10-K 1 form10k-42053_122801.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ____________________ Commission File Number: 0-25233 PROVIDENT BANCORP, INC. ---------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Federal 06-1537499 -------------------------------- --------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 400 Rella Boulevard, Montebello, New York 10901 ------------------------------------------ ---------- (Address of Principal Executive Office) (Zip Code) (845) 369-8040 --------------------------------------------------- (Registrant's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: None ---- Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per share --------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. As of November 30, 2001, there were issued and outstanding 8,034,624 shares of the Registrant's common stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of November 30, 2001, was $89,380,013. DOCUMENT INCORPORATED BY REFERENCE Proxy Statement for the Annual Meeting of Stockholders (Part III) to be held in February 2002. 1 FORM 10-K TABLE OF CONTENTS

PART I........................................................................................................3 ITEM 1. BUSINESS......................................................................................3 ITEM 2. PROPERTIES...................................................................................33 ITEM 3. LEGAL PROCEEDINGS............................................................................34 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................34 PART II......................................................................................................34 ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........................34 ITEM 6. SELECTED FINANCIAL DATA......................................................................35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................46 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................................................................87 PART III.....................................................................................................87 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........................................87 ITEM 11. EXECUTIVE COMPENSATION.......................................................................87 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................87 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................87 PART IV......................................................................................................88 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.............................88 SIGNATURES...................................................................................................90

2 PART I ITEM 1. Business Provident Bancorp, Inc. Provident Bancorp, Inc. (the "Company") was organized at the direction of the Board of Directors of Provident Bank (the "Bank") for the purpose of acting as the stock holding company of the Bank. The Company's principal business is overseeing and directing the business of the Bank. At September 30, 2001, the Company's assets consist primarily of its investment in all outstanding capital stock of the Bank, and cash and securities totaling $9.4 million. At September 30, 2001, 3,608,166 shares, or 44.97%, of the Company's outstanding common stock, par value $0.10 per share, were held by the public, and 4,416,000 shares, or 55.03%, were held by Provident Bancorp, MHC, the Company's parent mutual holding company (the "Mutual Holding Company"). The Company's office is located at 400 Rella Boulevard, Montebello, New York 10901. The telephone number is (845) 369-8040. Provident Bank The Bank was organized in 1888 as a New York-chartered mutual savings and loan association. It adopted a federal mutual charter in 1986 and reorganized into the stock form of ownership in 1999 as part of its reorganization into the mutual holding company structure. The Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF"), as administered by the Federal Deposit Insurance Corporation ("FDIC"), up to the maximum amount permitted by law. The Bank is engaged primarily in the business of offering various FDIC-insured savings and demand deposits to customers through its 14 full-service offices, and using those deposits, together with funds generated from operations and borrowings, to originate one- to four-family residential and commercial real estate loans, consumer loans, construction loans and commercial business loans. The Bank also invests in investment securities and mortgage-backed securities. Additional products and services offered include the sale of mutual funds and annuities, and investment management and trust services. The Bank's executive office is located at 400 Rella Boulevard, Montebello, New York 10901. The telephone number is (845) 369-8040. Provident Bancorp, MHC The Mutual Holding Company was formed in January 1999 as part of the Bank's mutual holding company reorganization. The Mutual Holding Company is chartered under federal law and owns 55.03% of the outstanding common stock of the Company as of September 30, 2001. The Mutual Holding Company does not engage in any business activities other than owning the common stock of the Company, investing in liquid assets and contributing to local charities. The Mutual Holding Company's office is located at 400 Rella Boulevard, Montebello, New York 10901. The telephone number is (845) 369-8040. 3 Forward-Looking Statements In addition to historical information, this annual report contains forward-looking statements. For this purpose, any statements contained herein (including documents incorporated herein by reference) that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believe", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, without limitation, the Company's continued ability to originate quality loans, fluctuations in interest rates, real estate conditions in the Company's lending areas, general and local economic conditions, the Company's continued ability to attract and retain deposits, the Company's ability to control costs, and the effect of new accounting pronouncements and changing regulatory requirements. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Market Area The Bank is an independent community bank offering a broad range of customer-focused services as an alternative to money center banks in its market area. At September 30, 2001, the Bank's 14 branch offices consisted of 12 full-service banking offices in Rockland County, New York and two full-service supermarket branches in Orange County, New York. An additional supermarket branch was opened in October 2001. The Bank's primary market for deposits is currently concentrated around the areas where its full-service banking offices are located. The Bank's primary lending area also has been historically concentrated in Rockland and contiguous counties. Rockland County is a suburban market with a broad employment base. Rockland County also serves as a bedroom community for nearby New York City and other suburban areas including Westchester County and northern New Jersey. Neighboring Orange County, where the Bank operates two branches, is one of the two fastest growing counties in New York State. The favorable economic environment in the New York metropolitan area has led to an increase in residential and commercial construction activity in recent years. The economy of the Bank's primary market areas is based on a mixture of service, manufacturing and wholesale/retail trade. Other employment is provided by a variety of industries and state and local governments. The diversity of the employment base is evidenced by its many major employers. Additionally, Rockland and Orange Counties have numerous small employers. Lending Activities General. Historically, the principal lending activity of the Bank has been the origination of fixed-rate and adjustable-rate mortgage ("ARM") loans collateralized by one- to four-family residential real estate located within its primary market area. The Bank also originates commercial real estate loans, commercial business loans and construction loans (collectively referred to as the "commercial loan portfolio"), as well as consumer loans such as home equity lines of credit and homeowner loans. The Bank retains most of the loans that it originates, although from time to time it may sell longer-term one- to four-family residential real estate loans. One- to Four-Family Real Estate Lending. The Bank offers conforming and non-conforming, fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $650,000. This portfolio totaled $358.2 million, or 58.2% of the Bank's total loan portfolio at September 30, 2001. 4 The Bank currently offers both fixed- and adjustable-rate conventional mortgage loans with terms of 10 to 30 years that are fully amortizing with monthly or bi-weekly loan payments. One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and loans that conform to such guidelines are referred to as "conforming loans." The Bank generally originates both fixed-rate and ARM loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac secondary mortgage market standards, which are currently $275,000 for single-family homes. Private mortgage insurance is generally required initially for loans with loan-to-value ratios in excess of 80%. Loans in excess of conforming loan limits, in amounts of up to $500,000, are also generally underwritten to both Fannie Mae and Freddie Mac secondary mortgage market standards. These loans are generally eligible for sale to various conduit firms that specialize in the purchase of such non-conforming loans, although most of these loans are retained in the Bank's loan portfolio. The Bank's bi-weekly one- to four-family residential mortgage loans result in significantly shorter repayment schedules than conventional monthly mortgage loans, and are repaid through an automatic deduction from the borrower's savings or checking account, which enables the Bank to avoid the cost of processing payments. As of September 30, 2001, bi-weekly loans totaled $106.4 million or 29.7% of the Bank's residential loan portfolio. The Bank actively monitors its interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Depending on market interest rates and the Bank's capital and liquidity position, the Bank may retain all of its newly originated longer term fixed-rate, fixed-term residential mortgage loans or from time to time may decide to sell all or a portion of such loans in the secondary mortgage market to government sponsored enterprises such as Fannie Mae and Freddie Mac. As a matter of policy, the Bank retains the servicing rights on all loans sold to generate fee income and reinforce its commitment to customer service. For the year ended September 30, 2001, the Bank sold no mortgage loans, compared with $808,000 and $14.1 million sold for the years ended September 30, 2000 and 1999, respectively. As of September 30, 2001 and 2000, the Bank's portfolio of loans serviced for others totaled $86.7 million and $98.5 million, respectively. The Bank currently offers several ARM loan products secured by residential properties with rates that adjust every six months to one year, after an initial fixed-rate period ranging from six months to five years. After the initial term, the interest rate on these loans is reset based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of six months to one year (the "U.S. Treasury Constant Maturity Index"), as published weekly by the Federal Reserve Board and subject to certain limitations on interest rate changes. ARM loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default. At September 30, 2001, the Bank's ARM portfolio included $9.4 million in loans that re-price every six months, $22.1 million in one-year ARMs and $48.2 million in loans with an initial fixed-rate period ranging from three to five years. The Bank requires title insurance on all of its one- to four-family mortgage loans, and also requires that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. Loans with initial loan-to-value ratios in excess of 80% must have private mortgage insurance, although occasional exceptions may be made. Nearly all residential loans must have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance. 5 Commercial Real Estate Lending. The Bank originates real estate loans secured predominantly by first liens on commercial real estate and apartment buildings. The commercial real estate properties are predominantly non-residential properties such as office buildings, shopping centers, retail strip centers, industrial and warehouse properties and, to a lesser extent, more specialized properties such as churches, mobile home parks, restaurants, motel/hotels and auto dealerships. The Bank may, from time to time, purchase commercial real estate loan participations. Loans secured by commercial real estate totaled $129.3 million or 21.0% of the Bank's total loan portfolio at September 30, 2001, and consisted of 252 loans outstanding with an average loan balance of approximately $513,000. Substantially all of the Bank's commercial real estate loans are secured by properties located in its primary market area. The initial interest rates on a substantial portion of the Bank's commercial real estate loans adjust after an initial three-to-five year period to new market rates that generally range between 200 to 350 basis points over the then-current three-to-five year U.S. Treasury or FHLB rates. More typically, commercial real estate loans may have a term of approximately 5 to 10 years, with an amortization schedule of approximately 20 to 25 years, and may be repaid subject to certain penalties. Fixed rate loans for a term of 15 to 20 years are also made, from time to time. In the underwriting of commercial real estate loans, the Bank generally lends up to 75% of the property's appraised value on apartment buildings and commercial properties. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, the Bank emphasizes primarily the ratio of the property's projected net cash flow to the loan's debt service requirement (generally requiring a ratio of at least 110%), computed after deduction for a vacancy factor and property expenses deemed appropriate by the Bank. In addition, a personal guarantee of the loan is generally required from the principal(s) of the borrower. On all real estate loans, the Bank requires title insurance insuring the priority of its lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect the Bank's security interest in the underlying property. Commercial real estate loans generally carry higher interest rates and have shorter terms than those on one- to four-family residential mortgage loans. Commercial real estate loans, however, entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the economy generally. Construction Loans. The Bank originates land acquisition, development and construction loans to builders in its market area. These loans totaled $19.5 million, or 3.2% of the Bank's total loan portfolio at September 30, 2001. Acquisition loans are made to help finance the purchase of land intended for further development, including single-family houses, multi-family housing, and commercial income property. In some cases, the Bank may make an acquisition loan before the borrower has received approval to develop the land as planned. Loans for the acquisition of land are generally limited to the Bank's most creditworthy customers. In general, the maximum loan-to-value ratio for a land acquisition loan is 60% of the appraised value of the property. The Bank also makes development loans to builders in its market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance the cost of utilities, roads and sewers. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum amount loaned is generally limited to the cost of the improvements. Advances are made in accordance with a schedule reflecting the cost of the improvements. 6 The Bank also grants construction loans to area builders, often in conjunction with development loans. These loans finance the cost of completing homes on the improved property. The loans are generally limited to the lesser of 70% of the appraised value of the property or the actual cost of improvements. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. The Bank commits to provide the permanent mortgage financing on most of its construction loans on income-producing property. Land acquisition, development and construction lending exposes the Bank to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event the Bank makes an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and construction loans also expose the Bank to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. Commercial Business Loans. In an effort to expand its customer account relationships and develop a broader mix of assets, the Bank makes various types of secured and unsecured commercial loans to customers in its market area for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to seven years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate which is determined internally, or a short-term market rate index. The Bank may, from time to time, purchase commercial business loan participations. At September 30, 2001, the Bank had 375 commercial business loans outstanding with an aggregate balance of $31.4 million, or 5.1% of the total loan portfolio. As of September 30, 2001, the average commercial business loan balance was approximately $83,700. Commercial credit decisions are based upon a complete credit assessment of the loan applicant. A determination is made as to the applicant's ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. An investigation is made of the applicant to determine character and capacity to manage. Personal guarantees of the principals are generally required. In addition to an evaluation of the loan applicant's financial statements, a determination is made of the probable adequacy of the primary and secondary sources of repayment to be relied upon in the transaction. Credit agency reports of the applicant's credit history as well as bank checks and trade investigations supplement the analysis of the applicant's creditworthiness. Collateral supporting a secured transaction is also analyzed to determine its marketability and liquidity. Commercial business loans generally bear higher interest rates than residential loans, but they also involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower's business. 7 Consumer Loans. The Bank originates a variety of consumer and other loans, including homeowner loans, home equity lines of credit, new and used automobile loans, and personal unsecured loans, including fixed-rate installment loans and prime rate variable lines-of-credit. As of September 30, 2001, consumer loans totaled $76.9 million, or 12.5% of the total loan portfolio. At September 30, 2001, the largest group of consumer loans consisted of $70.6 million of loans secured by junior liens on residential properties. The Bank offers fixed-rate, fixed-term second mortgage loans referred to as homeowner loans and adjustable-rate home equity lines of credit. As of September 30, 2001, homeowner loans totaled $39.5 million or 6.4% of the Bank's total loan portfolio. The disbursed portion of home equity lines of credit totaled $31.1 million, or 5.1% of the Bank's total loan portfolio, with $18.7 million remaining undisbursed. Other consumer loans include personal loans and loans secured by new or used automobiles. As of September 30, 2001, these loans totaled $6.3 million, or 1.0% of the Bank's total loan portfolio. The Bank originates automobile loans directly to its customers and has no outstanding agreement with automobile dealerships to generate indirect loans. The Bank requires all borrowers to maintain collision insurance on automobiles securing consumer loans, with the Bank listed as loss payee. Personal loans also include secured and unsecured installment loans for other purposes. Unsecured installment loans generally have shorter terms than secured consumer loans, and generally have higher interest rates than rates charged on secured installment loans with comparable terms. The Bank's procedures for underwriting consumer loans include an assessment of an applicant's credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral security, if any, to the proposed loan amount. Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that tend to depreciate rapidly, such as automobiles. In addition, the repayment of consumer loans depends on the borrower's continued financial stability, as their repayment is more likely than a single family mortgage loan to be adversely affected by job loss, divorce, illness or personal bankruptcy. 8 Loan Portfolio Composition. The following table sets forth the composition of the Bank's loan portfolio by type of loan at the dates indicated.

September 30, ----------------------------------------------------------------- 2001 2000 1999 ------------------ ------------------- ------------------ Amount Percent Amount Percent Amount Percent (Dollars in thousands) One- to four-family residential mortgage loans $ 358,198 58.2% $ 343,871 57.5% $ 344,731 60.2% --------- ---- --------- ---- --------- ---- Commercial real estate loans ................. 129,295 21.0 124,988 20.9 110,382 19.3 Commercial business loans .................... 31,394 5.1 27,483 4.6 30,768 5.4 Construction loans ........................... 19,490 3.2 29,599 5.0 19,147 3.3 --------- ---- --------- ---- --------- ---- Total commercial loans ..................... 180,179 29.3 182,070 30.5 160,297 28.0 --------- ---- --------- ---- --------- ---- Home equity lines of credit .................. 31,125 5.1 28,021 4.7 25,380 4.4 Homeowner loans .............................. 39,501 6.4 37,027 6.2 34,852 6.1 Other consumer loans ......................... 6,266 1.0 6,486 1.1 7,463 1.3 --------- ---- --------- ---- --------- ---- Total consumer loans ....................... 76,892 12.5 71,534 12.0 67,695 11.8 --------- ---- --------- ---- --------- ---- Total loans .................................. 615,269 100.0% 597,475 100.0% 572,723 100.0% Allowance for loan losses .................... (9,123) (7,653) (6,202) --------- --------- --------- Total loans, net ............................. $ 606,146 $ 589,822 $ 566,521 ========= ========= =========

September 30, --------------------------------------------- 1998 1997 ------------------- -------------------- Amount Percent Amount Percent One- to four-family residential mortgage loans $ 290,334 62.0% $ 241,886 59.3% --------- ---- --------- ---- Commercial real estate loans ................. 71,149 15.1 62,910 15.4 Commercial business loans .................... 24,372 5.2 18,433 4.5 Construction loans ........................... 20,049 4.3 23,475 5.7 --------- ---- --------- ---- Total commercial loans ..................... 115,570 24.6 104,818 25.6 --------- ---- --------- ---- Home equity lines of credit .................. 26,462 5.7 31,571 7.8 Homeowner loans .............................. 27,208 5.8 19,160 4.7 Other consumer loans ......................... 8,999 1.9 10,741 2.6 --------- ---- --------- ---- Total consumer loans ....................... 62,669 13.4 61,572 15.1 --------- ---- --------- ---- Total loans .................................. 468,573 100.0% 408,276 100.0% ===== ======= ===== Allowance for loan losses .................... (4,906) (3,779) --------- --------- Total loans, net ............................. $ 463,667 $404,497 ========= ========

9 Loan Maturity Schedule. The following table summarizes the scheduled repayments of the Bank's loan portfolio at September 30, 2001. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

One- to Four-Family Commercial Real Estate Commercial Business -------------------- ---------------------- --------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate --------- ----- --------- ---------- --------- --------- (Dollars in thousands) Due During the Years Ending September 30, 2002 (1) ...................................... $ 12,785 7.96% $ 15,255 6.88% $ 19,210 6.65% 2003 to 2006 .................................. 58,050 8.36 43,983 8.04 12,105 7.81 2007 and beyond ............................... 287,363 7.24 70,057 8.01 79 8.64 Total....................................... $358,198 7.25% $129,295 7.99% $ 31,394 7.41% ======== ======== ========

Construction (2) Consumer Total ---------------------- ------------------- --------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate ---------- -------- --------- ------ --------- -------- (Dollars in thousands) Due During the Years Ending September 30, 2002 (1) ...................................... $ 14,750 6.75% $ 8,354 11.04% $ 70,354 6.97% 2003 to 2006 .................................. 3,563 5.88 31,272 8.21 148,973 7.88 2007 and beyond ............................... 1,177 7.49 37,266 7.69 395,942 7.45 -------- ---- -------- ----- -------- ----- Total....................................... $ 19,490 6.57% $ 76,892 7.93% $615,269 7.48% ======== ======== ========

------------------------------- (1) Includes demand loans, loans having no stated repayment schedule or maturity, and overdraft loans. (2) Includes land acquisition loans. The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2001 that are contractually due after September 30, 2002.

