,518 6.68 113,458 7,231 6.37
Investment securities (2)...... 114,269 6,750 5.91 78,858 4,410 5.59
Other.......................... 9,119 588 6.45 5,229 417 7.97
------------- ----------- ----------- -----------
Total interest-earning assets 798,040 58,899 7.38 723,684 52,267 7.22
---------- -----------
Non-interest-earning assets...... 38,770 35,165
------------- -----------
Total assets................. $ 836,810 $ 758,849
============= ===========
Interest-bearing liabilities:
Savings deposits (3)........... $ 177,077 3,435 1.94 $ 171,585 3,398 1.98
Money market and
.....................NOW deposits 129,527 2,499 1.93 125,196 2,516 2.01
Certificates of deposit........ 244,279 12,787 5.23 235,620 11,560 4.91
Borrowings..................... 122,315 7,313 5.98 74,328 4,115 5.53
------------- ----------- ----------- -----------
Total interest-bearing
liabilities.............. 673,198 26,034 3.87 606,729 21,589 3.56
----------- -----------
Non-interest-bearing liabilities. 74,316 74,064
------------- -----------
Total liabilities............ 747,514 680,793
Equity........................... 89,296 78,056
------------- -----------
Total liabilities and equity. $ 836,810 $ 758,849
============= ===========
Net interest income.............. $ 32,865 $ 30,678
=========== ===========
Net interest rate spread (4)..... 3.51% 3.66%
Net interest-earning assets (5).. $ 124,842 $ 116,955
============= ===========
Net interest margin (6).......... 4.12% 4.24%
Ratio of interest-earning assets
to interest-bearing liabilities 118.54% 119.28%
------------------------------------
</TABLE>
Years Ended September 30,
-------------------------
1998
--------------------------------------
Average
Balance Interest Yield/Rate
------------ ---------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans (1)...................... $ 428,460 $ 35,032 8.18%
Mortgage-backed securities (2). 136,011 8,822 6.49
Investment securities (2)...... 64,177 3,791 5.91
Other.......................... 4,345 303 6.97
--------- -----------
Total interest-earning assets 632,993 47,948 7.57
-----------
Non-interest-earning assets...... 30,254
---------
Total assets................. $ 663,247
=========
Interest-bearing liabilities:
Savings deposits (3)........... $ 166,529 3,697 2.22
Money market and
.....................NOW deposits 114,542 2,687 2.35
Certificates of deposit........ 240,986 12,771 5.30
Borrowings..................... 28,961 1,725 5.96
--------- -----------
Total interest-bearing
liabilities.............. 551,018 20,880 3.79
-----------
Non-interest-bearing liabilities. 58,811
---------
Total liabilities............ 609,829
Equity........................... 53,418
---------
Total liabilities and equity. $ 663,247
=========
Net interest income.............. $ 27,068
=============
Net interest rate spread (4)..... 3.78%
Net interest-earning assets (5).. $ 81,975
=========
Net interest margin (6).......... 4.28%
Ratio of interest-earning assets
to interest-bearing liabilities 114.88%
------------------------------------
(1) Balances include the effect of net deferred loan origination fees and
costs, and the allowance for loan losses.
(2) Average outstanding balances are based on amortized cost.
(3) Includes club accounts and interest-bearing mortgage escrow balances.
(4) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
total interest-earning assets.
8
<PAGE>
The following table presents the dollar amounts of changes in interest income
and interest expense for the major categories of the Company's interest-earning
assets and interest-bearing liabilities. Information is provided for each
category of interest-earning assets and interest-bearing liabilities with
respect to (i) the change attributable to change in volume (change in average
balance multiplied by the prior-period average rate) and (ii) the change
attributable to rate (change in average rate multiplied by the prior-period
average balance). For purposes of this table, changes attributable to both rate
and volume, which cannot be segregated, have been allocated proportionately to
the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
--------------------------------------- -----------------------------------------
Increase (Decrease) Increase (Decrease) Total
Due to Total Due to Increase
------------------------- Increase ------------------------
Volume Rate (Decrease) Volume Rate
------ ---------- ---------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................ $ 3,895 $ 939 $ 4,834 $ 7,581 $(2,404) $ 5,177
Mortgage-backed securities ........... (1,014) 301 (713) (1,440) (151) (1,591)
Investment securities ................ 1,979 361 2,340 839 (149) 690
Other ................................ 310 (139) 171 59 (16) 43
------- ------- ------- ------- ------- -------
Total interest-earning assets .... 5,170 1,462 6,632 7,039 (2,720) 4,319
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings deposits ..................... 109 (72) 37 109 (408) (299)
Money market and NOW deposits ........ 87 (104) (17) 236 (407) (171)
Certificates of deposit .............. 425 802 1,227 (279) (931) (1,210)
Borrowings ........................... 2,654 544 3,198 2,519 (130) 2,389
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 3,275 1,170 4,445 2,585 (1,876) 709
------- ------- ------- ------- ------- -------
Change in net interest income ........ $ 1,895 $ 292 $ 2,187 $ 4,454 $ (844) $ 3,610
======= ======= ======= ======= ======= =======
</TABLE>
Comparison of Financial Condition at September 30, 2000 and September 30, 1999
Total assets increased to $844.8 million at September 30, 2000 from $814.5
million at September 30, 1999, an increase of $30.3 million, or 3.7%. The asset
growth was primarily attributable to a $23.3 million increase in net loans and a
$5.6 million increase in total securities. Asset growth was funded principally
from a $22.3 million increase in deposits and a $9.8 million increase in
borrowings.
Net loans increased by $23.3 million in the year ended September 30, 2000
primarily due to an increase of $21.8 million in the commercial loan portfolio.
Commercial loans increased to $182.1 million at September 30, 2000, from $160.3
million at September 30, 1999, a growth rate of 13.6%. This increase was
attributable to increases in commercial mortgage and multi-family loans of $14.6
million and construction loans of $10.5 million, net of a $3.3 million decrease
in commercial business loans. Total consumer loans increased by $3.8 million
over the period. The allowance for loan losses increased by $1.5 million to $7.7
million at September 30, 2000 from $6.2 million at September 30, 1999.
Securities increased by $5.6 million to $210.7 million at September 30, 2000
from $205.2 million at September 30, 1999. This increase reflects a $13.8
million increase in available-for-sale securities, net of an $8.2 million
decrease in securities held to maturity. The increase in the available-for-sale
portfolio consisted primarily of an $11.5 million increase in U.S. Government
and Agency securities and a $6.9 million increase in corporate debt securities.
9
<PAGE>
Deposits increased by $22.3 million to $609.0 million at September 30, 2000 from
$586.6 million at September 30, 1999. An increase in the total balance of
transaction accounts represented the largest component of deposit growth,
increasing $14.3 million, or 13.4%, to $121.3 million at September 30, 2000 from
$107.0 million at September 30, 1999. Total savings and money market account
balances decreased by $3.5 million, or 1.4%, to $238.3 million at September 30,
2000 from $241.8 million at September 30, 1999. Total certificates of deposit
increased $11.6 million, or 4.9%, to $249.4 million at September 30, 2000 from
$237.8 million at September 30, 1999. Federal Home Loan Bank ("FHLB") borrowings
(advances and securities repurchase agreements) and overdrafts increased by $9.8
million to $127.6 million at September 30, 2000 from $117.8 million at September
30, 1999.
Stockholders' equity increased by $687,000 to $91.0 million at September 30,
2000 compared to $90.3 million at September 30, 1999. Equity increased due to
fiscal year 2000 net income of $5.9 million, a $903,000 reduction in the
after-tax net unrealized loss on the available-for-sale securities portfolio,
allocation of employee stock ownership plan ("ESOP") shares of $470,000, and
vesting of recognition and retention plan ("RRP") shares of $689,000. These
increases were substantially offset by cash dividends of $1.0 million, treasury
share purchases of $3.2 million and stock grants of $3.0 million under the
Bank's RRP.
Comparison of Operating Results for the Years Ended September 30, 2000 and
September 30, 1999
Net income for the year ended September 30, 2000 was $5.9 million, an increase
of $2.0 million, or 49.4%, from net income of $3.9 million for the year ended
September 30, 1999. The increase was due primarily to an increase in net
interest income and a decrease in non-interest expense, which, in the prior
year, included special charges associated with the conversion to a new computer
system and the establishment of the ESOP. Excluding the after-tax impact of
these special charges, net income would have been approximately $4.9 million for
the year ended September 30, 1999.
Interest income increased by $6.6 million, or 12.7%, to $58.9 million for the
year ended September 30, 2000 from $52.3 million for the year ended September
30, 1999. The increase was primarily due to increased loan volume, as well as
the acquisition over time of higher yielding loans and investment securities and
the upward adjustment of rates earned on variable rate loans. For the year ended
September 30, 2000, income from loans increased by $4.8 million or 12.0%, and
income from securities and other earning assets increased $1.8 million or 14.9%.
The increase in income from loans was attributable to a $51.0 million increase
in the average balance to $577.1 million from $526.1 million, as well as a 16
basis point increase in the average yield to 7.80% from 7.64%. The continued
growth of the commercial loan portfolio was responsible for $26.9 million of the
overall increase in average loans. Average commercial loans grew to $167.1
million in 2000, from $140.2 million in 1999, an increase of 19.2%. Interest
income from commercial loans was $14.6 million for 2000, a $3.0 million or 25.9%
increase from income of $11.6 million in 1999. The increase was attributable to
both the above-mentioned increase in average balances and a 47 basis point
increase in average yields, to 8.72% from 8.25%. The increase in income from
investment securities of $2.3 million was attributable to a $35.4 million
increase in the average balance to $114.3 million from $78.9 million, as well as
a 32 basis point increase in the average yield to 5.91% from 5.59%. The $713,000
decrease in income from mortgage-backed securities was attributable to a $16.0
million decrease in the average balance to $97.5 million from $113.5 million,
which offset a 31 basis point increase in the average yield to 6.68% from 6.37%.
Interest expense increased by $4.4 million, or 20.6 %, to $26.0 million for the
year ended September 30, 2000 from $21.6 million for the year ended September
30, 1999. This increase was due primarily to the continuing rise in market
interest rates and higher average balances in wholesale borrowings, which carry
higher interest rates than the Bank's core deposits. Average interest-bearing
10
<PAGE>
liabilities for the fiscal year ended September 30, 2000 increased $66.5
million, or 10.8%, to $673.2 million, from an average of $606.7 million for the
fiscal year ended September 30, 1999. In addition, there was a 31 basis point
increase in the average rate paid on such liabilities over the same period.
Interest expense on FHLB borrowings increased by $3.2 million due to an increase
of $48.0 million in the average balance of such borrowings to $122.3 million
from $74.3 million, combined with an increase of 45 basis points in the average
rate paid to 5.98% from 5.53%. Interest expense on certificates of deposit
increased to $12.8 million in fiscal 2000 from $11.6 million in fiscal 1999.
This increase was due to a 32 basis point increase in the average rate paid to
5.23% from 4.91%, as well as an $8.7 million increase in the average balance of
certificates of deposit to $244.3 million from $235.6 million. Interest expense
on savings deposits, money market and NOW accounts was substantially unchanged
compared to fiscal 1999.
Net interest income was $32.9 million and $30.7 million for the years ended
September 30, 2000 and 1999, respectively. The $2.2 million increase in net
interest income was primarily attributable to a $7.8 million increase in net
earning assets (interest-earning assets less interest-bearing liabilities), to
$124.8 million from $117.0 million, partially offset by a 15 basis point decline
in the net interest rate spread to 3.51% from 3.66%. The Company's net interest
margin decreased by 12 basis points to 4.12% in the year ended September 30,
2000 from 4.24% in the year ended September 30, 1999.
Provision for loan losses is a charge to earnings recorded in order to maintain
the allowance for loan losses at a level that is considered appropriate to
absorb probable loan losses inherent in the existing portfolio. In determining
the appropriate level of the allowance for loan losses, management considers
past and anticipated loss experience, evaluations of real estate collateral,
current and anticipated economic conditions, volume and type of lending, and the
levels of non-performing and other classified loans. The amount of the allowance
for loan losses is based on estimates, and the ultimate losses may vary from
such estimates. Management assesses the allowance for loan losses on a quarterly
basis and makes provisions for loan losses in order to maintain the adequacy of
the allowance. The Company recorded $1.7 million and $1.6 million in loan loss
provisions during the years ended September 30, 2000 and 1999, respectively. The
provisions reflect continued loan portfolio growth in both fiscal years,
including commercial mortgage and business loans.
Non-interest income increased to $3.4 million for the year ended September 30,
2000 from $3.1 million for the year ended September 30, 1999 primarily
reflecting higher collection of transaction-based service charges, fees on
mutual fund sales, and other fee income. ATM transaction fees increased $70,000
to $512,000 for the year ended September 30, 2000 from $442,000 in the prior
year. The Company also realized an increase of $44,000 in income from the sale
of mutual funds and annuities, to $160,000 from $116,000 in the year ended
September 30, 1999.
Non-interest expense decreased by $495,000, or 1.9%, to $25.8 million for the
fiscal year ended September 30, 2000 from $26.3 million for the fiscal year
ended September 30, 1999. During fiscal 1999, expenses of $1.1 million were
incurred in connection with the conversion of computer systems, and ESOP expense
of $371,000 was recognized for shares allocated to employees for the full plan
year ended December 31, 1998. The absence of these costs in fiscal 2000 was
partially offset by increased current period expenses associated with operating
two new branches and the new Asset Management and Trust Department, and making
final preparations for issues relating to the Year 2000 date change.
Non-interest expenses for fiscal 2000 were reduced by the reversal of $318,000
in accruals made in fiscal 1999 which were part of the total computer system
conversion costs, as discussed above. These accruals were made for
conversion-related losses that did not materialize as originally expected.
11
<PAGE>
Excluding the impact of the accrual reversal in fiscal 2000 and the one-time
conversion and ESOP charges in fiscal 1999, total non-interest expenses
increased $1.3 million in fiscal 2000 compared to the prior year. Compensation
and employee benefits expense and occupancy and office operations expense
increased $1.7 million and $314,000, respectively. Compensation expense in
fiscal 2000 includes $689,000 for the vesting of RRP shares, while no shares
vested in fiscal 1999. These increases were partially offset by decreases in
fiscal 2000 expenses for advertising and promotion, FDIC insurance and
consulting fees of $103,000, $132,000 and $279,000, respectively.
Income tax expense was $2.9 million for the year ended September 30, 2000
compared to $2.0 million for fiscal 1999, representing effective tax rates of
32.8% and 33.3%, respectively. The tax rate in both fiscal years reflects the
investment in tax-exempt securities and the implementation of strategies
designed to lower state taxes.
Comparison of Operating Results for the Years Ended September 30, 1999 and
September 30, 1998
Net income for the year ended September 30, 1999 was $3.9 million, a decrease of
$312,000, or 7.4%, compared to net income of $4.2 million for the year ended
September 30, 1998. The decrease was due primarily to increases in non-interest
expenses (including special charges associated with the conversion to a new
computer system and the establishment of the ESOP), partially offset by an
increase in net interest income. Excluding the after-tax impact of expenses
related to the computer system conversion and the allocation of ESOP shares to
participants for the plan year ended December 31, 1998, net income would have
been approximately $4.9 million for the year ended September 30, 1999.
Interest income increased by $4.3 million, or 9.0%, to $52.3 million for the
year ended September 30, 1999 from $48.0 million for the year ended September
30, 1998. The increase was primarily due to a $5.2 million, or 14.8%, increase
in income from loans, partially offset by a $901,000, or 7.1%, decrease in
income from securities. The increase in income from loans was attributable to a
$97.6 million increase in the average balance to $526.1 million from $428.5
million, partially offset by a 54 basis point decrease in the average yield to
7.64% from 8.18%. The continued growth of the one-to-four family residential
mortgage loan portfolio was responsible for $64.5 million of the overall
increase in average loans, with growth of $35.5 million coming from the average
commercial loan portfolio. The decrease in income from securities was
attributable to a $22.5 million decrease in the average balance of
mortgage-backed securities to $113.5 million from $136.0 million, combined with
a 12 basis point decrease in the average yield to 6.37% from 6.49%.
Interest expense increased by $709,000, or 3.4 %, to $21.6 million for the year
ended September 30, 1999 from $20.9 million for the year ended September 30,
1998. This was the net result of a $55.7 million or 10.1% increase in the
average balance of total interest-bearing liabilities in fiscal 1999 compared to
fiscal 1998, substantially offset by a 23 basis point decrease in the average
rate paid on such liabilities over the same period. Interest expense on
borrowings from the FHLB increased by $2.4 million due to an increase of $45.3
million in the average balance of such borrowings to $74.3 million from $29.0
million, offset, in part, by a decrease of 43 basis points in the average rate
paid to 5.53% from 5.96%. The higher interest expense on borrowings was
partially offset by a decrease of $1.2 million in interest expense on
certificates of deposit to $11.6 million from $12.8 million. This decrease was
due to a 39 basis point decrease in the average rate paid to 4.91% from 5.30%,
as well as a $5.4 million decrease in the average balance of certificates of
deposit to $235.6 million from $241.0 million. Also partially offsetting the
higher interest expense on borrowings was a decrease of $299,000 in interest
expense on savings deposits to $3.4 million from $3.7 million. This decrease was
12
<PAGE>
due to a 24 basis point decrease in the average rate paid to 1.98% from 2.22%,
offset, in part, by a $5.1 million increase in the average balance to $171.6
million from $166.5 million. Interest expense on money market and NOW accounts
declined by $171,000 for the year ended September 30, 1999 due to a reduction in
average rate paid to 2.01% from 2.35%, partially offset by a $10.7 million
increase in the average balances of such deposits.
Net interest income was $30.7 million and $27.1 million for the years ended
September 30, 1999 and 1998, respectively. The $3.6 million increase in net
interest income was primarily attributable to a $35.0 million increase in net
earning assets (interest-earning assets less interest-bearing liabilities), to
$117.0 million from $82.0 million, partially offset by a 12 basis point decline
in the net interest rate spread to 3.66% from 3.78%. The Company's net interest
margin decreased slightly to 4.24% in the year ended September 30, 1999 from
4.28% in the year ended September 30, 1998.
Provision for loan losses was $1.6 million and $1.7 million for the years ended
September 30, 1999 and 1998, respectively. The provisions reflect continued loan
portfolio growth in both fiscal years, including commercial mortgage and
commercial business loans. The provision for loan losses in fiscal 1998 also
reflects the higher level of net loan charge-offs compared to fiscal 1999.
Non-interest income remained relatively unchanged at $3.1 million. Fees from
overdrafts increased by $94,000 to $986,000 in the year ended September 30, 1999
from $892,000 in the year ended September 30, 1998. The Company also realized an
increase of $55,000 in income from the sale of mutual funds and annuities, to
$116,000 in fiscal 1999 from $61,000 in the year ended September 30, 1998.
Offsetting these increases were a loss of $79,000 on disposal of fixed assets
and a loss of $74,000 on the valuation of loans held for sale.
Non-interest expense increased by $4.5 million, or 20.5%, to $26.3 million for
the year ended September 30, 1999 from $21.8 million for the year ended
September 30, 1998. Expenses associated with the new system conversion amounted
to $1.1 million in fiscal 1999, versus pre-conversion spending of $340,000 in
fiscal 1998. Excluding these system conversion costs, compensation and employee
benefits expense increased by $1.2 million; occupancy and office operations
expense increased by $229,000; and data processing expenses, consulting fees,
and stationery and printing expenses increased by $335,000, $246,000 and
$141,000, respectively. A portion of the higher costs were attributable to
branch expansion and new product offerings. The increase in compensation and
benefits included ESOP expense of $635,000 in fiscal 1999, consisting of
$371,000 attributable to the allocation of 10% of total plan shares to
participants for the plan year ended December 31, 1998 and $264,000 attributable
to shares committed to be released during the nine months ended September 30,
1999.
Income tax expense was $2.0 million for the fiscal year ended September 30, 1999
compared to $2.3 million for fiscal 1998, representing effective tax rates of
33.3% and 35.6%, respectively. The lower effective tax rate in fiscal 1999
reflects the investment in tax-exempt securities and implementation of state tax
strategies during the year.
13
<PAGE>
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from principal and
interest payments on loans and securities, and to a lesser extent, borrowings
and proceeds from the sale of fixed-rate mortgage loans in the secondary
mortgage market. Maturities and scheduled amortization of loans and securities,
as well as proceeds from borrowings, are predictable sources of funds. Other
funding sources, however, such as deposit inflows, mortgage prepayments and
mortgage loan sales are greatly influenced by market interest rates, economic
conditions and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial real estate loans, and the
purchase of investment securities and mortgage-backed securities. During the
years ended September 30, 2000, 1999 and 1998, the Company's loan originations
totaled $135.5 million, $220.8 million and $172.3 million, respectively;
purchases of mortgage-backed securities totaled $9.2 million, $18.3 million and
$35.5 million, respectively; and purchases of investment securities totaled
$31.3 million, $72.7 million and $23.0 million, respectively. These activities
were funded primarily by deposit growth and by principal repayments on loans and
securities, as well as by borrowings.
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, and other factors. The
net increase in total deposits was $22.3 million, $13.5 million and $26.3
million for the years ended September 30, 2000, 1999 and 1998, respectively. The
net increase in transaction, savings and money market accounts was $10.8
million, $24.8 million and $13.3 million for the years ended September 30, 2000,
1999 and 1998, respectively.
The Company monitors its liquidity position on a daily basis, and any excess
short-term liquidity is usually invested in overnight federal funds sold. The
Company generally remains fully invested and meets additional funding
requirements through FHLB borrowings, which amounted to $122.0 million at
September 30, 2000.
In addition to deposits and borrowings, cash flows from financing activities
included capital-raising and related transactions in fiscal 2000 and 1999. Net
proceeds of $37.1 million from the sale of common stock in the Offering provided
an additional source of liquidity during the year ended September 30, 1999,
partially offset by a $3.8 million outlay to fund the purchase of common stock
for the ESOP. In fiscal 2000, purchases of treasury stock and shares for RRP
awards were made at a total cost of $5.0 million. Cash payments for dividends
were $1.0 million and $367,000 during the years ended September 30, 2000 and
1999, respectively.
At September 30, 2000, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $80.1 million, or 9.6% of adjusted
assets (which is above the required level of $33.4 million, or 4.0%) and a
risk-based capital level of $86.5 million, or 16.9% of risk-weighted assets
(which is above the required level of $41.0 million, or 8.0%). See Note 11 of
the Notes to Consolidated Financial Statements.
14
<PAGE>
New Accounting Standards
In fiscal 2001, the Company will adopt Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, and SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. Adoption of these new
accounting standards is not expected to have a significant effect on the
Company's consolidated financial statements. See Note 19 of the Notes to
Consolidated Financial Statements for a further of discussion of these
standards.
COMMON STOCK AND RELATED MATTERS
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "PBCP." As of September 30, 2000, the Company had seven registered market
makers, 3,475 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
8,077,800 shares outstanding. As of such date, the Mutual Holding Company held
4,416,000 shares of common stock and stockholders other than the Mutual Holding
Company held 3,661,800 shares.
The following table sets forth market price and dividend information for the
common stock since the completion of the Offering on January 7, 1999.