Due After September 30, 2002 -------------------------------------- Fixed Adjustable Total ---------- ---------- ---------- (In thousands) One- to four-family residential mortgage loans $265,684 $ 79,729 $345,413 -------- -------- -------- Commercial real estate loans ................. 42,721 71,319 114,040 Commercial business loans .................... 6,786 5,398 12,184 Construction loans ........................... 433 4,307 4,740 -------- -------- -------- Total commercial loans ........ 49,940 81,024 130,964 -------- -------- -------- Consumer loans ............................... 37,844 30,694 68,538 -------- -------- -------- Total loans ................... $353,468 $191,447 $544,915 ======== ======== ========

10 Loan Originations, Purchases, Sales and Servicing. While the Bank originates both fixed-rate and adjustable-rate loans, its ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed- versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders in the Bank's market area. This includes competing banks, savings banks, credit unions, mortgage banking companies and life insurance companies that may also actively compete for local commercial real estate loans. Loan originations are derived from a number of sources, including branch office personnel, existing customers, borrowers, builders, attorneys, real estate broker referrals and walk-in customers. The Bank's loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand, while declining interest rates may stimulate increased loan demand. Accordingly, the volume of loan origination, the mix of fixed and adjustable-rate loans, and the profitability of this activity can vary from period to period. One- to four-family residential mortgage loans are generally underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines, closed on standard Fannie Mae/Freddie Mac documents, and sales conducted using standard Fannie Mae/Freddie Mac purchase contracts and master commitments as applicable. One- to four-family mortgage loans may be sold both to Fannie Mae and Freddie Mac on a non-recourse basis whereby foreclosure losses are generally the responsibility of the purchaser and not the Bank. The Bank is a qualified loan servicer for both Fannie Mae and Freddie Mac. The Bank's policy has been to retain the servicing rights for all loans sold, and to continue to collect payments on the loans, maintain tax escrows and applicable fire and flood insurance coverage, and supervise foreclosure proceedings if necessary. The Bank retains a portion of the interest paid by the borrower on the loans as consideration for its servicing activities. The following table sets forth the loan origination, sale and repayment activities of the Bank for the last three fiscal years. The Bank has not purchased any loans in recent years.

Year Ended September 30, 2001 2000 1999 -------------- -------------- --------------- (In thousands) Unpaid principal balances at beginning of year.......... $ 597,475 $ 572,723 $ 468,573 --------------- -------------- --------------- Originations by Type Adjustable-rate: One- to four-family............................. 12,711 16,792 17,563 Commercial real estate.......................... 7,827 22,463 17,540 Commercial business............................. 16,962 17,785 20,616 Construction.................................... 5,803 15,630 16,941 Consumer........................................ 12,055 12,886 12,510 --------------- -------------- --------------- Total adjustable-rate........................ 59,558 85,556 85,170 --------------- -------------- --------------- Fixed-rate: One- to four-family............................. 50,209 16,328 100,873 Commercial real estate.......................... 5,396 3,014 22,244 Commercial business............................. 5,401 12,305 4,584 Construction.................................... 4,570 3,675 -- Consumer........................................ 19,163 14,589 21,213 --------------- -------------- --------------- Total fixed-rate............................. 84,739 49,911 148,914 --------------- -------------- --------------- Total loans originated.......................... 139,297 135,467 234,084 Principal repayments.................................... (121,129) (109,580) (115,525) Sales ................................................ -- (808) (14,089) Net recoveries (charge-offs)............................ 30 (259) (294) Net change in deferred loan fees and costs.............. (186) 86 285 Transfers to real estate owned.......................... (218) (154) (311) ---------------- --------------- ---------------- Unpaid principal balances at end of year................ 615,269 597,475 572,723 Allowance for loan losses............................... (9,123) (7,653) (6,202) ---------------- --------------- ---------------- Net loans at end of year................................ $ 606,146 $ 589,822 $ 566,521 =============== ============== ===============

11 Loan Approval Authority and Underwriting. The Bank has four levels of lending authority beginning with the Board of Directors. The Board grants lending authority to the Director Loan Committee, the majority of the members of which are Directors. The Director Loan Committee, in turn, may grant authority to the Management Loan Committee and individual loan officers. In addition, designated members of management may grant authority to individual loan officers up to specified limits. The lending activities of the Bank are subject to written policies established by the Board. These policies are reviewed periodically. The Director Loan Committee may approve loans in accordance with applicable loan policies, of up to the limits established in the Bank's policy governing loans-to-one-borrower. This policy places limits on the aggregate dollar amount of credit that may be extended to any one borrower and related entities. Loans exceeding $3.2 million in the aggregate require approval of the Board of Directors. The Management Loan Committee may approve loans of up to an aggregate of $650,000 to any one borrower and related borrowers. Two loan officers with sufficient loan authority acting together may approve loans up to $350,000. The maximum individual authority to approve an unsecured loan is $50,000. The Bank has established a risk rating system for its commercial business loans, commercial real estate loans, and construction loans to builders. The risk rating system assesses a variety of factors to rank the risk of default and risk of loss associated with the loan. These ratings are performed by commercial credit personnel who do not have responsibility for loan originations. The Bank determines its maximum loans to one borrower based upon the rating of the loan. The large majority of loans fall into three categories. The maximum for the best rated borrowers is $8.5 million, for the next group of borrowers is $6.5 million, and for the third group is $3.5 million. Sublimits apply based on reliance on any single property, and for commercial business loans. In connection with its residential and commercial real estate loans, the Bank requires property appraisals to be performed by independent appraisers who are approved by the Board. Appraisals are then reviewed by the appropriate loan underwriting areas of the Bank. The Bank also requires title insurance, hazard insurance and, if indicated, flood insurance on property securing its mortgage loans. For consumer loans under $50,000, such as equity lines of credit and homeowner loans, title insurance is not required. Loan Origination Fees and Costs. In addition to interest earned on loans, the Bank also receives loan origination fees. Such fees vary with the volume and type of loans and commitments made, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. The Bank defers loan origination fees and costs, and amortizes such amounts as an adjustment to yield over the term of the loan by use of the level-yield method. Deferred loan origination costs (net of deferred fees) were $914,000 at September 30, 2001. To the extent that originated loans have been sold with servicing retained since January 1, 1997, the Bank has capitalized a mortgage servicing asset at the time of the sale in accordance with applicable accounting standards (currently Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"). The capitalized amount is amortized thereafter (over the period of estimated net servicing income) as a reduction of servicing fee income. The unamortized amount is fully charged to income when loans are prepaid. Asset recognition of servicing rights on sales of originated loans was not permitted under accounting standards in effect prior to January 1,1997, when the Bank sold the majority of the loans it presently services for others. Originated mortgage servicing rights with an amortized cost of $201,000 are included in other assets at September 30, 2001. See also Notes 3 and 6 of the Notes to Consolidated Financial Statements. 12 Loans to One Borrower. At September 30, 2001, the five largest aggregate amounts loaned to individual borrowers by the Bank (including any unused lines of credit) consisted of secured and unsecured financing of $8.1 million, $8.0 million, $7.1 million, $6.7 million and $5.1 million. See "REGULATION - Federal Regulation of Savings Institutions - Loans to One Borrower" for a discussion of applicable regulatory limitations. Delinquent Loans, Other Real Estate Owned and Classified Assets Collection Procedures. A computer-generated late notice is sent by the 17th day of the month requesting the payment due plus the late charge that was assessed. After the late notices have been mailed, accounts are assigned to a collector for follow-up to determine reasons for delinquency and to review payment options. Additional system-generated collection letters are sent to customers every 10 days. Notwithstanding ongoing collection efforts, all consumer loans are fully charged-off after 120 days. Loans Past Due and Non-performing Assets. Loans are reviewed on a regular basis. Loans are placed on non-accrual status when either principal or interest is 90 days or more past due. In addition, loans are placed on non-accrual status when, in the opinion of management, there is sufficient reason to question the borrower's ability to continue to meet contractual principal or interest payment obligations. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income. Interest payments received on non-accrual loans are not recognized as income unless warranted based on the borrower's financial condition and payment record. At September 30, 2001, the Bank had non-accrual loans of $2.3 million. The ratio of non-performing loans to total loans was 0.38% at September 30, 2001. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned ("REO") until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less estimated costs of disposal. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses. At September 30, 2001, the Bank had REO of $109,000, total non-performing assets (non-accrual loans and REO) of $2.4 million, and a ratio of non-performing assets to total assets of 0.27%. 13 The following table sets forth certain information with respect to the Bank's loan portfolio delinquencies at the dates indicated.

Loans Delinquent For -------------------------------------------- 60-89 Days 90 Days and Over Total --------------------- --------------------- --------------------- Number Amount Number Amount Number Amount --------------------- --------------------- --------------------- (Dollars in thousands) At September 30, 2001 One- to four-family .. 9 $ 935 21 $1,684 30 $2,619 Commercial real estate 2 213 3 418 5 631 Commercial business .. -- -- -- -- -- -- Construction ......... -- -- -- -- -- -- Consumer ............. 9 277 8 175 17 452 ------ ------ ------ ------ ------ ------ Total .............. 20 $1,425 32 $2,277 52 $3,702 ====== ====== ====== ====== ====== ====== At September 30, 2000 One- to four-family .. 14 $1,180 26 $2,496 40 $3,676 Commercial real estate 2 270 5 1,149 7 1,419 Commercial business .. -- -- -- -- -- -- Construction ......... -- -- 1 27 1 27 Consumer ............. 10 187 23 359 33 546 ------ ------ ------ ------ ------ ------ Total .............. 26 $1,637 55 $4,031 81 $5,668 ====== ====== ====== ====== ====== ====== At September 30, 1999 One- to four-family .. 15 $1,834 37 $2,839 52 $4,673 Commercial real estate 1 45 4 1,133 5 1,178 Commercial business .. -- -- 2 208 2 208 Construction ......... -- -- 1 27 1 27 Consumer ............. 21 432 23 429 44 861 ------ ------ ------ ------ ------ ------ Total .............. 37 $2,311 67 $4,636 104 $6,947 ====== ====== ====== ====== ====== ======

Non-Performing Assets. The table below sets forth the amounts and categories of the Bank's non-performing assets at the dates indicated. At each date presented, the Bank had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates).

September 30, ------------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in thousands) Non-accrual loans: One- to four-family ................. $1,684 $2,496 $2,839 $2,965 $2,549 Commercial real estate .............. 418 1,149 1,133 871 1,375 Commercial business ................. -- -- 208 368 243 Construction ........................ -- 27 27 1,256 276 Consumer ............................ 175 359 429 647 234 ------ ------ ------ ------ ------ Total non-performing loans ........ 2,277 4,031 4,636 6,107 4,677 ------ ------ ------ ------ ------ Real estate owned: One- to four-family ................. 109 154 403 92 186 Commercial real estate .............. -- -- -- 274 -- ------ ------ ------ ------ ------ Total real estate owned ........... 109 154 403 366 186 ------ ------ ------ ------ ------ Total non-performing assets ........... $2,386 $4,185 $5,039 $6,473 $4,863 ====== ====== ====== ====== ====== Ratios: Non-performing loans to total loans . 0.38% 0.67% 0.82% 1.32% 1.16% Non-performing assets to total assets 0.27 0.50 0.62 0.94 0.75

14 For the year ended September 30, 2001, gross interest income that would have been recorded had the non-accrual loans at the end of the period remained on accrual status throughout the period amounted to $165,000. Interest income actually recognized on such loans totaled $13,000. Classification of Assets. The Bank's policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the savings institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated as special mention by management. As of September 30, 2001, the Bank had $3.5 million of assets designated as special mention. When the Bank classifies assets as either substandard or doubtful, it allocates for analytical purposes a portion of general valuation allowances or loss reserves to such assets as deemed prudent by management. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which have not been allocated to particular problem assets. When the Bank classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or to charge-off such amount. The Bank's determination as to the classification of its assets and the amount of its valuation allowance is subject to review by its regulatory agencies, which can order the establishment of additional loss allowances. Management regularly reviews the Bank's asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management's review of the Bank's assets at September 30, 2001, classified assets consisted of substandard assets of $3.4 million (loans receivable of $3.3 million and REO of $109,000) and doubtful assets (loans receivable) of $71,000. There were no assets classified as loss at September 30, 2001. Allowance for Loan Losses. The Bank provides for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in management's judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the adequacy of the allowance for loan losses. The allowance for loan losses consists of amounts specifically allocated to non-performing loans and potential problem loans (if any) as well as allowances determined for each major loan category. Loan categories such as single-family residential mortgages and consumer loans are generally evaluated on an aggregate or "pool" basis by applying loss factors to the current balances of the various loan categories. The loss factors are determined by management based on an evaluation of historical loss experience, delinquency trends, volume and type of lending conducted, and the impact of current economic conditions in the Bank's market area. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. At September 30, 2001, the allowance for loan losses was $9.1 million, which equaled 1.51% of net loans and 400.66% of non-performing loans. For the years ended September 30, 2001, 2000 and 1999, the Bank recorded net loan (recoveries) charge-offs of ($30,000), $259,000 and $294,000, respectively. Provisions for loan losses were $1.4 million, $1.7 million and $1.6 million during the respective fiscal years. 15 The following table sets forth activity in the Bank's allowance for loan losses for the years indicated.

Years Ended September 30, -------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (Dollars in thousands) Balance at beginning of year ........................ $ 7,653 $ 6,202 $ 4,906 $ 3,779 $ 3,357 ------- ------- ------- ------- ------- Charge-offs: One- to four-family ............................... (26) (168) (9) (13) (114) Commercial real estate ............................ (18) (1) -- (87) (301) Commercial business ............................... (115) (6) (567) (10) (173) Construction ...................................... -- -- -- (355) -- Consumer .......................................... -- (195) (346) (200) (171) ------- ------- ------- ------- ------- Total charge-offs ............................. (159) (370) (922) (665) (759) ------- ------- ------- ------- ------- Recoveries: One- to four-family ............................... -- 24 -- -- 42 Commercial real estate ............................ 147 -- 101 -- -- Commercial business ............................... 42 24 194 -- -- Construction ...................................... -- -- 286 2 32 Consumer .......................................... -- 63 47 53 49 ------- ------- ------- ------- ------- Total recoveries .............................. 189 111 628 55 123 ------- ------- ------- ------- ------- Net recoveries (charge-offs) ........................ 30 (259) (294) (610) (636) Provision for loan losses ........................... 1,440 1,710 1,590 1,737 1,058 ------- ------- ------- ------- ------- Balance at end of year .............................. $ 9,123 $ 7,653 $ 6,202 $ 4,906 $ 3,779 ======= ======= ======= ======= ======= Ratios: Net charge-offs to average loans outstanding ...... --% 0.04% 0.06% 0.14% 0.17% Allowance for loan losses to non-performing loans . 400.66 189.85 133.78 80.33 80.80 Allowance for loan losses to total loans, net ..... 1.51 1.30 1.09 1.06 0.93

16 Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

September 30, ---------------------------------------------------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------------------------- Percent Percent Percent of Losses of Losses of Losses Loan in Each Loan in Each Loan in Each Balances Category Balances Category Balances Category Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total Allowance Category Loans Allowance Category Loans Allowance Category Loans --------- -------- ----- --------- -------- ----- --------- -------- ----- (Dollars in thousands) One- to four-family .. $ 2,638 $358,198 58.2% $ 2,423 $343,871 57.5% $ 2,091 $344,731 60.2% Commercial real estate 3,930 129,295 21.0 3,210 124,988 20.9 2,416 110,382 19.3 Commercial business .. 841 31,394 5.1 481 27,483 4.6 254 30,768 5.4 Construction ......... 871 19,490 3.2 733 29,599 5.0 614 19,147 3.3 Consumer ............. 843 76,892 12.5 806 71,534 12.0 827 67,695 11.8 -------- -------- ----- -------- -------- ----- -------- -------- Total .......... $ 9,123 $615,269 100.0% $ 7,653 $597,475 100.0% $ 6,202 $572,723 100.0% ======== ======== ===== ======== ======== ===== ======== ======== =====

September 30, ----------------------------------------------------------------- 1998 1997 ----------------------------------------------------------------- Percent Percent of Losses of Losses Loan in Each Loan in Each Balances Category Balances Category Loan Loss by to Total Loan Loss by to Total Allowance Category Loans Allowance Category Loans --------- -------- ----- --------- -------- ----- (Dollars in thousands) One- to four-family .. $ 1,320 $290,334 62.0% $ 734 $241,886 59.3% Commercial real estate 1,976 71,149 15.1 1,431 62,910 15.4 Commercial business .. 376 24,372 5.2 443 18,433 4.5 Construction ......... 301 20,049 4.3 389 23,475 5.7 Consumer ............. 933 62,669 13.4 782 61,572 15.1 -------- -------- ----- -------- -------- ----- Total ............ $ 4,906 $468,573 100.0% $ 3,779 $408,276 100.0% ======== ======== ===== ======== ======== =====