Cash Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
March 31, 1999 $ 12.25 $ 9.88 $ --
June 30, 1999 11.00 9.94 0.03
September 30, 1999 12.88 11.50 0.03
December 31, 1999 $ 16.23 $ 10.04 0.03
March 31, 2000 15.79 14.93 0.04
June 30, 2000 15.46 14.19 0.04
September 30, 2000 15.92 14.69 0.04
Payment of dividends on the Company's common stock is subject to determination
and declaration by the Board of Directors and depends on a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the results of operations and financial condition, tax considerations
and general economic conditions. No assurance can be given that dividends will
be declared or, if declared, what the amount of dividends will be, or whether
such dividends will continue.
The dividend of $0.03 per share paid during the first quarter of fiscal 2000 was
increased to $0.04 per share for the second through fourth quarters. In
accordance with OTS regulations, the Mutual Holding Company elected to waive its
receipt of dividends of approximately $177,000 during the fourth quarter.
During the third and fourth quarters of the year ended September 30, 1999, the
Company paid dividends of $0.03 per share. In accordance with OTS regulations,
the Mutual Holding Company elected to waive its receipt of dividends of
approximately $132,000 during the third quarter.
15
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting Annual Report on Form 10-K
The Annual Meeting of Stockholders A copy of the Company's Form 10-K
will be held at the Holiday Inn, 3 for the fiscal year ended September
Executive Boulevard, Suffern, New 30, 2000, will be furnished without
York on February 21, 2001, at 10:00 charge to stockholders upon written
a.m. request to the Manager of
Shareholder Relations, Provident
Stock Listing Bancorp, Inc., 400 Rella Boulevard,
P.O. Box 600, Montebello, New York
The Company's common stock is listed 10901, or call (845) 369-8082.
on the Nasdaq National Market under
the symbol "PBCP."
Transfer Agent and Registrar
Special Counsel
Registrar & Transfer Co.
Luse Lehman Gorman Pomerenk & Schick, P.C. 10 Commerce Drive
5335 Wisconsin Avenue, N.W Cranford, New Jersey 07016
Washington, D.C. 20015
Independent Auditors If you have any questions concerning
your stockholder account, call our
KPMG LLP transfer agent, noted above, at
3001 Summer Street (800) 368-5948 ext. 2531. This is
Stamford, Connecticut 06905 the number to call if you require a
change of address, records or
information about lost certificates,
or dividend checks.
16
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Provident Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Provident Bancorp, Inc. and subsidiary (the "Company") as of September 30,
2000 and 1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Provident Bancorp,
Inc. and subsidiary as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
-------------
KPMG LLP
Stamford, Connecticut
October 27, 2000
17
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 2000 and 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999
--------- -----------
Assets
<S> <C> <C>
Cash and due from banks $ 12,785 $ 11,838
Securities:
Available for sale, at fair value (amortized cost of $163,057 in 2000 and
$150,792 in 1999) (note 3) 162,157 148,387
Held to maturity, at amortized cost (fair value of $48,374 in 2000 and
$56,479 in 1999) (note 4) 48,586 56,782
--------- ---------
Total securities 210,743 205,169
--------- ---------
Loans (note 5):
One- to four-family residential mortgage loans 343,871 344,731
Commercial real estate, commercial business and construction loans 182,070 160,297
Consumer loans 71,534 67,695
Allowance for loan losses (7,653) (6,202)
--------- ---------
Total loans, net 589,822 566,521
--------- ---------
Accrued interest receivable, net (note 6) 5,495 5,833
Federal Home Loan Bank stock, at cost 7,023 6,176
Premises and equipment, net (note 7) 8,952 8,232
Deferred income taxes (note 10) 6,033 5,510
Other assets (notes 5, 8, 13 and 15) 3,933 5,239
--------- ---------
Total assets $ 844,786 $ 814,518
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 8) $ 608,976 $ 586,640
Borrowings (note 9) 127,571 117,753
Mortgage escrow funds (note 5) 5,971 10,489
Other 11,282 9,337
--------- ---------
Total liabilities 753,800 724,219
--------- ---------
Commitments and contingencies (notes 14 and 15)
Stockholders' equity (notes 1 and 11):
Preferred stock (par value $0.10 per share; 10,000,000 shares authorized;
none issued or outstanding) -- --
Common stock (par value $0.10 per share; 10,000,000 shares authorized;
8,280,000 shares issued) 828 828
Additional paid-in capital 36,356 36,262
Unallocated common stock held by employee stock ownership plan ("ESOP")
(note 13) (2,726) (3,102)
Common stock awards under recognition and retention plan ("RRP") (note 13) (2,306) --
Treasury stock, at cost (202,200 shares) (note 11) (3,203) --
Retained earnings 62,577 57,754
Accumulated other comprehensive loss, net of taxes (note 12) (540) (1,443)
--------- ---------
Total stockholders' equity 90,986 90,299
--------- ---------
Total liabilities and stockholders' equity $ 844,786 $ 814,518
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended September 30, 2000, 1999 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Interest and dividend income:
Loans $45,043 $40,209 $35,032
Securities 13,268 11,641 12,613
Other earning assets 588 417 303
------- ------- -------
Total interest and dividend income 58,899 52,267 47,948
------- ------- -------
Interest expense:
Deposits (note 8) 18,721 17,474 19,155
Borrowings 7,313 4,115 1,725
------- ------- -------
Total interest expense 26,034 21,589 20,880
------- ------- -------
Net interest income 32,865 30,678 27,068
Provision for loan losses (note 5) 1,710 1,590 1,737
------- ------- -------
Net interest income after provision for loan losses 31,155 29,088 25,331
------- ------- -------
Non-interest income:
Banking fees and service charges 2,765 2,567 2,427
Loan servicing fees 260 298 342
Other 366 238 311
------- ------- -------
Total non-interest income 3,391 3,103 3,080
------- ------- -------
Non-interest expense:
Compensation and employee benefits (note 13) 13,509 12,279 10,506
Occupancy and office operations (note 14) 3,805 3,370 3,141
Advertising and promotion 1,096 1,199 1,146
Data processing 1,494 1,301 845
Amortization of branch purchase premiums (note 8) 1,625 1,720 1,630
Other 4,279 6,434 4,555
------- ------- -------
Total non-interest expense 25,808 26,303 21,823
------- ------- -------
Income before income tax expense 8,738 5,888 6,588
Income tax expense (note 10) 2,866 1,958 2,346
------- ------- -------
Net income $ 5,872 $ 3,930 $ 4,242
======= ======= =======
Basic and diluted earnings per common share, from date
of stock offering (January 7, 1999) (note 2) $ 0.76 $ 0.40
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Additional Unallocated Common
Common Paid-in ESOP Stock Awards Treasury
Stock Capital Shares Under RRP Stock
---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $ -- $ -- $ -- $ -- $ --
Net income -- -- -- -- --
Other comprehensive income (note 12) -- -- -- -- --
Total comprehensive income 4,801
-------- -------- -------- -------- --------
Balance at September 30, 1998 -- -- -- -- --
Net income -- -- -- -- --
Other comprehensive loss (note 12) -- -- -- -- --
Total comprehensive income 1,578
Issuance of 8,280,000 common shares (note 1) 828 36,285 -- -- --
Initial capitalization of Provident Bancorp, MHC -- -- -- -- --
Shares purchased by ESOP (309,120 shares) -- -- (3,760) -- --
ESOP shares allocated or committed to be
released for allocation (54,096 shares) -- (23) 658 -- --
Cash dividends paid ($0.06 per common share) -- -- -- -- --
-------- -------- -------- -------- --------
Balance at September 30, 1999 828 36,262 (3,102) -- --
Net income -- -- -- -- --
Other comprehensive income (note 12) -- -- -- -- --
Total comprehensive income 6,775
Purchases of treasury stock (202,200 shares) -- -- -- -- (3,203)
ESOP shares allocated or committed to be
released for allocation (30,912 shares) -- 94 376 -- --
Awards of RRP shares (193,200 shares) -- -- -- (2,995) --
Vesting of RRP shares -- -- -- 689 --
Cash dividends paid ($0.15 per common share) -- -- -- -- --
-------- -------- -------- -------- --------
Balance at September 30, 2000 $ 828 $ 36,356 $ (2,726) $ (2,306) $ (3,203)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Retained Comprehensive Stockholders'
Earnings Income (Loss) Equity
--------- -------------- -----------
<S> <C> <C> <C>
Balance at September 30, 1997 $ 50,049 $ 350 $ 50,399
Net income 4,242 -- 4,242
Other comprehensive income (note 12) -- 559 559
--------
Total comprehensive income
-------- -------- --------
Balance at September 30, 1998 54,291 909 55,200
Net income 3,930 -- 3,930
Other comprehensive loss (note 12) -- (2,352) (2,352)
--------
Total comprehensive income
Issuance of 8,280,000 common shares (note 1) -- -- 37,113
Initial capitalization of Provident Bancorp, MHC (100) -- (100)
Shares purchased by ESOP (309,120 shares) -- -- (3,760)
ESOP shares allocated or committed to be
released for allocation (54,096 shares) -- -- 635
Cash dividends paid ($0.06 per common share) (367) -- (367)
-------- -------- --------
Balance at September 30, 1999 57,754 (1,443) 90,299
Net income 5,872 -- 5,872
Other comprehensive income (note 12) -- 903 903
--------
Total comprehensive income
Purchases of treasury stock (202,200 shares) -- -- (3,203)
ESOP shares allocated or committed to be
released for allocation (30,912 shares) -- -- 470
Awards of RRP shares (193,200 shares) -- -- (2,995)
Vesting of RRP shares -- -- 689
Cash dividends paid ($0.15 per common share) (1,049) -- (1,049)
-------- -------- --------
Balance at September 30, 2000 $ 62,577 $ (540) $ 90,986
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 2000, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 5,872 $ 3,930 $ 4,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,710 1,590 1,737
Depreciation and amortization of premises
and equipment 1,625 1,497 1,390
Amortization of branch purchase premiums 1,625 1,720 1,630
Net amortization of premiums and discounts
on securities 85 239 250
ESOP and RRP expense 1,159 635 --
Originations of loans held for sale (361) (13,271) (20,402)
Proceeds from sales of loans held for sale 808 14,089 17,163
Deferred income tax benefit (1,124) (1,488) (1,057)
Net changes in accrued interest receivable
and payable 992 (1,293) 675
Other adjustments, net (158) 945 659
--------- --------- ---------
Net cash provided by operating activities 12,233 8,593 6,287
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of securities:
Available for sale (35,746) (91,029) (43,120)
Held to maturity (4,710) -- (15,375)
Proceeds from maturities, calls and principal
payments on securities:
Available for sale 17,439 36,586 24,645
Held to maturity 12,869 41,510 43,077
Proceeds from sales of securities available for sale 6,001 -- 6,007
Loan originations (135,467) (220,813) (172,271)
Loan principal payments 109,580 115,525 114,166
Purchases of Federal Home Loan Bank stock (847) (2,486) (49)
Purchases of premises and equipment (2,345) (2,670) (1,565)
Other investing activities 350 274 615
--------- --------- ---------
Net cash used in investing activities (32,876) (123,103) (43,870)
--------- --------- ---------
</TABLE>
(Continued)
21
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 2000, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net increase in deposits $ 22,336 $ 13,466 $ 26,328
Net increase in borrowings 9,818 67,822 8,308
Net (decrease) increase in mortgage escrow funds (4,518) 4,602 1,328
Treasury shares purchased (3,203) -- --
Shares purchased for RRP awards (1,794) -- --
Shares purchased by ESOP -- (3,760) --
Net proceeds from stock offering -- 37,113 --
Cash dividends paid (1,049) (367) --
Initial capitalization of Provident Bancorp, MHC -- (100) --
--------- --------- ---------
Net cash provided by financing activities 21,590 118,776 35,964
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 947 4,266 (1,619)
Cash and cash equivalents at beginning of year 11,838 7,572 9,191
--------- --------- ---------
Cash and cash equivalents at end of year $ 12,785 $ 11,838 $ 7,572
========= ========= =========
Supplemental Information:
Interest paid $ 25,382 $ 21,313 $ 20,380
Income taxes paid 4,185 1,446 3,539
Loans transferred to real estate owned 154 311 597
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(1) Reorganization and Stock Offering
On January 7, 1999, Provident Bank (the "Bank") completed its
reorganization into a mutual holding company structure (the
"Reorganization"). As part of the Reorganization, the Bank converted from
a federally-chartered mutual savings bank to a federally-chartered stock
savings bank (the "Conversion"). The Bank became the wholly-owned
subsidiary of Provident Bancorp, Inc., which became the majority-owned
subsidiary of Provident Bancorp, MHC (the "Mutual Holding Company").