17 Securities Activities The Company's securities investment policy is established by the Board of Directors. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with the Company's interest rate risk management strategy. The Board's asset/liability committee oversees the Company's investment program and evaluates on an ongoing basis the Company's investment policy and objectives. The chief financial officer, or the chief financial officer acting with the chief executive officer, is responsible for making securities portfolio decisions in accordance with established policies. The Company's chief financial officer and chief executive officer have the authority to purchase and sell securities within specific guidelines established by the investment policy. In addition, all transactions are reviewed by the Board's asset/liability committee at least quarterly. The Company's current policies generally permit securities investments in U.S. Government and U.S. Agency securities, municipal bonds, and corporate debt obligations, as well as investments in preferred and common stock of government agencies such as Fannie Mae, Freddie Mac and the FHLB (federal agency securities). Securities in these categories are classified as "investment securities" for financial reporting purposes. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations ("CMOs") issued or backed by securities issued by these government agencies. Also permitted are investments in securities issued or backed by the Small Business Administration and asset-backed securities collateralized by auto loans, credit card receivables, and home equity and home improvement loans. The Company's current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities, as well as adjustable-rate securities, which may have a longer term to maturity. The emphasis of this approach is to increase overall investment securities yields while managing interest rate risk. SFAS No. 115 requires that at the time of purchase the Company designate a security as held to maturity, available for sale, or trading, depending on the Company's ability and intent. Available for sale securities are reported at fair value, while held to maturity securities are reported at amortized cost. The Company does not have a trading portfolio. As of September 30, 2001, the Company's overall securities portfolio had a carrying value of $235.3 million. In accordance with SFAS No. 115, securities with a fair value of $163.9 million, or 18.6% of total assets, were classified as available for sale, while securities with an amortized cost of $71.4 million, or 8.1% of total assets, were classified as held to maturity. The estimated fair value of the held to maturity securities at September 30, 2001 was $73.7 million, which was $2.3 million more than their amortized cost. Government Securities. At September 30, 2001, the Company held $48.9 million, or 5.5% of total assets, in government securities at amortized cost, consisting primarily of U.S. Treasury and agency obligations with short- to medium-term maturities (one to five years), all of which were classified as available for sale. While these securities generally provide lower yields than other investments such as mortgage-backed securities, the Company's current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity purposes, as collateral for borrowings, and for prepayment protection. Corporate Bonds and Other Debt Securities. At September 30, 2001, the Company held $48.4 million in corporate debt securities, at amortized cost, all of which were classified as available for sale. Although corporate bonds may offer a higher yield than that of a U.S. Treasury or agency security of comparable duration, corporate bonds also may have a higher risk of default due to adverse changes in the creditworthiness of the issuer. In recognition of this potential risk, the Company's policy limits investments in corporate bonds to securities with maturities of ten years or less and rated "A" or better by at least one nationally recognized rating agency, and to a total investment of no more than $2.0 million per issuer and a total portfolio limit of $40.0 million. The policy limits investments in municipal bonds to securities with maturities of 20 years or less and rated AA or better by at least one nationally recognized rating agency and favors issues that are insured. In addition, the policy imposes limitations on a total investment to no more than $2.0 million per municipal issuer and a total portfolio limit of 5% of assets. At September 30, 2001, the Company held $11.9 million at amortized cost in bonds issued by states and political subdivisions, all of which were classified as held to maturity. 18 Equity Securities. At September 30, 2001, the Company's equity securities portfolio at amortized cost totaled $1.3 million, all of which was classified as available for sale, and consisted of stock issued by Freddie Mac and Fannie Mae, and certain other equity investments. The Company also held $5.5 million of common stock in the FHLB of New York, a portion of which must be held as a condition of membership in the Federal Home Loan Bank System, with the remainder held as a condition to borrow under the FHLB advance program. Mortgage-Backed Securities. The Company purchases mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) lower credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase liquidity. The Company invests primarily in mortgage-backed securities issued or sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae. The Company also invests to a lesser extent in securities backed by agencies of the U.S. Government. At September 30, 2001, the Company's mortgage-backed securities portfolio totaled $117.3 million at amortized cost, of which $57.9 million was available for sale and $59.4 million was held to maturity. Of this total, the CMO portfolio totaled $33.2 million, of which $28.8 million was available for sale and $4.4 million was held to maturity. The remaining mortgage-backed securities were pass-through securities. Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of the Company's mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as the Company, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than the estimated life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield on such securities. The Company reviews prepayment estimates for its mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio. A portion of the Company's mortgage-backed securities portfolio is invested in CMOs or collateralized mortgage obligations, including REMICs, backed by Fannie Mae and Freddie Mac. CMOs and REMICs are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into "tranches" or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. The Company's practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with emphasis on the relative trade-offs between lifetime rate caps, prepayment risk, and interest rates. 19 Available for Sale Portfolio As of September 30, 2001, securities with a fair value of $163.9 million, or 18.6% of total assets, were classified as available for sale. Investment securities, consisting of U.S. Government and agency securities, municipal bonds, and corporate debt obligations as well as investments in preferred and common stock, made up $104.4 million of this total, or 11.8% of total assets, with mortgage-backed securities totaling $59.5 million, or 6.8% of total assets. The following table sets forth the composition of the Company's available for sale portfolio at the dates indicated.

September 30, ------------------------------------------------------------------------ 2001 2000 1999 ------------------------ --------------------- ---------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value -------- -------- -------- -------- -------- -------- (In thousands) Investment Securities: U.S. Government securities .......................... $ 22,125 $ 22,975 $ 33,004 $ 32,851 $ 31,657 $ 31,507 Federal agency obligations .......................... 26,744 28,182 37,934 37,546 27,966 27,407 Corporate debt securities ........................... 48,367 50,872 30,975 30,588 24,201 23,667 State and municipal securities ...................... -- -- 11,697 10,981 11,700 10,808 Equity securities ................................... 1,290 2,372 3,201 4,383 3,175 3,236 -------- -------- -------- -------- -------- -------- Total investment securities available for sale ...... 98,526 104,401 116,811 116,349 98,699 96,625 -------- -------- -------- -------- -------- -------- Mortgage-Backed Securities: Pass-through securities: Fannie Mae ..................................... 18,225 18,815 17,767 17,723 16,053 15,930 Freddie Mac .................................... 6,361 6,842 2,344 2,383 3,252 3,306 Other .......................................... 4,481 4,529 6,582 6,494 7,163 7,252 CMOs and REMICs .................................... 28,811 29,341 19,553 19,208 25,625 25,274 -------- -------- -------- -------- -------- -------- Total mortgage-backed securities available for sale . 57,878 59,527 46,246 45,808 52,093 51,762 -------- -------- -------- -------- -------- -------- Total securities available for sale ................. $156,404 $163,928 $163,057 $162,157 $150,792 $148,387 ======== ======== ======== ======== ======== ========

At September 30, 2001, the Company's available for sale U. S. Treasury securities portfolio, at amortized cost, totaled $22.1 million, or 2.5% of total assets and the federal agency securities in the Company's available for sale portfolio totaled $26.7 million, or 3.0% of total assets. Of the combined U.S. Government and agency portfolio, at amortized cost, $6.1 million had maturities of one year or less and a weighted average yield of 5.71% and $36.0 million had maturities of between one and five years, with a weighted average yield of 5.72%. The agency securities portfolio includes both non-callable and callable debentures. The agency debentures are callable on a quarterly basis following an initial holding period of from twelve to twenty-four months. Available for sale corporate debt securities, at amortized cost, totaled $48.4 million at September 30, 2001. Of these securities, at amortized cost, $46.1 million had maturities of less than five years, with a weighted average yield of 6.50%, and $2.2 million will mature between five and ten years, with a weighted average yield of 6.45%. Equity securities available for sale at September 30,2001 had an amortized cost of $1.3 million and a fair value of $2.4 million. At September 30, 2001, $29.1 million of the Company's available for sale mortgage-backed securities, at amortized cost, consisted of pass-through securities, which totaled 3.3% of total assets. At the same date, the amortized cost of the Company's available for sale CMO portfolio totaled $28.8 million, or 3.3% of total assets, and consisted of CMOs issued by government sponsored agencies such as Fannie Mae and Freddie Mac with a weighted average yield of 5.59%. The Company owns both fixed-rate and floating-rate CMOs. The underlying mortgage collateral for the Company's portfolio of CMO's available for sale at September 30, 2001 had contractual maturities of over ten years. However, as with mortgage-backed pass-through securities, the actual maturity of a CMO may be less than its stated contractual maturity due to prepayments of the underlying mortgages and the terms of the CMO tranche owned. 20 Held to Maturity Portfolio As of September 30, 2001, securities with an amortized cost of $71.4 million, or 8.1% of total assets, were classified as held to maturity. Mortgage-backed securities totaling $59.5 million, or 6.7% of total assets, made up the majority of this portfolio. Investment securities, consisting of municipal bonds, made up $11.9 million of this total, or 1.4% of total assets. The following table sets forth the composition of the Company's held to maturity portfolio at the dates indicated.

September 30, ------------------------------------------------------------------------ 2001 2000 1999 ------------------------ --------------------- ---------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value -------- -------- -------- -------- -------- -------- (In thousands) nvestment Securities: State and municipal securities ........................ $11,906 $12,160 $ 2,991 $ 2,957 $ 2,987 $ 2,953 Other ................................................. -- -- 397 397 415 415 ------- ------- ------- ------- ------- ------- Total investment securities held to maturity ...... 11,906 12,160 3,388 3,354 3,402 3,368 ------- ------- ------- ------- ------- ------- Mortgage-Backed Securities: Pass-through securities: Ginnie Mae ........................................ 3,510 3,611 4,279 4,275 5,106 5,140 Fannie Mae ........................................ 23,616 24,421 16,578 16,440 18,116 17,786 Freddie Mac ....................................... 26,477 27,394 17,105 16,902 22,014 21,900 Other ............................................. 1,491 1,542 2,283 2,343 2,453 2,499 CMOs and REMICs ....................................... 4,355 4,532 4,953 5,060 5,691 5,786 ------- ------- ------- ------- ------- ------- Total mortgage-backed securities held to maturity . 59,449 61,500 45,198 45,020 53,380 53,111 ------- ------- ------- ------- ------- ------- Total securities held to maturity ....................... $71,355 $73,660 $48,586 $48,374 $56,782 $56,479 ======= ======= ======= ======= ======= =======

At September 30, 2001, the Company's held to maturity mortgage-backed pass-through securities portfolio including CMOs totaled $59.4 million, of which $3.7 million had a weighted average yield of 6.12% and contractual maturities within five years; $14.2 million had a weighted average yield of 6.32% and contractual maturities of five to ten years; and $41.6 million had a weighted average yield of 6.67% and contractual maturities of over ten years. CMOs of $4.4 million are included in this portfolio, making up 0.5% of total assets. The estimated fair value of the Company's held-to-maturity CMO portfolio at September 30, 2001 was $4.5 million, or $177,000 more than the amortized cost. While the contractual maturity of the CMOs underlying collateral is greater than ten years, the actual period to maturity of the CMOs may be shorter due to prepayments on the underlying mortgages and the terms of the CMO tranche owned. The composition and maturities of the investment securities portfolio (debt securities) and the mortgage-backed securities portfolio at September 30, 2001 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. 21 Investment Portfolio Maturity Schedule. The following table summarizes the composition and maturities of the Company's investment portfolio at September 30,2001

More than One Year More than Five Years One Year or Less through Five Years through Ten Years More than Ten Years --------------------- -------------------- --------------------- --------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- ----- -------- -------- -------- ----- --------- -------- (Dollars in thousands) Available for Sale: Mortgage-Backed Securities Fannie Mae ..................... $ -- --% $ 3,693 6.24% $ 927 6.09% $ 16,905 6.55% Freddie Mac .................... -- -- -- -- 5,781 6.37 21,094 5.67 Other .......................... -- -- -- -- 4,594 6.33 4,884 5.50 -------- ----- -------- ---- -------- ---- -------- ---- Total ....................... -- -- 3,693 6.24 11,302 6.33 42,883 6.00 -------- ---- -------- ---- -------- ---- -------- ---- Investment Securities U.S. Gov't and agency securities 6,108 5.71 35,964 5.72 5,000 7.00 1,797 4.71 Corporate debt securities ...... -- -- 46,127 6.50 2,240 6.45 -- -- Equity securities .............. -- -- -- -- -- -- 1,290 -- -------- ----- -------- ---- -------- ---- -------- ---- Total ....................... 6,108 5.71 82,091 6.16 7,240 6.83 3,087 4.71 -------- ----- -------- ---- -------- ---- -------- ---- Total available for sale ........... $ 6,108 5.71% $ 85,784 6.16% $ 18,542 6.53% $45,970 5.91% ======== ==== ======== ==== ======== ==== ======= ==== Held to Maturity: Mortgage-Backed Securities Fannie Mae ..................... $ -- --% $ 1,846 5.89% $ 2,859 6.39% $ 23,266 6.34% Freddie Mae .................... 26 6.10 1,693 6.59 10,744 6.19 14,040 6.87 Ginnie Mae and other ........... -- -- 111 2.86 586 8.30 4,304 7.78 -------- ---- -------- ---- -------- ---- -------- ---- Total ....................... 26 6.10 3,650 6.12 14,189 6.32 41,610 6.67 Investment Securities State and municipal securities.. -- -- 604 3.90 6,727 4.07 4,575 4.46 -------- ---- -------- ---- -------- ---- -------- ---- Total held to maturity ............. $ 26 6.10% $ 4,254 5.81% $ 20,916 5.59% $ 46,185 6.45% ======== ==== ======== ==== ======== ==== ======== ====

Total Securities ----------------------------------- Weighted Amortized Fair Average Cost Value Yield -------- --------- -------- (Dollars in thousands) Available for Sale: Mortgage-Backed Securities Fannie Mae ..................... $ 21,525 $ 22,138 6.47% Freddie Mac .................... 26,875 27,749 5.82 Other .......................... 9,478 9,640 5.90 Total ....................... 57,878 59,527 6.07 -------- -------- ---- Investment Securities U.S. Gov't and agency securities 48,869 51,157 5.81 Corporate debt securities ...... 48,367 50,872 6.50 Equity securities .............. 1,290 2,372 -- -------- -------- ---- Total ....................... 98,526 104,401 6.07 -------- -------- ---- Total available for sale ........... $156,404 $163,928 6.07% ======== ======== Held to Maturity: Mortgage-Backed Securities Fannie Mae ..................... $ 27,971 $ 28,953 6.32% Freddie Mae .................... 26,477 27,394 6.58 Ginnie Mae and other ........... 5,001 5,153 7.74 -------- -------- ---- Total ....................... 59,449 61,500 6.56 Investment Securities State and municipal securities . 11,906 12,160 4.21 -------- -------- ---- Total held to maturity ............. $ 71,355 $ 73,660 6.16% ======== ======== ====

22 Sources of Funds General. Deposits, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations are the primary sources of the Bank's funds for use in lending, investing and for other general purposes. To a lesser extent, the Bank uses borrowed funds (primarily FHLB advances) to fund its operations. Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. Its deposit accounts consist of savings accounts, NOW accounts, checking accounts, money market accounts, club accounts, certificates of deposit and IRAs and other qualified plan accounts. The Bank provides commercial checking accounts for small to moderately-sized businesses, as well as low-cost checking account services for low-income customers. At September 30, 2001, the Bank's deposits totaled $653.1 million. Interest-bearing deposits totaled $578.7 million, and non-interest bearing demand deposits totaled $74.4 million. NOW, savings and money market deposits totaled $333.4 million at September 30, 2001. Also at that date, the Bank had a total of $245.3 million in certificates of deposit, of which $218.9 million had maturities of one year or less. Although the Bank has a significant portion of its deposits in shorter-term certificates of deposit, management monitors activity on these accounts and, based on historical experience and the Bank's current pricing strategy, believes it will retain a large portion of such accounts upon maturity. The Bank's deposits are obtained predominantly from the areas in which its branch offices are located. It relies primarily on competitive pricing of its deposit products, customer service and long-standing relationships with customers to attract and retain these deposits. While certificates of deposit in excess of $100,000 are accepted by the Bank, and may be subject to preferential rates, it does not actively solicit such deposits as they are more difficult to retain than core deposits. Historically, the Bank has not used brokers to obtain deposits. The following table sets forth the distribution of the Bank's deposit accounts, by account type, at the dates indicated.

September 30, 2001 2000 1999 ------------------------------- -------------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Amount Percent Rate Amount Percent Rate Amount Percent Rate ------------------------------- -------------------------------- ---------------------------- (Dollars in thousands) Demand deposits Retail .................... $ 41,280 6.3% --% $ 38,145 6.3% --% $ 35,701 6.1% --% Commercial ................ 33,081 5.1 -- 28,324 4.7 -- 24,147 4.1 -- -------- ---- ---- -------- ----- ----- -------- ----- ----- Total demand deposits 74,361 11.4 -- 66,469 11.0 -- 59,848 10.2 -- NOW deposits .............. 63,509 9.7 0.49 54,800 9.0 1.01 47,129 8.0 1.01 Savings deposits .......... 160,777 24.6 1.05 161,987 26.6 2.02 161,809 27.6 2.02 Money market deposits ..... 109,126 16.7 1.81 76,332 12.5 2.55 80,033 13.6 2.75 -------- ---- ---- -------- ----- ----- -------- ----- ----- 407,773 62.4 1.00 359,588 59.1 1.61 348,819 59.4 1.70 Certificates of deposit.... 245,327 37.6 4.63 249,388 40.9 5.83 237,821 40.6 4.82 -------- ---- ---- -------- ----- ----- -------- ----- ----- Total deposits............. $ 653,100 100.0% 2.31% $ 608,976 100.0% 3.34% $586,640 100.0% 2.97% ========= ===== ==== ========= ===== ==== ======== ===== ====

23 The following table sets forth, by interest rate ranges, information concerning the Bank's certificates of deposit at the dates indicated.

At September 30, 2001 --------------------------------------------------------------------- Total at Period to Maturity September 30, --------------------------------------------------------------------- ------------------- Less than One to Two to More than Percent Interest Rate Range One Year Two Years Three Years Three Years Total of Total 2000 1999 ------------------- -------- --------- ----------- ----------- -------- -------- ------- -------- (Dollars in thousands) 4.00% and below .... $104,308 $ 3,760 $ 93 $ -- $108,161 44.1% $ 2,350 $ 14,019 4.01% to 5.00%...... 25,000 4,975 2,259 1,551 33,785 13.8 14,436 135,380 5.01% to 6.00% ..... 25,240 3,693 147 1,336 30,416 12.4 155,499 77,889 6.01% to 7.00% ..... 62,302 2,495 -- 658 65,455 26.7 69,936 7,026 7.01% and above .... 2,000 5,510 -- -- 7,510 3.0 7,167 3,507 -------- -------- -------- -------- -------- ----- -------- -------- Total .......... $218,850 $ 20,433 $ 2,499 $ 3,545 $245,327 100.0% $249,388 $237,821 ======== ======== ======== ======== ======== ===== ======== ========

The following table sets forth the amount of the Bank's certificates of deposit by time remaining until maturity as of September 30, 2001.

Maturity ----------------------------------------------------- 3 Months Over 3 to 6 Over 6 to 12 Over 12 or Less Months Months Months Total -------- ----------- ------------ -------- -------- (In Thousands) Certificates of deposit less than $100,000 .... $ 97,460 $ 47,835 $ 43,741 $ 23,631 $212,667 Certificates of deposit of $100,000 or more (1) 14,101 8,368 7,345 2,846 32,660 -------- -------- -------- -------- -------- Total of certificates of deposit ......... $111,561 $ 56,203 $ 51,086 $ 26,477 $245,327 ======== ======== ======== ======== ========

(1) The weighted average interest rates for these accounts, by maturity period, are 4.63% for 3 months or less; 4.18% for 3 to 6 months; 4.33% for 6 to 12 months; and 5.98% for over 12 months. The overall weighted average interest rate for accounts of $100,000 or more was 4.57%. Borrowings. At September 30, 2001, the Bank had $110.4 million of borrowings, consisting of FHLB advances and repurchase agreements. FHLB borrowings were $122.0 million as of September 30, 2000 and $115.5 million as of September 30, 1999. At September 30, 2001, the Bank had access to additional FHLB borrowings of up to $193.7 million. The following table sets forth information concerning balances and interest rates on the Bank's FHLB advances and repurchase agreements at the dates and for the periods indicated.