Collectively, Provident Bancorp, Inc. and the Bank are referred to herein
as "the Company".
Provident Bancorp, Inc. issued a total of 8,280,000 common shares on
January 7, 1999, consisting of 3,864,000 shares (or 46.67%) sold to the
public (the "Offering") and 4,416,000 shares (or 53.33%) issued to the
Mutual Holding Company. The net proceeds from the sale of shares to the
public amounted to $37,113, representing gross proceeds of $38,640 less
offering costs of $1,527. Provident Bancorp, Inc. utilized net proceeds
of $24,000 to make a capital contribution to the Bank. Prior to the
Reorganization and Offering, Provident Bancorp, Inc. had no operations
other than those of an organizational nature.
The Company's employee stock ownership plan ("ESOP"), which did not
purchase shares in the Offering, was authorized to purchase up to 8% of
the shares sold in the Offering, or 309,120 shares. The ESOP completed
its purchase of all such authorized shares in the open market during
January and February 1999, at a total cost of $3,760.
(2) Summary of Significant Accounting Policies
The Bank is a community bank offering financial services to individuals
and businesses primarily in Rockland County, New York and its contiguous
communities. The Bank's principal business is accepting deposits and,
together with funds generated from operations and borrowings, investing
in various types of loans and securities. The Bank is a
federally-chartered savings bank and its deposits are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation ("FDIC"). The Office of Thrift
Supervision ("OTS") is the primary regulator for the Bank, Provident
Bancorp, Inc. and the Mutual Holding Company.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Provident
Bancorp, Inc., the Bank, and the Bank's wholly-owned subsidiaries. These
subsidiaries are (i) Provident REIT, Inc. which was formed in fiscal 1999
as a real estate investment trust and holds a portion of the Company's
real estate loans, (ii) Provest Services Corp. I which became active in
fiscal 1996 and has invested in a low- income housing partnership, and
(iii) Provest Services Corp. II which became active in fiscal 1997 and
has engaged a third-party provider to sell mutual funds and annuities to
the Bank's customers. Intercompany transactions and balances are
eliminated in consolidation.
23
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America. In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expense. Actual results could
differ significantly from these estimates. An estimate that is
particularly susceptible to significant near-term change is the allowance
for loan losses, which is discussed below.
Certain prior year amounts have been reclassified to conform to the
current year presentation. For purposes of reporting cash flows, cash
equivalents (if any) include highly liquid short-term investments such as
overnight federal funds.
Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities, requires entities
to classify securities among three categories -- held to maturity,
trading, and available for sale. Management determines the appropriate
classification of the Company's securities at the time of purchase.
Held-to-maturity securities are limited to debt securities for which
management has the intent and the Company has the ability to hold to
maturity. These securities are reported at amortized cost.
Trading securities are debt and equity securities bought and held
principally for the purpose of selling them in the near term. These
securities are reported at fair value, with unrealized gains and losses
included in earnings. The Company does not engage in security trading
activities.
All other debt and equity securities are classified as available for
sale. These securities are reported at fair value, with unrealized gains
and losses (net of the related deferred income tax effect) excluded from
earnings and reported in a separate component of stockholders' equity
(accumulated other comprehensive income or loss). Available-for-sale
securities include securities that management intends to hold for an
indefinite period of time, such as securities to be used as part of the
Company's asset/liability management strategy or securities that may be
sold in response to changes in interest rates, changes in prepayment
risks, the need to increase capital, or similar factors.
Premiums and discounts on debt securities are recognized in interest
income on a level-yield basis over the period to maturity. The cost of
securities sold is determined using the specific identification method.
Unrealized losses are charged to earnings when management determines that
the decline in fair value of a security is other than temporary.
Loans
Loans, other than those classified as held for sale, are reported at
amortized cost less the allowance for loan losses. Mortgage loans
originated and held for sale in the secondary market are reported at the
24
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
lower of aggregate cost or estimated market value. Market value is
estimated based on outstanding investor commitments or, in the absence of
such commitments, based on current investor yield requirements. Net
unrealized losses, if any, are recognized in a valuation allowance by a
charge to earnings.
A loan is placed on non-accrual status when management has determined
that the borrower may be unable to meet contractual principal or interest
obligations, or when payments are 90 days or more past due. Accrual of
interest ceases and, in general, uncollected past due interest (including
interest applicable to prior years, if any) is reversed and charged
against current interest income. Interest payments received on
non-accrual loans, including impaired loans under SFAS No. 114, are not
recognized as income unless warranted based on the borrower's financial
condition and payment record. Interest on loans that have been
restructured is accrued in accordance with the renegotiated terms.
The Company defers non-refundable loan origination and commitment fees,
and certain direct loan origination costs, and amortizes the net amount
as an adjustment of the yield over the contractual term of the loan. If a
loan is prepaid or sold, the net deferred amount is recognized in income
at that time.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
losses charged to earnings. Losses on loans (including impaired loans)
are charged to the allowance for loan losses when management believes
that the collection of principal is unlikely. Recoveries of loans
previously charged-off are credited to the allowance when realized.
The allowance for loan losses is an amount that management believes will
be adequate to absorb probable losses on existing loans that may become
uncollectable, based on evaluations of the collectability of the loans.
Management's evaluations, which are subject to periodic review by the
Company's regulators, take into consideration factors such as the
Company's past loan loss experience, changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific problem
loans and collateral values, and current economic conditions that may
affect the borrowers' ability to pay. Future adjustments to the allowance
for loan losses may be necessary based on changes in economic and real
estate market conditions, further information obtained regarding known
problem loans, regulatory examinations, the identification of additional
problem loans, and other factors.
In accordance with SFAS No. 114, Accounting by Creditors for Impairment
of a Loan, the Company considers a loan to be impaired when, based on
current information and events, it is probable that it will be unable to
collect all principal and interest contractually due. SFAS No. 114
applies to loans that are individually evaluated for collectability in
accordance with the Company's ongoing loan review procedures (principally
commercial real estate, commercial business and construction loans). The
standard does not generally apply to smaller-balance homogeneous loans
that are collectively evaluated for impairment, such as residential
mortgage and consumer loans. Under SFAS No. 114,
25
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
creditors are permitted to report impaired loans based on one of three
measures -- the present value of expected future cash flows discounted at
the loan's effective interest rate; the loan's observable market price;
or the fair value of the collateral if the loan is collateral dependent.
If the measure of an impaired loan is less than its recorded investment,
an impairment loss is recognized as part of the allowance for loan
losses.
Mortgage Servicing Assets
Mortgage servicing rights are recognized as assets when loans are sold
with servicing retained. The cost of an originated mortgage loan that is
sold is allocated between the loan and the servicing right based on
estimated relative fair values. The cost allocated to the servicing right
is capitalized as a separate asset and amortized thereafter in proportion
to, and over the period of, estimated net servicing income. Capitalized
mortgage servicing rights are assessed for impairment based on the fair
value of those rights, and impairment losses are recognized in a
valuation allowance by charges to income.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank ("FHLB") of New York, the Bank
is required to hold a certain amount of FHLB stock. This stock is
considered to be a non-marketable equity security under SFAS No. 115 and,
accordingly, is reported at cost.
Premises and Equipment
Premises and equipment are reported at cost, less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related
assets ranging from 3 to 40 years. Leasehold improvements are amortized
on a straight-line basis over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter. Routine
holding costs are charged to expense as incurred, while significant
improvements are capitalized.
Branch Purchase Premiums
Premiums attributable to the acquisition of core deposits in branch
purchase transactions are amortized using the straight-line method over
periods not exceeding the estimated average remaining life of the
acquired customer base. The unamortized premiums are reviewed for
impairment if events or changes in circumstances indicate that the
carrying amount may not be fully recoverable.
Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded
initially at estimated fair value less expected sales costs, with any
resulting writedown charged to the allowance for loan losses. Subsequent
valuations are performed by management, and the carrying amount of a
property is adjusted by a charge to expense to reflect any subsequent
declines in estimated fair value. Fair value
26
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
estimates are based on recent appraisals and other available information.
Routine holding costs are charged to expense as incurred, while
significant improvements are capitalized. Gains and losses on sales of
real estate owned are recognized upon disposition.
Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities to
a counterparty under an agreement to repurchase the identical securities
at a fixed price on a future date. These agreements are accounted for as
secured financing transactions since the Company maintains effective
control over the transferred securities and the transfer meets other
specified criteria. Accordingly, the transaction proceeds are recorded as
borrowings and the underlying securities continue to be carried in the
Company's securities portfolio.
Income Taxes
Deferred taxes are recognized for the estimated future tax effects
attributable to "temporary differences" between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax laws or rates is
recognized in income tax expense in the period that includes the
enactment date of the change.
A deferred tax liability is recognized for all temporary differences that
will result in future taxable income. A deferred tax asset is recognized
for all temporary differences that will result in future tax deductions,
subject to reduction of the asset by a valuation allowance in certain
circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more
likely than not that some portion or all of the deferred tax asset will
not be realized. The valuation allowance is subject to ongoing adjustment
based on changes in circumstances that affect management's judgment about
the realizability of the deferred tax asset. Adjustments to increase or
decrease the valuation allowance are charged or credited, respectively,
to income tax expense.
Interest Rate Cap Agreements
The Company uses the accrual method of accounting for interest rate cap
agreements entered into for interest rate risk management purposes.
Interest payments (if any) due from the counterparties are recognized in
the consolidated statements of income as an adjustment to interest income
or expense on the assets or liabilities designated in the Company's
interest rate risk management strategy. Premiums paid by the Company at
inception of the agreements are included in other assets and amortized on
a straight-line basis as an adjustment to interest income or expense over
the term of the agreements. These policies were revised upon adoption of
SFAS No. 133, effective October 1, 2000, as discussed in note 19.
27
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Stock-Based Compensation Plans
Compensation expense is recognized for the Company's ESOP equal to the
fair value of shares that have been allocated or committed to be released
for allocation to participants. Any difference between the fair value of
the shares at that time and the ESOP's original acquisition cost is
charged or credited to stockholders' equity (additional paid-in capital).
The cost of ESOP shares that have not yet been allocated or committed to
be released is deducted from stockholders' equity.
The Company accounts for its stock option plan in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. Accordingly, compensation expense is recognized only
if the exercise price of an option is less than the fair value of the
underlying stock at the grant date. SFAS No. 123, Accounting for
Stock-Based Compensation, encourages entities to recognize the fair value
of all stock-based awards (measured on the grant date) as compensation
expense over the vesting period. Alternatively, SFAS No. 123 allows
entities to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosures of net income and earnings per share as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and
provide these pro forma disclosures.
The recognition and retention plan ("RRP") is also accounted for in
accordance with APB Opinion No. 25. The fair value of the shares awarded,
measured at the grant date, is recognized as unearned compensation (a
deduction from stockholders' equity) and amortized to compensation
expense as the shares become vested.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income
applicable to common stock by the weighted average number of common
shares outstanding during the period. Diluted EPS is computed in a
similar manner, except that the weighted average number of common shares
is increased to include incremental shares (computed using the treasury
stock method) that would have been outstanding if all potentially
dilutive stock options and unvested RRP shares were exercised or became
vested during the period. For purposes of computing both basic and
diluted EPS, outstanding shares include all shares issued to the Mutual
Holding Company, but exclude unallocated ESOP shares that have not been
committed to be released to participants. RRP shares are not included in
outstanding shares until they become vested.
Both basic and diluted EPS were based on 7,772,724 and 8,041,018 common
shares for the years ended September 30, 2000 and 1999, respectively. The
Company's stock options and unvested RRP shares did not have a dilutive
effect on EPS in fiscal 2000 and, accordingly, were not included in the
calculation of diluted EPS. There were no stock options or unvested RRP
shares in fiscal 1999. Earnings per share presented in the fiscal 1999
consolidated statement of income is for the nine-month period following
the Offering, based on net income of $3,202 for that period.
28
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Segment Information
Public companies are required to report certain financial information
about significant revenue-producing segments of the business for which
such information is available and utilized by the chief operating
decision maker. Specific information to be reported for individual
operating segments includes a measure of profit and loss, certain revenue
and expense items, and total assets. As a community-oriented financial
institution, substantially all of the Company's operations involve the
delivery of loan and deposit products to customers. Management makes
operating decisions and assesses performance based on an ongoing review
of these community banking operations, which constitute the Company's
only operating segment for financial reporting purposes.
(3) Securities Available for Sale
The following are summaries of securities available for sale at September
30, 2000 and 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
September 30, 2000
Mortgage-Backed Securities
Fannie Mae $ 22,193 $ 135 $ (309) $ 22,019
Freddie Mac 17,471 39 (214) 17,296
Other 6,582 16 (105) 6,493
------------- ------------- ------------- ------------
46,246 190 (628) 45,808
------------- ------------- ------------- ------------
Investment Securities
U.S. Government and Agency securities 70,938 -- (541) 70,397
Corporate debt securities 30,975 -- (387) 30,588
State and municipal securities 11,697 -- (716) 10,981
Equity securities 3,201 1,211 (29) 4,383
------------- ------------- ------------- ------------
116,811 1,211 (1,673) 116,349
------------- ------------- ------------- ------------
Total available for sale $ 163,057 $ 1,401 $ (2,301) $ 162,157
============= ============= ============= ============
September 30, 1999
Mortgage-Backed Securities
Fannie Mae $ 24,004 $ 102 $ (344) $ 23,762
Freddie Mac 20,926 54 (232) 20,748
Other 7,163 89 -- 7,252
------------- ------------- ------------- ------------
52,093 245 (576) 51,762
------------- ------------- ------------- ------------
Investment Securities
U.S. Government and Agency securities 59,623 -- (709) 58,914
Corporate debt securities 24,201 -- (534) 23,667
State and municipal securities 11,700 -- (892) 10,808
Equity securities 3,175 144 (83) 3,236
------------- ------------- ------------- ------------
98,699 144 (2,218) 96,625
------------- ------------- ------------- ------------
Total available for sale $ 150,792 $ 389 $ (2,794) $ 148,387
============= ============= ============= ============
</TABLE>
29
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Equity securities at both September 30, 2000 and 1999 consist of Freddie
Mac and Fannie Mae preferred stock.
The following is a summary of the amortized cost and fair value of debt
securities available for sale (other than mortgage-backed securities) at
September 30, 2000, by remaining period to contractual maturity. Actual
maturities may differ because certain issuers have the right to call or
prepay their obligations.
Amortized Fair
Cost Value
Remaining period to contractual maturity:
Less than one year $ 18,554 $ 18,489
One to five years 71,255 70,539
Five to ten years 17,420 17,010
Greater than ten years 6,381 5,928
-------- --------
Total $113,610 $111,966
======== ========
The following is an analysis, by type of interest rate, of the amortized
cost and weighted average yield of debt securities available for sale:
Fixed Adjustable
Rate Rate Total
------------ -------------- ----------
September 30, 2000
Amortized cost $ 148,464 $ 11,392 $ 159,856
Weighted average yield 5.95% 7.52% 6.06%
September 30, 1999
Amortized cost $ 134,015 $ 13,602 $ 147,617
Weighted average yield 6.03% 6.43% 6.07%
Proceeds from sales of securities available for sale during the years
ended September 30, 2000 and 1998 totaled $6,001 and $6,007,
respectively, resulting in gross realized gains of $9 and $10,
respectively, which are included in other non-interest income. There were
no sales of securities available for sale during the year ended September
30, 1999.
At September 30, 2000 and 1999, respectively, U.S. Government securities
with carrying amounts of $5,166 and $3,577 were pledged as collateral for
purposes other than the borrowings described in note 9.
30
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(4) Securities Held to Maturity
The following are summaries of securities held to maturity at September
30, 2000 and 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
September 30, 2000
Mortgage-Backed Securities
Fannie Mae $ 21,531 $ 107 $ (138) $ 21,500
Freddie Mac 17,105 19 (222) 16,902
Ginnie Mae 4,279 -- (4) 4,275
Other 2,283 60 -- 2,343
-------- -------- -------- --------
45,198 186 (364) 45,020
-------- -------- -------- --------
Investment Securities
U.S. Government and Agency securities 2,991 -- (34) 2,957
Other 397 -- -- 397
-------- -------- -------- --------
3,388 -- (34) 3,354
-------- -------- -------- --------
Total held to maturity $ 48,586 $ 186 $ (398) $ 48,374
======== ======== ======== ========
September 30, 1999
Mortgage-Backed Securities
Fannie Mae $ 23,807 $ 94 $ (329) $ 23,572
Freddie Mac 22,014 69 (183) 21,900
Ginnie Mae 5,106 34 -- 5,140
Other 2,453 46 -- 2,499
-------- -------- -------- --------
53,380 243 (512) 53,111
-------- -------- -------- --------
Investment Securities
U.S. Government and Agency securities 2,987 -- (34) 2,953
Other 415 -- -- 415
-------- -------- -------- --------
3,402 -- (34) 3,368
-------- -------- -------- --------
Total held to maturity $ 56,782 $ 243 $ (546) $ 56,479
======== ======== ======== ========
</TABLE>
31
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The following is a summary of the amortized cost and fair value of
securities held to maturity (other than mortgage-backed securities) at
September 30, 2000, by remaining period to contractual maturity. Actual
maturities may differ because certain issuers have the right to call or
repay their obligations.
Amortized Fair
Cost Value
--------- -------
Remaining period to contractual maturity:
Less than one year $ 25 $ 25
One to five years 2,991 2,957
Greater than five years 372 372
------ --------
Total $ 3,388 $ 3,354
====== ========
The following is an analysis, by type of interest rate, of the amortized
cost and weighted average yield of securities held to maturity:
Fixed Adjustable
Rate Rate Total
------- --------- ----------
September 30, 2000
Amortized cost $ 39,829 $ 8,757 $ 48,586
Weighted average yield 6.77% 7.72% 6.94%
September 30, 1999
Amortized cost $ 45,175 $ 11,607 $ 56,782
Weighted average yield 6.69% 6.66% 6.68%
There were no sales of securities held to maturity during the years ended
September 30, 2000, 1999 and 1998.
32
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(5) Loans
The components of the loan portfolio were as follows at September 30:
<TABLE>
<CAPTION>
2000 1999
---------- ---------
<S> <C> <C>
One- to four-family residential mortgage loans:
Fixed rate $ 257,138 $ 263,577
Adjustable rate 86,733 81,154
--------- ---------
343,871 344,731
--------- ---------
Commercial real estate loans 124,988 110,382
Commercial business loans 27,483 30,768
Construction loans 29,599 19,147
--------- ---------
182,070 160,297
--------- ---------
Home equity lines of credit 28,021 25,380
Homeowner loans 37,027 34,852
Other consumer loans 6,486 7,463
--------- ---------
71,534 67,695
--------- ---------
Total loans 597,475 572,723
Allowance for loan losses (7,653) (6,202)
--------- ---------
Total loans, net $ 589,822 $ 566,521
========= =========
</TABLE>
Total loans include net deferred loan origination costs of $674 and $838
at September 30, 2000 and 1999, respectively.
A substantial portion of the Company's loan portfolio is secured by
residential and commercial real estate located in Rockland County, New
York and its contiguous communities. The ability of the Company's
borrowers to make principal and interest payments is dependent upon,
among other things, the level of overall economic activity and the real
estate market conditions prevailing within the Company's concentrated
lending area. Commercial real estate and construction loans are
considered by management to be of somewhat greater credit risk than loans
to fund the purchase of a primary residence due to the generally larger
loan amounts and dependency on income production or sale of the real
estate. Substantially all of these loans are collateralized by real
estate located in the Company's primary market area.
33
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The principal balances of non-accrual loans were as follows at September
30:
2000 1999
------- -------
One- to four-family residential mortgage loans $ 2,496 $ 2,839
Commercial real estate loans 1,149 1,133
Commercial business loans -- 208
Construction loans 27 27
Consumer loans 359 429
------- ------
Total non-accrual loans $ 4,031 $ 4,636
======= ======
The allowance for uncollected interest, representing the amount of
interest on non-accrual loans that has not been recognized in interest
income, was $485 and $456 at September 30, 2000 and 1999, respectively.
Gross interest income that would have been recorded if the non-accrual
loans at September 30 had remained on accrual status throughout the year,
amounted to $337 in fiscal 2000, $395 in fiscal 1999 and $698 in fiscal
1998. Interest income actually recognized on such loans (including income
recognized on a cash basis) totaled $77, $131 and $310 for the years
ended September 30, 2000, 1999 and 1998, respectively.
The Company's total recorded investment in impaired loans, as defined by
SFAS No. 114, was $1,176 and $1,368 at September 30, 2000 and 1999,
respectively. Substantially all of these loans were collateral-dependent
loans measured based on the fair value of the collateral. The Company
determines the need for an allowance for loan impairment under SFAS No.
114 on a loan-by-loan basis. An impairment allowance was not required at
September 30, 2000 and 1999 due to the adequacy of collateral values. The
Company's average recorded investment in impaired loans was $1,196,
$2,577 and $2,909 during the years ended September 30, 2000, 1999 and
1998, respectively.
Activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
2000 1999 1998
------- ------- -------
Balance at beginning of year $ 6,202 $ 4,906 $ 3,779
Provision for losses 1,710 1,590 1,737
Charge-offs (370) (922) (665)
Recoveries 111 628 55
------- ------- -------
Balance at end of year $ 7,653 $ 6,202 $ 4,906
======= ======= =======
34
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Real estate owned properties are included in other assets at net carrying
amounts of $154 and $403 at September 30, 2000 and 1999, respectively.
Provisions for losses and other activity in the allowance for losses on
real estate owned were insignificant during the years ended September 30,
2000, 1999 and 1998.
Certain residential mortgage loans originated by the Company are sold in
the secondary market. Net gains on sales of residential mortgage loans
held for sale are included in other non-interest income and amounted to
$28, $162 and $170 for the years ended September 30, 2000, 1999 and 1998,
respectively. Fixed-rate residential mortgage loans include loans held
for sale at a carrying amount of $1,198 at September 30, 1999 (none at
September 30, 2000). This amount is net of an allowance for losses of $70
that was established to reduce the loans to market value. Other assets at
September 30, 2000 and 1999, respectively, include capitalized mortgage
servicing rights with an amortized cost of $229 and $255, which
approximated fair value.
The Company generally retains the servicing rights on mortgage loans
sold. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors and, if necessary, processing foreclosures. Mortgage loans
serviced for others totaled approximately $98,500, $109,000 and $120,700
at September 30, 2000, 1999 and 1998, respectively. These amounts include
loans sold with recourse (approximately $1,600 at September 30, 2000) for
which management does not expect the Company to incur any significant
losses. Mortgage escrow funds include balances of $1,680 at September 30,
2000 and $2,047 at September 30, 1999 related to loans serviced for
others.