Years Ended September 30, --------------------------------- 2001 2000 1999 ---- ---- ---- (Dollars in thousands) Balance at end of year............................... $110,427 $121,975 $115,515 Average balance during year.......................... 113,975 122,315 74,319 Maximum outstanding at any month end................. 135,727 131,458 118,526 Weighted average interest rate at end of year........ 5.32% 6.36% 5.60% Average interest rate during year.................... 5.98% 5.98% 5.53%

24 Subsidiary Activities Provest Services Corp. I is a wholly-owned subsidiary of the Bank holding an investment in a limited partnership which operates an assisted-living facility. A percentage of the units in the facility are for low-income individuals. Provest Services Corp. II is a wholly-owned subsidiary of the Bank which has engaged a third-party provider to sell annuities and mutual funds to the Bank's customers. Through September 30, 2001, the activities of these subsidiaries have had an insignificant effect on the Bank's consolidated financial condition and results of operations. During fiscal 1999, the Bank established Provident REIT, Inc., a wholly-owned subsidiary in the form of a real estate investment trust ("REIT"). The REIT holds both residential and commercial real estate loans. Competition The Bank faces significant competition in both originating loans and attracting deposits. The New York metropolitan area has a high concentration of financial institutions, most of which are significantly larger institutions with greater financial resources than the Bank, and many of which are competitors of the Bank to varying degrees. The Bank's competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, insurance companies and other financial service companies. Its most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. The Bank faces additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. The Bank has emphasized personalized banking and the advantage of local decision making in its banking business and this strategy appears to have been well received in the Bank's market area. The Bank does not rely on any individual, group, or entity for a material portion of its deposits. Employees As of September 30, 2001, the Bank had 219 full-time employees and 26 part-time employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good. REGULATION General As a federally chartered, SAIF-insured savings bank, the Bank is subject to examination, supervision and extensive regulation by the OTS and the FDIC. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The Bank also is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") governing reserves to be maintained against deposits and certain other matters. The OTS examines the Bank and prepares reports for the consideration of the Bank's Board of Directors. The FDIC also has examination authority over the Bank in its role as the administrator of the SAIF. The Bank's relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. Any change in such regulation, whether by the FDIC, OTS, or Congress, could have a material adverse impact on the Company and the Bank and their operations. 25 Federal Regulation of Savings Institutions Business Activities. The activities of savings institutions are governed by the Home Owners Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations issued by the agencies to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which savings association may engage. The description of statutory provisions and regulations applicable to savings associations set forth herein does not purport to be a complete description of such statutes and regulations and their effect on the Bank. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limits on loans to a single or related group of borrowers. Generally, this limit is 15% of the Bank's unimpaired capital and surplus, and an additional 10% of unimpaired capital and surplus if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. The OTS by regulation has amended the loans to one borrower rule to permit savings associations meeting certain requirements to extend loans to one borrower in additional amounts under circumstances limited essentially to loans to develop or complete residential housing units. Qualified Thrift Lender Requirement. The HOLA requires savings institutions to be qualified thrift lenders ("QTL"). To be a QTL, the Bank can either satisfy the QTL test, or the Domestic Building and Loan Association ("DBLA") Test of the Internal Revenue Code of 1986, as amended (the "Code"). Under the QTL test, a savings bank is required to maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments," primarily residential mortgages and related investments, including certain mortgage-backed and related securities on a monthly basis in 9 out of every 12 months. Under the DBLA test, an institution must meet a "business operations test" and a "60% of assets test". The business operations test requires the business of a DBLA to consist primarily of acquiring the savings of the public and investing in loans. An institution meets the public savings requirements when it meets one of two conditions: (i) the institution acquires its savings in conformity with OTS rules and regulations; or (ii) the general public holds more than 75% of its deposits, withdrawable shares, and other obligations. The general public may not include family or related business groups or persons who are officers or directors of the institution. The 60% of assets test requires that at least 60% of a DBLA's assets must consist of assets that thrifts normally hold, except for consumer loans that are not educational loans. The DBLA test does not include, as the QTL test does to a limited or optional extent, mortgage loans originated and sold into the secondary market and subsidiary investments. A savings bank that fails to be a QTL must either convert to a bank charter or operate under certain restrictions. As of September 30, 2001, the Bank met the QTL test. Limitations on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. A "well capitalized" institution can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year in an amount up to 100 percent of its net income during the calendar year, plus its retained net income for the preceding two years. As of September 30, 2001, the Bank was a "well-capitalized" institution. 26 In addition, OTS regulations require the Mutual Holding Company to notify the OTS of any proposed waiver of its right to receive dividends. It is the OTS' recent practice to review dividend waiver notices on a case-by-case basis, and, in general, not object to any such waiver if: (i) the mutual holding company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (ii) for as long as the savings association subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company are considered as a restriction on the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with SFAS No. 5, where the savings association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability and (iv) the amount of any waived dividend is considered as having been paid by the savings association (and the savings association's capital ratios adjusted accordingly) in evaluating any proposed dividend under OTS capital distribution regulations. Community Reinvestment Act and Fair Lending Laws. Savings associations share a responsibility under the Community Reinvestment Act ("CRA") and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The Bank received an outstanding CRA rating under the current CRA regulations in its most recent federal examination by the OTS. Transactions with Affiliates. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Company and any nonsavings institution subsidiaries) or to make loans to certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with nonaffiliated companies. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties", including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institutions, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. 27 Standards for Safety and Soundness. The FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement the safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit systems; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 4% tier 1 core capital ratio, a 4% tier 1 risk-based ratio, and an 8% total risk-based ratio. Tier 1 core capital is defined as common stockholders' equity less investments in and advances to "nonincludable" subsidiaries, goodwill and other intangible assets, nonqualifying equity instruments, disallowed servicing assets, and other disallowed assets; plus (minus) accumulated losses (gains) on certain available-for-sale securities and cash flow hedges (net of taxes); plus qualifying intangible assets, minority interest in includable consolidated subsidiaries, and mutual institutions' nonwithdrawable deposit accounts. Adjusted total assets is defined as total assets less assets of "nonincludable" subsidiaries, goodwill and other intangible assets, disallowed servicing assets, and other disallowed assets; plus (minus) accumulated losses (gains) on certain available-for sale securities and cash flow hedges; plus qualifying intangible assets. Total risk-based capital is defined as tier 1 (core) capital plus 45% of net unrealized gains on available-for-sale equity securities, qualifying subordinated debt and redeemable preferred stock, capital certificates, nonwithdrawable deposit accounts not included in core capital, other equity instruments and allowances for loan and lease losses; less equity investments and other assets required to be deducted, low-level recourse deduction and capital reduction for interest-rate risk exposure. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. At September 30, 2001, the Bank exceeded each of the OTS capital requirements as summarized below:

To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------- ----------------- ----------------------- Amount Ratio (1) Amount Ratio (1) Amount Ratio(1) ------ --------- ------ --------- ------ -------- (Dollars in thousands) Tangible capital .......... $88,526 10.20% $13,015 1.5% $ -- --% Tier I core capital ....... 88,526 10.20 34,706 4.0 43,383 5.0 Tier I risk-based capital.. 88,526 16.91 -- -- 31,404 6.0 Total risk-based capital... 95,100 18.17 41,873 8.0 52,341 10.0

(1) Core capital is calculated on the basis of a percentage of total adjusted assets; risk-based capital levels are calculated on the basis of a percentage of risk-weighted assets. 28 Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective Action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has total risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized", and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized". Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized". The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an institution receives notice that it is "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS may also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. At September 30, 2001, the Bank was categorized as "well capitalized", meaning that the Bank's total risk-based capital ratio exceeded 10.0%, Tier I risk-based capital ratio exceeded 6.0%, leverage capital ratio exceeded 5.0%, and the Bank was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. Insurance of Deposit Accounts. The FDIC has adopted a risk-based deposit insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC is authorized to raise the assessment rates in certain circumstances. The FDIC has exercised this authority several times in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank. Federal Home Loan Bank System The Bank, as a federal association, is required to be a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. As of September 30, 2001, the Bank was in compliance with this requirement. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. 29 Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). At September 30, 2001, the Bank was in compliance with these reserve requirements. Holding Company Regulation General. The Mutual Holding Company and the Company are nondiversified mutual savings and loan holding companies within the meaning of the HOLA. As such, the Mutual Holding Company and the Company are registered with the OTS and are subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Mutual Holding Company and the Company and any nonsavings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. As federal corporations, the Company and the Mutual Holding Company are generally not subject to state business organizations law. Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS regulations and policy, a Mutual Holding Company and a federally chartered mid-tier holding company such as the Company may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director. If a Mutual Holding Company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (x) above, and has a period of two years to cease any nonconforming activities and divest of any nonconforming investments. The HOLA prohibits a savings and loan holding company, including the Company and the Mutual Holding Company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors. 30 The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. The OTS has proposed new rules which would require savings and loan holding companies to notify the OTS prior to engaging in transactions which (i) when combined with other debt transactions engaged in during a 12-month period, would increase the holding company's consolidated debt by 5% or more; (ii) when combined with other asset acquisitions engaged in during a 12-month period, would result in asset acquisitions of greater than 15% of the holding company's consolidated assets; or (iii) when combined with any other transactions engaged in during a 12-month period, would reduce the holding company's ratio of consolidated tangible capital to consolidated tangible assets by 10% or more during the 12-month period. The OTS has proposed to exempt from this rule holding companies whose consolidated tangible capital exceeds 10% following the transactions. The OTS has also proposed new rules which would codify the manner in which the OTS reviews the capital adequacy of savings and loan holding companies and determines when a holding company must maintain additional capital. The OTS is not currently proposing to establish uniform capital adequacy guidelines for all savings and loan holding companies. The Company and the Bank are unable to predict whether or when these proposed regulations will be adopted, and what effect, if any, the adoption of these regulations would have on their business. Waivers of Dividends by the Mutual Holding Company. OTS regulations require the Mutual Holding Company to notify the OTS of any proposed waiver of its right to receive dividends. The OTS reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the Mutual Holding Company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the Mutual Holding Company's members; (ii) for as long as the savings association subsidiary is controlled by the Mutual Holding Company, the dollar amount of dividends waived by the Mutual Holding Company are considered as a restriction to the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the Mutual Holding Company is available for declaration as a dividend solely to the Mutual Holding Company, and, in accordance with SFAS No. 5, where the savings association determines that the payment of such dividend to the Mutual Holding Company is probable, an appropriate dollar amount is recorded as a liability and (iv) the amount of any waived dividend is considered as having been paid by the savings association in evaluating any proposed dividend under OTS capital distribution regulations. 31 Conversion of the Mutual Holding Company to Stock Form. OTS regulations permit the Mutual Holding Company to undertake a conversion from mutual to stock form ("Conversion Transaction"). In a Conversion Transaction a new holding company would be formed as the successor to the Company (the "New Holding Company"), the Mutual Holding Company's corporate existence would end, and certain customers of the Bank would receive the right to subscribe for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock ("Common Stock") held by stockholders of the Company other than the Mutual Holding Company ("Minority Stockholders") would be automatically converted into a number of shares of common stock of the New Holding Company determined pursuant an exchange ratio that ensures that after the Conversion Transaction the percentage of the to-be outstanding shares of the New Holding Company issued to Minority Stockholders in exchange for their Common Stock would be equal to the percentage of the outstanding shares of Common Stock held by Minority Stockholders immediately prior to the Conversion Transaction. The total number of shares held by Minority Stockholders after the Conversion Transaction would be affected by any purchases by such persons in the offering that would be conducted as part of the Conversion Transaction. Federal Securities Law The common stock of the Company is registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Common stock of the Company held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. 32 ITEM 2. Properties Properties As of September 30, 2001, the Bank leases ten properties, including its headquarters location, from third parties under terms and conditions considered by management to be favorable to the Bank. In addition, the Bank owns six properties. Following is a list of the Bank's locations: Corporate Office, Commercial Lending Group, and Investment Management and Trust Department 400 Rella Boulevard 1 Lake Road West Montebello, NY 10901 Congers, NY 19020 (845) 369-8040 (845) 267-2180 Rockland County Branches: 71 Lafayette Avenue Suffern, NY 10901 44 W. Route 59 (845) 369-8350 Nanuet, NY 10954 (845) 627-6180 26 North Middletown Rd. (In the ShopRite Supermarket) 38-40 New Main Street Pearl River, NY 10965 Haverstraw, NY 10927 (845) 627-6170 (845) 942-3880 196 Rt. 59 375 Rt. 303 at Kings Highway Suffern, NY 10901 Orangeburg, NY 10962 (845) 369-8360 (845) 398-4810 1633 Rt. 202 148 Rt. 9W Pomona, NY 10970 Stony Point, NY 10980 (845) 364-5690 (845) 942-3890 44 North Main Street 179 South Main Street (In the ShopRite Supermarket) (Opened 10/01) New City, NY 10956 New City, NY 10956 (845) 639-7750 (845) 639-7650 72 West Eckerson Rd. Spring Valley, NY 10977 Orange County Branches: (845) 426-7230 125 Dolson Avenue 715 Route 304 (In the ShopRite Supermarket) Bardonia, NY 10954 Middletown, NY 10940 (845) 623-6340 (845)-342-5777 153 Rt. 94 (In the ShopRite Supermarket) Warwick, NY 10990 (845) 986-9540 33 ITEM 3. Legal Proceedings The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involved amounts which are believed by management to be immaterial to the financial condition and operations of the Company. ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of stockholders during the quarter ended September 30, 2001. PART II ITEM 5. Market for Company's Common Equity and Related Stockholder Matters The common stock of the Company is quoted on the Nasdaq National Market under the symbol "PBCP." As of September 30, 2001, the Company had seven registered market makers, 3,245 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 8,024,166 shares outstanding. As of such date, Provident Bancorp, MHC (the "Mutual Holding Company"), held 4,416,000 shares of common stock and stockholders other than the Mutual Holding Company held 3,608,166 shares. The following table sets forth market price and dividend information for the common stock for the past two fiscal years. Cash Dividends Quarter Ended High Low Declared ------------- ---- --- -------- December 31, 1999 $16.75 $12.50 $ 0.03 March 31, 2000 16.13 14.00 0.04 June 30, 2000 15.88 14.13 0.04 September 30, 2000 16.00 14.63 0.04 December 31, 2000 16.63 15.19 0.04 March 31, 2001 17.81 15.75 0.05 June 30, 2001 21.52 17.00 0.06 September 30, 2001 21.65 17.65 0.07 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. In accordance with regulations, the Mutual Holding Company waived receipt of dividends declared by the Company during the fourth quarter of fiscal 2000 and all of fiscal 2001 after obtaining OTS approval to do so. In total, the Mutual Holding Company has waived receipt of $1.3 million in dividends through September 30, 2001. 34 ITEM 6. Selected Financial Data The following financial condition data and operating data are derived from the audited consolidated financial statements of Provident Bancorp, Inc. (the "Company"), or prior to January 7, 1999, Provident Bank (the "Bank"). Additional information is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes included as Item 7 and Item 8 of this report, respectively.

At September 30, ---------------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (Dollars in thousands) Selected Financial Condition Data: Total assets ................... $881,260 $844,303 $814,518 $691,068 $648,742 Loans, net ..................... 606,146 589,822 566,521 463,667 404,497 Securities available for sale... 163,928 162,157 148,387 97,983 84,670 Securities held to maturity .... 71,355 48,586 56,782 98,402 126,266 Deposits ....................... 653,100 608,976 586,640 573,174 546,846 Borrowings ..................... 110,427 127,571 117,753 49,931 41,623 Equity ......................... 102,620 90,986 90,299 55,200 50,399

Years Ended September 30, ------------------------------------------------------------ 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (Dollars in thousands) Selected Operating Data: Interest and dividend income ................................ $60,978 $58,899 $52,267 $47,948 $46,555 Interest expense ............................................ 26,244 26,034 21,589 20,880 20,179 ------- ------- ------- ------- ------- Net interest income ................................... 34,734 32,865 30,678 27,068 26,376 Provision for loan losses ................................... 1,440 1,710 1,590 1,737 1,058 ------- ------- ------- ------- ------- Net interest income after provision for loan losses.... 33,294 31,155 29,088 25,331 25,318 Non-interest income ......................................... 4,706 3,391 3,103 3,080 2,711 Non-interest expense (1) ................................... 26,431 25,808 26,303 21,823 20,602 ------- ------- ------- ------- ------- Income before income tax expense ............................ 11,569 8,738 5,888 6,588 7,427 Income tax expense .......................................... 4,087 2,866 1,958 2,346 2,829 ------- ------- ------- ------- ------- Net income (1) ....................................... $ 7,482 $ 5,872 $ 3,930 $ 4,242 $ 4,598 ======= ======= ======= ======= =======

(Footnotes on next page) 35

At or for the Years Ended September 30, ------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets)............ 0.87% 0.70% 0.52% 0.64% 0.72% Return on equity (ratio of net income to average equity).................. 7.71 6.58 5.03 7.94 9.51 Average interest rate spread (2).......................................... 3.56 3.51 3.66 3.79 3.92 Net interest margin (3)................................................... 4.20 4.12 4.24 4.28 4.36 Efficiency ratio (4)...................................................... 67.02 71.18 77.86 72.39 70.83 Non-interest expense to average total assets.............................. 3.06 3.08 3.47 3.29 3.24 Average interest-earning assets to average interest-bearing liabilities... 120.20 118.54 119.28 114.88 113.07 Per Share and Related Data: Basic earnings per share (5)............................................ $ 0.98 $ 0.76 $0.40 -- -- Diluted earnings per share ............................................. 0.97 0.76 0.40 -- -- Dividends per share .................................................... 0.22 0.15 0.06 -- -- Dividend payout ratio (6)............................................... 22.45% 19.74% 15.00% -- -- Book value per share (7)................................................ $ 12.79 $ 11.26 $10.91 -- -- ................................................................ Asset Quality Ratios: Non-performing assets to total assets..................................... 0.27% 0.50% 0.62% 0.94% 0.75% Non-performing loans to total loans....................................... 0.38 0.67 0.82 1.32 1.16 Allowance for loan losses to non-performing loans......................... 400.66 189.85 133.78 80.33 80.80 Allowance for loan losses to total loans.................................. 1.51 1.30 1.09 1.06 0.93 Capital Ratios: Equity to total assets at end of year..................................... 11.64% 10.77% 11.09% 7.99% 7.77% Average equity to average assets.......................................... 11.24 10.67 10.29 8.05 7.59 Tier 1 leverage ratio (Bank only)......................................... 10.20 9.59 9.56 7.37 6.96

------------------------------- (1) Non interest expense for fiscal 1999 includes special charges totaling approximately $1.5 million in connection with a computer system conversion ($1.1 million) and establishment of the employee stock ownership plan ("ESOP") ($371,000). Excluding these special charges, net income after taxes would have been approximately $4.9 million for fiscal 1999. (2) 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. (3) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. (4) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. (5) 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. (6) For fiscal 1999, the payout 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%. (7) Book value per share is based on total shareholders' equity and 8,024,166, 8,077,800 and 8,280,000 outstanding common shares at September 30, 2001, 2000 and 1999, respectfully. For this purpose, common shares include unallocated ESOP shares but exclude treasury shares. 36 Item 7. 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 County, New York. On January 7, 1999, the Bank completed its reorganization into a mutual holding company structure. Provident Bancorp, Inc. (the "Company"), which is the Bank's stock holding company, sold 3,864,000 shares or 46.67% of its common stock to the public and issued 4,416,000 shares or 53.33% to Provident Bancorp, MHC. As a result of the stock offering, the Company raised net proceeds of approximately $37.1 million, prior to the purchase of stock by the Employee Stock Ownership Plan (the "ESOP"). The ESOP, which did not purchase shares in the offering, purchased 8% of the shares issued to the public, or 309,120 shares, in the open market during January and February 1999. The financial condition and results of operations of the Company are being discussed on a consolidated basis with the Bank. Reference to the Company may signify the Bank, depending on the context and time period. 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 and data processing expenses. 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. 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. 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 has implemented new technologies to offer customers new financial products and services including PC banking, cash management services and sweep accounts, and intends to continue to do so as market and regulatory conditions permit. 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. Commercial and real estate loans improve the yield of the overall portfolio and shorten its average maturity. The Bank has established experienced commercial loan and loan administration departments to assure the continued growth and careful management of the quality of its assets. 37 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 addition, acknowledging the time pressures on the two-income families typical to its market area, seven of the Bank's branch offices are now open seven days a week. The Bank also has 20 automated teller machines ("ATM") including nine new, advanced-function ATMs that deliver change to the penny, in addition to the more typical ATM functions. Its ATMs also participate in networks that permit customers to access their accounts through ATMs worldwide. The Bank fosters a sales culture in its branch offices that emphasizes transaction accounts, the account most customers identify with "their" bank. During and immediately following the close of fiscal 2001, the Bank opened two additional branches in Rockland County, adding to its base of 11 conveniently located branches in Rockland County and two in Orange County. In November 2001, the Bank entered into an agreement and plan of merger with The National Bank of Florida ("NBF"), a commercial bank in Orange County that had total assets of $99.7 million and deposits of $81.2 million at September 30, 2001. The Bank will acquire all of the outstanding common shares of NBF in an all-cash transaction valued at approximately $28.1 million. Consummation of the merger is subject to approval by NBF shareholders and the receipt of all required regulatory approvals. As a result of the merger, which is anticipated to take place by the end of the first calendar quarter of 2002, NBF's main office and branch office will become branch offices of the Bank. The Bank intends to pursue opportunities to expand its branch network further as market conditions permit. 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. 38 The following table sets forth average balance sheets, average yields and costs, and certain other information for the years ended September 30, 2001, 2000 and 1999. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are monthly average balances which, in the opinion of management, are not materially different from daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

Years Ended September 30, 2001 2000 ----------------------------------- ---------------------------------- Average Average Outstanding Outstanding Balance Interest Yield/Rate Balance Interest Yield/Rate ----------- --------- ---------- ----------- -------- ---------- (Dollars in thousands) Interest-earning assets: Loans (1) .................................. $590,298 $ 46,434 7.87% $577,119 $ 45,043 7.80% Securities available for sale .............. 159,185 9,598 6.03 159,287 9,719 6.10 Securities held to maturity ................ 66,253 4,318 6.52 52,515 3,549 6.76 Other ...................................... 10,983 628 5.72 9,119 588 6.45 -------- -------- ---- -------- -------- ------ Total interest-earning assets ....... 826,719 60,978 7.38 798,040 58,899 7.38 -------- -------- Non-interest-earning assets ................ 36,624 38,770 -------- -------- Total assets............................... $863,343 $836,810 ======== ======== Interest-bearing liabilities: Savings deposits (2) ....................... $177,994 $ 2,898 1.63 $177,077 3,435 1.94 Money market deposits ...................... 86,717 2,245 2.59 77,475 2,029 2.62 NOW deposits ............................... 57,806 365 0.63 52,052 470 0.90 Certificates of deposit .................... 251,299 13,915 5.54 244,279 12,787 5.23 Borrowings ................................. 113,975 6,821 5.98 122,315 7,313 5.98 -------- -------- -------- -------- ------- Total interest-bearing liabilities .... 687,791 26,244 3.82 673,198 26,034 3.87 .Non-interest-bearing liabilities .......... 78,547 74,316 -------- -------- Total liabilities ..................... 766,338 747,514 Equity ..................................... 97,005 89,296 -------- Total liabilities and equity .......... $863,343 $836,810 ======== ======== Net interest income ........................ $ 34,734 $ 32,865 ======== ======== Net interest rate spread (3) ............... 3.56 3.51 Net interest-earning assets (4) ............ $138,928 $124,842 ======== ======== Net interest margin (5) .................... 4.20 4.12 Ratio of interest-earning assets to interest-bearing liabilities ...... 120.20% 118.54% ====== ======

Years Ended September 30, 1999 ---------------------------------- Average Outstanding Balance Interest Yield/Rate -------- -------- ---------- (Dollars in thousands) Interest-earning assets: Loans (1) .................................. $526,139 $ 40,209 7.64% Securities available for sale .............. 120,329 7,192 5.98 Securities held to maturity ................ 71,987 4,520 6.28 Other ...................................... 5,229 346 6.62 -------- -------- -------- Total interest-earning assets ....... 723,684 52,267 7.22 -------- Non-interest-earning assets ................ 35,165 -------- Total assets............................... $758,849 ======== Interest-bearing liabilities: Savings deposits (2) ....................... $171,585 3,398 1.98 Money market deposits ...................... 79,568 2,049 2.58 NOW deposits ............................... 45,628 467 1.02 Certificates of deposit .................... 235,620 11,560 4.91 Borrowings ................................. 74,328 4,115 5.53 -------- -------- -------- Total interest-bearing liabilities .... 606,729 21,589 3.56 ------- -------- .Non-interest-bearing liabilities .......... 74,064 -------- Total liabilities ..................... 680,793 Equity ..................................... 78,056 -------- Total liabilities and equity .......... $758,849 ======== Net interest income ........................ $ 30,678 ======== Net interest rate spread (3) ............... 3.66 Net interest-earning assets (4) ............ $116,955 ======== Net interest margin (5) .................... 4.24 Ratio of interest-earning assets to interest-bearing liabilities ...... 119.28% ======

------------------------------- (1) Balances include the effect of net deferred loan origination fees and costs, and the allowance for loan losses. (2) Includes club accounts and interest-bearing mortgage escrow balances. (3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average total interest-earning assets. 39 The following table presents the dollar amount of changes in interest income and interest expense for the major categories of the Company's interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

Years Ended September 30, ------------------------------------------------------------------ 2001 vs. 2000 2000 vs. 1999 -------------------------------- -------------------------------- Increase (Decrease) Increase (Decrease) Due to Total Due to Total ------------------- Increase -------------------- Increase Volume Rate (Decrease) Volume Rate (Decrease) ------ -------- -------- -------- ------ --------- (Dollars in thousands) Interest-earning assets: Loans ................................ $ 1,060 $ 331 $ 1,391 $ 4,119 $ 715 $ 4,834 Securities available for sale ........ (6) (115) (121) 2,380 147 2,527 Securities held to maturity .......... 899 (130) 769 (1,296) 325 (971) Other ................................ 112 (72) 40 251 (9) 242 ------- ------- ------- ------- ------- ------- Total interest-earning assets ... 2,065 14 2,079 5,454 1,178 6,632 ------- ------- ------- ------- ------- ------- Interest-bearing liabilities: Savings deposits ..................... 23 (560) (537) 109 (72) 37 Money market deposits ................ 239 (23) 216 (53) 33 (20) NOW deposits ......................... 48 (153) (105) 62 (59) 3 Certificates of deposit .............. 369 759 1,128 442 785 1,227 Borrowings ........................... (492) -- (492) 2,848 350 3,198 ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities 187 23 210 3,408 1,037 4,445 ------- ------- ------- ------- ------- ------- Change in net interest income .......... $ 1,878 $ (9) $ 1,869 $ 2,046 $ 141 $ 2,187 ======= ======= ======= ======= ======= =======

Comparison of Financial Condition at September 30, 2001 and September 30, 2000 Total assets increased to $881.3 million at September 30, 2001 from $844.3 million at September 30, 2000, an increase of $37.0 million, or 4.4%. The asset growth was primarily attributable to overall increases of $16.3 million in net loans and $24.5 million in securities. Net Loans. Net loans increased by $16.3 million, or 2.8%, in the year ended September 30, 2001, primarily due to increases of $14.3 million in residential mortgage loans. Residential mortgage loans increased to $358.2 million at September 30, 2001, from $343.9 million at September 30, 2000, a growth rate of 4.2%. The commercial loan portfolio (which includes commercial mortgage, construction and commercial business loans) decreased to $180.2 million at September 30, 2001, from $182.1 million at September 30, 2000 reflecting the slowing economic growth in the Bank's market area. The small decline in the commercial portfolio was primarily attributable to a decrease of $10.1 million in commercial construction loans to $19.5 million from $29.6 million, partially offset by increases in commercial mortgage loans of $4.3 million and commercial business loans of $3.9 million. Total consumer loans increased by $5.4 million. The allowance for loan losses increased by $1.4 million to $9.1 million at September 30, 2001 from $7.7 million at September 30, 2000. Asset quality remains high, with a ratio of non-performing loans ("NPLs") 40 to total loans of 0.38% at September 30, 2001, an improvement from 0.67% at September 30, 2000. Securities. The total securities portfolio increased by $24.5 million to $235.3 million at September 30, 2001 from $210.7 million at September 30, 2000. This net increase reflects a $1.7 million increase in securities available for sale to $163.9 million from $162.2 million and a $22.8 million increase in securities held to maturity to $71.4 million at September 30, 2001 from $48.6 million at September 30, 2000. During fiscal 2001, the Company reclassified its municipal debt securities, which had an amortized cost of $12.0 million at September 30, 2000, from the available for sale portfolio to the held to maturity portfolio, based on its present intent to retain these securities. Deposits. Total deposits increased by $44.1 million to $653.1 million at September 30, 2001 from $609.0 million at September 30, 2000. Total transaction account balances increased by $16.6 million, or 13.7%, in the year ended September 30, 2001, to $137.9 million from $121.3 million at September 30, 2000. Total savings and money market account balances increased by $31.6 million, or 13.3%, to $269.9 million at September 30, 2001 from $238.3 million at September 30, 2000. Total certificates of deposits decreased by $4.1 million, or 1.6%, to $245.3 million at September 30, 2001 from $249.4 million at September 30, 2000. As interest rates declined, many Bank customers allowed maturing higher rate certificates of deposit to roll into savings or money market accounts rather than lock in the lower rates in effect. Borrowings. Total borrowings decreased by $11.5 million to $110.4 million at September 30, 2001 from $122.0 million at September 30, 2000. The Bank was able to pay down borrowings, as the growth in transaction and savings accounts was sufficient to fund asset growth. Stockholders' Equity. Stockholders' equity increased by $11.6 million, or 12.8%, to $102.6 million at September 30, 2001 compared to $91.0 million at September 30, 2000, reflecting fiscal year net income of $7.5 million and a $4.9 million improvement in accumulated other comprehensive income (loss), principally the after-tax net unrealized gains and losses on the available-for-sale securities portfolio. Allocation of ESOP shares totaling $555,000 and vesting of shares issued under the Bank's recognition and retention plan of $577,000 also increased equity. The increases in equity were partially offset by cash dividends of $0.8 million and net treasury share purchases of $1.1 million. Comparison of Operating Results for the Years Ended September 30, 2001 and September 30, 2000 Net income for the year ended September 30, 2001 was $7.5 million, an increase of $1.6 million, or 27.4%, compared to net income of $5.9 million for the year ended September 30, 2000. The growth and changes in mix of assets and liabilities provided a 5.7% increase in net interest income, to $34.7 million from $32.9 million. Non-interest income grew by 38.8%, to $4.7 million from $3.4 million, while non-interest expense increased by only 2.4%. Interest Income. Interest income for the fiscal year ended September 30, 2001 grew by $2.1 million, or 3.5%, over the prior fiscal year to $61.0 million, primarily due to increased loan and securities volumes. Average interest-earning assets for the fiscal year ended September 30, 2001 were $826.7 million, an increase of $28.7 million, or 3.6%, compared to average interest-earning assets in the fiscal year ended September 30, 2000 of $798.0 million. Average loan balances grew by $13.2 million, while the average balances of securities and other earning assets increased by a combined $15.5 million. Although market interest rates declined significantly during fiscal 2001, the average yield on total earning assets remained the same as the prior year. The average yield on loans increased by 7 basis points to 7.87%, from 7.80%, reflecting the higher rates in effect when the loans were originated, as many of these loans carry fixed rates. The average yield on securities, which have shorter average maturities, declined somewhat during fiscal 2001, leaving the average earning asset yield unchanged on an overall basis. 41 Interest Expense. Interest expense increased by $210,000, or 0.8%, to $26.2 million for the year ended September 30, 2001 from $26.0 million for the year ended September 30, 2000. This was the net result of a $14.6 million or 2.2% increase in the average balance of total interest-bearing liabilities in fiscal 2001 compared to fiscal 2000, offset by a five basis point decrease in the average rate paid on such liabilities over the same period. Interest expense on savings and NOW accounts decreased in fiscal 2001 by $537,000 and $105,000, respectively, attributable to declines in the average rates paid of 31 basis points and 27 basis points, respectively. Partially offsetting the lower interest expense on savings and NOW accounts was an increase of $216,000 in interest expense on money market deposits to $2.2 million from $2.0 million. This increase was due to a $9.2 million increase in the average balance to $86.7 million from $77.5 million, which was partially offset by a three basis point decrease in the average rate paid to 2.59% from 2.62%. Interest expense on certificates of deposit increased by $1.1 million to $13.9 million from $12.8 million, due to a 31 basis point increase in the average rate paid to 5.54% from 5.23%, as well as a $7.0 million increase in the average balance to $251.3 million from $244.3 million. The increase in average rate paid occurred despite the large decline in market interest rates, as CDs added to the portfolio from June through December of 2000 were booked at relatively high rates. If current market interest rates continue at present levels, management expects that the existing CD portfolio will re-price at lower rates. Interest expense on borrowings from the Federal Home Loan Bank of New York (the "FHLB") decreased by $492,000 due to a decrease of $8.3 million in the average balance to $114.0 million from $122.3 million. Net Interest Income. For the years ended September 30, 2001 and 2000, net interest income was $34.7 million and $32.9 million, respectively. The $1.9 million increase in net interest income was primarily attributable to a $14.1 million increase in net earning assets (interest-earning assets less interest-bearing liabilities), to $138.9 million from $124.8 million, combined with a five basis point increase in the net interest rate spread to 3.56% from 3.51%. The Company's net interest margin increased to 4.20% in the year ended September 30, 2001 from 4.12% in the year ended September 30, 2000. Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level which is considered appropriate to absorb probable loan losses inherent in the existing portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of real estate collateral, current and anticipated economic conditions, volume and type of lending, and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses in order to maintain the adequacy of the allowance. Due to the steadily improving asset quality and the growing coverage ratio of the allowance for loan losses to non-performing loans, management determined that it was appropriate to reduce the loan loss provision to $1.4 million for fiscal 2001 compared to a provision of $1.7 million in fiscal 2000. Non-Interest Income. Non-interest income for the fiscal year ended September 30, 2001 was $4.7 million, an increase of $1.3 million over non-interest income for the fiscal year ended September 30, 2000, primarily reflecting higher collection of service charges on deposits, fees on asset management and trust services, and other fee income, which together increased by $561,000, or 20.3%. The Company also recorded gains on sales of securities of $531,000 for the current year, compared to only $9,000 of such gains for fiscal 2000. Other non-interest income increased by $263,000 over the prior fiscal year, including a $118,000 gain recognized in connection with the final repayment of a construction loan. 42 Non-Interest Expense. Non-interest expenses for the fiscal year ended September 30, 2001 totaled $26.4 million, or $623,000 more than expenses of $25.8 million for the fiscal year ended September 30, 2000. Compensation expense increased by $620,000, and occupancy and office operations increased by $456,000, both related partially to the opening of the new branch in Bardonia and preparation for opening the new supermarket branch in New City, which began operations in October 2001. Compensation expense also grew due to normal annual merit increases and staff additions. Also, advertising and promotion expenses increased by $411,000, or $37.5%, related to the opening of the new branches and the introduction of the Bank's new product lines. In addition, other expenses in the current fiscal year were higher by $335,000, or 7.8%, primarily because expenses in fiscal 2000 were reduced by the reversal of $318,000 in accruals made in fiscal 1999 for operational losses that did not materialize as originally expected. These increases were partially offset by fiscal 2001's decrease of $1.3 million in the amortization of branch purchase and deposit premiums, as the premiums associated with 1996 branch purchases became fully amortized. Income Taxes. Income tax expense was $4.1 million for the fiscal year ended September 30, 2001 compared to $2.9 million for fiscal 2000, representing effective tax rates of 35.3% and 32.8%, respectively. The higher effective tax rate in fiscal 2001 primarily reflects a lower level of state tax benefits from the REIT subsidiary in relation to total pre-tax income. 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 fiscal 1999, 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. 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 securities available for sale of $2.5 million was attributable to a $39.0 million increase in the average balance to $159.3 million from $120.3 million, as well as a 12 basis point increase in the average yield to 6.10% from 5.98%. The $971,000 decrease in income from securities held to maturity was attributable to a $19.5 million decrease in the average balance to $52.5 million from $72.0 million, which more than offset a 48 basis point increase in the average yield to 6.76% from 6.28%. < 43 Interest Expense. 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 which began late in fiscal 1999, and higher average balances in wholesale borrowings, which carry higher interest rates than the Bank's core deposits. Average interest-bearing 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 an $8.7 million increase in the average balance of certificates of deposit to $244.3 million from $235.6 million. Interest expense in savings deposits, money market and NOW accounts was substantially unchanged compared to fiscal 1999. Net Interest Income. 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. The 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. 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. 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. 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 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. 44 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. 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. 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 cash flows are derived from operating activities, investing activitites and financing activities as reported in the Consolidated Statements of Cash Flows in Item 8. The 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, 2001, 2000, and 1999, the Company's loan originations totaled $139.3 million, $135.5 million and $220.8 million, respectively. Purchases of mortgage-backed securities totaled $53.5 million, $9.2 million and $18.3 million for the years ended September 30, 2001, 2000 and 1999, respectively. Purchases of investment securities totaled $28.2 million, $31.3 million and $72.7 million for the years ended September 30, 2001, 2000 and 1999, respectively. These activities were funded primarily by deposit growth (a financing activity), and by principal repayments on loans and securities. Net proceeds of $37.1 million from the stock offering provided an additional source of financing cash flows during the year ended September 30, 1999. Loan origination commitments totaled $12.3 million at September 30, 2001, comprised of $2.3 million at adjustable or variable rates and $10.0 million at fixed rates. The Company anticipates that it will have sufficient funds available to meet current loan commitments. Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, and other factors. The net increase in total deposits was $44.1 million, $22.3 million and $13.5 million for the years ended September 30, 2001, 2000 and 1999, respectively. Certificates of deposit that are scheduled to mature in one year or less from September 30, 2001 totaled $218.9 million. Based upon prior experience and current pricing strategy, management believes that a significant portion of such deposits will remain with the Bank. The Company monitors its liquidity position on a daily basis, and any excess short-term liquidity is usually invested in overnight federal funds sold. The Company generally remains fully invested and meets additional funding requirements through FHLB borrowings (a financing activity), which amounted to $110.4 million at September 30, 2001. 45 At September 30, 2001, the Bank exceeded all of its regulatory capital requirements with a leverage capital level of $88.5 million, or 10.2% of adjusted assets (which is above the required level of $34.7 million, or 4.0%) and a risk-based capital level of $95.1 million, or 18.2% of risk-weighted assets (which is above the required level of $41.9 million, or 8.0%). These capital requirements, which are applicable to the Bank only, do not consider additional capital retained by the Company. See Note 15 of the Notes to Consolidated Financial Statements in Item 8 for additional information concerning the Bank's capital requirements. Recent Accounting Standards In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Among other things, SFAS No. 141 requires the use of the purchase method to account for all business combinations; use of the pooling-of-interests methods is not permitted for business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets must meet in order to be recognized and reported apart from goodwill. SFAS No. 142 requires that (i) goodwill not be amortized to expense, but instead be reviewed for impairment at least annually, with impairment losses charged to expense when they occur, and (ii) acquisition-related intangible assets recognized apart from goodwill be amortized to expense over their estimated useful lives. The Company is required to adopt the provisions of SFAS No. 141 immediately, and SFAS No. 142 effective October 1, 2002. However, goodwill acquired in a purchase business combination completed after June 30, 2001 (but before SFAS No. 142 is adopted in full) will not be amortized. Accordingly, if the pending acquisition of NBF is consummated in fiscal 2002, the resulting goodwill will not be amortized and the separately-recognized intangible assets (such as core deposit values) will be amortized over their estimated useful lives. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Management of Market Risk Qualitative Analysis. As with other financial institution holding companies, one of the Company's most significant forms of market risk is interest rate risk. The general objective of the Company's interest rate risk management is to determine the appropriate level of risk given the Company's business strategy, and then manage that risk in a manner that is consistent with the Company's policy to reduce the exposure of the Company's net interest income to changes in market interest rates. The Bank's asset/liability management committee ("ALCO"), which consists of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, the Company's operating environment, and capital and liquidity requirements, and modifies lending, investing and deposit gathering strategies accordingly. A committee of the Board of Directors reviews the ALCO's activities and strategies, the effect of those strategies on the Company's net interest margin, and the effect that changes in market interest rates would have on the value of the Company's loan and securities portfolios. The Company actively evaluates interest rate risk concerns in connection with its lending, investing, and deposit activities. The Company emphasizes the origination of residential monthly and bi-weekly fixed-rate mortgage loans, residential and commercial adjustable-rate mortgage loans, and consumer loans. Depending on market interest rates and the Company's capital and liquidity position, the Company may retain all of its newly originated fixed-rate, fixed-term residential mortgage loans or may sell all or a portion of such longer-term loans on a servicing-retained basis. The Company also invests in short-term securities, which generally have lower yields compared to longer-term investments. Shortening the maturities of the Company's interest-earning assets by increasing investments in shorter-term loans and securities helps to better match the maturities and interest rates of the Company's assets and liabilities, thereby reducing the exposure of the Company's net interest income to changes in market interest rates. These strategies may adversely impact net interest income due to lower initial yields on these investments in comparison to longer term, fixed-rate loans and investments. The Company has purchased interest rate caps with a notional amount of $50.0 million 46 to reduce the variability of cash flows from potentially higher interest payments associated with upward interest rate repricings on a portion of its certificate of deposit accounts and 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 $20.0 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 $30.0 million notional amount to the extent that the three-month LIBOR rate exceeds 8.25% at each quarterly determination date. These interest rate caps have not had a significant financial impact on the Company because interest rate levels have remained below the cap levels at substantially all times since inception of the agreements. See Note 16 of the Notes to Consolidated Financial Statements in Item 8 for an additional discussion of these agreements. Quantitative Analysis. Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in the Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. Both models assume estimated loan prepayment rates, reinvestment rates and deposit decay rates which seem most likely based on historical experience during prior interest rate changes. The table below sets forth, as of September 30, 2001, 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.