(6) Accrued Interest Receivable
The components of accrued interest receivable were as follows at
September 30:
2000 1999
------- -------
Loans, net of allowance for uncollected interest $ 2,917 $ 3,638
Securities 2,578 2,195
------- -------
Total accrued interest receivable, net $ 5,495 $ 5,833
======= =======
35
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(7) Premises and Equipment
Premises and equipment are summarized as follows at September 30:
2000 1999
--------- ---------
Land and land improvements $ 1,090 $ 1,088
Buildings 4,807 4,522
Leasehold improvements 3,304 2,809
Furniture, fixtures and equipment 8,712 7,258
-------- --------
17,913 15,677
Accumulated depreciation and amortization (8,961) (7,445)
-------- --------
Total premises and equipment, net $ 8,952 $ 8,232
======== ========
(8) Deposits
Deposit balances and weighted average interest rates are summarized as
follows at September 30:
<TABLE>
<CAPTION>
2000 1999
--------------- ------------------
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Demand deposits:
Retail $ 38,145 --% 35,701 --%
Commercial 28,324 -- 24,147 --
NOW deposits 54,800 1.01 47,129 1.01
Savings deposits 161,987 2.02 161,809 2.02
Money market deposits 76,332 2.55 80,033 2.75
Certificates of deposit 249,388 5.83 237,821 4.82
-------- --------
Total deposits $608,976 3.34% $586,640 2.97%
======== ===== ======== =====
</TABLE>
Certificates of deposit at September 30 had remaining periods to
contractual maturity as follows:
2000 1999
--------- --------
Remaining period to contractual maturity:
Less than one year $176,756 $197,373
One to two years 59,579 28,636
Two to three years 9,788 5,579
Greater than three years 3,265 6,233
-------- --------
Total certificates of deposit $249,388 $237,821
======== ========
36
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Certificate of deposit accounts with a denomination of $100 or more
totaled $31,003 and $27,280 at September 30, 2000 and 1999, respectively.
The FDIC generally insures depositor accounts up to $100 as defined in
the applicable regulations.
The Company purchased two branch offices in separate transactions
consummated in fiscal 1996 and recorded a core deposit purchase premium
of $7,532. Unamortized premiums of $350 and $1,960 are included in other
assets at September 30, 2000 and 1999, respectively.
Interest expense on deposits is summarized as follows for the years ended
September 30:
2000 1999 1998
------- ------- -------
Savings deposits $ 3,435 $ 3,398 $ 3,697
Money market and NOW deposits 2,499 2,516 2,687
Certificates of deposit 12,787 11,560 12,771
------- ------- -------
Total interest expense $18,721 $17,474 $19,155
======= ======= =======
(9) Borrowings
The Company's borrowings and weighted average interest rates are
summarized as follows at September 30:
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
Amount Rate Amount Rate
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
FHLB borrowings by remaining period to maturity:
Less than one year $ 42,600 6.70% $ 40,000 5.83%
One to two years 33,750 6.74 5,000 6.35
Two to three years 10,625 5.90 27,535 5.56
Three to four years 15,000 5.43 7,980 5.84
Four to five years 10,000 6.68 25,000 5.20
Greater than five years 10,000 5.19 10,000 5.19
----------- -----------
121,975 6.36 115,515 5.60
Bank overdraft 5,596 2,238
----------- -----------
Total borrowings $ 127,571 $ 117,753
=========== ===========
</TABLE>
37
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
FHLB borrowings include securities repurchase agreements of $34,750 at
September 30, 2000 and $44,750 at September 30, 1999, with weighted
average interest rates of 5.70% and 5.32% and weighted average remaining
terms to maturity of approximately 45 months and 61 months at the
respective dates. Securities with carrying amounts of $37,619 and $47,366
were pledged as collateral for these borrowings at September 30, 2000 and
1999, respectively. Average borrowings under securities repurchase
agreements were $40,515 and $18,330 during the years ended September 30,
2000 and 1999, respectively, and the maximum outstanding month-end
balance was $44,750 during both periods.
The remaining FHLB borrowings were advances of $87,225 and $70,765 at
September 30, 2000 and 1999, respectively. As a member of the FHLB of New
York, the Bank may have outstanding advances of up to 30% of its total
assets, or approximately $250,300 at September 30, 2000, in a combination
of term and overnight advances. The unused FHLB borrowing capacity was
approximately $163,075 at September 30, 2000. FHLB advances are secured
by the investment in FHLB stock and by a blanket security agreement. This
agreement requires the Bank to maintain as collateral certain qualifying
assets (principally securities and residential mortgage loans) not
otherwise pledged. The Bank satisfied this collateral requirement at
September 30, 2000 and 1999.
FHLB borrowings of $25,000 at September 30, 2000 are callable at the
discretion of the FHLB beginning on various dates during fiscal 2001 and
2002. These borrowings have weighted average remaining terms to the
initial call dates and the contractual maturity dates of approximately 10
and 67 months, respectively. The weighted average interest rate on
callable borrowings was 5.33% at September 30, 2000.
(10) Income Taxes
Income tax expense consists of the following components for the years
ended September 30:
2000 1999 1998
------- ------- -------
Current tax expense:
Federal $ 3,596 $ 2,832 $ 2,765
State 394 614 638
------- ------- -------
3,990 3,446 3,403
------- ------- -------
Deferred tax benefit:
Federal (854) (1,097) (787)
State (270) (391) (270)
------- ------- -------
(1,124) (1,488) (1,057)
------- ------- -------
Total income tax expense $ 2,866 $ 1,958 $ 2,346
======= ======= =======
38
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Actual income tax expense amounts for the years ended September 30 differ
from the amounts computed by applying the statutory Federal tax rate of
34% to income before income taxes, for the following reasons:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Tax at Federal statutory rate $ 2,971 $ 2,002 $ 2,240
State income taxes, net of Federal tax effect 82 147 243
Tax-exempt interest (139) (102) --
Low-income housing tax credits (72) (72) (71)
Other, net 24 (17) (66)
------- ------- -------
Actual income tax expense $ 2,866 $ 1,958 $ 2,346
======= ======= =======
Effective income tax rate 32.8% 33.3% 35.6%
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at September 30 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 3,134 $ 2,540
Branch purchase premium amortization 2,002 1,546
Deferred compensation 1,093 996
Net unrealized loss on securities available for sale 360 962
Depreciation of premises and equipment 145 149
Other 321 385
--------- ---------
Total deferred tax assets 7,055 6,578
--------- ---------
Deferred tax liabilities:
Prepaid pension costs 475 393
Federal tax bad debt reserve 296 370
Deferred loan origination costs, net 251 305
--------- ---------
Total deferred tax liabilities 1,022 1,068
--------- ---------
Net deferred tax asset $ 6,033 $ 5,510
========= =========
</TABLE>
Based on management's consideration of historical and anticipated future
pre-tax income, as well as the reversal period for the items giving rise
to the deferred tax assets and liabilities, a valuation allowance for
deferred tax assets was not considered necessary at September 30, 2000
and 1999.
39
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
As a savings institution, the Bank is subject to special provisions in
the Federal and New York State tax laws regarding its allowable tax bad
debt deductions and related tax bad debt reserves. Tax bad debt reserves
consist of a defined "base-year" amount, plus additional amounts ("excess
reserves") accumulated after the base year. Deferred tax liabilities are
recognized with respect to such excess reserves, as well as any portion
of the base-year amount that is expected to become taxable (or
"recaptured") in the foreseeable future. Federal tax laws include a
requirement to recapture into taxable income (over a six-year period) the
Federal bad debt reserves in excess of the base-year amounts. The Bank
has established a deferred tax liability with respect to such excess
Federal reserves. New York State tax laws designate all State bad debt
reserves as the base-year amount.
The Bank's base-year tax bad debt reserves were $4,600 for Federal tax
purposes and $26,500 for New York State tax purposes at September 30,
2000. Associated deferred tax liabilities of $3,400 have not been
recognized since the Company does not expect that the base-year reserves
will become taxable in the foreseeable future. Under the tax laws, events
that would result in taxation of certain of these reserves include (i)
redemptions of the Bank's stock or certain excess distributions by the
Bank to Provident Bancorp, Inc. and (ii) failure of the Bank to maintain
a specified qualifying-assets ratio or meet other thrift definition tests
for New York State tax purposes.
(11) Regulatory Matters
Capital Requirements
OTS regulations require savings institutions to maintain a minimum ratio
of tangible capital to total adjusted assets of 1.5%; a minimum ratio of
Tier 1 (core) capital to total adjusted assets of 4.0%; and a minimum
ratio of total (core and supplementary) capital to risk-weighted assets
of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories -- well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a Tier 1 (core) capital ratio of at least
5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
40
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors. These
capital requirements apply only to the Bank, and do not consider
additional capital retained by Provident Bancorp, Inc.
Management believes that, as of September 30, 2000 and 1999, the Bank met
all capital adequacy requirements to which it was subject. Further, the
most recent OTS notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations. There have
been no conditions or events since that notification that management
believes have changed the Bank's capital classification.
The following is a summary of the Bank's actual regulatory capital
amounts and ratios at September 30, 2000 and 1999, compared to the OTS
requirements for minimum capital adequacy and for classification as a
well-capitalized institution:
<TABLE>
<CAPTION>
OTS Requirements
--------------------------------------------
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- --------- ---------- ---------
September 30, 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $ 80,097 9.6% $ 12,526 1.5% $ -- --%
Tier 1 (core) capital 80,097 9.6 33,402 4.0 41,752 5.0
Risk-based capital:
Tier 1 80,097 15.6 -- -- 30,738 6.0
Total 86,497 16.9 40,985 8.0 51,231 10.0
========== ========= ========== ========= ========== =========
September 30, 1999
Tangible capital $ 76,894 9.6% $ 12,069 1.5% $ -- --%
Tier 1 (core) capital 76,894 9.6 32,184 4.0 40,230 5.0
Risk-based capital:
Tier 1 76,894 15.9 -- -- 28,986 6.0
Total 82,935 17.2 38,648 8.0 48,310 10.0
========== ========= ========== ========= ========== =========
</TABLE>
Dividend Payments
Under current OTS regulations, savings associations such as the Bank
generally may declare annual cash dividends up to an amount equal to the
sum of net income for the current year and net income retained for the
two preceding years. Dividends in excess of this amount require OTS
approval. The Bank paid cash dividends of $2,000 to Provident Bancorp,
Inc. during the year ended September 30, 2000 (none during the year ended
September 30, 1999).
41
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Unlike the Bank, Provident Bancorp, Inc. is not subject to OTS regulatory
limitations on the payment of dividends to its shareholders. Through
September 30, 2000, the Mutual Holding Company has waived receipt of $309
in cash dividends with respect to its shares of Provident Bancorp, Inc.
common stock.
Stock Repurchase Programs
The Company completed a stock repurchase program during the year ended
September 30, 2000, purchasing 193,200 common shares for the treasury at
a total cost of $3,061. In July 2000, the Company announced a second
repurchase program to acquire up to 5%, or approximately 185,000, of its
publicly-traded shares as market conditions warrant. A total of 9,000
shares were purchased for the treasury under the second program through
September 30, 2000 at a total cost of $142.
Liquidation Rights
All depositors who had liquidation rights with respect to the Bank as of
the effective date of the Reorganization continue to have such rights
solely with respect to the Mutual Holding Company, as long as they
continue to hold deposit accounts with the Bank. In addition, all persons
who become depositors of the Bank subsequent to the Reorganization will
have liquidation rights with respect to the Mutual Holding Company.
(12) Comprehensive Income
Comprehensive income represents the sum of net income and items of "other
comprehensive income or loss" that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net
unrealized gain or loss on securities available for sale. The Company has
reported its comprehensive income in the consolidated statements of
changes in stockholders' equity.
The Company's other comprehensive income (loss), which is attributable to
gains and losses on securities available for sale, is summarized as
follows for the years ended September 30:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net unrealized holding gain (loss) arising during the year,
net of related income taxes of ($606), $1,570
and ($367), respectively $ 908 $(2,352) $ 565
Reclassification adjustment for net realized gains
included in net income, net of related income taxes
of $4 in both 2000 and 1998 (5) -- (6)
-------- --------- --------
Other comprehensive income (loss) $ 903 $(2,352) $ 559
======== ========= ========
</TABLE>
42
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
The Company's accumulated other comprehensive loss, which is included in
stockholders' equity, represents the net unrealized loss on securities
available for sale of $900 and $2,405 at September 30, 2000 and 1999,
respectively, less related deferred income taxes of $360 and $962,
respectively.
(13) Employee Benefit and Stock-Based Compensation Plans
Pension Plans
The Company has a non-contributory defined benefit pension plan covering
substantially all of its employees. Employees who are twenty-one years of
age or older and have worked for the Company for one year are eligible to
participate in the plan. The Company's funding policy is to contribute
annually an amount sufficient to meet statutory minimum funding
requirements, but not in excess of the maximum amount deductible for
Federal income tax purposes. Contributions are intended to provide not
only for benefits attributed to service to date, but also for benefits
expected to be earned in the future.
The following is a summary of changes in the projected benefit
obligations and fair value of plan assets, together with a reconciliation
of the plan's funded status and the prepaid pension costs recognized in
the consolidated statements of financial condition:
2000 1999
------- --------
Changes in projected benefit obligations:
Beginning of year $ 5,543 $ 5,471
Service cost 515 475
Interest cost 409 402
Actuarial gain (315) (651)
Benefits paid (731) (154)
------- -------
End of year 5,421 5,543
------- -------
Changes in fair value of plan assets:
Beginning of year 6,464 5,312
Actual return on plan assets 1,126 733
Employer contributions 600 573
Benefits paid (731) (154)
------- -------
End of year 7,459 6,464
------- -------
Funded status at end of year 2,038 921
Unrecognized net actuarial (gain) loss (893) 9
Unrecognized prior service cost (96) (110)
Unrecognized net transition obligation 112 138
------- -------
Prepaid pension costs (included in other assets) $ 1,161 $ 958
======= =======
43
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
A discount rate of 7.75% and a rate of increase in future compensation
levels of 5.5% were used in determining the actuarial present value of
the projected benefit obligation at September 30, 2000 (7.5% and 5.5%,
respectively, at September 30, 1999). The expected long-term rate of
return on plan assets was 8.0% for 2000 and 1999.
The components of the net periodic pension expense were as follows for
the years ended September 30:
2000 1999 1998
------ ------ ------
Service cost $ 515 $ 475 $ 427
Interest cost 409 402 367
Expected return on plan assets (539) (425) (411)
Amortization of prior service cost (14) (14) (14)
Amortization of net transition obligation 26 26 26
Recognized net actuarial loss -- 23 --
------ ------- -------
Net periodic pension expense $ 397 $ 487 $ 395
====== ===== =====
The Company has also established a non-qualified Supplemental Executive
Retirement Plan to provide certain executives with supplemental
retirement benefits in addition to the benefits provided by the pension
plan. The periodic pension expense for the supplemental plan amounted to
$54, $53 and $46 for the years ended September 30, 2000, 1999 and 1998,
respectively. The actuarial present value of the projected benefit
obligation was approximately $226 and $128 at September 30, 2000 and
1999, respectively, all of which is unfunded. The obligations at
September 30, 2000 and 1999 were determined using discount rates of 7.75%
and 7.5%, respectively, and a rate of increase in future compensation of
4.5%.
Other Postretirement Benefits Plan
The Company's postretirement health care plan, which is unfunded,
provides optional medical, dental and life insurance benefits to
retirees. In accordance with SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, the cost of postretirement
benefits is accrued over the years in which employees provide services to
the date of their full eligibility for such benefits. As permitted by
SFAS No. 106, the Company has elected to amortize the transition
obligation for accumulated benefits (which amounted to $237 at the
adoption date) as an expense over a 20-year period. The periodic expense
recognized for this plan was $39, $44 and $38 for the years ended
September 30, 2000, 1999 and 1998, respectively.
401(k) Savings Plan
The Company also sponsors a defined contribution plan established under
Section 401(k) of the Internal Revenue Code. Eligible employees may elect
to contribute up to 10% of their compensation
44
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
to the plan. The Company currently makes matching contributions equal to
50% of a participant's contributions up to a maximum matching
contribution of 3% of compensation. Voluntary and matching contributions
are invested, in accordance with the participant's direction, in one or a
number of investment options. Savings plan expense was $180, $212 and
$315 for the years ended September 30, 2000, 1999 and 1998, respectively.
Employee Stock Ownership Plan
In connection with the Reorganization and Offering, the Company
established an ESOP for eligible employees who meet certain age and
service requirements. The ESOP borrowed $3,760 from Provident Bancorp,
Inc. and used the funds to purchase 309,120 shares of common stock in the
open market subsequent to the Offering. The Bank makes periodic
contributions to the ESOP sufficient to satisfy the debt service
requirements of the loan which has a ten-year term and bears interest at
the prime rate. The ESOP uses these contributions, and any dividends
received by the ESOP on unallocated shares, to make principal and
interest payments on the loan.
ESOP shares are held by the plan trustee in a suspense account until
allocated to participant accounts. Shares released from the suspense
account are allocated to participants on the basis of their relative
compensation in the year of allocation. Participants become vested in the
allocated shares over a period not to exceed five years. Any forfeited
shares are allocated to other participants in the same proportion as
contributions.
ESOP expense was $470 and $635 for the years ended September 30, 2000 and
1999, respectively. The fiscal 1999 expense consisted of (i) $264
attributable to the allocation of 30,912 shares to participants with
respect to the initial plan year ended December 31, 1998, and (ii) $264
attributable to 23,184 shares committed to be released to participants
during the nine months ended September 30, 1999. Through September 30,
2000, a cumulative total of 85,008 shares have been allocated to
participants or committed to be released for allocation. The cost of ESOP
shares that have not yet been allocated to participants or committed to
be released for allocation is deducted from stockholders' equity (224,112
shares with a cost of $2,726 at September 30, 2000). The fair value of
these shares was approximately $3,500 at that date.
Recognition and Retention Plan
In February 2000, the Company's stockholders approved the Provident Bank
2000 Recognition and Retention Plan (the "RRP"). The principal purpose of
the RRP is to provide executive officers and directors a proprietary
interest in the Company in a manner designed to encourage their continued
performance and service. A total of 193,200 shares were awarded under the
RRP in February 2000, and the grant-date fair value of these shares
($2,995) was charged to stockholders' equity. The awards vest at a rate
of 20% on each of five annual vesting dates, the first of which was
September 30, 2000. RRP expense was $689 for the year ended September 30,
2000.
45
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Stock Option Plan
The stockholders also approved the Provident Bank 2000 Stock Option Plan
(the "Stock Option Plan") in February 2000. A total of 386,400 shares of
authorized but unissued common stock has been reserved for issuance under
the Stock Option Plan, although the Company may also fund option
exercises using treasury shares. Options have a ten-year term and may be
either non-qualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock at an
exercise price equal to the fair market value of the stock on the grant
date.
In February 2000, initial option grants were made for 366,650 shares at
an exercise price of $15.50 per share. Options on 11,250 shares were
subsequently forfeited. A total of 355,400 options were outstanding at
September 30, 2000 and 71,080 options were exercisable at that date. A
total of 31,000 shares are available for future option grants.
In accordance with the provisions of APB Opinion No. 25 related to fixed
stock options, compensation expense is not recognized with respect to the
Company's options since the exercise price equals the fair value of the
common stock at the grant date. Under the alternative fair-value-based
method defined in SFAS No. 123, the grant-date fair value of fixed stock
options is recognized as expense over the vesting period. The estimated
per share fair value of options granted in February 2000 was $5.90,
estimated using the Black-Scholes option-pricing model with assumptions
as follows: dividend yield of 1%; expected volatility rate of 22%;
risk-free interest rate of 6.6%; and expected option life of 8 years. Had
the fair-value-based method of SFAS No. 123 been applied to the options
granted, net income would have been approximately $5,300 and both basic
and diluted earnings per share would have been $0.68 for the year ended
September 30, 2000.
(14) Commitments and Contingencies
Certain premises and equipment are leased under operating leases with
terms expiring through 2025. The Company has the option to renew certain
of these leases for terms of up to five years. Future minimum rental
payments due under non-cancelable operating leases with initial or
remaining terms of more than one year at September 30, 2000 are $1,022
for fiscal 2001; $1,047 for fiscal 2002; $1,055 for fiscal 2003; $1,049
for fiscal 2004; $1,032 for fiscal 2005; and a total of $5,849 for later
years. Occupancy and office operations expense includes net rent expense
of $1,124, $1,020 and $931 for the years ended September 30, 2000, 1999
and 1998, respectively.
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. Management, after consultation with
legal counsel, does not anticipate losses on any of these claims or
actions that would have a material adverse effect on the consolidated
financial statements.
46
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(15) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to
off-balance-sheet financial instruments that involve, to varying degrees,
elements of credit risk and interest rate risk in addition to the amounts
recognized in the consolidated financial statements. The contractual or
notional amounts of these instruments, which reflect the extent of the
Company's involvement in particular classes of off-balance-sheet
financial instruments, are summarized as follows at September 30:
2000 1999
-------- --------
Lending-Related Instruments:
Loan origination commitments:
Fixed-rate loans $ 9,412 $ 8,433
Adjustable-rate loans 1,993 10,257
Unused lines of credit 35,529 30,443
Standby letters of credit 7,548 6,597
Interest Rate Risk Management:
Interest rate cap agreements 50,000 20,000
======== ========
Lending-Related Instruments
The contractual amounts of loan origination commitments, unused lines of
credit and standby letters of credit represent the Company's maximum
potential exposure to credit loss, assuming (i) the instruments are fully
funded at a later date, (ii) the borrowers do not meet the contractual
payment obligations, and (iii) any collateral or other security proves to
be worthless. The contractual amounts of these instruments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully
drawn upon. Substantially all of these lending-related instruments have
been entered into with customers located in the Company's primary market
area described in note 5.
Loan origination commitments are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments have fixed expiration dates (generally ranging
up to 60 days) or other termination clauses, and may require payment of a
fee by the customer. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral, if any,
obtained by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral varies but may
include mortgages on residential and commercial real estate, deposit
accounts with the Company, and other property. The Company's fixed-rate
loan origination commitments at September 30, 2000 provide for interest
rates ranging from 5.50% to 11.78%.
47
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Unused lines of credit are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Lines of credit generally have fixed expiration dates or
other termination clauses. The amount of collateral obtained, if deemed
necessary by the Company, is based on management's credit evaluation of
the borrower.
Standby letters of credit are conditional commitments issued by the
Company to assure the performance of financial obligations of a customer
to a third party. These commitments are primarily issued in favor of
local municipalities to support the obligor's completion of real estate
development projects. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers.
In order to limit the interest rate and market risk associated with loans
held for sale and commitments to originate loans held for sale, the
Company may enter into mandatory forward commitments to sell loans in the
secondary mortgage market. There were no such forward commitments
outstanding at September 30, 2000 and 1999. Risks associated with forward
commitments to sell mortgage loans include the possible inability of the
counterparties to meet the contract terms, or of the Company to originate
loans to fulfill the contracts. If the Company is unable to fulfill a
contract, it could purchase securities in the open market to deliver
against the contract. The Company controls its counterparty risk by
entering into these agreements only with highly-rated counterparties.