NPV Net Interest Income Estimated Increase Increase (Decrease) in Change 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) +300 $ 100,585 $ (41,999) (29.5)% $ 36,137 $ (5,304) (12.8)% +200 115,761 (26,823) (18.8) 37,610 (3,831) (9.2) +100 130,782 (11,802) (8.3) 39,049 (2,392) (5.8) 0 142,584 -- 0.0 41,441 - 0.0 -100 147,911 5,327 3.7 42,736 1,295 3.1 -200 151,770 9,186 6.4 42,991 1,550 3.7 -300 157,930 15,346 10.8 41,920 479 1.2

The table set forth above indicates that at September 30, 2001, in the event of an abrupt 200 basis point decrease in interest rates, the Company would be expected to experience a 6.4% increase in NPV, and a 3.7% increase in net interest income. In the event of an abrupt 200 basis point increase in interest rates, the Company would be expected to experience an 18.8% decrease in NPV, and a 9.2% decline in net interest income. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not reflect any actions management may undertake in response to changes in interest rates. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. It also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of the Company's sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and will differ from actual results. 47 ITEM 8. Financial Statements and Supplementary Data The following are included in this item: (A) Independent Auditors' Report (B) Consolidated Statements of Financial Condition as of September 30, 2001 and 2000 (C) Consolidated Statements of Income for the years ended September 30, 2001, 2000 and 1999 (D) Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2001, 2000 and 1999 (E) Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999 (F) Notes to Consolidated Financial Statements The supplementary data required by this item (selected quarterly financial data) is provided in Note 21 of the Notes to Consolidated Financial Statements. 48 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America. Stamford, Connecticut October 26, 2001, except as to note 2 which is as of November 2, 2001 49 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition September 30, 2001 and 2000 (Dollars in thousands, except per share data)

Assets 2001 2000 ---------- ---------- Cash and due from banks $ 16,447 $ 12,785 Securities (including $40,582 and $37,619 pledged as collateral for borrowings in 2001 and 2000, respectively): Available for sale, at fair value (amortized cost of $156,404 in 2001 and $163,057 in 2000 ) (note 4) 163,928 162,157 Held to maturity, at amortized cost (fair value of $73,660 in 2001 and $48,374 in 2000) (note 5) 71,355 48,586 --------- --------- Total securities 235,283 210,743 --------- --------- Loans (note 6): One- to four-family residential mortgage loans 358,198 343,871 Commercial real estate, commercial business and construction loans 180,179 182,070 Consumer loans 76,892 71,534 Allowance for loan losses (9,123) (7,653) --------- --------- Total loans, net 606,146 589,822 --------- --------- Accrued interest receivable, net (note 7) 5,597 5,495 Federal Home Loan Bank stock, at cost 5,521 7,023 Premises and equipment, net (note 8) 8,917 8,952 Deferred income taxes (note 11) 371 5,550 Other assets (notes 6, 12 and 16) 2,978 3,933 --------- --------- Total assets $ 881,260 $ 844,303 ========= ========= Liabilities and Stockholders' Equity Liabilities: Deposits (note 9) $ 653,100 $ 608,976 Borrowings (note 10) 110,427 127,571 Mortgage escrow funds (note 6) 6,197 5,971 Other 8,916 10,799 --------- --------- Total liabilities 778,640 753,317 --------- --------- Commitments and contingencies (notes 16 and 17) Stockholders' equity (notes 1 and 15): 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; 8,024,166 and 8,077,800 shares outstanding in 2001 and 2000, respectively) 828 828 Additional paid-in capital 36,535 36,356 Unallocated common stock held by employee stock ownership plan ("ESOP") (note 12) (2,350) (2,726) Common stock awards under recognition and retention plan ("RRP") (note 12) (1,729) (2,306) Treasury stock, at cost (255,834 shares in 2001 and 202,200 shares in 2000) (note 15) (4,298) (3,203) Retained earnings 69,252 62,577 Accumulated other comprehensive income (loss), net of taxes (note 13) 4,382 (540) --------- --------- Total stockholders' equity 102,620 90,986 --------- --------- Total liabilities and stockholders' equity $ 881,260 $ 844,303 ========= =========

See accompanying notes to consolidated financial statements 50 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income Years Ended September 30, 2001, 2000 and 1999 (Dollars in thousands, except per share data)

2001 2000 1999 ------- ------- ------- Interest and dividend income: Loans $46,434 $45,043 $40,209 Securities 13,916 13,268 11,641 Other earning assets 628 588 417 ------- ------- ------- Total interest and dividend income 60,978 58,899 52,267 ------- ------- ------- Interest expense: Deposits (note 9) 19,423 18,721 17,474 Borrowings 6,821 7,313 4,115 ------- ------- ------- Total interest expense 26,244 26,034 21,589 ------- ------- ------- Net interest income 34,734 32,865 30,678 Provision for loan losses (note 6) 1,440 1,710 1,590 ------- ------- ------- Net interest income after provision for loan losses 33,294 31,155 29,088 ------- ------- ------- Non-interest income: Banking fees and service charges 3,326 2,765 2,567 Loan servicing fees 229 260 298 Gain on sales of securities available for sale (note 4) 531 9 -- Other (note 6) 620 357 238 ------- ------- ------- Total non-interest income 4,706 3,391 3,103 ------- ------- ------- Non-interest expense: Compensation and employee benefits (note 12) 14,129 13,509 12,279 Occupancy and office operations (note 17) 4,261 3,805 3,370 Advertising and promotion 1,507 1,096 1,199 Data processing 1,561 1,494 1,301 Amortization of branch purchase premiums 359 1,625 1,720 Other 4,614 4,279 6,434 ------- ------- ------- Total non-interest expense 26,431 25,808 26,303 ------- ------- ------- Income before income tax expense 11,569 8,738 5,888 Income tax expense (note 11) 4,087 2,866 1,958 ------- ------- ------- Net income $ 7,482 $ 5,872 $ 3,930 ======= ======= ======= Earnings per common share, subsequent to the January 7, 1999 stock offering (note 14): Basic $ 0.98 $ 0.76 $ 0.40 Diluted 0.97 0.76 0.40 ======= ======= =======

See accompanying notes to consolidated financial statements 51 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Years Ended September 30, 2001, 2000 and 1999 (Dollars in thousands, except per share data)

Additional Unallocated Common Common Paid-in ESOP Stock Awards Treasury Retained Stock Capital Shares Under RRP Stock Earnings --------- --------- ---------- --------- --------- --------- Balance at September 30, 1998 $ -- $ -- $ -- $ -- $ -- $ 54,291 Net income -- -- -- -- -- 3,930 Other comprehensive loss (note 13) -- -- -- -- -- -- Total comprehensive income 1,578 Issuance of 8,280,000 common shares (note 1) 828 36,285 -- -- -- -- Initial capitalization of Provident Bancorp, MHC -- -- -- -- -- (100) Shares purchased by ESOP -- -- (3,760) -- -- -- ESOP shares allocated or committed to be released for allocation -- (23) 658 -- -- -- Cash dividends paid ($0.06 per common share) -- -- -- -- -- (367) --------- --------- --------- --------- --------- --------- Balance at September 30, 1999 828 36,262 (3,102) -- -- 57,754 Net income -- -- -- -- -- 5,872 Other comprehensive income (note 13) -- -- -- -- -- -- Total comprehensive income 6,775 Purchases of treasury stock (202,200 shares) -- -- -- -- (3,203) -- ESOP shares allocated or committed to be released for allocation -- 94 376 -- -- -- Awards of RRP shares -- -- -- (2,995) -- -- Vesting of RRP shares -- -- -- 689 -- -- Cash dividends paid ($0.15 per common share) -- -- -- -- -- (1,049) --------- --------- --------- --------- --------- --------- Balance at September 30, 2000 828 36,356 (2,726) (2,306) (3,203) 62,577 Net income -- -- -- -- -- 7,482 Other comprehensive income (note 13) -- -- -- -- -- -- Total comprehensive income 12,404 Purchases of treasury stock (59,034 shares) -- -- -- -- (1,155) -- Stock option transactions -- -- -- -- 60 -- ESOP shares allocated or committed to be released for allocation -- 179 376 -- -- -- Vesting of RRP shares -- -- -- 577 -- -- Cash dividends paid ($0.22 per common share) -- -- -- -- -- (807) --------- --------- --------- --------- --------- --------- Balance at September 30, 2001 $ 828 $ 36,535 $ (2,350) $ (1,729) $ (4,298) $ 69,252 ========= ========= ========= ========= ========= =========

Accumulated Other Total Comprehensive Stockholders' Income (Loss) Equity ------------ ------------- Balance at September 30, 1998 $ 909 $ 55,200 Net income -- 3,930 Other comprehensive loss (note 13) (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) Shares purchased by ESOP -- (3,760) ESOP shares allocated or committed to be Released for allocation -- 635 Cash dividends paid ($0.06 per common share) -- (367) --------- --------- Balance at September 30, 1999 (1,443) 90,299 Net income -- 5,872 Other comprehensive income (note 13) 903 903 --------- Total comprehensive income Purchases of treasury stock (202,200 shares) -- (3,203) ESOP shares allocated or committed to be Released for allocation -- 470 Awards of RRP shares -- (2,995) Vesting of RRP shares -- 689 Cash dividends paid ($0.15 per common share) -- (1,049) --------- --------- Balance at September 30, 2000 (540) 90,986 Net income -- 7,482 Other comprehensive income (note 13) 4,922 4,922 --------- Total comprehensive income Purchases of treasury stock (59,034 shares) -- (1,155) Stock option transactions -- 60 ESOP shares allocated or committed to be released for allocation -- 555 Vesting of RRP shares -- 577 Cash dividends paid ($0.22 per common share) -- (807) --------- --------- Balance at September 30, 2001 $ 4,382 $ 102,620 ========= =========

See accompanying notes to consolidated financial statements 52 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended September 30, 2001, 2000 and 1999 (Dollars in thousands)

2001 2000 1999 --------- --------- --------- Cash Flows from Operating Activities: Net income $ 7,482 $ 5,872 $ 3,930 Adjustments to reconcile net income to net cash Provided by operating activities: Provision for loan losses 1,440 1,710 1,590 Depreciation and amortization of premises And equipment 1,741 1,625 1,497 Amortization of branch purchase premiums 359 1,625 1,720 Net amortization of premiums and discounts On securities 109 85 239 ESOP and RRP expense 1,132 1,159 635 Originations of loans held for sale -- (361) (13,271) Proceeds from sales of loans held for sale -- 808 14,089 Deferred income tax expense (benefit) 1,897 (642) (1,488) Net changes in accrued interest receivable And payable (786) 992 (1,293) Other adjustments (principally net changes in 133 (640) 945 --------- --------- --------- other assets and other liabilities) Net cash provided by operating activities 13,507 12,233 8,593 --------- --------- --------- Cash Flows from Investing Activities: Purchases of securities: Available for sale (51,368) (35,746) (91,029) Held to maturity (30,366) (4,710) -- Proceeds from maturities, calls and other principal payments on securities: Available for sale 29,743 17,439 36,586 Held to maturity 19,396 12,869 41,510 Proceeds from sales of securities available for sale 16,760 6,001 -- Loan originations (139,297) (135,467) (220,813) Loan principal payments 121,129 109,580 115,525 Redemption (purchase) of Federal Home Loan Bank stock 1,502 (847) (2,486) Purchases of premises and equipment (1,706) (2,345) (2,670) Other investing activities 259 350 274 --------- --------- --------- Net cash used in investing activities (33,948) (32,876) (123,103) --------- --------- ---------

(Continued) 53 PROVIDENT BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows, Continued Years Ended September 30, 2001, 2000 and 1999 (Dollars in thousands)

2001 2000 1999 --------- --------- --------- Cash Flows from Financing Activities: Net increase in deposits $ 44,124 $ 22,336 $ 13,466 Net increase (decrease) in borrowings (17,144) 9,818 67,822 Net increase (decrease) in mortgage escrow funds 226 (4,518) 4,602 Treasury shares purchased (1,155) (3,203) -- Stock option transactions 60 -- -- Shares purchased for RRP awards (1,201) (1,794) -- Shares purchased by ESOP -- -- (3,760) Net proceeds from stock offering -- -- 37,113 Cash dividends paid (807) (1,049) (367) Initial capitalization of Provident Bancorp, MHC -- -- (100) --------- --------- --------- Net cash provided by financing activities 24,103 21,590 118,776 --------- --------- --------- Net increase in cash and cash equivalents 3,662 947 4,266 Cash and cash equivalents at beginning of year 12,785 11,838 7,572 --------- --------- --------- Cash and cash equivalents at end of year $ 16,447 $ 12,785 $ 11,838 ========= ========= ========= Supplemental Information: Interest payments $ 26,928 $ 25,382 $ 21,313 Income tax payments 3,110 4,185 1,446 Securities transferred from available for sale to held to maturity 11,865 -- -- Loans transferred to real estate owned 218 154 311 ========= ========= =========

See accompanying notes to consolidated financial statements. 54 PROVIDENT BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands except per share data) (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 309,120 shares or 8% of the number of shares sold in the Offering. 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) Pending Acquisition On November 2, 2001, Provident Bancorp, Inc. and the Bank entered into an Agreement and Plan of Merger with The National Bank of Florida ("NBF") under which the Bank will acquire all of NBF's outstanding common shares in an all-cash transaction valued at approximately $28,100. NBF will be merged with and into the Bank. At September 30, 2001, NBF had total assets of approximately $99,700 (unaudited) and total deposits of approximately $81,200 (unaudited). The acquisition will be accounted for using the purchase method of accounting for business combinations. Accordingly, the assets acquired and liabilities assumed by the Bank will be recorded at their fair values at the acquisition date. The excess of the total acquisition cost over the fair value of the net assets acquired will be recorded as intangible assets (consisting of both goodwill and intangible assets recognized apart from goodwill) that will be accounted for in accordance with the recently-issued accounting standards described in note 19. Operating results attributable to the NBF acquisition will be included in the Company's consolidated financial statements from the date of acquisition. Completion of the transaction is subject to approval by regulators and by the shareholders of NBF. The transaction is expected to close during the first calendar quarter of 2002. (3) 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 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. 55 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. 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. 56 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 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. 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 OTS, 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, results of 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, 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. 57 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. Premium amortization was $359, $1,625 and $1,720 for the years ended September 20, 2001, 2000 and 1999, respectively. All premiums became fully amortized during the year ended September 30, 2001. 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 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. Disclosure of the pledged securities has been made in the consolidated statements of financial condition because the counterparty has the right by contract to sell or repledge the collateral. 58 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 Interest rate cap agreements are accounted for as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which the Company adopted as of October 1, 2000. These agreements are used to reduce the variability of cash flows from potentially higher interest payments associated with upward interest rate repricings on a portion of the Company's certificate of deposit accounts and borrowings. In accordance with SFAS No. 133, the interest rate cap agreements are reported as assets or liabilities at their fair value. Changes in time value are reported in interest expense, and changes in intrinsic value of a derivative that is highly effective are reported in other comprehensive income until earnings are affected by the variability in cash flows of the hedged liabilities. Prior to the adoption of SFAS No. 133, payments (if any) due from the counterparties were recognized as a reduction of interest expense and premiums paid by the Company were amortized on a straight-line basis to interest expense. 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. 59 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. 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. 60 (4) Securities Available for Sale The following is a summary of securities available for sale at September 30, 2001 and 2000:

Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- September 30, 2001 Mortgage-Backed Securities Fannie Mae $ 21,525 $ 613 $ -- $ 22,138 Freddie Mac 26,875 883 (9) 27,749 Other 9,478 162 -- 9,640 --------- --------- --------- --------- 57,878 1,658 (9) 59,527 --------- --------- --------- --------- Investment Securities U.S. Government and Agency securities 48,869 2,288 -- 51,157 Corporate debt securities 48,367 2,505 -- 50,872 Equity securities 1,290 1,143 (61) 2,372 --------- --------- --------- --------- 98,526 5,936 (61) 104,401 --------- --------- --------- --------- Total available for sale $ 156,404 $ 7,594 $ (70) $ 163,928 ========= ========= ========= ========= 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 ========= ========= ========= =========

Equity securities principally consist of Freddie Mac and Fannie Mae common and preferred stock. The following is a summary of the amortized cost and fair value of investment securities available for sale (other than equity securities) at September 30, 2001, by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or prepay their obligations. 61 Amortized Fair Cost Value -------- -------- Remaining period to contractual maturity: Less than one year $ 6,108 $ 6,278 One to five years 82,091 86,317 Five to ten years 7,240 7,632 Greater than ten years 1,797 1,802 -------- -------- Total $ 97,236 $102,029 ======== ======== The following is an analysis of the amortized cost and weighted average yield of securities available for sale (other than equity securities), segregated between fixed-rate and adjustable-rate securities:

Fixed Adjustable Rate Rate Total ------------ ----------- ------------ September 30, 2001 Amortized cost $ 145,194 $ 9,920 $155,114 Weighted average yield 6.12% 6.16% 6.12% September 30, 2000 Amortized cost $ 148,464 $11,392 $159,856 Weighted average yield 5.95% 7.52% 6.06%

Proceeds from sales of securities available for sale during the years ended September 30, 2001 and 2000 totaled $16,760 and $6,001, respectively, resulting in gross realized gains of $531 and $9, respectively. There were no sales of securities available for sale during the year ended September 30, 1999. The Company transferred securities with a fair value of $11,865 from its available-for-sale portfolio to its held-to-maturity portfolio during the year ended September 30, 2001, based on an evaluation of the respective portfolios and the Company's investment policy and strategies. The securities were assigned a new cost basis in the held-to-maturity portfolio equal to their fair value at the transfer date. The net unrealized loss of $146 at the transfer date and the related discounts are being amortized as offsetting yield adjustments over the terms of the securities. At September 30, 2001 and 2000, U.S. Government securities with carrying amounts of $4,772 and $5,166, respectively, were pledged as collateral for purposes other than the borrowings described in note 10. 62 (5) Securities Held to Maturity The following is a summary of securities held to maturity at September 30, 2001 and 2000:

Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- September 30, 2001 Mortgage-Backed Securities Fannie Mae $ 27,971 $ 983 $ (1) $ 28,953 Freddie Mac 26,477 917 -- 27,394 Ginnie Mae and other 5,001 152 -- 5,153 -------- -------- -------- -------- 59,449 2,052 (1) 61,500 Investment Securities State and municipal securities 11,906 254 -- 12,160 -------- -------- -------- -------- Total held to maturity $ 71,355 $ 2,306 $ (1) $ 73,660 ======== ======== ======== ======== September 30, 2000 Mortgage-Backed Securities Fannie Mae $ 21,531 $ 107 $ (138) $ 21,500 Freddie Mac 17,105 19 (222) 16,902 Ginnie Mae and other 6,562 60 (4) 6,618 -------- -------- -------- -------- 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 ======== ======== ======== ========

63 The following is a summary of the amortized cost and fair value of investment securities held to maturity at September 30, 2001, 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: One to five years $ 604 $ 622 Five to ten years 6,727 6,880 Greater than ten years 4,575 4,658 ------- ------- Total $11,906 $12,160 ======= ======= The following is an analysis of the amortized cost and weighted average yield of securities held to maturity, segregated between fixed-rate and adjustable-rate securities:

Fixed Adjustable Rate Rate Total --------- ---------- --------- September 30, 2001 Amortized cost $ 64,553 $ 6,802 $ 71,355 Weighted average yield 6.25% 5.39% 6.16% September 30, 2000 Amortized cost $ 39,829 $ 8,757 $ 48,586 Weighted average yield 6.77% 7.72% 6.94%

There were no sales of securities held to maturity during the years ended September 30, 2001, 2000 and 1999. 64 (6) Loans The components of the loan portfolio were as follows at September 30: 2001 2000 --------- --------- One- to four-family residential mortgage loans: Fixed rate $ 278,668 $ 257,138 Adjustable rate 79,530 86,733 --------- --------- 358,198 343,871 --------- --------- Commercial real estate loans 129,295 124,988 Commercial business loans 31,394 27,483 Construction loans 19,490 29,599 --------- --------- 180,179 182,070 --------- --------- Home equity lines of credit 31,125 28,021 Homeowner loans 39,501 37,027 Other consumer loans 6,266 6,486 --------- --------- 76,892 71,534 --------- --------- Total loans 615,269 597,475 Allowance for loan losses (9,123) (7,653) --------- --------- Total loans, net $ 606,146 $ 589,822 ========= ========= Total loans include net deferred loan origination costs of $914 and $728 at September 30, 2001 and 2000, 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. 65 The principal balances of non-accrual loans were as follows at September 30: 2001 2000 ------ ------ One- to four-family residential mortgage loans $1,684 $2,496 Commercial real estate loans 418 1,149 Construction loans -- 27 Consumer loans 175 359 ------ ------ Total non-accrual loans $2,277 $4,031 ====== ====== The allowance for uncollected interest, representing the amount of interest on non-accrual loans that has not been recognized in interest income, was $383 and $485 at September 30, 2001 and 2000, 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 $165 in fiscal 2001, $337 in fiscal 2000 and $395 in fiscal 1999. Interest income actually recognized on such loans (including income recognized on a cash basis) totaled $13, $77 and $131 for the years ended September 30, 2001, 2000 and 1999, respectively. The Company's total recorded investment in impaired loans, as defined by SFAS No. 114, was $358 and $1,176 at September 30, 2001 and 2000, 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, 2001 and 2000 due to the adequacy of collateral values. The Company's average recorded investment in impaired loans was $768, $1,196 and $2,577 during the years ended September 30, 2001, 2000 and 1999, respectively. Activity in the allowance for loan losses is summarized as follows for the years ended September 30: 2001 2000 1999 ------- ------- ------- Balance at beginning of year $ 7,653 $ 6,202 $ 4,906 Provision for loan losses 1,440 1,710 1,590 Charge-offs (159) (370) (922) Recoveries 189 111 628 ------- ------- ------- Balance at end of year $ 9,123 $ 7,653 $ 6,202 ======= ======= ======= 66 Real estate owned properties are included in other assets at net carrying amounts of $109 and $154 at September 30, 2001 and 2000, respectively. Provisions for losses and other activity in the allowance for losses on real estate owned were insignificant during the years ended September 30, 2001, 2000 and 1999. 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 and $162 for the years ended September 30, 2000 and 1999, respectively (none for the year ended September 30, 2001). There were no loans held for sale at September 30, 2001 and 2000. Other assets at September 30, 2001 and 2000 include capitalized mortgage servicing rights with an amortized cost of $201 and $229, respectively, which approximated fair value. The Company generally retains the servicing rights on mortgage loans sold. Servicing loans for others includes collecting payments, maintaining escrow accounts, making remittances to investors and, if necessary, processing foreclosures. Mortgage loans serviced for others totaled approximately $86,700, $98,500 and $109,000 at September 30, 2001, 2000 and 1999, respectively. These amounts include loans sold with recourse (approximately $1,200 at September 30, 2001) for which management does not expect the Company to incur any significant losses. Mortgage escrow funds include balances of $1,416 and $1,680 at September 30, 2001 and 2000, respectively, related to loans serviced for others. (7) Accrued Interest Receivable The components of accrued interest receivable were as follows at September 30: 2001 2000 ------ ------ Loans, net of allowance for uncollected interest of $383 in 2001 and $485 in 2000 $2,971 $2,917 Securities 2,626 2,578 ------ ------ Total accrued interest receivable, net $5,597 $5,495 ====== ====== 67 (8) Premises and Equipment Premises and equipment are summarized as follows at September 30: 2001 2000 -------- -------- Land and land improvements $ 1,090 $ 1,090 Buildings 4,775 4,807 Leasehold improvements 4,163 3,304 Furniture, fixtures and equipment 9,607 8,712 -------- -------- 19,635 17,913 Accumulated depreciation and amortization (10,718) (8,961) -------- -------- Total premises and equipment, net $ 8,917 $ 8,952 ======== ======== (9) Deposits Deposit balances and weighted average interest rates are summarized as follows at September 30: 2001 2000 ----------------- ----------------- Amount Rate Amount Rate ------ ---- ------ ---- Demand deposits: Retail $ 41,280 --% 38,145 --% Commercial 33,081 -- 28,324 -- NOW deposits 63,509 0.49 54,800 1.01 Savings deposits 160,777 1.05 161,987 2.02 Money market deposits 109,126 1.81 76,332 2.55 Certificates of deposit 245,327 4.63 249,388 5.83 -------- ---- Total deposits $653,100 2.31% $608,976 3.34% ======== ======= Certificates of deposit at September 30 had remaining periods to contractual maturity as follows: 2001 2000 -------- -------- Remaining period to contractual maturity: Less than one year $218,850 $176,756 One to two years 20,433 59,579 Two to three years 2,499 9,788 Greater than three years 3,545 3,265 -------- -------- Total certificates of deposit $245,327 $249,388 ======== ======== 68 Certificate of deposit accounts with a denomination of $100 or more totaled $32,660 and $31,003 at September 30, 2001 and 2000, respectively. The FDIC generally insures depositor accounts up to $100 as defined in the applicable regulations. Interest expense on deposits is summarized as follows for the years ended September 30: 2001 2000 1999 ------- ------- ------- Savings deposits $ 2,898 $ 3,435 $ 3,398 Money market and NOW deposits 2,610 2,499 2,516 Certificates of deposit 13,915 12,787 11,560 ------- ------- ------- Total interest expense $19,423 $18,721 $17,474 ======= ======= ======= (10) Borrowings The Company's borrowings and weighted average interest rates are summarized as follows at September 30:

2001 2000 ------------------- ------------------- Amount Rate Amount Rate -------- ---- -------- ---- FHLB borrowings by remaining period to maturity: Less than one year $ 39,950 6.20% $ 42,600 6.70% One to two years 20,477 4.73 33,750 6.74 Two to three years 15,000 5.43 10,625 5.90 Three to four years 10,000 3.74 15,000 5.43 Four to five years -- -- 10,000 6.68 Greater than five years 25,000 4.96 10,000 5.19 -------- 110,427 5.32 121,975 6.36 Bank overdraft -- 5,596 -------- ------- Total borrowings $110,427 $127,571 ======== ========

69 FHLB borrowings include securities repurchase agreements of $39,750 at September 30, 2001 and $34,750 at September 30, 2000, with weighted average interest rates of 5.18% and 5.70% and weighted average remaining terms to maturity of approximately 63 months and 45 months at the respective dates. Securities with carrying amounts of $40,582 and $37,619 were pledged as collateral for these borrowings at September 30, 2001 and 2000, respectively. Average borrowings under securities repurchase agreements were $36,417, $40,515 and $18,330 during the years ended September 30, 2001, 2000 and 1999, respectively, and the maximum outstanding month-end balance was $39,750, $44,750 and $44,750, respectively. The remaining FHLB borrowings were advances of $70,677 and $87,225 at September 30, 2001 and 2000, 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 $264,400 at September 30, 2001, in a combination of term and overnight advances. The Bank's unused FHLB borrowing capacity was approximately $193,700 at September 30, 2001. FHLB advances are secured by the Bank's 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, 2001 and 2000. FHLB borrowings of $40,000 at September 30, 2001 are callable at the discretion of the FHLB beginning on various dates during fiscal 2002 and 2003. These borrowings have weighted average remaining terms to the initial call dates and the contractual maturity dates of approximately 1 year and 6 years, respectively. The weighted average interest rate on callable borrowings was 5.13% at September 30, 2001. (11) Income Taxes Income tax expense consists of the following for the years ended September 30: 2001 2000 1999 ------- ------- ------- Current tax expense: Federal $ 1,839 $ 3,214 $ 2,832 State 351 294 614 ------- ------- ------- 2,190 3,508 3,446 ------- ------- ------- Deferred tax expense (benefit): Federal 1,800 (472) (1,097) State 97 (170) (391) ------- ------- ------- 1,897 (642) (1,488) ------- ------- ------- Total income tax expense $ 4,087 $ 2,866 $ 1,958 ======= ======= ======= 70 Actual income tax expense for the years ended September 30 differs from the amount computed by applying the statutory Federal tax rate of 34% to income before income taxes, for the following reasons:

2001 2000 1999 ------- ------- ------- Tax at Federal statutory rate $ 3,933 $ 2,971 $ 2,002 State income taxes, net of Federal tax effect 296 82 147 Tax-exempt interest (148) (139) (102) Low-income housing tax credits (72) (72) (72) Other, net 78 24 (17) ------- ------- ------- Actual income tax expense $ 4,087 $ 2,866 $ 1,958 ======= ======= ======= Effective income tax rate 35.3% 32.8% 33.3% ======= ======= =======

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30 are as follows:

2001 2000 ------ ------ Deferred tax assets: Allowance for loan losses $3,516 $3,134 Branch purchase premium amortization 1,904 2,002 Deferred compensation 1,389 1,093 Depreciation of premises and equipment 448 145 Net unrealized loss on securities available for sale -- 360 Other 164 321 ------ ------ Total deferred tax assets 7,421 7,055 ------ ------ Deferred tax liabilities: Undistributed earnings of subsidiary not consolidated for tax return purposes (Provident REIT, Inc.) 3,193 483 Net unrealized gain on securities available for sale 2,954 -- Prepaid pension costs 394 475 Other 509 547 ------ ------ Total deferred tax liabilities 7,050 1,505 ------ ------ Net deferred tax asset $ 371 $5,550 ====== ======

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, 2001 and 2000. 71 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 $28,000 for New York State tax purposes at September 30, 2001. 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. (12) 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. 72 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:

2001 2000 ------- ------- Changes in projected benefit obligations: Beginning of year $ 5,421 $ 5,543 Service cost 465 515 Interest cost 427 409 Actuarial loss (gain) 640 (315) Benefits paid (64) (731) ------- ------- End of year 6,889 5,421 ------- ------- Changes in fair value of plan assets: Beginning of year 7,459 6,464 Actual (loss) return on plan assets (1,150) 1,126 Employer contributions 140 600 Benefits paid (64) (731) ------- ------- End of year 6,385 7,459 ------- ------- Funded status at end of year (504) 2,038 Unrecognized net actuarial loss (gain) 1,500 (893) Unrecognized prior service cost (82) (96) Unrecognized net transition obligation 86 112 ------- ------- Prepaid pension costs (included in other assets) $ 1,000 $ 1,161 ======= =======

A discount rate of 7.25% 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, 2001 (7.75% and 5.5%, respectively, at September 30, 2000). The expected long-term rate of return on plan assets was 8.0% for 2001 and 2000. The components of the net periodic pension expense were as follows for the years ended September 30:

2001 2000 1999 ----- ----- ----- Service cost $ 465 $ 515 $ 475 Interest cost 427 409 402 Expected return on plan assets (600) (539) (425) Amortization of prior service cost (14) (14) (14) Amortization of net transition obligation 26 26 26 Recognized net actuarial (gain) loss (2) -- 23 ----- ----- ----- Net periodic pension expense $ 302 $ 397 $ 487 ===== ===== =====