Interest Rate Cap Agreements
The Company had outstanding interest rate cap agreements with notional
amounts of $50,000 and $20,000 at September 30, 2000 and 1999,
respectively. The agreements at September 30, 2000 have terms ending in
March 2003 and April 2003. These agreements were entered into to reduce
the Company's exposure to potential increases in interest rates on a
portion of its certificate of deposit accounts and borrowings. The
counterparties in the transactions have agreed to make interest payments
to the Company, based on the notional amounts, to the extent that the
three-month LIBOR rate exceeds specified levels during the term of the
agreements. These specified rate levels were 8.25% and 6.50% for
agreements with notional amounts of $30,000 and $20,000, respectively, at
September 30, 2000.
The carrying amounts of the agreements at September 30, 2000 and 1999
represented unamortized premiums of $258 and $209, respectively, which
are included in other assets. The estimated fair values of the agreements
at September 30, 2000 and 1999 were approximately $190 and $310,
respectively, representing the estimated net amounts the Company would
have received had it terminated the contracts at those dates. Premium
amortization of $79, $61 and $36 is included in interest expense for the
years ended September 30, 2000, 1999 and 1998, respectively. Counterparty
payments of $19 were received and recorded as a reduction of interest
expense for the year ended September 30, 2000.
(16) Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information for those financial
instruments for which it is practicable to estimate fair value,
48
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
whether or not such financial instruments are recognized in the
consolidated statements of financial condition. Fair value is the amount
at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation.
Quoted market prices are used to estimate fair values when those prices
are available, although active markets do not exist for many types of
financial instruments. Fair values for these instruments must be
estimated by management using techniques such as discounted cash flow
analysis and comparison to similar instruments. These estimates are
highly subjective and require judgments regarding significant matters,
such as the amount and timing of future cash flows and the selection of
discount rates that appropriately reflect market and credit risks.
Changes in these judgments often have a material effect on the fair value
estimates. Since these estimates are made as of a specific point in time,
they are susceptible to material near-term changes. Fair values disclosed
in accordance with SFAS No. 107 do not reflect any premium or discount
that could result from the sale of a large volume of a particular
financial instrument, nor do they reflect possible tax ramifications or
estimated transaction costs.
The following is a summary of the carrying amounts and estimated fair
values of financial assets and liabilities at September 30 (none of which
were held for trading purposes):
<TABLE>
<CAPTION>
2000 1999
--------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------- ----------- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks 12,785 $ 12,785 $ 11,838 $ 11,838
Securities available for sale 162,157 162,157 148,387 148,387
Securities held to maturity 48,586 48,374 56,782 56,479
Loans 589,822 576,568 566,521 564,275
Accrued interest receivable 5,495 5,495 5,833 5,833
FHLB stock 7,023 7,023 6,176 6,176
Financial Liabilities:
Deposits 608,976 608,450 586,640 585,402
Borrowings 127,571 127,015 117,753 117,077
Mortgage escrow funds 5,971 5,971 10,489 10,489
============ ============= =========== ==============
</TABLE>
The following methods and assumptions were used by management to estimate
the fair value of the Company's financial instruments:
Securities
The estimated fair values of securities were based on quoted market
prices.
49
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Loans
Fair values were estimated for portfolios of loans with similar financial
characteristics. For valuation purposes, the total loan portfolio was
segregated into performing and non-performing categories. Performing
loans were segregated by adjustable-rate and fixed-rate loans; fixed-rate
loans were further segmented by type, such as residential mortgage,
commercial mortgage, commercial business and consumer loans. Residential
loans were also segmented by maturity.
Fair values were estimated by discounting scheduled future cash flows
through estimated maturity using a discount rate equivalent to the
current market rate on loans that are similar with regard to collateral,
maturity and the type of borrower. The discounted value of the cash flows
was reduced by a credit risk adjustment based on loan categories. Based
on the current composition of the Company's loan portfolio, as well as
past experience and current economic conditions and trends, the future
cash flows were adjusted by prepayment assumptions that shortened the
estimated remaining time to maturity and therefore affected the fair
value estimates.
Estimated fair values of loans held for sale were based on contractual
sale prices for loans covered by forward sale commitments. Any remaining
loans held for sale were valued based on current secondary market prices
and yields.
Deposits
In accordance with SFAS No. 107, deposits with no stated maturity (such
as savings, demand and money market deposits) were assigned fair values
equal to the carrying amounts payable on demand. Certificates of deposit
were segregated by account type and original term, and fair values were
estimated by discounting the contractual cash flows. The discount rate
for each account grouping was equivalent to the current market rates for
deposits of similar type and maturity.
These fair values do not include the value of core deposit relationships
that comprise a significant portion of the Company's deposit base.
Management believes that the Company's core deposit relationships provide
a relatively stable, low-cost funding source that has a substantial
unrecognized value separate from the deposit balances.
Borrowings
Fair values of FHLB borrowings were estimated by discounting the
contractual cash flows. A discount rate was utilized for each outstanding
borrowing equivalent to the then-current rate offered by the FHLB on
borrowings of similar type and maturity. The bank overdraft included in
total borrowings has an estimated fair value equal to the carrying
amount.
50
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
Other Financial Instruments
The other financial assets and liabilities listed in the preceding table
have estimated fair values that approximate the respective carrying
amounts because the instruments are payable on demand or have short-term
maturities and present relatively low credit risk and interest rate risk.
The carrying amounts and estimated fair values of the Company's interest
rate cap agreements at September 30, 2000 and 1999 are set forth in note
15. The fair values of the Company's lending-related off-balance-sheet
financial instruments described in note 15 were estimated based on the
interest rates and fees currently charged to enter into similar
agreements, considering the remaining terms of the agreements and the
present credit worthiness of the counterparties. At September 30, 2000
and 1999, the estimated fair values of these instruments approximated the
related carrying amounts which were not significant.
(17) Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition of
Provident Bancorp, Inc. at September 30, 2000 and 1999, together with the
related condensed statements of income and cash flows for the year ended
September 30, 2000 and the period from January 7, 1999 through September
30, 1999.
<TABLE>
<CAPTION>
September 30,
--------------------------
2000 1999
---------- ---------
Condensed Statements of Financial Condition
<S> <C> <C>
Assets
Cash and cash equivalents $ 129 $ 2,367
Securities available for sale 10,396 9,906
Loan receivable from ESOP 3,008 3,384
Investment in Provident Bank 77,084 74,496
Other assets 434 320
------- -------
Total assets $91,051 $90,473
======= =======
Liabilities $ 65 $ 174
Stockholders' Equity 90,986 90,299
------- -------
Total liabilities and stockholders' equity $91,051 $90,473
======= =======
</TABLE>
51
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Period Ended
September 30, September 30,
2000 1999
-------- --------
<S> <C> <C>
Condensed Statements of Income
Interest income $ 902 $ 425
Dividends from Provident Bank 2,000 --
Non-interest expense (180) --
Income tax expense (279) (174)
-------- --------
Income before equity in undistributed earnings
of Provident Bank 2,443 251
Equity in undistributed earnings of Provident Bank 3,429 2,951
-------- --------
Net income $ 5,872 $ 3,202
======== ========
Condensed Statements of Cash Flows
Cash Flows from Operating Activities:
Net income $ 5,872 $ 3,202
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of
Provident Bank (3,429) (2,951)
Other adjustments, net (405) (312)
-------- --------
Net cash provided by (used in) operating
activities 2,038 (61)
-------- --------
Cash Flows from Investing Activities:
Purchases of securities available for sale (1,008) (10,218)
Proceeds from sales of securities available for sale 984 --
Capital contribution to Provident Bank -- (24,000)
-------- --------
Net cash used in investing activities (24) (34,218)
-------- --------
Cash Flows from Financing Activities:
Treasury shares purchased (3,203) --
Cash dividends paid (1,049) (367)
Net proceeds from stock offering -- 37,113
Initial capitalization of Provident Bancorp, MHC -- (100)
-------- --------
Net cash (used in) provided by financing
activities (4,252) 36,646
-------- --------
Net (decrease) increase in cash and cash equivalents (2,238) 2,367
Cash and cash equivalents at beginning of period 2,367 --
-------- --------
Cash and cash equivalents at end of period $ 129 $ 2,367
======== ========
</TABLE>
52
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(18) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations
for the years ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 2000 Quarter Quarter Quarter Quarter
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest and dividend income $ 14,298 $ 14,522 $ 14,811 $ 15,268
Interest expense 6,194 6,324 6,642 6,874
------------ ------------- ------------- --------------
Net interest income 8,104 8,198 8,169 8,394
Provision for loan losses 450 450 450 360
Non-interest income 847 794 843 907
Non-interest expense 6,385 6,623 6,365 6,435
------------ ------------- ------------- --------------
Income before income tax expense 2,116 1,919 2,197 2,506
Income tax expense 716 691 681 778
------------ ------------- ------------- --------------
Net income $ 1,400 $ 1,228 $ 1,516 $ 1,728
============ ============= ============= ==============
Basic and diluted earnings per common
share $ 0.17 $ 0.16 $ 0.20 $ 0.23
============ ============= ============= ==============
Year Ended September 30, 1999
Interest and dividend income $ 12,506 $ 12,563 $ 13,171 $ 14,027
Interest expense 5,333 5,009 5,249 5,998
------------ ------------- ------------- --------------
Net interest income 7,173 7,554 7,922 8,029
Provision for loan losses 360 360 420 450
Non-interest income 812 766 687 838
Non-interest expense 6,472 6,632 6,517 6,682
------------ ------------- ------------- --------------
Income before income tax expense 1,153 1,328 1,672 1,735
Income tax expense 425 491 544 498
------------ ------------- ------------- --------------
Net income $ 728 $ 837 $ 1,128 $ 1,237
============ ============= ============= ==============
Basic and diluted earnings per common
share $ 0.10 $ 0.14 $ 0.15
============= ============= ==============
</TABLE>
(19) Accounting Standards
In fiscal 2001, the Company will adopt SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, and SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.
SFAS No. 133 requires that all derivative instruments be measured at fair
value and recognized in the statement of financial condition as either
assets or liabilities. Changes in the fair value of derivative
instruments are reported either in current earnings or comprehensive
income, depending on the use of the derivative and whether it qualifies
for hedge accounting. Special hedge accounting treatment is
53
<PAGE>
PROVIDENT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
permitted only if specific criteria are met, including a requirement that
the hedging relationship be highly effective both at inception and on an
ongoing basis. Accounting for hedges varies based on the type of hedge.
For instance, the effective portion of a cash flow hedge is recognized in
other comprehensive income, while the ineffective portion is recognized
in current earnings.
SFAS No. 133 was effective October 1, 2000 for the Company. Because the
Company's derivatives were limited to the interest rate cap agreements
described in note 15, the effect of adoption of SFAS No. 133 was not
significant. However, there may be increased volatility in net income and
stockholders' equity on an ongoing basis as a result of SFAS No. 133
depending on factors such as the Company's future use of derivatives and
further ongoing interpretation of SFAS No. 133 by the Financial
Accounting Standards Board.
SFAS No. 140 replaces SFAS No. 125 which the Company adopted in fiscal
1997. Although SFAS No. 140 revises certain aspects of accounting for
securitizations and collateral, and requires certain new disclosures, it
carries over most provisions of SFAS No. 125 without revision. SFAS No.
140 is effective for transactions occurring after March 31, 2001, and its
provisions related to collateral and disclosures are effective for fiscal
years ending after December 15, 2000. The Company's present accounting
practices for mortgage loan sales, the related servicing rights, and
securities repurchase agreements are not expected to change significantly
under SFAS No. 140. Accordingly, adoption of the standard in fiscal 2001
is not expected to have a significant effect on the Company's
consolidated financial statements.
54