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 $59, $54 and $53 for the years ended September 30, 2001, 2000 and 1999, respectively. The actuarial present value of the projected benefit obligation was $296 and $226 at September 30, 2001 and 2000, respectively, all of which is unfunded. The obligations at September 30, 2001 and 2000 were determined using discount rates of 7.25% and 7.75%, respectively, and a rate of increase in future compensation of 4.5%. 73 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 as an expense over a 20-year period. The periodic expense recognized for this plan was $37, $39 and $44 for the years ended September 30, 2001, 2000 and 1999, respectively. Employee Savings Plans 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 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 $184, $180 and $212 for the years ended September 30, 2001, 2000 and 1999, respectively. A supplemental savings plan has also been established for certain senior officers. Expense recognized for this plan was $62, $53 and $41 for the years ended September 30, 2001, 2000 and 1999, 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 $555, $470 and $635 for the years ended September 30, 2001, 2000 and 1999, respectively. The fiscal 1999 expense consisted of (i) $371 attributable to the allocation of shares to participants with respect to the initial plan year ended December 31, 1998, and (ii) $264 attributable to shares committed to be released to participants during the nine months ended September 30, 1999. Through September 30, 2001, a cumulative total of 115,670 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 (193,450 shares with a cost of $2,350 at September 30, 2001). The fair value of these shares was approximately $4,200 at that date. 74 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 $577 and $689 for the years ended September 30, 2001 and 2000, respectively. 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. 75 The following is a summary of activity in the Stock Option Plan:

Shares Subject Weighted Average to Option Exercise Price -------------- ---------------- Granted in February 2000 366,650 $ 15.50 Forfeited (11,250) 15.50 -------- --------- Outstanding at September 30, 2000 355,400 15.50 Forfeited (1,200) 15.50 Exercised (10,851) 15.50 Granted 5,451 21.15 -------- --------- Outstanding at September 30, 2001 348,800 $ 15.59 ======== ========= Exercisable at September 30, 2001 (weighted average remaining term of 8.4 years) 137,815 $ 15.50 ======== ========= Available for future option grants 32,200 ======

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 $7,100 and $5,300 for the years ended September 30, 2001 and 2000, respectively. Basic and diluted earnings per common share would have been $0.93 and $0.92, respectively, for fiscal 2001 and $0.68 for fiscal 2000. 76 (13) 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) is summarized as follows for the years ended September 30:

2001 2000 1999 ------- ------- ------- Net unrealized holding gain (loss) arising during the year on securities available for sale, net of related income taxes of $(3,526), ($606) and $1,570, respectively $ 5,289 $ 908 $(2,352) Reclassification adjustment for net realized gains included in net income, net of related income taxes of $212 and $4 in 2001 and 2000, respectively (319) (5) -- ------- ------- ------- 4,970 903 (2,352) Net unrealized loss on derivatives qualifying as cash flow hedges, net of related income taxes of $32 in 2001 (note 16) (48) -- -- ------- ------- ------- Other comprehensive income (loss) $ 4,922 $ 903 $(2,352) ======= ======= =======

The Company's accumulated other comprehensive income at September 30, 2001 consists of (i) the after-tax net unrealized gain of $4,430 on securities available for sale, including securities transferred to held to maturity, and (ii) the after-tax net unrealized loss of $48 on derivatives qualifying as cash flow hedges. At September 30, 2000, accumulated other comprehensive loss represented the after-tax net unrealized loss of $540 on securities available for sale. 77 (14) Earnings Per Common Share The following is a summary of the calculation of earnings per share ("EPS") for the years ended September 30, 2001 and 2000, and for the nine-month period ended September 30, 1999 subsequent to the Reorganization and Offering. For purposes of computing basic EPS, net income applicable to common stock equaled net income for each period presented.

2001 2000 1999 ------- ------- ------- (In thousands, except per share data) Net income $ 7,482 $ 5,872 $ 3,202 (1) ======= ========= =========== Weighted average common shares outstanding for computation of basic EPS (2) 7,661 7,773 8,041 Common-equivalent shares due to the dilutive effect of stock options and RRP awards (3) 50 -- -- ------- --------- ----------- Weighted average common shares for computation of diluted EPS 7,711 7,773 8,041 ======= ========= =========== Earnings per common share: Basic $ 0.98 $ 0.76 $ 0.40 Diluted 0.97 0.76 0.40 ======= ========= ===========

(1) Represents net income for the nine-month period subsequent to the Reorganization and Offering. (2) Includes all shares issued to the Mutual Holding Company, but excludes unvested RRP shares and unallocated ESOP shares that have not been released or committed to be released to participants. (3) Computed using the treasury stock method. (15) 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%. 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. 78 Management believes that, as of September 30, 2001 and 2000, 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, 2001 and 2000, compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution:

OTS Requirements ------------------------------------------------------------------ Minimum Capital Classification as Bank Actual Adequacy Well Capitalized -------------------- ------------------ ------------------- Amount Ratio Amount Ratio Amount Ratio ------- ------- ------- ------- ------- ------ September 30, 2001 Tangible capital $88,526 10.2% $13,015 1.5% $ -- --% Tier 1 (core) capital 88,526 10.2 34,706 4.0 43,383 5.0 Risk-based capital: Tier 1 88,526 16.9 -- -- 31,404 6.0 Total 95,100 18.2 41,873 8.0 52,341 10.0 ======= ==== ======= === ======= ==== September 30, 2000 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 ======= ==== ======= === ======= ====

Dividend Payments Under 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. Dividend payments 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 years ended September 30, 2001 and 1999). Unlike the Bank, Provident Bancorp, Inc. is not subject to OTS regulatory limitations on the payment of dividends to its shareholders. Through September 30, 2001, the Mutual Holding Company has waived receipt of $1,281 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 68,034 shares have been purchased for the treasury under the second program through September 30, 2001 at a total cost of $1,297. 79 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. (16) 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: 2001 2000 ------- ------- Lending-Related Instruments: Loan origination commitments: Fixed-rate loans $ 9,983 $ 9,412 Adjustable-rate loans 2,282 1,993 Unused lines of credit 37,748 35,529 Standby letters of credit 6,716 7,548 Interest Rate Risk Management: Interest rate cap agreements 50,000 50,000 ======= ======= 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 6. 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, 2001 provide for interest rates ranging from 6.00% to 7.13%. 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. 80 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. Interest Rate Cap Agreements The Company's derivative instruments consist solely of two interest rate cap agreements with a total notional amount of $50,000 at both September 30, 2001 and 2000. The agreements mature in March and April 2003, and are used to reduce the variability of cash flows from potentially higher interest payments associated with upward interest rate repricings on a portion of the Company's certificate of deposit accounts and borrowings. The counterparties to the agreements are obligated to make 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 are 8.25% and 6.50% for interest rate cap agreements with notional amounts of $30,000 and $20,000, respectively. The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as of October 1, 2000, and recorded an after-tax transition adjustment of $41 to recognize at fair value the interest rate cap agreements designated as cash flow hedging instruments. SFAS No. 133 requires that derivative instruments be reported as either assets or liabilities, at fair value, in the consolidated statement of financial condition. Changes in the fair value of derivative instruments used for hedging purposes are reported in either current earnings or in stockholders' equity (accumulated other comprehensive income or loss), depending on whether the derivatives are used in a cash flow hedge, a fair value hedge, or a foreign currency hedge, and whether the pertinent hedge criteria specified in SFAS No. 133 are met. These criteria include a requirement that derivatives used for hedging purposes be highly effective in offsetting changes in the fair values or cash flows of the hedged items. If a derivative ceases to be highly effective, hedge accounting is discontinued prospectively. The Company's interest rate cap agreements are accounted for as cash flow hedges under SFAS No. 133 and are reported at their fair value. Other assets at September 30, 2001 include the Company's interest rate cap agreements at a fair value of $4. Interest expense for the year ended September 30, 2001 includes a charge of $157 for the change in the agreements' time value. There were no gains or losses recognized in earnings hedge ineffectiveness during fiscal 2001, and no cash flow hedges were discontinued during the year. Accumulated other comprehensive income at September 30, 2001 includes an after-tax unrealized loss of $48 from adjusting the interest rate cap agreements to fair value. Due to the near-term maturity of the two outstanding agreements, the majority of the amount reported in accumulated other comprehensive income at September 30, 2001 will be reclassified into earnings during the fiscal year ending September 30, 2002. (17) 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, 2001 are $1,839 for fiscal 2002; $1,847 for fiscal 2003; $1,833 for fiscal 2004; $1,629 for fiscal 2005; $1,146 for fiscal 2006; and a total of $3,291 for later years. 81 Occupancy and office operations expense includes net rent expense of $1,076, $1,008 and $910 for the years ended September 30, 2001, 2000 and 1999, 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. (18) Fair Values of Financial Instruments SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information for those financial instruments for which it is practicable to estimate fair value, whether or not such financial instruments are recognized in the consolidated statements of financial condition. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. 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):

2001 2000 ------------------------- ------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Financial Assets: Cash and due from banks $ 16,447 $ 16,447 $ 12,785 $ 12,785 Securities available for sale 163,928 163,928 162,157 162,157 Securities held to maturity 71,355 73,660 48,586 48,374 Loans 606,146 624,020 589,822 576,568 Accrued interest receivable 5,597 5,597 5,495 5,495 FHLB stock 5,521 5,521 7,023 7,023 Financial Liabilities: Deposits 653,100 655,675 608,976 608,450 Borrowings 110,427 113,970 127,571 127,015 Mortgage escrow funds 6,197 6,197 5,971 5,971 ======== ======== ======== ========

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. 82 Loans Fair values were estimated for portfolios of loans with similar financial characteristics. For valuation purposes, the total loan portfolio was segregated into adjustable-rate and fixed-rate categories. 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. 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 at September 30, 2000 has an estimated fair value equal to the carrying amount. Other Financial Instruments The other financial assets and liabilities listed in the preceding table have estimated fair values that approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk. The fair value of the Company's interest rate cap agreements described in note 16 was estimated by reference to market terms for similar agreements at the valuation date. The fair values of the Company's lending-related off-balance-sheet financial instruments described in note 16 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, 2001 and 2000, the estimated fair values of these instruments approximated the related carrying amounts which were not significant. 83 (19) Recent Accounting Standards In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Among other things, SFAS No. 141 requires the use of the purchase method to account for all business combinations; use of the pooling-of-interests method is not permitted for business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets must meet in order to be recognized and reported apart from goodwill. SFAS No. 142 requires that (i) goodwill not be amortized to expense, but instead be reviewed for impairment at least annually, with impairment losses charged to expense when they occur, and (ii) acquisition-related intangible assets recognized apart from goodwill be amortized to expense over their estimated useful lives. The Company is required to adopt the provisions of SFAS No. 141 immediately, and SFAS No. 142 effective October 1, 2002. However, goodwill acquired in a purchase business combination completed after June 30, 2001 (but before SFAS No. 142 is adopted in full) will not be amortized. Accordingly, if the pending acquisition of NBF described in note 2 is consummated in fiscal 2002, the resulting goodwill will not be amortized and the separately-recognized intangible assets (such as core deposit values) will be amortized over their estimated useful lives. (20) Condensed Parent Company Financial Statements Set forth below are the condensed statements of financial condition of Provident Bancorp, Inc. at September 30, 2001 and 2000, together with the related condensed statements of income and cash flows for the years then ended and for the period from January 7, 1999 (date of the Reorganization and Offering) through September 30,1999.

At September 30, ---------------------- 2001 2000 -------- -------- Condensed Statements of Financial Condition ------------------------------------------- Assets Cash and cash equivalents $ 2,847 $ 129 Securities available for sale 6,510 10,396 Loan receivable from ESOP 2,632 3,008 Investment in Provident Bank 90,419 77,084 Other assets 305 434 -------- -------- Total assets $102,713 $ 91,051 ======== ======== Liabilities $ 93 $ 65 Stockholders' Equity 102,620 90,986 -------- -------- Total liabilities and stockholders' equity $102,713 $ 91,051 ======== ========

84

Year Ended September 30, Period Ended ------------------------- September 30, 2001 2000 1999 -------- -------- -------- Condensed Statements of Income Interest income $ 626 $ 902 $ 425 Dividends from Provident Bank -- 2,000 -- Gain on sales of securities available for sale 431 -- -- Non-interest expense (180) (180) -- Income tax expense (338) (279) (174) -------- -------- -------- Income before equity in undistributed earnings of Provident Bank 539 2,443 251 Equity in undistributed earnings of Provident Bank 6,943 3,429 2,951 -------- -------- -------- Net income $ 7,482 $ 5,872 $ 3,202 ======== ======== ======== Condensed Statements of Cash Flows Cash Flows from Operating Activities: Net income $ 7,482 $ 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 (6,943) (3,429) (2,951) Other adjustments, net (298) (405) (312) -------- -------- -------- Net cash provided by (used in) operating activities 241 2,038 (61) -------- -------- -------- Cash Flows from Investing Activities: Purchases of securities available for sale (2,431) (1,008) (10,218) Proceeds from sales of securities available for sale 6,810 984 -- Capital contribution to Provident Bank -- -- (24,000) -------- -------- -------- Net cash provided by (used in) investing activities 4,379 (24) (34,218) -------- -------- -------- Cash Flows from Financing Activities: Treasury shares purchased (1,155) (3,203) -- Cash dividends paid (807) (1,049) (367) Stock option transactions 60 -- -- Net proceeds from stock offering -- -- 37,113 Initial capitalization of Provident Bancorp, MHC -- -- (100) -------- -------- -------- Net cash (used in) provided by financing activities (1,902) (4,252) 36,646 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 2,718 (2,238) 2,367 Cash and cash equivalents at beginning of period 129 2,367 -- -------- -------- -------- Cash and cash equivalents at end of period $ 2,847 $ 129 $ 2,367 ======== ======== ========

85 (21) Quarterly Results of Operations (Unaudited) The following is a condensed summary of quarterly results of operations for the years ended September 30, 2001 and 2000:

First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Year Ended September 30, 2001 Interest and dividend income $15,369 $15,361 $15,155 $15,093 Interest expense 7,061 6,921 6,412 5,850 ------- ------- ------- ------- Net interest income 8,308 8,440 8,743 9,243 Provision for loan losses 360 360 360 360 Non-interest income 1,051 1,023 1,477 1,155 Non-interest expense 6,125 6,739 6,664 6,903 ------- ------- ------- ------- Income before income tax expense 2,874 2,364 3,196 3,135 Income tax expense 999 799 1,092 1,197 ------- ------- ------- ------- Net income $ 1,875 $ 1,565 $ 2,104 $ 1,938 ======= ======= ======= ======= Earnings per common share: Basic $ 0.24 $ 0.20 $ 0.27 $ 0.27 Diluted 0.24 0.20 0.27 0.26 ======= ======= ======= ======= Year Ended September 30, 2000 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 ======= ======= ======= =======

86 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III ITEM 10. Directors and Executive Officers of the Registrant The "Proposal 1 -"Election of Directors" section of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held in February 2002 (the "Proxy Statement") is incorporated herein by reference. ITEM 11. Executive Compensation The "Proposal I -"Election of Directors" section of the Proxy Statement is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The "Proposal I -"Election of Directors" section of the Proxy Statement is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions The "Transactions with Certain Related Persons" section of the Proxy Statement is incorporated herein by reference. 87 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements The financial statements filed in Item 8 of this Form 10-K are as follows: (A) Independent Auditors' Report (B) Consolidated Statements of Financial Condition as of September 30, 2001 and 2000 (C) Consolidated Statements of Income for the years ended September 30, 2001, 2000 and 1999 (D) Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2001, 2000 and 1999 (E) Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999 (F) Notes to Consolidated Financial Statements 88 (a)(2) Financial Statement Schedules All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2001. (c) Exhibits 3.1 Stock Holding Company Charter of Provident Bancorp, Inc. (incorporated herein by reference to the Company's Registration Statement on Form S-1, file No. 333-63593 (the "S-1") 3.2 Bylaws of Provident Bancorp, Inc. (incorporated herein by reference to the S-1) 4 Form of Stock Certificate of Provident Bancorp, Inc. (incorporated herein by reference to the S-1) 10.1 Form of Employee Stock Ownership Plan (incorporated herein by reference to the S-1) 10.2 Employment Agreement with George Strayton, as amended (incorporated herein by reference to the S-1) 10.3 Form of Employment Agreement (incorporated herein by reference to the S-1) 10.4 Deferred Compensation Agreement (incorporated herein by reference to the S-1) 10.5 Supplemental Executive Retirement Plan, as amended (incorporated herein by reference to the S-1) 10.6 Management Incentive Program (incorporated herein by reference to the S-1) 10.7 1996 Long-Term Incentive Plan for Officers and Directors, as amended (incorporated herein by reference to the S-1) 10.8 Provident Bank Stock Option Plan (incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders, filed with the SEC on January 18, 2000.) 10.9 Provident Bank Recognition and Retention Plan (incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders, filed with the SEC on January 18, 2000.) 21 Subsidiaries of the Company 23.1 Consent of KPMG LLP 89 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Provident Bancorp, Inc. Date: December 20, 2001 By: \s\ George Strayton ---------------------------- George Strayton President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By: \s\ George Strayton By: \s\ Katherine Dering --------------------------------------- ----------------------------------- George Strayton Katherine Dering President, Chief Executive Officer and Chief Financial Officer and Senior Director Vice President Date: December 20, 2001 Date: December 20, 2001 By: \s\ William F. Helmer By: \s\ Dennis L. Coyle --------------------------------------- ----------------------------------- William F. Helmer Dennis L. Coyle, Vice Chairman Chairman of the Board Date: December 20, 2001 Date: December 20, 2001 By: \s\ Judith Hershaft By: \s\ Thomas F. Jauntig, Jr. --------------------------------------- ----------------------------------- Judith Hershaft, Director Thomas F. Jauntig, Jr., Director Date: December 20, 2001 Date: December 20, 2001 By: \s\ Donald T. McNelis By: \s\ Richard A. Nozell --------------------------------------- ----------------------------------- Donald T. McNelis, Director Richard A. Nozell, Director Date: December 20, 2001 Date: December 20, 2001 By: \s\ William R. Sichol, Jr. By: \s\ Burt Steinberg --------------------------------------- ----------------------------------- William R. Sichol, Jr., Director Burt Steinberg, Director Date: December 20, 2001 Date: December 20, 2001 By: \s\ Wilbur C. Ward By: \s\ F. Gary Zeh --------------------------------------- ----------------------------------- Wilbur C. Ward, Director F. Gary Zeh, Director Date: December 20, 2001 Date: December 20, 2001